<PAGE>
Mentor Income Fund, Inc.
Annual Report
October 31, 1999
- --------------------------------------------------------------------------------
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 investment in
U.S. Treasury securities having the same maturity as the expected average
life of the Fund's investments.
The following is the Mentor Income Fund, Inc. annual report for the year ended
October 31, 1999.
The Mentor Income Fund, Inc.'s 1.28% net asset value total return for the
twelve-month period ended October 31, 1999 compares to the Merrill Lynch
Mortgage Master Index return of 2.92%, the Merrill Lynch U.S. Treasury/Agency
Master Index return of - 1.20% and the Merrill Lynch U.S. Treasury 6.5-7.5 Year
Bond Index return of - 3.29% over the same time period.* The return of the
Fund's Lipper U.S. Mortgage Bond Fund peer group was 1.74%.** On a market price
basis, returns were not as strong, with the Fund returning - 3.68%. A generally
weak bond market for much of the past year put pressure on the share prices of
many closed-end bond funds and resulted in the Fund's market price total return
coming in well below its net asset value performance. During the year ended
October 31, 1999, the Fund paid distributions totaling $0.72 per share, which
represents an annualized yield of 9.52% based on the Fund's closing market
price of $7.56 on October 31, 1999. These monthly dividends have provided the
Fund's shareholders with a significant income advantage over the yield-to-
maturity of 5.58%, 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 fluctuate in value.***
1
<PAGE>
Mentor Income Fund, Inc.
Annual Report
October 31, 1999
- --------------------------------------------------------------------------------
Environment
The past twelve months were extremely difficult for bond investors. Stronger-
than-expected economic growth drove interest rates 1.00% to 1.60% higher across
all maturities, putting 1999 on track to be the second worst year for bonds in
the history of the credit markets.
The fiscal year started with interest rates moving lower. The summer of 1998
left world economies and financial markets in a state of upheaval. Russia's
effective default on its debt revealed a strong connection between emerging
markets, Wall Street trading desks and hedge funds. Hedge funds are private
investment accounts that often engage in highly leveraged, complex trading
activity, and are not subject to the same regulations as mutual funds. The
fallout from the Russian default pushed the largest hedge fund in the United
States to the brink of bankruptcy. Investors became increasingly concerned
about the widespread global effects of traders unwinding their positions.
Corporate bond and mortgage-backed security prices spiraled lower as selling
continued into a market with severely reduced liquidity. Investors sought only
the highest quality and most liquid securities. Demand for U.S. Treasuries
soared, but faded for bonds with even a hint of risk. To stabilize global
economies and financial markets, the world's central bankers eased monetary
conditions in the fourth quarter of 1999, pushing interest rates to
extraordinarily low levels.
As we entered 1999, many investors expected fragile international economies to
limit U.S. economic growth. However, thanks to aggressive easing by the Fed and
other central banks across the world, the U.S. economy remained robust and
growth in many global economies was faster and more durable than many investors
anticipated. Market sentiment shifted from concerns that weak international
growth would dampen the U.S. economy to concerns about an overheated economy
fostering inflation and prompting the need for a more restrictive monetary
policy. By the end of the Fund's 1999 fiscal year, the Federal Reserve Board
had raised interest rates twice. Many foreign interest rates followed U.S.
interest rates higher, as global investors shared concerns about inflation.
2
<PAGE>
Mentor Income Fund, Inc.
Annual Report
October 31, 1999
- --------------------------------------------------------------------------------
The market's volatility created longer-term opportunity, as changing market
conditions caused yield relationships between U.S. Treasuries and other sectors
to shift. Corporate bonds and mortgage-backed securities began to offer yield
advantages versus Treasuries that were high by historical standards. Market
psychology also changed. Although global markets recovered somewhat from the
turmoil of last fall, many Wall Street firms - hurt by last year's use of
extensive leverage - became unusually cautious about adding to their security
inventories. This reluctance on the part of dealers to make markets in many
types of securities limited the potential price appreciation for bonds,
particularly those considered to be less liquid. Liquidity is a measure of how
easily a particular security can be bought and sold, and how high the
transaction costs associated with such purchases and sales will be. In light of
reduced overall liquidity in the market, the liquidity of individual securities
became a top priority for investors.
Strategy
Our management strategies focused on asset-allocation and active management of
the Fund's duration. We entered the fiscal year with a heavy weighting in U.S.
Government and Agency Obligations, a minimal position in investment grade
corporate bonds and virtually no high yield bond holdings. The Fund also had a
long duration. The Fund's asset allocation and long duration enhanced total
return when demand was unusually strong for U.S. Treasuries and interest rates
fell. We reduced holdings in Treasuries toward the end of 1998, reinvesting
assets primarily in mortgage-backed securities, investment grade corporate
bonds and high yield corporate bonds. At that time, market conditions had
stabilized and yield advantages were at attractive levels. The new asset
allocation benefited performance when mortgage-backed securities and corporate
bonds outperformed U.S. Treasuries as yield relationships returned to more
normal historical standards. We shortened the Fund's duration to approximately
5.5 years in May and maintained this defensive stance through the end of the
fiscal period. A shorter duration enhanced price stability as interest rates
rose. As of October 31, 1999, the portfolio was invested as follows: Asset
backed
3
<PAGE>
Mentor Income Fund, Inc.
Annual Report
October 31, 1999
- --------------------------------------------------------------------------------
securities - 5.5%; Investment grade corporate bonds - 10.8%; Preferred Stocks -
3.9%; High yield bonds - 20.4%; Mortgage backed securities - 21.3%;
Collateralized mortgage obligations - 31.0%; Residual interests - 7.1%. Average
portfolio quality was "A+", also as of that date.
Outlook
Over the long term, we think that bonds offer an extremely attractive
investment opportunity. "Real" interest rates - the rate earned by the investor
in excess of inflation - are fairly high by historical standards. It is our
belief that the current fears concerning accelerating inflation will prove to
be unfounded for two reasons. First, the Fed has proven time and again that
they will not allow inflation to get out of hand. We believe they will continue
to tighten credit conditions until any inflationary pressures are extinguished.
Second, we also believe the internet is the most deflationary force yet
invented. Every conceivable good or service is being offered across the
internet, and price comparisons are quick and easy. In such an environment,
raising prices becomes a fairly dangerous proposition. Low and stable inflation
rates ultimately result in much lower interest rates and excellent returns from
fixed income investments.
At current levels, bonds are attractively valued and offer the potential for
solid returns over the long term. Near term, however, we believe interest rates
could continue to rise. We think the Federal Reserve Board will need to
continue draining some of the liquidity it provided to markets during last
year's crisis, and would not be surprised to see short-term rates reach the 6%
area. Such aggressive action on the part of the Fed, however, would bring the
bear market in bonds to an end. Much of the economy's strength has come from
consumer spending, which has been fueled by the "wealth effect" of rising stock
prices. In our opinion, stock prices will respond negatively to continued
increases in short-term interest rates. A softening in equity prices will
dampen the "wealth effect" and curb consumer spending. A slower economy with
continued low inflation should improve bond market sentiment considerably.
Given our outlook, high yield investments are particularly attractive and we
4
<PAGE>
Mentor Income Fund, Inc.
Annual Report
October 31, 1999
- --------------------------------------------------------------------------------
anticipate the Fund moving to its maximum 35% weighting in this sector. We had
virtually no exposure to high yield when the Russian default sparked last
year's liquidity crisis on Wall Street. High yield spreads more than doubled
overnight, and Y2K fears kept investors from returning to this market in 1999
despite continued strong economic growth. As we enter the new year and leave
Y2K fears behind, we believe investors will be drawn to the extraordinary yield
potential available from this sector of the bond market. Longer term, we
believe the prospects for high yield investments are even better. As stated
previously, we think low and stable inflation rates will force interest rates
to decline and stay at low levels compared to recent history. In other words,
over the next 20 years interest rates could resemble the levels seen in the
50's and 60's rather than the rates seen in the 70's and 80's. In this
environment, we believe investors will increasingly look to the high yield
market to enhance the income of their portfolios. We believe this increased
demand could result in excellent returns from high yield investments.
Dividend Reinvestment Plan
Shareholders who wish to purchase aditional 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.
* The Merrill Lynch Mortgage Master Index is a composite of fixed rate
mortgage pass-through securities. The Merrill Lynch U.S. Treasury/Agency
Master Index is a composite of Treasury and Agency issues with maturities
ranging from one to 30 years. The Merrill Lynch 6.5-7.5 Year U.S. Treasury
Bond Index is a composite of U.S. Treasury Securities in this maturity
range adjusted to reflect reinvestment of interest on securities in the
index. These indexes are not adjusted to reflect sales loads, expenses or
other fees that the SEC requires to be reflected in the Fund's performance.
It is not possible to invest directly in an index.
** Lipper Analytical Services, Inc., an independent mutual fund rating
company, groups funds by investment objective and calculates performance
figures for each group. Performance does not include sales charges and does
include reinvested dividends.
*** 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.
5
<PAGE>
Mentor Income Fund, Inc.
Schedule of Investments
October 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percent of
Net Assets Shares Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Preferred Stocks 4.3%
- -------------------------------------------------------------------------------
Home Ownership Funding Corp. (a) (cost
$4,742,829) 5,650,000 $ 4,638,741
- -------------------------------------------------------------------------------
Principal
Amount
- -------------------------------------------------------------------------------
Adjustable Rate Mortgage Securities 0.3%
California Federal Bank Los Angeles,
Ser. 1991-CI2, Class A, 6.86%, 7/15/2021
(g) $ 266,362 265,030
Kidder Peabody Acceptance Corp. I,
Ser. 1989-3, Class A, 8.894%, 6/20/2019
(g) 109,719 109,171
- -------------------------------------------------------------------------------
Total Adjustable Rate Mortgage Securities
(cost $372,251) 374,201
- -------------------------------------------------------------------------------
Asset-Backed Securities 6.1%
Advanta Mortgage Loan Trust, Ser. 1993-3,
Class A, 5.55%, 1/25/2025 798,019 769,454
CS First Boston Mortgage Securities Corp.,
Ser. 1996-2, Class A6, 7.18%, 2/25/2018 2,750,000 2,740,774
EQCC Home Equity Loan Trust, Ser. 1998-2,
Class A-F, 6.159%, 4/15/2008 1,481,250 1,438,864
Old Stone Credit Corp. Home Equity Trust,
Ser. 1993-2, Class B1, 6.20%, 6/15/2008 684,340 677,801
Olympic Automobiles Receivables,
Ser. 1994-B, Class A2, 6.85%, 6/15/2001 269,354 269,606
Union Acceptance Corp., Ser. 1996-B,
Class A, 6.45%, 7/9/2003 721,524 721,247
- -------------------------------------------------------------------------------
Total Asset-Backed Securities (cost
$6,598,186) 6,617,746
- -------------------------------------------------------------------------------
Corporate Bonds 31.5%
- -------------------------------------------------------------------------------
Business Equipment & Services 1.0%
IBM Corp., Debentures, 6.50%, 1/15/2028 1,200,000 1,099,978
- -------------------------------------------------------------------------------
Cable/Other Video Distribution 2.1%
Charter Communications LLC, Sr. Notes,
8.625%, 4/1/2009 800,000 760,000
CSC Holdings, Inc., Sr. Sub. Notes,
9.875%, 5/15/2006 700,000 729,750
</TABLE>
6
<PAGE>
Mentor Income Fund, Inc.
Schedule of Investments (continued)
October 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percent of Principal
Net Assets Amount Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Corporate Bonds (continued)
- -------------------------------------------------------------------------------
Cable/Other Video Distribution (continued)
- -------------------------------------------------------------------------------
Rogers Cablesystems Ltd., Sr. Secd. Notes,
Ser. B, 10.00%, 3/15/2005 $ 750,000 $ 793,125
- -------------------------------------------------------------------------------
2,282,875
- -------------------------------------------------------------------------------
Chemical & Agricultural Products 0.6%
Lyondell Chemical Co., Sr. Secd. Notes,
Ser. B, 9.875%, 5/1/2007 700,000 700,000
- -------------------------------------------------------------------------------
Communication Systems & Services 7.3%
Adelphia Communications Corp., Notes,
9.875%, 3/1/2005 375,000 383,906
Century Communications Corp., Sr. Notes,
9.50%, 3/1/2005 476,000 478,380
Chancellor Media Corp., Sr. Sub. Notes,
9.00%, 10/1/2008 1,000,000 1,027,500
Intermedia Communications, Inc., Sr.
Notes, 8.60%, 6/1/2008 570,000 507,300
JCAC, Inc., Sr. Sub. Notes, 10.125%,
6/15/2006 1,000,000 1,060,000
Metromedia Fiber Network, Inc., Sr. Notes,
10.00%, 11/15/2008 580,000 572,750
Nextel Communications, Inc.,
Sr. Disc. Notes, Step Bond
(Eff. Yield 10.54%) (b), 0.00%, 9/15/2007 1,410,000 1,064,550
Nextlink Communications, Inc., Sr. Notes,
10.75%, 6/1/2009 450,000 461,250
Sprint Capital Corp., Notes, 6.125%,
11/15/2008 1,800,000 1,671,860
Williams Communications Group, Inc.,
Sr. Notes, 10.875%, 10/1/2009 300,000 309,000
Worldwide Fiber, Inc., Sr. Notes, 12.00%,
8/1/2009 (a) 450,000 452,250
- -------------------------------------------------------------------------------
7,988,746
- -------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
Mentor Income Fund, Inc.
Schedule of Investments (continued)
October 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percent of Principal
Net Assets Amount Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Corporate Bonds (continued)
- -------------------------------------------------------------------------------
Consumer Products & Services 2.3%
Cinemark USA, Inc., Sr. Sub. Notes, Ser.
D, 9.625%, 8/1/2008 $ 570,000 $ 510,150
Playtex Prods. Inc., Sr. Notes, Ser. B,
8.875%, 7/15/2004 600,000 597,000
Verio, Inc., Sr. Notes, 11.25%, 12/1/2008 850,000 892,500
Weight Watchers Int'l., Inc., Sr. Sub.
Notes, 13.00%, 10/1/2009 (a) 500,000 512,500
- -------------------------------------------------------------------------------
2,512,150
- -------------------------------------------------------------------------------
Diversified Companies 0.3%
KMC Telecom Holdings, Inc., Sr. Notes,
13.50%, 5/15/2009 (a) 300,000 295,500
- -------------------------------------------------------------------------------
Electrical Equipment & Services 0.9%
Alabama Power Co., Sr. Notes, 7.125%,
8/15/2004 1,000,000 1,005,548
- -------------------------------------------------------------------------------
Electronic Equipment & Services 0.4%
Amkor Technologies, Inc., Sr. Notes,
9.25%, 5/1/2006 (a) 400,000 390,000
- -------------------------------------------------------------------------------
Finance & Insurance 2.6%
ASAT Finance LLC, 12.50%, 11/1/2006 400,000 398,918
General Motors Acceptance Corp., Notes,
6.85%, 6/17/2004 1,000,000 998,974
Lady Luck Gaming Finance Corp.,
Mtge. Notes, 11.875%, 3/1/2001 400,000 402,000
Principal Financial Group, Sr. Gtd. Notes,
8.20%, 8/15/2009 (a) 1,000,000 1,016,343
- -------------------------------------------------------------------------------
2,816,235
- -------------------------------------------------------------------------------
Food & Beverage Products 2.5%
Canandaigua Brands, Inc., Sr. Notes,
8.625%, 8/1/2006 900,000 886,500
Del Monte Corp., Sr. Sub. Notes, 12.25%,
4/15/2007 400,000 441,000
Kroger Co., Sr. Notes, 7.25%, 6/1/2009 (a) 1,000,000 977,995
</TABLE>
8
<PAGE>
Mentor Income Fund, Inc.
Schedule of Investments (continued)
October 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percent of Principal
Net Assets Amount Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Corporate Bonds (continued)
- -------------------------------------------------------------------------------
Food & Beverage Products (continued)
- -------------------------------------------------------------------------------
Vlasic Foods Int'l., Inc., Sr. Sub. Notes,
Ser. B, 10.25%, 7/1/2009 $ 450,000 $ 425,250
- -------------------------------------------------------------------------------
2,730,745
- -------------------------------------------------------------------------------
Forest Products 0.2%
Tembec Inds., Inc., Sr. Gtd. Notes,
8.625%, 6/30/2009 250,000 247,500
- -------------------------------------------------------------------------------
Gaming 2.7%
Coast Hotels & Casinos, Inc., Sr. Sub.
Notes, 9.50%, 4/1/2009 400,000 374,500
Hollywood Casino Corp., Sr. Secd. Notes,
11.25%, 5/1/2007 500,000 503,750
Hollywood Park, Inc.:
9.50%, 8/1/2007 1,000,000 967,500
13.00%, 8/15/2003 400,000 453,500
Isle of Capri Casinos, Inc., Sr. Sub.
Notes, 8.75%, 4/15/2009 700,000 635,250
- -------------------------------------------------------------------------------
2,934,500
- -------------------------------------------------------------------------------
Oil/Energy 3.9%
CMS Energy Corp., Sr. Notes, 6.75%,
1/15/2004 400,000 374,119
Enron Corp., Notes, 6.725%, 11/17/2008 1,600,000 1,525,288
Eott Energy Partners, Sr. Notes, 11.00%,
10/1/2009 250,000 256,875
Ocean Energy, Inc., Sr. Sub. Notes, Ser.
B, 8.375%, 7/1/2008 500,000 480,000
Parker Drilling Co., Sr. Notes, Ser. D,
9.75%, 11/15/2006 400,000 387,000
Pride Petroleum Services, Inc., Sr. Notes,
9.375%, 5/1/2007 650,000 641,875
Swift Energy Co., Sr. Sub. Notes, 10.25%,
8/1/2009 600,000 602,250
- -------------------------------------------------------------------------------
4,267,407
- -------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
Mentor Income Fund, Inc.
Schedule of Investments (continued)
October 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percent of Principal
Net Assets Amount Value
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Corporate Bonds (continued)
- ------------------------------------------------------------------------------
Telecommunication Services & Equipment 3.7%
Filtronic PLC, Sr. Notes, 10.00%,
12/1/2005 (a) $ 950,000 $ 938,125
Insight Midwest LP, Sr. Notes, 9.75%,
10/1/2009 (a) 400,000 413,000
Level 3 Communications, Inc., Sr. Notes,
9.125%, 5/1/2008 400,000 375,000
McLeod USA, Inc., Sr. Notes, 9.25%,
7/15/2007 999,000 996,502
Microcell Telecommunications, Inc., Sr.
Disc. Notes, Ser. B, Step Bond (Eff.
Yield 12.09%) (b), 0.00%, 6/1/2006 680,000 561,000
Rogers Cantel, Inc., Sr. Sub. Notes,
8.80%, 10/1/2007 750,000 756,563
- ------------------------------------------------------------------------------
4,040,190
- ------------------------------------------------------------------------------
Textile & Apparel 0.4%
Simmons Co., Sr. Sub. Notes, Ser. B,
10.25%, 3/15/2009 450,000 444,375
- ------------------------------------------------------------------------------
Hospitals/Nursing Homes/Healthcare 0.6%
Lifepoint Hospitals Holdings, Inc., Sr.
Sub. Notes, 10.75%, 5/15/2009 (a) 200,000 197,500
Triad Hospitals Holdings, Sr. Sub. Notes,
11.00%, 5/15/2009 (a) 450,000 443,250
- ------------------------------------------------------------------------------
640,750
- ------------------------------------------------------------------------------
Total Corporate Bonds (cost $35,304,676) 34,396,499
- ------------------------------------------------------------------------------
Collateralized Mortgage Obligations 22.3%
General Electric Capital Mortgage
Services, Inc.:
Ser. 1993-18, Class B1, 6.00%, 2/25/2009 1,689,573 1,620,866
Ser. 1997-13, Class M, 6.75%, 12/25/2012 1,854,209 1,792,213
Ser. 1998-1, Class M, 6.75%, 1/25/2013 697,617 673,853
Norwest Asset Securities Corp.:
Ser. 1996-3, Class M, 7.00%, 9/25/2011 1,676,197 1,647,944
Ser. 1997-7, Class M, 7.00%, 5/25/2027 1,561,697 1,491,725
Prudential Home Mortgage Securities (a):
Ser. 1993-2, Class M, 7.50%, 5/25/2023 2,718,342 2,709,684
</TABLE>
10
<PAGE>
Mentor Income Fund, Inc.
Schedule of Investments (continued)
October 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percent of Principal
Net Assets Amount Value
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Collateralized Mortgage Obligations
(continued)
- ------------------------------------------------------------------------------
Prudential Home Mortgage Securities
(continued)
Ser. 1993-22, Class M, 7.00%, 7/25/2023 $ 4,110,453 $ 3,999,532
Ser. 1994-29, Class M, 7.00%, 10/25/2024 3,118,135 3,018,526
Ser. 1995-5, Class B1, 7.25%, 9/25/2025 2,618,858 2,539,518
Ser. 1995-5, Class M, 7.25%, 9/25/2025 2,535,461 2,481,494
Ser. 1995-7, Class M, 7.00%, 11/25/2025 1,921,633 1,854,483
Ser. 1996-4, Class B1, 6.50%, 4/25/2026 579,188 554,690
- ------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations (cost
$24,133,995) 24,384,528
- ------------------------------------------------------------------------------
U.S. Government & Agency Obligations (f) 36.7%
FHLMC: 4.9%
6.65%, 9/1/2018 1,235 1,255
10.75%, 9/1/2009 235,853 253,291
9.50%, 12/1/2009 (d) 1,169,819 1,235,271
Ser. 1647, Class 1647-B, 6.50%,
11/15/2008 3,919,198 3,846,923
- ------------------------------------------------------------------------------
5,336,740
- ------------------------------------------------------------------------------
FNMA: 19.4%
6.00%, 12/1/2013 3,219,190 3,069,627
6.50%, 5/18/2028 267,692 255,801
6.51%, 7/1/2027 16,212 16,373
7.00%, 9/1/2014 - 8/1/2029 12,928,506 12,777,671
7.50%, 8/1/2014 - 10/1/2014 5,000,000 5,065,743
- ------------------------------------------------------------------------------
21,185,215
- ------------------------------------------------------------------------------
GNMA: 12.4%
6.00%, 3/15/2029 3,515,583 3,265,203
6.13%, 12/20/2022 3,717,675 3,760,763
6.50%, 7/15/2014 - 4/15/2029 3,702,770 3,559,130
7.00%, 12/15/2008 2,745,185 2,749,192
11.50%, 2/15/2013 - 6/15/2019 118,808 134,353
- ------------------------------------------------------------------------------
13,468,641
- ------------------------------------------------------------------------------
Total U.S. Government & Agency Obligations
(cost $40,265,930) 39,990,596
- ------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
Mentor Income Fund, Inc.
Schedule of Investments (continued)
October 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percent of Principal
Net Assets Amount Value
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Only Securities 0.0%
Contimortgage Home Equity Loan Trust,
Ser. 1994-3, Class A4, 0.13%,
3/15/2014 (cost $127,093)(e) $37,684,893 $ 29,441
- ----------------------------------------------------------------------------
Residual Interests (a) 7.9%
- ----------------------------------------------------------------------------
Capital Mtge. Funding I, Inc.:
1998-9, 11/20/2022 20,405 356,746
1999-1, 10/20/2022 11,601 314,700
1999-2, 10/20/2023 12,611 321,744
1999-3, 12/20/2027 13,181 330,260
General Mtge. Securities, Inc., 1989-2,
1998, 4/17/2019 10,719 799,547
General Mtge. Securities, Inc. II:
1995-1, 1998, 6/25/2020 5,086 229,181
1995-4, 1998, 6/25/2023 2,967 259,415
1997-4, 1999, 5/20/2022 10,489 457,048
1997-5, 1998, 7/20/2023 14,391 526,142
1998-2, 12/20/2023 23,303 356,546
1998-3, 6/1/2029 2,100 385,602
1998-4, 9/20/2023 43,224 479,932
1998-5, 9/20/2021 24,555 526,294
1999-1, 8/20/2024 26,262 370,852
1999-2, 1/20/2022 17,493 268,281
1999-4, Ser. 2, 10/27/2029 40,000 714,560
National Mtge. Funding, Inc.:
1998-1, 10/20/2024 18,228 482,131
1998-6, 7/20/2022 25,307 515,552
1998-7, 2/20/2023 42,536 496,683
1998-10, 1998, 1/20/2023 10,667 378,411
- ----------------------------------------------------------------------------
Total Residual Interests (cost
$10,363,323) 8,569,627
- ----------------------------------------------------------------------------
</TABLE>
12
<PAGE>
Mentor Income Fund, Inc.
Schedule of Investments (continued)
October 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percent of Principal
Net Assets Amount Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Yankee Obligations 0.9%
- --------------------------------------------------------------------------------
Communication Systems & Services 0.6%
Clearnet Communications, Inc., Sr. Disc.
Notes, Step Bond (Eff. Yield 12.39%)
(b), 0.00%, 12/15/2005 $ 695,000 $ 661,119
- --------------------------------------------------------------------------------
Telecommunication Services & Equipment 0.3%
Telewest Communications PLC, Sr. Disc.
Debentures, Step Bond (Eff. Yield
10.83%) (b), 0.00%, 10/1/2007 400,000 365,500
- --------------------------------------------------------------------------------
Total Yankee Obligations (cost $1,015,392) 1,026,619
- --------------------------------------------------------------------------------
Total Long-Term Investments (cost
$122,923,675) 120,027,998
- --------------------------------------------------------------------------------
Repurchase Agreement 5.2%
State Street Bank & Trust Co. dated
10/29/1999, 5.16%, maturing 11/1/1999,
maturity value $5,656,594 (c) (cost
$5,654,163) 5,654,163 5,654,163
- --------------------------------------------------------------------------------
Total Investments (cost $128,577,838) 115.2% 125,682,161
- --------------------------------------------------------------------------------
Other Assets and Liabilities - net (15.2) (16,585,835)
- --------------------------------------------------------------------------------
Net Assets 100.0% $109,096,326
- --------------------------------------------------------------------------------
</TABLE>
(a) 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) Effective yield (calculated at the time of purchase) is the yield at which
the bond accretes on an annual basis until maturity date.
(c) The repurchase agreement is fully collateralized by the U.S. Government
and/or agency obligations based on market prices plus accrued interest at
October 31, 1999.
(d) All or a portion of the principal amount of this security was pledged to
cover initial margin requirements for open futures contracts.
(e) Notional principal amount.
(f) A portion of these securities have been segregated as collateral for
reverse repurchase agreements.
(g) 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.
13
<PAGE>
Mentor Income Fund, Inc.
Schedule of Investments (continued)
October 31, 1999
- --------------------------------------------------------------------------------
Futures Contracts - Long Positions
<TABLE>
<CAPTION>
Value at
Number of Initial Contract October 31, Unrealized
Expiration Contracts Amount 1999 Gain
- ---------- --------------- ---------------- ----------- ----------
<S> <C> <C> <C> <C>
December 1999 37 5 Yr. T-Note $3,963,047 $3,994,266 $31,219
</TABLE>
Summary of Abbreviations:
FHLMCFederal Home Loan Mortgage Corporation
FNMAFederal National Mortgage Association
GNMAGovernment National Mortgage Association
Cost of purchases and proceeds from sales of investment securities (excluding
short-term securities) were as follows for the year ended October 31, 1999:
<TABLE>
<CAPTION>
Cost of Purchases Proceeds from Sales
-------------------------------------------------------------------------
U.S. Government Non-U.S. Government U.S. Government Non-U.S. Government
--------------- ------------------- --------------- -------------------
<S> <C> <C> <C>
$6,701,789 $135,898,044 $31,043,583 $152,009,981
</TABLE>
On October 31, 1999, the composition of unrealized appreciation and
depreciation on securities based on the aggregate cost of securities for
federal income tax purposes was as follows:
<TABLE>
<CAPTION>
Gross Gross
Tax Unrealized Unrealized Net Unrealized
Cost Appreciation Depreciation Depreciation
---- ------------ ------------ --------------
<S> <C> <C> <C>
$129,466,162 $1,202,754 $(4,986,755) $(3,784,001)
</TABLE>
See Notes to Financial Statements.
14
<PAGE>
Mentor Income Fund, Inc.
Statement of Assets and Liabilities
October 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets
Identified cost of securities $128,577,838
Net unrealized gains or losses on securities (2,895,677)
- ------------------------------------------------------------------------------
Market value of securities 125,682,161
Receivable for securities sold 7,930,147
Interest receivable 1,922,038
Receivable for daily variation margin on open futures contracts 18,725
Prepaid expenses and other assets 61,506
- ------------------------------------------------------------------------------
Total assets 135,614,577
- ------------------------------------------------------------------------------
Liabilities
Distributions payable 709,086
Payable for securities purchased 747,406
Payable for reverse repurchase agreements 24,856,000
Accrued expenses and other liabilities 205,759
- ------------------------------------------------------------------------------
Total liabilities 26,518,251
- ------------------------------------------------------------------------------
Net assets $109,096,326
- ------------------------------------------------------------------------------
Net assets represented by
Common stock at par value $ 118,178
Additional paid-in capital 130,872,981
Overdistributed net investment income (709,086)
Accumulated net realized gains or losses on securities and
futures contracts (18,321,289)
Net unrealized gains or losses on securities and futures
contracts (2,864,458)
- ------------------------------------------------------------------------------
Total net assets $109,096,326
Shares outstanding 11,817,776
- ------------------------------------------------------------------------------
Net asset value per share $ 9.23
- ------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
15
<PAGE>
Mentor Income Fund, Inc.
Statement of Operations
Year Ended October 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment income
Interest (net of interest expense of $1,708,552) $ 8,826,891
- ------------------------------------------------------------------------------
Expenses
Advisory fee 738,946
Shareholder service fee 60,000
Administrative services fees 113,684
Transfer agent fee 38,332
Trustees' fees and expenses 2,600
Printing and postage expenses 78,249
Custodian fee 92,979
Registration and filing fees 30,114
Professional fees 46,996
Other 2,069
- ------------------------------------------------------------------------------
Total expenses 1,203,969
Less: Fee credits (30,962)
- ------------------------------------------------------------------------------
Net expenses 1,173,007
- ------------------------------------------------------------------------------
Net investment income 7,653,884
- ------------------------------------------------------------------------------
Net realized and unrealized gains or losses on securities and
futures contracts
Net realized gains or losses on:
Securities (2,281,164)
Futures contracts (197,108)
- ------------------------------------------------------------------------------
Net realized gains or losses on securities and futures contracts (2,478,272)
- ------------------------------------------------------------------------------
Net change in unrealized gains or losses on securities and
futures contracts (4,984,112)
- ------------------------------------------------------------------------------
Net realized and unrealized gains or losses on securities and
futures contracts (7,462,384)
- ------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 191,500
- ------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
16
<PAGE>
Mentor Income Fund, Inc.
Statement of Cash Flows
Year Ended October 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Increase in Cash
Cash Flows from Operating Activities:
Net increase in net assets from operations $ 191,500
Adjustments to reconcile net increase in net assets from
operations to net cash provided by operating activities:
Purchase of investment securities (142,599,833)
Proceeds from disposition of investment securities 183,053,564
Purchase of short-term investment securities, net (4,806,578)
Variation margin on futures contracts 12,494
Increase in interest receivable (655,370)
Increase in receivable for securities sold (3,065,885)
Decrease in other assets 188,926
Decrease in payable for securities purchased (3,051,486)
Increase in accrued expenses 107,636
Net unrealized depreciation on investments and futures
contracts 4,984,112
Net realized loss from investments and futures contracts 2,478,272
- -------------------------------------------------------------------------
Net cash provided by operating activities 36,837,352
- -------------------------------------------------------------------------
Cash Flows from Financing Activities:
Decrease in reverse repurchase agreements (29,144,000)
Cash distributions paid (7,953,448)
- -------------------------------------------------------------------------
Net cash used in financing activities (37,097,448)
- -------------------------------------------------------------------------
Net decrease in cash (260,096)
- -------------------------------------------------------------------------
Cash:
Beginning of year 260,096
- -------------------------------------------------------------------------
End of year $ 0
- -------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
17
<PAGE>
Mentor Income Fund, Inc.
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended October 31,
--------------------------
1999 1998
- ---------------------------------------------------------------------------
<S> <C> <C>
Operations
Net investment income $ 7,653,884 $ 7,605,215
Net realized gains or losses on securities and
futures contracts (2,478,272) (958,710)
Net change in unrealized gains or losses on
securities and futures contracts (4,984,112) (1,445,672)
- ---------------------------------------------------------------------------
Net increase in net assets resulting from
operations 191,500 5,200,833
- ---------------------------------------------------------------------------
Distributions to shareholders from
Net investment income (8,288,727) (8,419,461)
Tax return of capital (219,869) (680,074)
- ---------------------------------------------------------------------------
Total distributions to shareholders (8,508,596) (9,099,535)
- ---------------------------------------------------------------------------
Total decrease in net assets (8,317,096) (3,898,702)
Net assets
Beginning of period 117,413,422 121,312,124
- ---------------------------------------------------------------------------
End of period $109,096,326 $117,413,422
- ---------------------------------------------------------------------------
Overdistributed net investment income $ (709,086) $ (153,938)
- ---------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
18
<PAGE>
Mentor Income Fund, Inc.
Financial Highlights
(For a share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended October 31,
--------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $ 9.94 $ 10.27 $ 10.06 $ 10.21 $ 9.60
- -------------------------------------------------------------------------------
Income from investment
operations
Net investment income 0.65 0.64 0.82 0.83 0.80
Net realized and
unrealized gains or
losses on securities and
futures contracts (0.64) (0.20) 0.23 (0.14) 0.70
- -------------------------------------------------------------------------------
Total from investment
operations 0.01 0.44 1.05 0.69 1.50
- -------------------------------------------------------------------------------
Distributions to
shareholders from
Net investment income (0.70) (0.71) (0.84) (0.84) (0.89)
Tax return of capital (0.02) (0.06) 0 0 0
- -------------------------------------------------------------------------------
Total distributions (0.72) (0.77) (0.84) (0.84) (0.89)
- -------------------------------------------------------------------------------
Net asset value, end of
period $ 9.23 $ 9.94 $ 10.27 $ 10.06 $ 10.21
- -------------------------------------------------------------------------------
Per share market price,
end of year $ 7.56 $ 8.56 $ 9.38 $ 9.00 $ 8.88
Total Investment Return
Based on market price (3.68)% (0.74%) 13.92% 11.24% 18.83%
Based on net asset value 1.28 % 5.22% 11.65% 8.08% 17.48%
- -------------------------------------------------------------------------------
Ratios and supplemental
data
Net assets, end of period
(in thousands) $109,096 $117,413 $121,312 $118,838 $120,617
Ratio of investment income
to average net assets (a) 9.27 % 9.68% 10.97% 11.12% 10.58%
Ratio of operating
expenses to average net
assets (a) 1.06 % 1.02% 1.08% 1.13% 1.09%
Ratio of total expenses to
average net assets 2.54 % 3.29% 2.78% 2.84% 2.39%
Ratio of net investment
income to average net
assets 6.73 % 6.39% 8.19% 8.28% 8.19%
Portfolio turnover rate 99 % 80% 71% 190% 154%
Shares outstanding at end
of year (in thousands) 11,818 11,818 11,818 11,818 11,818
- -------------------------------------------------------------------------------
</TABLE>
(a) This ratio excludes any interest expense.
See Notes to Financial Statements.
19
<PAGE>
Mentor Income Fund, Inc.
Notes to Financial Statements
October 31, 1999
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.
2. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles, which
require management to make estimates and assumptions that affect amounts
reported herein. Actual results could differ from these estimates.
A. Valuation of Securities
Corporate bonds, U.S. government obligations, mortgage and other asset-backed
securities and other fixed-income securities are valued at prices provided by
an independent pricing service. In determining a price for normal
institutional-size transactions, the pricing service uses methods based on
market transactions for comparable securities and analysis of various
relationships between similar securities, which are generally recognized by
institutional traders.
Securities for which valuations are not available from an independent pricing
service may be valued by brokers which use prices provided by market makers or
estimates of market value obtained from yield data relating to investments or
securities with similar characteristics. Securities for which market quotations
are not readily available, including restricted securities are valued at fair
value as determined in good faith according to procedures approved by the Board
of Directors.
Short-term investments with remaining maturities of 60 days or less are carried
at amortized cost, which approximates market value.
B. Repurchase Agreements
The Fund may invest in repurchase agreements. The custodian holds securities
pledged as collateral for repurchase agreements in a segregated account on the
Fund's behalf. The Fund monitors the adequacy of the collateral daily and will
require the seller to provide additional collateral in the event the market
value of the securities pledged falls below the carrying value of the
20
<PAGE>
Mentor Income Fund, Inc.
Notes to Financial Statements
(continued)
repurchase agreement, including accrued interest. The Fund will only enter into
repurchase agreements with banks and other financial institutions, which are
deemed by the investment advisor to be creditworthy pursuant to guidelines
established by the Board of Directors.
C. Reverse Repurchase Agreements
To obtain short-term financing, the Fund may enter into reverse repurchase
agreements with qualified third-party broker-dealers. Interest on the value of
reverse repurchase agreements 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
custodian containing qualifying assets 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.
D. Futures Contracts
In order to gain exposure to or protect against changes in security values, the
Fund may buy and sell futures contracts.
The initial margin deposited with a broker when entering into a futures
transaction is subsequently adjusted by daily payments or receipts ("variation
margin") as the value of the contract changes. Such changes are recorded as
unrealized gains or losses. Realized gains or losses are recognized on closing
the contract.
Risks of entering into futures contracts include (i) the possibility of an
illiquid market for the contract, (ii) the possibility that a change in the
value of the contract may not correlate with changes in the value of the
underlying instrument or index, and (iii) the credit risk that the other party
will not fulfill their obligations under the contract. Futures contracts also
involve elements of market risk in excess of the amount reflected in the
statement of assets and liabilities.
E. Options
The Fund is authorized to write covered put or call options. When the Fund
writes an option, an amount equal to the premium received is recorded as a
liability and is subsequently adjusted to the current market value of the
written option. Premiums received from writing
21
<PAGE>
Mentor Income Fund, Inc.
Notes to Financial Statements
(continued)
options, which expire unexercised, are recognized as realized gains from
investments on the expiration date. The difference between the premium received
and the amount paid on effecting a closing purchase transaction, including
brokerage commissions, is treated as a realized gain or loss. If a call option
is exercised, the premium is added to the proceeds from the sale of the
underlying security in calculating the realized gain or loss on the sale. If a
put option is exercised, the premium reduces the cost of the security
purchased. The Fund, as a writer of an option, bears the market risk of an
unfavorable change in the price of the security underlying the written option.
F. Dollar Roll Transactions
The Fund may engage in dollar roll transactions with respect to mortgage-backed
securities issued by GNMA, FNMA and FHLMC. In a dollar roll transaction, a Fund
sells a mortgage-backed security to a financial institution, such as a bank or
broker/dealer, and simultaneously agrees to repurchase a substantially similar
(i.e., same type, coupon and maturity) security from the institution at a later
date at an agreed upon price. The mortgage-backed securities that are
repurchased will bear the same interest rate as those sold, but generally will
be collateralized by different pools of mortgages with different prepayment
histories.
G. Residual Interests
The Fund may invest in mortgage security residual interests ("residuals"). A
residual is a derivative security, which is any investment that derives its
value from an underlying security, asset, or market index. The Fund's
investments in residuals are 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 has 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.
22
<PAGE>
Mentor Income Fund, Inc.
Notes to Financial Statements
(continued)
H. Interest-Rate Swaps
The Fund may invest in 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 or losses by marking-to-market the value of the swap. When the
swap is terminated, the Fund will record a realized gain or loss.
I. 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 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.
J. 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.
K. Security Transactions and Investment Income
Securities transactions are accounted for no later than one business day after
the trade date. Realized gains and losses are computed on the identified cost
basis. Interest income is recorded on the accrual basis and includes accretion
of discounts and amortization of premiums. Dividend income is recorded on the
ex-dividend date.
L. Federal Taxes
The Fund has qualified and intends to continue to qualify as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
"Code"). Thus, the Fund will not incur any federal income tax liability since
it is expected to distribute all of its net investment company taxable income,
net tax-exempt income and net capital gains, if any, to its shareholders. The
Fund also intends to avoid any excise tax liability
23
<PAGE>
Mentor Income Fund, Inc.
Notes to Financial Statements
(continued)
by making the required distributions under the Code. Accordingly, no provision
for federal taxes is required. To the extent that realized capital gains can be
offset by capital loss carryforwards, it is the Fund's policy not to distribute
such gains.
M. Distributions
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.
Income and capital gains distributions to shareholders are determined in
accordance with income tax regulations, which may differ from generally
accepted accounting principles. The significant differences between financial
statement amounts available for distributions and distributions made in
accordance with income tax regulations are primarily due to differing treatment
for paydown gains and losses on asset-backed securities, mortgage dollar roll
transactions and residual interests.
Certain distributions paid during previous years have been reclassified to
conform to current year presentation.
3. Investment Advisory Agreement and Other Affiliated Transactions
Mentor Advisors, LLC ("Mentor Advisors"), a wholly-owned subsidiary of First
Union Corporation ("First Union"), the Fund's investment advisor, receives for
its services an annual investment advisory fee at 0.65% of average weekly net
assets.
Evergreen Investment Services, Inc. ("EIS"), a subsidiary of First Union,
serves as the administrator to the Fund. As administrator, EIS provides the
Fund with facilities, equipment and personnel and is entitled to a fee at an
annual rate of 0.10% of the Fund's average weekly net assets. Prior to June 14,
1999, Mentor Investment Group LLC ("Mentor"), a wholly-owned subsidiary of
First Union, provided administrative personnel and services for the Fund at the
same rate indicated above. During the year ended October 31, 1999, the Fund
paid or accrued to EIS $39,968 and Mentor $73,716 for administrative services.
24
<PAGE>
Mentor Income Fund, Inc.
Notes to Financial Statements
(continued)
4. Capital Share Transactions
The Fund has authorized 200,000,000 shares of $0.01 par value common stock. At
October 31, 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 year ended October 31, 1999 no shares were issued.
5. Securities Transactions
The average daily balance of reverse repurchase agreements outstanding for the
Fund during the year ended October 31, 1999 was approximately $18,538,092 at a
weighted average interest rate of 5.01%. The maximum amount outstanding under
reverse repurchase agreements during the year ended October 31, 1999 for the
Fund was $55,054,519 (including accrued interest). At October 31, 1999, the
Fund had a reverse repurchase agreement with Goldman Sachs outstanding in the
amount of $24,856,000 maturing November 1, 1999 with an average rate of 5.30%.
At October 31, 1999, the Fund had no mortgage dollar rolls outstanding. During
the year ended October 31, 1999, the Fund earned income on mortgage dollar roll
transactions of $13,906.
As of October 31, 1999, the Fund had capital loss carryovers for federal income
tax purposes of $17,401,746 of which $108,152 expires in 2001, $11,955,561
expires in 2003, $1,699,165 expires in 2004, $1,155,089 expires in 2006 and
$2,483,779 expires in 2007.
6. Expense Offset Arrangements
The Fund has entered into expense offset arrangements with its custodian
whereby credits realized as a result of uninvested cash balances were used to
reduce a portion of the Fund's related expenses. The assets deposited with the
custodian under these expense offset arrangements could have been invested in
income-producing assets. The amount of fee credits received by the Fund and the
impact on the Fund's expense ratio represented as a percentage of its average
net assets were as follows:
<TABLE>
<CAPTION>
Total
Fee Credits % of Average
Received Net Assets
----------- ------------
<S> <C>
$30,962 0.03%
</TABLE>
25
<PAGE>
Mentor Income Fund, Inc.
Notes to Financial Statements
(continued)
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> <C> <C> <C> <C> <C> <C> <C>
1999
October 31, 1999........ $2,172 $0.18 $ 1,893 $ 0.16 $ (5,335) $ (0.45) $ (1,242) $ (0.11)
July 31, 1999........... 2,333 0.20 2,038 0.17 (817) (0.07) (979) (0.08)
April 30, 1999.......... 2,247 0.19 1,955 0.17 (3,201) (0.27) (1,246) (0.11)
January 31, 1999........ 2,075 0.18 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 1,875 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) 0
January 31, 1998........ 3,757 0.32 2,111 0.17 (713) (0.06) 1,398 0.11
</TABLE>
26
<PAGE>
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Board of Directors and Shareholders
Mentor Income Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments of the Mentor Income Fund, Inc. as of October 31,
1999, and the related statements of operations and cash flows for the year then
ended, the statement of changes in net assets for each of the years in the two-
year period then ended and financial highlights for each of the years in the
three-year period ended October 31, 1999. 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 audits. The financial highlights for each of
the years in the two-year period ended October 31, 1996 were audited by other
auditors whose report dated December 19, 1996 expressed an unqualified opinion
on those financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1999 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Mentor Income Fund, Inc. as of October 31, 1999, the results of its operations,
cash flows, changes in its net assets and financial highlights for the periods
described above, in conformity with generally accepted accounting principles.
KPMG LLP
Boston, Massachusetts
December 10, 1999
27
<PAGE>
Additional Information (unaudited)
Year 2000
The Fund's investment advisor and other service providers have given
representations of readiness and are continuing to take steps to address any
year 2000 computer problems. At this time, however, there can be no assurance
that these steps will be sufficient to avoid any adverse impact on the Fund
from this problem.
Shareholder Meeting
On December 15, 1999 the Annual Meeting of stockholders of the Fund was held to
consider a number of proposals. On October 15, 1999, the record date of the
meeting, the company had:
<TABLE>
<S> <C>
Record Date Shares Outstanding 11,817,776
Shares represented at the meeting 11,085,808
Percentage of record date shares Represented at the meeting 93.81%
</TABLE>
The votes recorded at the meeting, by proposal, were as follows:
Proposal 1--Election of Directors
To Serve Until the 2000 Annual Meeting of Shareholders:
<TABLE>
<S> <C>
Laurence B. Ashkin
Shares voted "For" 10,813,512
Shares voted "Against" 0
Shares voted "Abstain" 272,296
Charles A. Austin III
Shares voted "For" 10,814,425
Shares voted "Against" 0
Shares voted "Abstain" 271,383
K. Dun Gifford
Shares voted "For" 10,813,774
Shares voted "Against" 0
Shares voted "Abstain" 272,034
</TABLE>
To Serve Until the 2001 Annual Meeting of Shareholders:
<TABLE>
<S> <C>
Leroy Keith, Jr.
Shares voted "For" 10,814,425
Shares voted "Against" 0
Shares voted "Abstain" 271,383
Gerald M. McDonnell
Shares voted "For" 10,814,425
Shares voted "Against" 0
Shares voted "Abstain" 271,383
</TABLE>
<TABLE>
<S> <C>
Thomas L. McVerry
Shares voted "For" 10,814,425
Shares voted "Against" 0
Shares voted "Abstain" 271,383
William Walt Pettit
Shares voted "For" 10,812,012
Shares voted "Against" 0
Shares voted "Abstain" 273,796
David Richardson
Shares voted "For" 10,812,925
Shares voted "Against" 0
Shares voted "Abstain" 272,883
</TABLE>
To Serve Until the 2002 Annual Meeting of Shareholders:
<TABLE>
<S> <C>
Russell A. Salton, III MD
Shares voted "For" 10,812,925
Shares voted "Against" 0
Shares voted "Abstain" 272,883
Michael S. Scofield
Shares voted "For" 10,812,012
Shares voted "Against" 0
Shares voted "Abstain" 273,796
Richard J. Shima
Shares voted "For" 10,812,925
Shares voted "Against" 0
Shares voted "Abstain" 272,883
Louis W. Moelchert, Jr.
Shares voted "For" 10,813,467
Shares voted "Against" 0
Shares voted "Abstain" 272,341
</TABLE>
Proposal 2--Ratification of auditors:
<TABLE>
<S> <C>
Shares voted "For" 10,930,343
Shares voted "Against" 50,381
Shares voted "Abstain" 105,084
</TABLE>
28
<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 EquiServe (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 Transfer Agent, 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, EquiServe, by calling 1-800-426-5523.
29
<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
Equiserve
Attn.: Mentor Income Fund
P.O. Box 8128
Boston, MA 02200-8218
Custodian
State Street Bank & Trust Company
Post Office Box 1713
Boston, Massachusetts 02105-1713
Independent Auditors
KPMG LLP
99 High Street
Boston, Massachusetts 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
J. Garnett Nelson
Troy A. Perry
Peter J. Quinn
Officers
Paul F. Costello, President
Terry L. Perkins, Treasurer
Geoffry B. Sale, Secretary
Michael A. Wade, Assistant Treasurer
Mentor Income Fund, Inc.
-------------
ANNUAL REPORT
-------------
October 31, 1999
Mentor
Investment Advisors
