<PAGE>
Manager Profile
Throughout its history, your Fund has been managed by investment affiliates of
Lincoln National Corporation. Today, Lincoln Investment Management Inc. (LIM)
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.
LIM invests in nearly all domestic capital markets and has developed an
increasing international investment presence. LIM currently has over $35
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 allows LIM to deliver substantial value to the investment
process.
LIM 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 had been the Fund's portfolio manager since 1992, was
promoted to oversee several areas within the investment management company. In
February of 1995, David C. Fischer assumed the portfolio management role for the
Lincoln National Income Fund, Inc. Mr. Fischer, who joined LIM in 1988, has
extensive experience in the investment industry and has worked closely with Mr.
Berry to continue the investment strategies the Fund already had 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 rights either through warrants or convertible features. The Fund
also will invest in publicly traded fixed-income securities and high-yield
common stocks.
The Fund may borrow to purchase securities in an amount not exceeding 20 percent
of net assets. The Fund also may invest in non-dollar denominated securities,
however, as of December 31, 1995, has chosen not to do so.
1
<PAGE>
President's Letter
January 26, 1996
Dear Shareholders,
Nineteen ninety-five was a welcome change from the tumultuous financial markets
of 1994. Following one of the worst bear markets for bonds in history, 1995 was
one of the best. Bonds, as measured by the Lehman Corporate Bond Index,
returned 22.3 percent for the year. This compares to the S&P stock index return
of 37.5 percent.
The Lincoln National Income Fund, Inc. (LND) was clearly one of the best
performing bond funds of 1995. The Fund's market return was 39.1 percent and
the net asset value (NAV) return was 27.4 percent. The market return, which
incorporates the narrowing of the Fund's discount to NAV, gave our shareholders
returns better than the equity market. The Fund placed second of 32 in NAV
return for its Morningstar peer group in 1995. The Fund's long-term performance
is also exceptional, meriting an upgrade in our Morningstar rating during the
year from 3-star to 4-star.
A variety of factors helped drive the bull run in the bond and equity markets in
1995. The Federal Reserve Bank tightenings embarked upon in 1994 began to
impact the economy in 1995. The result was slowing growth coupled with benign
inflation. This "soft landing" combined with record corporate profits and
robust merger activity were all fuel for rallying financial markets.
We are pleased about LND's comparatively low discount to NAV of 4.3 percent, as
most other closed-end bond funds have larger discounts. A low discount to NAV
is a statement by the market of its confidence in the Fund going forward. We
appreciate the confidence and will continue to work hard to further reduce the
discount and meet investor expectations in 1996 and beyond.
With interest rates at their current low levels, maintaining the Fund's dividend
will continue to be a challenge. However, we will continue to emphasize
diligent credit selection, call-protection, and the utilization of private
placements in the Fund in an attempt to maintain our attractive dividend.
Net investment income for the Fund totaled $9.95 million in 1995 versus $8.66
million for the prior year. On December 18, 1995, the Board of Directors
declared a dividend of $0.43 per share and a capital gains distribution of $0.05
per share. This brought total 1995 payouts to $1.32 per share a 3.1 percent
increase over 1994. The fourth quarter dividend was payable January 17, 1996 to
shareholders of record as of December 29, 1995.
Economic growth has slowed recently, and we see this slow growth continuing into
1996. However, we do not believe an outright recession will occur in the next
twelve months. We see little in the way of inflationary pressures "in the
pipeline," and anticipate CPI inflation falling into the 2 to 2.5 percent range
in the first half of the year. Thus, we see modestly lower interest rates and
maintain a positive outlook on the bond market for 1996. The bond market should
be less volatile -- perhaps taking a breather from the roller coaster movements
of the last two years.
Sincerely,
H. Thomas McMeekin
President
2
<PAGE>
Portfolio Manager's Commentary
In 1995, ten-year Treasury interest rates declined by 225 basis points, more
than offsetting the significant rise in interest rates and resultant bond market
debacle of 1994. To say that we've had a lot of interest rate volatility in the
last two years is quite an understatement.
As noted in the President's letter, the Fund was an exceptional performer in
1995. All of the financial markets enjoyed a very big up year--both stocks and
bonds. This performance was most directly a result of the Federal Reserve-
engineered economic slowdown, the elusive "soft landing." This time however, it
certainly looks like the Fed has succeeded in pushing a recession off into the
future. Record corporate profits also were a major factor in the performance of
the equity markets and the corporate bond market.
Bonds returns come primarily from taking a combination of interest rate risk and
credit risk. Positioning of the Fund in both these risk categories throughout
the year gave rise to above-market returns. The performance of the Fund can be
attributed to the decline in interest rates and the excellent performance of
corporate bonds relative to Treasury bonds. LND benefited from good
performances in several sectors of the bond market in which the Fund had
significant positions. These sectors were: airlines, media and cable, and high-
yield or "junk" bonds.
The leverage of the Fund via the Variable Term Preferred (VTP) continues to
magnify the net asset value (NAV) change in the Fund due to interest rate
changes. This effect is seen by looking at the NAV performance of the Fund over
the last two years. The leverage benefited the Fund's total return in 1995 by
approximately 500 basis points. To a similar degree, the leverage had negative
effect in 1994. We have been making adjustments in the average maturity of the
portfolio and other changes to reduce the interest sensitivity of the NAV.
Although the VTP does add some risk, this instrument is issued at a cost
competitive with the highest-quality corporate commercial paper, and is a very
cheap cost of funds over time. The VTP auctions in the institutional money
market every 28 days. Borrowing in this manner allows the Fund to take
advantage of the historical steepness in the "yield curve" -meaning that the
Fund will be investing in intermediate securities that on average have better
yields than the VTP's short term interest rate borrowing cost. Our plan is to
continue borrowing for the Fund with the VTP, while taking other steps to reduce
the Fund's NAV sensitivity.
For 1996, we still like the airline industry and maintain a significant exposure
to bonds of the companies in this industry (6.2% of the Fund's assets). High-
yield bonds, defined as those rated below BBB, have been reduced from 21% of
assets to 16% of assets during the year. The reduction in the high yield sector
has been made to position the Fund a little more defensively should a recession
crop up unexpectedly in the next 12-18 months. We are comfortable with our
continued healthy exposure to the bonds of this economically sensitive sector,
as our view is that the Fed has averted a near-term recession with the beginning
of an easing in monetary policy in late 1995.
We are watching the budget showdown in Washington closely. The financial
markets in 1995 built in significant optimism for long-term budget deficit
reduction. If the end result dashes these hopes, the financial markets could be
in for a correction.
The Fund has been emphasizing the acquisition of private placement securities in
an attempt to maintain a high level of income. Private placements during the
year grew from 9% of assets to 16% of assets. We plan to continue to grow
private placements in 1996, especially looking for those that have convertible
or other equity-type features.
3
<PAGE>
Total Fund Investments
At Market or Fair Values as of December 31
<TABLE>
<CAPTION>
@Mini Table@ 1995 YEAR INCOME FUND LEHMAN CORPORATE S&P 500 INDEX
<S> <C> <C> <C> <C><C> <C> <C> <C>
1973 3.20% 2.28% (14.69%) 1985 17.30% 21.30% 31.73%
1974 (12.60%) 0.17% (26.47%) 1986 17.55% 15.62% 18.67%
</TABLE>
4
<PAGE>
<TABLE>
<S> <C> <C> <C> <C><C> <C> <C> <C>
1975 13.03% 12.30% 37.23% 1987 5.04% 2.29% 5.25%
1976 17.24% 15.59% 23.93% 1988 15.35% 7.58% 16.56%
1977 7.82% 2.99% (7.13%) 1989 17.38% 14.23% 31.63%
1978 7.28% 1.18% 6.58% 1990 1.31% 8.28% (3.11%)
1979 12.92% 2.30% 18.60% 1991 21.34% 16.13% 30.40%
1980 15.37% 3.06% 32.46% 1992 6.96% 7.58% 7.61%
1981 4.73% 7.26% (4.92%) 1993 15.89% 11.03% 10.06%
1982 26.24% 31.10% 21.55% 1994 (7.52%) (3.93%) 1.31%
1983 14.67% 7.99% 22.56% 1995 27.35% 22.25% 37.53%
1984 16.88% 15.02% 6.27%
- -----------------------------------------------------------------------------------------------------
</TABLE>
Lincoln National Income Fund, Inc. has provided a superior long-term
performance record. The data in the table above indicates that the fund has
provided a positive total return in 21 of its 23 years of existence.
Dividend History
The Fund in its lifetime has distributed common dividends of $26.08 which
represents 208.6 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. Long-term
capital gains paid in 1995 totaled $0.05 per share on a common stock equivalent
basis. Previous year retention's allowed the Fund to grow its assets by
$6,490,689 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>
YEAR ANNUAL DIVIDEND YEAR ANNUAL DIVIDEND YEAR ANNUAL DIVIDEND
<S> <C> <C> <C> <C> <C>
1973 $0.69 1981 $1 .04 1989 $1.17
1974 0.86 1982 1.12 1990 1.18
1975 0.73 1983 1.14 1991 1.15
1976 0.87 1984 1.20 1992 1.68
1977 0.90 1985 1.27 1993 1.77
1978 0.90 1986 1.17 1994 1.28
1979 0.92 1987 1.52 1995 1.32
1980 0.97 1988 1.23
- ----------------------------------------------------------------------
</TABLE>
5
<PAGE>
Asset Classification
As of December 31, 1995
Note: "Other Assets" includes Short-Term Investments.
Distribution by Quality
As of December 31, 1995
Common Stock Market Prices & Net Asset Value History *
<TABLE>
<CAPTION>
@MINI TABLE@ Market Market PriXXrXXX H EAVY MACHINERY
Price High Price
Close Volume
<S> <C> <C> <C> <C> <C> <C> <C> <C>
G eneral Electric Capital $ 1,214,130 C aterpillar $ 985,760 0.7%
Inc.
GM Acceptance Corp. 1,826,670
G reentree Financial Corp. 1,079,687 H OSPITAL
MANAGEMENT
M errill Lynch Mortgage 940,464 C hampion 500,003 0.4%
Healthcare Co.
Mid-State Homes 1,046,048
N RUC Finance Corporation 1,013,150 H OTELS
P ru-Home Mortgage Sec. 1,011,440 H ilton Hotel 524,670 0.4%
Corporation
Resolution Trust Corp. 538,535
S alomon Inc. 1,080,629 H OUSEHOLD
PRODUCTS
T he Money Store 1,098,043 P laytex 220,000
Family
Products
V an Kampen Merritt Comp. 258,750 S cotsman 250,000
Group
------------- ---------------
18,322,646 13.4% 470,000 0.3%
I NDUSTRIAL
F OOD AND BEVERAGE E ssex Group 245,000 0.2%
Inc.
Coca-Cola Enterprises Inc. 1,139,770
C oca-Cola Femsa SA DE 1,052,951 I NSURANCE
C onAgra Inc. 1,584,045 A llState 1,067,530
Corporation
D el Monte Corporation 550,332 N ationwide 1,168,060
D esert Eagle Distributing 2,832,053 T ravelers 1,767,045
Inc.
---------------
F leming Companies Inc. 843,230 4,002,635 2.9%
Riverwood International 278,125
S afeway Inc. 287,500 M ETALS AND
MINING
-------------
8,568,006 6.2% Cyprus Amax 534,065
Minerals
F OREIGN AND FOREIGN GOV'T I NCO LTD 1,153,700
---------------
C emex SA 237,812 1,687,765 1.2%
Noranda Inc. 1,644,330
P rovince de Quebec 1,204,840 M ISCELLANEOUS
-------------
3,086,982 2.3% Authorized 153
Dist.Network
F OREST PRODUCTS H uron 549,987
Technologies
Inc.
C rown Pacific Limited 1,146,939 K eystone 193,000
Group
M DAS Investors Ltd 50,000 L ouis 1,076,537
Partners Dreyfus
Corporation
W est Fraser Mills LTD 1,103,649 N ebraska 537,041
Book Company
-------------
2,300,588 1.7% Stackpole 499,992
Magnetic Sys.
---------------
F UNERAL HOMES 2,856,710 2.1%
Loewen Group Inc. 1,870,000 1.4%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
Portfolio of Investments
by Industry
Classification
(continued)
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Market or Percent Market or Percent
Fair Value of Net Fair Value of Net
Assets Assets
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GOVERNMENT/GOV'T AGENCY RESTAURANT
F HLMC $ 2,337,225 P lanet $ 750,010 0.5%
Hollywood
Inter'l
FNMA 1,361,355
G NMA 4,789,337 R ETAIL
-----------
8,487,917 6.2% Federated 270,625
Department Stores
K mart Corporation 188,053
N ATURAL GAS M urray's 500,000
Discount Auto
Stores
A rkla Inc. 1,141,890 S ears Roebuck & 2,522,280
Company
-----------
C oastal Corporation 1,193,090 3,480,958 2.5%
Penn Fuel Gas Inc. 1,070,835
-----------
3,405,815 2.5% STEEL
A K Steel 276,875
Corporation
P APER AND PAPER PRODUCTS S teel Dynamics 124,839
Holdings Inc.
C ontainer Corp. of America 255,000 S teel Dynamics 875,237
Inc.
D omtar Inc. 265,000 S teel 551,726
Technologies
-----------
S weetheart Cup Company 252,500 1,828,676 1.3%
-------------
772,500 0.6%
T
ELECOMMUNICATIONS
P ETROLEUM C entury 1,278,513
Telephone
Enterprise
A tlantic Richfield Company 1,272,790 M CI 1,096,660
Communications
Corp.
O ccidental Petroleum Corp. 1,796,356 N ew England 1,219,100
Telephone
O ryx Energy Company 1,122,100 N ynex Corporation 2,164,940
P ennzoil Company 1,277,490 T 2,188,200
ele-Communications Inc.
-----------
U nion Oil Co. of 1,160,430 7,947,413 5.8%
California
-------------
6,629,166 4.8%
P UBLIC UTILITY T OBACCO
C leveland Electric Illum. 967,090 R JR Nabisco 2,092,260 1.5%
Co. Inc.
Commonwealth Edison Inc. 1,099,690
G ulf States Utilities Company 502,760 T RANSPORTATION
H ouston Lighting & Power 1,667,040 C oncordia 1,046,329
Maritime
L ong Island Lighting Co. 2,038,810 F ederal Express 1,480,387
Corp. - Global
L ouisiana Power & Light Co. 1,084,810 G eorgia Pacific 1,756,515
Corporation
-----------
N iagara Mohawk Power 511,455 4,283,231 3.1%
PacifiCorp 1,153,460
P ennsylvania Power & Light 566,825 W ASTE MANAGEMENT
T exas Utilities Electric 1,059,180 B 501,250 0.4%
Co. rowning-Ferris Industries
---------------
Virginia Electric & Power 1,083,570
-----------
11,734,690 8.6% Total $135,051,616 98.5%
Long-Term
Investments
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<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 SEC
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
8
<PAGE>
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. For
1995, all direct placement securities, which totaled $22,300,762 and represents
16.3% of total net assets, were valued by directors who are not interested
persons. Because of the inherent uncertainty of valuation, those estimated
values may differ significantly from the values that would have been used had a
ready market for the securities existed, and the differences could be material.
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 accrued daily and paid every 28 days. In addition, in the
preparation of financial statements management relies on the use of estimates
where necessary.
9
<PAGE>
Notes to Financial Statements
NOTE B - INVESTMENTS
Direct placement securities are restricted as to resale because these securities
have not been registered with the Securities and Exchange Commission (SEC). 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.
The following is a summary of registration rights pertaining to direct placement
securities held by the Fund:
1) Common shares issuable upon conversion of convertible securities or exercise
of warrants are entitled to at least one free registration and to certain free
"piggyback" registration rights.
2) Warrants owned by the Fund do not carry registration rights.
3) 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 SEC 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 $37,538,341
and $36,093,716, respectively, in 1995; and $58,862,311 and $39,848,966,
respectively in 1994.
NOTE C - MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Under an agreement between the Fund and Lincoln Investment Management, Inc. (the
Advisor), the
(continued)
10
<PAGE>
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 for 1995 or 1994.
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.
11
<PAGE>
Notes to Financial Statements
NOTE D - EXCESS OF OTHER ASSETS OVER LIABILITIES
The net asset caption "excess of other assets over liabilities" consisted of the
following:
<TABLE>
<CAPTION>
<S> <C>
Accrued investment income receivable $ 2,558,667
Accrued dividends payable (3,304,825)
Management fees payable (295,457)
Other - Net 177,040
Cash 978,750
-------------
$ 114,175
- ---------------------------------------------------
</TABLE>
NOTE E - NET ASSETS
Net assets at December 31, 1995, consisted of the following:
<TABLE>
<CAPTION>
Preferred Stock, par value $1.00 per
share (authorized 1,000,000 shares)
<S> <C>
Variable Term Preferred Stock, issued $ 40,000,000
and outstanding 40,000 shares,
liquidation preference $1,000 per
share:
Common Stock, par value $1.00 per share 6,832,195
(authorized 10,000,000 shares), issued
and outstanding 6,832,195 shares
Proceeds in excess of par value of 73,101,180
shares issued
Undistributed realized gain on 6,490,689
investments, net of taxes paid
Undistributed net investment income 128,250
Net unrealized appreciation of 10,611,144
investments
--------------
Total Net Assets $137,163,458
--------------
- ------------------------------------------------------
</TABLE>
NOTE F - INCOME TAXES
The cost of investments for federal income tax purposes is the same as for book
purposes. At December 31, 1995, the aggregate gross unrealized
(continued)
12
<PAGE>
appreciation of investments was $11,229,650 and the aggregate gross unrealized
depreciation was $618,506.
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 year ended December 31, 1995, dividend rates have ranged from 5.50%
to 5.95% and the average dividend rate was 5.75%.
NOTE H - RIGHTS OFFERING
On July 28, 1994, the Fund received proceeds from a three-for-one 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. 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
anticipated expenses associated with the rights offering. Through September
1995, all expenses associated with this rights offering were paid ($85,652).
Therefore, the remaining $74,348 was added back into the Fund's net assets.
13
<PAGE>
Notes to Financial Statements (continued)
NOTE I - UNAUDITED QUARTERLY RESULTS OF OPERATIONS
The following is a tabulation of the unaudited quarterly results of operations.
Per share data is based on shares outstanding at the end of each quarter:
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
<S> <C> <C> <C> <C>
1995
Investment Income (000) $ 2,822 $ 2,909 $ 2,865 $ 2,871
Net Investment Income (000) 2,463 2,504 2,491 2,489
Net Realized and Unrealized Gain on 4,547 6,510 482 3,277
Investments (000)
Per Share Amounts:
Net Investment Income 0.36 0.37 0.36 0.37
Net Realized and Unrealized 0.67 0.95 0.07 0.48
Gain on Investments
1994
Investment Income (000) $ 2,249 $ 2,365 $ 2,546 $ 2,913
Net Investment Income (000) 1,921 2,010 2,179 2,551
Net Realized and Unrealized Loss on (5,285) (3,231) (2,369) (1,074)
Investments (000)
Per Share Amounts:
Net Investment Income 0.38 0.39 0.33 0.37
Net Realized and Unrealized (1.04) (.63) (.35) (.16)
Gain on Investments
- ---------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
Report of Independent Accountants
To the Shareholders and Board of Directors of Lincoln National Income Fund,
Inc.:
We have audited the accompanying statement of net assets of Lincoln National
Income Fund, Inc., including the portfolio of investments in securities as of
December 31, 1995, and the related statements of operations, cash flows and
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the ten years in the 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.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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
December 31, 1995, by correspondence with the custodian. 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
Lincoln National Income Fund, Inc. as of December 31, 1995, the results of its
operations, cash flows and changes in its net assets for each of the two years
in the period then ended, and the financial highlights for each of the ten years
in the period then ended, in conformity with generally accepted accounting
principles.
Fort Wayne, Indiana
January 26, 1996
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Directors & Officers of the Fund
@MINI TABLE@DIRECTORS DESCRIPTIONS OF OCCUPATIONS AND RESPONSIBILITIES
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