Mentor Institutional Trust
Mentor Perpetual International Portfolio
Annual Report, October 31, 1997
Message from the Chairman and President
- --------------------------------------------------------------------------------
It is our privilege to send you the Mentor Institutional Trust Annual Report
for the Perpetual International Portfolio for the year ended October 31, 1997.
Mentor Institutional Trust is part of Mentor Investment Group, a firm that
provides diversified investment management services to a broad range of
investors including corporations, foundations, endowments, municipalities,
public funds, and individual investors. Seven different investment styles are
available to investors through Mentor, in both mutual funds and
separately-invested portfolios.
The Annual Report that follows provides commentary from the management teams of
the award-winning British investment firm, Perpetual.
Mentor Investment Group
Seven Investment Styles
[GRAPH]
[LISTED IN ORDER FROM LOWER RISK AND REWARD TO HIGHER RISK AND REWARD]
CASH MANAGEMENT
ACTIVE FIXED INCOME
BALANCED MANAGEMENT
TACTICAL ASSET ALLOCATION
LARGE-CAPITALIZATION QUALITY GROWTH
GLOBAL/INTERNATIONAL EQUITY GROWTH
SMALL/MID-CAPITALIZATION GROWTH
1
<PAGE>
Mentor Institutional Trust
Mentor Perpetual International Portfolio
Annual Report, October 31, 1997
Message from the Chairman and President (continued)
- --------------------------------------------------------------------------------
In the commentary they present their perspectives on the markets and their
strategies for investing your assets in international securities. Complete
performance information for the Portfolio, relative to the EAFE (Europe,
Australia, and the Far East) Index, is also included.
Please review the information carefully. Should you have questions, please call
your consultant, or call us directly, (800) 382-0016. On behalf of all of us at
Mentor Investment Group, we thank you for your investment in the International
Portfolio of Mentor Institutional Trust.
Sincerely,
/s/Daniel J. Ludeman /s/ Paul F. Costello
- -------------------- --------------------
Daniel J. Ludeman Paul F. Costello
Chairman and CEO 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 for Mentor Funds and the Portfolios
of Mentor Institutional Trust, 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
- --------------------------------------------------------------------------------
Overall, world equity markets made modest gains during the 12-months ended
October 31, 1997, with the Morgan Stanley Capital Europe Australia and Far East
(EAFE) Index rising by 4.9%. However, world markets can be split in two with
the major markets of the Western Hemisphere - the United States, Europe and
Latin America - showing good gains, while those in the Eastern Hemisphere
delivered losses. Although international investors took heart from the American
"Goldilocks" scenario (economic growth that is neither too hot nor too cold,
but just right), problems specific to the Asian economies undermined investor
confidence in those markets over the summer and autumn months.
Europe
The major European markets were all strong. Economies began to emerge from a
sustained period of sluggish growth, particularly as exports were boosted by
the relative weakness of European currencies against the dollar. Despite better
rates of growth, central banks kept monetary policy loose as unemployment
remained at levels not seen since the 1930s. Bond markets received a further
boost as investors became convinced that European Monetary Union was nearly
certain to commence in January, 1999. Throughout the region, except for
Switzerland, bond yields converged on German rates. Because of the Bundesbank's
success in restraining inflation, German rates have traditionally been the
lowest on the continent. Yield convergence also sparked spectacular rises in
the equity markets of traditionally high inflation/high interest rate
countries. Overall, the MSCI Europe ex. UK Index moved ahead by 25.3% in dollar
terms.
UK
Unlike the rest of Europe, the UK did not enjoy low or falling interest rates.
With the UK staying out of at least the initial round of EMU, the Bank of
England was able to respond to a strong domestic economy by pushing up rates.
This rise in rates helped propel pound sterling higher, and so caused exports
to sag, another contrast with the Continent. Even so, the UK for the first time
in the post-war period was the high growth, low inflation economy of Europe.
Investors were not frightened away by an incoming Labour government, as it
promised to be as pro-business as its Conservative predecessor. Against this
background, in dollar terms the MSCI UK Index was up 28.6%.
Japan
Although the stock market and the currency rallied in the middle of the period,
the past 12 months were once again disappointing for investors in Japan.
Domestic institutions dumped stocks in favor of bonds, with the yield on the
long
3
<PAGE>
Mentor Perpetual International Portfolio
Managers' Commentary (continued)
- --------------------------------------------------------------------------------
bond falling to 1.60% - possibly the lowest yield seen on a major bond market
for more than 400 years - and overwhelmed foreign buying of stocks. Economic
recovery ran out of steam; indeed the decline in GDP in the second quarter of
1997 was the second biggest decline in quarterly output in the post-war period.
Having pledged itself to deficit reduction and having already brought money
rates down to little above zero, the government had apparently run out of
options to cope with renewed recession. The outlook for corporate profits,
outside selected export industries, deteriorated, and the potential for a
number of collapses in the banking and insurance sector never receded. The MSCI
Japan Index was down 18.0% in dollar terms, with smaller companies particularly
hard hit.
Asia (Excluding Japan)
During the past 12 months the Asian dream turned into a nightmare. The MSCI
Pacific ex. Japan Index fell by 25.5% in dollar terms, but behind that were
collapses in a number of stock markets widely favored by foreign investors. The
Bangkok SET Index fell by 69.5%, the Kuala Lumpur Composite Index by 57.1%, the
Jakarta SE Index by 43.1% and the Korean Composite Index by 46.7%, all in
dollar terms. For these countries, as well as elsewhere in much of Asia,
disappointing export growth brought a slowdown in economic growth and balance
of payments problems. This left their currencies vulnerable to speculators'
attacks, and unsuccessful attempts by central banks to maintain exchange rates
led to collapses in both currencies and stock markets. Moreover, the slowdown
in growth rates made it apparent that after years in which
capital-investment-to-GDP ratios generally exceeded 25%, and in some cases 40%,
there was considerable over-capacity in manufacturing and real estate. Since
much of this investment had been financed in US dollars rather than local
currencies, servicing borrowings became a major problem for Asian corporations.
Consequently the strength of Asian banks was seriously undermined. It is
estimated that in Thailand, the most extreme example so far, approximately one
third of bank loans may be bad.
The one major exception to this gloomy scenario was Hong Kong. The changeover
in sovereignty from the UK to China transpired without problems. However, late
in the period the Hong Kong dollar came under attack by speculators despite the
territory's good fundamentals. The government's determination to defend the
exchange rate, at whatever the cost in terms of higher interest rates, caused a
sell-off in October in this market dominated by real estate and banking
concerns. Over the 12 months the Hang Seng Index fell by 14.8% in dollar terms.
4
<PAGE>
Mentor Perpetual International Portfolio
Managers' Commentary (continued)
- --------------------------------------------------------------------------------
Latin America
The contrast with Asia could hardly be greater. These markets rewarded
investors, with the MSCI EMF Latin America Index up 24.1% in dollar terms for
the 12-month period. Balance of payments problems receded as exports grew
healthily. Governments were successful in getting public sector expenditures
under control, and in reducing inflation rates to less than 10% per annum. This
contrasts to the 10% per month more typically experienced in the past. With
stocks generally trading at P/E's relatively low by international standards,
Latin America offered investors the promise which Asia had offered in the past
- - superior growth at discounted valuations - and so foreign capital flowed into
these markets.
Outlook
Large questions, and risks, loom for investors over the next 12 months. Will
the American Goldilocks meet at least one bear? Can the European move to
monetary union be sustained? Will the Japanese economy fall back into
interminable recession or will its financial sector collapse? Will other Asian
economies and stock markets simply free-fall? Will the Asian flu prove
contagious?
Without ignoring these risks, we wish to be relatively optimistic. Given the
already rich valuation of American shares, a correction, or series of
corrections, on Wall Street is likely. A prolonged bear market is not likely,
however, and high valuations alone should not deter investment. While
international markets do reflect moves on Wall Street, a series of corrections
need not hold back their progress.
In Europe progress toward EMU seems unstoppable. Probably the maximum political
danger to monetary union has passed and stronger growth should lessen the human
cost in terms of unemployment. However, some tightening of monetary policy can
be expected to occur, especially as the Bundesbank will not want the EMU to be
considered a "soft" currency. The damage to stock markets caused by rising
rates will be minimized by a wave of cross-border mergers and acquisitions. M &
A activity has already commenced as European companies jockey for position
before January, 1999.
In the UK the pressure for rising rates has already peaked as the signs mount
that the economy is beginning to slow. With the new Labour government adopting
a friendlier position towards the EMU, a shadowing of European rates is likely
to occur. This could provide a second leg to the UK equity bull market,
particularly as British stocks are attractively valued by international
standards.
5
<PAGE>
Mentor Perpetual International Portfolio
Managers' Commentary (continued)
- --------------------------------------------------------------------------------
Japan will probably not fall into prolonged recession, although a period of
lackluster growth is certain. While a tightening in fiscal policy will have a
contractionary influence, it should be more than offset by continued buoyancy
in exports and by an uptick in consumer expenditures. This should be especially
true since huge amounts of personal sector savings now earn virtually no
return. In the short term, a series of bankruptcies in the financial sector
will continue to cause considerable stock market volatility. Longer term,
however, Japan can not return to financial health without ridding itself of a
number of weak, mismanaged banks, insurance companies and brokers which have
been effectively rendered insolvent by bad debts and hidden losses. Bad news
today is good news for tomorrow.
Asian stock markets remain problematic. After many years of economic and stock
market boom, it would be wrong to expect a bust of only a few months. The
magnitude of the burden of corporate bankruptcy and the consequent need for
financial sector reconstruction can not be overcome quickly. As virtually
everything has been sold down, bargains have been created in sound companies
amid the wreckage.
In contrast, the Latin American story looks compelling. Although a history of
disappointing performance cautions investors against complacency, the mix of
sound government policy, strong profit growth and appealing stock price
valuations promises high returns in these high risk markets.
For the world as a whole, there is benefit (as well as pain in the form of
reduced export prospects) from the Asian collapse. Asian deflation should more
than offset any inflationary pressure which might build as Western economies
grow. Consequently, the interest rate outlook remains very benign for equity
investors.
The objective of the Mentor Perpetual International Portfolio remains to seek
long-term capital appreciation by investing in a diversified portfolio and
equity securities of issuers outside the U.S.
While the managers seek to invest the Portfolio in accordance with their
proprietary equity selection process, there is no guarantee of investment
success. Past performance does not guarantee future comparable results.
Investment return and principal value will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
Performance figures represent change in investment value after reinvesting all
dividends.
6
<PAGE>
Mentor Perpetual International Portfolio
Managers' Commentary (continued)
- --------------------------------------------------------------------------------
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]
Class A Class B Morgan Stanley
12/27/96 $9,525 $10,000 $10,000.00
1/31/97 $9,548 $10,048 $ 9,652.34
2/28/97 $9,875 $10,392 $ 9,812.54
3/31/97 $9,890 $10,408 $ 9,850.49
4/30/97 $10,057 $10,584 $ 9,905.14
5/31/97 $10,627 $11,144 $10,552.16
6/30/97 $11,091 $11,680 $11,136.49
7/31/97 $11,357 $11,960 $11,318.94
8/31/97 $10,726 $11,288 $10,475.92
9/30/97 $11,357 $11,936 $11,065.13
10/31/97 $10,513 $11,048 $10,217.04
Total Returns as of 10/31/97
1-Year Since Inception**
n/a 5.11%
Class A n/a 7.41%
Class B
The performance data quoted in this report are historical and do not predict
future investment results. Investment return and principal value will fluctuate
so that shares, when redeemed, may be worth more or less than their original
cost.
Performance is cited as of October 31, 1997, and includes changes in share
price and reinvestment of dividends and capital gains.
* 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 changes = $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 on year from the purchase date. 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
10/31/97.
7
<PAGE>
Mentor Perpetual International Portfolio
Managers' Commentary (continued)
- --------------------------------------------------------------------------------
[GRAPH]
Performance Comparison
Mentor Institutional Class Morgan Stanley
5/96 10,000 10,000
6/96 10,064 10,058.73
7/96 9,736 9,767.25
8/96 9,816 9,791.18
9/96 9,920 10,053.76
10/96 9,696 9,953.38
11/96 10,104 10,351.89
12/96 10,153 10,221.21
1/97 10,153 9,865.86
2/97 10,506 10,029.61
3/97 10,522 10,068.40
4/97 10,627 10,124.26
5/97 11,253 10,785.59
6/97 11,759 11,382.84
7/97 12,049 11,569.33
8/97 11,382 10,707.66
9/97 12,049 11,309.91
10/97 11,157 10,443.05
Average Annual Returns as of 10/31/97
1-Year Since Inception**
Institutional Class 15.07% 7.99%
The graph compares the investment performance of the Mentor Perpetual
International Portfolio Institutional Class, from its inception date to the
index that is most representative of the Portfolio. The graph reflects the
performance of a $10,000 investment from the date the Portfolio started through
October 31, 1997. Returns do not reflect taxes payable on distributions.
In comparing the performance of a portfolio to an index, you should keep in
mind that market indexes do not take into account brokerage commissions that
would be incurred if you purchased the individual securities that make up the
index. They also do not include taxes payable on dividends and interest
payments, or operating expenses necessary to maintain a portfolio investing in
the index.
The performance data quoted in this report are historical and do not predict
future investment results. Investment return and principal value will fluctuate
so that shares, when redeemed, may be worth more or less than their original
cost.
Performance is cited as of October 31, 1997, and includes changes in share
price and reinvestment of dividends and capital gains.
+ Represents a hypothetical investment of $10,000 in Mentor Perpetual
International Portfolio Institutional Class Shares. The Institutional
Class 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 1119
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
Institutional Class from the date of commencement of operations on
5/29/96 through 10/31/97.
8
<PAGE>
Mentor Perpetual International Portfolio
Portfolio of Investments
October 31, 1997
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Preferred Stock 0.09%
- -------------------------------------------------------------------------------------
Brazil
CESP CIA Energ SAO (cost $79,009) 3,080 $ 58,669
- -------------------------------------------------------------------------------------
Common Stocks 85.85%
- -------------------------------------------------------------------------------------
Argentina 0.89%
Banco Rio de La Plata SA-* 2,560 26,880
Disco SA-* 3,000 121,500
Perez Companc SA- 11,430 142,731
Siderar SA (a) 3,600 142,070
Telecom Argentina SP- 4,800 121,500
Telefonica de Argentina SA- 2,060 57,938
- -------------------------------------------------------------------------------------
612,619
- -------------------------------------------------------------------------------------
Belgium 0.59%
Electrabel* 1,800 402,433
- -------------------------------------------------------------------------------------
Brazil 2.48%
Brazil Fund, Inc. 2,540 54,770
Cemig CIA Energetic- (a) 7,290 291,018
Centrais Eletrobras- 13,990 304,557
CESP CIA Energ SAO-* 3,800 72,384
Pao De Acucar # 6,230 118,672
Petroleo Brasileiro SA- 9,000 178,783
Telebras- 5,500 558,250
Vale Do Rio Doche- 6,270 122,846
- -------------------------------------------------------------------------------------
1,701,280
- -------------------------------------------------------------------------------------
Chile 0.87%
Banco BHIF- 5,200 90,025
Chilectra SA- 4,250 114,810
Embotella Andina- 3,500 84,000
Enersis SA- 3,760 124,080
</TABLE>
9
<PAGE>
Mentor Perpetual International Portfolio
Portfolio of Investments
October 31, 1997
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stocks (continued)
- -------------------------------------------------------------------------------------
Chile (continued)
Santa Isabel SA- 3,630 $ 67,155
CIA Telecom Chile- 4,130 114,608
- -------------------------------------------------------------------------------------
594,678
- -------------------------------------------------------------------------------------
China 0.06%
Huaneng Power International, Inc.-* 2,000 44,000
- -------------------------------------------------------------------------------------
Finland 1.99%
Huhtamaki OY 11,000 451,671
Nokia (AB) OY 10,500 914,910
- -------------------------------------------------------------------------------------
1,366,581
- -------------------------------------------------------------------------------------
France 4.85%
Atos SA* 3,110 348,215
Carbone Lorraine 2,000 528,730
Entrelec* 3,000 117,150
Generale Des Eaux-Warrants 780 411
Geneset SA-* 10,000 190,000
ISIS* 3,600 419,874
PIN-Printemps 2,000 911,628
Serp Recyclage* 3,250 150,217
Total SA- Class B 6,000 663,505
- -------------------------------------------------------------------------------------
3,329,730
- -------------------------------------------------------------------------------------
Germany 5.13%
Allianz AG 1,700 382,708
Pfeiffer Vacuum Tech -* 4,900 159,250
Porsche AG 500 736,422
VIAG AG 4,820 2,245,493
- -------------------------------------------------------------------------------------
3,523,873
- -------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
Mentor Perpetual International Portfolio
Portfolio of Investments
October 31, 1997
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stocks (continued)
- -------------------------------------------------------------------------------------
Great Britain 18.88%
Abbey National PLC 35,000 $556,207
BAT Industries PLC 37,400 328,035
BAA PLC 47,000 432,710
Barclays PLC 15,000 378,484
Bass 30,000 414,674
British Aerospace PLC 14,000 372,251
British Airways 36,000 351,342
British Biotech* 190,000 323,110
British Telecom 55,100 417,043
BurMah Castrol 20,000 340,451
Centrica* 180,200 252,100
Commercial Union 24,000 336,565
Dalgety 75,000 308,492
Enterprise Oil 45,500 507,712
General Accident 11,000 182,733
Glaxo Wellcome 11,400 243,718
Granada Group 24,500 336,598
Grand Metropolitan 40,000 359,551
Great Univeral Stores 25,000 297,183
Greenalls Group PLC 50,000 295,717
Lloyds TSB Group 17,000 207,496
Medeva 98,300 338,452
National Westminster 22,600 326,398
Powergen 30,000 332,493
Prudential Corporation PLC 27,000 287,482
Rank Organisation PLC 70,000 389,375
Reckitt & Colman 10,000 152,718
Rolls Royce 75,000 263,569
Safeway 60,000 391,553
Scotia Holdings* 30,000 198,541
Shell 43,000 304,387
Smith (W.H.) Group 25,000 158,330
</TABLE>
11
<PAGE>
Mentor Perpetual International Portfolio
Portfolio of Investments
October 31, 1997
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stocks (continued)
- -------------------------------------------------------------------------------------
Great Britain (continued)
SmithKline Beecham PL 32,000 $ 302,653
Stakis 180,000 292,533
Standard Chartered 46,500 503,678
Tesco PLC 43,300 342,240
United Utilities 36,300 440,937
UTD Assurance Group CNV 15,000 1,634
Vickers 140,000 534,803
Whitbread PLC 12,500 165,869
- -------------------------------------------------------------------------------------
12,969,817
- -------------------------------------------------------------------------------------
Hong Kong 5.07%
Asia Satellite 8,000 19,250
Beijing Enterprises* 2,000 6,688
CDL Hotels International 51,400 14,795
Cheung Kong Holdings 36,000 250,323
China Aerospace International 253,800 99,320
China Light & Power 32,000 168,486
China Pharmaceutical 700,000 112,290
China Telecommunication* 120,000 191,721
China Travel International 150,000 61,610
Citic Pacific Limited 82,000 392,497
Dah Sing Financial 8,000 20,078
First Tractor Company* 143,000 110,996
Giordano International 320,000 117,982
GZI Transport 100,000 32,341
GZI Transport - Warrants* 16,000 435
Hang Seng Bank 5,000 43,499
Hon Kwok Land Investment 110,000 23,622
Hong Kong Electric 80,000 271,151
Hong Kong Telecom, Ltd.- 53,029 101,530
HSBC Holdings PLC 15,997 362,157
Hutchison Whampoa, Ltd. 34,000 235,317
</TABLE>
12
<PAGE>
Mentor Perpetual International Portfolio
Portfolio of Investments
October 31, 1997
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stocks (continued)
- -------------------------------------------------------------------------------------
Hong Kong (continued)
Kwong Sang Hong International 250,000 $ 88,939
National Mutual Asia 100,000 90,556
New World Development 37,312 131,292
New World Infrastructure* 107,000 211,785
Road King Infrastructure 200,000 129,366
Swire Pacific Limited - Class A 8,000 42,743
Television Broadcast, Ltd. 32,000 89,004
Wharf Holdings 32,000 65,407
- -------------------------------------------------------------------------------------
3,485,180
- -------------------------------------------------------------------------------------
Hungary 0.03%
OTP Bank #* 700 21,613
- -------------------------------------------------------------------------------------
India 0.28%
India Cement # 15,000 39,375
Tata Electric Cies#* 500 150,000
- -------------------------------------------------------------------------------------
189,375
- -------------------------------------------------------------------------------------
Indonesia 0.12%
BAT Indonesia* 4,000 28,849
PT London Sumatra 48,000 51,595
- -------------------------------------------------------------------------------------
80,444
- -------------------------------------------------------------------------------------
Ireland 2.40%
Bank of Ireland 71,300 898,933
Elan Corporation PLC-* 15,000 748,125
- -------------------------------------------------------------------------------------
1,647,058
- -------------------------------------------------------------------------------------
Italy 1.60%
Assicurazioni General 17,500 390,436
Eni SPA 27,000 151,512
</TABLE>
13
<PAGE>
Mentor Perpetual International Portfolio
Portfolio of Investments
October 31, 1997
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stocks (continued)
- ---------------------------------------------------------------------------------------------
Italy (continued)
Seat SPA* 12,000 $ 4,810
Telecom Italia Mobil 150,000 555,261
- --------------------------------------------------------------------------------------------
1,102,019
- --------------------------------------------------------------------------------------------
Japan 16.23%
Aoyama Trading Company 40,000 1,074,250
Chugai Pharmaceutical* 53,000 426,133
Daiwa Securities Company 150,000 907,957
Fuji Electric Company 275,000 841,440
House Food Industrial* 37,000 636,817
Japan Tobacco 1,500 1,230,980
Mycal Corporation* 95,000 908,373
Nintendo Corportation, Ltd. 9,000 778,249
Rohm Company 7,000 692,608
TDK Corporation* 9,000 746,820
Tokio Marine & Fire 90,000 897,980
Tokyo Electric Power 67,000 1,281,284
Toyoda Automatic Loom Works 7,000 726,033
- --------------------------------------------------------------------------------------------
11,148,924
- --------------------------------------------------------------------------------------------
Korea 0.10%
Atlantis Korean Company* 5,000 25,600
Korea Housing & Commercial Bank #* (a) 2,000 15,400
Schroder Korea Fund* 7,000 30,625
- ---------------------------------------------------------------------------------------------
71,625
- ---------------------------------------------------------------------------------------------
Malaysia 0.26%
Berjaya Capital BHD 50,000 26,939
Boustead Holdings BHD 10,000 11,311
Genting Berhad 5,000 13,990
Leader University Holdings 36,000 21,860
</TABLE>
14
<PAGE>
Mentor Perpetual International Portfolio
Portfolio of Investments
October 31, 1997
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stocks (continued)
- -------------------------------------------------------------------------------------
Malaysia (continued)
Malaysian Plantations 16,000 $ 7,144
Nanyang Press 8,000 13,812
Powertek Berhad* 60,000 75,368
Public Finance BHD 16,000 7,811
- -------------------------------------------------------------------------------------
178,235
- -------------------------------------------------------------------------------------
Mexico 2.51%
CEMEX SA-* 21,700 188,649
CIFRA SA- 60,050 117,998
Corporation GEO SA #* (a) 5,200 108,212
DESC SA- 7,122 241,275
Empresas ICA SA- 6,500 86,531
Empresas La Modern-* 6,750 132,047
Fomento Economico- (a) 15,340 107,671
Grupo Carso SA- 16,890 214,635
Grupo Finance Bancomer #* (a) 9,250 85,562
Grupo Industrial Durango* 4,100 53,300
Grupo Televisa #* 4,300 133,800
Kimberly Clark Mexico SP- 5,760 115,200
Panamericana Beverages-Class A 4,490 139,190
- -------------------------------------------------------------------------------------
1,724,070
- -------------------------------------------------------------------------------------
Netherlands 5.98%
ABN Amro Holdings NV 1,300 26,087
BAAN Company NV* 10,000 705,671
IHC Caland NV 3,000 183,834
ING Groep NV 9,000 376,443
Ispat International NV* 21,300 541,109
Oce NV 2,140 243,269
Philips Electronics NV* 9,460 737,963
Royal Dutch Petroleum 2,476 130,503
Unilever PLC 72,000 534,402
</TABLE>
15
<PAGE>
Mentor Perpetual International Portfolio
Portfolio of Investments
October 31, 1997
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stocks (continued)
- -------------------------------------------------------------------------------------
Netherlands (continued)
VNU-Ver Ned Uitgevers 26,500 $ 625,610
- -------------------------------------------------------------------------------------
4,104,891
- -------------------------------------------------------------------------------------
Norway 0.22%
Orkla ASA-Class A 1,670 152,738
- -------------------------------------------------------------------------------------
Peru 0.19%
CPT Telefonica Del Peru 6,600 130,350
- -------------------------------------------------------------------------------------
Philippines 0.21%
Ayala Corporation 37,500 13,791
Benpres Holdings #* 29,000 134,125
- -------------------------------------------------------------------------------------
147,916
- -------------------------------------------------------------------------------------
Singapore 0.72%
City Developments 16,000 67,026
Development Bank Singapore 4,000 37,322
GP Batteries International 43,000 125,547
Overseas Union Bank 68,000 226,595
Singapore Press Holdings 3,000 41,320
- -------------------------------------------------------------------------------------
497,810
- -------------------------------------------------------------------------------------
Spain 5.66%
BCO Central Hispanoam 42,200 779,635
Continente SA 32,605 637,540
Corporacion Financiera Alba 515 56,223
Iberdrola SA 100,000 1,191,699
Prosegur Seguridad Compania 98,294 1,097,317
Viscofan Envolturas Celulos 6,010 123,279
- -------------------------------------------------------------------------------------
3,885,693
- -------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
Mentor Perpetual International Portfolio
Portfolio of Investments
October 31, 1997
<TABLE>
<CAPTION>
Percent of Net Assets Shares Market Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stocks (continued)
- ---------------------------------------------------------------------------------------------------
Sweden 4.07%
Astra AB-Class A 34,000 $ 548,095
BPA AB 115,000 283,440
Celsisu AB-Class B 6,500 108,247
Ericsson LM-Class B 20,000 879,297
Securitas AB-Class B 3,920 104,450
Skandinaviska Enskili-Class A 3,210 34,640
Svenska Handels Banken-Class A 26,580 839,257
- ---------------------------------------------------------------------------------------------------
2,797,426
- ---------------------------------------------------------------------------------------------------
Switzerland 4.00%
Credit Suisse Group 3,000 421,069
Nestle SA 220 308,862
Novartis AG 840 1,310,790
Roche Holding AG 50 437,791
Zurich Versicherunswf 650 267,335
- ---------------------------------------------------------------------------------------------------
2,745,847
- ---------------------------------------------------------------------------------------------------
Taiwan 0.07%
Taipei Fund @* 4 32,600
Taiwan Semiconductor @* 1,000 18,000
- ---------------------------------------------------------------------------------------------------
50,600
- ---------------------------------------------------------------------------------------------------
Thailand 0.18%
Bangkok Bank 35,000 121,739
- ---------------------------------------------------------------------------------------------------
Venezuela 0.21%
CIA Anonima Telefonos 3,400 148,750
- ---------------------------------------------------------------------------------------------------
Total Common Stocks (Cost $60,606,510) 58,977,314
- ---------------------------------------------------------------------------------------------------
Total Long-Term Investments (cost $60,685,519) 59,035,983
- ---------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
Mentor Perpetual International Portfolio
Portfolio of Investments
October 31, 1997
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Market Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Short-Term Investment 6.98%
- ---------------------------------------------------------------------------------------------------
Repurchase Agreement
Goldman Sachs & Company
Dated 10/31/97, 5.72%, due 11/03/97,
collateralized by Federal Home Loan
Mortgage Corporation, $4,876,431, 7.00%,
7/01/27, market value $4,899,289,
(cost $4,796,832) $4,796,832 $ 4,796,832
- ---------------------------------------------------------------------------------------------------
Total Investments (cost $65,482,351) 92.92% 63,832,815
- ---------------------------------------------------------------------------------------------------
Other Assets less Liabilities 7.08% 4,861,096
- ---------------------------------------------------------------------------------------------------
Net Assets 100.00% $68,693,911
- ---------------------------------------------------------------------------------------------------
</TABLE>
* Non-income producing.
- American Depository Receipts.
# Global Depository Receipts.
@ International Depository Receipts.
(a) These are securities that may be resold to "qualified institutional buyers"
under Rule 144A or securities offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended. These securities have been determined
to be liquid under guidelines established by the Board of Trustees.
See notes to financial statements.
18
<PAGE>
Mentor Perpetual International Portfolio
Statement of Assets and Liabilities
October 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets
Investments, at market value* (Note 2)
Investment securities $ 59,035,983
Repurchase agreements 4,796,832
- ---------------------------------------------------------------------------------------------------------
Total investments 63,832,815
- ---------------------------------------------------------------------------------------------------------
Cash 54,521
Collateral for securities loaned (Note 2) 2,943,048
Receivables
Dividends and interest 120,731
Fund shares sold 7,916,026
Investments sold 171,253
Deferred expenses (Note 2) 14,693
- ---------------------------------------------------------------------------------------------------------
Total assets 75,053,087
- ---------------------------------------------------------------------------------------------------------
Liabilities
Payables
Investments purchased 3,340,419
Securities loaned (Note 2) 2,943,048
Fund shares redeemed 3,402
Unrealized depreciation on forward foreign currency exchange
contracts (Note 8) 1,870
Accrued expenses and other liabilities 70,437
- ---------------------------------------------------------------------------------------------------------
Total liabilities 6,359,176
- ---------------------------------------------------------------------------------------------------------
Net Assets $ 68,693,911
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Net Assets represented by:
Additional paid-in capital $ 70,054,521
Accumulated undistributed net investment income 8,093
Accumulated net realized gain on investments and foreign currency related transactions 214,844
Net unrealized depreciation on investments and foreign currency related transactions (1,583,547)
- ---------------------------------------------------------------------------------------------------------
Net Assets $ 68,693,911
- ---------------------------------------------------------------------------------------------------------
Net Asset Value per Share
Institutional Class $ 13.89
Class A Shares $ 13.83
Class B Shares $ 13.81
Offering Price per Share
Institutional Class $ 13.89
Class A Shares $ 14.67(a)
Class B shares $ 13.81
Shares Outstanding
Institutional Class 1,159,956
Class A Shares 2,401,538
Class B Shares 1,402,509
- ---------------------------------------------------------------------------------------------------------
Total Shares Outstanding 4,964,003
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
* Investments at cost is $65,482,351.
(a) Computation of offering price: 100/94.25 of net asset value.
See notes to financial statements.
19
<PAGE>
Mentor Perpetual International Portfolio
Statement of Operations
Year Ended October 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment income
Interest $ 125,521
Dividends* 365,456
- -----------------------------------------------------------------------------
Total investment income (Note 2) 490,977
- -----------------------------------------------------------------------------
Expenses
Management fee (Note 4) 223,001
Custodian fees 98,137
Registration expenses 35,455
Distribution fees (Note 5) 32,113
Shareholder service fees (Note 5) 22,421
Transfer agent fees 8,147
Shareholder reports and postage expenses 6,973
Organizational expenses (Note 2) 5,736
Legal fees 1,883
Audit fees 868
Directors' fees and expenses 105
Miscellaneous 77
- -----------------------------------------------------------------------------
Total expenses 434,916
- -----------------------------------------------------------------------------
Deduct
Waiver of management fee (Note 4) 137,516
- -----------------------------------------------------------------------------
Net expenses 297,400
- -----------------------------------------------------------------------------
Net investment income 193,577
- -----------------------------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments
Net realized gain on investments and foreign currency
related transactions (Note 2) 177,630
Change in unrealized depreciation of investments and
foreign currency related transactions (1,434,574)
- -----------------------------------------------------------------------------
Net realized and unrealized loss on investments and foreign
currency related transactions (1,256,944)
- -----------------------------------------------------------------------------
Net decrease in net assets resulting from operations $ (1,063,367)
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
</TABLE>
* Net of withholding taxes of $49,554.
See notes to financial statements.
20
<PAGE>
Mentor Perpetual International Portfolio
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended Period Ended
10/31/97 10/31/96(a)
--------------- -------------
<S> <C> <C>
Net Increase in Net Assets
Operations
Net investment income $ 193,577 $ 30,313
Net realized gain (loss) on investments 177,630 (141,811)
Change in unrealized depreciation of investments (1,434,574) (148,973)
- --------------------------------------------------------------------------------------------
Decrease in net assets resulting from operations (1,063,367) (260,471)
- --------------------------------------------------------------------------------------------
Distributions to Shareholders
Net investment income (36,772) -
- --------------------------------------------------------------------------------------------
Capital Share Transactions (Note 9)
Net proceeds from sale of shares 62,103,256 9,001,925
Reinvested distributions 36,772 -
Cost of shares redeemed (1,087,432) -
- --------------------------------------------------------------------------------------------
Change in net assets from capital share transactions 61,052,596 9,001,925
- --------------------------------------------------------------------------------------------
Increase in net assets 59,952,457 8,741,454
Net Assets
Beginning of period 8,741,454 -
- --------------------------------------------------------------------------------------------
End of period (including undistributed net investment
income of $8,093 and $12,826, respectively) $ 68,693,911 $ 8,741,454
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
(a) For the period from May 29, 1996 (commencement of operations) to October
31, 1996.
See notes to financial statements.
21
<PAGE>
Mentor Perpetual International Portfolio
Financial Highlights
<TABLE>
<CAPTION>
Institutional Class Class A Class B
----------------------------------- ----------------------- ----------------------
Year Period Period Period
Ended Ended Ended Ended
10/31/97 10/31/96(b) 10/31/97(c) 10/31/97(c)
----------- ----------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 12.12 $ 12.50 $ 12.53 $ 12.53
Income from investment operations
Net investment income 0.15 0.04 0.01 0.00
Net realized and unrealized gain
(loss) on investments and foreign
currency related transactions 1.67 (0.42) 1.29 1.28
- ----------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.82 (0.38) 1.30 1.28
Less distributions
Dividends from income (0.05)
- ----------------------------------------------------------------------------------------------------------------------
Total distributions (0.05) - - -
- ----------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 13.89 $ 12.12 $ 13.83 $ 13.81
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Total Return 15.07% (3.04%) 10.38% 10.22%
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Ratios / Supplemental Data
- ----------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $ 16,110 $ 8,741 $ 33,213 $ 19,371
Ratio of expenses to average net assets 1.10% 1.10%(a) 1.35%(a) 2.10%(a)
Ratio of expenses to average net assets
excluding waiver 1.74% 1.75%(a) 1.92%(a) 2.65%(a)
Ratio of net investment income to
average net assets 1.20% 0.89%(a) 0.71%(a) 0.04%(a)
Portfolio turnover rate 107% 59% 107% 107%
Average commission rate on portfolio
transactions $ 0.0150 $ 0.0295 $ 0.0150 $ 0.0150
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Annualized.
(b) For the period from May 29, 1996 (commencement of operations) to October
31, 1996.
(c) For the period from December 27, 1996 (initial offering of Class A and
Class B shares) to October 31, 1997.
See notes to financial statements.
22
<PAGE>
Mentor Perpetual International Portfolio
Notes to Financial Statements
October 31, 1997
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, 1997:
Mentor U.S. Government
Cash Management Portfolio
("Cash Management Portfolio")
Mentor Fixed-Income Portfolio
("Fixed-Income Portfolio")
Mentor Perpetual International Portfolio
("International 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 three 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 from 4.0% to 1.0% depending on when shares were
purchased and how long they have been held. The Institutional Class 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.
23
<PAGE>
Mentor Perpetual International Portfolio
Notes to Financial Statements
(continued)
(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 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 by the Board of
Trustees of the Portfolios as the primary market. Securities traded in the
over-the-counter market, other than those quoted on the NASDAQ National Market
System, are valued at the last available bid price.
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.
(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, or to have
segregated within the custodian bank's possession all securities held as
collateral in support of repurchase agreement investments. Additionally,
procedures have been established by the 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.
24
<PAGE>
Mentor Perpetual International Portfolio
Notes to Financial Statements
(continued)
(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 lending securities
transactions. During the period that a security is out on loan, 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 an 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, 1997, the Portfolio had loaned securities to brokers which were
collateralized by cash and letter of credit. Income from securities lending
activities amounted to $3,498 for the year ended October 31, 1997. 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, 1997, the market value of the securities on loan and the related
collateral were as follows:
<TABLE>
<CAPTION>
Letter of
Securities Cash Credit
On Loan Collateral Collateral
------------ ------------ -----------
<S> <C> <C> <C>
Portfolio $2,804,761 $2,943,048 $86,603
</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.
(e) Expenses
Expenses arising in connection with a Portfolio are allocated to that
Portfolio. Other Trust expenses are allocated among
25
<PAGE>
Mentor Perpetual International Portfolio
Notes to Financial Statements
(continued)
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 allowable time limit substantially all taxable income and realized
capital gains.
(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 deferral of wash
sales, gains and losses on foreign currency transactions and gains on passive
foreign investment companies.
(i) Reclassification of Capital Accounts
Distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. Accordingly, periodic
reclassifications are made within the Portfolio's capital accounts to reflect
income and gains available for distribution under income tax regulations.
Note 3: Dividends
Dividends are declared and paid annually by the Portfolio. Capital gains
realized by the Portfolio, if any, are 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
26
<PAGE>
Mentor Perpetual International Portfolio
Notes to Financial Statements
(continued)
company. Under this agreement, Mentor Perpetual's management fee is accrued
daily and paid monthly at an annual rate of 1.00% of the average daily net
assets of the Portfolio. For the year ended October 31, 1997, Mentor Perpetual
earned advisory fees of $223,001 and waived $137,516 of those fees.
Mentor Investment Group, LLC ("Mentor") provides administrative personnel and
services to the Portfolio, pursuant to an Administration Agreement. Mentor
receives no compensation for such services. Mentor is a partially owned
subsidiary of Wheat First Butcher Singer, Inc., ("Wheat") and EVEREN Capital
Corporation.
Acquisition of Advisor
On August 20, 1997, Wheat entered into an Agreement and Plan of Merger
("Merger") with First Union Corporation ("First Union"), pursuant to which
Wheat would be merged into First Union. First Union is a bank holding company
that as of September 30, 1997, had assets of $144 billion. Upon consummation of
the Merger (expected to occur as early as December of this year), First Union
will become the owner of a majority of the beneficial interest in Mentor
Advisors and Mentor Perpetual.
At a meeting held on October 14, 1997, the Trustees of Mentor Institutional
Trust approved new Investment Advisory, Sub-Advisory and Administration
Agreements which will replace the existing agreements. Each of the existing
agreements will by its terms terminate upon the consummation of the Merger,
since the Merger will constitute a change in control of Mentor Advisors and
Perpetual Advisors for purposes of the Investment Company Act of 1940, as
amended ("1940 Act"). The shareholders of each Portfolio at a meeting to be
held on December 22, 1997, will vote to approve the new Investment Advisory
Agreements with Mentor Advisors and Mentor Perpetual. Each new agreement is
substantially identical to the existing agreements it replaces, other than its
effective and termination date.
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
27
<PAGE>
Mentor Perpetual International Portfolio
Notes to Financial Statements
(continued)
Investment Company Act of 1940. Under a Distribution Agreement between the
Portfolio and Mentor Distributors, LLC ("Mentor Distributors") a wholly-owned
subsidiary of Mentor, 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 pays
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 and Class B 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 or
Class B 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 the average daily net assets of the Class A or
Class B 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 period ended October 31, 1997, distribution fees and shareholder servicing
fees were as follows:
<TABLE>
<CAPTION>
Distribution Shareholder
Fees Servicing Fees
Class B Class A Class B
------------- --------- --------
<S> <C> <C> <C>
Portfolio $32,113 $11,717 $10,704
</TABLE>
Note 6: Investment Transactions
Purchases and sales of investments (excluding short-term investments), for the
year ended October 31, 1997, were $74,740,358 and $22,312,357 respectively.
28
<PAGE>
Mentor Perpetual International Portfolio
Notes to Financial Statements
(continued)
Note 7: Unrealized Appreciation and Depreciation of Investments
At October 31, 1997, the cost of investments for federal income tax purposes
amounted to $65,485,138 and net unrealized depreciation aggregated $1,652,323
of which $2,228,424 related to appreciated securities and $3,880,747 related to
depreciated securities.
Note 8: Forward 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 International
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, 1997, 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
11/3/97 Japanese Yen 3,087,051 $ 25,667 $ 25,985 $ (318)
11/3/97 Singapore Dollar 90,992 57,754 57,809 (55)
Sales
11/28/97 French Franc 718,586 124,163 123,193 (970)
11/28/97 French Franc 390,213 67,424 66,897 (527)
- -------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
Mentor Perpetual International Portfolio
Notes to Financial Statements
(continued)
Note 9: 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>
Year Ended Period Ended
10/31/97 10/31/96 (a)
Shares Dollars Shares Dollars
------------- --------------- --------- -----------
Institutional Class:
<S> <C> <C> <C> <C>
Shares sold 444,362 $ 6,032,071 721,208 $9,001,925
Shares issued upon reinvestment of distributions 3,002 36,772 - -
Shares redeemed (8,616) (123,700) - -
--------- ----------- -------- -----------
Change in net assets from capital share
transactions 438,748 $ 5,945,143 721,208 $9,001,925
========= =========== ======== ===========
Class A: (b)
Shares sold 2,446,508 35,229,362 - -
Shares redeemed (44,970) (656,144) - -
--------- ----------- -------- -----------
Change in net assets from capital share
transactions 2,401,538 $34,573,218 - -
========= =========== ======== ===========
Class B: (b)
Shares sold 1,423,996 20,841,823 - -
Shares redeemed (21,487) (307,588) - -
--------- ----------- -------- -----------
Change in net assets from capital share
transactions 1,402,509 $20,534,235 - -
========= =========== ======== ===========
</TABLE>
(a) For the period from May 29, 1996 (commencement of operations) to October
31, 1996.
(b) For the period from December 27, 1996 (initial offering of Class A and
Class B shares) to October 31, 1997.
30
<PAGE>
Mentor Perpetual International Portfolio
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 Perpetual International Portfolio, a
portfolio of Mentor Institutional Trust as of October 31, 1997, and the related
statement of operations for the year then ended, statements of changes in net
assets for the year then ended and for the period from May 29, 1996
(commencement of operations) to October 31, 1996 and financial highlights for
the year ended October 31, 1997 and for the period from May 29, 1996
(commencement of operations) to October 31, 1996 for Institutional Class shares
and for the period from December 27, 1996 to October 31, 1997 for Class A and
Class B shares. 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 and financial highlights. Our procedures included confirmation of
securities owned as of October 31, 1997 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
Perpetual International Portfolio, a portfolio of Mentor Institutional Trust,
as of October 31, 1997 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 12, 1997
31
<PAGE>
Trustees
Daniel J. Ludeman, Trustee & Chairman
Chairman and Chief Executive Officer
Mentor Investment Group, LLC
Arnold H. Dreyfuss, Trustee
Former Chairman and Chief Executive Officer
Hamilton Beach/Proctor-Silex, Inc.
Thomas F. Keller, Trustee
Former Dean, Fuqua School of Business
Duke University
Louis W. Moelchert, Jr., Trustee
Vice President for Business & Finance
University of Richmond
Stanley F. Pauley, Jr., Trustee
Chairman and Chief Executive Officer
Carpenter Company
Troy A. Peery, Jr., Trustee
President
Heilig-Meyers Company
Officers
Paul F. Costello, President
Managing Director
Mentor Investment Group, LLC
Terry L. Perkins, Treasurer
Senior Vice President
Mentor Investment Group, LLC
John M. Ivan, Secretary
Managing Director/Assistant General Counsel
Wheat First Butcher Singer, Inc.
Michael A. Wade, Assistant Treasurer
Vice President
Mentor Investment Group, LLC
MK 1065
Mentor Institutional Trust
Mentor Perpetual
International Portfolio
---------------------------
ANNUAL REPORT
---------------------------
October 31, 1997
[MENTOR INVESTMENT GROUP LOGO]
