Mentor Income Fund, Inc.
Annual Report
October 31, 1997
- --------------------------------------------------------------------------------
The Fund
[ ] A closed-end investment fund that invests primarily in high-quality
fixed- income securities. The Fund is listed on the New York Stock
Exchange with common shares traded under the symbol, MRF.
Investment Objective
[ ] To achieve high monthly income consistent with preservation of capital
Dividend Objective
[ ] To distribute monthly income in excess of that attainable from
investments in U.S. Treasury securities having the same maturity as the
expected average life of the Fund's investments.
Report from the Chairman and President
We appreciate the opportunity to provide the Annual Report to shareholders for
Mentor Income Fund for the 12 months ended October 31, 1997. Regardless of
market environment, the Fund's primary mission remains the same, to provide
attractive income and competitive net asset value total returns to
shareholders.
During the 12 months ended October 31, 1997, the Fund paid dividends totaling
$0.84 per share, which represents an annualized yield of 8.94% based on the
Fund's closing market price of $9.38 on October 31, 1997. These monthly
dividends have provided the Fund's shareholders with a significant income
advantage over the average yield-to-maturity of 6.34%, attainable during the
period from treasury securities having the same approximate maturity as the
average life of the Fund's investments. Of course, treasuries are guaranteed as
to principal and interest, while the Fund's shares are not guaranteed and will
fluctuate in value.
1
<PAGE>
Mentor Income Fund, Inc.
Annual Report
October 31, 1997
- --------------------------------------------------------------------------------
Market Conditions
Chart I: A Period of Falling Interest Rates
[GRAPH]
10/31/96 10/31/97
3 Mo. 5.144 5.194
6 Mo. 5.264 5.305
1 Yr. 5.404 5.347
2 Yr. 5.732 5.608
3 Yr. 5.86 5.682
5 Yr. 6.07 5.717
10 Yr. 6.341 5.833
30 Yr. 6.641 6.154
Source: Bloomberg
As Chart I indicates, during the 12-month period ended October 31, 1997 the
yield curve flattened. While yields of three-month and six-month treasury bills
were largely unchanged, yields of treasury notes and bonds with maturities of
five years and greater were lower by 0.35% to 0.50%. Generally, the greater the
maturity of the security, the larger the decrease in its yield. Two and 10-year
treasuries closed the period at 5.61% and 5.83%, respectively, down 0.12% and
0.51% from the beginning of the period. Rates trended lower during the period
with the exception of the first quarter of 1997. In the first quarter much
stronger than anticipated economic growth prompted the Federal Reserve to
increase the Federal Funds Rate (the rate member banks charge each other on
inter-bank loans) by 0.25% in late March.
As noted, only once during the 12-month period did the Federal Reserve deem it
necessary to alter the level of the short-term fed funds rate, and then only
modestly. Otherwise the monetary authorities remained on the sidelines, content
to let the economy move unencumbered on a low-inflation and moderate-growth
progression. Gross Domestic Product (GDP), the most comprehensive measure of
overall domestic economic growth, grew at annualized rates of 4.3%, 4.9%, 3.3%,
and 3.3% for the fourth quarter of 1996, the first quarter of 1997, the second
quarter of 1997, and the third quarter of 1997, respectively.
Despite continued steady economic growth, inflation at both the wholesale
2
<PAGE>
Mentor Income Fund, Inc.
Annual Report
October 31, 1997
- --------------------------------------------------------------------------------
and retail levels has remained consistently benign. In seven of the 12 monthly
periods during the fiscal year ended October 31, the PPI (Producer Price Index)
actually declined. The CPI-core (Consumer Price Index minus the volatile food
and energy components), viewed by many as the most reliable and significant of
the inflation measures, only once during the period experienced a monthly
increase as much as 0.3%. Given the lack of current measurable inflationary
pressure and the Federal Reserve's growing credibility as an inflation-fighting
institution, fixed-income buyers have scaled back the inflation premium they
have demanded from their fixed-income investments. As a result, despite
continued economic growth and the lowest unemployment rate in the past 30
years, rates on fixed-income securities have eased from levels of a year ago.
Effect on the Fund
When compared to the indexes which we have traditionally used to assess our
relative performance, our results for the 12-month period ended October 31,
1997 provided competitive returns to our shareholders. As Chart II indicates,
the Fund's 11.65% net asset value total return for the 12-months ended October
31, 1997 compares favorably to the 9.08%, 8.67%, and 8.88% returns posted by
the Merrill Lynch Mortgage, Government Bond, and 7-year Treasury indexes,*
respectively. The return of the Fund's Lipper U.S. Mortgage Bond Fund peer
group was 10.95%.**
Chart II: Relative Performance
(10/31/96-10/31/97)
[GRAPH]
Mentor Income Fund 11.65%
Lipper Peer Group 10.95%
Mortgage Index 9.08%
Gov't Bond Index 8.67%
7-Year Treasury 8.88%
Source: Lipper Analytical Services, Inc. and Merrill Lynch
Portfolio Strategy
Throughout the 12-month period we continued to focus on our primary objectives
- - to provide attractive income,
3
<PAGE>
Mentor Income Fund, Inc.
Annual Report
October 31, 1997
- --------------------------------------------------------------------------------
maintain risk close to that of intermediate treasuries, and capitalize on the
investment opportunities provided within the guidelines of our investment
policy.*** Security selection, sector allocation, and yield curve-weighting
strategies remain the fundamental methods through which we seek to add value.
The relative interest-rate exposure of the portfolio at the end of October
stood approximately 5% longer than its Merrill Lynch 7-Year Treasury benchmark,
a posture we have maintained most of the year. At fiscal year-end 29% of the
Portfolio was in agency mortgage-backed securities while private label CMOs
represented 22% of the Fund. Other significant weightings were 16% in corporate
bonds, 11% in agency CMOs, 10% in residuals, and 9% in asset-backed securities.
During the period we added foreign duration exposure to the portfolio through
interest-rate swap contracts. During much of the year the Fund benefited from
the higher income available in Canadian markets. As yields in this market
dropped significantly below those available in the U.S., these positions were
eliminated. At fiscal year-end, the Fund had a 5% exposure to five-year German
bonds and a 5% exposure to two-year UK interest rates. These transactions, like
the Canadian transactions that preceded them, have been structured to eliminate
virtually all foreign currency risks. We also added a Yankee position through
an investment in the Korean Development Bank (KDB) bonds due in 2001. Yankee
bonds are U.S. dollar-denominated securities issued by overseas governments or
corporations. The KDB bonds are backed by the full faith and credit of the
Korean government, and have widened markedly in light of turmoil in Asian
markets. At yields well above those of many junk bond issues, these A-rated
securities appear to offer good relative value despite the risk of a credit
downgrade.
PORTFOLIO COMPOSITION
[GRAPH]
Preferred Stock 3.0%
Fixed-Rate Multiple Class
Collateralized Mortgage
Obligations 20.6%
Fixed Rate Single-Class
Mortgage Backed Securities 29.5%
Corporate Bonds 14.9%
Adjustable-Rate Mortgage
Backed Securities 6.0%
U.S. Government Agencies 8.5%
Asset-Backed Securities 7.7%
Residual Interests 9.5%
Repurchase Agreement 0.2%
Interest-Only Securities 0.1%
Market Outlook
The moderate growth, low unemployment, low inflation environment of recent
years continues intact. We believe, however, that
4
<PAGE>
Mentor Income Fund, Inc.
Annual Report
October 31, 1997
- --------------------------------------------------------------------------------
this combination of economic growth and job creation, if sustained, may
eventually lead to inflationary pressures. We are of the opinion that the Fed
would have tightened in November absent the recent extreme international market
volatility.
The outlook going forward is clouded by uncertainty over how much growth in the
Pacific rim will decline, and to what degree this slowdown in Asia will affect
the US economy. Given the stock market's recovery from October's declines, we
feel that the risks remain weighted toward continued above trend-economic
growth and an eventual Fed tightening. This suggests that short rates are
currently at risk of rising. However, the prospects for continued low inflation
make us comfortable that long rates, which are more sensitive to inflation than
economic growth, will not rise and may even decline if the Fed acts to preserve
the current low inflation environment.
Dividend Reinvestment Plan
Shareholders who wish to purchase additional shares can do so through the
Fund's automatic dividend reinvestment plan. Over 60% of the Fund's
shareholders participate in this plan. If you would like to receive information
about the plan, please call our plan agent at (800) 426-5523.
Sincerely,
/s/ Weston E. Edwards, CFA
- ---------------------------
Weston E. Edwards, CFA
Chairman
/s/ Paul F. Costello
- ---------------------------
Paul F. Costello
President
* The Merrill Lynch Mortgage Index is a composite of fixed-rate mortgage
pass-through securities. The Merrill Lynch Government Bond Index is a
composite of 2,347 treasury and agency issues with maturities ranging
from one to 30 years. The Merrill Lynch 7-Year Treasury Index is
adjusted to reflect reinvestment of interest on securities in the
index. The Merrill Lynch
7-Year Treasury Index is not adjusted to reflect sales loads, expenses,
or other fees that the SEC requires to be reflected in the Fund's
performance.
** Lipper Analytical Services, an independent rating company, groups funds
by investment objective and calculates performance figures for each
group. Performance does not include sales charges and does not include
reinvestment of all distributions.
*** While the portfolio managers will endeavor to manage the portfolio in
accordance with this strategy, there are no guarantees that it will be
successful. Past performance does not guarantee future comparable
results. Investment return and principal value will fluctuate so that
an investor's shares, when redeemed, maybe worth more or less than
their original cost.
5
<PAGE>
Mentor Income Fund, Inc.
Portfolio of Investments
October 31, 1997
<TABLE>
<CAPTION>
Principal Market
Percent of Net Assets Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C>
Long-Term Investments 152.82%
- ---------------------------------------------------------------------------------------------------------
Preferred Stock 4.60%
Home Ownership Funding Corporation (a)
(cost $5,473,005) $ 5,650,000 $ 5,577,912
- ---------------------------------------------------------------------------------------------------------
U.S. Government Securities and Agencies 68.94%
- ---------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corporation
6.50%, Series 1422, 2/15/07-REMIC 4,565,108 4,559,451
6.50%, Series 1647 B, 11/15/08-REMIC (d) 8,639,312 8,611,606
6.00%, Series 1693-Z, 3/15/09-REMIC 5,789,532 5,471,166
7.49%-10.75%, 9/01/09-9/01/18 (d) 7,170,830 7,504,092
Federal National Mortgage Association
10.50%, 11/01/18 (d) 5,647,396 6,177,641
7.48%, 7/01/27-ARM 29,486 29,486
Government National Mortgage Association
7.00%, 15-year Platinum, 12/15/08 (d) 4,530,586 4,631,007
11.50%, 2/15/13-6/15/19 202,194 227,977
5.00%-6.88%, 12/20/22-1/20/27 (d) 25,146,360 25,345,320
6.00%, 4/20/27-11/20/27-ARM 5,257,101 5,304,149
U.S. Treasury Notes, 6.13%-6.63%, 3/31/02-
8/15/07 (d) 15,350,000 15,770,686
- ---------------------------------------------------------------------------------------------------------
Total U.S. Government Securities and Agencies
(cost $82,384,968) 83,632,581
- ---------------------------------------------------------------------------------------------------------
Corporate Bonds 22.80%
- ---------------------------------------------------------------------------------------------------------
Finance 19.26%
Capital One Bank, 7.15%, 9/15/06, puttable
9/15/99 4,000,000 4,060,144
Korea Development Bank, 7.13%, 9/17/01 12,500,000 12,133,425
Lehman Brothers, Inc., 7.50%, 8/01/26, puttable
8/01/03 1,500,000 1,593,771
Nationsbank Corporation, 7.50%, 9/15/06 1,500,000 1,587,785
Salomon, Inc., 7.65%, 6/27/05 2,700,000 2,868,795
Travelers Group, Inc., 9.50%, 3/01/02 1,000,000 1,123,723
- ---------------------------------------------------------------------------------------------------------
23,367,643
- ---------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
Mentor Income Fund, Inc.
Portfolio of Investments
October 31, 1997
<TABLE>
<CAPTION>
Principal Market
Percent of Net Assets Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C>
Corporate Bonds (continued)
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Utilities 3.54%
Mississippi Power & Light Company, 8.80%,
4/01/05, callable 4/01/98 $4,250,000 $ 4,298,191
- ---------------------------------------------------------------------------------------------------------
Total Corporate Bonds (cost $27,471,343) 27,665,834
- ---------------------------------------------------------------------------------------------------------
Private Issues 41.99%
- ---------------------------------------------------------------------------------------------------------
Adjustable Rate Mortgages 9.24%
California Federal Bank Series 1991-2, Class A,
7.71%, 7/15/21 (b) 484,945 485,200
Kidder Peabody Acceptance Corporation
Series 1989-3, Class A, 8.91%, 6/20/19 (b) 928,086 932,582
PaineWebber Mortgage Acceptance Corporation
Series 1993-1, Class M-1, 7.89%, 3/25/23 1,224,588 1,239,859
Series 1993-3, Class M-1, 7.76%, 4/25/23 1,939,957 1,964,157
Sears Mortgage Securities Corporation
Series 1992-9, Class A, 7.92%, 10/25/21 (b) 1,430,713 1,457,559
Structured Asset Securities Residential Trust
Series 1990-1, Class A, 7.85%, 4/01/20 4,994,017 5,127,812
- ---------------------------------------------------------------------------------------------------------
11,207,169
------------
Asset-Backed Securities 11.78%
Advanta Mortgage Loan Trust, Series 1993-3,
Class A5, 5.55%, 1/25/25 1,286,601 1,231,727
AFG Receivables Trust, 6.45%, 9/15/00 733,239 731,127
CS First Boston, Series 1996-2, Class A6,
7.18%, 2/25/18 2,750,000 2,834,587
First Interstate Bank of California Home Equity
Loan Trust, Series 1990-1, 8.90%, 11/15/97 4,715,683 4,750,702
Olympic Automobiles Receivables Trust, Series
1994-B, Class A2, 6.85%, 6/15/01 1,264,961 1,271,831
Old Stone Credit Corporation Home Equity
Trust, Series 1993-2, 6.20%, 6/15/08 1,448,594 1,437,499
Union Acceptance Corporation Auto Trust,
Series 1996-B, 6.45%, 7/08/03 2,027,089 2,033,616
- ---------------------------------------------------------------------------------------------------------
14,291,089
------------
</TABLE>
7
<PAGE>
Mentor Income Fund, Inc.
Portfolio of Investments
October 31, 1997
<TABLE>
<CAPTION>
Principal Market
Percent of Net Assets Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C>
Private Issues (continued)
- ---------------------------------------------------------------------------------------------------------
Collateralized Mortgage Obligations 20.63%
General Electric Capital Mortgage Services
Series 1993-18, Class B1, 6.00%, 2/25/09 (a) $ 2,057,264 $ 1,991,668
Series 1996-4, Class B1, 7.00%, 3/25/26 4,437,552 4,405,225
NASCOR, Series 1996-2, Class M, 7.00%,
9/25/11 1,830,942 1,871,246
Prudential Home Mortgage Securities
Series 1993-27, Class M, 7.50%, 5/25/23 3,246,551 3,379,504
Series 1993-22, Class M, 7.00%, 7/25/23 4,779,156 4,817,246
Series 1994-29, Class M, 7.00%, 10/25/24 3,197,636 3,222,289
Series 1995-5, Class M, 7.25%, 9/25/25 2,589,506 2,630,933
Series 1995-5, Class B1, 7.25%, 9/25/25 (a) 2,674,681 2,707,036
- ---------------------------------------------------------------------------------------------------------
25,025,147
- ---------------------------------------------------------------------------------------------------------
Mortgage Backed Securities 0.08%
Republic Federal Savings & Loan Association
Series 1988-03, Class A, 9.75%, 6/01/18 (b) 96,097 97,525
- ---------------------------------------------------------------------------------------------------------
Interest Only Securities 0.26%
Conti-Mortgage Home Equity Loan Trust
Series 94-3, A3-1, 0.52%, 5/15/09 (c) 11,344,374 42,541
Series 94-3, A3-1, 0.13%, 3/15/14 (c) 73,050,000 274,157
- ---------------------------------------------------------------------------------------------------------
316,698
- ---------------------------------------------------------------------------------------------------------
Total Private Issues (cost $48,910,597) 50,937,628
- ---------------------------------------------------------------------------------------------------------
Residual Interests (a) 14.49%
- ---------------------------------------------------------------------------------------------------------
Capital Mortgage Funding, Inc., 1997-6,
12/01/26 29,864 1,017,287
Capital Mortgage Funding, Inc., 1997-7,
5/20/26 52,559 1,412,586
General Mortgage Securities, Inc., 1989-2, 1997,
4/17/19 22,661 1,118,970
General Mortgage Securities II, Inc., 1991-2,
1997, 10/25/29 2,631 751,397
General Mortgage Securities II, Inc., 1991-4,
1997, 3/28/20 776 406,963
</TABLE>
8
<PAGE>
Mentor Income Fund, Inc.
Portfolio of Investments
October 31, 1997
<TABLE>
<CAPTION>
Principal Market
Percent of Net Assets Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C>
Residual Interests (a) (continued)
- ---------------------------------------------------------------------------------------------------------
General Mortgage Securities II, Inc., 1991-7,
1997, 6/28/30 $ 1,762 $ 430,269
General Mortgage Securities II, Inc., 1995-1,
1997, 6/25/20 22,850 573,063
General Mortgage Securities II, Inc., 1995-4,
1996, 6/25/23 12,666 504,718
General Mortgage Securities II, Inc., 1996-1,
1997, 11/25/22 12,391 537,278
General Mortgage Securities II, Inc., 1997-4,
5/20/22 22,285 956,078
General Mortgage Securities II, Inc., 1997-5,
7/20/23 16,694 503,831
National Mortgage Funding I, Inc., 1992-4,
1997, 11/27/22 11,060 765,769
National Mortgage Funding I, Inc., 1993-1,
1997, 6/18/14 44,392 665,455
National Mortgage Funding I, Inc., 1995-4,
1997, 3/20/21 10,926 187,226
National Mortgage Funding I, Inc., 1995-5,
1997, 3/25/22 2,520 307,064
National Mortgage Funding I, Inc., 1995-7,
1997, 8/01/25 27,710 634,130
National Mortgage Funding I, Inc., 1995-9,
1997, 11/19/25 32,674 542,145
National Mortgage Funding I, Inc., 1996-1,
1997, 4/25/25 38,368 593,176
National Mortgage Funding I, Inc., 1996-4,
1997, 10/25/21 8,240 402,630
National Mortgage Funding I, Inc., 1996-5,
1997, 5/22/26 70,720 1,129,047
National Mortgage Funding I, Inc., 1997-6,
9/20/21 45,000 978,676
National Mortgage Funding I, Inc., 1997-7,
7/20/22 45,000 932,390
National Mortgage Funding I, Inc., 1997-8,
2/20/23 85,000 956,149
</TABLE>
9
<PAGE>
Mentor Income Fund, Inc.
Portfolio of Investments
October 31, 1997
<TABLE>
<CAPTION>
Principal Market
Percent of Net Assets Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C>
Residual Interests (a) (continued)
- ---------------------------------------------------------------------------------------------------------
National Mortgage Funding I, Inc., 1997-9,
10/20/24 $ 30,000 $ 582,897
National Mortgage Funding I, Inc., 1997-10,
1/01/90 45,000 692,592
- ---------------------------------------------------------------------------------------------------------
Total Residual Interests (cost $17,450,416) 17,581,786
- ---------------------------------------------------------------------------------------------------------
Total Long-Term Investments (cost $181,690,329) 185,395,741
- ---------------------------------------------------------------------------------------------------------
Short-Term Investments 0.28%
- ---------------------------------------------------------------------------------------------------------
Repurchase Agreement
Goldman Sachs & Company Dated 10/31/97,
5.72%, due 11/03/97 collateralized by
$347,961 Federal Home Loan Mortgage
Corporation, 7.00%, 7/01/27, market value
$349,592 (cost $342,167) 342,167 342,167
- ---------------------------------------------------------------------------------------------------------
Total Investments (cost $182,032,496) 153.10% 185,737,908
- ---------------------------------------------------------------------------------------------------------
Other Assets less Liabilities (53.10%) (64,425,784)
- ---------------------------------------------------------------------------------------------------------
Net Assets 100.00% $ 121,312,124
- ---------------------------------------------------------------------------------------------------------
</TABLE>
REMIC - Real Estate Mortgage Investment Conduit
ARM - Adjustable Rate Mortgage
(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 Directors.
(b) 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 Directors. See notes
to financial statements.
(c) Notional principal amount.
(d) A portion of these securities have been segregated as collateral for
reverse repurchase agreements.
See notes to financial statements.
10
<PAGE>
Mentor Income Fund, Inc.
Statement of Assets and Liabilities
October 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets
Investments, at market value (Cost $182,032,496) $ 185,737,908
Cash 1,210
Receivables
Investments sold 5,854,863
Interest 1,675,764
Other assets 68,185
- ----------------------------------------------------------------------------
Total assets 193,337,930
- ----------------------------------------------------------------------------
Liabilities
Reverse repurchase agreements 49,236,231
Payable for investments purchased 22,109,397
Unrealized depreciation on interest-rate swaps (Note 2) 140,086
Income dividend payable 188,853
Accrued expenses and other liabilities 351,239
- ----------------------------------------------------------------------------
Total liabilities 72,025,806
- ----------------------------------------------------------------------------
Net Assets $ 121,312,124
- ----------------------------------------------------------------------------
Analysis of Net Assets
Common stock at par value $ 118,178
Additional paid-in capital 131,619,599
Accumulated undistributed net investment income 860,161
Accumulated net realized loss on investment transactions (14,851,140)
Net unrealized appreciation of investments 3,565,326
- ----------------------------------------------------------------------------
Net Assets $ 121,312,124
Shares Outstanding 11,817,776
- ----------------------------------------------------------------------------
Net Asset Value Per Share $ 10.27
- ----------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
11
<PAGE>
Mentor Income Fund, Inc.
Statement of Operations
Year Ended October 31, 1997
- ---------------------------------------------------------------------
<TABLE>
<S> <C>
Investment income
Interest and net discount earned* $ 13,039,486
- ----------------------------------------------------------------------------
Expenses
Management fee 774,196
Administration fee 119,107
Reports to shareholders 96,260
Directors' fees and expenses 73,505
Shareholder servicing fees 54,999
Transfer agent fee 39,001
Custodian fee 36,232
Legal fees 35,677
Audit fees 28,346
Registration and filing fees 27,095
Miscellaneous 4,633
- ----------------------------------------------------------------------------
Total operating expenses 1,289,051
- ----------------------------------------------------------------------------
Interest expense 2,014,410
- ----------------------------------------------------------------------------
Total expenses 3,303,461
- ----------------------------------------------------------------------------
Net investment income 9,736,025
- ----------------------------------------------------------------------------
Realized and unrealized gain on investments,
futures contracts and interest-rate swaps
Net realized gain on investments, futures contracts and
interest-rate swaps 602,516
Change in unrealized appreciation on investments and
interest-rate swaps 2,065,727
- ----------------------------------------------------------------------------
Net realized and unrealized gain on investments, futures
contracts and interest-rate swaps 2,668,243
- ----------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 12,404,268
- ----------------------------------------------------------------------------
</TABLE>
* Net of interest expense on interest-rate swaps.
See notes to financial statements.
12
<PAGE>
Mentor Income Fund, Inc.
Statement of Cash Flows
Year Ended October 31, 1997
- ---------------------------------------------------------------------
<TABLE>
<S> <C>
Cash Flows from Operating Activities
Interest received $ 12,746,543
Interest paid (1,731,555)
Operating expenses paid (1,255,294)
- ----------------------------------------------------------------------------
Net cash provided by operating activities 9,759,694
- ----------------------------------------------------------------------------
Cash Flows from Investing Activities
Cost of purchases of portfolio investments (140,772,671)
Proceeds from sales of portfolio investments 111,231,203
Variation margin on futures contracts and interest-rate
swaps 420,692
- ----------------------------------------------------------------------------
Net cash used in investing activities (29,120,776)
- ----------------------------------------------------------------------------
Net cash used in operating and investing activities (19,361,082)
- ----------------------------------------------------------------------------
Cash Flows from Financing Activities
Net proceeds from reverse repurchase agreements 29,236,231
Net proceeds from dollar roll transactions 43,332
Cash dividends paid (9,917,271)
- ----------------------------------------------------------------------------
Net cash provided by financing activities 19,362,292
Net increase in cash 1,210
Cash at beginning of year -
- ----------------------------------------------------------------------------
Cash at end of year $ 1,210
- ----------------------------------------------------------------------------
Reconciliation of Net Increase in Net Assets from
Operations to Net Cash used by Operating and
Investing Activities
Increase in net assets from operations $ 12,404,268
Increase in investments (32,477,705)
Increase in receivable for investments sold (2,512,177)
Increase in interest receivable (292,943)
Decrease in other assets 115,868
Increase in payable for investments purchased 5,753,238
Increase in accrued expenses and other liabilities 316,612
Net realized gain (602,516)
Net unrealized appreciation (2,065,727)
- ----------------------------------------------------------------------------
Net cash used by operating and investing activities $ (19,361,082)
- ----------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
13
<PAGE>
Mentor Income Fund, Inc.
Statements of Changes in Net Assets
<TABLE>
<S> <C>
Year Ended October 31,
1997 1996
- --------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Operations
Net investment income $ 9,736,025 $ 9,793,912
Net realized gain (loss) on investments,
futures contracts and interest-rate swaps 602,516 (1,861,525)
Change in unrealized appreciation of
investments and interest-rate swaps 2,065,727 215,494
- ---------------------------------------------------------------------------------
Increase in net assets resulting from
operations 12,404,268 8,147,881
- ---------------------------------------------------------------------------------
Distributions to Shareholders
Net investment income (9,930,537) (9,926,059)
- ---------------------------------------------------------------------------------
Increase (decrease) in net assets 2,473,731 (1,778,178)
Net Assets
Beginning of year 118,838,393 120,616,571
- ---------------------------------------------------------------------------------
End of year (including undistributed
net investment income (loss) of $860,161
and ($85,254), respectively) $121,312,124 $118,838,393
- ---------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
14
<PAGE>
Mentor Income Fund, Inc.
Financial Highlights
<TABLE>
<CAPTION>
<S> <C>
Year Ended October 31, 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------
Per Share Operating Performance
Net asset value, beginning of year $ 10.06 $ 10.21 $ 9.60 $ 11.29 $ 11.06
Income from investment operations
Net investment income 0.82 0.83 0.80 1.02 1.05
Net realized and unrealized gain (loss)
on investments, futures contracts and
interest-rate swaps 0.23 (0.14) 0.70 (1.75) 0.23
- --------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.05 0.69 1.50 (0.73) 1.28
Less distributions
Distributions from net investment
income (0.84) (0.84) (0.89) (0.96) (1.05)
- --------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 10.27 $ 10.06 $ 10.21 $ 9.60 $ 11.29
- --------------------------------------------------------------------------------------------------------------------
Per share market price, end of year $ 9.38 $ 9.00 $ 8.88 $ 8.25 $ 10.50
Total Investment Return
Based on market price 13.92% 11.24% 18.83% (13.32)% (6.91)%
Based on net asset value 11.65% 8.08% 17.48% (6.19)% 12.00 %
- --------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
Net assets, end of year
(in thousands) $121,312 $118,838 $120,617 $113,401 $ 133,077
Ratio of gross investment income
to average net assets 10.97% 11.12% 10.58% 12.18% 11.79%
Ratio of operating expenses to average
net assets 1.08% 1.13% 1.09% 1.22% 1.09%
Ratio of total expenses to average
net assets 2.78% 2.84% 2.39% 2.38% 2.48%
Ratio of net investment income to average
net assets 8.19% 8.28% 8.19% 9.80% 9.31%
Portfolio turnover rate 70.50% 189.71% 153.92% 173.71% 269.16%
Shares outstanding at end of period
(in thousands) 11,818 11,818 11,818 11,818 11,786
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
15
<PAGE>
Mentor Income Fund, Inc.
Notes to Financial Statements
October 31, 1997
Note 1: Organization
Mentor Income Fund, Inc. ("the Fund") is registered under the Investment
Company Act of 1940 as a diversified, closed-end management investment company.
Note 2: Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of the financial statements. The
policies are in conformity with generally accepted accounting principles which
require management to make estimates and assumptions that affect amounts
reported therein. Although actual results could differ from these estimates,
any such differences are expected to be immaterial to the net assets of the
Fund.
(a) Valuation of Securities
The Fund values mortgage-backed securities, mortgage-related, asset-backed and
other debt-related securities on the basis of valuations provided by dealers
approved by the Fund's Board of Directors. In determining value, the dealers
use information with respect to transactions in such securities, various
relationships between securities, and yield to maturity. Exchange-traded
options are valued at the closing sales price or the average of the quoted bid
and asked price. Any securities or other assets for which current market
quotations are not readily available are valued at their fair value as
determined in good faith under procedures established by and under the general
supervision and responsibility of the Fund's Board of Directors.
(b) Repurchase Agreements
It is the policy of the Fund 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 vault all securities held as collateral
in support of repurchase agreement investments. Additionally, procedures have
been established by the Fund to monitor, on a daily basis, the market value of
each repurchase agreement's underlying securities to ensure the existence of a
proper level of collateral.
16
<PAGE>
Mentor Income Fund, Inc.
Notes to Financial Statements
(continued)
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers which are deemed by
the Fund's advisor to be creditworthy pursuant to guidelines established by the
the Fund's Board of Directors. Risks may arise from the potential inability of
counterparties to honor the terms of the repurchase agreement. Accordingly, the
Fund could receive less than the repurchase price on the sale of collateral
securities.
(c) Options
In order to produce incremental earnings or protect against changes in the
value of portfolio securities, the Fund may buy and sell put and call options
and write covered call options on portfolio securities.
The Fund generally purchases put options or writes covered call options to
hedge against adverse movements in the value of portfolio holdings. The Fund
may also use options for speculative purposes, although it does not employ
options for this at the present time. The Fund will segregate assets to cover
their obligations under option contracts.
Options contracts are valued daily based upon the last sales price on the
principal exchange on which the option is traded and unrealized appreciation or
depreciation is recorded. The Fund will realize a gain or loss upon the
expiration or closing of the option transaction. When an option is exercised,
the proceeds on sales for a written call option, the purchase cost for a
written put option, or the cost of the security for a purchased put or call
option is adjusted by the amount of the premium received or paid.
The risk in writing a call option is that the Fund gives up the opportunity for
profit if the market price of the security increases and the option is
exercised. The risk in writing a put option is that the Fund may incur a loss
if the market price of the security decreases and the option is exercised. The
risk in buying an option is that the Fund pays a premium whether or not the
option is exercised. The Fund also has the additional risk of not being able to
enter into a closing transaction if a liquid secondary market does not exist.
The
17
<PAGE>
Mentor Income Fund, Inc.
Notes to Financial Statements
(continued)
Fund may also write over-the-counter options where the completion of the
obligation is dependent upon the credit standing of the counterparty.
(d) Futures Contracts
In order to gain exposure to or protect against declines in security values,
the Fund may buy and sell futures contracts. The Fund may also buy or write put
or call options on these futures contracts.
The Fund generally sells futures contracts to hedge against declines in the
value of portfolios securities. The Fund may also purchase futures contracts to
gain exposure to market changes as it may be more efficient or cost effective
than actually buying securities. The Fund will segregate assets to cover its
commitments under such speculative futures contracts.
Upon entering into a futures contract, the Fund is required to deposit either
cash or securities in an amount (initial margin) equal to a certain percentage
of the contract value. Subsequent payments (variation margin) are made or
received by the Fund each day. The variation margin payments are equal to the
daily changes in the contract value and are recorded as unrealized gains and
losses. The Fund recognizes a realized gain or loss when the contract is
closed. For the year ended October 31, 1997, the Fund had realized losses of
$108,924 on closed futures contracts.
Risks of entering into futures contracts (and related options) include the
possibility that there may be an illiquid market and that a change in the value
of the contract or option may not correlate with changes in the value of the
underlying securities. At October 31, 1997, the Fund had no open futures
contracts.
(e) Dollar-Roll Transactions
A dollar-roll is a simultaneous agreement to sell a security held in the Fund's
portfolio with a purchase of a similar security at a future date at an
agreed-upon price. The difference between the sale and repurchase price is
recorded as interest income to the Fund. Dollar-rolls are accounted for as
financing transactions by the Fund and no gain or loss is recognized,
18
<PAGE>
Mentor Income Fund, Inc.
Notes to Financial Statements
(continued)
provided that the sale and subsequent repurchase involve substantially
identical securities. If the counterparty to the transaction is rendered
insolvent, the ultimate realization of the securities to be repurchased by the
Fund may be delayed or limited.
(f) Short Sales
A short sale is a transaction in which the Fund sells a security it does not
own in anticipation that the market price of the security will decline. If the
price of the security sold short increases between the time of the short sale
and the time the Fund must deliver the security, the Fund realizes a loss.
(g) Interest-Rate Swap
An interest-rate swap is a contract between two parties on a specified
principal amount (referred to as the notional principal) for a specified
period. In the most common instance, a swap involves the exchange of streams of
variable and fixed-rate interest payments. During the term of the swap, changes
in the value of the swap are recognized as unrealized gains and losses by
marking-to-market to reflect the market value of the swap. When the swap is
terminated, the Fund will record a realized gain or loss. For the year ended
October 31, 1997, the Fund had realized gains of $672,124 in connection with
closed interest-rate swap agreements. As of October 31, 1997, the Fund had
entered into the following interest-rate swap agreements. In each agreement,
the Fund has exchanged fixed rates for floating rates. The terms vary among the
contracts but provide for the interest rate differential to be settled on a
semi annual basis. During the year ended October 31, 1997, net cash payments of
$231,918 were received in connection with the interest-rate swap agreements. At
October 31, 1997, the net interest receivable was $31,534.
19
<PAGE>
Mentor Income Fund, Inc.
Notes to Financial Statements
(continued)
<TABLE>
<CAPTION>
Rate Paid Rate Received Net
Swap Notional by the Fund by the Fund Floating Termination Unrealized
Counter Party Principal at 10/31/97 at 10/31/97 Rate Index Date Loss
- ----------------- ------------- ------------- --------------- ----------------- ------------- --------------
<S> <C>
Lehman Brothers $16,935,617 7.43% 7.25% 6-Month British 10/03/99 $ (12,634)
LIBOR
Lehman Brothers 7,821,553 3.22% 4.77% 6-Month German 07/17/02 (127,452)
----------
LIBOR
$ (140,086)
==========
</TABLE>
(h) Interest-Rate Cap
An interest-rate cap is similar to an interest-rate swap, except that one party
agrees to pay a fee, while the other party pays the excess, if any, of a
floating rate over a specified fixed rate. No collateral is provided by the
counterparty to the transaction and as such the Fund is exposed to credit risk
in the event of non-performance by the other party to the interest-rate cap.
(i) Residual Interests
The Fund invests in mortgage security residual interests ("residuals") which
are considered derivative securities. A derivative security is any investment
that derives its value from an underlying security, asset, or market index. The
Fund's investment in residuals has been primarily in securities issued by
proprietary mortgage trusts. While these entities have been highly leveraged,
often having indebtedness of up to 95% of their total value, the Fund has not
incurred any indebtedness in the course of making these residual investments;
nor have the Fund's assets been pledged to secure the indebtedness of the
issuing structure or the Fund's investment in the residuals. In consideration
of the risk associated with investment in residual securities, it is the Fund's
policy to limit its exposure at the time of purchase to no more than 20%of its
total assets. The Fund will continue to invest in residual securities because,
in the opinion of the Investment Manager, these investments can play a key role
in fulfilling the Fund's objective of achieving high monthly income through
providing a means of economic leverage.
20
<PAGE>
Mentor Income Fund, Inc.
Notes to Financial Statements
(continued)
(j) Security Transactions and Investment Income
Security transactions are recorded on the trade date. Realized gains and losses
from security transactions are reported on an identified-cost basis. Income and
expenses are recorded on the accrual basis with interest income on principal-
only securities, interest-only securities and residual interests determined
using the effective-yield method based upon estimates of future net cash flows.
Estimated effective yields are periodically updated consistent with changes in
interest rates and prepayment assumptions. Premiums and discounts on mortgage
securities and collateralized mortgage obligations are amortized into interest
income using the effective-yield method.
(k) Federal Income Taxes
No provision for federal income or excise taxes is required since the Fund
intends to continue to qualify as a regulated investment company and distribute
all of its taxable income to its shareholders.
(l) 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 Fund's capital accounts to reflect income
and gains available for distribution under income tax regulations.
(m) Distributions to Shareholders
The Fund declares and distributes dividends monthly from net investment income
and annually from net realized capital gains after offsetting capital-loss
carryovers. Reinvestment of income distribution is a non-cash transaction.
Note 3: Investment Transactions
Purchases and sales of investment securities, other than short-term
investments, options, caps, and futures transactions, aggregated $160,874,797
and $110,901,705, respectively, for the year ended October 31, 1997. At October
31, 1997, the cost of securities for federal income-tax purposes was
$182,941,243 and net unrealized
21
<PAGE>
Mentor Income Fund, Inc.
Notes to Financial Statements
(continued)
appreciation aggregated $3,705,412 of which $4,837,967 related to appreciated
securities and $1,132,555 related to depreciated securities. The Fund had an
unused realized capital loss carryforward for income-tax purposes of
$13,825,362 at October 31, 1997, of which $170,636 expires in 2000, $11,955,561
expires in 2002 and $1,699,165 expires in 2004.
Note 4: Investment Management and Administration Agreements
The Mentor Income Fund has entered into an Investment Advisory and Management
Agreement with Mentor Advisors, LLC ("Mentor Advisors"), a wholly-owned
subsidiary of Mentor Investment Group, LLC ("Mentor"), which is in turn a
partially owned subsidiary of Wheat First Butcher Singer, Inc. ("Wheat") and
EVEREN Capital Corporation (see "Acquisition of Advisor" below). Pursuant to
this agreement, the Fund pays Mentor Advisors a monthly management fee at the
annual rate of 0.65% of average weekly net assets. Mentor provides
administrative personnel and services to the Fund at an annual rate of 0.10% of
the Fund's average weekly net assets.
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.
At a meeting held on October 14, 1997, the Trustees of Mentor Income Fund,
Inc., approved new Investment 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 for purposes of the
Investment Company Act of 1940, as amended ("1940 Act"). The shareholders of
Mentor Income Fund, Inc., at a meeting to be held on December 22, 1997, will
vote to approve the new Investment Advisory Agreements with
22
<PAGE>
Mentor Income Fund, Inc.
Notes to Financial Statements
(continued)
Mentor Advisors. Each new agreement is substantially identical to the existing
agreements it replaces, other than its effective and termination date.
Note 5: Borrowings
The Fund enters into reverse repurchase agreements with qualified third-party
broker-dealers as determined by and under the direction of the Fund's Board of
Directors. Interest on the value of reverse repurchase agreements issued and
outstanding is based upon competitive market rates at the time of issuance. At
the time the Fund enters into a reverse repurchase agreement, it will establish
and maintain a segregated account with the lender containing securities having
a value not less than the repurchase price (including accrued interest). If the
counterparty to the transaction is rendered insolvent, the ultimate realization
of the securities to be repurchased by the Fund may be delayed or limited.
The average daily balance of reverse repurchase agreements outstanding during
the year ended October 31, 1997, was $28,074,345 or $2.38 per share based on
average shares outstanding of 11,817,776. During the period the weighted
average interest rate was 5.46%. The maximum amount of borrowings outstanding
during the period was $49,283,993 (including accrued interest) as of October
30, 1997, at a weighted average interest rate of 4.01%, and was 25.43%of total
assets. The average rate on the October 31, 1997, borrowing was 5.22% and
matures on November 3, 1997.
Note 6: Capital Share Transactions
The Fund has authorized 200,000,000 shares of $.01 par value common stock. At
October 31, 1997, there were 11,817,776 shares issued and outstanding,
including, 1,151,463 shares issued under the Fund's reinvestment plan and
666,313 from an equity rights offering which occurred from December 23, 1991 to
January 31, 1992. During the year ended October 31, 1997, no shares were
issued.
23
<PAGE>
Mentor Income Fund, Inc.
Notes to Financial Statements
(continued)
Note 7: Quarterly Results of Operations (unaudited)
Shown in thousands of dollars and per common share:
<TABLE>
<CAPTION>
Increase (Decrease)
Investment Net Investment Net Gain (Loss) in Net Assets
Income Income on Investments from Operations
------------------- ------------------- ------------------------- ------------------------
Per Per Per Per
Quarter End Total Share Total Share Total Share Total Share
- ------------------ -------- -------- -------- -------- ----------- ----------- ----------- ----------
<S> <C>
1997
October 31, 1997 $3,095 $ 0.26 $2,459 $ 0.21 $ (504) $ (0.04) $ 1,947 $ 0.16
July 31, 1997 3,545 0.30 2,551 0.21 4,579 0.39 7,130 0.60
April 30, 1997 3,303 0.28 2,423 0.21 11 0.00 2,434 0.21
January 31, 1997 3,096 0.26 2,303 0.19 (1,410) (0.12) 893 0.08
1996
October 31, 1996 $3,074 $ 0.30 $2,405 $ 0.21 $ 3,495 $ 0.30 $ 5,900 $ 0.51
July 31, 1996 3,278 0.28 2,486 0.21 (1,545) (0.13) 941 0.08
April 30, 1996 3,596 0.30 2,530 0.21 (6,726) (0.57) (4,196) (0.36)
January 31, 1996 3,205 0.27 2,373 0.20 3,130 0.26 5,503 0.46
</TABLE>
24
<PAGE>
Mentor Income Fund, Inc.
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Board of Directors and Shareholders
Mentor Income Fund, Inc.
We have audited the accompanying statement of assets and liabilities of Mentor
Income Fund, Inc., including the portfolio of investments, as of October 31,
1997, and the related statements of operations, cash flows, changes in net
assets and financial highlights for the year then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audit. The statement of
changes in net assets for the year ended October 31, 1996 and the financial
highlights for each of the years in the four-year period ended October 31, 1996
were audited by other auditors whose report dated December 19, 1996 expressed
an unqualified opinion on those financial statements and financial highlights.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Mentor Income Fund, Inc. as of October 31, 1997, the results of its operations,
cash flows, changes in its net assets and financial highlights for the year
then ended, in conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
Boston, Massachusetts
December 12, 1997
25
<PAGE>
Mentor Income Fund, Inc.
Dividend Reinvestment Plan
- --------------------------------------------------------------------------------
A Dividend Reinvestment Plan (the "Plan") is provided to shareholders of the
Fund pursuant to which they have all distributions of dividends and capital
gains automatically reinvested by State Street Bank and Trust Company (the
"Plan Agent") in additional fund shares. Shareholders who elect not to
participate in the Plan will receive all distributions in cash paid by check
mailed directly to the shareholder of record (or if the shares are held in
street or other nominee name, then to the nominee) by the Fund's Custodian, as
Dividend Disbursing Agent.
The Plan Agent serves as Agent for shareholders in administering the Plan. When
the Fund declares a dividend or determines to make a capital gain distribution,
nonparticipants in the Plan will receive cash. If you participate in the Plan,
you will receive the equivalent in shares of the Fund as follows: (1) if the
market price of the shares on the payment date of the dividend or distribution
is equal to or exceeds the Fund's net asset value, participants will be issued
Fund shares at the higher of net asset value or 95% of the market price; or (2)
if the market price is lower than net asset value, the Plan Agent will receive
the dividend or capital gain distributions in cash and apply them to buy Fund
shares on your behalf in the open market, on the New York Stock Exchange or
elsewhere, for your account. If the market price exceeds the net asset value of
the Fund's shares before the Plan Agent has completed its purchases, the
average per-share purchase price paid by the Plan Agent may exceed the net
asset value of the Fund's shares. This would result in the acquisition of fewer
shares than if the dividend or capital gain distributions had been paid in
shares issued by the Fund.
Participants in the Plan may withdraw from the Plan upon written notice (not
less than 10 business days prior to any dividend record date) to the Plan
Agent. When a participant withdraws from the Plan or upon termination of the
Plan by the Fund, certificates for whole shares credited to his or her account
under the Plan will be issued and a cash payment will be made for any fraction
of a share credited to such account. In lieu of receiving a certificate, you
may request the Plan Agent to sell part or all of your reinvested shares held
by the Agent at market price and remit the proceeds to you, net of any
brokerage commissions. A $2.50 fee is charged by the Plan Agent upon any cash
withdrawal or termination. The Plan may be terminated by the Agent of the Fund
upon written notice mailed to each participant at least 90 days prior to any
record date for the payment of any dividend or capital gain distribution by the
Fund.
There is no charge to participants for reinvesting dividends or capital gain
distributions, except for certain brokerage commissions, as described below.
The Plan Agent's fees for the handling of the reinvestment of dividends and
distributions are paid by the Fund. There are no brokerage commissions charged
with respect to shares issued directly by the Fund. However, each participant
will pay a pro-rata share of brokerage commissions incurred with respect to the
Plan Agent's open-market purchases in connection with the reinvestment of
dividends and distributions. It is anticipated that these commissions will be
lower than those would normally incur individually, since these shares are
purchased in large blocks by the Plan Agent.
The automatic reinvestment of dividends and distributions will not relieve
participants of any federal income tax that may be payable on such dividends or
distributions.
If you hold shares of the Fund in your own name, you are an automatic
participant in this Plan unless you elect to withdraw. If your shares are held
in the name of a brokerage firm, bank, or other nominee, you should contact
your nominee to see if it will participate in the Plan on your behalf. If your
nominee is able to participate in the Plan, dividend and capital gain
distributions will be credited to your account. If your nominee is unable to
participate in the Plan on your behalf, you may want to request that your
shares be re-registered in your name so that you can participate in the Plan.
If your shares are registered in your name, and you desire to receive your
dividends and capital gain distributions in cash, you must notify the Plan
Agent, State Street Bank and Trust Company, by calling 1-800-426-5523.
26
<PAGE>
Shareholder Information
Investment Manager
Corporate Office
Mentor Investment Advisors, LLC
Riverfront Plaza, 901 East Byrd Street
Richmond, Virginia 23219
Investor Relations Office
1-800-382-0016
Operations Office
Riverfront Plaza, 901 East Byrd Street
Richmond, Virginia 23219
Transfer Agent and Registrar
State Street Bank & Trust Company
Post Office Box 366
Boston, Massachusetts 02101
(800) 426-5523
Custodian
Investor Fiduciary Trust Company
811 Main - 11th Floor
Kansas City, Missouri 64105
Independent Auditors
KPMG Peat Marwick LLP
99 High Street
Boston, Massachuetts 02110
Legal Counsel
Dechert Price & Rhoads
1500 K Street, N.W.
Wachington, D.C. 20005
Directors and Officers
Directors
Weston E. Edwards, Chairman
Jerry R. Barrentine
Daniel J. Ludeman
J. Garnett Nelson
Officers
Paul F. Costello, President
Terry L. Perkins, Treasurer
John M. Ivan, Secretary
Michael A. Wade, Assistant Treasurer
Mentor Income Fund, Inc.
--------------------------
ANNUAL REPORT
--------------------------
October 31, 1997
[MENTOR INVESTMENT GROUP LOGO]
