<PAGE>
Mentor Income Fund, Inc.
Semi-Annual Report
April 30, 2000 (unaudited)
--------------------------------------------------------------------------------
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. semiannual report for the six-
month period ended April 30, 2000. Regardless of market environments, the
Fund's primary mission remains the same, to provide attractive income and
competitive net asset value total returns to shareholders.*
The Mentor Income Fund, Inc.'s 1.99% net asset value total return for the six-
month period ended April 30, 2000, compared favorably to the 0.12% return for
the Lehman Brothers Corporate Bond Index.** Comparatively, the Merrill Lynch
Mortgage Master Index, the Merrill Lynch U.S. Treasury/Agency Master Index and
the Merrill Lynch U.S. Treasury 6.5-7.5 Year Bond Index returned 1.67%, 2.30%
and 1.43%, respectively over the same six-month period.***
We attribute the modest returns to the difficult conditions that existed in the
bond market during the period. Over the past six months, bond prices
experienced wide fluctuations, which caused sharp, sudden swings in interest
rates. The period was also characterized by a yield curve inversion - a rare
market event in which 30-year Treasury securities yielded less than instruments
with shorter maturities. Finally, during this time, bonds that generated more
income, such as corporate bonds and mortgage-backed securities, underperformed
U.S. Treasuries.
Environment
30-year U.S. Treasuries benefited from a supply/demand imbalance that was
1
<PAGE>
Mentor Income Fund, Inc.
Semi-Annual Report
April 30, 2000 (unaudited)
--------------------------------------------------------------------------------
unique to that particular maturity range and sector. As January 2000 came to a
close, the U.S. Treasury announced plans to buy back as much as thirty billion
in long-term U.S. Treasury bonds and also reduce the size of future auctions.
The announcement coincided with the purchase of a huge block of U.S. Treasuries
in the same maturity range by one of the world's largest money managers. Many
investors became concerned that a shortage would develop, igniting a rally that
sent the yield on the 30-year U.S. Treasury down to 5.84% from a high of nearly
6.75% during the period.
In contrast, interest rates in all other maturities rose, forcing bond prices
lower. No longer concerned with Y2K, investors turned their attention to the
economy's continued explosive growth - and its implications for future
inflation and interest rate hikes. Stock prices soared for much of the period,
enhancing the "wealth effect" and adding to the economy's momentum. For the
most part, however, inflation remained well-contained. Commodity and oil prices
rose, but with the exception of oil prices, cost increases were not passed
along to consumers.
Extraordinary demand and expectations of a continually lower supply of 30-year
U.S. Treasuries drove prices higher and yields lower. At the same time, demand
for income-oriented securities fell, forcing their prices lower and yields
higher. This was particularly true for high yield bonds. At the end of the
period, turbulence in the NASDAQ stock market spilled over into the high yield
sector, putting significant downward pressure on prices. NASDAQ stocks
encountered unprecedented volatility, with some stocks experiencing 20% price
swings from high to low within just a few trading days. The performance
disparity that occurred between U.S. Treasuries and income-oriented bonds
changed yield relationships between the sectors. Although U.S. Treasuries
outperformed income-oriented securities, the changes in their respective yields
laid the groundwork for longer-term opportunity. By the end of the period, many
mortgage-backed securities, corporate bonds and U.S. agency securities had
begun to provide yield advantages over U.S.
2
<PAGE>
Mentor Income Fund, Inc.
Semi-Annual Report
April 30, 2000 (unaudited)
--------------------------------------------------------------------------------
Treasuries that were extremely attractive by historical standards.
Strategy
We monitored changes in yield relationships to take advantage of longer-term
opportunities. Because of its strong emphasis on income, the Fund carried a
substantial position of both high grade and high yield bonds. We continually
review the Fund's holdings and were confident that the issuers represented
sound credits, despite the price declines experienced in those sectors. Then,
when yield advantages reached what we believed were attractive levels, we added
to the Fund's high yield bond position; targeting securities whose underlying
issuers would not need to tap the equity or credit markets for future funding.
As of April 30, 2000, the portfolio was invested as follows: Adjustable rate
mortgage backed securities--3.2%; Asset backed securities--3.8%; Collateralized
mortgage obligations--22.1%; Corporate bonds--29.6%; Residual interests--2.6%;
U.S. Government & Agency Obligations--27.5%; U.S. Treasury Obligations--5.0%;
Preferred Stocks--3.9%; Repurchase agreements--2.3%.
Outlook
We think 30-year U.S. Treasuries could continue to benefit from their unique
situation at least over the near-term; and that bond prices will continue to
fluctuate until the economy begins to cool. In our opinion, three factors could
slow economic growth: further tightening moves by the Federal Reserve Board,
moderating gains and/or continued significant volatility in stock prices and
the dramatic rise in oil and gas prices. We believe the future course of
interest rates depends on developments in each of these areas and that a tug-
of-war between opposing forces within the areas make the outcome too close to
call.
Given the uncertainty with the direction of interest rates, we intend to build
returns by focusing on the attractive yield advantages offered by income-
oriented securities. In our opinion, the price fluctuations that occurred over
the past few months laid the groundwork for opportunity in the future. We think
the yield advantages provided by income-
3
<PAGE>
Mentor Income Fund, Inc.
Semi-Annual Report
April 30, 2000 (unaudited)
--------------------------------------------------------------------------------
oriented securities could begin to narrow in the months ahead, causing
corporate bonds to outperform their U.S. government counterparts. Even if yield
advantages do not return to their historical norms, we believe the significant
increase in yield associated with income-oriented securities should generate
solid future returns.
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.
* While the portfolio managers will endeavor to manage the portfolio in
accordance with its 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.
*** The Lehman Brothers Corporate Bond Index includes publicly issued U.S.
corporate and Yankee debentures and secured notes that meet the maturity,
liquidity and quality guidelines. 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 U.S. Treasury Bond Index 6.5-7.5 Year is a composite of U.S. Treasury
securities in this maturity range adjusted to reflect reinvestment of
interest on securities in the index. These indices 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.
4
<PAGE>
Mentor Income Fund, Inc.
Schedule of Investments
April 30, 2000 (unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percent of Principal
Net Assets Amount Value
<S> <C> <C> <C>
------------------------------------------------------------------------------
Adjustable Rate Mortgage Securities 3.6%
------------------------------------------------------------------------------
California Federal Bank Los Angeles, Ser.
1991-CI2, Class A, 7.35%, 7/15/2001 (f) $ 253,307 $ 252,041
FHLMC, 6.96%, 9/1/2018 1,129 1,156
FNMA, 7.06%, 7/1/2027 14,780 15,105
GNMA, 7.125%, 12/20/2022 3,305,471 3,354,757
Kidder Peabody Acceptance Corp. I, Ser.
1989-3, Class A, 8.89%, 6/20/2019 (f) 105,600 105,072
------------------------------------------------------------------------------
Total Adjustable Rate Mortgage Securities
(cost $3,755,887) 3,728,131
------------------------------------------------------------------------------
Asset-Backed Securities 4.2%
Advanta Mtge. Loan Trust, Ser. 1993-3,
Class A, 5.55%, 1/25/2025 701,246 663,256
CS First Boston Mortgage Securities Corp.,
Ser. 1996-2, Class A6, 7.18%, 2/25/2018 2,750,000 2,630,994
Old Stone Credit Corp. Home Equity Trust,
Ser. 1993-2, Class B1, 6.20%, 6/15/2008 569,552 557,577
Union Acceptance Corp., Ser. 1996-B, Class
A, 6.45%, 7/9/2003 518,235 516,978
------------------------------------------------------------------------------
Total Asset-Backed Securities (cost
$4,462,444) 4,368,805
------------------------------------------------------------------------------
Collateralized Mortgage Obligations 24.2%
BA Mortgage Securities, Inc.:
Ser. 1998-3, Class 2, 6.50%, 7/25/2013 284,874 255,841
Ser. 1998-4, Class 2, 6.50%, 8/25/2013 301,461 270,328
Citicorp Mtge. Securities, Inc.:
Ser. 1999-8, Class B-1, 6.25%, 10/25/2029 601 520
Ser. 1999-8, Class B-2, 6.25%, 10/25/2029 377 312
Ser. 1999-8, Class M, 6.25%, 10/25/2029 2,401 2,096
GE Capital Mortgage Services Inc.:
Ser. 1993-18, Class B-1, 6.00%, 2/25/2009 1,574,192 1,480,441
Ser. 1997-13, Class M, 6.75%, 12/25/2012 1,807,534 1,697,989
Ser. 1998-1, Class M, 6.75%, 1/25/2013 680,459 638,777
</TABLE>
5
<PAGE>
Mentor Income Fund, Inc.
Schedule of Investments (continued)
April 30, 2000 (unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percent of Principal
Net Assets Amount Value
<S> <C> <C> <C>
-----------------------------------------------------------------------------
Collateralized Mortgage Obligations
(continued)
-----------------------------------------------------------------------------
Norwest Asset Securities Corp.:
Ser. 1996-3, Class M, 7.00%, 9/25/2011 $1,609,304 $ 1,538,406
Ser. 1997-7, Class M, 7.00%, 5/25/2027 1,548,782 1,447,422
Ser. 1998-2, Class M, 6.50%, 2/25/2028 1,171,068 1,058,160
Prudential Home Mortgage Securities (a):
Ser. 1993-2, Class M, 7.50%, 5/25/2023 2,581,942 2,485,700
Ser. 1993-18, Class M, 7.00%, 6/25/2023 781,457 741,888
Ser. 1993-22, Class M, 7.00%, 7/25/2023 4,003,191 3,763,700
Ser. 1994-29, Class M, 7.00%, 10/25/2024 3,028,368 2,860,793
Ser. 1995-5, Class B-1, 7.25%, 9/25/2025 2,594,394 2,492,100
Ser. 1995-5, Class M, 7.25%, 9/25/2025 2,511,776 2,393,257
Ser. 1995-7, Class M, 7.00%, 11/25/2025 1,903,071 1,790,076
Ser. 1996-4, Class B-1, 6.50%, 4/25/2026 573,887 519,968
-----------------------------------------------------------------------------
Total Collateralized Mortgage Obligations
(cost $25,927,532) 25,437,774
-----------------------------------------------------------------------------
Corporate Bonds 30.0%
-----------------------------------------------------------------------------
Cable/Other Video Distribution 1.4%
Classic Cable, Inc., 9.375%, 8/1/2009 400,000 376,000
CSC Holdings, Inc., 9.875%, 5/15/2006 700,000 717,500
Telewest Communications, Plc, Step Bond,
0.00%, 10/1/2007 (b) 400,000 378,000
-----------------------------------------------------------------------------
1,471,500
-----------------------------------------------------------------------------
Chemical & Agricultural Products 0.9%
Lyondell Chemical Co.:
Ser. B, 9.88%, 5/1/2007 700,000 692,125
10.88%, 5/1/2009 250,000 248,125
-----------------------------------------------------------------------------
940,250
-----------------------------------------------------------------------------
</TABLE>
6
<PAGE>
Mentor Income Fund, Inc.
Schedule of Investments (continued)
April 30, 2000 (unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percent of Principal
Net Assets Amount Value
<S> <C> <C> <C>
-----------------------------------------------------------------------------
Corporate Bonds (continued)
-----------------------------------------------------------------------------
Communication Systems & Services 2.1%
Adelphia Communications Corp., 9.875%,
3/1/2005 $ 375,000 $ 369,375
Century Communications Corp., 9.50%,
3/1/2005 476,000 461,720
Charter Communications, 8.625%, 4/1/2009 800,000 703,000
Exodus Communications, Inc., 10.75%,
12/15/2009 400,000 401,000
Rhythms Netconnections, Inc., 14.00%,
2/15/2010 300,000 267,000
-----------------------------------------------------------------------------
2,202,095
-----------------------------------------------------------------------------
Consumer Products & Services 1.7%
Globix Corp., 12.50%, 2/1/2010 500,000 442,500
Verio, Inc., 11.25%, 12/1/2008 850,000 841,500
Weight Watchers Intl., Inc., 13.00%,
10/1/2009 (a) 500,000 517,500
-----------------------------------------------------------------------------
1,801,500
-----------------------------------------------------------------------------
Electronic Equipment & Services 0.8%
Amkor Tech., Inc., 9.25%, 5/1/2006 (a) 400,000 394,000
Integrated Circuit Systems, Inc., 11.50%,
5/15/2009 450,000 497,250
-----------------------------------------------------------------------------
891,250
-----------------------------------------------------------------------------
Finance & Insurance 0.5%
Asat Fin., LLC, 12.50%, 11/1/2006 400,000 472,000
-----------------------------------------------------------------------------
Food & Beverage Products 0.9%
Agrilink Foods, Inc., 11.875%, 11/1/2008 200,000 178,000
Del Monte Corp., 12.25%, 4/15/2007 400,000 426,000
Vlasic Foods Intl., Inc., Ser. B, 10.25%,
7/1/2009 450,000 294,750
-----------------------------------------------------------------------------
898,750
-----------------------------------------------------------------------------
Gaming 2.7%
Casino Magic Corp., Ser. B, 13.00%,
8/15/2003 400,000 430,000
Coast Hotels & Casinos, Inc., 9.50%,
4/1/2009 400,000 378,000
Hollywood Casino Corp., 11.25%, 5/1/2007 500,000 510,000
</TABLE>
7
<PAGE>
Mentor Income Fund, Inc.
Schedule of Investments (continued)
April 30, 2000 (unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percent of Principal
Net Assets Amount Value
<S> <C> <C> <C>
------------------------------------------------------------------------------
Corporate Bonds (continued)
------------------------------------------------------------------------------
Gaming (continued)
------------------------------------------------------------------------------
Hollywood Park, Inc., Ser. B, 9.50%,
8/1/2007 $1,000,000 $ 1,001,250
Isle of Capri Casinos, Inc., 8.75%,
4/15/2009 600,000 544,500
------------------------------------------------------------------------------
2,863,750
------------------------------------------------------------------------------
Healthcare Products & Services 1.0%
Iasis Healthcare Corp., 13.00%, 10/15/2009 400,000 399,000
Tenet Healthcare Corp., 8.625%, 1/15/2007 700,000 674,625
------------------------------------------------------------------------------
1,073,625
------------------------------------------------------------------------------
Holding Companies 0.6%
Lifepoint Holdings, Inc., Ser. B, 10.75%,
5/15/2009 (a) 200,000 207,000
Triad Hospitals Holdings, Inc., 11.00%,
5/15/2009 (a) 450,000 470,250
------------------------------------------------------------------------------
677,250
------------------------------------------------------------------------------
Oil/Energy 4.2%
Chesapeake Energy Corp., Ser. B, 9.625%,
5/1/2005 400,000 386,000
Enron Corp., 6.725%, 11/17/2008 1,600,000 1,467,325
Eott Energy Partners LP, 11.00%, 10/1/2009 450,000 453,375
Ocean Energy, Inc., Ser. B, 8.375%,
7/1/2008 500,000 482,500
Parker Drilling Co., Ser. D, 9.75%,
11/15/2006 400,000 378,000
Pride Petroleum Services, Inc., 9.375%,
5/1/2007 650,000 641,062
Swift Energy Co., 10.25%, 8/1/2009 600,000 585,000
------------------------------------------------------------------------------
4,393,262
------------------------------------------------------------------------------
Paper & Packaging 1.1%
Georgia Pacific Corp., 7.75%, 11/15/2029 1,250,000 1,139,680
------------------------------------------------------------------------------
Retailing & Wholesale 0.2%
K-mart Corp., 8.375%, 12/1/2004 250,000 242,604
------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
Mentor Income Fund, Inc.
Schedule of Investments (continued)
April 30, 2000 (unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percent of Principal
Net Assets Amount Value
<S> <C> <C> <C>
-------------------------------------------------------------------------------
Corporate Bonds (continued)
-------------------------------------------------------------------------------
Telecommunication Services & Equipment 10.8%
Airgate PCS, Inc., Step Bond, 0.00%,
10/1/2004 (b) $ 400,000 $ 235,000
Allegiance Telecom, Inc., 12.875%,
5/15/2008 300,000 328,500
Filtronic Plc, 10.00%, 12/1/2005 (a) 300,000 288,000
ICG Holdings, Inc., Step Bond, 0.00%,
5/1/2001 (b) 575,000 462,875
Insight Midwest, 9.75%, 10/1/2009 (a) 500,000 508,750
Intermedia Communications, Inc., Ser. B,
8.60%, 6/1/2008 570,000 521,550
Level 3 Communications, Inc.:
9.125%, 5/1/2008 400,000 350,000
11.00%, 3/15/2008 350,000 340,375
McLeod USA, Inc., 9.25%, 7/15/2007 999,000 959,040
Metricom, Inc., 13.00%, 2/15/2010 450,000 371,812
Metromedia Fiber Network, Inc., Ser. B,
10.00%, 11/15/2008 580,000 553,900
Microcell Telecommunications, Inc., Ser. B,
Step Bond, 0.00%, 6/1/2006 (b) 680,000 617,100
Nextel Communications, Inc., Step Bond,
0.00%, 9/15/2007 (b) 1,410,000 1,075,125
Nextel Partners, Inc.:
11.00%, 3/15/2010 450,000 443,250
Step Bond, 0.00%, 2/1/2004 (b) 585,000 391,950
Nextlink Communications, Inc., 10.75%,
6/1/2009 450,000 444,375
Rogers Cantel, Inc., 8.80%, 10/1/2007 750,000 716,250
Sprint Capital Corp., 6.125%, 11/15/2008 1,800,000 1,601,802
U.S. Unwired, Inc., Step Bond, 0.00%,
5/1/2000 (a) (b) 500,000 282,500
Voicestream Wireless Co., 10.375%,
11/15/2009 400,000 408,000
Worldwide Fiber, Inc., 12.00%, 8/1/2009 (a) 450,000 418,500
-------------------------------------------------------------------------------
11,318,654
-------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
Mentor Income Fund, Inc.
Schedule of Investments (continued)
April 30, 2000 (unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percent of Principal
Net Assets Amount Value
<S> <C> <C> <C>
-------------------------------------------------------------------------------
Corporate Bonds (continued)
-------------------------------------------------------------------------------
Transportation 1.1%
Delta Air Lines, Inc., 8.30%, 12/15/2029 $ 1,250,000 $ 1,101,396
-------------------------------------------------------------------------------
Total Corporate Bonds (cost $32,985,886) 31,487,566
-------------------------------------------------------------------------------
Interest Only Securities 0.0%
Contimortgage Home Equity Loan Trust, Ser.
1994-3, Class A4, 0.13%, 3/15/2014 (d)
(cost $106,173) 29,342,674 22,917
-------------------------------------------------------------------------------
Residual Interests (a) 2.8%
General Mtge. Securities, Inc., 1989-2,
4/17/2019 8,241 530,389
General Mtge. Securities, Inc. II:
1998-4, 9/20/2023 38,863 434,244
1999-4, 2/20/2023 37,580 663,855
1999-5, 2/20/2023 38,106 856,457
National Mtge. Funding, Inc., 1998-7,
2/20/2023 38,642 465,876
-------------------------------------------------------------------------------
Total Residual Interests (cost $3,470,708) 2,950,821
-------------------------------------------------------------------------------
U.S. Government & Agency Obligations 30.1%
FHLMC 6.1%
6.50%, 11/15/2008 3,744,219 3,607,238
7.00%, 12/1/2014 1,521,181 1,486,346
9.50%, 12/1/2009 1,027,122 1,067,098
10.75%, 9/1/2009 222,904 237,296
-------------------------------------------------------------------------------
6,397,978
-------------------------------------------------------------------------------
FNMA 19.1%
6.00%, 12/1/2013 - 8/1/2014 3,025,970 2,790,277
7.00%, 8/1/2029 (e) 8,565,838 8,198,877
7.50%, 4/1/2015 - 5/1/2015 4,800,480 4,775,662
8.50%, 4/1/2030 4,182,000 4,244,228
-------------------------------------------------------------------------------
20,009,044
-------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
Mentor Income Fund, Inc.
Schedule of Investments (continued)
April 30, 2000 (unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percent of Principal
Net Assets Amount Value
<S> <C> <C> <C>
------------------------------------------------------------------------------
U.S. Government & Agency Obligations
(continued)
------------------------------------------------------------------------------
GNMA 4.9%
7.00%, 12/15/2008 - 4/15/2024 $5,177,221 $ 5,059,145
11.50%, 2/15/2013 - 6/15/2019 107,479 119,032
------------------------------------------------------------------------------
5,178,177
------------------------------------------------------------------------------
Total U.S. Government & Agency Obligations
(cost $32,448,863) 31,585,199
------------------------------------------------------------------------------
U.S. Treasury Obligations 5.5%
U.S. Treasury Bonds:
5.25%, 2/15/2029 (e) 2,315,000 2,035,031
9.00%, 11/15/2018 (e) 910,000 1,174,185
9.25%, 2/15/2016 (e) 600,000 772,875
U.S. Treasury Notes, 4.75%, 11/15/2008 (e) 2,000,000 1,786,876
------------------------------------------------------------------------------
Total U.S. Treasury Obligations (cost
$5,729,708) 5,768,967
------------------------------------------------------------------------------
Yankee Obligations 2.4%
------------------------------------------------------------------------------
Cable/Other Video Distribution 0.7%
Rogers Cablesystems Ltd., Ser. B, 10.00%,
3/15/2005 750,000 783,750
------------------------------------------------------------------------------
Communication Systems & Services 0.7%
Clearnet Communications, Inc., Step Bond,
0.00%, 12/15/2005 (b) 695,000 708,900
------------------------------------------------------------------------------
Finance & Insurance 1.0%
Principal Finl. Group, Australia, 8.20%,
8/15/2009 1,000,000 999,327
------------------------------------------------------------------------------
Total Yankee Obligations (cost $2,540,515) 2,491,977
------------------------------------------------------------------------------
<CAPTION>
Shares
------------------------------------------------------------------------------
<S> <C> <C> <C>
Preferred Stocks 4.2%
Home Ownership Funding Corp. (cost
$4,523,447) (a) 5,650,000 4,384,434
</TABLE>
11
<PAGE>
Mentor Income Fund, Inc.
Schedule of Investments (continued)
April 30, 2000 (unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percent of
Net Assets Shares Value
<S> <C> <C> <C>
--------------------------------------------------------------------------
Warrants 0.0%
--------------------------------------------------------------------------
Communication Systems & Services 0.0%
*Metricom, Inc., Expires 2/15/2010
(cost $95,427) 450 $ 36,056
--------------------------------------------------------------------------
<CAPTION>
Principal
Amount
--------------------------------------------------------------------------
<S> <C> <C> <C>
Repurchase Agreement 2.5%
State Street Bank & Trust Co. dated
4/28/2000, 5.67%, maturing 5/1/2000,
maturity value $2,652,635 (cost
$2,651,382) (c) $2,651,382 2,651,382
--------------------------------------------------------------------------
Total Investments (cost $118,697,972) 109.5% 114,914,029
--------------------------------------------------------------------------
Other Assets and Liabilities - net (9.5) (9,985,425)
--------------------------------------------------------------------------
Net Assets 100.0% $104,928,604
--------------------------------------------------------------------------
</TABLE>
* Non-income producing security.
(a) Securities that may be resold to "qualified institutional buyers" under
Rule 144A 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) Security initially issued in zero coupon form which converts to coupon form
at a specified rate and date. An effective interest rate is applied to
recognize interest income daily for the bond. This rate is based on total
expected interest to be earned over the life of the bond which consists of
the aggregate coupon-interest payments and discount at acquisition. The
rate shown is the stated rate at the current period end.
(c) The repurchase agreement is fully collateralized by $2,660,000 FHLB
discount note, 12/27/2000; value including accrued interest--$2,705,257.
(d) Notional principal amount.
(e) All or a portion of these securities have been segregated as collateral for
a reverse repurchase agreement.
(f) These securities are illiquid and are valued using market quotations where
readily available. In the absence of market quotations, the securities are
valued based upon their fair value determined under procedures approved by
the Board of Trustees.
Summary of Abbreviations:
FHLB Federal Home Loan Bank
FHLMC Federal Home Loan Mortgage Corporation
FNMA Federal National Mortgage Association
GNMA Government National Mortgage Association
See Notes to Financial Statements.
12
<PAGE>
Mentor Income Fund, Inc.
Statement of Assets and Liabilities
April 30, 2000 (unaudited)
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets
Identified cost of securities $118,697,972
Net unrealized gains or losses on securities (3,783,943)
-------------------------------------------------------------------------
Market value of securities 114,914,029
Cash 1,518
Receivable for securities sold 2,821,425
Interest receivable 1,770,009
Prepaid expenses and other assets 105,905
-------------------------------------------------------------------------
Total assets 119,612,886
-------------------------------------------------------------------------
Liabilities
Distributions payable 709,210
Payable for reverse repurchase agreements 13,855,000
Advisory fee payable 5,584
Due to other related parties 859
Accrued expenses and other liabilities 113,629
-------------------------------------------------------------------------
Total liabilities 14,684,282
-------------------------------------------------------------------------
Net assets $104,928,604
-------------------------------------------------------------------------
Net assets represented by
Common stock at par value $ 118,178
Paid-in capital 130,872,981
Overdistributed net investment income (736,821)
Accumulated net realized gains or losses on securities and
futures contracts (21,541,791)
Net unrealized gains or losses on securities (3,783,943)
-------------------------------------------------------------------------
Total net assets $104,928,604
Shares outstanding 11,817,776
-------------------------------------------------------------------------
Net asset value per share $ 8.88
-------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
13
<PAGE>
Mentor Income Fund, Inc.
Statement of Operations
Six Months Ended April 30, 2000 (unaudited)
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment income
Interest $ 5,261,864
------------------------------------------------------------------------------
Expenses
Advisory fee 347,357
Administrative services fees 53,439
Transfer agent fee 26,232
Trustees' fees and expenses 1,284
Printing and postage expenses 39,947
Custodian fee 61,064
Registration and filing fees 12,130
Professional fees 24,106
Interest expense 481,931
Other 3,558
------------------------------------------------------------------------------
Total expenses 1,051,048
Less: Expense reductions (15,849)
------------------------------------------------------------------------------
Net expenses 1,035,199
------------------------------------------------------------------------------
Net investment income 4,226,665
------------------------------------------------------------------------------
Net realized and unrealized gains or losses on securities and
futures contracts
Net realized gains or losses on:
Securities (3,157,641)
Futures contracts (62,861)
------------------------------------------------------------------------------
Net realized gains or losses on securities and futures contracts (3,220,502)
------------------------------------------------------------------------------
Net change in unrealized gains or losses on securities and
futures contracts (919,485)
------------------------------------------------------------------------------
Net realized and unrealized gains or losses on securities and
futures contracts (4,139,987)
------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 86,678
------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
14
<PAGE>
Mentor Income Fund, Inc.
Statement of Cash Flows
Six Months Ended April 30, 2000 (unaudited)
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
Cash Flows from Operating Activities:
Net increase in net assets from operations $ 86,678
Adjustments to reconcile net increase in net assets from
operations to net cash provided by operating activities:
Purchase of investment securities (65,795,674)
Proceeds from disposition of investment securities 69,452,257
Sales of short-term investment securities, net 3,002,781
Decrease in interest receivable 152,029
Decrease in receivable for securities sold 5,108,722
Increase in other assets (56,893)
Decrease in payable for securities purchased (747,406)
Decrease in accrued expenses (85,687)
Net unrealized depreciation on securities 919,485
Net realized losses from securities and futures contracts 3,220,502
-------------------------------------------------------------------------
Net cash provided by operating activities 15,256,794
-------------------------------------------------------------------------
Cash Flows from Financing Activities:
Decrease in reverse repurchase agreements (11,001,000)
Cash distributions paid (4,254,276)
-------------------------------------------------------------------------
Net cash used in financing activities (15,255,276)
-------------------------------------------------------------------------
Net increase in cash 1,518
-------------------------------------------------------------------------
Cash:
Beginning of period 0
-------------------------------------------------------------------------
End of period $ 1,518
-------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
15
<PAGE>
Mentor Income Fund, Inc.
Statements of Changes in Net Assets
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended Year Ended
April 30, 2000 October 31, 1999
<S> <C> <C>
(unaudited)
------------------------------------------------------------------------------
Operations
Net investment income $ 4,226,665 $ 7,653,884
Net realized gains or losses on securities
and futures contracts (3,220,502) (2,478,272)
Net change in unrealized gains or losses on
securities (919,485) (4,984,112)
------------------------------------------------------------------------------
Net increase in net assets resulting from
operations 86,678 191,500
------------------------------------------------------------------------------
Distributions to shareholders from
Net investment income (4,254,400) (8,288,727)
Tax return of capital 0 (219,869)
------------------------------------------------------------------------------
Total distributions to shareholders (4,254,400) (8,508,596)
------------------------------------------------------------------------------
Total decrease in net assets (4,167,722) (8,317,096)
Net assets
Beginning of period 109,096,326 117,413,422
------------------------------------------------------------------------------
End of period $104,928,604 $109,096,326
------------------------------------------------------------------------------
Overdistributed net investment income $ (736,821) $ (709,086)
------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
16
<PAGE>
Mentor Income Fund, Inc.
Financial Highlights
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended Year Ended October 31,
April 30, --------------------------------------------------
2000 1999 1998 1997 1996 1995
(unaudited)
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 9.23 $ 9.94 $ 10.27 $ 10.06 $ 10.21 $ 9.60
-----------------------------------------------------------------------------------------
Income from investment
operations
Net investment income 0.36 0.65 0.64 0.82 0.83 0.80
Net realized and
unrealized gains or
losses on securities (0.35) (0.64) (0.20) 0.23 (0.14) 0.70
-----------------------------------------------------------------------------------------
Total from investment
operations 0.01 0.01 0.44 1.05 0.69 1.50
-----------------------------------------------------------------------------------------
Distributions to
shareholders from
Net investment income (0.36) (0.70) (0.71) (0.84) (0.84) (0.89)
Tax return of capital 0 (0.02) (0.06) 0 0 0
-----------------------------------------------------------------------------------------
Total distributions to
shareholders (0.36) (0.72) (0.77) (0.84) (0.84) (0.89)
-----------------------------------------------------------------------------------------
Net asset value, end of
period $ 8.88 $ 9.23 $ 9.94 $ 10.27 $ 10.06 $ 10.21
-----------------------------------------------------------------------------------------
Per share market price,
end of period $ 7.19 $ 7.56 $ 8.56 $ 9.38 $ 9.00 $ 8.88
-----------------------------------------------------------------------------------------
Total Investment Return
Based on market price (0.18%) (3.68%) (0.74%) 13.92% 11.24% 18.83%
Based on net asset
value 1.99% 1.28% 5.22% 11.65% 8.08% 17.48%
-----------------------------------------------------------------------------------------
Ratios and supplemental
data
Net assets, end of
period
(in thousands) $104,929 $109,096 $117,413 $121,312 $118,838 $120,617
Ratio of investment
income to average net
assets 9.82%+ 9.27% 9.68% 10.97% 11.12% 10.58%
Ratio of operating
expenses to average
net assets (a) 1.07%+ 1.06% 1.02% 1.08% 1.13% 1.09%
Ratio of total expenses
to average net assets 1.94%+ 2.54% 3.29% 2.78% 2.84% 2.39%
Ratio of net investment
income to average net
assets 7.88%+ 6.73% 6.39% 8.19% 8.28% 8.19%
Portfolio turnover rate 55% 99% 80% 71% 190% 154%
Shares outstanding at
end of period (in
thousands) 11,818 11,818 11,818 11,818 11,818 11,818
-----------------------------------------------------------------------------------------
</TABLE>
(a) This ratio excludes interest expense and expense reductions.
+ Annualized.
See Notes to Financial Statements.
17
<PAGE>
Mentor Income Fund, Inc.
Notes to Financial Statements (unaudited)
April 30, 2000
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. Otherwise, securities for which
valuations are not readily available from an independent pricing service,
(including restricted securities) are valued at fair value as determined in
good faith according to procedures established 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
18
<PAGE>
Mentor Income Fund, Inc.
Notes to Financial Statements (unaudited)
(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
Funds 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. Mortgage Dollar Roll Transactions
The Fund may engage in mortgage dollar roll transactions with respect to
mortgage-backed securities issued by GNMA, FNMA and FHLMC. In a mortgage dollar
roll transaction, a Fund sells a mortgage-backed security to a financial
institution, such as a bank or
19
<PAGE>
Mentor Income Fund, Inc.
Notes to Financial Statements (unaudited)
(continued)
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. During the roll period the Fund foregoes principal and interest paid
on the securities. The Fund receives compensation from the interest earned on
the cash proceeds of the initial sale and in the form of a fee which is
recorded as deferred income and amortized to income over the roll period, or
alternatively, a lower price for the security upon its repurchase. Mortgage
dollar rolls may be renewed with a new purchase and repurchase price and cash
settlement made at each renewal without physical delivery of the securities
subject to the contract.
F. Residual Interests
A derivative security is any investment that derives its value from an
underlying security, asset or market index. The Fund may invest in mortgage
security residual interests ("residuals") which are considered derivative
securities. 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.
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 or losses by
marking-to-
20
<PAGE>
Mentor Income Fund, Inc.
Notes to Financial Statements (unaudited)
(continued)
market the value of the swap. When the swap is terminated, the Fund will record
a realized gain or loss.
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 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. 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.
J. 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.
K. 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
and net capital gains, if any, to its shareholders. The Fund also intends to
avoid any excise tax liability 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.
L. Distributions
Distributions from net investment income are declared and paid monthly.
Distributions from net realized capital gains, if any, are paid at least
annually.
21
<PAGE>
Mentor Income Fund, Inc.
Notes to Financial Statements (unaudited)
(continued)
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.
3. Investment Advisory Agreement and Other Affiliated Transactions
Mentor Investment 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.
4. Capital Share Transactions
The Fund has authorized 200,000,000 shares of $.01 par value common stock. At
April 30, 2000 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, 2000 no shares were issued.
22
<PAGE>
Mentor Income Fund, Inc.
Notes to Financial Statements (unaudited)
(continued)
5. Securities Transactions
Cost of purchases and proceeds from sales of investment securities (excluding
short-term securities and mortgage dollar roll transactions) were as follows
for the six months ended April 30, 2000:
<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>
$13,187,583 $52,608,091 $8,122,724 $61,329,533
</TABLE>
During the six months ended April 30, 2000, the Fund entered into reverse
repurchase agreements. The average daily balance of reverse repurchase
agreements was approximately $15,666,786 at a weighted average interest rate of
6.15%. During the six months ended April 30, 2000, the Fund incurred an
interest expense of $481,931 related to reverse repurchase agreements. The
impact on the Fund's expense ratio represented as a percentage of its average
net assets was 0.90%. The maximum amount outstanding during the period was
$25,608,102 (including accrued interest). At April 30, 2000, the Fund had
reverse repurchase agreements outstanding of $8,075,000 and $5,780,000 with
interest rates and maturity dates of 6.00% and 5/3/2000 and 5.95% and 5/3/2000,
respectively. State Street Bank and Trust Co. is the counterparty for both
reverse repurchase agreements.
As of October 31, 1999, the Fund had capital loss carryovers for federal income
tax purposes as follows:
<TABLE>
<CAPTION>
Expiration
Capital Loss -----------------------------------------------------
Carryover 2001 2003 2004 2006 2007
------------ -------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
$17,401,746 $108,152 $11,955,561 $1,699,165 $1,155,089 $2,483,779
</TABLE>
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 expense reductions received by the Fund
was $15,849 and the impact on the Fund's expense ratio represented as a
percentage of its average net assets was 0.03%.
23
<PAGE>
Mentor Income Fund, Inc.
Notes to Financial Statements (unaudited)
(continued)
7. Quarterly Results of Operations. Shown in thousands of dollars and per
common share:
<TABLE>
<CAPTION>
Increase
(Decrease)
Net Net Gain in Net Assets
Investment Investment (Loss) from
Income Income on Investments Operations
------------ ------------ --------------- ---------------
Per Per Per Per
Quarter End Total Share Total Share Total Share Total Share
----------- ------ ----- ------ ----- ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2000
April 30, 2000..... $2,618 $0.22 $2,156 $0.18 $(1,603) $(0.14) $ 553 $ 0.05
January 31, 2000... 2,644 0.22 2,071 0.18 (2,537) (0.21) (466) (0.04)
1999
October 31, 1999... $ 739 $0.06 $1,893 $0.16 $(5,335) $(0.45) $(1,242) $(0.11)
July 31, 1999...... 2,672 0.23 2,038 0.17 (817) (0.07) (979) (0.08)
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 1,875 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) 0.00
January 31, 1998... 3,757 0.32 2,111 0.17 (713) (0.06) 1,398 0.11
</TABLE>
24
<PAGE>
Shareholder Information
Investment Manager
Corporate Office
Mentor Investment Advisors, LLC
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
(800) 426-5523
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
Sullivan & Worcester LLP
1025 Connecticut Avenue, N.W.
Washington, D.C. 20036
Directors and Officers
Directors
Michael S. Scofield, Chairman
Laurence B. Ashkin
Charles A. Austin III
Arnold H. Dreyfuss
K. Dun Gifford
Leroy Keith, Jr.
Gerald M. McDonnell
Thomas L. McVerry
Louis W. Moelchert, Jr.
William Walt Pettit
David M. Richardson
Russell A. Salton, III MD
Richard J. Shima
Richard K. Wagoner, CFA
Officers
William M. Ennis, President
Carol Kosel, Treasurer
Douglas Munn, Secretary
Mentor Income Fund, Inc.
-------------
SEMI ANNUAL REPORT
-------------
April 30, 2000
Mentor
Investment Advisors
