<PAGE>
<TABLE>
Table of Contents
PAGE
<S> <C>
Manager Profile................................................................2
Investment Policies & Objectives...............................................2
President's Letter.............................................................3
Asset Classification ..........................................................4
Distribution By Quality........................................................4
Portfolio Performance..........................................................4
Total Fund Investments.........................................................4
Dividend History...............................................................5
Shareholder Meeting Results....................................................5
Financial Highlights...........................................................6
Statement of Net Assets........................................................8
Statements of Operations......................................................17
Statements of Changes in Net Assets...........................................18
Statements of Cash Flows......................................................19
Portfolio of Investments by Industry Classification...........................20
Notes to Financial Statements.................................................22
Common Stock Market Prices & Net Asset Value History..........................25
Directors & Officers of the Fund..............................................26
Corporate Information.........................................................27
</TABLE>
1996 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. (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 16 years are still with
Lincoln today and have senior positions affecting the investment results of the
Fund.
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. Mr. Fischer earned his MBA
from Indiana University in 1986 and is a Certified Public Accountant (CPA) and
Certified Financial Analyst (CFA).
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 carry forward.
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 June 30, 1996, has chosen not to do so.
2 Lincoln National Income Fund, Inc.
<PAGE>
President's Letter July 30, 1996
Dear Shareholders:
The first half of 1996 was noteworthy because of the significant performance
differences in the stock and bond markets. Stocks as measured by the S&P 500
were up over 10 percent in the first six months of 1996 while bonds were down
about 2 percent. This 12 percent return advantage of stocks over bonds is rare,
and may have been fueled by retail investors pouring money into equity funds
while largely ignoring historically less volatile fixed income investments.
The Lincoln National Income Fund was not immune from these market conditions.
The Fund had a Net Asset Value (NAV) return of -1.58 percent over the past six
months. Although we are disappointed with the negative returns, the Lincoln
National Income Fund did well relative to its peers for the first half of 1996,
beating the Lehman Corporate Bond index (-2.14 percent) by 56 basis points.
We're also pleased with the Fund's long-term performance. The Fund's five-year
annualized NAV return was 9.96 percent for the first half of 1996, 64 basis
points better than the Lehman Corporate index. In the three-, five-and ten-year
historical periods, the Fund remains in the top quartile of its Morningstar peer
group.
With interest rates up almost 1.5 percent in 1996, we feel fixed income
investments are now a more attractive investment alternative than stocks through
the end of the year. The belief that "stocks always outperform" is starting to
sound a little overdone to us. A stock market correction could change the nearly
exclusive flow of funds into equities back towards bonds and other less-risky
investments.
We continue to believe the economy is in good shape and do not expect signs
of a recession until after the Presidential election. If anything, the economy
may be too strong, which could cause a tightening by the Federal Reserve Board
to slow growth. We think the Fed will be slow to tighten since it is an
election year. This could lead the bond market to "take matters into its own
hands" by pushing up rates in anticipation of Fed action. The market did this
on July 5 after being surprised by the June employment statistics. In our
opinion most of the interest rate increase for this year has already occurred.
We have been able to maintain the Fund's $.28 per share quarterly dividend, due
in part to our increased investments in private placements. Private placements
are now 17 percent of assets, and our goal remains to grow this to 20 percent by
the end of 1997. Fourteen percent of the Fund is invested in less-than-
investment-grade bonds, a level we believe is prudent given the health of the
economy. Many of the funds ahead of us in the Morningstar three-and five- year
rankings have much higher investments in low quality bonds.
The Fund's discount to net asset value remains low at 5.2 percent, only slightly
wider than the beginning of year discount of 4.2 percent. This is one of the
lowest discounts to NAV in our Morningstar peer group and is an excellent
validation by the market of not only our past performance but our future
prospects. By maintaining the strategies now in place, the Lincoln National
Income Fund is structured to give competitive performance throughout an entire
economic cycle. We also continue to believe that the Fund is an excellent choice
for risk-averse but income-oriented investors.
Sincerely,
/s/ H. Thomas McMeekin
H. Thomas McMeekin
President
1996 Semi-Annual Report 3
<PAGE>
Portfolio Profile
As Of June 30, 1996 (Dollars In Millions)
[PIE CHART] [BAR CHART]
<TABLE>
<CAPTION>
Asset Classification Distribution By Quality Rating
<S> <C> <C> <C>
Public Debt 79.73% $106.6 BBB $38.7
Direct Placements 16.83% $22.5 A $32.6
Equities/Partnerships 1.12% $1.5 Direct $22.5
Other Assets 2.32% $3.1 Placements
BB $15.6
AAA $12.8
AA $3.2
Other Assets $3.1
Not Rated $1.9
B $1.8
Equities $1.5
</TABLE>
Portfolio Performance
As Of June 30, 1996
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 (1.58%) 6.46% 20.79% 60.73% 152.75%
Lehman Corporate Bond Index (2.14%) 5.12% 18.74% 56.14% 141.63%
Standard & Poor's 500 10.10% 25.96% 60.97% 107.36% 264.59%
(with dividends reinvested)
Total Fund Investments
At Market Or Fair Values as of June 30
1996 1995
(000) % of Total (000) % of Total
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Public Debt Securities $106,576 80% $113,222 83%
Direct Placement Securities 22,515 17% 17,526 13%
Common Stocks and Warrants -- -- 1,409 1%
Preferred Stocks 1,495 1% 2,110 1%
Short-Term Investments -- -- -- --
Partnerships 50 -- -- --
Other Assets Over Liabilities 3,066 2% 2,352 2%
- --------------------------------------------------------------------------------
Net Assets $133,702 100% $136,619 100%
================================================================================
</TABLE>
4 Lincoln National Income Fund, Inc.
<PAGE>
Dividend History
The Fund in its lifetime has distributed common dividends of $26.36 which
represents 211 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
retention's allowed the Fund to grow its assets by $6,490,688 which is net of
capital gains tax. The table below shows the 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>
1976 & Prior $3.15 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 1.32
1982 1.12 1989 1.17 1996* .28
</TABLE>
* Dividends paid as of June 30th.
Shareholder Meeting Results
The Fund had their annual Shareholder meeting on April 19, 1996. Two proposals
were presented to shareholders for vote. Proposal I "Election of Directors" and
Proposal II "Ratification of the Selection of Auditors." A total of 5,429,671 of
Common Stock shares (79.47% of the total outstanding shares) and 34,000 of
Variable Term Preferred (VTP) stock shares (85.00% 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 5,351,636 78,035 --
Directors -- R. Deshaies 5,360,405 69,266 --
Common Stock C. Freund 5,357,393 72,278 --
T. McMeekin 5,359,259 70,412 --
D. Toll 5,358,806 70,865 --
A. Warner 5,339,054 90,617 --
F. Young 5,342,612 87,059 --
Election of R. Burridge 34,000 -- --
Directors -- A. Cepeda 34,000 -- --
Variable Term R. Deshaies 34,000 -- --
Preferred Stock C. Freund 34,000 -- --
T. Mathers 34,000 -- --
T. McMeekin 34,000 -- --
D. Toll 34,000 -- --
A. Warner 34,000 -- --
F. Young 34,000 -- --
Proposal II
Ratification of the Selection of Auditor 5,346,255 25,586 57,830
(Coopers & Lybrand L.L.P)
</TABLE>
1996 Semi-Annual Report 5
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
Six Months Ended June 30 -----------------------------------
(Selected data for each share of common stock 1996 1995
outstanding throughout the period) (Unaudited) (Unaudited) 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 14.22 $ 12.25 $ 12.25 $ 14.63
Net Investment Income .72 .73 1.46 1.47
Net Realized & Unrealized Gain\(Loss) (.79) 1.61 2.17 (2.18)
- ---------------------------------------------------------------------------------------------------------------------------
Total From Investment Operations (.07) 2.34 3.63 (0.71)
- ---------------------------------------------------------------------------------------------------------------------------
Reduction - Stock Rights Offering -- -- -- (0.10)
Preferred Stock Underwriting Discounts
and Offering Costs -- -- -- --
Less Distributions:
Dividends from Net Investment Income:
To Preferred Shareholders (.16) (.17) (.29) (.27)
To Common Shareholders (.28) (.28) (1.16) (1.20)
Dividends from Net Realized Gains:
To Preferred Shareholders -- -- (.05) (.02)
To Common Shareholders -- -- (.16) (.08)
- ---------------------------------------------------------------------------------------------------------------------------
Total Distributions (.44) (.45) (1.66) (1.57)
- ---------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 13.71 $ 14.14 $ 14.22 $ 12.25
- ---------------------------------------------------------------------------------------------------------------------------
Per Share Market Value, End of Period $ 13.00 $ 12.88 $ 13.63 $ 10.75
Total Investment Return (based on Market Value) (2.49%) 22.53% 39.07% (19.80%)
Ratios/Supplemental Data
Net Assets, End of Period (000) $133,702 $136,619 $137,163 $123,683
Ratio - Expenses to Average Net Assets .55% .59% 1.14% 1.19%
Ratio - Net Income to Average Net Assets 3.64% 3.81% 7.44% 7.31%
Portfolio Turnover Rate 12.36% 12.33% 26.98% 33.64%
</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 --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1993 1992 1991 1990 1989 1988 1987 1986
- --------------------------------------------------------------------------------------------------------
$14.18 $14.85 $13.40 $14.44 $13.35 $12.83 $13.68 $12.88
1.56 1.36 1.15 1.17 1.15 1.16 1.21 1.21
.92 (.01) 1.45 (1.03) 1.11 .59 (.54) .76
- --------------------------------------------------------------------------------------------------------
2.48 1.35 2.60 0.14 2.26 1.75 0.67 1.97
- --------------------------------------------------------------------------------------------------------
-- -- -- -- -- -- -- --
-- (.23) -- -- -- -- -- --
(.19) (0.08) -- -- -- -- -- --
(1.31) (1.31) (1.15) (1.18) (1.16) (1.16) (1.52) (1.17)
(.07) (.03) -- -- -- -- -- --
(.46) (.37) -- -- (.01) (.07) -- --
- --------------------------------------------------------------------------------------------------------
(2.03) (1.79) (1.15) (1.18) (1.17) (1.23) (1.52) (1.17)
- --------------------------------------------------------------------------------------------------------
$14.63 $14.18 $14.85 $13.40 $14.44 $13.35 $12.83 13.68
- --------------------------------------------------------------------------------------------------------
$15.00 $14.31 $13.81 $11.88 $12.94 $11.88 $11.50 $12.88
17.17% 15.78% 25.96% 0.87% 18.80% 13.96% 1.31% 15.84%
$113,181 $109,466 $72,752 $65,652 $70,740 $65,383 $62,870 $67,030
1.17% 1.00% .97% .97% .96% .97% .93% .91%
6.76% 7.56% 8.05% 8.49% 8.04% 8.43% 8.93% 8.90%
43.72% 97.63% 15.07% 28.85% 44.46% 63.39% 46.71% 29.68%
</TABLE>
1996 Semi-Annual Report 7
<PAGE>
Statement of Net Assets
AS OF JUNE 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
PAR MARKET OR
AMOUNT COST FAIR VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investments - Notes A & B
Public Debt Securities (79.7%)
ADT Operations Inc.
8.25% Senior Notes, 8/1/00 $ 250,000 $ 250,000 $ 257,335
Airplanes Pass Through Trust
10.875% Subordinated Bond Series 1, 3/15/19 250,000 256,562 260,000
AK Steel Corporation
10.75% Guaranteed Senior Note, 4/1/04 250,000 251,250 270,000
Alcan Aluminum LTD
9.70% Debenture, 10/15/96 1,000,000 998,200 1,010,620
AllState Corporation
7.50% Debenture, 6/15/13 1,000,000 911,180 978,170
AMR Corporation
10.00% Bond, 4/15/21 1,000,000 1,028,860 1,183,390
American Airlines 1988-A Grantor Trusts
9.83% Equipment Note Pass Through
Certificates Series 1988-A3, 1/1/02 1,235,286 1,235,286 1,288,996
Bally Park Place Funding
9.25% First Mortgage Bonds, 3/15/04 250,000 214,375 266,250
Banc One Corporation
9.875% Subordinated Notes, 3/1/09 1,000,000 1,152,890 1,195,020
BankAmerica Corporation
10.00% Bond, 2/1/03 1,000,000 1,183,100 1,147,340
Black & Decker Corporation
8.91% Bond, 1/21/02 500,000 542,425 537,165
BVPS II Funding Corporation
8.33% Collateralized Lease Bond, 12/1/07 1,490,000 1,536,279 1,402,462
Capital Cities/ABC Inc.
8.875% Senior Notes, 12/15/00 1,000,000 1,006,630 1,074,920
Caterpillar Inc.
6.00% Debenture, 5/1/07 1,000,000 885,534 891,910
Cemex SA
10.00% Eurobond Medium-Term Note, 11/5/99 250,000 222,500 249,375
Chiquita Brands
9.625% Senior Notes, 1/15/04 250,000 252,500 243,125
Chrysler Financial Corporation
9.50% Senior Notes, 12/15/99 1,000,000 1,120,000 1,082,960
Citicorp Mortgage Securities Inc.
8.75% REMIC 91-6 Class B, 5/25/21 500,000 505,703 504,375
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
Statements of Net Assets
CONTINUED (UNAUDITED)
<TABLE>
<CAPTION>
PAR MARKET OR
AMOUNT COST FAIR VALUE
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Public Debt Securities (continued)
Cleveland Electric Illuminating Co.
7.625% First Mortgage Bonds, 8/1/02 $1,000,000 $ 961,790 $ 930,580
Coastal Corporation
9.75% Debenture, 8/1/03 1,000,000 1,150,890 1,127,110
Coca-Cola Enterprises Inc.
8.00% Note, 1/4/05 1,000,000 1,130,150 1,061,950
Commonwealth Edison Inc.
8.625% First Mortgage Bonds, 2/1/22 1,000,000 939,620 1,008,660
Compania De Desarrollo Aero
10.19% Senior Note, 5/31/11 500,000 500,000 505,280
ConAgra Inc.
7.40% Subordinated Debt Securities, 9/15/04 1,500,000 1,495,140 1,477,245
Container Corporation of America
11.25% Senior Notes Series A, 5/1/04 250,000 258,750 257,500
Cyprus Amax Minerals Co.
7.375% Note, 5/15/07 500,000 517,255 489,310
Dayton Hudson Corporation
10.00% Debenture, 1/1/11 1,000,000 1,248,660 1,220,260
Delta Air Lines Inc.
9.90% Equipment Trust Certificates
Series 1988 C, 6/16/02 1,473,000 1,564,297 1,629,167
Discover Credit Corporation
8.73% Medium Term Note Series II, 8/15/96 1,000,000 1,015,180 1,003,860
Donaldson Lufkin & Jenrette Inc.
7.71% Mortgage Pass Through Class A, 6/26/25 976,693 991,954 986,460
Domtar Inc.
11.25% Debenture, 9/15/17 250,000 267,250 265,625
Dow Capital B.V.
9.00% Guaranteed Debenture, 5/15/10 1,000,000 1,186,170 1,114,900
Duquesne II Funding Corporation
8.70% Collateralized Lease Bonds, 6/1/16 990,000 990,000 1,013,344
EI Dupont Nemour
8.25% Debenture, 1/15/22 1,000,000 1,097,680 1,024,350
Enron Corporation
9.50% Senior Fixed Rate Note, 6/15/01 1,000,000 1,141,040 1,100,840
Essex Group Inc.
10.00% Senior Notes, 5/1/03 250,000 243,125 248,125
Federal Express Corporation - Global
9.875% Note, 4/1/02 1,250,000 1,400,000 1,400,762
</TABLE>
The accompanying notes are an integral part of the financial statements.
1996 Semi-Annual Report 9
<PAGE>
STATEMENT OF NET ASSETS
CONTINUED (UNAUDITED)
<TABLE>
<CAPTION>
PAR MARKET OR
AMOUNT COST FAIR VALUE
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Public Debt Securities (continued)
Federal Home Loan Mortgage Corporation (FHLMC)
7.80% REMIC Series 46 Class B, 9/15/20 $1,188,459 $1,050,716 $1,196,445
7.00% Pass Through Series 7 Class A, 9/17/31 993,825 966,806 943,202
Federal National Mortgage Association (FNMA)
9.20% Guaranteed REMIC 88-14, 12/25/17 1,051,965 1,029,983 1,086,522
9.00% Trust Series 265 Class C, 3/1/24 848,511 912,149 872,375
Federated Department Stores
10.00% Senior Notes, 2/15/01 250,000 250,000 265,312
First Interstate Bancorp
8.15% Subordinated Notes, 3/15/02 1,000,000 1,000,000 1,009,110
First USA Bank
7.65% Subordinated Notes, 8/1/03 1,000,000 1,000,000 976,250
Fleet/Norstar Group
8.625% Subordinated Notes, 1/15/07 1,000,000 1,044,630 1,083,650
Ford Holdings Inc.
9.25% Guaranteed Notes, 7/15/97 1,000,000 998,710 1,030,060
General Electric Capital Corporation
8.75% Notes, 5/21/07 1,000,000 1,108,350 1,109,850
General Motors Acceptance Corporation
8.875% Notes, 6/1/10 1,500,000 1,656,000 1,651,395
Georgia Pacific Corporation
9.50% Debentures, 5/15/22 1,500,000 1,551,450 1,600,920
Goldman Sachs Group
7.875% Medium Term Notes, 1/15/03 500,000 523,340 505,625
Government National Mortgage Association (GNMA)
9.00% Pass-Thru Pool #309771, 8/15/21 1,254,101 1,352,105 1,319,051
9.00% Pass-Thru Pool #349329, 3/15/23 2,899,382 3,125,922 3,047,251
Greentree Financial Corporation
8.65% Subordinated Notes Class B1, 11/15/19 1,000,000 988,594 1,028,125
Hilton Hotel Corporation
7.70% Senior Notes, 7/15/02 500,000 508,915 504,325
HongKong & Shanghai Bank
6.063% Subordinated Notes, 12/29/49 500,000 408,500 421,250
Houston Lighting & Power Company
9.80% Medium Term Note Series B, 2/15/99 1,500,000 1,467,165 1,609,845
INCO LTD
9.60% Debentures, 6/15/22 1,000,000 1,084,580 1,077,170
Keystone Group
9.75% Senior Secured Notes, 9/1/23 200,000 192,000 198,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
Statement of Net Assets
CONTINUED (UNAUDITED)
<TABLE>
<CAPTION>
PAR MARKET OR
AMOUNT COST FAIR VALUE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Public Debt Securities (continued)
Kinder Care Learning Centers
10.375% Senior Notes, 6/1/01 $ 250,000 $ 251,250 $ 262,812
Lehman Brothers Holding Inc.
7.375% Senior Notes, 5/15/07 500,000 522,740 506,695
Lloyds Bank PLC
6.25% Subordinated Notes, 6/29/49 1,000,000 835,000 872,500
Long Island Lighting Company
9.75% General Refunding Mortgage, 5/1/21 2,000,000 2,013,290 2,004,420
Louisiana Power & Light Company
10.67% Waterford Secured Lease, 1/2/17 1,000,000 996,250 1,076,930
Macmillan Bloedel LTD
8.50% Debentures, 1/15/04 500,000 523,390 520,915
MARK IV Industries Inc.
8.75% Senior Subordinated Notes, 4/1/03 250,000 250,000 246,250
McDonnell Douglas Corporation
9.25% Notes, 4/1/02 1,000,000 1,142,300 1,101,530
MCI Communications Corporation
7.50% Senior Notes, 8/20/04 1,000,000 1,013,020 1,020,290
Merrill Lynch Mortgage Investors Inc.
10.00% Pass-thru Series 90-A1, 3/15/10 741,821 737,668 810,277
Mid-State Homes IV Series I Class A
8.33% Class A Series 1, 4/1/30 940,410 940,266 965,391
National Westminster Bank PLC
6.813% Subordinated Notes, 8/29/49 1,000,000 875,000 873,750
Nationsbank Corporation
8.125% Subordinated Debentures, 6/15/02 2,000,000 1,995,000 2,102,160
Nationwide
9.875% Contingent Surplus Notes, 2/15/25 1,000,000 1,092,350 1,099,170
New England Telephone & Telegraph
9.00% Debentures, 8/1/31 1,000,000 1,007,300 1,093,220
News America Holdings Inc.
9.25% Senior Debentures, 2/1/13 1,000,000 1,110,980 1,082,990
Niagara Mohawk Power Corporation
9.25% First Mortgage Bonds, 10/1/01 500,000 503,490 491,720
Noram Energy Inc.
10.00% Debentures, 11/15/19 1,000,000 1,117,400 1,089,670
Noranda Inc.
8.00% Yankee Bond, 6/1/03 1,500,000 1,500,000 1,553,355
</TABLE>
The accompanying notes are an integral part of the financial statments.
1996 Semi-Annual Report 11
<PAGE>
Statement of Net Assets
CONTINUED (UNAUDITED)
<TABLE>
<CAPTION>
PAR MARKET OR
AMOUNT COST FAIR VALUE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Public Debt Securities (continued)
NWA Trust
10.23% Notes, 6/21/14 $ 481,541 $ 566,939 $ 528,337
Nynex Corporation
9.55% Debentures, 5/1/10 1,720,561 2,069,938 1,919,389
Olympic Financial LTD
13.00% Senior Notes, 5/1/00 250,000 253,438 268,750
Oryx Energy Company
10.00% Debentures, 4/1/01 1,000,000 1,036,380 1,087,130
PacifiCorp
8.29% Secured Medium Term Note, 12/30/11 1,000,000 1,000,000 1,065,870
Peco Energy Company
7.125% 1st Refunding Mortgage Bonds, 9/1/02 1,500,000 1,500,375 1,498,275
Pennsylvania Power & Light
8.50% First Mortgage Bonds, 5/1/22 500,000 534,295 524,640
Pennzoil Company
10.125% Debentures, 11/15/09 1,000,000 1,134,440 1,166,570
Province de Quebec
11.00% Yankee Bond, 6/15/15 1,000,000 1,072,720 1,161,160
Prudential Home Mortgage Securities Co. Inc.
6.70% Mortgage Pass-thru Ser. 92-39, 12/15/07 1,000,000 965,469 981,390
Resolution Trust Corporation
8.80% Mortgage Pass-thru Ser. 92-C1, 8/25/23 479,650 478,309 483,247
RJR Nabisco Inc.
9.25% Debentures, 8/15/13 2,000,000 1,830,060 2,035,800
Safeway Inc.
9.875% Subordinated Debentures, 3/15/07 250,000 274,375 270,938
Scotsman Group
9.50% Senior Secured Notes, 12/15/00 250,000 232,812 251,250
Sears Roebuck & Company
10.00% Medium Term Notes, 2/3/12 1,000,000 1,156,840 1,216,950
9.05% Medium Term Notes, 2/6/12 1,000,000 1,059,380 1,132,050
Sequa Corporation
8.75% Senior Notes, 12/15/01 250,000 250,937 242,813
Showboat Inc.
9.25% First Mortgage Bonds, 5/1/08 250,000 212,500 251,250
Sun Inc.
9.375% Debentures, 6/1/16 1,000,000 1,182,350 1,084,190
Sweetheart Cup Company
9.625% Senior Notes, 9/1/00 250,000 241,562 247,188
</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)
<TABLE>
<CAPTION>
PAR MARKET OR
AMOUNT COST FAIR VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Public Debt Securities (continued)
Tele-Communications Inc.
9.25% Debentures, 1/15/23 $2,000,000 $1,993,580 $1,964,580
Tenet Healthcare
10.125% Senior Subordinated Notes, 3/1/05 250,000 266,875 263,750
Tenneco Inc.
10.00% Notes, 8/1/98 1,000,000 1,136,560 1,064,840
Texas Instruments Inc.
8.75% Notes, 4/1/07 1,000,000 1,067,180 1,101,580
Texas Utilities Electric Company
7.375% First Mortgage Bonds, 8/1/01 1,000,000 999,375 1,015,990
Time Warner Inc.
9.125% Senior Notes, 1/15/13 1,500,000 1,592,520 1,567,230
Travelers Inc.
8.625% Notes, 2/1/07 1,500,000 1,582,140 1,621,020
Turner Broadcasting Inc.
7.40% Senior Notes, 2/1/04 250,000 249,612 235,625
UNC Inc.
9.125% Senior Notes, 7/15/03 250,000 250,000 242,500
Union Oil Company of California
9.75% Guaranteed Notes, 12/1/00 1,000,000 1,119,400 1,105,080
Uniroyal Chemical Co. Inc.
9.00% Senior Notes, 9/1/00 250,000 236,875 253,125
United Airlines Inc.
8.70% Pass-thru Trust Series 92-A1, 10/7/08 967,147 963,578 1,026,491
11.21% Debenture, 5/1/14 1,000,000 1,258,300 1,256,190
9.35% Pass-thru Series 92-A, 4/7/16 1,500,000 1,516,845 1,618,080
Van Kampen Merritt Companies, Inc.
9.75% Senior Secured Notes, 2/15/03 250,000 260,000 266,875
Viacom Inc.
7.75% Senior Notes, 6/1/05 500,000 525,915 485,985
Virginia Electric & Power Company
9.35% Medium Term Notes Series A, 6/22/98 1,000,000 991,640 1,050,700
- ----------------------------------------------------------------------------------------------------------------
TOTAL PUBLIC DEBT SECURITIES 105,362,348 106,575,347
- ----------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
1996 Semi-Annual Report
13
</TABLE>
<PAGE>
Statement of Net Assets
CONTINUED (UNAUDITED)
<TABLE>
<CAPTION>
DATE OF INITIAL PAR MARKET OR
ACQUISITION AMOUNT COST FAIR VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Direct Placement Securities (16.8%)
Notes A & B
DEBT
Anglo Irish Bank Corporation
9.10% Notes Series A, 9/30/06 9/30/94 $1,000,000 $1,000,000 $1,060,466
Cambuhy Export Trust
8.12% Trust Certificates Series 96-1, 7 6/11/96 500,000 500,000 495,514
Champion Healthcare Corporation
11.00% Senior Subordinated Note, 12/31/03 6/12/96 500,000 490,453 500,000
Coca-Cola Femsa SA DE
9.40% Convertible Senior Note, 8/15/04 8/5/94 1,000,000 1,000,000 1,015,803
Concordia Maritime
9.29% 1st Preferred Ship Mortgage, 6/30/99 4/15/94 1,000,000 1,000,000 1,013,154
Crown Pacific Limited Partnership
9.78% Senior Notes, 12/1/09 8/22/95 1,000,000 1,100,310 1,062,526
Desert Eagle Distributing of El Paso Inc.
13.00% Senior Subordinated Notes, 11/1/99 5/7/92 1,750,000 1,529,500 1,750,000
Dow Chemical Co.
17.25% Certificate of Interest, 1/2/03 3/25/92 1,825,054 1,825,054 2,454,332
Huron Technologies Inc.
14.00% Subordinated Notes, 5/15/05 2/20/95 550,000 421,667 421,669
Louis Dreyfus Corporation
8.43% Senior Notes, 7/15/01 7/20/94 1,000,000 1,000,000 1,025,306
Marks Brothers Jewelers, Inc.
15.00% Senior Subordinated Notes, 10/31/04 5/7/96 500,000 500,000 500,000
Murray's Discount Auto Stores, Inc.
11.00% Senior Subordinated Notes, 9/30/03 10/2/95 500,000 478,000 478,000
Nebraska Book Company, Inc.
12.00% Senior Subordinated Notes, 8/31/05 8/31/95 500,000 500,000 500,000
New Boston Garden Corporation
8.45% Senior Secured Notes, 9/22/15 9/22/95 985,035 985,035 958,766
Penn Fuel Gas Inc.
7.51% Senior Notes, 4/15/14 5/25/94 1,000,000 1,000,000 978,187
Refco Group, LTD
8.21% Senior Notes, 5/16/02 5/8/95 1,000,000 1,000,000 1,014,780
Stackpole Magnetic Systems, Inc.
13.50% Senior Subordinated Notes, 10/15 9/1/95 380,000 351,500 351,500
Steel Dynamics Inc.
11.00% Senior Subordinated Notes, 9/30/02 12/23/94 1,000,000 882,751 875,200
The accompanying notes are an integral part of the financial statements.
14 Lincoln National Income Fund
</TABLE>
<PAGE>
Statement of Net Assets
CONTINUED (UNAUDITED)
<TABLE>
<CAPTION>
DATE OF INITIAL PAR MARKET OR
ACQUISITION AMOUNT COST FAIR VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Direct Placement Securities (continued)
DEBT (continued)
Steel Technologies Inc.
8.52% Senior Notes, 3/1/05 2/6/95 $ 500,000 $ 500,000 $ 521,638
Suburban Propane L.P.
7.54% Senior Notes, 6/30/11 3/7/96 1,000,000 1,000,000 953,989
The Money Store
9.00% Senior Notes, 3/31/02 2/22/95 1,000,000 1,000,000 1,040,442
United States Playing Card Company
12.00% Subordinated Notes, 11/18/04 11/18/94 500,000 470,000 500,000
West Fraser Mills LTD
8.44% Guaranteed Senior Notes, 6/30/04 4/15/94 1,000,000 1,000,000 1,039,929
- -------------------------------------------------------------------------------------------------------------------
TOTAL DIRECT PLACEMENT DEBT 19,534,270 20,511,201
- -------------------------------------------------------------------------------------------------------------------
EQUITIES
Bicycle Holding Inc.*
Common Stock 11/18/94 8 $ 30,000 $ 62,842
Champion Healthcare Corporation*
Common Stock 4/17/95 7,500 62,048 68,250
Desert Eagle Distributing of El Paso Inc.*
Equity Appreciation Rights Certificate
(entitled to receive the equivalent of the
purchase price of 87,895 shares of common
stock on or after 5/1/97) 5/7/92 1 219,426 1,410,978
Desert Eagle Distributing of New Mexico Inc.*
Equity Appreciation Rights Certificate
(entitled to receive the equivalent of the
purchase price of 430 shares of common
stock on or after 5/1/97) 5/7/92 1 1,074 1,074
Huron Technologies Corporation*
Stock Warrants
(entitled to purchase 59 shares of common
stock for $0.06 per share. Expires 2/20/05) 2/20/95 1 128,333 128,319
Murray's Discount Auto Stores, Inc.*
Stock Warrants
(entitled to purchase 25 shares of common
stock for $0.01 per share.Expires 8/3 10/2/95 1 22,000 22,000
Nebraska Book Company, Inc.*
Common Stock 8/31/95 3,704 37,039 37,039
Stock Warrants
(entitled to purchase 7,071 shares of
common stock for $10 per share. Expires 8/31/05) 1 1 1
* Non-Income Producing
The accompanying notes are an integral part of the financial statements.
1996 Semi-Annual Report 15
</TABLE>
<PAGE>
Statements of Net Assets
CONTINUED (UNAUDITED)
<TABLE>
<CAPTION>
DATE OF INITIAL PAR MARKET OR
ACQUISITION AMOUNT COST FAIR VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Direct Placement Securities (continued)
EQUITIES (continued)
Stackpole Magnetic Systems*
Stock Warrants
(entitled to purchase 54,582 shares of common
stock for $0.01 per share. Expires 9/1/05) 9/1/95 $ 1 $ 28,500 $ 28,492
8.00% Cumulative Convertible Preferred Stock 120,000 120,000 120,000
Steel Dynamics Holdings Inc.*
Stock Warrants
(entitled to purchase 1,064 shares of
Class A Common Shares for $0.01 per share.
Expires 12/23/04) 12/23/94 1 117,249 124,839
- --------------------------------------------------------------------------------------------------------------------------
Total Direct Placement Equities 765,670 2,003,834
- --------------------------------------------------------------------------------------------------------------------------
Total Direct Placement Securities 20,299,940 22,515,035
- --------------------------------------------------------------------------------------------------------------------------
MARKET OR
QUANTITY COST FAIR VALUE
- --------------------------------------------------------------------------------------------------------------------------
Preferred Stocks - (1.1%)
Loewen Group Inc.
Capital Series A 40,000 1,000,000 995,000
Salomon Financing Trust I
Guaranteed Preferred Security 20,000 500,000 500,000
- --------------------------------------------------------------------------------------------------------------------------
Total Preferred Stocks 1,500,000 1,495,000
Common Stocks - (0.0%)
Authorized Distribution Network, Inc.* 9,816 1,227 153
Partnerships - (0.0%)
MDAS Investors, L.P. 50,000 50,000
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (97.7%) $127,213,515 $130,635,535
- --------------------------------------------------------------------------------------------------------------------------
Excess of Other Assets Over Liabilities (2.3% ) Note D 3,066,072
- --------------------------------------------------------------------------------------------------------------------------
Net Assets (100%) - Note E $133,701,607
- --------------------------------------------------------------------------------------------------------------------------
Net asset value per share of common stock outstanding
($133,701,607 less Variable Term Preferred stock at
liquidation value of $40,000,000 divided by 6,832,195
shares of common stock outstanding) - Note G $13.71
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Non-Income Producing
The accompanying notes are an integral part of the financial statements.
16
<PAGE>
STATEMENTS OF OPERATIONS +
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
1996 1995 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Income:
Interest $2,786,613 $2,858,214 $5,587,128 $5,629,736
Dividends 23,625 50,571 51,187 101,142
- -------------------------------------------------------------------------------------------------------------
TOTAL INCOME 2,810,238 2,908,785 5,638,315 5,730,878
Expenses:
Management Fees - Note C 289,620 292,946 571,428 568,090
Variable Term Preferred Stock Auction 23,328 23,328 46,656 46,656
Director Fees 21,500 35,000 40,000 52,500
Professional fees 5,697 4,025 30,204 25,025
Printing, stationery, and supplies 3,108 17,665 3,514 18,393
Stock Transfer & dividend disbursing (1,622) 4,855 630 11,857
Postage and mailing fees 12,996 4,898 17,392 11,009
New York Stock Exchange fee 4,410 4,535 7,350 7,559
Custodian and registrar fees 9,314 4,338 13,797 6,369
Other (2,745) 13,098 14,585 16,401
- -------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 365,606 404,688 745,556 763,859
NET INVESTMENT INCOME 2,444,632 2,504,097 4,892,759 4,967,019
Net realized and unrealized gain(loss)
on investments:
Net realized gain on investments 480,029 271,900 1,815,846 448,944
Increase(decrease) in net unrealized
appreciation of investments (1,256,446) 6,239,071 (7,189,125) 10,608,720
- -------------------------------------------------------------------------------------------------------------
NET REALIZED & UNREALIZED GAIN(LOSS)
ON INVESTMENTS (776,417) 6,510,971 (5,373,279) 11,057,664
- -------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $1,668,215 $9,015,068 $ (480,520) $16,024,683
- -------------------------------------------------------------------------------------------------------------
</TABLE>
+ Unaudited
The accompanying notes are an integral part of the financial statements.
1996 Semi-Annual Report 17
<PAGE>
Statements of Changes in Net Assets +
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
1996 1995 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Changes from operations:
Net Investment Income $ 2,444,632 $ 2,504,097 $ 4,892,759 $ 4,967,019
Net realized gain on investments 480,029 271,900 1,815,846 448,944
Increase(Decrease) in Net Unrealized
appreciation of investments (1,256,446) 6,239,071 (7,189,125) 10,608,720
- ----------------------------------------------------------------------------------------------------------------
Net Increase(Decrease) in Net Assets
Resulting from Operations 1,668,215 9,015,068 (480,520) 16,024,683
Distributions to shareholders from
net investment income:
Common Shareholders (1,913,015) (1,913,015) (1,913,015) (1,913,015)
Preferred Shareholders (521,330) (594,242) (1,068,316) (1,175,571)
- ----------------------------------------------------------------------------------------------------------------
Total Distributions to Shareholders
from Net Investment Income (2,434,345) (2,507,257) (2,981,331) (3,088,586)
Total Increase(Decrease) in Net Assets (766,130) 6,507,811 (3,461,851) 12,936,097
Net assets at beginning of period 134,467,737 130,111,316 137,163,458 123,683,030
- ----------------------------------------------------------------------------------------------------------------
*Net Assets at End of Period $133,701,607 $136,619,127 $133,701,607 $136,619,127
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
+Unaudited
*Includes undistributed net investment income as of June 30: 1996 - $2,039,678;
1995 - $1,963,248
The accompanying notes are an integral part of the financial statements
18 Lincoln National Income Fund, Inc.
<PAGE>
Statements of Cash Flows+
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Activities:
Interest received $3,057,408 $2,955,270 $5,620,378 $5,581,492
Dividends received 23,624 50,571 59,061 101,142
Operating expenses paid (375,944) (387,141) (761,410) (745,952)
- ------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 2,705,088 2,618,700 4,918,029 4,936,682
- ------------------------------------------------------------------------------------------------------------------
Investing Activities:
Purchase of investment securities (5,461,630) (8,909,798) (17,102,812) (20,785,441)
Proceeds from sale of investment securities 4,337,349 7,766,981 16,163,471 17,622,272
Net proceeds of short-term investments 998,707 1,025,713 1,999,232 287,620
- ------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used In)
Investing Activities (125,574) (117,104) 1,059,891 (2,875,549)
- ------------------------------------------------------------------------------------------------------------------
Financing Activities:
Distributions paid to common
and preferred shareholders (2,394,702) (2,460,215) (6,182,556) (3,004,215)
Increase (Decrease) In Cash 184,812 41,381 (204,636) (943,082)
Cash at Beginning of Period 589,302 133 978,7509 84,596
- ------------------------------------------------------------------------------------------------------------------
Cash at End of Period - Note D $774,114 $41,514 $774,114 $41,514
- ------------------------------------------------------------------------------------------------------------------
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 $1,668,215 $9,015,068 $(480,520) $16,024,683
Reconciling Adjustments:
Net realized and unrealized (gain) loss on investments 776,417 (6,510,971) 5,373,279 (11,057,664)
Discount accretion on investment securities (1,672) (1,582) (3,375) (3,134)
(Increase) decrease in accrued
investment income receivable 272,498 98,638 36,626 (45,110)
Increase (decrease) in accrued expenses (10,370) 17,547 (7,981) 17,907
- ------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities $2,705,088 $2,618,700 $4,918,029 $4,936,682
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
+Unaudited
The accompanying notes are an integral part of the financial statements.
1996 Semi-Annual Report 19
<PAGE>
Portfolio of Investments by
Industry Classification+
<TABLE>
<CAPTION>
As of June 30, 1995 Market Percent
or Fair of Net
Value Assets
- ---------------------------------------------------------
<S> <C> <C>
Aerospace
McDonnell Douglas Corporation $ 1,101,530
Sequa Corporation 242,813
UNC Inc. 242,500
- ---------------------------------------------------------
1,586,843 1.2%
Airline
AMR Corporation 2,472,386
Delta Air Lines Inc. 1,629,167
United Airlines Inc. 3,900,761
- ---------------------------------------------------------
8,002,314 6.0%
Aluminum
Alcan Aluminum LTD 1,010,620 0.8%
Bank
Anglo Irish Bank Corporation 1,060,466
Banc One Corporation 1,195,020
BankAmerica Corporation 1,147,340
First Interstate Bancorp 1,009,110
First USA Bank 976,250
Fleet/Norstar Group 1,083,650
HongKong & Shanghai Bank 421,250
Lloyds Bank PLC 872,500
National Westminster Bank PLC 873,750
Nationsbank Corporation 2,102,160
Olympic Financial LTD 268,750
- ---------------------------------------------------------
11,010,246 8.2%
Broadcasting/Publishing
Capital Cities/ABC Inc. 1,074,920
News America Holdings Inc. 1,082,990
Turner Broadcasting Inc. 235,625
- ---------------------------------------------------------
2,393,535 1.8%
Brokerage
Goldman Sachs Group 505,625
Lehman Brothers Holding Inc. 506,695
Refco Group, LTD 1,014,780
Salomon Inc. 500,000
- ---------------------------------------------------------
2,527,100 1.9%
Chemicals
Dow Chemical Co. 2,454,332
EI Dupont Nemour 1,024,350
Uniroyal Chemical Co. Inc. 253,125
- ---------------------------------------------------------
3,731,807 2.8%
Electrical and Electronics
ADT Operations Inc. 257,335
MARK IV Industries Inc. 246,250
Texas Instruments Inc. 1,101,580
- ---------------------------------------------------------
1,605,165 1.2%
Energy
Enron Corporation 1,100,840
Peco Energy Company 1,498,275
Tenneco Inc. 1,064,840
- ---------------------------------------------------------
3,663,955 2.7%
Entertainment
Bicycle Holding Inc. 62,842
New Boston Garden Corporation 958,766
Showboat Inc. 251,250
Time Warner Inc. 1,567,230
United States Playing Card Company 500,000
Viacom Inc. 485,985
- ---------------------------------------------------------
3,826,073 2.9%
Finance/Financing
Airplanes Pass Through Trust 260,000
Bally Park Place Funding 266,250
BVPS II Funding Corporation 1,402,462
Chrysler Financial Corporation 1,082,960
Citicorp Mortgage Securities Inc. 504,375
Discover Credit Corporation 1,003,860
DLJ Mortgage Pass-thru 986,460
Dow Capital 1,114,900
Duquesne II Funding Corporation 1,013,344
Ford Holdings Inc. 1,030,060
General Electric Capital Corporation 1,109,850
General Motors
Acceptance Corporation 1,651,395
Greentree Financial Corporation 1,028,125
Merrill Lynch Mortgage Investors Inc. 810,277
Mid-State Homes IV Series I Class A 965,391
NWA Trust 528,337
Prudential Home Mortgage Securities 981,390
Resolution Trust Corporation 483,247
The Money Store 1,040,442
Van Kampen Merritt Companies, Inc. 266,875
- ---------------------------------------------------------
17,530,000 13.1%
Food and Beverage
RJR Nabisco Inc. 2,035,800
Cambuhy Export Trust 495,513
Chiquita Brands 243,125
Coca-Cola Enterprises Inc. 1,061,950
Coca-Cola Femsa SA DE 1,015,803
Conagra Inc. 1,477,245
Desert Eagle Distributing -- El Paso 3,160,978
Desert Eagle Distributing -- New Mexico 1,074
Safeway Inc. 270,938
- ---------------------------------------------------------
9,762,426 7.3%
Foreign and Foreign Government
Cemex SA 249,375
Compania De Desarrollo Aero 505,280
Province de Quebec 1,161,160
- ---------------------------------------------------------
1,915,815 1.4%
Forest Products
Crown Pacific Limited Partner 1,062,526
Macmillan Bloedel LTD 520,915
West Fraser Mills LTD 1,039,929
- ---------------------------------------------------------
2,623,370 2.0%
</TABLE>
+Unaudited
20 Lincoln National Income Fund, Inc.
<PAGE>
Portfolio of Investments by
Industry Classification+ CONTINUED
<TABLE>
<CAPTION>
Market Percent
or Fair of Net
Value Assets
- ---------------------------------------------------------
<S> <C> <C>
Funeral Homes
Loewen Group Inc. $ 995,000 0.7%
Government/Government Agency
Federal Home Loan Mortgage Corp. 2,139,647
Federal National Mortgage Assoc. 1,958,897
Government National
Mortgage Assoc. 4,366,302
- ---------------------------------------------------------
8,464,846 6.3%
Health Care
Champion Healthcare Corporation 568,250
Tenet Healthcare 263,750
- ---------------------------------------------------------
832,000 0.6%
Heavy Machinery
Caterpillar Inc. 891,910 0.7%
Hotels
Hilton Hotel Corporation 504,325 0.4%
Household Products
Black & Decker Corporation 537,165
Scotsman Group 251,250
- ---------------------------------------------------------
788,415 0.6%
Industrial
Essex Group Inc. 248,125 0.2%
Insurance
AllState Corporation 978,170
Nationwide 1,099,170
Travelers Inc. 1,621,020
- ---------------------------------------------------------
3,698,360 2.8%
Metals/Mining
Cyprus Amax Minerals Co. 489,310
INCO LTD 1,077,170
Noranda Inc. 1,553,355
- ---------------------------------------------------------
3,119,835 2.3%
Miscellaneous
Authorized Distribution Network Inc. 153
Huron Technologies Inc. 549,988
Keystone Group 198,000
Kinder Care Learning Centers 262,813
Louis Dreyfus Corporation 1,025,306
Nebraska Book Company, Inc. 537,040
Stackpole Magnetic Systems 499,992
- ---------------------------------------------------------
3,073,292 2.3%
Natural Gas
Coastal Corporation 1,127,110
Noram Energy Inc. 1,089,670
Penn Fuel Gas Inc. 978,187
Suburban Propane L.P. 953,989
- ---------------------------------------------------------
4,148,956 3.1%
Paper and Paper Products
Container Corporation
of America 257,500
Domtar Inc. 265,625
Sweetheart Cup Company 247,188
- ---------------------------------------------------------
770,313 0.6%
Petroleum
Oryx Energy Company 1,087,130
Pennzoil Company 1,166,570
Sun Inc. 1,084,190
Union Oil Company of California 1,105,080
- ---------------------------------------------------------
4,442,970 3.3%
Public Utility
Cleveland Electric Illuminating Co. 930,580
Commonwealth Edison Inc. 1,008,660
Houston Lighting & Power Company 1,609,845
Long Island Lighting Company 2,004,420
Louisiana Power & Light Company 1,076,930
Niagara Mohawk Power Corporation 491,720
PacifiCorp 1,065,870
Pennsylvania Power & Light 524,640
Texas Utilities Electric Company 1,015,990
Virginia Electric & Power Company 1,050,700
- ---------------------------------------------------------
10,779,355 8.1%
Retail
Dayton Hudson Corporation 1,220,260
Federated Department Stores 265,312
MDAS Investors Limited Partnership 50,000
Marks Brothers Jewelers, Inc. 500,000
Murray's Discount Auto Stores, Inc. 500,000
Sears Roebuck & Company 2,349,000
- ---------------------------------------------------------
4,884,572 3.7%
Steel
AK Steel Corporation 270,000
Steel Dynamics Holdings Inc. 1,000,039
Steel Technologies 521,638
- ---------------------------------------------------------
1,791,677 1.3%
Telecommunications
MCI Communications Corporation 1,020,290
New England Telephone & Telegraph 1,093,220
Nynex Corporation 1,919,389
Tele-Communications Inc. 1,964,580
- ---------------------------------------------------------
5,997,479 4.5%
Transportation
Concordia Maritime 1,013,154
Federal Express Corporation 1,400,762
Georgia Pacific Corporation 1,600,920
- ---------------------------------------------------------
4,014,836 3.0%
Total Investments $130,635,535 97.7%
- ---------------------------------------------------------
</TABLE>
+Unaudited
1996 Semi-Annual Report 21
<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 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 note 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. As of June 30, 1996, all direct placement securities, which totaled
$22,515,035 and represents 16.8% 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 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.
22 Lincoln National Income Fund, Inc.
<PAGE>
Notes to Financial Statements
CONTINUED
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:
. 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.
. 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 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 $17,602,812
and $16,647,426, respectively, as of June 30, 1996; and 20,558,774 and
$16,086,626, respectively as of June 30, 1995.
Note C -- Management Fees and Other Transactions with Affiliates
Under an agreement between the Fund and Lincoln Investment Management, Inc.
(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.
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, 1996.
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:
Cash $ 774,114
Accrued investment income
receivable 2,676,468
Receivable for investments
securities sold 501,594
Management fee payable (289,620)
Payable for investment
securities purchase (500,000)
Accrued VTP dividends payable (103,600)
Other -- net 7,116
----------
$3,066,072
----------
1996 Semi-Annual Report 23
<PAGE>
Notes to Financial Statements
CONTINUED
Note E -- Net Assets
Net assets at June 30, 1996, consisted of the following:
Preferred Stock,
par value $1.00 per share
(authorized 1,000,000 shares)
Variable Term Preferred Stock (VTP),
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 73,101,180
Undistributed realized gain on
investments, net of taxes paid 8,306,534
Undistributed net investment income 2,039,678
Net unrealized appreciation
of investments 3,422,020
------------
Total Net Assets $133,701,607
------------
Note F -- Income Taxes
The cost of investments for federal income tax purposes is the same as for
book purposes. At June 30, 1996, the aggregate gross unrealized appreciation on
investments was $5,087,965 and the aggregate gross unrealized depreciation was
$1,665,945.
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 non-compliance 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, 1996, dividend rates have ranged from
5.03% to 5.39% and the average dividend rate was 5.22%.
Note H -- Subsequent Event
On July 12, 1996, the Board of Directors declared a $.28 per share
distribution. The dividend is payable July 31, 1996 to shareholders of record
as of July 22, 1996.
24 Lincoln National Income Fund, Inc.
<PAGE>
<TABLE>
<CAPTION>
Common Stock Market Prices &
Net Asset Value History
1996
Market Prices & Volumes Net Asset Values
High Low Close Volumes High Low Close
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1st Quarter $13.88 $12.88 $13.13 304,700 $14.32 $13.82 $13.83
2nd Quarter 13.13 12.38 13.00 237,200 13.88 13.36 13.71
1995
Market Prices & Volumes Net Asset Values
High Low Close Volumes High Low Close
- ----------------------------------------------------------------------
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
3rd Quarter 13.00 12.25 12.75 218,100 14.30 13.82 14.22
4th Quarter 14.25 12.50 12.63 277,500 14.54 14.17 14.22
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
</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
1996 Semi-Annual Report 25
<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. and St. Joseph Light and Power Company;
Chairman of the Board Fort Dearborn Income Securities,
Inc.
Adela Cepeda President, A.C. Advisory, Inc.; Commissioner, Chicago
Public Building Commission; Director, Lincoln National
Convertible Securities Fund, Inc.; 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., Hospital Laundry Services, Inc.,
and Signature Care, Inc. Director and Treasurer, Pine
Valley Country Club; Member, Chamber of Commerce
Finance Committee.
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.; 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 and Chief Investment Officer,
Lincoln National Corporation; President and Director
Lincoln National Investment Companies, Inc.; President
and Director, Lincoln Investment Management Inc. and
Lincoln National Convertible Securities Fund, Inc.;
Director, The Lincoln National Life Insurance Company,
Delaware Management Holdings, Inc., Lynch & Mayer, Inc.
and Vantage Global Advisors, Inc.
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 and Director Portfolio
Management, Lincoln Investment Management, Inc;
Director, Lincoln National Convertible Securities Fund,
Inc.
Fred J. Young President, United Wealth Watchers of America; 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
Harold McElraft Vice President, Treasurer
Ann L. Warner Vice President
C. Suzanne Womack Secretary
26 Lincoln National Income Fund, Inc.
<PAGE>
CORPORATE INFORMATION
DIVIDEND DISBURSING AGENT,
TRANSFER AGENT AND
PLAN AGENT
Boston EquiServe
Investor Relations
P.O. Box 644
Boston, MA 02102-0644
1-800-730-6001
INVESTMENT ADVISOR
LINCOLN INVESTMENT MANAGEMENT, INC.
200 East Berry Street
Fort Wayne, IN 46802
(219) 455-2210
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
490 Lincoln Tower
Fort Wayne, IN 46802
STOCK EXCHANGE
The Fund's stock is traded on the New York Stock Exchange (NYSE) under the
trading symbol of LND.
AUTOMATIC DIVIDEND
REINVESTMENT PLAN
Any registered shareholder of Lincoln National Income Fund, Inc. may
participate in the Automatic Dividend Reinvestment Plan (the Plan). If you are
a beneficial owner whose shares are registered in the name of another (e.g., in
a broker's "street name") and desires to participate in the Plan, you must
become a registered holder by having the shares transferred to your name.
To participate in the Plan, you must complete and forward an authorization
card to the Plan agent. This card authorizes the Plan agent to receive your
dividends and other distributions from the Fund in additional shares of common
stock. The additional shares will be issued by the Fund, if the net asset value
per share is equal to or lower than the market price of the Fund's Common Stock
plus brokerage commissions. If the net asset value per share is higher than the
market price of the Fund's Common Stock plus brokerage commissions, the
additional shares will be purchased in the open market and the cost of the
brokerage commissions will be charged to each participant on a pro-rata basis.
The Plan also allows the Plan agent to accept optional cash contributions. Each
optional cash contribution by a participant must be not less than $100 and not
more than $3,000 per dividend period and must be received by the Plan agent not
less than five business days and no more than thirty days prior to the dividend
payment date.
Shares will be held by Boston EquiServe, the Plan agent. You will receive a
statement each time shares are distributed by the Fund or purchased for you.
There is no direct charge for Plan participation. The administrative costs of
the Plan are borne by the Fund.
If your dividends and other distributions are reinvested, they will be
subject to capital gains and income taxes as if they were paid to you in cash.
You may terminate your participation in the Plan at any time by giving
written notice to the Plan agent.
For additional information on the Plan, please write Boston EquiServe, P.O.
Box 644, Boston, MA 02102-0644 or call 1-800-730-6001.
1996 Semi-Annual Report 27
