<PAGE>
MENTOR INCOME FUND, INC.
MRF
ANNUAL REPORT
2000
[LOGO] FIRST AMERICAN
ASSET MANAGEMENT
<PAGE>
[LOGO] FIRST AMERICAN
ASSET MANAGEMENT
MENTOR INCOME FUND, INC.
PRIMARY INVESTMENTS: Mentor Income Fund, Inc. (the "fund") invests in
high-quality, fixed-income securities, primarily in mortgage-backed securities.
Mentor also invests in other mortgage-related securities, such as CMOs and
asset-backed securities, high-yield bonds, corporate bonds, and preferred stock.
The following outlines the fund's investment policies.
- The fund expects generally to invest at least 65% of its assets in
investment-grade securities.
- No more than 35% of the fund's assets may be held in high-yield issues.
- The fund is authorized to borrow funds or issue senior securities in
amounts not exceeding 33 1/3% of its total assets.
FUND OBJECTIVE: Mentor Income Fund, Inc. is 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.
The fund's investment objective is to achieve high monthly income consistent
with preservation of capital; its dividend objective is to distribute monthly
income in excess of that attainable from investments in U.S. Treasury securities
having the same maturity as the expected average life of the fund's
investments.
[SIDE BAR]
TABLE OF CONTENTS
1 Fund Overview
4 Financial Statements and Notes
14 Investments in Securities
18 Independent Auditors' Report
19 Federal Income Tax Information
20 Shareholder Update
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AVERAGE ANNUALIZED TOTAL RETURNS
Based on net asset value for the periods ended October 31, 2000
[CHART]
<TABLE>
<CAPTION>
Since Inception
One Year Five Year 12/30/1998
-------- --------- ---------------
<S> <C> <C> <C>
Mentor Income Fund 5.97% 6.39% 8.23%
Lipper Closed-End U.S.
Mortgage Funds Category 7.93% 7.23% 8.01%
</TABLE>
The average annualized total returns for Mentor Income Fund are based on the
change in its net asset value (NAV), assume all distributions were reinvested,
and do not reflect sales charges. NAV-based performance is used to measure
investment management results.
Average annualized total returns based on the change in market price for the
one-year, five-year, and since-inception periods ended October 31, 2000, were
17.20%, 7.27%, and 7.06%, respectively. These returns assume reinvestment of all
distributions and reflect sales charges on distributions as described in the
fund's dividend reinvestment plan, but not on initial purchases.
PLEASE REMEMBER, YOU COULD LOSE MONEY WITH THIS INVESTMENT. NEITHER SAFETY OF
PRINCIPAL NOR STABILITY OF INCOME IS GUARANTEED. Past performance does not
guarantee future results. The investment return and principal value of an
investment will fluctuate so that fund shares, when sold, may be worth more or
less than their original cost. Closed-end funds, such as this fund, often trade
at discounts to NAV. Therefore, you may be unable to realize the full NAV of
your shares when you sell.
Lipper Closed-End U.S. Mortgage Funds Category invests at least 65% of its
assets in mortgages/securities issued or guaranteed as to principal and interest
by the U.S. government and certain federal agencies.
NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE
<PAGE>
FUND OVERVIEW
December 15, 2000
WE ARE PLEASED TO ANNOUNCE THAT, EFFECTIVE OCTOBER 24, 2000, FIRST AMERICAN
ASSET MANAGEMENT WAS APPROVED AS INVESTMENT ADVISOR FOR THE MENTOR INCOME FUND,
INC. We would like to take this opportunity to welcome you to the First American
family of funds and tell you about ourselves. Founded in 1967, First American
has a long history of fund management and is a respected and experienced
closed-end fund advisor. With the addition of the Mentor Income Fund, Inc. to
our line-up, we now manage 12 closed-end funds and 37 open-end funds, with
combined assets of $35 billion.
AT FIRST AMERICAN ASSET MANAGEMENT WE HAVE A TEAM APPROACH TO PORTFOLIO
MANAGEMENT. Your team will be led by two industry veterans, Chris Neuharth and
Doug Hedberg, who will have responsibility for the day-to-day management of the
fund. Both managers are Chartered Financial Analysts and together have 57 years
of industry experience. They will be assisted by a mortgage-backed securities
analyst, four credit analysts, and a team of backup portfolio managers.
THE PAST 12 MONTHS HAVE BEEN CHALLENGING FOR FIXED-INCOME INVESTORS. As we
entered the new year, interest rates were rising as the Federal Reserve was well
into a tightening cycle that appeared to be having little success in cooling the
domestic economy.
THE YIELD CURVE CONTINUED ITS FLATTENING TREND FROM 1999 THROUGH THE FIRST
SEVERAL MONTHS OF 2000 AND INVERTED AFTER THE U.S. TREASURY ANNOUNCED PLANS TO
REPURCHASE A LARGE PORTION OF THEIR EXISTING LONG-TERM DEBT WITH THE BUDGET
SURPLUS. The perception that long-term Treasury securities would be in scarce
supply in the future created a strong bid for these securities and also caused
yield spreads on mortgages and corporate bonds to widen dramatically.
AS THE PACE OF THE ECONOMY SLOWED DURING THE SECOND HALF OF THE YEAR, TREASURY
RATES FELL AS IT APPEARED THAT THE FEDERAL RESERVE WOULD SUCCESSFULLY ACHIEVE AN
ECONOMIC SOFT LANDING AND THAT NO FURTHER TIGHTENING WOULD BE NECESSARY. Yield
spreads on mortgages partially recovered from the widening early in the year,
but corporate bond spreads did not. Increased equity market volatility, earnings
pressures, heightened company-specific risk, and fears of a sustained slowdown
in the economy resulted in a repricing of the risk premium demanded by investors
for owning
[SIDEBAR]
FUND MANAGEMENT
CHRIS NEUHARTH, CFA
is responsible for the management of the mortgage portion of the fund. He has 20
years of financial experience.
DOUG HEDBERG, CFA
is responsible for the management of the high-yield portion of the fund. He has
37 years of financial experience.
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[CHART]
PORTFOLIO COMPOSITION
As a percentage of total assets on October 31, 2000
<TABLE>
<S> <C>
Private Mortgage-Backed Securities 25%
U.S. Government Securities 5%
U.S. Agency Mortgage-Backed Securities 31%
Corporate Bonds 25%
Yankee Obligations 1%
Asset-Backed Securities 3%
Preferred Stock 4%
Short-Term Securities 3%
Other Assets 3%
</TABLE>
MENTOR INCOME FUND ANNUAL REPORT 2000 1)
<PAGE>
FUND OVERVIEW CONTINUED
corporate debt securities. Lower-rated securities were hit particularly hard as
the equity-like characteristics of these bonds became evident amidst the
correction in the stock market.
FOR THE 12 MONTHS ENDING IN OCTOBER, TREASURY SECURITIES HAVE ENJOYED RETURNS OF
ABOUT 9% WHILE OTHER SECTORS HAVE LAGGED BY SEVERAL HUNDRED BASIS POINTS, AND IN
THE CASE OF HIGH YIELD, HAVE ACTUALLY BEEN NEGATIVE. On a market price and NAV
basis, the fund returned 17.20% and 5.97%, respectively.(1) The NAV returns were
in line with a portfolio invested in a combination of mortgage-backed and
high-yield securities. This compares to the fund's Lipper Closed-End U.S.
Mortgage Bond Fund peer group return of 7.93%. The current discount to market
price was 9.41% as of October 31, 2000.
GOING FORWARD, WE WILL CONTINUE TO FOCUS ON RELATIVE VALUE WITHIN THE
MORTGAGE-BACKED AND LOWER-QUALITY CORPORATE BOND MARKETS AND WILL MANAGE THE
PORTFOLIO AGAINST A BLENDED BENCHMARK OF 75% LEHMAN GOVERNMENT MORTGAGE INDEX
AND 25% LEHMAN HIGH YIELD INDEX.(2) We will be leveraging the portfolio to
increase income but will be managing our duration to a target of five years.
ALTHOUGH WE CURRENTLY SEE VALUE IN LOWER-RATED MORTGAGE AND CORPORATE
SECURITIES AND ARE TEMPTED TO INCREASE OUR EXPOSURE TO THESE SECTORS, THE
UPCOMING TENDER(3) DICTATES THAT WE MANAGE OUR CREDIT QUALITY AND LIQUIDITY
SOMEWHAT CONSERVATIVELY. We are neutral on our outlook for rates and will
likely manage our duration close to the target of five years. The average
credit quality of the fund will be BBB with no more than 35% of the holdings
rated below investment grade (BB or lower). Because the Mentor Income Fund is
closed end, it is an ideal investment vehicle in which to hold these somewhat
lower-rated and less-liquid securities. In addition, the fund's
diversification among these areas of the bond market should help provide a
more reliable income stream in varying market conditions.
THERE MAY BE TIMES WHEN THE MENTOR INCOME FUND, INC. COULD EXPERIENCE SOME
EROSION OF PRINCIPAL RELATED TO ITS INVESTMENTS, ESPECIALLY HIGH-YIELD
SECURITIES. We will ask shareholders in early 2001 to approve replacing the
current objective of "high monthly income consistent with preservation of
capital" with an objective of "high monthly income consistent with prudent risk
to capital." We believe this objective is more reflective of the portfolio
strategies that have previously been, and will continue to be, used. In
addition, we will seek to change the fund name from the Mentor Income Fund, Inc.
to American Income Fund.
(1) All returns assume reinvestment of distributions at prices pursuant to the
fund's dividend reinvestment plan. Past performance does not guarantee future
results. The investment return and principal value of an investment will
fluctuate so that fund shares, when sold, may be worth more or less than their
original cost.
(2) This benchmark consists of the Lehman Government/Mortgage Index (75%) and
the Lehman High Yield Index (25%). The Lehman Brothers Mutual Fund
Government/Mortgage Index is comprised of all U.S. government agency and
Treasury securities and agency mortgage-backed securities. Developed by Lehman
Brothers for comparative use by the mutual fund industry, this index is
unmanaged and does not include any fees or expenses in its total return
calculations. The Lehman Brothers High Yield Index covers the universe of
fixed-rate, noninvestment grade debt. Pay-in-kind (PIK) bonds, Eurobonds, and
debt issues from countries designated as emerging markets (e.g., Argentina,
Brazil, Venezuela, etc.) are excluded, but Canadian and global bonds (SEC
registered) of issuers in non-EMG countries are included. Original issue zeroes,
step-up coupon structures, and 144a securities are also included.
2) MENTOR INCOME FUND ANNUAL REPORT 2000
<PAGE>
DURING THE YEAR ENDED OCTOBER 31, 2000, THE FUND PAID DISTRIBUTIONS TOTALING
$0.72 PER SHARE (WE ANTICIPATE THAT APPROXIMATELY $0.05 PER SHARE WILL BE A
RETURN OF CAPITAL ON A TAX BASIS). This distribution rate equaled 7.53% and
8.31% on NAV and market price as of October 31, 2000, respectively. For
comparison, the yield-to-maturity on U.S. Treasury securities that generally
have the same approximate maturity as the fund's investments was 5.81%. Of
course, Treasuries offer guaranteed principal and interest, while the fund's
shares are subject to fluctuation in value.
ON OCTOBER 17, 2000, THE FUND'S BOARD OF DIRECTORS APPROVED A TENDER OFFER FOR
20% OF THE FUND'S NET ASSETS. It is anticipated that this tender offer of up to
20% of the fund's net assets will be completed in April 2001. (For a more
detailed description see below.)
WE ARE EXCITED FOR THIS OPPORTUNITY TO MANAGE THE MENTOR INCOME FUND, INC. AND
TO PROVIDE YOU WITH FIRST AMERICAN'S FIXED-INCOME EXPERTISE. If you have any
questions about First American, the Mentor Income Fund, Inc., or if we can
assist you in any other way with your investment strategy, please don't hesitate
to call us at 800-814-3406.
Sincerely,
/s/ Paul A. Dow
Paul A. Dow, CIO
First American Asset Management
--------------------------------------------------------------------------------
TENDER OFFER
(3) On October 17, 2000, the fund announced that its board of directors voted to
authorize a tender offer to purchase up to 20% of the outstanding voting shares
of the fund. The tender offer price would be equal to the NAV of the shares,
less expenses of the tender offer, and is expected to occur during April 2001.
The board also authorized a second tender offer for up to 10% of the fund's
shares to occur in April 2003. That tender offer would be at NAV, less expenses
of the tender offer, and is contingent upon the discount between the fund's
market price and NAV per share exceeding five percent (5%) during the 12
calendar weeks preceding February 1, 2001, and upon the board determining at the
time that the tender offer continues to be in the best interest of the fund's
shareholders.
MENTOR INCOME FUND ANNUAL REPORT 2000 3)
<PAGE>
FINANCIAL STATEMENTS
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STATEMENT OF ASSETS AND LIABILITIES October 31, 2000
................................................................................
<TABLE>
<S> <C>
ASSETS:
Investments in securities at market value, including
repurchase agreement of $3,000,000* (note 2) ............ $105,845,981
Cash in bank on demand deposit ............................ 67,107
Receivable for securities sold ............................ 1,526,659
Accrued interest receivable ............................... 1,354,243
Other assets .............................................. 33,849
------------
Total assets ............................................ 108,827,839
------------
LIABILITIES:
Payable for securities purchased .......................... 2,741,826
Accrued dividend payable .................................. 709,352
Accrued investment management fee ......................... 11,228
Accrued administrative fee ................................ 1,727
Accrued proxy expenses .................................... 75,000
Other accrued expenses .................................... 82,378
------------
Total liabilities ....................................... 3,621,511
------------
Net assets applicable to outstanding capital stock ...... $105,206,328
============
COMPOSITION OF NET ASSETS:
Capital stock and additional paid-in capital .............. $130,034,570
Distributions in excess of net investment income .......... (762,683)
Accumulated net realized loss on investments .............. (22,434,402)
Unrealized depreciation of investments .................... (1,631,157)
------------
Total - representing net assets applicable to capital
stock ................................................. $105,206,328
============
* Investments in securities at identified cost ............ $107,477,138
============
NET ASSET VALUE AND MARKET PRICE:
Net assets ................................................ $105,206,328
Shares outstanding (authorized 200 million shares of $0.01
par value) .............................................. 11,817,776
Net asset value ........................................... $ 8.90
Market price .............................................. $ 8.06
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
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4 2000 Annual Report - Mentor Income Fund
<PAGE>
Financial Statements (continued)
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STATEMENT OF OPERATIONS For the Year Ended October 31,
2000
................................................................................
<TABLE>
<S> <C>
INCOME:
Interest (net of interest expense of $557,358) ............ $ 9,111,070
-----------
EXPENSES (NOTE 3):
Investment management fee ................................. 691,628
Administrative fee ........................................ 106,404
Custodian and accounting fees ............................. 60,245
Transfer agent fees ....................................... 42,189
Reports to shareholders ................................... 62,461
Directors' fees ........................................... 31,000
Audit and legal fees ...................................... 35,760
Proxy expenses ............................................ 75,000
Other expenses ............................................ 26,328
-----------
Total expenses .......................................... 1,131,015
Less expenses paid indirectly ......................... (22,393)
-----------
Total net expenses ...................................... 1,108,622
-----------
Net investment income ................................... 8,002,448
-----------
NET REALIZED AND UNREALIZED LOSSES ON INVESTMENTS (NOTE 4):
Net realized loss on investments in securities ............ (4,554,087)
Net realized loss on futures contracts .................... (62,861)
-----------
Net realized loss on investments in securities and futures
contracts ............................................. (4,616,948)
-----------
Net change in unrealized appreciation or depreciation of
investments ............................................. 1,233,301
-----------
Net loss on investments ................................. (3,383,647)
-----------
Net increase in net assets resulting from operations .... $ 4,618,801
===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
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5 2000 Annual Report - Mentor Income Fund
<PAGE>
Financial Statements (continued)
--------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS For the Year Ended October 31,
2000
................................................................................
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest income ........................................... $ 9,111,070
Net expenses .............................................. (1,108,622)
------------
Net investment income ................................... 8,002,448
------------
Adjustments to reconcile net investment income to net cash
provided by operating activities:
Change in accrued interest receivable ................... 567,795
Net amortization of bond discount and premium ........... (628,237)
Change in accrued fees and expenses ..................... (35,426)
Change in variation margin .............................. 18,725
Change in other assets .................................. 27,657
------------
Total adjustments ..................................... (49,486)
------------
Net cash provided by operating activities ............. 7,952,962
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments ........................ 86,422,109
Decrease in receivable from securities sold ............... 6,403,488
Purchases of investments .................................. (71,995,502)
Increase in payable for securities purchased .............. 1,994,420
Net sales of short-term securities ........................ 2,654,163
------------
Net cash provided by investing activities ............. 25,478,678
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on reverse repurchase agreements ............. (24,856,000)
Distributions paid to shareholders ........................ (8,508,533)
------------
Net cash used by financing activities ................. (33,364,533)
------------
Net increase in cash ...................................... 67,107
Cash at beginning of year ................................. --
------------
Cash at end of year ................................... $ 67,107
============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
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6 2000 Annual Report - Mentor Income Fund
<PAGE>
Financial Statements (continued)
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STATEMENTS OF CHANGES IN NET ASSETS
................................................................................
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
10/31/00 10/31/99
--------------- ---------------
<S> <C> <C>
OPERATIONS:
Net investment income ..................................... $ 8,002,448 $ 7,653,884
Net realized loss on investments in securities ............ (4,554,087) (2,281,164)
Net realized loss on futures contracts .................... (62,861) (197,108)
Net change in unrealized appreciation or depreciation of
investments ............................................. 1,233,301 (4,984,112)
------------ ------------
Net increase in net assets resulting from operations .... 4,618,801 191,500
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ................................ (7,964,140) (8,288,727)
From tax return of capital ................................ (544,659) (219,869)
------------ ------------
Total distributions ..................................... (8,508,799) (8,508,596)
------------ ------------
Total decrease in net assets .............................. (3,889,998) (8,317,096)
Net assets at beginning of year ........................... 109,096,326 117,413,422
------------ ------------
Net assets at end of year ................................. $105,206,328 $109,096,326
============ ============
Distributions in excess of net investment income .......... $ (762,683) $ (709,086)
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
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7 2000 Annual Report - Mentor Income Fund
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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(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. Fund shares are
listed on the New York Stock Exchange under the symbol
MRF.
(2) SUMMARY OF
SIGNIFICANT
ACCOUNTING
POLICIES
............................
INVESTMENTS IN SECURITIES
Portfolio securities for which market quotations are
readily available are valued at current market value. If
market quotations or valuations are not readily available,
or if such quotations or valuations are believed to be
inaccurate, unreliable or not reflective of market value,
portfolio securities are valued according to procedures
adopted by the fund's board of directors in good faith at
"fair value", that is, a price that the fund might
reasonably expect to receive for the security or other
asset upon its current sale.
The current market value of certain fixed income
securities is provided by an independent pricing service.
Fixed income securities for which prices are not available
from an independent pricing service but where an active
market exists are valued using market quotations obtained
from one or more dealers that make markets in the
securities or from a widely-used quotation system.
Short-term securities with maturities of 60 days or less
are valued at amortized cost, which approximates market
value.
Securities transactions are accounted for on the date
securities are purchased or sold. Realized gains and
losses are calculated on the identified-cost basis.
Interest income, including amortization of bond discount
and premium, is recorded on an accrual basis.
REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements involve the sale of a
portfolio-eligible security by the fund, coupled with an
agreement to repurchase the security at a specified date
and price. Reverse repurchase agreements may increase
volatility of the fund's net asset value and involve the
risk that interest costs on money borrowed may exceed the
return on securities purchased with that borrowed money.
Reverse repurchase agreements are considered to be
borrowings by the fund, and are subject to the fund's
overall restriction on borrowing under which it must
maintain asset coverage of at least 300%. For the year
ended October 31, 2000, the weighted average borrowings
outstanding were $9,402,504 and the weighted average rate
was 5.93%.
REPURCHASE AGREEMENTS
For repurchase agreements entered into with certain
broker-dealers, the fund may transfer uninvested cash
balances into a trading account, the daily aggregate of
which is invested in repurchase agreements secured by U.S.
government or agency obligations. Securities pledged as
collateral for repurchase agreements are held by the
fund's custodian bank until maturity of the repurchase
agreement. Provisions for all agreements ensure that the
daily market value of the collateral is in excess of the
repurchase amount, including accrued interest, to protect
the fund in the event of a default.
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8 2000 Annual Report - Mentor Income Fund
<PAGE>
Notes to Financial Statements (continued)
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FUTURES TRANSACTIONS
In order to gain exposure to or protect against changes in
the market, the fund may buy and sell financial futures
contracts and related options. Risks of entering into
futures contracts and related options include the
possibility there may be an illiquid market and that a
change in the value of the contract or option may not
correlate with changes in the value of the underlying
securities.
Upon entering into a futures contract, the fund is
required to deposit either cash or securities in an amount
(initial margin) equal to a certain percentage of the
contract value. Subsequent payments (variation margin) are
made or received by the fund each day. The variation
margin payments are equal to the daily changes in the
contract value and are recorded as unrealized gains and
losses. The fund recognizes a realized gain or loss when
the contract is closed or expires.
MORTGAGE DOLLAR ROLLS
The fund may enter into mortgage dollar rolls in which the
fund sells securities it owns or has purchased on a
forward commitment basis and simultaneously contracts with
a counterparty to repurchase similar (same type, coupon
and maturity) but not identical securities on a specified
future date. As an inducement to "roll over" its purchase
commitments, the fund receives negotiated fees or agrees
to repurchase the securities at a lower price. For the
year ended October 31, 2000, such fees earned by the fund
amounted to $24,188.
RESIDUAL INTERESTS
The Fund may invest in mortgage security residual
interests ("residuals") which are considered derivative
securities. Derivative securities are investments which
derive their 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 have the
Fund's assets been pledged to secure the indebtedness of
the issuing structure or the Fund's investment in the
residuals. In consideration of the risk associated with
investment in residual securities, it is the Fund's policy
to limit its exposure at the time of purchase to no more
than 20% of its total assets.
FEDERAL TAXES
The fund intends to comply with the requirements of the
Internal Revenue Code applicable to regulated investment
companies and not be subject to federal income tax.
Therefore, no income tax provision is required. The fund
also intends to distribute its taxable net investment
income and realized gains, if any, to avoid the payment of
any federal excise taxes.
Net investment income and net realized gains and losses
may differ for financial statement and tax purposes
primarily because of losses deferred due to "wash sale"
transactions and the timing of recognition of income on
certain collateralized mortgage-backed securities. The
character of distributions made during the year from net
investment income or net realized gains may differ from
its ultimate characterization for federal income tax
purposes. Distributions that exceed the net investment
income or net realized gains recorded on a tax basis are
presented as a "tax return
--------------------------------------------------------------------------------
9 2000 Annual Report - Mentor Income Fund
<PAGE>
Notes to Financial Statements (continued)
--------------------------------------------------------------------------------
of capital" in the statements of changes in net assets and
the financial highlights. In addition, due to the timing
of dividend distributions, the fiscal year in which
amounts are distributed may differ from the year that the
income or realized gains or losses were recorded by the
fund.
On the statement of assets and liabilities, as a result of
permanent book-to-tax differences, a reclassification
adjustment has been made to increase distributions in
excess of net investment income by $91,905, decrease
accumulated net realized loss on investments by $503,835
and decrease additional paid-in-capital by $411,930.
DISTRIBUTIONS TO SHAREHOLDERS
Distributions from net investment income are made monthly
and realized capital gains, if any, will be distributed at
least annually. These distributions are recorded as of the
close of business on the ex-dividend date. Such
distributions are payable in cash or, pursuant to the
fund's dividend reinvestment plan, reinvested in
additional shares of the fund's capital stock.
(3) EXPENSES
............................
INVESTMENT MANAGEMENT AND ADMINISTRATIVE FEES
Mentor Investment Advisors, LLC ("Mentor Advisors"), a
wholly-owned subsidiary of First Union Corporation ("First
Union"), served as the fund's investment advisor for the
period from November 1, 1999, through October 23, 2000.
For its services, Mentor Advisors received an annual
investment advisory fee of 0.65% of average weekly net
assets. Effective October 24, 2000, the fund has entered
into an investment advisory agreement with U.S. Bank
National Association ("U.S. Bank") acting through its
division, First American Asset Management ("the advisor").
This agreement provides the advisor with a monthly
investment management fee in an amount equal to an
annualized rate of 0.65% of average weekly net assets. For
its fee, the advisor provides investment advice and
conducts the management and investment activity of the
fund.
Evergreen Investment Services, Inc. ("EIS"), a subsidiary
of First Union, served as administrator to the Fund for
the period from November 1, 1999, through October 23,
2000. For its services, EIS received an administrative fee
equal to an annual rate of 0.10% of the fund's average
weekly net assets. Effective October 24, 2000, the fund
has entered into an administrative agreement with U.S.
Bank acting through its division, First American Asset
Management ("the administrator"). The administration
agreement provides the administrator with a monthly fee
based on an annualized rate of 0.10% of the fund's average
weekly net assets. For its fee, the administrator provides
reporting, regulatory and record-keeping services for the
fund.
OTHER FEES AND EXPENSES
In addition to the investment management and
administrative fees, the fund is responsible for paying
most other operating expenses, including: outside
directors' fees and expenses; custodian fees; registration
fees; printing and shareholder reports; transfer agent
fees and expenses; legal, auditing and accounting
services; insurance; interest; taxes and other
miscellaneous expenses.
EXPENSES PAID INDIRECTLY
Expenses paid indirectly represent a reduction of
custodian fees for earnings on miscellaneous cash balances
maintained by the fund.
--------------------------------------------------------------------------------
10 2000 Annual Report - Mentor Income Fund
<PAGE>
Notes to Financial Statements (continued)
--------------------------------------------------------------------------------
(4) INVESTMENT
SECURITY
TRANSACTIONS
............................
Cost of purchases and proceeds from sales of securities,
other than temporary investments in short-term securities,
for the year ended October 31, 2000, aggregated
$72,623,739 and $86,422,109, respectively.
(5) CAPITAL LOSS
CARRYOVER
............................
For federal income tax purposes, the fund had capital loss
carryovers at October 31, 2000, which, if not offset by
subsequent capital gains, will expire on the fund's fiscal
year-ends as indicated below. It is unlikely the board of
directors will authorize a distribution of any net
realized capital gains until the available capital loss
carryovers have been offset or expire.
<TABLE>
<CAPTION>
CAPITAL
LOSS CARRYOVER EXPIRATION
-------------- ----------
<S> <C>
$ 108,152 2001
11,955,561 2003
1,699,165 2004
1,155,089 2006
2,573,283 2007
4,931,683 2008
-----------
$22,422,933
===========
</TABLE>
(6) PENDING
ACQUISITION
............................
On October 4, 2000, U.S. Bancorp, the parent company of
the fund's investment advisor, announced that it had
entered into an agreement to be acquired by Firstar
Corporation. It is anticipated that this acquisition will
be completed in the first quarter of 2001, subject to
regulatory approval, the approval of U.S. Bancorp
shareholders and the satisfaction of customary closing
conditions.
(7) TENDER OFFER
............................
On October 17, 2000, the fund announced that the fund's
Board of Directors voted to authorize a tender offer to
purchase up to 20% of the outstanding voting shares of the
fund. The tender offer price would be equal to the net
asset value of the shares, less expenses of the tender
offer, and is expected to occur during April 2001.
--------------------------------------------------------------------------------
11 2000 Annual Report - Mentor Income Fund
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------------
(8) FINANCIAL
HIGHLIGHTS
............................
Per-share data for a share of capital stock outstanding
throughout each period and selected information for each
period are as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------------------------
2000(c) 1999 1998 1997 1996
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning
of period ............................ $ 9.23 $ 9.94 $10.27 $10.06 $10.21
Operations:
Net investment income ................ 0.68 0.65 0.64 0.82 0.83
Net realized and unrealized gains
(losses) on investments ............ (0.29) (0.64) (0.20) 0.23 (0.14)
------ ------ ------ ------ ------
Total from operations .............. 0.39 0.01 0.44 1.05 0.69
------ ------ ------ ------ ------
Distributions to shareholders:
From net investment income ........... (0.67) (0.70) (0.71) (0.84) (0.84)
Tax return of capital ................ (0.05) (0.02) (0.06) -- --
------ ------ ------ ------ ------
Total distributions ................ (0.72) (0.72) (0.77) (0.84) (0.84)
------ ------ ------ ------ ------
Net asset value, end of period ..... $ 8.90 $ 9.23 $ 9.94 $10.27 $10.06
====== ====== ====== ====== ======
Per-share market value, end of
period ............................... $ 8.06 $ 7.56 $ 8.56 $ 9.38 $ 9.00
====== ====== ====== ====== ======
SELECTED INFORMATION
Total return, net asset value (a) ...... 5.97% 1.28% 5.22% 11.65% 8.08%
Total return, market value (a) ......... 17.20% (3.68)% (0.74)% 13.92% 11.24%
Net assets at end of period
(in millions) ........................ $ 105 $ 109 $ 117 $ 121 $ 119
Ratio of expenses to average net assets
including interest expense ........... 1.59% 2.54% 3.29% 2.78% 2.84%
Ratio of expenses to average net assets
excluding interest expense ........... 1.06% 1.06% 1.02% 1.08% 1.13%
Ratio of net investment income to
average net assets ................... 7.52% 6.73% 6.39% 8.19% 8.28%
Portfolio turnover rate (excluding
short-term securities) ............... 65% 99% 80% 71% 190%
Amount of borrowings outstanding at end
of period (in millions) .............. $ -- $ 25 $ 54 $ 49 $ 20
Per-share amount of borrowings
outstanding at end of period ......... $ -- $ 2.10 $ 4.57 $ 4.17 $ 1.69
Per-share amount of net assets,
excluding borrowings, at end
of period ............................ $ 8.90 $11.33 $14.51 $14.43 $11.75
Asset coverage ratio (b) ............... N/A 539% 317% 346% 694%
</TABLE>
(a) ASSUMES REINVESTMENT OF DISTRIBUTIONS AT PRICES PURSUANT TO THE FUND'S
DIVIDEND REINVESTMENT PLAN.
(b) REPRESENTS NET ASETS, EXCLUDING BORROWINGS, AT END OF PERIOD DIVIDED BY
BORROWINGS OUTSTANDING AT END OF PERIOD.
(c) EFFECTIVE OCTOBER 24, 2000, THE ADVISOR WAS CHANGED FROM MENTOR INVESTMENT
ADVISORS, A WHOLLY-OWNED SUBSIDIARY OF FIRST UNION CORPORATION, TO U.S.
BANK NATIONAL ASSOCIATION, ACTING THROUGH ITS DIVISION, FIRST AMERICAN
ASSET MANAGEMENT.
--------------------------------------------------------------------------------
12 2000 Annual Report - Mentor Income Fund
<PAGE>
INVESTMENTS IN SECURITIES
--------------------------------------------------------------------------------
<TABLE>
MENTOR INCOME FUND October 31, 2000
........................................................................................
Par Market
Description of Security Value Value (a)
--------------------------------------------------------- ----------- ------------
<S> <C> <C>
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS)
U.S. GOVERNMENT AND AGENCY SECURITIES (37.4%)
U.S. AGENCY MORTGAGE-BACKED SECURITIES (31.6%)
FIXED RATE (28.7%)
6.50%, FHLMC Series 1647 B, Class B, 11/15/08 ..... $ 3,744,219 $ 3,623,419
7.00%, FHLMC, 12/1/14 ............................. 1,450,572 1,444,480
9.50%, FHLMC, 12/1/09 ............................. 918,651 944,447
10.75%, FHLMC, 9/1/09 ............................. 189,038 203,263
6.00%, FNMA, 12/1/13 .............................. 2,818,461 2,689,178
7.00%, FNMA, 8/1/29 .............................. 8,331,699 8,173,646
7.50%, FNMA, 4/1/15 .............................. 2,641,468 2,661,490
7.50%, FNMA, 5/1/15 .............................. 1,876,462 1,890,686
8.50%, FNMA, 4/1/30 .............................. 608,696 622,806
8.50%, FNMA, 4/1/30 .............................. 2,690,411 2,752,775
8.50%, FNMA, 5/1/30 .............................. 390,877 399,938
7.00%, GNMA, 12/15/08 ............................ 2,243,782 2,263,976
7.00%, GNMA, 4/15/24 .............................. 2,488,421 2,463,288
11.50%, GNMA, 2/15/13 ............................. 9,353 10,291
11.50%, GNMA, 5/15/13 ............................. 33,510 36,870
11.50%, GNMA, 4/15/19 ............................. 8,701 9,547
11.50%, GNMA, 6/15/19 ............................. 40,774 44,739
------------
30,234,839
------------
ADJUSTABLE RATE (2.9%)
7.557%, FHLMC, 9/1/18 ............................. 1,030 1,041
7.741%, FNMA, 7/1/27 .............................. 13,157 13,291
7.125%, GNMA, 12/20/22 ............................ 2,992,118 3,019,205
------------
3,033,537
------------
Total U.S. Agency Mortgage-Backed Securities ... 33,268,376
------------
U.S. GOVERNMENT SECURITIES (5.8%)
4.75%, U.S. Treasury Note, 11/15/08 .............. 2,000,000 1,861,694
5.25%, U.S. Treasury Bond, 2/15/29 ............... 2,315,000 2,110,368
6.25%, U.S. Treasury Note, 2/15/03 ............... 150,000 151,036
9.00%, U.S. Treasury Bond, 11/15/18 .............. 910,000 1,206,604
9.25%, U.S. Treasury Bond, 2/15/16 ................ 600,000 793,391
------------
Total U.S. Government Securities ............... 6,123,093
------------
Total U.S. Government and Agency Securities
(cost: $39,523,648) .......................... 39,391,469
------------
PRIVATE MORTGAGE-BACKED SECURITIES (25.7%)
FIXED RATE (4.0%)
BA Mortgage Securities, Series 1998-3, Class 2,
6.50%, 7/25/13 .................................. 277,552 254,161
BA Mortgage Securities, Series 1998-4, Class 2,
6.50%, 8/25/13 .................................. 293,978 268,771
GE Capital Mortgage Services, Series 1993-18,
Class B-1, 6.00%, 2/25/09 ....................... 1,474,524 1,394,096
GE Capital Mortgage Services, Series 1997-13,
Class M, 6.75%, 12/25/12 1,758,451 1,690,724
</TABLE>
<TABLE>
Par Market
Description of Security Value Value (a)
--------------------------------------------------------- ----------- ------------
<S> <C> <C>
GE Capital Mortgage Services, Series 1998-1,
Class M, 6.75%, 1/25/13 ......................... $ 662,558 $ 636,629
------------
4,244,381
------------
ADJUSTABLE RATE (21.7%)
California Federal Bank Los Angeles,
Series 1991-CI2, Class A, 7.454%, 7/15/21 244,385(d) 233,769
HSBC Mortgage Loan Trust, Series 2000-HSB1,
Class A3, 7.11%, 12/16/30 ...................... 1,500,000 1,500,000
Kidder Peabody Acceptance, Series 1989-3, Class A,
8.811%, 6/20/19 ................................. 54,994(d) 54,444
Norwest Asset Securities, Series 1996-3, Class M,
7.00%, 9/25/11 .................................. 1,556,424 1,519,109
Norwest Asset Securities, Series 1997-7, Class M,
7.00%, 5/25/27 .................................. 1,538,382 1,479,731
Norwest Asset Securities, Series 1998-2, Class M,
6.50%, 2/25/28 .................................. 1,163,583 1,077,262
Prudential Home Mortgage Securities,
Series 1993-18, Class M, 7.00%, 6/25/23 ......... 741,821 718,873
Prudential Home Mortgage Securities,
Series 1993-22, Class M, 7.00%, 7/25/23 ......... 3,850,926 3,734,801
Prudential Home Mortgage Securities,
Series 1993-27, Class M, 7.50%, 5/25/23 ......... 2,514,193 2,483,834
Prudential Home Mortgage Securities,
Series 1994-29, Class M, 7.00%, 10/25/24 2,937,897 2,837,730
Prudential Home Mortgage Securities, Series 1995-5,
Class M, 7.25%, 9/25/25 ......................... 2,463,836 2,383,897
Prudential Home Mortgage Securities, Series 1995-5,
Class B-1, 7.25%, 9/25/25 . 2,563,389(c) 2,452,868
Prudential Home Mortgage Securities, Series 1995-7,
Class B, 7.00%, 11/25/25 ........................ 1,883,600(c) 1,812,918
Prudential Home Mortgage Securities, Series 1996-4,
Class B-1, 6.50%, 4/25/26 . 568,240 528,062
------------
22,817,298
------------
INTEREST ONLY (0.0%)
Contimortgage Home Equity Loan Trust,
Series 1994-3, Class A4, 0.13%, 3/15/14 ......... 24,398,818(b)(d) 41,600
------------
Total Private Mortgage-Backed Securities
(cost: $27,209,679) .......................... 27,103,279
------------
CORPORATE BONDS (26.0%)
CABLE TELEVISION (1.7%)
Classic Cable, 9.375%, 8/1/09 ..................... 400,000 306,000
CSC Holdings, Senior Subordinated Note,
9.875%, 5/15/06 ................................. 700,000 714,000
Rogers Cablesystems, Senior Secured Note,
10.00%, 3/15/05 ................................. 750,000 795,000
------------
1,815,000
------------
CHEMICALS AND PLASTICS (0.5%)
Lyondell Chemical, Senior Secured Note,
10.875%, 5/1/09 ................................. 500,000 481,250
------------
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
--------------------------------------------------------------------------------
13 2000 Annual Report - Mentor Income Fund
<PAGE>
INVESTMENTS IN SECURITIES (continued)
--------------------------------------------------------------------------------
MENTOR INCOME FUND
(CONTINUED)
<TABLE>
Par Market
Description of Security Value Value (a)
--------------------------------------------------------- ----------- ------------
<S> <C> <C>
ENERGY (3.8%)
AES, 9.375%, 9/15/10 .............................. $ 500,000 $ 510,000
Cheasapeake Energy, 9.625%, 5/1/05 ................ 400,000 403,500
Enron, 6.725%, 11/17/08 ........................... 1,600,000 1,492,848
Eott Energy Partners, Senior Note,
11.00%, 10/1/09 ................................. 450,000 474,750
Ocean Energy, Senior Subordinated Note,
8.375%, 7/1/08 .................................. 500,000 503,750
Swift Energy, 10.25%, 8/1/09 ...................... 600,000 606,000
------------
3,990,848
------------
FINANCE (1.7%)
ASAT Finance, 12.50%, 11/1/06 ..................... 260,000 263,900
Principal Financial Group Australia, Senior
Guaranteed Note, 8.20%, 8/15/09 ................. 1,000,000(c) 1,009,600
Sovereign Bancorp, 10.50%, 11/15/06 ............... 500,000 510,000
------------
1,783,500
------------
FOOD AND BEVERAGE (0.4%)
Del Monte, Senior Subordinated Note,
12.25%, 4/15/07 ................................. 400,000 422,000
------------
GAMING (1.9%)
Coast Hotels and Casinos, Senior Subordinated Note,
9.50%, 4/1/09 ................................... 400,000 396,000
Hollywood Park, 9.50%, 8/1/07 ..................... 1,000,000 1,080,000
Isle of Capri Casinos, Senior Subordinated Note,
8.75%, 4/15/09 .................................. 600,000 547,500
------------
2,023,500
------------
HEALTHCARE (1.3%)
Lifepoint Hospitals Holdings, Senior Subordinated
Note, Series B, 10.75%, 5/15/09 ................. 200,000 213,500
Tenet Healthcare, 8.625%, 1/15/07 ................. 700,000 700,000
Triad Hospitals, Senior Subordinated Note,
11.00%, 5/15/09 ................................. 450,000 470,250
------------
1,383,750
------------
HOTELS (0.4%)
HMH Properties, 7.875%, 8/1/08 .................... 500,000 462,500
------------
MANUFACTURING (1.1%)
Georgia Pacific, 7.75%, 11/15/29 .................. 1,250,000 1,112,478
------------
OIL AND GAS (1.0%)
Parker Drilling, Senior Note, Series D,
9.75%, 11/15/06 ................................. 400,000 394,000
Pride Petroleum Services, Senior Note,
9.375%, 5/1/07 .................................. 650,000 661,375
------------
1,055,375
------------
SERVICES (0.5%)
Weight Watchers, Senior Subordinated Note,
13.00%, 10/1/09 ................................. 500,000 532,500
------------
</TABLE>
<TABLE>
Par Market
Description of Security Value Value (a)
--------------------------------------------------------- ----------- ------------
<S> <C> <C>
TECHNOLOGY (0.4%)
Amkor Technology, Senior Note, 9.25%, 5/1/06 ...... $ 400,000 $ 392,000
------------
TELECOMMUNICATIONS (10.3%)
Adelphia Communications, 9.875%, 3/1/05 ........... 375,000 360,469
Airgate PCS, Step Bond, 0.00%, 10/1/09
(13.50% after 10/1/04) .......................... 400,000(b) 231,000
Allegiance Telecom, 12.875%, 5/15/08 .............. 300,000 298,500
Century Communications, Senior Note,
9.50%, 3/1/05 ................................... 476,000 443,870
Charter Communications, Senior Note,
8.625%, 4/1/09 .................................. 800,000 724,000
Exodus Communications, 10.75%, 12/15/09 ........... 400,000 364,000
Insight Midwest, Senior Note, 9.75%, 10/1/09 ...... 500,000 488,750
Intermedia Communications, Senior Note, 8.60%,
6/1/08 ......................................... 570,000 540,075
Level 3 Communications, Senior Note,
9.125%, 5/1/08 .................................. 400,000 325,000
Level 3 Communications, 11.00%, 3/15/08 ........... 350,000 316,750
McLeod USA, Senior Note, 9.25%, 7/15/07 ........... 500,000 466,250
Metromedia Fiber Network, Senior Note,
10.00%, 11/15/08 ................................ 580,000 516,200
Microcell Telecommunications, Senior Discount Note,
Step Bond, Series B, 0.00%, 6/1/06 (14.00%
after 12/1/01) .................................. 680,000(b) 657,900
Nextel Communications, Senior Discount Note, Step
Bond, 0.00%, 9/15/07 (10.65% after 9/15/02) ..... 500,000(b) 403,750
Nextel Partners, Senior Discount Note, Step Bond,
0.00%, 2/1/09 (14.00% after 2/1/04) 585,000(b) 409,500
Nextel Partners, 11.00%, 3/15/10 .................. 450,000 448,875
Nextlink Communications, Senior Note,
10.75%, 6/1/09 .................................. 450,000 397,125
Rogers Cantel, Senior Subordinated Note,
8.80%, 10/1/07 .................................. 750,000 746,250
Sprint Capital, 6.125%, 11/15/08 .................. 1,800,000 1,607,053
U.S. Unwired, Step Bond, 0.00%, 11/1/09 (13.375%
after 11/1/04) .................................. 500,000(b) 246,250
Voicestream Wireless, 10.375%, 11/15/09 ........... 400,000 430,000
Worldwide Fiber, Senior Note, 12.00%, 8/1/09 450,000(c) 357,750
------------
10,779,317
------------
TRANSPORTATION (1.0%)
Delta Airlines, 8.30%, 12/15/29 ................... 1,250,000 1,072,411
------------
Total Corporate Bonds
(cost: $28,646,967) .......................... 27,306,429
------------
YANKEE OBLIGATIONS (1.0%)
Clearnet Communications, Senior Discount Note, Step
Bond, 0.00%, 12/15/05 (14.75%
after 12/15/00) ................................. 695,000(b) 740,175
Telewest PLC, 11.00%, 10/1/07 ..................... 400,000 350,000
------------
Total Yankee Obligations
(cost: $1,158,863) ........................... 1,090,175
------------
</TABLE>
SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.
--------------------------------------------------------------------------------
14 2000 Annual Report - Mentor Income Fund
<PAGE>
INVESTMENTS IN SECURITIES (continued)
--------------------------------------------------------------------------------
MENTOR INCOME FUND
(CONTINUED)
<TABLE>
Par Market
Description of Security Value/Shares Value (a)
--------------------------------------------------------- ----------- ------------
<S> <C> <C>
ASSET-BACKED SECURITIES (3.5%)
AUTO (0.3%)
Union Acceptance Corporation Auto Trust,
Series 1996-B, Class A, 6.45%, 7/9/03 ........... $ 352,371 $ 351,700
------------
HOME EQUITY (3.2%)
Advanta Mortgage Loan Trust, Series 1993-3,
Class A, 5.55%, 1/25/25 ......................... 647,580 599,908
CS First Boston Mortgage Securities, Series 1996-2,
Class A6, 7.18%, 2/25/18 ........................ 2,750,000 2,685,691
------------
3,285,599
------------
Total Asset-Backed Securities
(cost: $3,682,027) ........................... 3,637,299
------------
PREFERRED STOCK (4.1%)
Home Ownership Funding
(cost: $4,255,954) .............................. 5,650,000(c) 4,285,130
------------
WARRANTS (0.0%)
ASAT Finance, Expires 11/1/06
(cost: $0) ...................................... 400 32,200
------------
SHORT TERM SECURITIES (2.9%)
Repurchase agreement with State Street Bank &
Trust, acquired on 10/31/00, interest of $292,
3.50%, matures on 11/1/00 at value of $3,000,292
(cost: $3,000,000) .............................. 3,000,000(e) 3,000,000
------------
Total Investments in Securities
(cost: $107,477,138) (f) ..................... $105,845,981
============
</TABLE>
NOTES TO INVESTMENTS IN SECURITIES
(a) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 IN
THE NOTES TO FINANCIAL STATEMENTS.
(b) PORTFOLIO ABBREVIATIONS AND DEFINITIONS:
INTEREST ONLY - REPRESENTS A SECURITY THAT ENTITLES HOLDERS TO RECEIVE
ONLY INTEREST PAYMENTS ON THE UNDERLYING MORTGAGES. THE YIELD TO
MATURITY OF AN INTEREST-ONLY IS EXTREMELY SENSITIVE TO THE RATE OF
PRINCIPAL PAYMENTS ON THE UNDERLYING MORTGAGE ASSETS. A RAPID (SLOW)
RATE OF PRINCIPAL REPAYMENTS MAY HAVE AN ADVERSE (POSITIVE) EFFECT ON
YIELD TO MATURITY. THE INTEREST RATE DISCLOSED REPRESENTS THE CURRENT
YIELD BASED UPON THE CURRENT COST BASIS AND ESTIMATED TIMING AND
AMOUNT OF FUTURE CASH FLOWS.
STEP BOND - REPRESENTS SECURITIES THAT REMAIN ZERO-COUPON SECURIITES
UNTIL A PREDETERMINED DATE AT WHICH TIME THE STATED COUPON RATE
BECOMES EFFECTIVE AND INTEREST BECOMES PAYABLE AT REGULAR INTERVALS.
(c) SECURITIES SOLD WITHIN THE TERMS OF A PRIVATE PLACEMENT MEMORANDUM, EXEMPT
FROM REGISTRATION UNDER SECTION 144A OF THE SECURITIES ACT OF 1933, AS
AMENDED, WHICH MAY BE SOLD ONLY TO DEALERS IN THAT PROGRAM OR OTHER
"QUALIFIED INSTITUTIONAL INVESTORS". THESE SECURITIES HAVE BEEN DETERMINED
TO BE LIQUID UNDER GUIDELINES ESTABLISHED BY THE BOARD OF DIRECTORS.
(d) 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 DIRECTORS. THE TOTAL MARKET VALUE OF THESE ILLIQUID SECURITIES
ON OCTOBER 31, 2000, WAS $329,813, WHICH REPRESENTS 0.3% OF TOTAL NET
ASSETS.
(e) REPURCHASE AGREEMENT WHICH IS FULLY COLLATERALIZED BY U.S. GOVERNMENT
AND/OR AGENCY SECURITIES. ACCRUED INTEREST SHOWN REPRESENTS INTEREST DUE AT
MATURITY OF THE REPURCHASE AGREEMENT.
(f) ON OCTOBER 31, 2000, THE COST OF INVESTMENTS FOR FEDERAL INCOME TAX
PURPOSES WAS $107,477,138. THE AGGREGATE GROSS UNREALIZED APPRECIATION AND
DEPRECIATION OF INVESTMENTS IN SECURITIES BASED ON THIS COST WERE AS
FOLLOWS:
<TABLE>
<S> <C>
GROSS UNREALIZED APPRECIATION ...... $ 1,125,062
GROSS UNREALIZED DEPRECIATION ...... (2,756,219)
-----------
$(1,631,157)
===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
15 2000 Annual Report - Mentor Income Fund
<PAGE>
INDEPENDENT AUDITORS' REPORT
--------------------------------------------------------------------------------
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
Mentor Income Fund, Inc. as of October 31, 2000, and the
related statements of operations and cash flows for the
year then ended, and statements of changes in net assets
for each of the years in the two-year period then ended,
and the financial highlights for each of the years in the
four-year period then ended. These financial statements
and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an
opinion on these financial statements and financial
highlights based on our audits. The financial highlights
for the year 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 auditing
standards generally accepted in the United States of
America. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of
material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures
included confirmation of securities owned as of
October 31, 2000 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, 2000, the results of its
operations, cash flows, changes in its net assets and
financial highlights for each of the years described above
in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
Boston, Massachusetts
December 1, 2000
--------------------------------------------------------------------------------
16 2000 Annual Report - Mentor Income Fund
<PAGE>
SHAREHOLDER UPDATE
--------------------------------------------------------------------------------
ANNUAL MEETING RESULTS
An annual meeting of the fund's shareholders was held on
October 23, 2000. Each matter voted upon at that meeting,
as well as the number of votes cast for, against or
withheld, and the number of abstentions with respect to
such matters, are set forth below.
(1) The fund's shareholders approved a new advisory
agreement between the fund and U.S. Bank National
Association. The following votes were cast regarding
this matter:
<TABLE>
<CAPTION>
SHARES SHARES
VOTED "FOR" VOTED "AGAINST" ABSTENTIONS
------------- ------------------ ------------
<S> <C> <C> <C>
5,739,472 95,019 153,786
</TABLE>
(2) The fund's shareholders elected the following
directors:
<TABLE>
<CAPTION>
SHARES SHARES WITHHOLDING
VOTED "FOR" AUTHORITY TO VOTE
------------- ------------------
<S> <C> <C>
Robert J. Dayton ...................... 5,927,271 146,269
Roger A. Gibson ....................... 5,988,271 145,269
Andrew M. Hunter III .................. 5,986,671 146,869
Leonard W. Kedrowski .................. 5,986,771 146,869
John M. Murphy, Jr. ................... 5,985,171 148,369
Robert L. Spies ....................... 5,976,571 156,969
Joseph D. Strauss ..................... 5,987,171 145,869
Virginia L. Stringer .................. 5,987,671 145,869
</TABLE>
(3) The fund's shareholders ratified the selection of the
fund's Board of Directors of KPMG LLP as the
independent accountants of the fund for the fiscal
year ended October 31, 2000. The following votes were
cast regarding this matter:
<TABLE>
<CAPTION>
SHARES SHARES
VOTED "FOR" VOTED "AGAINST" ABSTENTIONS
------------- ------------------ ------------
<S> <C> <C> <C>
5,754,297 100,883 133,091
</TABLE>
(4) The fund's shareholders voted on a proposal to amend
Article 1 of the fund's Restated and Amended
Articles of Incorporation changing the name of the
fund to American Income Fund. This proposal did not
receive the required majority of votes for approval.
The following votes were cast regarding this matter:
<TABLE>
<CAPTION>
SHARES SHARES
VOTED "FOR" VOTED "AGAINST" ABSTENTIONS
------------- ------------------ ------------
<S> <C> <C> <C>
5,701,570 132,858 153,843
</TABLE>
(5) The fund's shareholders voted on a proposal to amend
Article II of the fund's Restated and Amended
Articles of Incorporation deleting Section 2 thereof,
which currently restricts transfers of fund's shares.
This proposal did not receive the required majority of
votes for approval. The following votes were cast
regarding this matter:
<TABLE>
<CAPTION>
SHARES SHARES
VOTED "FOR" VOTED "AGAINST" ABSTENTIONS
------------- ------------------ ------------
<S> <C> <C> <C>
5,673,633 113,958 200,860
</TABLE>
--------------------------------------------------------------------------------
17 2000 Annual Report - Mentor Income Fund
<PAGE>
Shareholder Update (continued)
--------------------------------------------------------------------------------
DIVIDEND REINVESTMENT PLAN
As a shareholder, you may choose to participate in the
Dividend Reinvestment Plan. It is a convenient and
economical way to buy additional shares of the fund by
automatically reinvesting dividends and capital gains. The
plan is administered by EquiServe, the plan agent.
ELIGIBILITY/PARTICIPATION
If you hold shares of the fund in your own name, you are
an automatic participant in the 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.
PLAN ADMINISTRATION
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.
There is no direct charge for reinvestment of dividends
and capital gains, since EquiServe's fees are paid for by
the fund. However, if fund shares are purchased in the
open market, each participant pays a pro rata portion of
the brokerage commissions. Brokerage charges are expected
to be lower than those for individual transactions because
shares are purchased for all participants in blocks.
TAX INFORMATION
Distributions invested in additional shares of the fund
are subject to income tax, to the same extent as if
received in cash. When shares are issued by the fund at a
discount from market value, shareholders will be treated
as having received distributions of an amount equal to the
full market value of those shares. Shareholders, as
required by the Internal Revenue Service, will receive
Form 1099 regarding the federal tax status of the prior
year's distributions.
PLAN WITHDRAWAL
If you hold your shares in your own name, you may
terminate your participation in the plan at any time by
giving written notice to EquiServe. Written instructions
should include your name and address as they appear on the
certificate or account.
If notice is received at least 10 days before the record
date, all future distributions will be paid directly to
the shareholder of record. If your shares are issued in
certificate form and you discontinue your participation in
the plan, you (or your nominee) will receive an additional
--------------------------------------------------------------------------------
18 2000 Annual Report - Mentor Income Fund
<PAGE>
Shareholder Update (continued)
--------------------------------------------------------------------------------
certificate for all full shares and a check for any
fractional shares in your 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. If your
shares are registered in your brokerage firm's name, you
should contact your investment professional to terminate
your participation.
PLAN AMENDMENT/TERMINATION
The fund reserves the right to amend or terminate the
plan. Should the plan be amended or terminated,
participants will be notified in writing at least 90 days
before the record date for such dividend or distribution.
The plan may also be amended or terminated by EquiServe
with at least 90 days written notice to participants in
the plan.
Any questions about the plan should be directed to your
investment professional or to EquiServe at 1-800-426-5523.
--------------------------------------------------------------------------------
19 2000 Annual Report - Mentor Income Fund
<PAGE>
BOARD OF DIRECTORS
MR. ROBERT DAYTON
Director of Mentor Income Fund, Inc.
Chief Executive Officer of Okabena Company
MR. ROGER GIBSON
Director of Mentor Income Fund, Inc.
Vice President of North America-Mountain Region for United Airlines
MR. ANDREW HUNTER III
Director of Mentor Income Fund, Inc.
Chairman of Hunter Keith Industries
MR. LEONARD KEDROWSKI
Director of Mentor Income Fund, Inc.
Owner and President of Executive Management Consulting, Inc.
MR. JOHN MURPHY JR.
Director of Mentor Income Fund, Inc.
Executive Vice President, U.S. Bancorp
MR. ROBERT SPIES
Director of Mentor Income Fund, Inc.
Retired Vice President, U.S. Bank National Association
MR. JOSEPH STRAUSS
Director of Mentor Income Fund, Inc.
Former Chairman of First American Investment Funds, Inc.
Owner and President of Strauss Management Company
MS. VIRGINIA STRINGER
Chairperson of Mentor Income Fund, Inc.
Owner and President of Strategic Management Resources, Inc.
<PAGE>
[LOGO] FIRST AMERICAN
ASSET MANAGEMENT
MENTOR INCOME FUND, INC.
2000 ANNUAL REPORT
[LOGO] This document is printed on paper containing 30% post-consumer waste.
12/2000 3180-00
