<PAGE>
Lincoln National Income Fund, Inc.
1995 Semi-Annual Report
<PAGE>
<TABLE>
<CAPTION>
Table of Contents
Page
<S> <C>
Manager Profile............................................................. 2
Investment Policies & Objectives............................................ 2
President's Letter.......................................................... 3
Portfolio Profile & Performance............................................. 4
Total Fund Investments...................................................... 4
Dividend History............................................................ 5
Shareholder Meeting Results................................................. 5
Financial Highlights........................................................ 6
Statement of Net Assets..................................................... 8
Statements of Operations.................................................... 14
Statements of Changes in Net Assets......................................... 15
Statements of Cash Flows.................................................... 16
Portfolio of Investments in Securities by Industry Classification........... 17
Notes to Financial Statements............................................... 19
Common Stock Market Prices & Net Asset Value History........................ 22
Directors & Officers of the Fund............................................ 23
Corporate Information....................................................... 24
</TABLE>
1995 Semi-Annual Report 1
<PAGE>
Manager Profile
Throughout its history, your Fund has been managed by investment affiliates of
Lincoln National Corporation. Today Lincoln Investment Management, Inc. brings
to the Fund the skills and expertise that it has developed through management of
the assets of Lincoln National Corporation, as well as pension plans,
foundations, endowments, and other asset groupings.
Lincoln Investments invests in nearly all domestic capital markets and also has
developed an increasing international investment presence. Currently it has over
$30 billion in assets under management, and over the past year, total investment
transactions exceeded $100 billion. The amount and breadth of this investment
expertise and activity allow Lincoln Investments to deliver substantial value to
the investment process.
Lincoln Investments also believes in the need for consistency in investment
strategy and the personnel involved in implementing those strategies. We are
pleased to say that the individuals involved with your Fund over the past 15
years are still with Lincoln today and have senior positions affecting the
investment results of the Fund.
David A. Berry, who has been the Fund's portfolio manager since 1992, was
recently promoted to oversee several areas within the investment management
company. In February of 1995, David C. Fischer assumed the portfolio management
role for the Income Fund. Fischer, who joined Lincoln Investments in 1988, is a
Chartered Financial Analyst, a Certified Public Accountant and received his
M.B.A. in finance from Indiana University. He will be working closely with Berry
to implement the investment strategies already in place.
Investment Policies & Objectives
The Fund's primary investment objective is to provide a high level of current
income from interest on fixed-income securities. A secondary objective is to
obtain long-term capital appreciation. Substantially all of the Fund's net
investment income will be distributed through regular dividends to shareholders.
Net realized gains, if any, will be distributed annually in cash, provided the
Fund does not have a capital loss carryforward.
The investment portfolio will have a significant component of direct placement
investments in fixed-income securities. Some of these may have equity
participation either through warrants or convertible features. The Fund will
also invest in publicly traded fixed-income securities and high-yielding common
stocks.
The Fund may borrow to purchase securities in an amount not exceeding 20 percent
of net assets.
2 Lincoln National Income Fund, Inc.
<PAGE>
President's Letter July 21, 1995
To our shareholders,
The Income Fund had an excellent second quarter performance with a market return
of 9.77 percent for the period. This placed the fund second of 13 in its Lipper
peer group and in the 97th percentile among its Morningstar peers (second of
32). This performance was due largely to the Fund's 7.6 percent increase in net
asset value in the second quarter from $13.19 to $14.14, a result of the
significant decline in interest rates and the Fund's leverage.
Recent economic data indicates that the economy slowed in the second quarter,
and some economists now believe the economy had a negative second quarter GDP.
There have even been some murmurings of the "r" word--recession, but so far both
the equity and fixed-income markets are saying this is a remote possibility.
The slower growth gave the markets hope that the Federal Reserve would ease
monetary policy. During the quarter, both stocks and bonds had outstanding
returns with the S&P 500 returning 9.55 percent and the Lehman Corporate Bond
index returning 7.44 percent. Ten-year Treasury yields declined from 7.20
percent at March 31 to 6.20 percent at June 30.
This second quarter market environment was very favorable for the Lincoln
National Income Fund. Looking ahead, we feel that economic growth will stay
modestly positive, but low enough to encourage the Fed to ease the Fed Funds
rate into the 5.0-5.5 percent range. We see this "soft-landing" followed by
better economic growth in 1996. However, we believe that Federal budget
downsizing will be a drag on the economy for some time. Accordingly, we expect a
2-3 year period of modest growth with low inflation.
Given this outlook, we anticipate long Treasury yields declining over the next
24 months. This should be a very favorable environment for the corporate bond
market and specifically for the Income Fund. Although we have reduced the
average maturity of the Fund this year, the Fund remains positioned to give
above-market return should rates decline further.
Given our expectation of lower interest rates, we are comfortable keeping the
Variable Term Preferred Stock (VTP) outstanding. However, we are monitoring the
attractiveness of the VTP closely since we have seen over the last two years
both the benefits and drawbacks of leverage.
With lower reinvestment rates anticipated, a major challenge for the Fund going
forward will be in maintaining its current high level of dividends. Although we
were able to pay a $.28 dividend per share in June, this level will be
increasingly difficult to maintain in the current market environment without
taking on excessive duration or credit risks.
One way that we are attempting to maintain the current dividend level for the
Fund is by increased investments in private placements. The Fund made several
commitments for private placement investments last quarter bringing our total
investments in these higher-yielding securities to 12 percent of the Fund. We
would like to increase private placements to between 15- 20 percent of the
Fund's assets over the next year.
The strategies put in place during the depressed fixed-income market of 1994
have served the Income Fund well in the first half of 1995. We remain positive
about the Fund's potential.
Sincerely,
/s/ H. Thomas McMeekin
----------------------
H. Thomas McMeekin
President
1995 Semi-Annual Report 3
<PAGE>
Portfolio Profile
As of June 30, 1995
Asset Classification
[PIE CHART]
Public Debt................ 82.87% $113.2
Direct Placements.......... 12.83% $ 17.5
Common & Preferred Stocks.. 2.58% $ 3.5
Other Assets............... 1.72% $ 2.4
Distribution by Moody's Quality Rating
(Dollars in Millions)
[BAR GRAPH]
BBB........................ 31.12% $42.5
A.......................... 22.62% $30.9
Direct Placements,
Equities & Other Assets.. 17.13% $23.4
BB......................... 11.91% $16.3
AAA........................ 9.33% $12.7
AA......................... 6.02% $ 8.2
B.......................... 1.87% $ 2.6
Portfolio Performance
As of June 30, 1995
The following table displays the net asset value total return for the Fund on
cumulative basis compared to the Lehman Corporate Bond Index and Standard &
Poor's 500 Index of common stocks.
<TABLE>
<CAPTION>
YTD 1 Year 3 Years 5 Years 10 Years
------ ------ ------- ------- ---------
<S> <C> <C> <C> <C> <C>
Lincoln National Income Fund 17.74% 17.19% 30.55% 66.09% 188.85%
Lehman Corporate Bond-Index 13.80% 15.12% 26.66% 64.16% 178.80%
Standard & Poor's 500 20.25% 25.50% 45.13% 76.84% 292.43%
(with dividends reinvested)
Total Fund Investments
At market or fair values as of June 30
1995 1994
(000) % of Total (000) % of Total
-------- ---------- -------- ----------
Public Debt Securities $113,222 83% $ 90,492 84%
Direct Placement Securities 17,526 13% 9,029 8%
Common Stocks and Warrants 1,409 1% 1,948 2%
Preferred Stocks 2,110 1% 0 0%
Short-Term Investments 0 0% 4,755 4%
Excess of other Asset over Liabilities 2,352 2% 1,912 2%
-------- --- ------- ---
Net Assets 136,619 100% 108,136 100%
======== === ======= ===
</TABLE>
4 Lincoln National Income Fund, Inc.
<PAGE>
Dividend History
The Fund in its lifetime has distributed common dividends of $25.04 which
represents 200.3 percent of its offering price of $12.50 as adjusted for the
1993 common stock split. On February 27, 1992 the Fund changed its policy of
retaining long-term capital gains to one of distributing them. Previous year
retentions allowed the Fund to grow its assets by $6,490,688 which is net of
capital gains tax. The table below shows the 23-year common dividend per share
history as adjusted for the two-for-one stock split.
<TABLE>
<CAPTION>
Annual Annual Annual
Year Dividend Year Dividend Year Dividend
---- -------- ---- -------- ---- --------
<S> <C> <C> <C> <C> <C>
1975 & Prior $2.28 1982 $1.12 1989 $1.17
1976 .87 1983 1.14 1990 1.18
1977 .90 1984 1.20 1991 1.15
1978 .90 1985 1.27 1992 1.68
1979 .92 1986 1.17 1993 1.77
1980 .97 1987 1.52 1994 1.28
1981 1.04 1988 1.23 *1995 .28
</TABLE>
* Dividends paid as of June 30
Shareholder Meeting Results
The Fund had their annual Shareholder meeting on May 19, 1995. Two proposals
were presented to shareholders for vote. Proposal I - "Election of Directors"
and Proposal II - "Selection of Auditors." A total of 5,253,128 of Common Stock
shares (76.89% of the total outstanding shares) and 28,200 of Variable Term
Preferred stock shares (70.50% of the total outstanding shares) were voted. The
following table highlights the results of the vote.
<TABLE>
<CAPTION>
Number of shares Number of shares Number of shares
voted FOR voted AGAINST ABSTAINED
<S> <C> <C> <C> <C>
Proposal I
Election of A. Cepeda 5,114,702 131,426 --
Directors -- R. Deshaies 5,121,458 131,670 --
Common Stock C. Freund 5,117,561 135,567 --
T. McMeekin 5,117,770 135,358 --
D. Toll 5,118,343 134,785 --
A. Warner 5,090,315 162,813 --
F. Young 5,104,828 148,300 --
Election of R. Burridge 28,200 0 --
Directors -- A. Cepeda 28,200 0 --
Variable Term R. Deshaies 28,200 0 --
Preferred Stock C. Freund 28,200 0 --
T. Mathers 28,200 0 --
T. McMeekin 28,200 0 --
D. Toll 28,200 0 --
A. Warner 28,200 0 --
F. Young 28,200 0 --
Proposal II
Ratification of the Selection of Auditor 5,078,919 108,903 65,306
(Coopers & Lybrand L.L.P.)
</TABLE>
1995 Semi-Annual Report 5
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights
Six Months Ended June 30 ----------------------------------
1995 1994
(Unaudited) (Unaudited) 1994 1993
----------- ---------- ---- ----
<S> <C> <C> <C> <C>
(Selected data for each share of common stock
outstanding throughout the period)
Net investment income:
Investment income.................................. $ 0.84 $ .90 $ 1.71 $ 1.83
Expenses (excluding interest)...................... (.11) (.14) (.24) (.27)
Interest expense................................... -- -- -- --
------ ------ ------ ------
Net investment income.............................. .73 .76 1.47 1.56
Dividends declared from net investment income:
Paid to common shareholders........................ (.28) (.32) (1.20) (1.31)
Common stock equivalent of dividends
paid to preferred shareholders.................... (.17) (.14) (.27) (.19)
------ ------ ------ ------
(.45) (.46) (1.47) (1.50)
Net realized and unrealized gain (loss)
on investments..................................... 1.61 (1.66) (2.18) .92
Reduction due to stock rights offering.............. -- -- (0.10) --
Dividends declared from net realized gains
on investments:
Paid to common shareholders........................ -- -- (.08) (.46)
Common stock equivalent of dividends
paid to preferred shareholders.................... -- -- (.02) (.07)
------ ------ ------ ------
(.10) (.53)
Preferred stock underwriting discounts and
offering costs.................................... -- -- -- --
------ ------ ------ ------
Total increase (decrease) in net asset value........ 1.89 (1.36) (2.38) .45
Net asset value:
Beginning of period.............................. 12.25 14.63 14.63 14.18
------ ------ ------ ------
End of period.................................... $14.14 $13.27 $12.25 $14.63
====== ====== ======= ======
Ratio of operating expenses to
average net assets................................. .59% .61% 1.19% 1.17%
Ratio of net investment income to
average net assets................................. 3.81% 3.53% 7.31% 6.76%
Portfolio turnover.................................. 12.33% 16.92% 33.64% 43.72%
Total investment return............................. 22.53% (8.70)% (19.80)% 17.17%
End of period market value.......................... $12.88 $13.38 $10.75 $15.00
Number of shares outstanding at end of year:
Common stock....................................... 6,832,195 5,134,309 6,832,195 5,002,781
Variable Term Preferred stock...................... 40,000 40,000 40,000 40,000
</TABLE>
( ) denotes deduction
Shares outstanding and per share amounts for 1993 and prior are restated for
two-for-one stock split effective October 15, 1993.
The accompanying notes are an integral part of the financial statements.
6 Lincoln National Income Fund, Inc.
<PAGE>
<TABLE>
<CAPTION>
---------Year Ending ---------------------------------------------------------
1992 1991 1990 1989 1988 1987 1986
---- ---- ---- ---- ---- ---- ----
<C> <C> <C> <C> <C> <C> <C>
$ 1.57 $ 1.29 $ 1.30 $ 1.29 $ 1.30 $ 1.37 $ 1.35
(.18) (.14) (.13) (.14) (.13) (.13) (.13)
(.03) -- -- -- (.01) (.03) (.01)
------ ------ ------ ------ ------ ------ ------
1.36 1.15 1.17 1.15 1.16 1.21 1.21
(1.31) (1.15) (1.18) (1.16) (1.16) (1.52) (1.17)
(.08) -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------
(1.39) (1.15) (1.18) (1.16) (1.16) (1.52) (1.17)
(.01) 1.45 (1.03) 1.11 .59 (.54) .76
-- -- -- -- -- -- --
(.37) -- -- (.01) (.07) -- --
(.03) -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------
(.40) -- -- (.01) (.07) -- --
(.23) -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------
(.67) 1.45 (1.04) 1.09 .52 (.85) .80
14.85 13.40 14.44 13.35 12.83 13.68 12.88
------ ------ ------ ------ ------ ------ ------
$14.18 $14.85 $13.40 $14.44 $13.35 $12.83 $13.68
====== ====== ====== ====== ====== ====== ======
1.00% .97% .97% .96% .97% .93% .91%
7.56% 8.05% 8.49% 8.04% 8.43% 8.93% 8.90%
97.63% 15.07% 28.85% 44.46% 63.39% 46.71% 29.68%
15.78% 25.96% .87% 18.80% 13.96% 1.13% 15.84%
$14.31 $13.81 $11.88 $12.94 $11.88 $11.50 $12.88
4,899,706 4,899,706 4,899,706 4,899,706 4,899,706 4,899,706 4,899,706
40,000 -- -- -- -- -- --
</TABLE>
1995 Semi-Annual Report 7
<PAGE>
Statement of Net Assets
As of June 30, 1995 (Unaudited)
<TABLE>
<CAPTION>
Investments -- Notes A & B Par Market or
Public Debt Securities (82.9%) Amount Cost Fair Value
------ ---- ----------
<S> <C> <C> <C>
ADT Operations Inc.
8.25% Senior Notes, 8/1/00........................................... $ 250,000 $ 250,000 $ 253,750
AK Steel Corporation
10.75% Guaranteed Senior Note, 4/1/04................................ 250,000 251,250 261,875
Alcan Aluminum Limited
9.70% Debentures, 10/15/96........................................... 1,000,000 998,200 1,043,180
Allstate Corporation
7.50% Debenture, 6/15/13............................................. 1,000,000 911,180 992,820
AMR Corporation
10.00% Bond, 4/15/21................................................. 1,000,000 1,028,860 1,152,760
American Airlines 1988-A Grantor Trusts
9.83% Equipment Note Pass Through Certificates
Series 1988-A3, 1/1/02............................................... 1,311,066 1,311,066 1,413,565
Amoco Canada
7.95% Subordinated Debentures, 10/1/22............................... 1,000,000 959,570 1,022,360
ARKLA
8.875% Notes, 7/15/99................................................ 1,000,000 1,090,000 1,051,210
Atlantic Richfield Company
9.00% Debentures, 4/1/21............................................. 1,000,000 1,103,470 1,170,680
BVPS II Funding Corp.
8.33% Collateralized Lease Bond, 12/1/07............................. 1,500,000 1,546,590 1,414,050
Bally Park Place Funding
9.25% First Mortgage Bonds, 3/15/04.................................. 250,000 214,375 236,250
Banc One Corporation
9.875% Subordinated Notes, 3/1/09.................................... 1,000,000 1,152,890 1,230,820
BankAmerica Corporation
7.50% Subordinated Notes, 10/15/02................................... 1,500,000 1,488,525 1,547,865
Baroid Corporation
8.00% Senior Notes, 4/15/03.......................................... 250,000 248,317 270,048
Bell Telephone Company of Canada
13.375% Debentures, Series DJ, 10/15/10.............................. 1,500,000 1,420,000 1,608,000
Browning-Ferris Inds. Inc.
6.75% Convertible Eurobond, 7/18/05
(convertible into 9,524 common shares)............................... 500,000 507,500 497,500
CNA Financial Corporation
6.25% Note, 11/15/03................................................. 1,000,000 850,180 925,870
Capital Cities/ABC Inc.
8.875% Senior Notes, 12/15/00........................................ 1,000,000 1,006,630 1,114,360
Caterpillar Inc.
6.00% Debentures, 5/1/07............................................. 1,000,000 878,906 915,220
Cemex SA
10.00% Eurobond Medium-Term Note, 11/5/99............................ 250,000 222,500 215,625
Chrysler Financial Corporation
9.50% Senior Notes, 12/15/99......................................... 1,000,000 1,120,000 1,107,260
Cleveland Electric Illuminating Co.
9.375% First Mortgage Bonds, 3/1/17.................................. 1,000,000 1,020,000 961,450
Coastal Corp.
9.75% Senior Notes, 8/1/03........................................... 1,000,000 1,150,890 1,147,270
Coca-Cola Enterprises Inc.
8.00% Note, 1/4/05................................................... 1,000,000 1,130,150 1,104,290
</TABLE>
The accompanying notes are an integral part of the financial statements.
8 Lincoln National Income Fund, Inc.
<PAGE>
Statement of Net Assets
continued (Unaudited)
<TABLE>
<CAPTION>
Par Market or
Public Debt Securities (cont'd.) Amount Cost Fair Value
---------- ---------- -----------
<S> <C> <C> <C>
Commonwealth Edison
8.625% First Mortgage Bond, 2/1/22......................... $1,000,000 $ 939,620 $1,049,370
ConAgra Inc.
7.40% Subordinated Debt Securities, 9/15/04................ 1,500,000 1,495,140 1,551,000
Container Corporation of America
11.25% Senior Note Series A, 5/1/04........................ 250,000 258,750 262,187
Delta Airline Inc.
9.90% Equipment & Trust Certificates Series 1988 C, 6/16/02 1,473,000 1,564,297 1,651,395
Discover Credit Corp.
8.73% Medium-Term Notes, Series II, 8/15/96................ 1,000,000 1,015,180 1,028,490
Domtar Inc.
11.25% Debenture, 9/15/17.................................. 250,000 267,250 266,250
Dow Capital B.V.
9.00% Guaranteed Debentures, 5/15/10....................... 1,000,000 1,186,170 1,174,570
Duquesne II Funding Corporation
8.70% Collateralized Lease Bonds, 6/1/16................... 992,000 992,000 1,042,572
EI Dupont Nemour
8.25% Debenture, 1/15/22................................... 1,000,000 1,097,680 1,060,530
Enron Corp.
9.50% Credit Sensitive Notes, 6/15/01...................... 1,000,000 1,141,040 1,134,410
Essex Group Inc.
10.00% Senior Note, 5/1/03................................. 250,000 243,125 243,125
Federal Express Corp. Global
9.875% Note, 4/1/02........................................ 1,250,000 1,400,000 1,443,925
Federal Home Loan Mortgage Corporation
7.80% REMIC Series 46 Class B, 9/15/20..................... 1,397,444 1,235,459 1,433,428
Federal National Mortgage Association
9.20% Guaranteed REMIC Pass-Through Certificates 88-14
Class F, 12/25/17.......................................... 1,563,777 1,531,098 1,614,538
Federated Department Stores
10.00% Senior Note, 2/15/01................................ 250,000 250,000 268,437
First Interstate Bancorp
8.15% Subordinate Note, 3/15/02............................ 1,000,000 1,000,000 1,036,470
First USABank
7.65% Subordinated Notes, 8/1/03........................... 1,000,000 1,000,000 996,950
Fleet/Norstar Group
8.625% Subordinated Note, 1/15/07.......................... 1,000,000 1,044,630 1,104,330
Fleming Companies Inc.
8.74% Medium-Term Notes, Series B, 9/19/02................. 1,000,000 997,540 1,018,750
Ford Holdings Inc.
9.25% Guaranteed Notes, 7/15/97............................ 1,000,000 998,710 1,053,180
Gaylord Container Inc.
11.50% Senior Note, 5/15/01................................ 250,000 253,750 264,062
GTE South Corporation
9.375% Series GG First Mortgage Bonds, 6/15/30............. 2,000,000 2,088,080 2,125,100
General Electric Capital Corp.
8.75% Notes, 5/21/07....................................... 1,000,000 1,108,350 1,162,350
General Motors Acceptance Corp.
8.875% Notes, 6/1/10....................................... 1,500,000 1,656,000 1,760,565
Georgia-Pacific Corporation
9.50% Debentures, 5/15/22.................................. 1,500,000 1,551,450 1,670,190
</TABLE>
The accompanying notes are an integral part of the financial statements.
1995 Semi-Annual Report 9
<PAGE>
Statement of Net Assets
continued (Unaudited)
<TABLE>
<CAPTION>
Par Market or
Public Debt Securities (cont'd.) Amount Cost Fair Value
---------- ---------- ----------
<S> <C> <C> <C>
Government National Mortgage Association
9.00% Pass-Through Certificate POOL #309771, 8/15/21...... $1,498,396 $1,615,479 $1,573,301
9.00% Pass-Through Certificate POOL #349329, 3/15/23...... 3,173,462 3,421,408 3,332,103
Greentree Financial Corporation
8.65% Subordinate Note, Class B1, Series 94-6, 11/15/19... 1,000,000 988,594 1,040,000
Hilton Hotel Corporation
7.70% Senior Note, 7/15/02................................ 500,000 508,915 524,085
Houston Lighting & Power Company
9.80% Collateralized Medium-Term Notes, Series B, 2/15/99. 1,500,000 1,467,165 1,655,640
Huntsman Corporation
10.625% First Mortgage Bonds, 4/15/01..................... 250,000 254,688 265,000
Keystone Group
9.75% Senior Secured Note, 9/1/03......................... 200,000 192,000 202,000
Kinder Care Learning Center
10.375% Senior Note, 6/1/01............................... 250,000 251,250 260,000
Litton Industries Inc.
12.625% Subordinated Debentures, 7/1/05................... 1,500,000 1,575,625 1,562,985
Long Island Lighting Co.
7.125% Debenture, 6/1/05.................................. 1,000,000 989,630 886,980
9.75% General Refunding Mortgage, 5/1/21.................. 1,000,000 988,290 1,043,230
Louisiana Power & Light Company
10.67% Waterford 3 Secured Lease Obligation Bonds, 1/2/17. 1,000,000 996,250 1,055,660
McDonnell Douglas Corporation
9.25% Notes, 4/1/02....................................... 1,000,000 1,142,300 1,125,810
MCI Communications Corporation
7.50% Senior Notes, 8/20/04............................... 1,000,000 1,013,020 1,046,280
Mark IV Industries Inc.
8.75% Senior Subordinated Notes, 4/1/03................... 250,000 250,000 255,000
Merrill Lynch Mortgage Investors Inc.
10.00% Manufactured Housing Contract
Pass-Through Certificates Series 1990-A1, 3/15/10......... 911,809 906,703 1,013,959
Mid-State Homes
8.33% Class A, Series 1, 4/1/30........................... 994,156 994,001 1,044,174
Nabisco Inc.
8.00% Senior Note, 1/15/00................................ 500,000 503,580 525,590
6.70% Bond, 6/15/02....................................... 500,000 499,705 492,940
National Rural Utilities Cooperative Finance Corporation
9.80% Medium-Term Notes Series B, 5/6/96.................. 1,000,000 1,037,760 1,027,810
NationsBank
8.125% Subordinated Notes, 6/15/02........................ 2,000,000 1,995,000 2,131,780
NCNB Corporation
9.375% Subordinated Notes, 9/15/09........................ 1,000,000 1,103,520 1,175,210
New England Telephone & Telegraph
9.00% Debentures, 8/1/31.................................. 1,000,000 1,007,300 1,145,350
New Zealand (Government of)
8.75% Yankee Bond, 12/15/06............................... 1,000,000 1,087,590 1,174,250
Niagara Mohawk Power Corporation
9.25% First Mortgage Bonds, 10/1/01....................... 1,000,000 1,006,980 1,093,360
Noranda Inc.
8.00% Yankee Bond, 6/1/03................................. 1,500,000 1,500,000 1,578,825
Nynex Corporation
9.55% Debenture, 5/1/10................................... 1,819,766 2,189,288 2,102,412
Occidental Petroleum Corporation
11.75% Senior Debentures, 3/15/11......................... 1,700,000 1,755,250 1,837,360
</TABLE>
The accompanying notes are an integral part of the financial statements.
10 Lincoln National Income Fund, Inc.
<PAGE>
Statement of Net Assets
continued (Unaudited)
<TABLE>
<CAPTION>
Par Market or
Public Debt Securities (cont'd.) Amount Cost Fair Value
---------- ---------- ----------
<S> <C> <C> <C>
Olympic Financial Ltd.
13.00% Senior Note, 5/1/00............................. $ 250,000 $ 253,437 $ 256,250
Oryx Energy Company
10.00% Debenture, 4/1/01............................... 1,000,000 1,036,380 1,087,950
Owens Illinois Inc.
9.75% Senior Subordinated Note, 8/15/04................ 250,000 243,750 256,250
PacifiCorp
8.29% Secured Medium-Term Notes, Series C, 12/30/11.... 1,000,000 1,000,000 1,083,900
Peco Energy Company
7.125% 1st Refunding Mortgage Bond, 9/1/02............. 1,500,000 1,500,375 1,508,610
Pennzoil Company
10.125% Debenture, 11/15/09............................ 1,000,000 1,134,440 1,264,320
Playtex Family Products Corporation
9.00% Senior Subordinated Notes, 12/15/03.............. 250,000 225,625 234,687
Province de Quebec
11.00% Yankee Bond, 6/15/15............................ 1,000,000 1,072,720 1,182,590
The Prudential Home Mortgage Securities Company Inc.
6.70% Mortgage Pass-Through Certificates Series 1992-39
Class A-5, 12/25/07.................................... 1,000,000 965,469 984,060
RJR Nabisco Inc.
9.25% Debenture, 8/15/13............................... 2,000,000 1,830,060 2,070,420
Resolution Trust Corporation
8.80% Mortgage Pass-Through Certificates,
Series 1992-C1, Class-A1, 8/25/23...................... 566,163 564,580 574,656
Riverwood International Corporation
10.375% Senior Subordinated Note, 6/30/04.............. 250,000 247,500 273,750
Safeway Inc.
9.875% Senior Subordinated Debentures, 3/15/07......... 250,000 274,375 280,000
Salomon Inc.
5.26% Step-up Medium Term Note, 2/10/99................ 1,079,000 985,872 1,071,188
Scotsman Group
9.50% Senior Secured Note, 12/15/00.................... 250,000 232,812 241,250
Sears Roebuck &Co.
10.00% Medium Term Note, 2/3/12........................ 1,000,000 1,156,840 1,232,710
9.05% Medium Term Note, 2/6/12......................... 1,000,000 1,059,380 1,144,580
Sequa Corporation
8.75% Senior Notes, 12/15/01........................... 250,000 250,937 235,000
Showboat Inc.
9.25% First Mortgage Bonds, 5/1/08..................... 250,000 212,500 228,750
Sweetheart Cup Company Inc.
9.625% Senior Note, 9/1/00............................. 250,000 241,563 247,500
Tele-Communications Inc.
9.25% Debenture, 1/15/23............................... 2,000,000 1,993,580 2,050,980
Tenneco Inc.
10.00% Notes, 8/01/98.................................. 1,000,000 1,136,560 1,096,760
Texas Instruments Inc.
8.75% Note, 4/1/07..................................... 1,000,000 1,067,180 1,140,850
Texas Utilities Electric Company
7.375% First Mortgage and Collateral Trust Bonds,
8/1/01................................................. 1,000,000 999,375 1,027,670
Time Warner Inc.
9.125% Debentures, 1/15/13............................. 1,500,000 1,592,520 1,569,105
Travelers Group, Inc.
8.625% Notes, 2/1/07................................... 1,500,000 1,582,140 1,668,240
</TABLE>
The accompanying notes are an integral part of the financial statements.
1995 Semi-Annual Report 11
<PAGE>
Statement of Net Assets
continued (Unaudited)
<TABLE>
<CAPTION>
Par Market or
Public Debt Securities (cont'd.) Amount Cost Fair Value
------------ ------------ ------------
<S> <C> <C> <C>
Turner Broadcasting Inc.
7.40% Senior Notes, 2/1/04............................. $ 250,000 $ 249,612 $ 232,813
UNC Incorporated
9.125% Senior Notes, 7/15/03........................... 250,000 250,000 235,000
Union Oil Company of California
9.75% Guaranteed Note, 12/1/00......................... 1,000,000 1,119,400 1,137,830
Uniroyal Chemical Co Inc.
9.00% Senior Note, 9/1/00.............................. 250,000 236,875 245,625
United Airlines Inc.
8.70% Pass-Through Trust, Series 92-A1, 10/7/08........ 990,494 986,839 1,018,723
9.35% Pass-Through Certificates, Series 1992-A, 4/7/16. 1,500,000 1,516,845 1,551,450
11.21% Debenture, 5/1/14............................... 1,000,000 1,094,670 1,215,460
The Van Kampen Merritt Companies Inc.
9.75% Senior Secured Notes, 2/15/03.................... 250,000 260,000 250,625
Virginia Electric and Power Company
9.35% Medium-Term Notes Series A, 6/22/98.............. 1,000,000 991,640 1,076,930
------------ ------------
Total Public Debt Securities..... 108,983,510 113,221,827
Direct Placement Securities (12.8%) Date of Initial
Notes A & B Acquisition
---------------
DEBT
Anglo Irish Bank Corporation PLC
9.10% Note Series A, 9/30/06............... 09/30/94 1,000,000 1,000,000 1,062,364
Champion Healthcare Corporation
11.00% Subordinated Note, 12/31/03......... 04/17/95 500,000 490,453 490,453
Coca-Cola Femsa SA DE
9.40% Convertible Senior Note, 8/15/04..... 08/05/94 1,000,000 1,000,000 963,368
Concordia Maritime
9.29% First Preferred Ship Mortgage Note,
6/30/99.................................... 04/15/94 1,000,000 1,000,000 1,029,375
Del Monte Corporation
18.00% Senior Secured Note, 12/1/01........ 06/21/95 500,000 500,000 500,000
Desert Eagle Distributing of El Paso Inc.
13.00% Senior Subordinated Note, 11/1/99... 05/07/92 1,750,000 1,529,500 1,750,000
Dow Chemical Company
17.25% Certificate of Interest, 1/2/03..... 03/25/92 1,952,470 1,952,470 2,723,696
Huron Tech Corp.
14.00% Subordinated Note, 5/15/05.......... 02/20/95 550,000 421,667 421,667
Louis Dreyfus Corporation
8.43% Senior Note, 7/15/01................. 07/20/94 1,000,000 1,000,000 1,050,884
Penn Fuel Gas Inc.
7.51% Note, 4/15/14........................ 05/25/94 1,000,000 1,000,000 1,018,655
Refco Group Ltd.
8.21% Senior Note, 5/16/02................. 05/08/95 1,000,000 1,000,000 1,034,160
Steel Dynamics Inc.
11.00% Senior Subordinated Promissory Note,
9/30/02.................................... 12/23/94 1,000,000 882,751 877,540
Steel Technologies, Inc.
8.52% Senior Note, 3/1/05.................. 02/06/95 500,000 500,000 535,161
The Money Store Inc.
9.00% Senior Note, 3/31/02................. 02/22/95 1,000,000 1,000,000 1,064,536
United States Playing Card Company
12.00% Subordinated Note, 11/18/04......... 11/18/94 500,000 470,000 470,048
West Fraser Mills Ltd.
8.44% Guaranteed Senior Notes, 6/30/04..... 04/15/94 1,000,000 1,000,000 1,066,652
----------- -----------
Total Direct Placement Debt.... 14,746,841 16,058,559
</TABLE>
The accompanying notes are an integral part of the financial statements.
12 Lincoln National Income Fund, Inc.
<PAGE>
Statement of Net Assets
continued (Unaudited)
Direct Placement Securities cont'd.
<TABLE>
<CAPTION>
Number
Date of Initial of Warrants/ Market or
Acquisition Rights/Shares Cost Fair Value
--------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
EQUITIES
Bicycle Holding Inc.
Common Stock*................................................ 11/18/94 8 $ 30,000 $ 29,999
Champion Healthcare Corporation
Stock Warrants
(entitled to purchase 7,500 shares of common
stock for $9.00 per share. Expires 12/31/03)............... 04/17/95 7,500 9,547 9,548
Desert Eagle Distributing of El Paso Inc.*
Equity Appreciation Rights Certificate
(entitled to receive the equivalent of the purchase price
of 88,325 shares of common stock on or after 5/1/97)....... 05/07/92 1 220,500 1,175,179
Huron Tech Corp.
Stock Warrants
(entitled to purchase 59 shares of common
stock for $ .06 per share. Expires 3/31/96)................. 02/20/95 59 128,333 128,319
Steel Dynamics Holdings Inc.*
Stock Warrants
(entitled to purchase 232 shares of Class A Common
Shares for $.01 per share. Expires 12/23/04)............... 12/23/94 1,064 117,249 124,839
------------ ------------
Total Direct Placement Equities....................... 505,629 1,467,884
------------ ------------
Total Direct Placement Securities..................... 15,252,470 17,526,443
Preferred Stocks -- (1.6%)
Loewen Group Inc.
Capital Series A............................................................. 80,000 2,000,000 2,110,000
Common Stocks -- Public Issues (1.0%)
Authorized Distribution Network Inc.*.......................................... 9,816 1,227 153
Century Telephone Enterprises Inc.............................................. 40,268 90,284 1,142,608
ITI Technologies*.............................................................. 14,000 81,667 266,000
------------ ------------
Total Common Stocks................................... 173,178 1,408,761
------------ ------------
Total Investments (98.3%)............................. 126,409,158 134,267,031
============
Excess of Other Assets over Liabilities (1.7%)--Note D
Cash........................................................................... 41,514
Other.......................................................................... 2,310,582
------------
Total Excess of Other Assets over Liabilities......... 2,352,096
------------
Net Assets (100%)--Note E $136,619,127
============
Net asset value per share of common stock outstanding ($136,619,127 less
Variable Term Preferred stock at liquidation value of $40,000,000 divided by
6,832,195 shares of common stock outstanding)--Note G.......................... $14.14
======
</TABLE>
* Non-Income producing.
The accompanying notes are an integral part of the financial statements.
1995 Semi-Annual Report 13
<PAGE>
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
1995 1994 1995 1994
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Investment income:
Income:
Interest.............................................. $2,858,214 $ 2,358,577 $ 5,629,736 $ 4,601,821
Dividends............................................. 50,571 6,021 101,142 12,043
---------- ----------- ----------- -----------
Total Income 2,908,785 2,364,598 5,730,878 4,613,864
Expenses:
Management fees -- Note C............................. 292,946 231,932 568,090 468,767
Stock transfer and dividend disbursing fees........... 4,855 18,213 11,857 25,984
Variable Term Preferred stock-auction fees............ 23,328 23,328 46,656 46,656
Printing, stationery, and supplies.................... 17,665 23,830 18,393 26,258
Director fees......................................... 35,000 21,000 52,500 42,000
Custodian and registrar fees.......................... 4,338 1,805 6,369 3,008
New York Stock Exchange fee........................... 4,535 3,925 7,559 6,542
Postage and mailing fees.............................. 4,898 18,089 11,009 28,684
Accountant fees....................................... 4,025 2,500 25,025 22,500
Other................................................. 13,098 9,705 16,401 11,727
---------- ----------- ----------- -----------
Total Operating Expenses 404,688 354,327 763,859 682,126
---------- ----------- ----------- -----------
Net Investment Income 2,504,097 2,010,271 4,967,019 3,931,738
Net realized and unrealized gain (loss) on investments:
Net realized gain (loss) on investments............... 271,900 (20,467) 448,944 14,233
Increase (decrease) in net unrealized
appreciation of investments.......................... 6,239,071 (3,211,032) 10,608,720 (8,531,018)
---------- ----------- ----------- -----------
Net Realized and Unrealized
Gain (Loss) On Investments 6,510,971 (3,231,499) 11,057,664 (8,516,795)
---------- ----------- ----------- -----------
Net Increase (Decrease) In Net Assets
Resulting From Operations $9,015,068 $(1,221,228) $16,024,683 $(4,585,057)
========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
14 Lincoln National Income Fund, Inc.
<PAGE>
Statements of Changes in Net Assets
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Changes from operations:
Net investment income.......................... $ 2,504,097 $ 2,010,271 $ 4,967,019 $ 3,931,738
Net realized gain (loss) on investments........ 271,900 (20,467) 448,944 14,223
Increase (decrease) in net unrealized
appreciation of investments................... 6,239,071 (3,211,032) 10,608,720 (8,531,018)
------------ ------------ ------------ ------------
Net Increase (Decrease) In Net Assets
Resulting From Operations 9,015,068 (1,221,228) 16,024,683 (4,585,057)
Distributions to shareholders from
net investment income:
Common shareholders............................ (1,913,015) (1,629,970) (1,913,015) (1,629,970)
Preferred shareholders......................... (594,242) (396,699) (1,175,571) (726,642)
------------ ------------ ------------ ------------
Total Distributions To Shareholders
From Net Investment Income (2,507,257) (2,026,669) (3,088,586) (2,356,612)
Changes from capital shares transactions:
Net proceeds from shares issued under
dividend reinvestment program.................. 0 533,260 0 1,895,513
------------ ------------ ------------ ------------
Total Increase (Decrease) In Net Assets 6,507,811 (2,694,637) 12,936,097 (5,046,156)
Net assets at beginning of period............... 130,111,316 110,830,435 123,683,030 113,181,954
------------ ------------ ------------ ------------
+Net Assets At End Of Period $136,619,127 $108,135,798 $136,619,127 $108,135,798
============ ============ ============ ============
</TABLE>
+ Includes undistributed net investment income at June 30: 1995--$1,963,248;
1994--$1,590,372.
The accompanying notes are an integral part of the financial statements.
1995 Semi-Annual Report 15
<PAGE>
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
1995 1994 1995 1994
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Operating Activities:
Interest received.............................................. $2,955,270 $ 2,306,842 $ 5,581,492 $ 4,537,173
Dividends received............................................. 50,571 6,021 101,142 12,043
Operating expenses paid........................................ (387,141) (353,327) (745,952) (709,416)
---------- ----------- ------------ ------------
Net Cash Provided by Operating Activities.. 2,618,700 1,959,536 4,936,682 3,839,800
Investing Activities:
Purchase of investment securities.............................. (8,909,798) (8,432,120) (20,785,441) (20,380,648)
Proceeds from sale of investment securities.................... 7,766,981 7,216,693 17,622,272 19,905,316
Net proceeds (purchase) of short-term investments.............. 1,025,713 664,238 287,620 946,436
---------- ----------- ------------ ------------
Net Cash Provided by (Used In) Investing Activities.. (117,104) (551,189) (2,875,549) 471,124
Financing Activities:
Deferred organization costs - Note H........................... 0 (16,643) 0 (16,643)
Distributions paid to common and preferred shareholders........ (2,460,215) (1,991,170) (3,004,215) (6,349,023)
Issuance of common shares from dividend reinvestment program... 0 553,260 0 1,895,513
---------- ----------- ------------ ------------
Net Cash Provided by (Used In)
Financing Activities.......... (2,460,215) (1,454,553) (3,004,215) (4,470,153)
Increase (Decrease) In Cash... 41,381 (46,206) (943,082) (159,229)
Cash At Beginning Of Period..................................... 133 38,381 984,596 151,404
---------- ----------- ------------ ------------
Cash At End Of Period......... $ 41,514 $ (7,825) $ 41,514 $ (7,825)
========== =========== ============ ============
Reconciliation of Increase (Decrease) in Net Assets Resulting
from Operations to Net Cash Provided by Operating Activities
Net increase (decrease) in net assets resulting from operations. $ 9,015,068 $(1,221,228) $16,024,683 $ (4,585,057)
Reconciling Adjustments:
Net realized and unrealized (gain) loss on investments......... (6,510,971) 3,231,499 (11,057,664) 8,516,795
Discount accretion on investment securities.................... (1,582) 0 (3,134) 0
(Increase) decrease in accrued investment income receivable.... 98,638 (51,735) (45,110) (64,647)
Increase (decrease) in accrued expenses........................ 17,547 1,000 17,907 (27,291)
----------- ----------- ------------ ------------
Net Cash Provided by Operating Activities.. $ 2,618,700 $ 1,959,536 $ 4,936,682 $ 3,839,800
=========== =========== ============ ============
The accompanying notes are an integral part of the financial statements.
Lincoln National Income Fund, Inc.
</TABLE>
16
<PAGE>
Portfolio of Investments by Industry Classification +
As of June 30, 1995
<TABLE>
<CAPTION>
Market Percent
or Fair of Net
Value Assets
---------- -------
<S> <C> <C>
Aerospace
McDonnell Douglas Corporation....................... $1,125,810
Sequa Corporation................................... 235,000
UNC Inc............................................. 235,000
----------
1,595,810 1.17%
Airline
AMR Corporation..................................... 2,566,325
Delta Air Lines Inc................................. 1,651,395
United Airlines Inc................................. 2,766,910
----------
6,984,630 5.11%
Aluminum
Alcan Aluminum LTD.................................. 1,043,180 0.76%
Bank
Anglo Irish Bank Corporation........................ 1,062,364
Banc One Corporation................................ 1,230,820
Bank America Corporation............................ 1,547,865
First Interstate Bancorp............................ 1,036,470
First USA Bank...................................... 996,950
Fleet/Norstar Group................................. 1,104,330
Nationsbank Corporation............................. 2,131,780
NCNB Corporation.................................... 1,175,210
Olympic Financial LTD............................... 256,250
----------
10,542,039 7.72%
Beverages
Coca-Cola Enterprises Inc........................... 1,104,290
Coca-Cola Femsa SA DE............................... 963,368
Riverwood International Corporation................. 273,750
----------
2,341,408 1.71%
Broadcasting
Capital Cities/ABC Inc.............................. 1,114,360
Turner Broadcasting Inc............................. 232,813
----------
1,347,173 0.99%
Brokerage Services
Refco Group, LTD.................................... 1,034,160 0.76%
Building Materials
Georgia Pacific Corporation......................... 1,670,190 1.22%
Chemicals
Dow Chemical Co..................................... 2,723,696
EI Dupont Nemour.................................... 1,060,530
Huntsman Corporation................................ 265,000
Uniroyal Chemical Co. Inc........................... 245,625
----------
4,294,851 3.14%
Child Care
Kinder Care Learning Centers........................ 260,000 0.19%
Consumer Products
Playtex Family Products Corporation................. 234,687
Scotsman Group...................................... 241,250
----------
475,937 0.35%
Department Stores
Federated Department Stores......................... 268,437
Sears Roebuck & Company............................. 2,377,290
----------
2,645,727 1.94%
Electricity
Cleveland Electric Illuminating Company............. 961,450
Commonwealth Edison Inc............................. 1,049,370
Houston Lighting & Power Company.................... 1,655,640
Long Island Lighting Company........................ 1,930,210
Louisiana Power & Light Company..................... 1,055,660
Niagara Mohawk Power Corporation.................... 1,093,360
PacifiCorp.......................................... 1,083,900
Texas Utilities Electric Company.................... 1,027,670
Virginia Electric & Power Company................... 1,076,930
----------
10,934,190 8.00%
Electronics
ADT Operations Inc.................................. 253,750
ITI Technologies, Inc............................... 266,000
Litton Industries Inc............................... 1,562,985
MARK IV Industries Inc.............................. 255,000
Texas Instruments Inc............................... 1,140,850
----------
3,478,585 2.55%
Energy
Enron Corporation................................... 1,134,410
Peco Energy Company................................. 1,508,610
Tenneco Inc......................................... 1,096,760
----------
3,739,780 2.74%
Entertainment
Bicycle Holding Inc................................. 29,998
Showboat Inc........................................ 228,750
Time Warner Inc..................................... 1,569,105
United States Playing Card Company.................. 470,048
----------
2,297,901 1.68%
Finance
Bally Park Place Funding............................ 236,250
BVPS II Funding Corporation......................... 1,414,050
Chrysler Financial Corporation...................... 1,107,260
Discover Credit Corporation......................... 1,028,490
Dow Capital......................................... 1,174,570
Duquesne II Funding Corporation..................... 1,042,572
Ford Holdings Inc................................... 1,053,180
General Electric Capital Corporation................ 1,162,350
General Motors Acceptance Corporation............... 1,760,565
Greentree Financial Corporation..................... 1,040,000
Merrill Lynch Mortgage Investors Inc................ 1,013,959
Mid-State Homes IV Series I Class A................. 1,044,174
National Rural Utilities Cooperative
Finance Corporation............................... 1,027,810
Prudential Home Mortgage Securities
Company Inc....................................... 984,060
Resolution Trust Corporation........................ 574,656
Salomon Inc......................................... 1,071,188
The Money Store..................................... 1,064,536
United Airlines Inc................................. 1,018,723
Van Kampen Merritt Companies, Inc................... 250,625
----------
19,069,018 13.96%
</TABLE>
+ Unaudited
1995 Semi-Annual Report 17
<PAGE>
Portfolio of Investments by Industry Classification +
Continued
<TABLE>
<CAPTION>
Market Percent
or Fair of Net
Value Assets
---------- -------
<S> <C> <C>
Food
Del Monte Corporation............................... $ 500,000
Nabisco Inc......................................... 1,018,530
-----------
1,518,530 1.11%
Food Processing
Conagra Inc......................................... 1,551,000 1.14%
Foreign and Foreign Government
Bell Telephone Co. of Canada........................ 1,608,000
Amoco Canada Company................................ 1,022,360
Cemex SA de CV...................................... 215,625
New Zealand (Government of)......................... 1,174,250
Noranda Inc......................................... 1,578,825
Province de Quebec.................................. 1,182,590
-----------
6,781,650 4.96%
Funeral Homes
Loewen Group Inc.................................... 2,110,000 1.54%
Government/Government Agency
Federal Home Loan Mortgage Corporation.............. 1,433,428
Federal National Mortgage Association............... 1,614,538
Government National Mortgage Association............ 4,905,404
-----------
7,953,370 5.82%
Hospital Management
Champion Healthcare Corporation..................... 500,000 0.37%
Hotels
Hilton Hotel Corporation............................ 524,085 0.38%
Industrial
Essex Group Inc..................................... 243,125
Owens Illinois Inc.................................. 256,250
-----------
499,375 0.37%
Insurance
AllState Corporation................................ 992,820
CNA Financial Corporation........................... 925,870
Travelers Inc....................................... 1,668,240
-----------
3,586,930 2.63%
Lumber Products
West Fraser Mills LTD............................... 1,066,652 0.78%
Machinery
Baroid Corporation.................................. 270,048
Caterpillar Inc..................................... 915,220
-----------
1,185,268 0.87%
Manufacturing
Huron Technologies Inc.............................. 549,985 0.40%
Miscellaneous
Authorized Distribution Network Inc................. 153
Keystone Group...................................... 202,000
Louis Dreyfus Corporation........................... 1,050,885
-----------
1,253,038 0.92%
Natural Gas
Arkla Inc........................................... 1,051,210
Coastal Corporation................................. 1,147,270
Penn Fuel Gas Inc................................... 1,018,655
-----------
3,217,135 2.35%
Oil
Atlantic Richfield Company.......................... 1,170,680
Occidental Petroleum Corporation.................... 1,837,360
Oryx Energy Company................................. 1,087,950
Pennzoil Company.................................... 1,264,320
Union Oil Company of California..................... 1,137,830
-----------
6,498,140 4.76%
Paper
Container Corporation of America.................... 262,188
Domtar Inc.......................................... 266,250
Gaylord Container Inc............................... 264,062
Sweetheart Cup Company.............................. 247,500
-----------
1,040,000 0.76%
Retail/Wholesale Food Stores
Desert Eagle Distributing of
El Paso Inc....................................... 2,925,179
Fleming Companies................................... 1,018,750
Safeway Inc......................................... 280,000
-----------
4,223,929 3.09%
Steel
AK Steel Corporation................................ 261,875
Steel Dynamics Holdings Inc......................... 124,839
Steel Dynamics Inc.................................. 877,540
Steel Technologies.................................. 535,161
-----------
1,799,415 1.32%
Telephone
Century Telephone Enterprise Inc.................... 1,142,608
GTE South Corporation............................... 2,125,100
MCI Communications Corporation...................... 1,046,280
New England Telephone & Telegraph................... 1,145,350
Nynex Corporation................................... 2,102,412
Tele-Communications Inc............................. 2,050,980
-----------
9,612,730 7.04%
Tobacco
RJR Nabisco Inc..................................... 2,070,420 1.52%
Transporation
Concordia Maritime.................................. 1,029,375
Federal Express Corporation......................... 1,443,925
-----------
2,473,300 1.81%
Waste Management
Browning-Ferris Industries Inc...................... 497,500 0.36%
Total Investments.....................................$134,267,031 98.29%
============
</TABLE>
+ Unaudited
18 Lincoln National Income Fund, Inc.
<PAGE>
Notes to Financial Statements
Note A -- Summary of Accounting Policies
Lincoln National Income Fund, Inc. (the Fund), is registered under the
Investment Company Act of 1940, as amended, as a closed-end, diversified
management investment company, incorporated under the laws of Maryland. The
following is a summary of significant accounting policies followed by the Fund
in the preparation of its financial statements.
Investments
Cost represents original cost except in those cases where there is "original-
issue discount" as defined by the Internal Revenue Service, and in those cases
the cost figure shown is amortized cost. "Original-issue discount" is being
amortized over the period to the next expected call date.
Investments in equity securities traded on a national exchange are valued at
their last reported sale price on the date of valuation; equity securities
traded in the over-the-counter market and listed securities for which no sale
was reported on that date are valued at the last reported bid price. Public debt
securities and certain direct placement securities, which are traded in a
secondary market system for trading restricted securities in reliance upon
S.E.C. Rule 144A, are valued at the composite price as determined by a pricing
service which uses market transactions as inputs. Short-term investments are
stated at cost which approximates market.
Direct placement securities are restricted as to resale. Except for certain
direct placement securities traded in a secondary market system for trading
restricted securities, direct placement securities have no quoted market values.
The amounts shown as fair values for direct placement securities with no
available quoted market values represent values approved by the Board of
Directors. Many factors are considered in arriving at fair value, including,
where applicable, yields available on comparable securities of other issuers;
changes in financial condition of the issuer; price at which the security was
initially acquired; extent of a private market for the security; period of time
before the security becomes freely marketable or becomes convertible;
anticipated expense to the Fund of registration or otherwise qualifying the
security for public sale; potential underwriting commissions if an underwriting
would be required for sale; size of the issue and the proportion held by the
Fund; if a convertible security, whether or not it would trade on the basis of
its stock equivalent; and existence of merger proposals or tender offers
involving the issuer.
The Board of Directors of the Fund is composed, in part, of individuals who are
interested persons (as defined in the Investment Company Act of 1940) of the
Advisor or affiliated companies. Since the fee paid to the Advisor is affected
by the valuation placed on securities held in the Fund's portfolio, valuations
are approved by a majority of the Directors who are not interested persons.
Income taxes
It is the intention of the Fund to distribute substantially all net investment
income and net realized gains. The Fund therefore qualifies for tax treatment
accorded to "regulated investment companies" as defined by the applicable
provisions of the Internal Revenue Code. On such basis, under present law, the
Fund will not incur any liability for income taxes on the portion of its net
investment income and net realized gains distributed to shareholders.
Other
Security transactions are accounted for on the day after the trade date for
equity securities and debt securities. Cost of securities sold is determined on
a specific identification method. Dividend income is recorded on the ex-dividend
date. Interest income is recorded on the accrual basis except for interest in
default, or interest deferred by a change in the terms of the loan agreement,
which is recorded when received. Distributions to common shareholders are
recorded on the ex-dividend date and distributions to preferred shareholders are
recorded daily.
Note B -- Investments
Direct placement securities are restricted as to resale because these securities
have not been registered with the Securities and Exchange Commission. The terms
under which direct placement securities are acquired, however, sometimes provide
for limited registration rights if requested by the security owner. These
registration rights usually relate to common stock issued or issuable upon
conversion of convertible securities or the exercise of warrants.
1995 Semi-Annual Report 19
<PAGE>
Notes to Financial Statements
continued
The following is a summary of registration rights pertaining to direct placement
securities held by the Fund:
. Common shares issuable upon conversion of convertible securities or exercise
of warrants are entitled to at least one free registration and also to certain
free "piggyback" registration rights.
. Warrants owned by the Fund do not carry registration rights.
. All debt and preferred securities have no registration rights, but can be sold
to other institutional investors after a minimum holding period, subject to
certain requirements.
The Securities and Exchange Commission requires that, as of the date a direct
placement security is acquired, the market value of an equivalent unrestricted
security of the same company be provided. Since there are no comparable publicly
traded securities of any of these companies outstanding, no such comparative
values have been provided.
The aggregate cost of investments purchased and the aggregate proceeds from
investments sold (exclusive of short-term investments) amounted to $20,558,774
and $16,086,626, respectively, as of June 30, 1995; and $18,275,544 and
$19,953,639, respectively as of June 30, 1994.
Note C -- Management Fees and other Transactions with Affiliates
Under an agreement between the Fund and Lincoln Investment Management Inc. (the
Advisor), the Advisor manages the Fund's investment portfolio, maintains its
accounts and records, and furnishes the services of individuals to perform
executive and administrative functions of the Fund. In return for these
services, the Advisor receives a management fee of .1875% of net assets of the
Fund as of the close of business on the last business day of the quarter (.75%
on an annual basis) and 1.5% of the net cash dividends and interest earned and
actually received in cash less interest on borrowed funds and dividends paid on
the Variable Term Preferred stock. Prior to May 21, 1993 the Fund paid a
Management fee of .125% (.5% on an annual basis) of net asset value of the Fund
as of the close of business on the last business day of the quarter. Securities
regulations of various states in which the Fund has shareholders provide that,
if expenses borne by the Fund in any year (including the advisory fee but
excluding interest, taxes, brokerage fees and where permitted, extraordinary
expenses) exceed certain limitations, the Advisor must reimburse the Fund for
any such excess at least annually and prior to the publication of the Fund's
annual report. These expense limitations may be raised or lowered from time to
time. The Fund believes the most restrictive expense limitation of state
securities commissioners is 2.5% of the Fund's average daily net assets up to
$30,000,000; 2% of the next $70,000,000 and 1.5% of average daily net assets in
excess of $100,000,000 during the applicable year. During any year, the Advisor
will be bound by the most stringent applicable requirements of any state in
which the Fund has shareholders. No reimbursement was due as of June 30, 1995.
Certain officers and directors of the Fund are also officers or directors of the
Advisor. The compensation of unaffiliated directors of the Fund is borne by the
Fund.
Note D -- Excess of Other Assets over Liabilities
The net asset caption "excess of other assets over liabilities" consisted of the
following:
<TABLE>
<S> <C>
Receivable for investments
securities sold $ 8,464
Accrued investment
income receivable 2,757,469
Management fees payable (292,946)
Accrued VTP dividends payable (104,000)
Other-net (58,405)
Cash 41,514
----------
$2,352,096
==========
</TABLE>
20 Lincoln National Income Fund, Inc.
<PAGE>
Notes to Financial Statements
CONTINUED
Note E -- Net Assets
Net assets at June 30, 1995, consisted of the following:
Preferred stock,
par value $1.00 per share
(authorized-1,000,000 shares):
Variable Term Preferred stock:
Issued and outstanding-
40,000 shares
Liquidation preference-
$1,000 per share $ 40,000,000
Common stock,
par value $1.00 per share:
Authorized-10,000,000 shares
Issued and outstanding-
6,832,195 shares 6,832,195
Proceeds in excess of par value
of shares issued 73,026,179
Undistributed net investment
income 1,963,248
Undistributed realized gain
on investments, net of taxes paid 6,939,632
Net unrealized appreciation
of investments 7,857,873
------------
Total $136,619,127
============
Note F -- Income Taxes
The cost of investments for federal income tax purposes is the same as for book
purposes. At June 30, 1995, the aggregate gross unrealized appreciation on
investments was $8,736,392 and the aggregate gross unrealized depreciation was
$878,519.
Note G -- Variable Term Preferred Stock
During August 1992, the Fund issued 40,000 shares of Variable Term Preferred
stock (VTP) at an offering price of $1,000 per share. During 1992 the
underwriting discount and other expenses incurred in the issuance of the
preferred stock aggregated $1,120,016 and were recorded as a reduction of net
assets applicable to common shares. Dividends are cumulative from the date of
the original issue and reset every 28 days through an auction process.
The Articles Supplementary, which establish and fix the rights and preferences
of the VTP, places restrictions on the payments of dividends on the Fund's
common stock upon noncompliance with certain provisions of the Articles
Supplementary, purchase of futures or options, issuance of debt, short sale of
securities, mergers, changing the Fund's pricing service, and investing in
reverse repurchase agreements, and requires the Fund to meet certain asset
maintenance tests. The shares of the VTP may be redeemed at the option of the
Fund in accordance with the terms of the Articles Supplementary. The mandatory
redemption provisions of the Articles Supplementary require the Fund under
certain conditions to redeem shares of the VTP if certain asset maintenance
tests are not maintained or if credit rating provisions are not met.
During the six months ending June 30, 1995, dividend rates have ranged from
5.70% to 5.95% and the average dividend rate was 5.84%.
Note H -- Rights Offering
On July 28, 1994 the Fund received proceeds from a three-for-one rights
offering. The offering was fully subscribed and an additional 1,697,886 common
shares were issued on July 28, 1994. The proceeds of $21,410,343 were reduced by
approximately $160,000 of expenses associated with the rights offering. The
shares were issued at a price of $12.61 per common share which represented 95%
of the June 30, 1994 net asset value.
Note 1 -- Subsequent Event
On July 21, 1995, The Board of Directors declared a $.28 per share distribution.
The dividend is payable September 7, 1995 to shareholders of record as of
August 22, 1995.
1995 Semi-Annual Report 21
<PAGE>
Common Stock Market Prices &
Net Asset Value History+
1995
<TABLE>
<CAPTION>
Market Prices & Volumes Net Asset Values
High Low Close Volumes High Low Close
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1st Quarter $12.25 $10.63 $12.00 229,000 $13.25 $12.25 $13.19
2nd Quarter 13.00 11.75 12.88 328,000 14.25 13.19 14.14
1994
Market Prices & Volumes Net Asset Values
High Low Close Volumes High Low Close
-----------------------------------------------------------------------------------------------------
1st Quarter $16.25 $14.75 $15.50 141,500 $14.90 $13.91 $13.91
2nd Quarter 16.00 13.25 13.37 328,900 13.80 13.27 13.27
3rd Quarter 13.38 11.38 12.25 323,400 13.35 12.75 12.75
4th Quarter 12.25 10.75 10.75 214,600 12.76 12.25 12.25
1993
Market Prices & Volumes Net Asset Values
High Low Close Volumes High Low Close
-----------------------------------------------------------------------------------------------------
1st Quarter $15.13 $13.44 $14.81 188,200 $15.27 $14.24 $15.26
2nd Quarter 15.44 14.38 15.38 145,800 15.46 15.04 15.44
3rd Quarter 16.81 14.94 16.31 217,800 15.73 15.46 15.68
4th Quarter 17.38 15.00 15.00 164,900 15.92 14.63 14.63
1992
Market Prices & Volumes Net Asset Values
High Low Close Volumes High Low Close
-----------------------------------------------------------------------------------------------------
1st Quarter $14.63 $13.81 $14.00 143,400 $14.93 $14.80 $14.92
2nd Quarter 14.56 14.13 14.44 138,400 15.18 14.91 15.06
3rd Quarter 15.13 14.38 14.50 160,400 15.39 14.98 15.36
4th Quarter 15.00 14.13 14.31 145,200 15.46 14.18 14.18
</TABLE>
Market prices, volumes and net asset values have been restated to reflect a two-
for-one stock split effective October 15, 1993. Shares are listed on the New
York Stock Exchange under the trading symbol LND.
+Unaudited
22 Lincoln National Income Fund, Inc.
<PAGE>
Directors & Officers of the Fund
Directors Descriptions of Occupations and Responsibilities
--------------------------------------------------------------------------------
Richard M. Burridge President, The Burridge Group, Inc.; Director, Cincinnati
Financial Corporation, Computer Access International,
Lincoln National Convertible Securities Fund, Inc.,
Lincoln Advisor Funds, Inc. and St. Joseph Light and Power
Company; Chairman of the Board, Fort Dearborn Income
Securities, Inc.
Adela Cepeda Managing Director, Abacus Financial Group, Inc.; Vice
President of Smith Barney and Harris Upham & Co.;
Commissioner, Chicago Public Building Commission;
Director, National Association of Securities
Professionals, Lincoln National Convertible Securities
Fund, Inc., National Society of Hispanic MBAs, Chicago
Chapter and Lincoln Advisor Funds, Inc.; Trustee and
Treasurer, The Latino Institute; Director and Vice
President, Harvard Club of Chicago.
Roger J. Deshaies Senior Vice President, Finance, Parkview Memorial
Hospital; Director, Lincoln National Convertible
Securities Fund, Inc., Lincoln Advisor Funds, Inc. and
Signature Care, Inc.; President and Chairman, Hospital
Laundry Services, Inc.; Director and Treasurer, Pine
Valley Country Club.
Charles G. Freund Chairman Emeritus of the Board of Directors, Success
National Bank at Lincolnshire; Director, Mathers Fund,
Inc., Lincoln National Convertible Securities Fund, Inc.
and Lincoln Advisor Funds, Inc.; Chairman of the Board,
First National Bank of Lincolnshire.
Thomas N. Mathers Director, Lincoln National Convertible Securities Fund,
Inc.; Vice President and Director, OFC Meadowood
Retirement Community.
H. Thomas McMeekin Executive Vice President, Lincoln National Corporation;
President, Lincoln National Investment Companies, Inc.;
President and Director, Lincoln Investment Management Inc.
and Lincoln National Convertible Securities Fund, Inc.;
Director, EMPHESYS Financial Group, Inc., Frontenac
Capital Corporation, Lincoln Advisor Funds, Inc., The
Lincoln National Life Insurance Company, Lynch & Mayer and
Vantage Global Advisors, Inc.; President, Chief Executive
Officer and Director, Lincoln National Mezzanine Finance
Corporation.
Daniel R. Toll Director, Brown Group, Inc., A. P. Green Industries, Inc.,
Kemper Corporation, Kemper National Insurance Company,
Lincoln National Convertible Securities Fund, Inc., NICOR,
Inc. and Mallinckrodt Group, Inc.
Ann L. Warner Senior Vice President, Director Portfolio Management,
Lincoln Investment Management, Inc.; and Director, Lincoln
National Convertible Securities Fund, Inc.
Fred J. Young President, United Wealth Watchers of America; former trust
investment officer, Harris Trust and Savings Bank;
Director, Lincoln National Convertible Securities Fund,
Inc.
--------------------------------------------------------------------------------
Officers
H. Thomas McMeekin President
David A. Berry Vice President
David C. Fischer Vice President
David G. Humes Vice President, Controller
C. Suzanne Womack Secretary
1995 Semi-Annual Report 23
<PAGE>
Corporate Information
Dividend Disbursing Agent, Transfer Agent and Registrar
The First National Bank of Boston
Investor Relations
Mail Stop 45-02-09
P.O. Box 644
Boston, MA 02102-0644
(800) 730-6001
Investment Advisor
Lincoln Investment Management, Inc.
200 E. Berry Street
Fort Wayne, IN 46802
(219) 455-2210
Independent Accountants
Coopers & Lybrand L.L.P.
490 Lincoln Tower
Fort Wayne, IN 46802
Dividend Reinvestment Program
Lincoln National Income Fund's dividend reinvestment plan provides shareholders
a convenient and economical method for investing in our Fund. Holders of common
stock may participate and invest quarterly cash dividends. Shareholders may also
send cash (with certain limitations) to purchase common stock. For further
information, write The First National Bank of Boston, P.O. Box 1865, Boston, MA
02105.
Stock Exchange
This stock is traded on the New York Stock Exchange and the trading symbol is
LND.
Special Notice
On June 1, 1995 the fund's investment advisor, Lincoln National Investment
Management Company, legally changed its name to Lincoln Investment Management,
Inc.
24 Lincoln National Income Fund, Inc.
<PAGE>
[LOGO OF LINCOLN NATIONAL INVESTMENT MANAGEMENT CO.]
Lincoln National Investment Management Co. is the investment
manager for the Lincoln National Income Fund, Inc.
Form 12728SA 8/95
