THE FUND
o 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
o To achieve high monthly income consistent with preservation of capital.
DIVIDEND OBJECTIVE
o 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 Semi-Annual Report to Shareholders
for Mentor Income Fund for the six months ended April 30, 1999. 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 six months ended April 30, 1999, the Fund paid dividends totaling
$0.36 per share, which represents an annualized yield of 7.36% based on the
Fund's closing market price of $9.78 on April 30, 1999. These monthly dividends
have provided the Fund's shareholders with a significant income advantage over
the average yield-to-maturity of 5.02%, attainable during the period from U.S.
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.
SEMI-ANNUAL REPORT
APRIL 30, 1999
- --------------------------------------------------------------------------------
MARKET CONDITIONS
Chart I: A Period of Rising Interest Rates
[GRAPH]
10/31/98 4/30/99
-------- -------
3 Months 4.32 4.53
6 Months 4.35 4.64
1 Year 4.18 4.77
2 Year 4.11 5.06
5 Year 4.23 5.21
10 Year 4.6 5.34
30 Year 5.15 5.66
Source: Bloomberg
As Chart I indicates, for the six-month period ended April 30, 1999, interest
rate levels had risen significantly across the full length of the yield curve.
These yield increases ranged from 0.21% for three-month Treasury bills to 0.98%
for five-year Treasury notes. Two, 10-year, and 30-year Treasuries closed the
period at 5.06%, 5.34%, and 5.66%, respectively, each up over 0.50% from the
beginning of the period.
Early in the fourth quarter of 1998, the stock market was weak, world markets
were in turmoil and fears of global deflation were rampant. The crisis in world
financial markets was prompted by Russia's default on its debt obligations, and
was exacerbated by the bankruptcy of the highly leveraged investment firm Long
Term Capital Management. Over the ensuing three-month period the Federal
Reserve lowered the Federal Funds rate 0.75% in response to these alarming
market conditions.
Economists expected U.S. economic growth in 1999 to be significantly depressed
by the severe shock that financial markets experienced during September and
October. These forecasts for slower growth garnered support in early January
when the Brazilian government was forced to devalue its currency, the real. The
sudden drop in the value of the real implied that Brazil would suffer a fairly
deep recession in 1999. In addition, the lower currency value has made American
exports too expensive for Brazilian markets.
2
<PAGE>
MENTOR INCOME FUND, INC.
SEMI-ANNUAL REPORT
APRIL 30, 1999
- --------------------------------------------------------------------------------
Despite turmoil in financial markets and in Brazil, the much-anticipated
slowdown in U.S. economic growth has yet to materialize. Indeed, economic
growth in the final quarter of 1998 surged more than 6.0% on an annualized
basis. Economic indicators for the first quarter of 1999 suggest that the
economy has continued its robust growth into 1999. Some market observers are
beginning to question the aggressiveness with which the Federal Reserve reacted
to the market crisis in late 1998. These economists have gone so far as to
suggest that the Fed should reverse course and raise rates in response to a
potentially overheating American economy. The fear that the Federal Reserve may
move to increase short-term borrowing rates prompted the bond market's severe
price declines and interest rate increases during the first quarter of 1999.
EFFECT ON THE FUND
Our results for the six-month period ended April 30, 1999 compared favorably to
a number of market indexes that we have traditionally used to assess our
relative performance. Our mortgage overweight and our lower-rated corporate
bond investments allowed our portfolios to outpace indices comprised of
treasury obligations. As Chart II indicates, the Fund's 2.14% net asset value
total return for the six months ended April 30 compares to the 2.40%, (0.87)%,
and (2.10)% 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 2.28%.**
Chart II: Relative Performance
(10/31/98 - 4/30/99)
[GRAPH]
Mentor Income Fund 2.14
Lipper Peer Group 2.28
Mortgage Index 2.4
Government Bond Index -0.87
7-Year Treasury -2.1
Source: Lipper Analytical Services, Inc. and Merrill Lynch
3
<PAGE>
MENTOR INCOME FUND, INC.
SEMI-ANNUAL REPORT
APRIL 30, 1999
- --------------------------------------------------------------------------------
PORTFOLIO STRATEGY
Throughout the period ended April 30, 1999 we continued to focus on our primary
objectives - to provide attractive income, 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.
Portfolio durations were 5% to 10% longer than their benchmark indices at the
beginning of 1999. This long duration tilt led to strong relative performance
early in January as the bond market responded to the Brazilian devaluation.
However, as economic data painted an ever-clearer picture of a robust U.S.
economy, portfolio durations were cut back to approximately neutral levels.
Sector allocations were heavily tilted toward spread product. Mortgage backed
securities were particularly emphasized given their high yield and strong
performance potential in a stable to rising rate environment. The stronger
economic growth prompted an increased allocation to lower-rated corporate
bonds, including high yield securities. Portfolio weightings in high yield were
increased from roughly 5% to 10%.
Portfolio Composition
Fixed-Rate Single-Class Mortgage-Backed Securities 36.5
Fixed-Rate Multiple-Class Collateralized Mortgage Obligations 22.1
Corporate Bonds 17.5
Residual Interests 6.3
U.S. Treasury Securities 5.0
Asset-Backed Securities 4.9
Preferred Stocks 3.3
Adjustable-Rate Mortgage-Backed Securities 3.1
Repurchase Agreement 1.3
MARKET OUTLOOK
Our long-term market outlook is for continued declines in inflation and
therefore continued lower interest rates. This optimism is fueled by structural
economic changes such as the Internet that offer the potential to substantially
increase economic efficiency and reduce costs. In addition, the increasing
productivity of the U.S. labor force suggests that the economy can grow faster
than previously thought without generating inflationary pressures. However,
short-term prospects for the bond market are less clear.
4
<PAGE>
MENTOR INCOME FUND, INC.
SEMI-ANNUAL REPORT
APRIL 30, 1999
- --------------------------------------------------------------------------------
The long-term picture for bonds has continued to improve in recent months.
Brazil's currency devaluation has made their products extremely price
competitive with U.S. made products. Since Brazil is the dominant economy in
Latin America, their devaluation implies falling growth rates for every economy
within the region. Lower growth in Latin America has coincided with slow growth
in Europe. The introduction of a single currency across much of Europe, the
euro, has yet to ignite economic growth in the region. Indeed, the newly
created European central bank has repeatedly revised down its growth estimates
for 1999, and is currently forecasting growth of little more than 2% for the
year.
Despite the good news for bonds overseas, domestic U.S. conditions continue to
put upward pressure on interest rates. The U.S. economy has repeatedly defied
predictions of an imminent slowdown. With unemployment as of March hitting
4.2%, inflation fears are mounting. Despite these fears, most broad measures of
inflation have continued to trend downward. This combination of robust economic
growth and benign inflation is almost unprecedented. As a result, the Federal
Reserve is examining whether old models of the growth and inflation trade-off
accurately describe the new American economy.
Although the Federal Reserve is considering whether or not the U.S. has entered
a new economic era, market participants are understandably reluctant to gamble
on such theoretical notions. Without some evidence of slowing economic growth,
the bond market is likely to either trade within a fairly narrow range around
current interest rate levels or continue to decline somewhat. Given that no
signs of a slacking in economic activity are yet apparent, we are anticipating
a range-bound market in the weeks and months ahead. In such an environment our
overweight position in mortgage-backed securities and lower-rated corporate
bonds should continue to perform well.
As the summer wears on, we expect that stumbling growth in Europe and Latin
America will exert pressure on the U.S. economy. This pressure on domestic
economic growth and global inflation
5
<PAGE>
MENTOR INCOME FUND, INC.
SEMI-ANNUAL REPORT
APRIL 30, 1999
- --------------------------------------------------------------------------------
should allow the rally in bond prices to continue. We anticipate significantly
reducing our exposure to mortgages and corporate bonds at that time and
extending portfolio durations.
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/ Daniel J. Ludeman
- ----------------------
Daniel J. Ludeman
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 approximately 2,350 Treasury and Agency issues with
maturities ranging from one to 30 years. The Merrill Lynch 3-Year and
7-Year Treasury Indexes are 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 include
reinvestment of all distributions.
*** While 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, may be worth more or less than
their original cost.
6
<PAGE>
MENTOR INCOME FUND, INC.
PORTFOLIO OF INVESTMENTS
APRIL 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Market Value
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LONG-TERM INVESTMENTS 132.39%
- -------------------------------------------------------------------------------------------------------
PREFERRED STOCK 4.42%
- -------------------------------------------------------------------------------------------------------
Home Ownership, Inc.,
12/30/26 (cost $4,954,350) (a) $ 5,650,000 $ 5,115,594
- -------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES AND AGENCIES 59.28%
- -------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corporation
Series 1647 B, 6.50%, 11/15/08, REMIC 4,875,797 4,874,301
Series 1693 Z, 6.00%, 3/15/09, REMIC 6,333,337 6,130,821
7.57% - 10.75%, 9/01/09 - 9/01/28 1,660,608 1,781,983
Federal National Mortgage Association
6.00%, 12/01/13 3,421,368 3,390,367
Series 1998-24 JZ, 6.50%, 5/18/28 1,817,491 1,794,351
7.48%, 7/01/27 ARM 18,370 18,370
Government National Mortgage Association
7.00%, 12/15/08 (d) 3,127,289 3,184,256
11.50%, 2/15/13 - 6/15/19 138,325 150,729
6.00% - 7.00%, 3/15/28 - 3/15/29 (d) 35,434,450 35,247,094
Government National Mortgage Association, II
6.13%, 12/20/22, ARM 4,094,686 4,181,819
U.S. Treasury Bond, 6.13%, 11/15/27 (d) 7,500,000 7,758,300
- -------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECURITIES AND AGENCIES (COST $68,638,919) 68,512,391
- -------------------------------------------------------------------------------------------------------
CORPORATE BONDS 23.46%
- -------------------------------------------------------------------------------------------------------
Adelphia Communications, 9.88%, 3/01/05 375,000 406,875
Capital One Bank, 7.15%, 9/15/06, puttable
9/15/99 4,000,000 4,055,355
Century Communications, 9.50%, 3/01/05 476,000 510,510
Chancellor Media Corporation, 9.00%, 10/01/08 1,000,000 1,072,500
Charter Communications, 8.63%, 4/01/09 (a) 800,000 821,000
Cinemark USA, Inc., 9.63%, 8/01/08 570,000 591,375
Clearnet Communications, 14.75%, 12/15/05 600,000 561,000
</TABLE>
7
<PAGE>
MENTOR INCOME FUND, INC.
PORTFOLIO OF INVESTMENTS
APRIL 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Market Value
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE BONDS (CONTINUED)
- -------------------------------------------------------------------------------------------------------
CMS Energy Corporation, 6.75%, 1/15/04 $ 400,000 $ 394,200
Comcast Cellular, 9.50%, 5/01/07 1,250,000 1,415,625
CSC Holdings, Inc., 9.88%, 5/15/06 700,000 766,500
Enron Corporation, 6.73%, 11/17/08 1,600,000 1,602,322
IBM Corporation, 5.10%, 11/10/03 1,000,000 965,233
Intermedia Communications, 8.60%, 6/01/08 570,000 568,575
Isle of Capri Casino, 8.75%, 4/15/09 600,000 598,500
JCAC, Inc., 10.13%, 6/15/06 1,000,000 1,100,000
Jitney-Jungle Stores, 12.00%, 3/01/06 1,000,000 1,070,000
Lenfest Communications, 7.63%, 2/15/08 320,000 331,200
McLeodusa, Inc., 9.25%, 7/15/07 999,000 1,046,453
Metromedia Fiber, 10.00%, 11/15/08 580,000 626,400
Microcell Telecommunications, zero coupon,
6/01/06 (a) 580,000 488,650
Nextel Communications, zero coupon, 9/15/07 (a) 1,000,000 785,000
Ocean Energy, Inc., 8.38%, 7/1/08 502,500 502,500
Playtex Products, 8.88%, 7/15/04 600,000 622,500
PSINet, Inc., 10.00%, 2/15/05 465,000 490,575
Randall's Food Markets, 9.38%, 7/01/07 720,000 782,100
RBF Finance, 11.38%, 3/15/09 (a) 500,000 527,500
Rogers CableSystems, 10.00%, 3/15/05 550,000 622,875
Rogers Cantel, 8.80%, 10/01/07 750,000 789,375
Safeway, Inc., 6.50%, 11/15/08 1,000,000 1,002,771
Sprint Capital Corporation, 6.13%, 11/15/08 1,800,000 1,740,174
Tembec Industrials, 8.63%, 6/30/09 250,000 258,750
- -------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS (COST $26,909,486) 27,116,393
- -------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
MENTOR INCOME FUND, INC.
PORTFOLIO OF INVESTMENTS
APRIL 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Market Value
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PRIVATE ISSUES 36.77%
- -------------------------------------------------------------------------------------------------------
ADJUSTABLE RATE MORTGAGES 0.56%
California Federal Bank, Series 1991-CI2 A,
6.54%, 7/15/21 (b) $ 296,105 $ 296,055
Kidder Peabody Acceptance Corporation,
Series 1989-3 A, 8.90%, 6/20/19(b) 354,769 354,706
- -------------------------------------------------------------------------------------------------------
650,761
- -------------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES 6.53%
Advanta Mortgage Loan Trust,
Series 1993-3 A5, 5.55%, 1/25/25 913,608 884,220
AFG Receivables Trust, Series 1995-A B, 6.45%,
9/15/00 159,253 159,253
CS First Boston Mortgage Securities Corporation,
Series 1996-2 A6, 7.18%, 2/25/18 2,750,000 2,759,536
EquiCredit Corporation of America,
Series 1998-A A6F, 6.16%, 4/15/08 1,481,250 1,480,669
Olympic Automobiles Receivables Trust,
Series 1994-B A2, 6.85%, 6/15/01 430,771 430,771
Old Stone Credit Corporation Home Equity
Trust, Series 1993-2 B1, 6.20%, 6/15/08 843,746 846,700
Union Acceptance Corporation Auto Trust,
Series 1996-B A, 6.45%, 7/09/03 984,827 990,024
- -------------------------------------------------------------------------------------------------------
7,551,173
- -------------------------------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS 29.64%
General Electric Capital Mortgage Services
Series 1993-18 B1, 6.00%, 2/25/09 (a) 1,810,510 1,746,634
Series 1997-13 M, 6.75%, 12/25/12 1,897,903 1,892,947
Series 1998-1 M, 6.75%, 1/25/13 713,755 712,453
Series 1996-4 B1, 7.00%, 3/25/26 4,355,034 4,314,032
Series 1998-3 M, 7.00%, 1/25/28 2,711,424 2,711,121
Norwest Asset Securities Corporation
Series 1996-2 M, 7.00%, 9/25/11 1,699,810 1,704,941
Series 1997-7 M, 7.00%, 5/25/27 1,567,773 1,580,136
</TABLE>
9
<PAGE>
MENTOR INCOME FUND, INC.
PORTFOLIO OF INVESTMENTS
APRIL 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Market Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PRIVATE ISSUES (CONTINUED)
- ----------------------------------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
- ----------------------------------------------------------------------------------------------------------
Prudential Home Mortgage Securities
Series 1993-27 M, 7.50%, 5/25/23 $2,814,371 $2,837,198
Series 1993-22 M, 7.00%, 7/25/23 4,317,929 4,308,694
Series 1994-29 M, 7.00%, 10/25/24 3,130,205 3,120,608
Series 1995-5 M, 7.25%, 9/25/25 2,627,427 2,638,360
Series 1995-5 B1, 7.25%, 9/25/25 (a) 2,543,757 2,571,974
Series 1995-7 M, 7.00%, 11/25/25 1,925,964 1,926,994
Series 1996-4 B1, 6.50%, 4/25/26 580,425 561,189
Series 1996-8 M, 6.75%, 6/25/26 1,645,982 1,628,774
- ---------------------------------------------------------------------------------------------------------
34,256,055
- ---------------------------------------------------------------------------------------------------------
INTEREST ONLY SECURITIES 0.04%
Conti-Mortgage Home Equity Loan Trust
Series 94-3, 0.13%, 3/15/14 (c) 42,467,622 33,178
- ---------------------------------------------------------------------------------------------------------
TOTAL PRIVATE ISSUES (COST $41,264,378) 42,491,167
- ---------------------------------------------------------------------------------------------------------
RESIDUAL INTERESTS (A) 8.46%
Capital Mortgage Funding, Inc., 1999-1, 10/20/22 13,747 399,094
Capital Mortgage Funding, Inc., 1999-2, 10/20/23 14,894 408,398
Capital Mortgage Funding, Inc., 1999-3, 11/20/23 15,466 418,254
General Mortgage Securities, Inc., 1989-2, 1999,
4/17/19 13,191 824,613
General Mortgage Securities II, Inc., 1991-7, 1998,
6/28/30 705 247,157
General Mortgage Securities II, Inc., 1995-1, 1998,
6/25/20 8,702 295,386
General Mortgage Securities II, Inc., 1995-4, 1998,
6/25/23 5,257 314,559
General Mortgage Securities II, Inc., 1997-4, 1998,
5/20/22 12,689 568,352
</TABLE>
10
<PAGE>
MENTOR INCOME FUND, INC.
PORTFOLIO OF INVESTMENTS
APRIL 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Market Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
RESIDUAL INTERESTS (A) (CONTINUED)
- ---------------------------------------------------------------------------------------------------------
General Mortgage Securities II, Inc., 1997-5, 1999,
7/20/23 $17,452 $ 619,594
General Mortgage Securities II, Inc., 1998-1, 1999,
10/20/24 20,543 572,242
General Mortgage Securities II, Inc., 1998-2, 1999,
10/20/24 27,034 424,367
General Mortgage Securities II, Inc., 1998-3, 1999,
6/01/29 3,651 474,011
General Mortgage Securities II, Inc., 1998-4, 1999,
2/20/23 51,040 563,961
General Mortgage Securities II, Inc., 1998-5, 1999,
9/20/21 28,076 617,158
General Mortgage Securities II, Inc., 1998-6, 1999,
7/20/22 29,722 623,817
General Mortgage Securities II, Inc., 1998-7, 1999,
2/20/23 50,892 604,640
General Mortgage Securities II, Inc., 1999-1, 1999,
8/20/24 29,319 451,966
General Mortgage Securities II, Inc., 1999-2, 1999,
1/20/02 19,500 314,255
National Mortgage Funding I, Inc., 1995-4, 1998,
3/20/21 4,524 96,569
National Mortgage Funding I, Inc., 1998-9,
11/20/22 23,638 451,182
National Mortgage Funding I, Inc., 1998-10,
1/20/23 13,015 486,704
- ---------------------------------------------------------------------------------------------------------
TOTAL RESIDUAL INTERESTS (COST $10,258,747) 9,776,279
- ---------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM INVESTMENTS (COST $152,025,880) 153,011,824
=========================================================================================================
</TABLE>
11
<PAGE>
MENTOR INCOME FUND, INC.
PORTFOLIO OF INVESTMENTS
APRIL 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Market Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT-TERM INVESTMENT 1.74%
- ---------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Goldman Sachs & Company
Dated 4/30/99, 4.89%, due 5/03/99
collateralized by $2,100,351 Federal
National Mortgage Association, 6.00%,
1/01/29, market value $2,037,341 (cost
$ 2,007,705) $2,007,705 $ 2,007,705
- ---------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST $154,033,585) 134.13% 155,019,529
- ---------------------------------------------------------------------------------------------------------
OTHER ASSETS LESS LIABILITIES (34.13%) (39,448,640)
- ---------------------------------------------------------------------------------------------------------
NET ASSETS 100.00% $115,570,889
=========================================================================================================
</TABLE>
ARM - Adjustable Rate Mortgage
CMO - Collateralized Mortgage Obligation
REMIC - Real Estate Mortgage Investment Conduit
(a) These are securities that may be resold to "qualified institutional buyers"
under Rule 144A or securities offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended. These securities have been determined
to be liquid under guidelines established by the Board of Trustees.
(b) 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.
(c) Notional principal amount.
(d) A portion of these securities have been segregated as collateral for
reverse repurchase agreements.
INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $75,195,523 and $66,762,745, respectively.
INCOME TAX INFORMATION
At April 30, 1999, the aggregated cost of investment securities for federal
income tax purposes was $154,033,585. Net unrealized appreciation aggregated
$985,944, of which $2,754,072 related to appreciated investment securities and
$1,768,128 related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
MENTOR INCOME FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1999 (UNAUDITED)
- -------------------------------------------------------------------
ASSETS
Investments, at market value (cost $154,033,585) $155,019,529
Cash 1,062
Receivables
Investments sold 758,993
Interest 1,568,334
Other assets 648,278
- -------------------------------------------------------------------
Total assets 157,996,196
- -------------------------------------------------------------------
LIABILITIES
Payables
Reverse repurchase agreements 38,000,000
Investments purchased 3,629,797
Income dividends 709,051
Accrued expenses and other liabilities 86,459
- -------------------------------------------------------------------
Total liabilities 42,425,307
- -------------------------------------------------------------------
NET ASSETS $115,570,889
===================================================================
Net Assets represented by:
Common stock at par value 118,178
Additional paid-in capital $131,211,028
Accumulated undistributed net investment loss (686,457)
Accumulated net realized loss on investment
transactions (15,939,626)
Net unrealized appreciation on investments 985,944
- -------------------------------------------------------------------
NET ASSETS $115,570,889
SHARES OUTSTANDING 11,817,776
- -------------------------------------------------------------------
NET ASSET VALUE PER SHARE $ 9.78
===================================================================
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
MENTOR INCOME FUND, INC.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED APRIL 30, 1999 (UNAUDITED)
- --------------------------------------------------------------------
INVESTMENT INCOME
Interest (Note 2) $ 5,415,558
- --------------------------------------------------------------------
EXPENSES
Management fee 375,649
Administration fee 57,792
Shareholders reports and postage expenses 41,863
Shareholder service fee 29,753
Custodian fee 26,761
Transfer agent fee 23,869
Legal fees 17,359
Registration and filing fees 13,228
Audit fees 1,932
Directors' fees and expenses 1,441
Miscellaneous 3,590
- --------------------------------------------------------------------
Total operating expenses 593,237
- --------------------------------------------------------------------
Interest expense 1,099,329
- --------------------------------------------------------------------
Total expenses 1,692,566
- --------------------------------------------------------------------
Net investment income 3,722,992
- --------------------------------------------------------------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS
Net realized loss on investments (176,304)
Change in unrealized appreciation (depreciation) on
investments (1,133,710)
- --------------------------------------------------------------------
Net realized and unrealized loss on investments (1,310,014)
- --------------------------------------------------------------------
Net increase in net assets resulting from operations $ 2,412,978
====================================================================
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
MENTOR INCOME FUND, INC.
STATEMENT OF CASH FLOWS
SIX MONTHS ENDED APRIL 30, 1999 (UNAUDITED)
- ---------------------------------------------------------------------------
DECREASE IN CASH
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase in net assets from operations $ 2,412,978
Adjustments to reconcile net increase in net assets from
operations to net cash provided by operating activities:
Purchase of investment securities (75,195,523)
Proceeds from disposition of investment securities 88,849,017
Purchase of short-term investment securities, net (1,160,120)
Variation margin on interest-rate swaps 44,201
Increase in interest receivable (301,666)
Decrease in receivable for securities sold 4,105,269
Increase in other assets (442,047)
Decrease in payable for securities purchased (169,095)
Decrease in accrued expenses (11,664)
Unrealized depreciation on investments 1,133,710
Net realized loss from investments 176,304
- ---------------------------------------------------------------------------
Net cash provided by operating activities 19,441,364
- ---------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in reverse repurchase agreements (16,000,000)
Cash distributions paid (3,700,398)
- ---------------------------------------------------------------------------
Net cash used in financing activities (19,700,398)
- ---------------------------------------------------------------------------
Net decrease in cash (259,034)
- ---------------------------------------------------------------------------
CASH:
Beginning of period 260,096
- ---------------------------------------------------------------------------
End of period $ 1,062
===========================================================================
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
MENTOR INCOME FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months
Ended 4/30/99 Year Ended
(Unaudited) 10/31/98
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
NET INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income $ 3,722,992 $ 7,605,215
Net realized loss on investments and interest-rate swaps (176,304) (958,710)
Change in unrealized appreciation (depreciation) on
investments (1,133,710) (1,445,672)
- -------------------------------------------------------------------------------------------------
Increase in net assets resulting from operations 2,412,978 5,200,833
- -------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income (4,255,511) (8,419,461)
Tax return of capital -- (680,074)
- -------------------------------------------------------------------------------------------------
Total distributions to Shareholders (4,255,511) (9,099,535)
- -------------------------------------------------------------------------------------------------
Decrease in net assets (1,842,533) (3,898,702)
NET ASSETS
Beginning of period 117,413,422 121,312,124
- -------------------------------------------------------------------------------------------------
End of period (including accumulated undistributed net
investment loss of ($686,457), and ($153,938),
respectively) $ 115,570,889 $ 117,413,422
=================================================================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
MENTOR INCOME FUND, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Six Months Year Year Year Year Year
Ended 4/30/99 Ended Ended Ended Ended Ended
(Unaudited) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
NET ASSET VALUE, BEGINNING OF
PERIOD $ 9.94 $ 10.27 $ 10.06 $ 10.21 $ 9.60 $ 11.29
- -----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.32 0.64 0.82 0.83 0.80 1.02
Net realized and unrealized
gain (loss) on investments
and interest-rate swaps (0.12) (0.20) 0.23 (0.14) 0.70 (1.75)
- -----------------------------------------------------------------------------------------------------------------------------
Total from investment
operations 0.20 0.44 1.05 0.69 1.50 (0.73)
- -----------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM
Net investment income (0.36) (0.71) (0.84) (0.84) (0.89) (0.96)
Tax return of capital -- (0.06) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total distributions (0.36) (0.77) (0.84) (0.84) (0.89) (0.96)
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 9.78 $ 9.94 $ 10.27 $ 10.06 $ 10.21 $ 9.60
- -----------------------------------------------------------------------------------------------------------------------------
Per share market price, end of
period $ 8.25 $ 8.56 $ 9.38 $ 9.00 $ 8.88 $ 8.25
Total Investment Return
Based on market price 0.51% (0.74%) 13.92% 11.24% 18.83% (13.32%)
Based on net asset value 2.81% 5.22% 11.65% 8.08% 17.48% (6.19%)
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in
thousands) $ 115,571 $ 117,413 $ 121,320 $ 118,838 $ 120,617 $ 113,401
Ratio of gross investment
income to average net assets 9.30% (a) 9.68% 10.97% 11.12% 10.58% 12.18%
Ratio of operating expenses to
average net assets 1.02% (a) 1.02% 1.08% 1.13% 1.09% 1.22%
Ratio of total expenses to
average net assets 2.91% (a) 3.29% 2.78% 2.84% 2.39% 2.38%
Ratio of net investment
income to average net assets 6.39% (a) 6.39% 8.19% 8.28% 8.19% 9.80%
Portfolio turnover rate 42.52% 79.70% 70.50% 189.71% 153.92% 173.71%
Shares outstanding at end of
period (in thousands) 11,818 11,818 11,818 11,818 11,818 11,818
=============================================================================================================================
</TABLE>
(a) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
MENTOR INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1999 (UNAUDITED)
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 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 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.
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
Fund's Board of Directors. Risks may arise from the potential inability of
counterparties to honor the terms of the
18
<PAGE>
MENTOR INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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 may purchase put options or write 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 premium received or paid.
The risk in writing a call option is that the Fund give 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 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.
19
<PAGE>
MENTOR INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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.
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 April 30, 1999, the Fund had no open futures
contracts.
(e) Dollar-Rolls -- 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, 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.
20
<PAGE>
MENTOR INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
(g) Interest-Rate Swaps -- 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 six months ended April 30, 1999, the Fund had realized losses of $44,201 in
connection with closed interest-rate swap agreements. As of April 30, 1999, the
Fund had no outstanding interest-rate swap contracts.
(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.
(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
21
<PAGE>
MENTOR INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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,
if any, after offsetting capital-loss carryovers. Reinvestment of income
distribution is a non-cash transaction.
NOTE 3: INVESTMENT MANAGEMENT AND ADMINISTRATION AGREEMENTS
Mentor Investment Advisors, LLC ("Mentor Advisors") is a wholly owned
subsidiary of Mentor Investment Group, LLC ("Mentor") and its affiliates.
Mentor is a subsidiary of Wheat First Butcher Singer, Inc., which in turn is a
wholly owned subsidiary of First Union Corporation ("First Union"). First Union
is a leading financial services company; First Union has announced plans to
acquire EVEREN Capital Corporation, which currently has a minority ownership
interest in Mentor.
Mentor Advisors, the Fund's investment advisor, receives for its services an
annual investment advisory fee of 0.65% of average weekly net assets. Mentor
Advisors is a wholly-owned subsidiary of
22
<PAGE>
MENTOR INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Mentor Investment Group, LLC ("Mentor"), which is in turn a partially owned
subsidiary of Wheat First Union and EVEREN Capital Corporation. Mentor provides
administrative personnel and services to the Fund at an annual rate of 0.10% of
the Fund's average weekly net assets.
NOTE 4: 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 six months ended April 30, 1999 was approximately $20,833,229 or $1.76 per
share based on average shares outstanding of 11,817,776 during the period at a
weighted average interest rate of 5.05%. The maximum amount of borrowings
outstanding at any day during the period was $55,054,519 (including accrued
interest) as of November 12, 1998, at a weighted average interest rate of
5.23%, and was 30.55% of total assets. The average rate on the April 30, 1999
borrowings was 4.72% and mature on May 5, 1999.
NOTE 5: CAPITAL SHARE TRANSACTIONS
The Fund has authorized 200,000,000 shares of $.01 par value common stock. At
April 30, 1999, 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 six months ended April 30, 1999, no shares were issued.
23
<PAGE>
MENTOR INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 6: 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> <C> <C> <C> <C> <C> <C> <C>
1999
April 30, 1999 $ 2,745 $ 0.23 $ 1,955 $ 0.17 $ (3,201) $ (0.27) $ (1,246) $ (0.11)
January 31, 1999 2,671 0.23 1,768 0.15 1,891 0.16 3,659 0.31
1998
October 31, 1998 $ 2,104 $ 0.18 $ 1,719 $ 0.15 $ (254) $ (0.02) $ 1,465 $ 0.13
July 31, 1998 2,761 0.23 1,876 0.16 500 0.04 2,375 0.20
April 30, 1998 2,898 0.25 1,900 0.16 (1,937) (0.16) (37) -
January 31, 1998 3,757 0.32 2,111 0.17 (713) (0.06) 1,398 0.11
</TABLE>
ADDITIONAL INFORMATION
YEAR 2000 (UNAUDITED)
The Fund receives services from a number of providers which rely on the
effective functioning of their respective systems and the systems of others to
perform those services. It is generally recognized that certain systems in use
today may not be able to perform their intended functions adequately after 1999
because of the inability of computer software to distinguish the year 2000 from
the year 1900. Mentor Advisors is taking steps that it believes are reasonably
designed to address this potential "Year 2000" problem and to obtain
satisfactory assurances that comparable steps are being taken by the Fund's
other major service providers. There can be no assurance, however, that these
steps will be sufficient to avoid any adverse impact on the Fund from this
problem.
24
<PAGE>
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<PAGE>
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<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
801 Pennsylvania Avenue
Kansas City, Missouri 64105
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
99 High Street
Boston, Massachuetts 02110
LEGAL COUNSEL
Ropes & Gray
One International Place
Boston, Massachusetts 02110
DIRECTORS AND OFFICERS
DIRECTORS
Daniel J. Ludeman, CHAIRMAN
Arch T. Allen III
Jerry R. Barrentine
Arnold H. Dreyfuss
Weston E. Edwards
Thomas F. Keller
Louis W. Molechert, Jr.
J. Garnett Nelson
Troy A. Peery, Jr.
Peter J. Quinn, Jr.
OFFICERS
Paul F. Costello, PRESIDENT
Terry L. Perkins, TREASURER AND SECRETARY
Michael A. Wade, ASSISTANT TREASURER
Mentor Income Fund, Inc.
------------------------------------
SEMI-ANNUAL REPORT
------------------------------------
April 30, 1999
[MENTOR INVESTMENT GROUP LOGO]
