MENTOR PERPETUAL INTERNATIONAL PORTFOLIO
MESSAGE FROM THE CHAIRMAN AND PRESIDENT
OCTOBER 31, 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 Perpetual
International Portfolio. This Annual Report reaffirms our commitment to our
shareholders and details the financial performance of these investments for the
period ended October 31, 1998.
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 teams present 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
1
<PAGE>
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO
MESSAGE FROM THE CHAIRMAN AND PRESIDENT
OCTOBER 31, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
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 LOGO]
THE MENTOR MISSION
To provide professional investment management services through a firm that is
second to none in the quality of its investment process, the skill and training
of its professionals, and the commitment, shared by all its associates, to
deliver the highest level of service and ethical behavior to clients.
FOR MORE INFORMATION AND PROSPECTUSES PLEASE CALL US, (800)382-0016, OR
CONTACT YOUR CONSULTANT. THE PROSPECTUSES CONTAIN COMPLETE INFORMATION
REGARDING FEES, SALES CHARGES, AND EXPENSES. PLEASE READ THEM CAREFULLY
BEFORE INVESTING OR SENDING MONEY.
2
<PAGE>
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO
MANAGERS' COMMENTARY: THE GLOBAL/INTERNATIONAL MANAGEMENT TEAM
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
MARKETS REVIEW
The 12-month period ended October 31, 1998 marked a turbulent period for world
markets. For the period, the Mentor Perpetual International Portfolio A shares
returned 7.43% while the B shares returned 6.64%, exclusive of sales charges.
This compares favorably to the 4.07% average return for its Lipper
International Funds peer group. This performance placed both share classes in
the 2nd quartile of that Lipper category. The Portfolio's Morgan Stanley EAFE
Index benchmark returned 9.95% for the period due to its lack of weighting in
Latin America or Emerging Europe, areas to which we had some, although modest,
exposure.
UNITED KINGDOM
In common with equity markets worldwide, the U.K. sharply corrected early in
the fourth quarter of 1997. However, in November, despite an unexpected 0.25%
rise in interest rates, the market rallied and continued to move forward
strongly through the end of the first quarter 1998. In June, the Monetary
Policy Committee (MPC) surprised many by raising interest rates a further 0.25%
to 7.5%. Almost coincidentally, stronger than expected numbers for inflation,
average earnings growth, and retail spending prompted fears of yet another rise
in U.K. interest rates. In common with other world equity markets, the U.K. has
seen recent indiscriminate declines and opinion appears to have shifted
towards expectation of a hard landing -- or technical recession -- later in
1998. The corporate sector today enjoys robust financial strength and any
downturn is unlikely to be as severe as the stock market is suggesting. With
growing international pressure for cuts in Western interest rates, coupled with
weakening domestic economic data and recent downward revisions to wages growth,
future interest rate cuts seem likely. With venture capitalists and directors
already taking active advantage of current low valuations among small- and
mid-cap. stocks, with U.K. interest rates set to fall farther, and with weaker
sterling providing support to exports and protection against imports, we find
ourselves more positive than the consensus about prospects for the U.K. equity
market.
3
<PAGE>
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO
MANAGERS' COMMENTARY: THE GLOBAL/INTERNATIONAL MANAGEMENT TEAM
OCTOBER 31, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
CONTINENTAL EUROPE
Early in the fourth quarter of 1997, Asia's deepening travails provoked
corrections to European markets. However, a strong bounce in December 1997
extended into a rally that continued well into the first quarter of 1998. By
the end of the first quarter, equity markets, supported by cross-border mergers
and acquisitions, corporate restructuring, low interest rates, and strong
mutual funds inflows, had reached new record highs. Despite sharp corrections
in April and June on concerns over renewed turmoil in Asia and a possible rise
in core European interest rates, European equity markets generally continued
their strong upward progress throughout the second quarter. However, in the
final weeks of the third quarter, European markets, already uneasy over growing
signs of a downturn in exports and hesitancy in Germany's economic recovery,
fell prey to the same global issues affecting other Western equity markets and
corrected sharply.
It seems increasingly likely that the EMU's interest rate will be set at a
fairly low level. Lower interest rates among Europe's peripheral countries will
provide added support for their economies and equity markets. We expect the
recent extreme market volatility to continue as the leverage that has built up
in markets unwinds. This outlook is clouded by the as yet unquantifiable
effects of international financial turmoil and the credit crunch resulting from
extreme risk aversion within international capital markets. The disorderly
markets and indiscriminate selling of recent months has introduced a number of
significant valuation anomalies, and suggests that investment on the basis of
fundamental analysis should be rewarded once order and a measure of calm
returns to the market place.
JAPAN
In October 1997, the collapse of Asian currencies and equity markets provoked a
sharp correction in the Japanese equity market. In January 1998, the market
rallied strongly on hopes of successful action by the government to stimulate
the domestic economy. However, as the first quarter of 1998 progressed,
optimism gave way to resigned gloom as the government once more proved
incapable of revitalizing an economy that was slipping back into
4
<PAGE>
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO
MANAGERS' COMMENTARY: THE GLOBAL/INTERNATIONAL MANAGEMENT TEAM
OCTOBER 31, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
recession, and the equity market drifted resignedly downward.
For some time, economic statistics have been universally and unremittingly
dire. The manufacturing sector has been shedding labor for the last five years,
and this has now spread to the service sector. Production, productivity and
real wages are all declining steeply, capacity utilization has fallen off a
cliff, and wholesale prices are collapsing. The recent dramatic strengthening
of the yen relative to the U.S. dollar, however, coupled with an unexpected
political consensus, has provided the government with a window of opportunity.
They can create massive new liquidity as part of the vital rehabilitation of a
banking system which is suffocating under a mountain of unrepayable loans to
failed property companies and bankrupt Asian corporations. Recession is forcing
corporate restructuring, and a new focus on shareholder value is sowing the
seeds of Japan's next bull market. However, shorter term, this is likely to
mean higher unemployment, further depressing consumer confidence and deepening
the severity of Japan's economic contraction.
ASIA
Asian markets plunged during October 1997, as currencies throughout the region
buckled, revealing extreme levels of government and corporate foreign debt. At
the same time, investor confidence was further undermined by ineffective,
inappropriate, and occasionally ill-considered responses by regional
governments. From mid-January, markets and currencies bounced dramatically from
their oversold lows and, despite unhappiness at the austerity involved, South
Korea and Thailand made valuable initial progress in implementing IMF reform
programs. However, in April 1998, increasing unrest in Indonesia and the
prospect of serious political and economic instability sparked renewed
region-wide concerns. Regional currencies and equity markets sank throughout
the remainder of the second quarter. A rapidly escalating financial crisis in
Russia, followed by effective default on its sovereign debt, triggered a
massive worldwide flight to quality and profound risk aversion. Investor
confidence in emerging markets, already weak, evaporated, and Asia's equity
markets sank to new lows.
5
<PAGE>
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO
MANAGERS' COMMENTARY: THE GLOBAL/INTERNATIONAL MANAGEMENT TEAM
OCTOBER 31, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
Little real progress has been made in restructuring the region's commercial,
financial, or legal infrastructure. Regionally, any progress in achieving long-
lasting and soundly-based economic recovery remains severely hampered by a
mountainous burden of foreign debt. Although there appears to be a growing
acceptance amongst G-7 banks and politicians that, faced with a choice between
forgiveness or default, the former is likely to prove more rewarding, actual
implementation is likely to prove both difficult and protracted. In the
meantime, the potential for further civil unrest and political uncertainty
suggest that markets are likely to remain volatile and that, at present levels,
optimism has already been discounted and further upside potential -- at least in
the medium term -- is limited.
LATIN AMERICA
In October 1997, the collapse of Asian currencies and equity markets triggered
dramatic declines in Latin American equity markets, with investors particularly
concerned over possible devaluation of the Brazilian currency. Prompt action by
the Brazilian authorities in raising interest rates to punitively high levels,
and instituting government spending reforms resulted in a successful defense of
the currency. Brazil's privatization program remained on course, and fading
concerns over the stability of the currency allowed the government to wind down
interest rates gradually, although these remained at high levels. In April
1998, renewed turmoil in Asia affected investor confidence in emerging markets
worldwide, and Latin America's equity markets sank throughout the remainder of
the second quarter.
A brief rally in Asia fed through to Latin American equity markets but, in the
closing months of the period under review, financial disarray in Russia, and
fears over worldwide contagion, effectively destroyed the last vestiges of
investor confidence in emerging markets. The ensuing `flight to quality' sent
Latin American equity markets tumbling past their earlier New Year lows.
The region continues to suffer from investor concern over fiscal imbalances,
with deficits in both government expenditure and trade accounts. The latter
6
<PAGE>
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO
MANAGERS' COMMENTARY: THE GLOBAL/INTERNATIONAL MANAGEMENT TEAM
OCTOBER 31, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
have, in part, been due to weak commodity prices, but much has been the product
of strong domestic growth that has sucked in imports. The re-election of
President Cardoso has raised hopes that, together with support from
international lending institutions, Brazil's government will be able to
institute the fiscal reforms necessary to restore confidence in the country's
currency. This could provide something of a role model for other Latin American
countries, such as Argentina, Chile and Mexico, also experiencing trade
deficits and fiscal imbalances.
On January 1, 1999 the Euro, the European Unions' new single currency, will
replace the individual currencies of 11 participating European countries. This
change will have no effect on the value of the International Portfolio in U.S.
dollars, since the Euro will be converted into dollars in the same way that
individual European country currencies are at present. Among the likely
benefits of conversion to a single currency like the Euro are lower inflation,
more stable currency relationships, increased competition, and lower cost of
capital. Any initial dislocations associated with applying one interest rate
policy to a variety of economies growing at differing speeds should be minor
and more than offset by the enhanced opportunities available to well-run,
innovative companies in the new Euro environment.
December 1998
7
<PAGE>
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON
Comparison of change in value of a hypothetical $10,000 purchase in Mentor
Perpetual International Portfolio Class A and Class B Shares and the Morgan
Stanley Capital International EAFE Index.*
[GRAPH]
Morgan Stanley Capital
Class A Shares Class B Shares International EAFE Index*
12/27/96 9,500 10,000 10,000
4/30/97 9,952 10,584 9,905
10/31/97 10,403 11,048 10,217
4/30/98 12,139 12,838 11,810
10/31/98 11,175+ 11,354++ 11,234*
Average Annual Returns as of 10/31/98
1-Year Since Inception**
Class A Shares 1.27% 6.23%
Class B Shares 2.64% 7.13%
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 Morgan Stanley Capital International EAFE Index is an unmanaged index
composed of approximately 1,119 securities issued by foreign companies
listed on Europe, Australia & Far East (EAFE) stock exchanges. This is a
total return index with gross dividends reinvested. The performance of
countries and unmanaged indexes does not reflect expenses and many do not
correspond to the performance of the Portfolio, which is actively managed
and incurs expenses.
+ Represents a hypothetical investment of $10,000 in Mentor Perpetual
International Portfolio Class A Shares, after deducting the maximum sales
charge of 5.75% ($10,000 investment minus $575 sales charges = $9,425).
The Class A Shares' performance assumes the reinvestment of all dividends
and distributions.
++ Represents a hypothetical investment of $10,000 in Mentor Perpetual
International 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. Class B Shares are
charged a redemption fee of 4.00% on any redemption less than one year
from the purchase date. The value of the Class B Shares reflects a
redemption fee in effect at the end of each of the stated periods. The
Class B Shares' performance assumes the reinvestment of all dividends and
distributions.
** Reflects operations on Mentor Perpetual International Portfolio Class A and
Class B Shares from the date of initial offering on 12/27/96 through
10/31/98.
8
<PAGE>
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON
Comparison of change in value of a hypothetical $10,000 purchase in Mentor
Perpetual International Portfolio Class E Shares and the Morgan Stanley Capital
International EAFE Index.*
[GRAPH]
Morgan Stanley Capital
Class E Shares International EAFE Index*
1/16/98 10,000 10,000
3/31/98 11,806 10,974
6/30/98 11,573 11,098
10/31/98 10,833+ 10,524*
Annual Return as of 10/31/98
1-Year Since Inception**
Class E Shares n/a 8.33%
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 Perpetual
International Portfolio Class E Shares. The Class E Shares' performance
assumes the reinvestment of all dividends and distributions.
* The Morgan Stanley Capital International (MSCI) EAFE (Europe, Australia, and
Far East) World Index is an unmanaged index of approximately 1,119
securities issued by companies listed on European, Australian, and Far
Eastern stock exchanges. It contains no US equities and is therefore a
broadly diversified proxy for international performance. This is a total
return index with gross dividends reinvested. The Index is not adjusted to
reflect sales loads, expenses, or other fees that the SEC requires to be
reflected in the Portfolio's performance. Investors cannot invest in the
index. The performance of countries and unmanaged indexes does not reflect
expenses and may not correspond to the performance of Mentor Perpetual
International Portfolio, which is actively managed and incurs expenses.
** Reflects operations of Mentor Perpetual International Portfolio Class E
Shares from the date of initial offering on 1/16/98 through 10/31/98.
9
<PAGE>
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON
Comparison of change in value of a hypothetical $10,000 purchase in Mentor
Perpetual International Portfolio Class Y Shares and the Morgan Stanley Capital
International EAFE Index.*
[GRAPH]
Morgan Stanley Capital
Class Y Shares International EAFE Index*
5/29/96 10,000 10,000
10/31/96 9,696 9,953
4/30/97 10,627 10,124
10/31/97 11,157 10,443
4/30/98 13,036 12,071
10/31/98 12,015+ 11,482*
Average Annual Return as of 10/31/98
1-Year Since Inception**
Class Y Shares 7.69% 7.86%
Past performance is not indicative of future performance. Your investment
return and principal value will fluctuate so when shares are redeemed, they may
be worth more or less than original cost. Mutual funds are not obligations of
or guaranteed by any bank and are not federally insured.
+ Represents a hypothetical investment of $10,000 in Mentor Perpetual
International Portfolio Class Y Shares. The Class Y Shares' performance
assumes the reinvestment of all dividends and distributions.
* The Morgan Stanley Capital International (MSCI) EAFE (Europe, Australia, and
Far East) World Index is an unmanaged index of approximately 1,119
securities issued by companies listed on European, Australian, and Far
Eastern stock exchanges. It contains no US equities and is therefore a
broadly diversified proxy for international performance. This is a total
return index with gross dividends reinvested. The Index is not adjusted to
reflect sales loads, expenses, or other fees that the SEC requires to be
reflected in the Portfolio's performance. Investors cannot invest in the
index. The performance of countries and unmanaged indexes does not reflect
expenses and may not correspond to the performance of Mentor Perpetual
International Portfolio, which is actively managed and incurs expenses.
** Reflects operations of Mentor Perpetual International Portfolio Class Y
Shares from the date of commencement of operations on 5/29/96 through
10/31/98.
10
<PAGE>
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1998
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
----------------------- -------- -------------
<S> <C> <C> <C>
PREFERRED STOCKS 2.54%
- ----------------------------------------------------------------------------------------------------
BRAZIL 0.15%
Electrobras - Centrais Eletricas Brasileiras SA~ 5,440 $ 62,934
Telecomonicacoes Brasileiras SA ~* 1,440 109,350
- ----------------------------------------------------------------------------------------------------
172,284
- ----------------------------------------------------------------------------------------------------
GERMANY 2.39%
M.A.N. AG 1,395 312,062
Porsche AG 845 1,507,104
Prosieben Media AG 12,650 630,970
Sap AG 797 388,381
- ----------------------------------------------------------------------------------------------------
2,838,517
- ----------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCKS (COST $3,276,921) 3,010,801
- ----------------------------------------------------------------------------------------------------
COMMON STOCKS 91.54%
- ----------------------------------------------------------------------------------------------------
ARGENTINA 0.10%
Perez Company SA~ 3,540 34,702
Telecom Argentina SA~ 1,100 35,475
Telefonica de Argentina SA~ 1,460 48,271
- ----------------------------------------------------------------------------------------------------
118,448
- ----------------------------------------------------------------------------------------------------
AUSTRIA 0.57%
Bank Austria AG 14,000 671,336
- ----------------------------------------------------------------------------------------------------
BELGIUM 1.88%
Cofinimmo 6,360 806,852
Fortis AG 1,600 459,281
G.I.B. Group Holdings SA 20,000 955,861
- ----------------------------------------------------------------------------------------------------
2,221,994
- ----------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1998
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
----------------------- ---------- -------------
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
- ----------------------------------------------------------------------------------------------------------
BRAZIL 0.18%
Companhia Energetica de Minais Gerais~ 2,802 $ 54,496
Companhia Energetica de Sao Paulo~ 630 12,253
Pao de Acucar # 2,730 45,772
Petroleo Brasileiro SA ~ 4,200 52,814
Vale do Rio Doche~ 3,320 50,097
- ---------------------------------------------------------------------------------------------------
215,432
- ---------------------------------------------------------------------------------------------------
CHILE 0.10%
Chilectra SA~ 2,150 42,297
Enersis SA~ 2,100 43,837
Telecomunicaciones de Chile~ 1,630 35,758
- ---------------------------------------------------------------------------------------------------
121,892
- ---------------------------------------------------------------------------------------------------
CHINA 0.18%
Huaneng Power International, Inc. - Class A~* 11,500 158,125
Jiangsu Express Company, Limited 200,000 49,067
- ---------------------------------------------------------------------------------------------------
207,192
- ---------------------------------------------------------------------------------------------------
FINLAND 2.78%
Huhtamaki 17,400 584,554
Metra Oyj - Class B 39,480 690,635
Nokia Oyj - Class A 22,120 2,016,106
- ---------------------------------------------------------------------------------------------------
3,291,295
- ---------------------------------------------------------------------------------------------------
FRANCE 12.00%
Accor SA 4,800 1,009,661
Air Liquide 5,250 880,047
Atos SA 6,739 1,272,976
Axa 11,060 1,251,925
Casino Guichard Perrachn 14,500 1,445,296
Coflexip 8,325 750,270
Colas 1,730 389,780
</TABLE>
12
<PAGE>
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1998
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
----------------------- ---------- -------------
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
- -------------------------------------------------------------------------------------------
FRANCE (CONTINUED)
Compagne de Saint-Gobain 3,400 $ 503,749
Comptoirs Modernes 2,200 1,352,199
Elf Aquitane SA 10,925 1,266,181
Entrelec 3,000 169,791
Genset SA~* 20,000 587,500
ISIS 3,600 281,615
Serp Recyclage * 3,809 566,407
Societe Generale D'Enterprises 12,610 606,862
Total SA - Class B 4,600 531,471
Vivendi 5,810 1,328,928
- -------------------------------------------------------------------------------------
14,194,658
- -------------------------------------------------------------------------------------
GERMANY 5.42%
Ava Allg Handels Der Verbrau 3,200 1,296,638
Daimler Benz 10,473 826,316
Sauer, Inc. 23,000 166,750
Siemens AG 14,475 880,402
Veba AG 37,940 2,085,094
Viag AG 1,700 1,155,260
- -------------------------------------------------------------------------------------
6,410,460
- -------------------------------------------------------------------------------------
GREAT BRITAIN 16.80%
Abbey National Bank 32,000 619,597
Allied Zurich PLC * 28,700 339,568
Arcadia Group PLC 37,750 164,886
Arriva PLC 23,000 141,260
ASDA Group PLC 107,000 282,027
BAA PLC 30,000 337,127
Barclays Bank PLC 31,650 679,028
Bass PLC 26,785 324,531
Billiton PLC 120,000 289,683
Britannic Assurance PLC 15,000 318,049
</TABLE>
13
<PAGE>
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1998
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
----------------------- ---------- -------------
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
- ---------------------------------------------------------------------------------------------
GREAT BRITAIN (CONTINUED)
British Aerospace PLC 74,200 $545,123
British Airways 42,800 313,005
British American Tobacco PLC 32,700 291,950
British Biotech * 190,000 128,776
Burmah Castrol 25,000 383,650
British Petroleum Company PLC 26,000 383,550
Celltech PLC * 24,000 146,599
Centrica PLC * 134,200 258,833
Countrywide Assured Group 100,000 164,840
Debenhams PLC 37,500 241,925
Dixons Group 19,000 200,159
Emap PLC 25,000 426,324
Enterprise Oil PLC 45,500 313,334
Glaxo Wellcome PLC 24,000 744,239
Granada Group PLC 33,400 508,364
Great Universal Stores PLC 27,300 296,734
Greenalls Group PLC 50,000 274,036
House of Fraser 50,000 53,970
HSBC Holdings PLC 31,000 702,435
Iceland Group PLC 38,250 125,782
III Group PLC 38,500 328,592
Imperial Chemical Industries PLC 38,000 340,859
Inchcape PLC 70,000 120,659
Ladbroke Group 50,000 182,621
Lloyds TSB Group PLC 57,000 704,928
Medeva PLC 123,300 249,674
Meggitt PLC 60,000 151,117
National Westminster Bank 32,200 537,520
Northern Foods PLC 70,000 189,775
PowerGen PLC 26,000 368,973
Prudential Corporation PLC 33,140 434,250
Rank Group PLC 90,000 368,254
Reckitt & Colman PLC 14,100 242,806
</TABLE>
14
<PAGE>
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1998
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
----------------------- ---------- -------------
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
- --------------------------------------------------------------------------------------------------------
GREAT BRITAIN (CONTINUED)
Reuters Group PLC 38,700 $ 397,978
Rolls-Royce PLC 135,000 501,548
Safeway 26,882 133,949
Sainsbury (J.) PLC * 55,000 485,984
Scotia Holdings * 30,000 60,497
Securicor PLC 45,000 331,165
Signet Group 361,500 193,590
Smith (H.W.) Group PLC 32,150 295,379
SmithKline Beecham PLC 42,000 517,664
Spirax-Sarco Engineering PLC 30,000 280,646
Stakis PLC 240,000 393,607
Standard Chartered Bank 51,500 548,785
Tate & Lyle PLC 34,682 199,223
Tesco PLC 103,900 283,854
Trinity PLC 30,000 225,671
United Assurance Group PLC 29,250 284,644
United News & Media PLC 42,000 464,948
UTD Assurance Group CNV 15,000 3,263
Vickers Group 18,333 51,696
- --------------------------------------------------------------------------------------------------
19,873,503
- --------------------------------------------------------------------------------------------------
HONG KONG 2.79%
Aeon Credit Services 434,000 72,291
Cheung Kong Holdings 41,000 280,586
China Foods Holdings, Limited * 300,000 79,411
China Resources Beijing 180,000 48,227
China Telecom Tranche 2 Widget (c) 66,000 111,939
China Telecom Tranche 1 Widget (c) 54,000 91,865
Citic Pacific, Limited 50,000 122,991
Dah Sing Financial 64,000 112,389
Elec & Eltek International Company, Limited 685,000 131,790
First Tractor Company 280,000 88,579
HKR International, Limited 432,800 244,496
</TABLE>
15
<PAGE>
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1998
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
----------------------- ---------- -------------
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
- ---------------------------------------------------------------------------------------------------
HONG KONG (CONTINUED)
Hong Kong & China Gas 104,000 $ 147,718
Hong Kong Electric 60,000 220,027
HSBC Holdings PLC - Warrants 2,685 61,539
Hung Hing Printing Group 238,000 92,194
Hutchison Whampoa, Limited 30,000 214,991
National Mutual Asia, Limited 280,000 191,620
New World Development 120,675 280,476
Road King Infrastructure, Limited 464,544 329,911
Swire Pacific, Limited - Class A 50,000 265,350
Yanzhou Coal Mining Company - Class H 600,000 117,761
- --------------------------------------------------------------------------------------------
3,306,151
- --------------------------------------------------------------------------------------------
INDIA 0.29%
BSES, Limited #* 8,000 97,600
Hindalco Industries, Limited # 4,000 46,000
Mahanagar Telephone Nigam, Limited # * 6,000 61,500
Tata Electric # 800 140,000
- --------------------------------------------------------------------------------------------
345,100
- --------------------------------------------------------------------------------------------
INDONESIA 0.10%
Bat Indonesia 20,000 30,482
Gudang Garam 50,000 44,051
PT HM Sampoerna 100,000 38,585
- --------------------------------------------------------------------------------------------
113,118
- --------------------------------------------------------------------------------------------
IRELAND 3.04%
Bank of Ireland 71,300 1,313,719
CRH PLC 92,300 1,345,382
Elan Corporation PLC~* 13,450 942,341
- --------------------------------------------------------------------------------------------
3,601,442
- --------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1998
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
----------------------- ---------- -------------
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
- ------------------------------------------------------------------------------------------------
ITALY 7.90%
Assicurazioni Generali 15,450 $ 554,010
ENI SPA 205,000 1,220,983
Finmeccanica SPA 972,030 771,330
Grupo Editoriale L'Espresso 210,500 1,877,398
Instituto Mobiliare Italiano 86,000 1,323,885
Ina SPA 348,000 959,817
Rinascente SPA 92,650 894,239
Telecom Italia SPA 180,000 908,247
Telecom Italia SPA - Warrants 114,000 825,229
- ------------------------------------------------------------------------------------------
9,335,138
- ------------------------------------------------------------------------------------------
JAPAN 12.75%
Asahi Glass Company, Limited 240,000 1,341,070
Chugai Pharmaceuticals 195,000 1,776,918
Kirin Brewery Company, Limited 145,000 1,583,065
Kokusai Securities Company, Limited 160,000 1,375,457
Mitsui Chemicals, Inc. 410,000 1,275,908
Nippon Steel Corporation 800,000 1,396,089
Nitto Boseki Company 550,000 1,276,596
Sony Music Entertainment, Inc. 7,000 244,315
Sumitomo Warehouse Company, Limited 335,000 1,411,133
Tokyo Electric Power Company 67,000 1,699,119
Tokio Marine & Fire Insurance 150,000 1,708,575
- ------------------------------------------------------------------------------------------
15,088,245
- ------------------------------------------------------------------------------------------
KOREA 0.04%
Atlantis Korean Smaller Companies 5,000 27,300
Schroder Korea Fund 7,000 23,520
- ------------------------------------------------------------------------------------------
50,820
- ------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1998
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
----------------------- ---------- -------------
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
- -----------------------------------------------------------------------------------------------
MALAYSIA 0.15%
Boustead Holdings Berhad (b) 10,000 $ 6,158
IOI Corporation Berhad (b) 300,000 118,419
Nanyang Press Berhad (b) 8,000 7,368
Petronas Dagangan Berhad (b) 80,000 48,210
- ----------------------------------------------------------------------------------------
180,155
- ----------------------------------------------------------------------------------------
MEXICO 0.39%
Cemex SA~* 5,150 27,981
Cifra SA 40,400 54,363
DESC SA~ 3,732 70,442
Empresas La Moderna SA~ 1,850 44,169
Grupo Carso SA~ 10,790 74,400
Kimberly-Clark de Mexico SA~ 3,460 44,115
Panamerican Beverages - Class A * 2,760 55,890
Telefonos de Mexico SA - Class L~ 1,770 93,478
- ----------------------------------------------------------------------------------------
464,838
- ----------------------------------------------------------------------------------------
NETHERLANDS 0.81%
Laurus NV 10,500 264,455
Royal Dutch Petroleum Company 6,476 313,025
Vendex International NV 15,000 381,812
Vendex International NV - Coupon 15,000 2,010
- ----------------------------------------------------------------------------------------
961,302
- ----------------------------------------------------------------------------------------
PERU 1.01%
Telefonica del Peru SA~ 26,000 1,176,019
Telefonica del Peru SA - Warrants~ 1,900 24,700
- ----------------------------------------------------------------------------------------
1,200,719
- ----------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1998
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
----------------------- ---------- -------------
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
- --------------------------------------------------------------------------------------------------
PHILIPPINES 0.09%
Ayala Corporation 45,000 $ 11,431
Benpres Holdings # * 29,000 79,750
Benpres Holdings - Rights (a)# 11,600 15,370
- --------------------------------------------------------------------------------------------
106,551
- --------------------------------------------------------------------------------------------
PORTUGAL 2.17%
BPI SGPS SA 30,900 943,636
Cimpor Cimentos de Portugal 15,000 516,368
Elec de Portugal 28,500 713,481
Jeronimo Martins 9,050 390,422
- --------------------------------------------------------------------------------------------
2,563,907
- --------------------------------------------------------------------------------------------
SINGAPORE 1.18%
GP Batteries International, Limited 100,000 220,511
Jardine Strategic Holdings 100,000 160,000
Marco Polo Developments, Limited 150,000 143,209
Overseas Chinese Bank * 80,286 351,112
Overseas Union Bank, Limited 60,000 163,351
United Overseas Bank 76,000 358,115
- --------------------------------------------------------------------------------------------
1,396,298
- --------------------------------------------------------------------------------------------
SPAIN 9.15%
Acciona SA 6,745 1,746,092
Argentaria Corp Bancaria de Espana SA 61,903 1,349,354
Baron de Ley * 40,000 1,338,454
Centros Comerciales Continente SA 51,791 1,546,990
Gas Natural SDG, SA 14,300 1,233,618
Prosegur CIA de Seguridad SA 98,294 1,191,887
Tabacalera SA 69,250 1,674,490
Viscofan Envolturas Celulosicas SA 25,051 745,597
- --------------------------------------------------------------------------------------------
10,826,482
- --------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1998
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
----------------------- ---------- --------------
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
- -----------------------------------------------------------------------------------------------------
SWEDEN 3.26%
BPA AB 115,000 $ 272,949
Celsius AB - Class B 62,800 1,007,120
Ericsson LM - Class B 30,680 692,755
ForeningsSparbanken AB - Class A 55,800 1,514,106
Hennes & Mauritz AB - Class B 5,170 364,809
- -----------------------------------------------------------------------------------------------
3,851,739
- -----------------------------------------------------------------------------------------------
SWITZERLAND 6.22%
Jelmoli Holdings AG 860 1,059,646
Nestle SA 840 1,790,276
Novartis AG 1,084 1,957,345
Roche Holdings AG - Genusshein 83 970,473
SCHW Rueckversicherungs 260 580,300
UBS AG * 3,655 1,004,834
- -----------------------------------------------------------------------------------------------
7,362,874
- -----------------------------------------------------------------------------------------------
TAIWAN 0.06%
Taipei Fund * 4 31,800
Taiwan Semiconductor~* 2,950 38,258
- -----------------------------------------------------------------------------------------------
70,058
- -----------------------------------------------------------------------------------------------
THAILAND 0.13%
Cogeneration PLC 67,000 50,027
Electricity Generating Public Company * 40,000 105,349
- -----------------------------------------------------------------------------------------------
155,376
- -----------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS (COST $105,430,547) 108,306,523
- -----------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1998
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Market Value
----------------------- ------------ ----------------
<S> <C> <C> <C>
CORPORATE BONDS 0.24%
- ---------------------------------------------------------------------------------------------------------
GREAT BRITAIN 0.02%
Scotia Holdings, 8.50%, 3/26/02 $ 19,000 $ 23,370
- ---------------------------------------------------------------------------------------------------------
KOREA 0.10%
Republic of Korea, 8.88%, 4/15/08 130,000 114,522
- ---------------------------------------------------------------------------------------------------------
THAILAND 0.13%
PTTEP International, Limited, 7.63%, 10/01/06 200,000 150,110
- ---------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS (COST $265,452) 288,002
- ---------------------------------------------------------------------------------------------------------
111,605,326
- ---------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENT 3.85%
- ---------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Goldman Sachs & Company Dated 10/30/98,
5.44%, due 11/02/98, collateralized by Federal
Home Loan Mortgage Corporation,
$4,569,952, 6.50%, 3/01/11, market value
$4,647,069 (cost $4,551,044) 4,551,044 4,551,044
- ---------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST $113,523,964) 98.17% 116,156,370
OTHER ASSETS LESS LIABILITIES 1.83% 2,165,803
- ---------------------------------------------------------------------------------------------------------
NET ASSETS 100.00% $ 118,322,173
- ---------------------------------------------------------------------------------------------------------
</TABLE>
* Non-income producing.
~ American Depository Receipts.
# Global 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) These securities are considered illiquid due to a one year moratorium on
the repatriation of assets from Malaysia.
(c) All or a portion of these securities are illiquid securities, and are
valued using market quotations where readily available. In the absence of
market quotations, the securities are valued based upon their fair value
determined under procedures approved by the Board of Trustees.
21
<PAGE>
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $161,082,305 and $112,179,739, respectively.
INCOME TAX INFORMATION
At October 31, 1998, the aggregated cost of investment securities for federal
income tax purposes was $114,041,652. Net unrealized appreciation aggregated
$2,114,718, of which $10,370,771 related to appreciated investment securities
and $8,256,053, related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
22
<PAGE>
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Note 2)
Investment securities $111,605,326
Repurchase agreements 4,551,044
- --------------------------------------------------------------------------------------- ------------
Total investments (cost $113,523,964) 116,156,370
- --------------------------------------------------------------------------------------- ------------
Collateral for securities loaned (Note 2) 10,009,574
Receivables
Investments sold 2,188,647
Fund shares sold 1,565,732
Dividends and interest 286,072
Unrealized appreciation on forward foreign currency exchange contracts (Note 6) 5,465
Deferred expenses (Note 2) 10,700
- --------------------------------------------------------------------------------------- ------------
Total assets 130,222,560
- --------------------------------------------------------------------------------------- ------------
LIABILITIES
Payables
Investments purchased $ 1,442,996
Securities loaned (Note 2) 10,009,574
Fund shares redeemed 336,540
Unrealized depreciation on forward foreign currency exchange contracts (Note 6) 60,007
Accrued expenses and other liabilities 51,270
- --------------------------------------------------------------------------------------- ------------
Total liabilities 11,900,387
- --------------------------------------------------------------------------------------- ------------
NET ASSETS $118,322,173
- --------------------------------------------------------------------------------------- ------------
Net Assets represented by: (Note 2)
Additional paid-in capital $116,499,350
Accumulated undistributed net investment loss 53
Accumulated net realized loss on investment transactions (775,647)
Net unrealized appreciation of investments and foreign currency related transactions 2,598,417
- --------------------------------------------------------------------------------------- ------------
NET ASSETS $118,322,173
- --------------------------------------------------------------------------------------- ------------
NET ASSET VALUE PER SHARE
Class A Shares $ 14.65
Class B Shares $ 14.52
Class E Shares $ 14.72
Class Y Shares $ 14.74
OFFERING PRICE PER SHARE
Class A Shares $ 15.54(a)
Class B Shares $ 14.52
Class E Shares $ 14.72
Class Y Shares $ 14.74
SHARES OUTSTANDING
Class A Shares 4,284,451
Class B Shares 2,916,071
Class E Shares 149,924
Class Y Shares 744,956
</TABLE>
(a) Computation of offering price: 100/94.25 of net asset value.
SEE NOTES TO FINANCIAL STATEMENTS.
23
<PAGE>
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO
STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME
Dividends (b) $ 1,888,271
Interest 413,497
- -------------------------------------------------------------------------------- -----------
Total investment income (Note 2) 2,301,768
- -------------------------------------------------------------------------------- -----------
EXPENSES
Management fee (Note 4) 983,291
Distribution fee (Note 5) 243,187
Shareholder service fee (Note 5) 203,505
Custodian and accounting fees 157,638
Transfer agent fee 110,878
Administration fee (Note 4) 63,564
Registration expenses 59,351
Shareholder reports and postage expenses 26,245
Organizational expenses 3,993
Legal fees 3,599
Audit fees 1,831
Directors' fees and expenses 1,469
Miscellaneous 1,574
- -------------------------------------------------------------------------------- -----------
Total expenses 1,860,125
- -------------------------------------------------------------------------------- -----------
Deduct
Waiver of management fee (Note 4) (318,510)
- -------------------------------------------------------------------------------- -----------
Net expenses 1,541,615
- -------------------------------------------------------------------------------- -----------
NET INVESTMENT INCOME 760,153
- -------------------------------------------------------------------------------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY RELATED
TRANSACTIONS
Net realized loss on investments and foreign currency related transactions
(Note 2) (1,408,584)
Change in unrealized appreciation (depreciation) on investments and foreign
currency related transactions 4,181,964
- -------------------------------------------------------------------------------- -----------
Net gain on investments and foreign currency related transactions 2,773,380
- -------------------------------------------------------------------------------- -----------
Net increase in net assets resulting from operations $ 3,533,533
- -------------------------------------------------------------------------------- -----------
</TABLE>
(b) Net of foreign withholding taxes of $221,269.
SEE NOTES TO FINANCIAL STATEMENTS.
24
<PAGE>
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended Year Ended
10/31/98 10/31/97
----------------- ---------------
<S> <C> <C>
NET INCREASE IN NET ASSETS
OPERATIONS
Net investment income $ 760,153 $ 193,577
Net realized gain (loss) on investments and foreign
currency related transactions (1,408,584) 177,630
Change in unrealized appreciation (depreciation) on
investments and foreign currency related transactions 4,181,964 (1,434,574)
- ---------------------------------------------------------- ------------- ------------
Increase (decrease) in net assets resulting from
operations 3,533,533 (1,063,367)
- ---------------------------------------------------------- ------------- ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income
Class A (71,555) -
Class B (52,551) -
Class E (2,861) -
Class Y (26,033) -
Net realized gain on investments
Class A (91,708) -
Class B (54,364) -
Class Y (51,028) (36,772)
Class E - -
Tax return of capital
Class A (594,361) -
Class B (404,533) -
Class E (19,395) -
Class Y (103,344) -
- ---------------------------------------------------------- ------------- ------------
Total distributions to shareholders (1,471,733) (36,772)
- ---------------------------------------------------------- ------------- ------------
CAPITAL SHARE TRANSACTIONS (NOTE 7)
Proceeds from sale of shares 70,000,076 62,103,256
Reinvested distributions 1,395,920 36,772
Shares redeemed (23,829,534) (1,087,432)
- ---------------------------------------------------------- ------------- ------------
Change in net assets resulting from capital share
transactions 47,566,462 61,052,596
- ---------------------------------------------------------- ------------- ------------
Increase in net assets 49,628,262 59,952,457
NET ASSETS
Beginning of period 68,693,911 8,741,454
- ---------------------------------------------------------- ------------- ------------
End of period (including accumulated undistributed net
investment income of $53 and $8,093, respectively) $ 118,322,173 $ 68,693,911
- ---------------------------------------------------------- ------------- ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
25
<PAGE>
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<TABLE>
<CAPTION>
Year Period
Ended Ended
10/31/98 10/31/97 (b)
------------ -------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.83 $ 12.53
- ---------------------------------------------------------- -------- ----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.11 0.01
Net realized and unrealized gain on investments 0.91 1.29
- ---------------------------------------------------------- -------- ----------
Total from investment operations 1.02 1.30
- ---------------------------------------------------------- -------- ----------
LESS DISTRIBUTIONS FROM
Net investment income (0.03) -
Capital gains (0.03) -
Tax return of capital (0.14) -
- ---------------------------------------------------------- -------- ----------
Total distributions (0.20) -
- ---------------------------------------------------------- -------- ----------
NET ASSET VALUE, END OF PERIOD $ 14.65 $ 13.83
- ---------------------------------------------------------- -------- ----------
Total Return* 7.43% 10.38%
- ---------------------------------------------------------- -------- ----------
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 62,782 $ 33,213
Ratio of expenses to average net assets 1.35% 1.35% (a)
Ratio of expenses to average net assets excluding waiver 1.68% 1.92% (a)
Ratio of net investment income to average net assets 0.96% 0.71% (a)
Portfolio turnover rate 120% 107%
- ---------------------------------------------------------- -------- ----------
</TABLE>
(a) Annualized.
(b) For the period from December 27, 1996 (initial offering of Class A shares)
to October 31, 1997.
* Total return does not reflect sales commission and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
26
<PAGE>
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
Year Period
Ended Ended
10/31/98 10/31/97 (c)
------------ -------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.81 $ 12.53
- -----------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.03 -
Net realized and unrealized gain on investments 0.88 1.28
- -----------------------------------------------------------------------------------------------
Total from investment operations 0.91 1.28
- -----------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM
Net investment income (0.03) -
Capital gains (0.03) -
Tax return of capital (0.14) -
- -----------------------------------------------------------------------------------------------
Total distributions (0.20) -
- -----------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 14.52 $ 13.81
- -----------------------------------------------------------------------------------------------
Total Return* 6.64% 10.22%
- -----------------------------------------------------------------------------------------------
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 42,354 $ 19,371
Ratio of expenses to average net assets 2.10% 2.10% (a)
Ratio of expenses to average net assets excluding waiver 2.43% 2.65% (a)
Ratio of net investment income to average net assets 0.21% 0.04% (a)
Portfolio turnover rate 120% 107%
- -----------------------------------------------------------------------------------------------
</TABLE>
(a) Annualized.
(c) For the period from December 27, 1996 (initial offering of Class B shares)
to October 31, 1997.
* Total return does not reflect sales commission and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
27
<PAGE>
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO
FINANCIAL HIGHLIGHTS
CLASS E SHARES
<TABLE>
<CAPTION>
Period
Ended
10/31/98 (e)
-------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.53
- ----------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.19
Net realized and unrealized gain on investments 1.15
- ----------------------------------------------------------------------------
Total from investment operations 1.34
- ----------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM
Net investment income (0.02)
Tax return of capital (0.13)
- ----------------------------------------------------------------------------
Total distributions (0.15)
- ----------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 14.72
- ----------------------------------------------------------------------------
Total Return* 8.33%
- ----------------------------------------------------------------------------
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 2,207
Ratio of expenses to average net assets 1.35% (a)
Ratio of expenses to average net assets excluding waiver 1.76% (a)
Ratio of net investment income to average net assets 1.57% (a)
Portfolio turnover rate 120%
- ----------------------------------------------------------------------------
</TABLE>
(a) Annualized.
(e) For the period from January 16, 1998 (initial offering of Class E shares)
to October 31, 1998.
* Total return does not reflect sales commission and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
28
<PAGE>
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO
FINANCIAL HIGHLIGHTS
CLASS Y SHARES
<TABLE>
<CAPTION>
Year Year Period
Ended Ended Ended
10/31/98 10/31/97 10/31/96 (f)
------------ ------------ -------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.89 $ 12.12 $ 12.50
- --------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.27 0.15 0.04
Net realized and unrealized gain (loss) on investments 0.79 1.67 (0.42)
- --------------------------------------------------------------------------------------------------------------
Total from investment operations 1.06 1.82 (0.38)
- --------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM
Net investment income (0.02) (0.05) -
Capital gains (0.05) - -
Tax return of capital (0.14) - -
- --------------------------------------------------------------------------------------------------------------
Total distributions (0.21) (0.05) -
- --------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 14.74 $ 13.89 $ 12.12
- --------------------------------------------------------------------------------------------------------------
Total Return* 7.69% 15.07% (3.04%)
- --------------------------------------------------------------------------------------------------------------
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 10,979 $ 16,110 $ 8,741
Ratio of expenses to average net assets 1.10% 1.10% 1.10% (a)
Ratio of expenses to average net assets excluding waiver 1.43% 1.74% 1.75% (a)
Ratio of net investment income to average net assets 1.21% 1.20% 0.89% (a)
Portfolio turnover rate 120% 107% 59%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Annualized.
(f) For the period from May 29, 1996 (commencement of operations) to October
31, 1996.
* Total return does not reflect sales commission and is not annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
29
<PAGE>
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1998
NOTE 1: ORGANIZATION
Mentor Institutional Trust ("Trust") was organized on February 8, 1994, and is
registered under the Investment Company Act of 1940, as amended, as an open-end
management investment company. The Trust consists of four separate diversified
portfolios (hereinafter each individually referred to as a "Portfolio" or
collectively as the "Portfolios") at October 31, 1998, as follows:
Mentor U.S. Government
Cash Management Portfolio ("Cash Management Portfolio")
Mentor Fixed-Income Portfolio ("Fixed-Income Portfolio")
Mentor Perpetual International Portfolio ("The Portfolio")
SNAP Fund
The assets of each Portfolio of the Trust are segregated and a shareholder's
interest is limited to the Portfolio in which shares are held.
These financial statements include only the International Portfolio.
The Portfolio currently issues four classes of shares. Class A shares are sold
subject to a maximum sales charge of 5.75% 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 E and Class Y shares are not subject to any
sales charges.
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 -- Listed securities held by the Portfolio traded
on national securities exchanges and over-the-counter securities quoted on the
NASDAQ National Market System are valued at the
30
<PAGE>
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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 designated as the primary market under
procedures approved by the Board of Trustees. 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.
Foreign currency amounts are translated into United States dollars as follows:
market value of investments, 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 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
31
<PAGE>
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
honor the terms of the repurchase agreement. Accordingly, the Trust could
receive less than the repurchase price on the sale of collateral securities.
(c) Portfolio Securities Loaned -- The Portfolio is authorized by the Board of
Trustees to participate in securities lending transactions.
The Portfolio may receive fees for participating in securities lending
transactions. During the period that a security is out on loan, the Portfolio
continues 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 Portfolio 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 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 October 31, 1998, the Portfolio had loaned securities to brokers which were
collateralized by cash and securities. Cash collateral at October 31, 1998 was
reinvested in U.S. Treasury and high quality money market instruments. Income
from securities lending activities amounted to $85,211 for the year ended
October 31, 1998. The risks to the Portfolio from securities lending are that
the borrower may not provide additional collateral when required or return the
securities when due. At October 31, 1998, the market value of the securities on
loan and the related collateral were as follows:
<TABLE>
<CAPTION>
Securities Cash Securities
On Loan Collateral Collateral
- -------------- -------------- -------------
<S> <C> <C>
$10,800,732 $10,009,574 $1,121,971
</TABLE>
(d) 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. Dividends are recorded on ex-dividend date. Realized and
unrealized gains and losses on investment security transactions are calculated
on an identified cost basis.
32
<PAGE>
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
(e) Expenses -- Expenses arising in connection with a Portfolio are allocated
to that Portfolio. Other Trust expenses are allocated among the Portfolios in
proportion to their relative net assets.
(f) 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.
At October 31, 1998 the Portfolio had a capital loss carryforward of
approximately $258,000. In accordance with tax regulations, the capital loss
carryforward will expire on October 31, 2006. It is the Portfolio's policy to
defer distributions or realized gains until the capital loss carryforward is
utilized or expired.
(g) 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.
(h) 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 the deferral of wash sales.
NOTE 3: DIVIDENDS
Dividends are declared and paid annually by the Portfolio. Capital gains
realized by the Portfolio, if any, will be distributed annually.
NOTE 4: INVESTMENT MANAGEMENT AND ADMINISTRATION AGREEMENTS
The Portfolio has entered into an Investment Advisory Agreement with Mentor
Perpetual Advisors, LLC ("Mentor Perpetual"). Mentor Perpetual is owned equally
by Mentor Investment Advisors, LLC 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 1.00% applied to the
average daily net assets of the Portfolio. For the year ended
33
<PAGE>
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
October 31, 1998, Mentor Perpetual earned advisory fees of $983,291 and waived
$318,510 of those fees.
Mentor Investment Group, LLC ("Mentor") provides administrative personnel and
services to the Portfolio, pursuant to an Administration Agreement. For the
year ended October 31, 1998, Mentor earned administration fees of $63,564.
Mentor is a partially owned subsidiary of Wheat First Butcher Singer, Inc.,
("Wheat") and EVEREN Capital Corporation.
NOTE 5: DISTRIBUTION AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
The Portfolio has adopted a Distribution Plan ("the Plan") with respect to its
Class B shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
Under a Distribution Agreement between the Portfolio and Mentor Distributors,
LLC ("Mentor Distributors") a wholly-owned subsidiary of BISYS Fund Services,
Inc., Mentor Distributors was appointed distributor of the Portfolio. To
compensate Mentor Distributors for the services it provides and for the
expenses it incurs under the Distribution Agreement, the Portfolio pay a
distribution fee, which is accrued daily and paid monthly at the annual rate of
0.75% of the Portfolio's average daily net assets.
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 Portfolio. Financial
institutions will receive fees from Mentor Distributors based upon Class B
shares owned by their clients or customers.
The Trust has adopted a Shareholder Servicing Plan (the "Service Plan") with
respect to Class A, Class B and Class E shares of the Portfolio. Under the
Service Plan, financial institutions will enter into shareholder service
agreements with the Portfolio to provide administrative support services to
their customers who from time to time may be owners of record or beneficial
owners of Class A, Class B or Class E shares of the Portfolio. In return for
providing these support services, a financial institution may receive payments
from the Portfolio at a rate not exceeding 0.25% of
34
<PAGE>
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
the average daily net assets of the Class A, Class B or Class E shares.
Presently, the Portfolio's class specific expenses are limited to expenses
incurred by a class of shares pursuant to its respective Distribution Plan. For
the year ended October 31, 1998, distribution fees and shareholder servicing
fees were as follows:
<TABLE>
<CAPTION>
Distribution Shareholder Service Fee
Fee Class A Class B Class E
- ------------- ----------- --------- --------
<S> <C> <C> <C>
$243,187 $117,340 $80,587 $5,578
</TABLE>
NOTE 6: FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
In connection with portfolio purchases and sales of securities denominated in a
foreign currency, the Portfolio may enter into forward foreign currency
exchange contracts ("contracts"). Additionally, from time to time the 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 October
31, 1998, the Portfolio had outstanding forward contracts as set forth below.
<TABLE>
<CAPTION>
Unrealized
Contracts to In Exchange Appreciation/
Settlement Date Deliver/Receive Value For (Depreciation)
- ----------------- ----------------- ------------ ------------- ---------------
<S> <C> <C> <C> <C> <C>
Purchases
11/30/98 Singapore Dollar 416,000 $ 255,465 $ 250,000 $ 5,465
Sales
11/03/98 British Pound 37,175 62,194 62,213 (19)
11/03/98 British Pound 31,915 53,394 53,410 (16)
11/04/98 British Pound 36,722 61,436 61,454 (18)
3/18/99 Hong Kong Dollar 7,928,000 1,000,000 1,016,475 (16,475)
11/30/98 Singapore Dollar 885,000 500,000 543,478 (43,479)
- -------- ------------------ --------- --------- --------- ---------
</TABLE>
35
<PAGE>
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO
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 capital
shares were as follows:
<TABLE>
<CAPTION>
Period Ended Period Ended
10/31/98 10/31/97
Shares Dollars Shares Dollars
------------- ---------------- ------------- ---------------
CLASS A: (a)
<S> <C> <C> <C> <C>
Shares sold 2,714,324 $ 40,017,047 2,446,508 $ 35,229,362
Shares issued upon reinvestment of distributions 51,307 729,947 - -
Shares redeemed (882,718) (12,590,371) (44,970) (656,144)
--------- ------------- --------- ------------
Change in net assets from capital share
transactions 1,882,913 $ 28,156,623 2,401,538 $ 34,573,218
--------- ------------- --------- ------------
CLASS B: (a)
Shares sold 1,859,926 $ 27,973,060 1,423,996 $ 20,841,823
Shares issued upon reinvestment of distributions 33,872 478,262 - -
Shares redeemed (380,236) (5,482,882) (21,487) (307,588)
--------- ------------- --------- ------------
Change in net assets from capital share
transactions 1,513,562 $ 22,968,440 1,402,509 $ 20,534,235
--------- ------------- --------- ------------
CLASS E: (b)
Shares sold 148,374 $ 2,008,618 - $ -
Shares issued upon reinvestment of distributions 1,550 22,256 - -
Shares redeemed - - - -
--------- ------------- --------- ------------
Change in net assets from capital share
transactions 149,924 $ 2,030,874 - $ -
--------- ------------- --------- ------------
CLASS Y:
Shares sold 95 $ 1,350 444,362 $ 6,032,071
Shares issued upon reinvestment of distributions 11,659 165,455 3,002 36,772
Shares redeemed (426,754) (5,756,280) (8,616) (123,700)
--------- ------------- --------- ------------
Change in net assets from capital share
transactions (415,000) $ (5,589,475) 438,748 $ 5,945,143
--------- ------------- --------- ------------
</TABLE>
(a) For the period from December 27, 1996 (initial offering of Class A and
Class B shares) to October 31, 1997.
(b) For the period from January 16, 1998 (initial offering of Class E shares)
to October 31, 1998.
36
<PAGE>
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO
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
Portfolio's 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.
FEDERAL TAX STATUS OF DIVIDENDS DECLARED (UNAUDITED)
Long-term capital gain dividends paid during the year were $143,609. For
federal income tax purposes, dividends from short-term capital gains are
classified as ordinary income. All net investment income dividends were
ordinary income.
37
<PAGE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
THE TRUSTEES AND SHAREHOLDERS
MENTOR PERPETUAL INTERNATIONAL PORTFOLIO
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the Mentor Perpetual International Portfolio,
a portfolio of Mentor Institutional Trust as of October 31, 1998, and the
related statement of operations for the year then ended, statements of changes
in net assets for each of the years in the two-year period then ended and
financial highlights for each of the years or periods in the two-year period
then ended and for the period from May 29, 1996 (commencement of operations) to
October 31, 1996. These financial statements and financial highlights are the
responsibility of the Trust's 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. Our procedures included confirmation of securities owned as of
October 31, 1998 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Mentor Perpetual International Portfolio, a portfolio of Mentor Institutional
Trust, as of October 31, 1998 and the results of its operations, changes in its
net assets and financial highlights for the periods specified in the first
paragraph above, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
December 18, 1998
38
<PAGE>
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
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, Treasurer
Mentor Investment Group, LLC
Geoffrey B. Sale, SECRETARY
Associate Vice President
Mentor Investment Group, LLC
Michael A. Wade, ASSISTANT TREASURER
Vice President, Controller
Mentor Investment Group, LLC
MK#1312
Mentor Institutional Trust
Mentor Perpetual
International Portfolio
---------------------------
ANNUAL REPORT
---------------------------
October 31, 1998
[MENTOR INVESTMENT GROUP LOGO]
