Lincoln National Income Fund, Inc.
1997 Semi-Annual Report
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<CAPTION>
Table of Contents
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Page
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 STATEMENTS:
Financial Highlights ......................................... 6
Statement of Net Assets ...................................... 8
Statements of Operations ..................................... 18
Statements of Changes in Net Assets .......................... 19
Statements of Cash Flows ..................................... 20
Portfolio of Investments by Industry Classification .......... 21
Notes to Financial Statements ................................ 23
Common Stock Market Prices & Net Asset Value History .............. 26
Directors & Officers of the Fund .................................. 27
Corporate Information ............................................. 28
</TABLE>
<PAGE>
Manager Profile
Throughout it's 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 client assets for Lincoln National Corporation, as well
as pension plans, foundations, endowments, and other clients.
LIM invests in nearly all domestic capital markets and has developed an
increasing international investment presence. LIM currently has approximately
$40 billion in assets under management,and over the past year, total
investment transactions were approximately $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 17 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 Chartered 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 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
equity securities.
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, 1997, has chosen not to do so.
<PAGE>
President's Letter
July 18, 1997
Dear Shareholders:
For the six months ended June 30, 1997, Lincoln National Income Fund provided
a NAV return of 3.41%, 34 basis points ahead of the Lehman Corporate Bond
Index with returned 3.07%. The Fund's discount to NAV narrowed during the
six-month period by approximately 4% to 3.8% providing a market return of
7.33%. We are pleased with these returns during a lackluster period of bonds.
Bond interest rates have remained in a fairly tight range during 1997 and
ended the six months with rates up across the yield curve about 0.15%.
Not only has interest rate volatility been low, but spread volatility in the
bond market has also been low so far in 1997. Yield spreads to Treasuries of
corporate and other spread sectors remain very tight with minimal fluctuation
year to date. Credit spread widening seems a remote possibility as the economy
continues to show much vitality. However, the strong economy has yet to impact
inflation as some of the best inflation performances in years have recently
been reported. As an example, the monthly Producer Price Index (PPI) has now
declined for five consecutive months, the first time this has happened since
1952.
The big financial market story remains the substantial outperformance of
equities over bonds. Bond interest rates hit their lows a little over 3 1/2
years ago, and since this time bonds have returned just over 6% annualized
while the S&P 500 has returned 23% annualized. This disparity is explained by
the fact that low bond yields can't go much lower and are not especially
attractive to investors as evidenced by mutual fund flows, while equities have
benefited from substantial increases in corporate earnings.
Bond rate increases from here will follow inflation. We expect real rates on
long Treasuries to stay in the 4 to 4.5% range, and a rally of the 30-year
Treasury to a 6% yield from the current 6.58% will require a consensus
inflation expectation of 1.5 to 2.0%. Although the bond market will be
hesitant to take such an optimistic view, this outlook is possible given the
recent stellar performance of inflation both domestically and globally.
Responsible central banking, an expanding labor supply and freer global trade
are key contributors to this favorable inflation trend.
The Fund has not made substantial changes in its sector allocations or credit
quality distribution since the beginning of the year. One new strategy is that
the Fund has made some investments in the bonds of emerging market countries
as an alternative to domestic high yield corporates. Bonds of emerging market
countries have better yields than the U.S. high yield market and should
provide better diversification to the U.S. economic cycle.So far, slightly
over 1% of the Fund's assets has gone into these emerging market investments
such as sovereign bonds of Brazil, Colombia, and Russia, but we anticipate
growing investments in this sector in the future. In all, we continue to
believe the Fund remains an excellent investment for income-oriented
investors.
Respectfully,
/s/ H. Thomas McMeekin
H. Thomas McMeekin
President
<PAGE>
Asset Classification
As of June 30, 1997 (Dollars in Millions)
[PIE CHART]
Public Debt 71.30% $94.9
Government/Gov't Agency 5.51% $7.3
Direct Placements 19.41% $25.9
Equities/Partnerships 2.45% $3.3
Other Liabilities 1.33% $1.8
Distribution By Quality
As of June 30, 1997 (Dollars in Millions)
[BAR GRAPH]
AAA 7.12% $9.5
AA 1.60% $2.1
A 22.13% $29.5
BBB 33.41% $43.3
BB 8.84% $11.8
B 0.81% $1.1
Not Rated 2.90% $3.9
Direct Placements 19.41% $25.9
Equities 2.45% $3.3
Other Liabilities 1.33% $1.8
Portfolio Performance
As of June 30, 1997
The following table displays the net asset value total return for the Fund on
a cumulative basis compared to the Lehman Corporate Bond Index and Standard &
Poor's 500 Index of common stocks.
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<CAPTION>
YTD 1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C> <C>
Lincoln National Income Fund 3.41% 10.71% 38.17% 53.93% 161.93%
Lehman Corporate Bond Index 3.07% 8.79% 31.66% 47.14% 147.15%
Standard & Poor's 500* 20.60% 34.67% 113.76% 146.29% 292.22%
* Dividends Reinvested
</TABLE>
Total Fund Investments
At Market or Fair Values As of June 30,
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<CAPTION>
1997 1996
(000) % of Total (000) % of Total
<S> <C> <C> <C> <C>
Public Debt Securities $102,323 77% $106,576 80%
Direct Placement Securitie 25,861 19% 22,515 17%
Common Stocks & Warrants 337 1% ----- -----
Preferred Stocks 2,649 2% 1,495 1%
Partnerships 281 0% 50 0%
Other Assets/(Liabilities) 1,772 1% 3,066 2%
Total Net Assets $133,223 100% $133,702 100%
</TABLE>
<PAGE>
Dividend History
The Fund in its lifetime has distributed common dividends of $27.82 which
represents 222.6 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. Previous year
retention's allowed the Fund to grow its assets by $6,490,687 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
Year Dividend Year Dividend
<S> <C> <C> <C>
1975 and Prior $2.28 1987 $1.52
1976 0.87 1988 1.23
1977 0.90 1989 1.17
1978 0.90 1990 1.18
1979 0.92 1991 1.15
1980 0.97 1992 1.68
1981 1.04 1993 1.77
1982 1.12 1994 1.28
1983 1.14 1995 1.32
1984 1.20 1996 1.46
1985 1.27 1997 * 0.28
1986 1.17
* Dividends paid as of June 30th.
</TABLE>
SHAREHOLDER MEETING RESULTS
The Fund had their annual Shareholder meeting on April 22, 1997. Two proposals
were presented to shareholders for vote. Proposal I "Election of Directors"
and Proposal II "Ratification of the Selection of Auditor". A total of
5,689,126 of Common Stock shares (83.27% of the total outstanding shares) and
35,000 of Variable Term Preferred (VTP) stock shares (87.50% of the total
outstanding shares) were voted. The following table highlights the results of
the vote.
<TABLE>
<CAPTION>
Number of Number of Number of
Shares Voted Shares Voted Shares Voted
FOR AGAINST ABSTAINED
<S> <C> <C> <C>
Proposal I
Election of Directors-Common Stock
A. Cepeda 5,430,518 258,608 ----
R. Deshaies 5,439,837 249,289 ----
C. Freund 5,438,439 250,687 ----
T. McMeekin 5,437,690 251,436 ----
D. Toll 5,445,827 243,299 ----
A. Warner 5,416,341 272,785 ----
F. Young 5,422,463 266,663 ----
Election of Directors-Varible Term Preferred (VTP)
R. Burridge 35,000 ---- ----
A. Cepeda 35,000 ---- ----
R. Deshaies 35,000 ---- ----
C. Freund 35,000 ---- ----
T. Mathers 35,000 ---- ----
T. McMeekin 35,000 ---- ----
D. Toll 35,000 ---- ----
A. Warner 35,000 ---- ----
F. Young 35,000 ---- ----
Proposal II
Ratification of the Selection of
Auditor (Coopers & Lybrand L. 5,583,933 40,505 99,688
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
(Selected data for each share of common stock
outstanding throughout the period)
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<CAPTION>
Six Months Ended June 30th
1997 1996
(Unaudited) (Unaudited) 1996 1995
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $13.47 $14.22 $14.22 $12.25
Net Investment Income 0.69 0.72 1.44 1.46
Net Realized & Unrealized Gain\(Loss) (0.09) (0.79) (0.41) 2.17
Total From Investment Operations 0.60 (0.07) 1.03 3.63
Reduction - Stock Rights Offering ---- ---- ---- ----
Preferred Stock Underwriting Discounts
and Offering Costs ---- ---- ---- ----
Less Distributions:
Dividends from Net Investment Income:
To Preferred Shareholders (0.15) (0.16) (0.24) (0.29)
To Common Shareholders (0.28) (0.28) (1.21) (1.16)
Dividends from Net Realized Gains:
To Preferred Shareholders ---- ---- (0.07) (0.05)
To Common Shareholders ---- ---- (0.26) (0.16)
Total Distributions (0.43) (0.44) (1.78) (1.66)
Net Asset Value, End of Period $13.64 $13.71 $13.47 $14.22
Per Share Market Value, End of Period $13.13 $13.00 $12.50 $13.63
Total Investment Return (based on
Market Value) 7.33% (2.49%) 2.42% 39.07%
Ratios/Supplemental Data
Net Assets, End of Period (000) $133,223 $133,702 $132,054 $137,163
Ratio - Expenses to Average Net Asset 0.59% 0.55% 1.11% 1.14%
Ratio-Net Income to Average Net Asset 3.60% 3.64% 7.32% 7.44%
Portfolio Turnover Rate 11.51% 12.36% 22.73% 26.98%
</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.
<PAGE>
FINANCIAL HIGHLIGHTS (CONT'D)
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<CAPTION>
----------- YEAR ENDING ----------
<S> <C> <C> <C> <C>
1994 1993 1992 1991
Net Asset Value, Beginning of Period $14.63 $14.18 $14.85 $13.40
Net Investment Income 1.47 1.56 1.36 1.15
Net Realized & Unrealized Gain\(Loss) (2.18) 0.92 (0.01) 1.45
Total From Investment Operations 0.71) 2.48 1.35 2.60
Reduction - Stock Rights Offering (0.10) ---- ---- ----
Preferred Stock Underwriting Discounts
and Offering Costs ---- ---- (0.23) ----
Less Distributions:
Dividends from Net Investment Income:
To Preferred Shareholders (0.27) (0.19) (0.08) ----
To Common Shareholders (1.20) (1.31) (1.31) (1.15)
Dividends from Net Realized Gains:
To Preferred Shareholders (0.02) (0.07) (0.03) ----
To Common Shareholders (0.08) (0.46) (0.37) ----
Total Distributions (1.57) (2.03) (1.79) (1.15)
Net Asset Value, End of Period $12.25 $14.63 $14.18 $14.85
Per Share Market Value, End of Period $10.75 $15.00 $14.31 $13.81
Total Investment Return (based on
Market Value) (19.80%) 17.17% 15.78% 25.96%
Ratios/Supplemental Data
Net Assets, End of Period (000) $123,683 $113,181 $109,466 $72,752
Ratio - Expenses to Average Net Asset 1.19% 1.17% 1.00% 0.97%
Ratio-Net Income to Average Net Asset 7.31% 6.76% 7.56% 8.05%
Portfolio Turnover Rate 33.64% 43.72% 97.63% 15.07%
</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.
<PAGE>
FINANCIAL HIGHLIGHTS (CONT'D)
<TABLE>
<CAPTION>
------- YEAR ENDING -------
1990 1989 1988 1987
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $14.44 $13.35 $12.83 $13.68
Net Investment Income 1.17 1.15 1.16 1.21
Net Realized & Unrealized Gain\(Loss) (1.03) 1.11 0.59 (0.54)
Total From Investment Operations 0.14 2.26 1.75 0.67
Reduction - Stock Rights Offering ---- ---- ---- ----
Preferred Stock Underwriting Discounts
and Offering Costs ---- ---- ---- ----
Less Distributions:
Dividends from Net Investment Income:
To Preferred Shareholders ---- ---- ---- ----
To Common Shareholders (1.18) (1.16) (1.16) (1.52)
Dividends from Net Realized Gains:
To Preferred Shareholders ---- ---- ---- ----
To Common Shareholders ---- (0.01) (0.07) ----
Total Distributions (1.18) (1.17) (1.23) (1.52)
Net Asset Value, End of Period $13.40 $14.44 $13.35 $12.83
Per Share Market Value, End of Period $11.88 $12.94 $11.88 $11.50
Total Investment Return (based on
Market Value) 0.87% 18.80% 13.96% 1.13%
Ratios/Supplemental Data
Net Assets, End of Period (000) $65,652 $70,740 $65,383 $62,870
Ratio - Expenses to Average Net Asset 0.97% 0.96% 0.97% 0.93%
Ratio-Net Income to Average Net Asset 8.49% 8.04% 8.43% 8.93%
Portfolio Turnover Rate 28.85% 44.46% 63.39% 46.71%
</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.
<PAGE>
Statement of Net Assets (Unaudited)
As of June 30, 1997
<TABLE>
<CAPTION>
Par Market or
Investments-Notes A & B Amount Cost Fair Value
Public Debt Securities (76.8%)
<S> <C> <C> <C>
ADT Operations Inc.
8.25% Senior Note, 8/1/00 $250,000 $250,000 $258,935
AGCO Corporation
8.50% Senior Note, 3/15/06 250,000 256,250 255,000
AK Steel Corporation
10.75% Guaranteed Senior Note, 4/1/04 250,000 251,250 269,062
AllState Corporation
7.50% Debenture, 6/15/13 1,000,000 911,180 1,013,740
AMR Corporation
10.00% Bond, 4/15/21 1,000,000 1,028,860 1,216,120
American Airlines 1988-A Grantor Trusts
9.83% Equipment Note Pass Through
Certificates Series 1988-A3, 1/1/02 1,157,445 1,157,445 1,207,562
Ametek Inc.
9.75% Senior Note, 3/15/04 250,000 264,063 265,000
Banc One Corporation
9.875% Subordinated Note, 3/1/09 1,000,000 1,152,890 1,202,180
BankAmerica Corporation
10.00% Subordinated Note, 2/1/03 1,000,000 1,183,100 1,136,440
Black & Decker Corporation
8.91% Medium Term Note, 1/21/02 500,000 542,425 537,415
Blount Inc.
9.00% Senior Subordinated Note, 6/15/03 500,000 516,250 523,750
BVPS II Funding Corporation
8.33% Collateralized Lease Bond, 12/1/07 1,490,000 1,536,279 1,482,550
Capital Cities/ABC Inc.
8.875% Senior Note, 12/15/00 1,000,000 1,006,630 1,069,670
Caterpillar Inc.
6.00% Debenture, 5/1/07 1,000,000 892,673 918,180
Cemex SA
10.00% Eurobond Medium-Term Note, 11/5/99 250,000 222,500 260,312
Chiquita Brands International Inc.
9.625% Senior Note, 1/15/04 250,000 252,500 265,312
Chrysler Financial Corporation
9.50% Senior Note, 12/15/99 1,000,000 1,120,000 1,068,250
Citicorp Mortgage Securities Inc.
8.75% REMIC 91-6 Class B, 5/25/21 500,000 505,703 507,344
Cleveland Electric Illuminating Company
7.625% First Mortgage Bond, 8/1/02 1,000,000 961,790 1,009,650
Coastal Corporation
9.75% Debenture, 8/1/03 1,000,000 1,150,890 1,133,540
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
Statement of Net Assets (Cont'd)
(Unaudited)
<TABLE>
<CAPTION>
Par Market or
Amount Cost Fair Value
Public Debt Securities (cont'd)
<S> <C> <C> <C>
Commonwealth Edison Company
8.625% First Mortgage Bond, 2/1/22 1,000,000 939,620 1,041,710
Compania De Desarrollo Aeropuerto Eldorado SA
10.19% Senior Note, 5/31/11 500,000 500,000 563,750
ConAgra Inc.
7.40% Subordinated Debt Securities, 9/15/04 1,500,000 1,495,140 1,519,440
Connecticut Light & Power Company
7.25% 1st Refunding Mortgage, 7/1/99 1,000,000 1,003,430 993,970
Container Corporation of America
11.25% Series A Senior Note, 5/1/04 250,000 258,750 273,750
Cyprus Amax Minerals Company
7.375% Note, 5/15/07 500,000 517,255 503,490
Dayton Hudson Corporation
10.00% Debenture, 1/1/11 1,000,000 1,248,660 1,224,390
Delta Air Lines Inc.
9.90% Equipment Trust Certificates
Series 1988 C, 6/16/02 1,473,000 1,564,297 1,634,146
Donaldson Lufkin & Jenrette Mortgage Acceptance Corp.
7.71% Mortgage Pass Through Class A, 6/26/25 954,853 969,773 525,169
Dow Capital B.V.
9.00% Guaranteed Debenture, 5/15/10 1,000,000 1,186,170 1,139,810
Duquesne II Funding Corporation
8.70% Collateralized Lease Bonds, 6/1/16 990,000 990,000 1,073,289
EES Coke Battery Company
7.125% Senior Note Series A, 4/15/02 500,000 500,000 501,565
EI Dupont Nemour
8.25% Debenture, 1/15/22 1,000,000 1,097,680 1,039,910
Enron Corporation
9.50% Senior Fixed Rate Note, 6/15/01 1,000,000 1,141,040 1,090,720
Essex Group Inc.
10.00% Senior Note, 5/1/03 250,000 243,125 263,750
Federal Express Corporation - Global
9.875% Note, 4/1/02 1,250,000 1,400,000 1,399,937
Federal Home Loan Mortgage Corporation (FHLMC)
7.80% REMIC Series 46 Class B, 9/15/20 1,000,445 884,496 1,019,564
7.00% Pass Through Series 7 Class A, 9/17/31 985,024 958,244 959,937
Federal National Mortgage Association (FNMA)
9.20% Guaranteed REMIC 88-14, 12/25/17 707,683 692,896 725,609
9.00% Trust Series 265 Class C, 3/1/24 760,982 818,055 810,445
First Hawaiian Bank
6.93% Series A Note, 12/01/03 500,000 488,050 495,000
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
Statement of Net Assets (Cont'd)
(Unaudited)
<TABLE>
<CAPTION>
Par Market or
Amount Cost Fair Value
Public Debt Securities (cont'd)
<S> <C> <C> <C>
First Interstate Bancorp
8.15% Subordinated Note, 3/15/02 1,000,000 1,000,000 1,014,700
First Nationwide Holdings
10.625% Senior Subordinated Note, 10/01/03 250,000 271,563 276,250
First USA Bank Wilmington Delaware
7.65% Subordinated Note, 8/1/03 1,000,000 1,000,000 1,028,130
Fleet/Norstar Financial Group Inc.
8.625% Subordinated Note, 1/15/07 1,000,000 1,044,630 1,090,760
Ford Holdings Inc.
9.25% Guaranteed Note, 7/15/97 1,000,000 998,710 1,001,090
General Electric Capital Corporation
8.75% Note, 5/21/07 1,000,000 1,108,350 1,123,830
General Motors Acceptance Corporation
8.875% Note, 6/1/10 1,500,000 1,656,000 1,714,230
Georgia Pacific Corporation
9.50% Debenture, 5/15/22 1,500,000 1,551,450 1,635,075
Goldman Sachs Group L.P.
7.20% Senior Note, 3/01/07 500,000 499,750 520,900
Government National Mortgage Association (GNMA)
9.00% Pass-Thru Pool #309771, 8/15/21 1,100,105 1,186,082 1,176,562
9.00% Pass-Thru Pool #349329, 3/15/23 2,492,270 2,687,014 2,644,398
Greentree Financial Corporation
8.65% Subordinated Note Class B1, 1,000,000 988,594 1,045,625
Gulf Canada Resources LTD
9.625% Subordinated Debenture, 07/01/05 250,000 262,500 269,063
HongKong & Shanghai Bank
5.813% Subordinated Note, 12/29/49 500,000 408,500 445,000
Houston Lighting & Power Company
9.80% Medium Term Note Series B, 2/15/99 1,500,000 1,467,165 1,579,500
INCO LTD
9.60% Debenture, 6/15/22 1,000,000 1,084,580 1,092,890
ITT Corporation
6.75% Note, 11/15/03 1,000,000 963,650 972,080
K - III Communications
8.50% Company Guarantee Series B, 2/1/06 250,000 252,188 251,875
Lehman Brothers Holdings Inc.
7.375% Senior Note, 5/15/07 500,000 522,740 513,850
Lloyds Bank PLC
6.25% Subordinated Note, 6/29/49 1,000,000 835,000 920,000
Long Island Lighting Company
9.75% General Refunding Mortgage, 5/1/21 2,000,000 2,013,290 2,059,440
Louisiana Power & Light Company
10.67% Waterford Secured Lease, 1/2/17 1,000,000 996,250 1,067,100
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
Statement of Net Assets (Cont'd)
(Unaudited)
<TABLE>
<CAPTION>
Par Market or
Amount Cost Fair Value
Public Debt Securities (cont'd)
<S> <C> <C> <C>
Macmillan Bloedel LTD
8.50% Debenture, 1/15/04 500,000 523,390 526,155
MARK IV Industries Inc.
8.75% Senior Subordinated Note, 4/1/03 250,000 250,000 253,750
McDonnell Douglas Corporation
9.25% Note, 4/1/02 1,000,000 1,142,300 1,100,390
MCI Communications Corporation
7.50% Senior Note, 8/20/04 1,000,000 1,013,020 1,039,700
Mellon Capital I
7.72% Bond Series A 12/1/26 400,000 400,000 387,360
Merrill Lynch Mortgage Investors Inc.
10.00% Pass-thru Series 90-A1, 3/15/10 595,822 592,486 645,597
NAL Auto Trust
7.30% 1996-3 Class A, 12/15/00 355,884 355,673 355,328
Nationsbank Corporation
8.125% Subordinated Note, 6/15/02 1,000,000 997,500 1,053,320
Nationwide
9.875% Contingent Surplus Note, 2/15/25 1,000,000 1,092,350 1,085,210
New England Telephone & Telegraph Company
9.00% Debenture, 8/1/31 1,000,000 1,007,300 1,087,440
News America Holdings Inc.
9.25% Senior Debenture, 2/1/13 1,000,000 1,110,980 1,106,540
Niagara Mohawk Power Corporation
9.25% First Mortgage Bond, 10/1/01 500,000 503,490 524,450
Noram Energy Inc.
10.00% Debenture, 11/15/19 1,000,000 1,117,400 1,101,360
Noranda Inc.
8.00% Yankee Bond, 6/1/03 1,500,000 1,500,000 1,562,625
NWA Trust
10.23% Asset-Backed Note Class B, 6/21/14 469,238 552,454 549,675
Nynex Corporation
9.55% Debenture, 5/1/10 1,615,508 1,943,553 1,818,206
Oryx Energy Company
10.00% Debenture, 4/1/01 1,000,000 1,036,380 1,096,820
PacifiCorp
8.29% Secured Medium Term Note, 12/30/11 1,000,000 1,000,000 1,093,060
Peco Energy Company
7.125% 1st Refunding Mortgage Bond, 9/1/02 1,500,000 1,500,375 1,518,465
Pennsylvania Power & Light
8.50% First Mortgage Bond, 5/1/22 500,000 534,295 531,025
Pennzoil Company
10.125% Debenture, 11/15/09 1,000,000 1,134,440 1,222,850
Progress Capital Holdings LTD
6.88% Medium Term Note, 8/1/01 1,000,000 1,000,000 999,570
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
Statement of Net Assets (Cont'd)
(Unaudited)
<TABLE>
<CAPTION>
Par Market or
Amount Cost Fair Value
Public Debt Securities (cont'd)
<S> <C> <C> <C>
Province de Quebec
11.00% Yankee Bond, 6/15/15 1,000,000 1,072,720 1,141,900
Republic of Brazil
10.125% Global Bond, 5/15/27 250,000 238,438 242,125
Republic of Colombia
7.625% Global Bond, 2/15/07 300,000 294,045 292,119
Resolution Trust Corporation
8.80% Mortgage Pass-thru Ser. 92-C1, 386,043 384,965 386,043
Russian Federation
10.00% Bond, 6/27/07 250,000 247,910 249,125
RJR Nabisco Inc.
9.25% Debenture, 8/15/13 1,000,000 987,390 1,014,900
Safeway Stores Inc.
9.875% Senior Subordinated Debenture, 250,000 274,375 295,885
Sears Roebuck & Company
9.05% Medium Term Note, 2/6/12 1,000,000 1,059,380 1,168,670
Selkirk Cogen Funding Corporation
8.65% First Mortgage Series A, 12/26/07 990,055 1,032,676 1,057,388
Sequa Corporation
8.75% Senior Note, 12/15/01 250,000 250,937 254,375
Showboat Inc.
9.25% First Mortgage Bond, 5/1/08 250,000 212,500 256,250
Specialty Paperboard Inc.
9.375% Senior Note, 10/15/06 250,000 256,875 253,438
Standard Charter PLC
5.813% Subordinated Note, 11/29/49 1,000,000 877,400 877,500
Sun Inc.
9.375% Debenture, 6/1/16 1,000,000 1,182,350 1,083,090
Systems Energy Resources
7.800% Senior Note, 8/1/00 1,000,000 1,000,000 1,002,840
Tele-Communications Inc.
9.25% Debenture, 1/15/23 2,000,000 1,993,580 2,048,540
Tenet Healthcare Corporation
10.125% Senior Subordinated Note, 3/1/05 250,000 266,875 273,750
Termoemcali Funding Corporation
10.125% Note, 12/15/14 500,000 500,000 521,281
Texas Instruments Inc.
8.75% Note, 4/1/07 1,000,000 1,067,180 1,117,170
Texas Utilities Electric Company
7.375% First Mortgage Bond, 8/1/01 1,000,000 999,375 1,018,380
Time Warner Inc.
9.125% Senior Note, 1/15/13 1,500,000 1,614,600 1,663,575
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
Statement of Net Assets (Cont'd)
(Unaudited)
<TABLE>
<CAPTION>
Par Market or
Amount Cost Fair Value
Public Debt Securities (cont'd)
<S> <C> <C> <C>
Toll Brothers Inc.
8.75% Company Guarantee, 11/15/06 250,000 257,188 257,500
Turner Broadcasting Systems Inc.
7.40% Senior Note, 2/1/04 250,000 249,612 250,430
UNC Inc.
9.125% Senior Note, 7/15/03 250,000 250,000 263,125
Uniroyal Chemical Co. Inc.
9.00% Senior Note, 9/1/00 250,000 236,875 259,375
United Airlines Inc.
8.70% Pass-thru Trust Series 92-A1, 10/7/08 938,639 935,176 993,756
9.35% Pass-thru Series 92-A, 4/7/16 1,500,000 1,516,845 1,690,380
Van Kampen Merritt Companies, Inc.
9.75% Senior Secured Note, 2/15/03 250,000 260,000 263,395
Viacom Inc.
7.75% Senior Note, 6/1/05 1,000,000 966,115 1,003,660
Virginia Electric & Power Company
9.35% Medium Term Note Series B, 6/22/98 1,000,000 991,640 1,029,300
Wells Fargo Capital A
8.13% Bond, 12/1/26 500,000 521,000 497,450
Whirlpool Corporation
9.00% Debenture, 03/01/03 1,000,000 1,087,820 1,095,820
Total Public Debt Securities 100,250,593 102,323,142
Direct Placement Securities (19.4%)
Notes A & B
DEBT
Anglo Irish Bank Corporation
9.10% Notes Series A, 9/30/06 1,000,000 1,000,000 1,081,861
Banco Nacional de Mexico
7.57% Fixed Rate Senior Certificate, 500,000 499,982 494,825
Cambuhy Export Trust
8.12% Trust Certificates Series 96-1, 437,191 437,191 437,077
Centennial Resources Inc.
13.00% Senior Subordinated Note, 500,000 499,999 499,999
Coca-Cola Femsa SA DE
9.40% Convertible Senior Note, 8/15/04 1,000,000 1,000,000 1,048,936
Concordia Maritime
9.29% 1st Preferred Ship Mortgage, 1,000,000 1,000,000 1,019,736
Deloitte & Touche LLP
7.41% Guaranteed Senior Note 1,000,000 1,000,000 998,309
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
Statement of Net Assets (Cont'd)
(Unaudited)
<TABLE>
<CAPTION>
Par Market or
Amount Cost Fair Value
Direct Placements Securities - Debt (cont'd)
<S> <C> <C> <C>
Desert Eagle Distributing of El Paso Inc.
13.00% Senior Subordinated Notes, 1,750,000 1,529,500 1,750,000
Dow Chemical Co.
17.25% Certificate of Interest, 1/2/03 1,674,710 1,674,710 2,170,592
Fort Wayne Capital Trust
9.85% Senior Note, 4/15/27 1,000,000 1,000,000 1,028,384
Global Telesystems Holdings
12.00% Senior Note, 3/31/04 200,000 200,000 200,000
Guangdong International Trust & Investment
8.75% Yankee Bond, 10/24/16 500,000 498,600 519,896
Huron Technologies Corporation
14.00% Subordinated Note, 5/15/05 550,000 421,667 550,000
Louis Dreyfus Corporation
8.43% Senior Note, 7/15/01 1,000,000 1,000,000 1,025,824
Murray's Discount Auto Stores, Inc.
11.00% Senior Subordinated Note, 500,000 478,000 478,000
Mutual Fund Fee Trust IV
7.99% Series 1997-2 Asset-Backed, 960,183 960,183 965,550
Nebraska Book Company, Inc.
12.00% Senior Subordinated Note, 500,000 500,000 500,000
New Boston Garden Corporation
8.45% Senior Secured Note, 9/22/15 963,564 963,564 954,630
Penn Fuel Gas Inc.
7.51% Senior Note, 4/15/14 1,000,000 1,000,000 983,193
Refco Group, LTD
8.21% Senior Note, 5/16/02 1,000,000 1,000,000 1,016,941
Spectrascan Inc.
11.25% Senior Subordinated Note, 6/30/00 500,000 490,000 490,000
Stackpole Magnetic Systems, Inc.
13.50% Senior Subordinated Note, 380,000 351,500 380,000
Steel Technologies Inc.
8.52% Senior Note, 3/1/05 500,000 500,000 519,676
Suburban Propane L.P.
7.54% Senior Note, 6/30/11 1,000,000 1,000,000 974,018
Summit Acceptance Corporation
12.00% Senior Subordinated Note, 3/31/00 500,000 477,500 477,500
The Money Store Inc.
9.00% Senior Note, 3/31/02 1,000,000 1,000,000 1,049,486
Union Acceptance Corporation
8.53% Senior Note, 8/01/02 1,000,000 1,015,910 1,016,000
United States Playing Card Company
12.00% Subordinated Note, 11/18/04 500,000 470,000 500,000
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
Statement of Net Assets (Cont'd)
(Unaudited)
<TABLE>
<CAPTION>
Par Market or
Amount Cost Fair Value
Direct Placements Securities - Debt (cont'd)
<S> <C> <C> <C>
West Fraser Mills LTD
8.44% Guaranteed Senior Note, 6/30/04 1,000,000 1,000,000 1,052,472
Total Direct Placement Debt 22,968,306 24,182,905
Quantity
Direct Placements Securities - Equities
Bicycle Holding Inc. *
Common Stock 8 30,000 88,195
Centennial Coal, Inc. *
Stock Warrants
(entitled to purchase 37 shares of common
stock for $0.01 per share. Expires
9/01/06) 1 1 1
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) 2 204,738 1,142,402
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) 1 1,074 1
Global Telesystems Holdings *
14.00% Preferred Stock 100 100,000 100,000
Huron Technologies Corporation *
Stock Warrants
(entitled to purchase 59 shares of common
stock for $0.06 per share. Expires
2/20/05) 1 128,333 182,417
Murray's Discount Auto Stores, Inc. *
Stock Warrants
(entitled to purchase 25 shares of common
stock for $0.01 per share.Expires 8/31/03) 1 22,000 1,625
Nebraska Book Company, Inc. *
Common Stock 3,704 37,039 57,931
Stock Warrants
(entitled to purchase 7,071 shares of
common stock for $10 per share. Expires
8/31/05) 1 1 39,880
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
Statement of Net Assets (Cont'd)
(Unaudited)
<TABLE>
<CAPTION>
Par Market or
Amount Cost Fair Value
Direct Placements Securities - Equities (cont'd)
<S> <C> <C> <C>
PSC, Inc. *
Stock Warrants 1 10,000 10,075
(entitled to purchase 16,250 shares of
common stock for $10 per share. Expires
7/12/06)
Stackpole Magnetic Systems *
Stock Warrants
(entitled to purchase 54,582 shares of
common stock for $0.01 per share. Expires
9/01/05) 1 28,500 9,825
8.00% Cumulative Convertible Preferred 120,000 120,000 22,800
Summit Acceptance Corporation *
Stock Warrants
(entitled to purchase 23,162 shares of
common stock for $0.01 per share. Expires
3/31/00) 1 22,500 22,500
Total Direct Placement Equities 704,186 1,677,652
Total Direct Placement Securities 23,672,492 25,860,557
Preferred Stocks (2.0%)
Loewen Group Inc.
Capital Series A 40,000 $1,000,000 $1,060,000
Salomon Financing Trust I 9.183%
Guaranteed Preferred Stock 20,000 500,000 528,740
Transcanada Capital
Guaranteed Preferred Stock 40,000 1,042,000 1,060,000
Total Preferred Stocks 2,542,000 2,648,740
Common Stocks (0.3%)
Authorized Distribution Network, Inc. * 10,945 1,227 153
Paracelsus Healthcare Corporation * 7,500 62,048 37,965
Steel Dynamics Holdings Inc. * 15,992 60,647 298,560
Total Common Stocks 123,922 336,678
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
Statement of Net Assets (Cont'd)
(Unaudited)
<TABLE>
<CAPTION>
Par Market or
Amount Cost Fair Value
<S> <C> <C> <C>
Partnerships (0.2%)
KBP Holdings L.P. 250,000 250,000
MDAS Investors, L.P. 49,652 31,320
Total Partnerships 299,652 281,320
Total Investments (98.7%) 126,888,658 131,450,437
Excess of Other Assets over Liabilities - Note D 1,772,154
1.3%
Net Assets (100%) - Note E 133,222,591
Net asset value per share of common stock outstanding
($133,222,591 less Variable Term Preferred stock at
liquidation value of $40,000,000 divided by 6,832,195
shares of common stock outstanding) - Note E
$13.64
* Non-Income Producing
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
3 Months Ended June 30, 6 Months Ended June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Investment Income:
Income:
Interest $2,718,994 $2,786,613 $5,422,745 $5,587,128
Dividends 57,374 23,625 114,747 51,187
Total Income 2,776,368 2,810,238 5,537,492 5,638,315
Expenses:
Management Fees(Note C) 287,149 289,620 563,713 571,428
Variable Term Preferred
Stock Auction Fees 28,604 23,328 49,988 46,656
Director Fees 20,500 21,500 38,000 40,000
Professional fees 8,533 5,697 22,533 30,204
Printing, stationery,
and supplies 24,972 3,108 25,810 3,514
Stock Transfer fees 10,946 (1,622) 30,120 630
Postage & mailing fees 13,197 12,996 13,197 17,392
NYSE fee 0 4,410 16,170 7,350
Custodian fees 1,861 9,314 3,743 13,797
Other 8,849 (2,745) 17,603 14,585
Total Expenses 404,611 365,606 780,877 745,556
Net Investment Income 2,371,757 2,444,632 4,756,615 4,892,759
Net realized and unrealized gain(loss)
on investments:
Net realized gain 193,181 480,029 247,270 1,815,846
Increase(decrease) in
net unrealized appreciation
of investments 1,432,489 (1,256,446) (876,679) (7,189,125)
Net Realized &
Unrealized Gain(Loss)
on Investments 1,625,670 (776,417) (629,409) (5,373,279)
Net Increase in Net Assets
Resulting from Operations $3,997,427 $1,668,215 $4,127,206 ($480,520)
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS (Unaudited)
<TABLE>
<CAPTION>
3 Months Ended June 30, 6 Months Ended June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Changes from operations:
Net Investment Income $2,371,757 $2,444,632 $4,756,615 $4,892,759
Net realized gain
on investments 193,181 480,029 247,270 1,815,846
Increase(Decrease) in
Net Unrealized appreciation
of investments 1,432,489 (1,256,446) (876,679) (7,189,125)
Net Increase(Decrease)
in Net Assets Resulting
from Operations 3,997,427 1,668,215 4,127,206 (480,520)
Distributions to shareholders from net
investment income:
Common Shareholders (1,913,015) (1,913,015) (1,913,015) (1,913,015)
Preferred Shareholders (517,504) (521,330) (1,045,257) (1,068,316)
Total Distributions
to Shareholders from Net
Investment Income (2,430,519) (2,434,345) (2,958,272) (2,981,331)
Total Increase(Decrease)
in Net Assets 1,566,908 (766,130) 1,168,934 (3,461,851)
Net assets at beginning
of perio d 131,655,683 134,467,737 132,053,657 137,163,458
Net Assets at
End of Period * $133,222,591 $133,701,607 $133,222,591 $133,701,607
</TABLE>
* Includes undistributed net investment income as of June 30: 1997 -
$1,989,479; 1996 - $ 2,039,678.
The accompanying notes are an integral part of the financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
3 Months Ended June 30, 6 Months Ended June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Operating Activities:
Interest Received $2,909,553 $3,057,408 $5,395,123 $5,620,378
Dividends Received 57,374 23,624 92,874 59,061
Operating Expenses Paid (387,036) (375,944) (768,870) (761,410)
Net Cash Provided by
Operating Activities 2,579,891 2,705,088 4,719,127 4,918,029
Investing Activities:
Purchase of investment
securities (11,942,713) (5,461,630) (16,993,306) (17,102,812)
Proceeds from sale of
investmentsecurities 11,229,719 4,337,349 15,240,660 16,163,471
Net proceeds of
short-term investments1,100,959 998,707 4,600,000 1,999,232
Net Cash Provided by
(Used In) Investing
Activities 387,965 (125,574) 2,847,354 1,059,891
Financing Activities:
Distributions paid to
common and preferred
shareholders (2,400,615) (2,394,702) (7,126,576) (6,182,556)
Net Cash Used in
Financing Activities (2,400,615) (2,394,702) (7,126,576) (6,182,556)
Increase (Decrease)
in Cash 567,241 184,812 439,905 (204,636)
Cash at Beginning
of Period (35,035) 589,302 92,301 978,750
Cash at End
of Period - Note D $532,206 $774,114 $532,206 $774,114
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 $3,997,427 $1,668,215 $4,127,206 ($480,520)
Reconciling Adjustments:
Net realized and
unrealized (gain)loss
on investments (1,625,670) 776,417 629,409 5,373,279
Discount accretion
on investment
securities (1,834) (1,672) (3,575) (3,375)
(Increase)Decrease
in accrued investment
income receivable 192,393 272,498 (24,046) 36,626
(Increase)decrease
in accrued dividend
receivable 0 0 (21,875) 0
Increase(Decrease)
in accrued expenses 17,575 (10,370) 12,008 (7,981)
Net Cash Provided
by Operating
Activities $2,579,891 $2,705,088 $4,719,127 $4,918,029
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
PORTFOLIO of INVESTMENTS BY INDUSTRY CLASSIFICATION
As of June 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Market or Percent of
Fair Value Net Assets
<S> <C> <C>
Accounting Firms
Deloitte & Touche LLP $998,309 0.7%
Aerospace
McDonnell Douglas Corporation 1,100,390
Sequa Corporation 254,375
UNC Inc. 263,125
1,617,890 1.2%
Airline
AMR Corporation 2,423,682
Delta Air Lines Inc. 1,634,146
United Airlines Inc. 2,684,136
6,741,964 5.1%
Bank
Anglo Irish Bank Corporation 1,081,861
Banc One Corporation 1,202,180
Banco Nacional De Mexico 494,825
BankAmerica Corporation 1,136,440
First Hawaiian Bank 495,000
First Interstate Bancorp 1,014,700
First Nationwide Holdings 276,250
First USA Bank 1,028,130
Fleet/Norstar Group 1,090,760
HongKong & Shanghai Bank 445,000
Lloyds Bank PLC 920,000
Mellon Capital I 387,360
Nationsbank Corporation 1,053,320
Standard Charter PLC 877,500
Wells Fargo Capital A 497,450
12,000,776 9.0%
Broadcasting/Publishing
Capital Cities/ABC Inc. 1,069,670
K-III Communications 251,875
News America Holdings Inc. 1,106,540
Turner Broadcasting Inc. 250,430
2,678,515 2.0%
Brokerage
Goldman Sachs Group 520,900
Lehman Brothers Holding Inc. 513,850
Refco Group 1,016,941
Salomon Inc. 528,740
2,580,431 1.9%
Chemicals
Dow Chemical Co. 2,170,592
EI Dupont Nemour 1,039,910
Uniroyal Chemical Co. Inc. 259,375
3,469,877 2.6%
Conglomerate
ITT Corporation 972,080 0.7%
</TABLE>
<PAGE>
PORTFOLIO of INVESTMENTS BY INDUSTRY CLASSIFICATION
Continued (Unaudited)
Market or Percent of
Fair Value Net Assets
[S] [C] [C]
Electrical and Electronics
ADT Operations Inc. 258,935
MARK IV Industries Inc. 253,750
PSC Inc. 10,075
Spectrascan Inc. 490,000
Texas Instruments Inc. 1,117,170
2,129,930 1.6%
Energy
Enron Corporation $1,090,720
Gulf Canada Resources 269,063
Peco Energy Company 1,518,465
Systems Energy Resources 1,002,840
3,881,088 2.9%
Entertainment
Bicycle Holding Inc. 88,195
New Boston Garden Corporation 954,630
Showboat Inc. 256,250
Time Warner Inc. 1,663,575
United States Playing Card Company 500,000
Viacom Inc. 1,003,660
4,466,310 3.4%
Finance
Chrysler Financial Corporation 1,068,250
Dow Capital 1,139,810
Duquesne II Funding Corporation 1,073,289
Ford Holdings Inc. 1,001,090
Fort Wayne Capital Trust 1,028,384
General Electric Capital Corporation 1,123,830
General Motors Acceptance Corporation 1,714,230
Progress Capital Holdings LTD 999,570
Selkirk Cogen Funding Corporation 1,057,388
Summit Acceptance Corporation 500,000
The Money Store 1,049,486
Termoemcali Funding Corporation 521,281
Union Acceptance Corporation 1,016,000
Van Kampen Merritt Companies, Inc. 263,395
13,556,003 10.2%
Finance - Structured
Citicorp Mortgage Securities Inc. 507,344
DLJ Mortgage Pass-thru 525,169
Greentree Financial Corporation 1,045,625
Merrill Lynch Mortgage Investors Inc. 645,597
NAL Auto Trust 355,328
NWA Trust 549,675
Resolution Trust Corporation 386,043
4,014,781 3.0%
Food and Beverage
Cambuhy Export Trust 437,077
Chiquita Brands 265,312
Coca-Cola Femsa SA DE 1,048,936
Conagra Inc. 1,519,440
Desert Eagle Distributing 2,892,403
RJR Nabisco Inc. 1,014,900
Safeway Inc. 295,885
7,473,953 5.6%
[/TABLE]
<PAGE>
PORTFOLIO of INVESTMENTS BY INDUSTRY CLASSIFICATION
Continued (Unaudited)
Market or Percent of
Fair Value Net Assets
[S] [C] [C]
Foreign and Foreign Government
Cemex SA 260,312
Compania De Desarrollo Aero 563,750
Guangdong International Trust 519,896
Noranda Inc. 1,562,625
Province de Quebec 1,141,900
Republic of Brazil 242,125
Republic of Colombia 292,119
Russian Federation 249,125
4,831,852 3.6%
Forest Products
Macmillan Bloedel LTD $526,155
West Fraser Mills LTD 1,052,472
1,578,627 1.2%
Funeral Homes
Loewen Group Inc. 1,060,000 0.8%
Government/Government Agency
Federal Home Loan Mortgage Corp. 1,979,501
Federal National Mortgage Association 1,536,054
Government National Mortgage Assoc. 3,820,960
7,336,515 5.5%
Health Care
Paracelsus Healthcare 37,965
Tenet Healthcare 273,750
311,715 0.2%
Heavy Machinery
AGCO Corporation 255,000
Caterpillar Inc. 918,180
1,173,180 0.9%
Home Construction
Toll Brothers Inc. 257,500 0.2%
Household Products
Black & Decker Corporation 537,415
Whirlpool Corporation 1,095,820
1,633,235 1.2%
Industrial
Ametek Inc. 265,000
Blount Inc. 523,750
Essex Group Inc. 263,750
1,052,500 0.8%
Insurance
AllState Corporation 1,013,740
Nationwide 1,085,210
2,098,950 1.6%
Metals/Mining
Centennial Resources Inc. 500,000
Cyprus Amax Minerals Co. 503,490
EES Coke Battery Company 501,565
INCO LTD 1,092,890
2,597,945 2.0%
[/TABLE]
<PAGE>
PORTFOLIO of INVESTMENTS BY INDUSTRY CLASSIFICATION
Continued (Unaudited)
Market or Percent of
Fair Value Net Assets
[S] [C] [C]
Miscellaneous
Authorized Distribution Network Inc. 153
Huron Technologies Inc. 732,417
KBP Holdings 250,000
Louis Dreyfus Corporation 1,025,824
Mutual Fund Fee Trust IV 965,550
Nebraska Book Company, Inc. 597,811
Stackpole Magnetic Systems 412,625
3,984,380 3.0%
Natural Gas
Coastal Corporation 1,133,540
Noram Energy Inc. 1,101,360
Penn Fuel Gas Inc. 983,193
Suburban Propane L.P. 974,018
4,192,111 3.1%
Paper and Paper Products
Container Corporation of America $273,750
Specialty Paperboard Inc. $253,438
527,188 0.4%
Petroleum
Oryx Energy Company 1,096,820
Pennzoil Company 1,222,850
Sun Inc. 1,083,090
3,402,760 2.6%
Public Utility
BVPS II Funding Corporation 1,482,550
Cleveland Electric Illuminating Co. 1,009,650
Commonwealth Edison Inc. 1,041,710
Connecticut Light & Power 993,970
Houston Lighting & Power Company 1,579,500
Long Island Lighting Company 2,059,440
Louisiana Power & Light Company 1,067,100
Niagara Mohawk Power Corporation 524,450
PacifiCorp 1,093,060
Pennsylvania Power & Light 531,025
Texas Utilities Electric Company 1,018,380
Transcanada Capital 1,060,000
Virginia Electric & Power Company 1,029,300
14,490,135 10.9%
Retail
Dayton Hudson Corporation 1,224,390
MDAS Investors Limited Partnership 31,320
Murray's Discount Auto Stores, Inc. 479,625
Sears Roebuck & Company 1,168,670
2,904,005 2.2%
Steel
AK Steel Corporation 269,062
Steel Dynamics Holdings Inc. 298,560
Steel Technologies 519,676
1,087,298 0.8%
[/TABLE]
<PAGE>
PORTFOLIO of INVESTMENTS BY INDUSTRY CLASSIFICATION
Continued (Unaudited)
Market or Percent of
Fair Value Net Assets
[S] [C] [C]
Telecommunications
Global Telesystems Holdings 300,000
MCI Communications Corporation 1,039,700
New England Telephone & Telegraph 1,087,440
Nynex Corporation 1,818,206
Tele-Communications Inc. 2,048,540
6,293,886 4.7%
Transportation
Concordia Maritime 1,019,736
Federal Express Corporation 1,399,937
Georgia Pacific Corporation 1,635,075
4,054,748 3.0%
Total Long-Term Investments $131,450,437 98.7%
[/TABLE]
<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. Fund
shares are listed on the New York Stock Exchange under the symbol LND.
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 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. As of June 30, 1997, the value of all direct placement securities,
which totaled $ 25,860,557 and represents 19.4% of total net assets were
approved 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.
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.
<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:
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 $17,786,859
and $15,223,768, respectively, as of June 30, 1997; and $17,602,812 and
$16,647,426, respectively as of June 30, 1996.
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) plus 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 30,1997.
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.
<PAGE>
Notes to Financial Statements
(continued)
Note D - Excess of Other Assets over Liabilities
The net asset caption "excess of other assets over liabilities" consisted of
the following:
Cash $532,206
Accrued interest income receivable 2,645,658
Accrued dividend income receivable 51,225
Receivable for investments securities sold 6,430
Payable for investment securities purchased (1,053,347)
Management fee payable (287,149)
Accrued dividends payable - VTP (109,657)
Other - net (13,212)
$1,772,154
Note E - Net Assets
Net assets at June 30, 1997, 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 6,737,958
Undistributed net investment income 1,989,479
Net unrealized appreciation of investments 4,561,779
Total Net Assets $133,222,591
Note F - Income Taxes
The cost of investments for federal income tax purposes is the same as for
book purposes. At June 30, 1997, the aggregate gross unrealized appreciation
on investments was $ 6,035,098 and the aggregate gross unrealized depreciation
was $ 1,473,319.
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 year ended June 30, 1997, dividend rates have ranged from 5.10% to
5.55% and the average dividend rate was 5.25%.
Note H - Subsequent Event
On July 7, 1997, the Board of Directors declared a $ 0.28 per share
distribution. The
dividend is payable July 31, 1997 to shareholders of record as of July 18,
1997.
<PAGE>
Common Stock Market Prices and Net Asset Value History
(Unaudited)
<TABLE>
<CAPTION>
1997
Market Prices and Volumes Net Asset Value
High Low Close Volume High Low Close
<S> <C> <C> <C> <C> <C> <C> <C>
1st Quarter $13.000 $12.375 $12.750 498,900 $13.77 $13.42 $13.42
2nd Quarter 13.250 12.375 13.250 351,100 13.68 13.16 13.64
1996
Market Prices and Volumes Net Asset Value
High Low Close Volume High Low Close
1st Quarter $13.875 $12.875 $13.125 304,700 $14.32 $13.82 $13.83
2nd Quarter 13.250 12.375 13.000 239,200 13.88 13.36 13.71
3rd Quarter 13.125 12.125 13.000 275,300 13.74 13.43 13.77
4th Quarter 13.125 12.250 12.500 433,000 14.27 13.47 13.47
1995
Market Prices and Volumes Net Asset Value
High Low Close Volume High Low Close
1st Quarter $12.250 $10.625 $12.000 229,000 $13.25 $12.25 $13.19
2nd Quarter 13.000 11.750 12.875 328,000 14.25 13.19 14.14
3rd Quarter 13.000 12.250 12.750 218,100 14.30 13.82 14.22
4th Quarter 14.250 12.500 13.625 277,500 14.54 14.17 14.22
1994
Market Prices and Volumes Net Asset Value
High Low Close Volume High Low Close
1st Quarter $16.250 $14.750 $15.500 141,500 $14.90 $13.91 $13.91
2nd Quarter 16.000 13.250 13.370 328,900 13.80 13.27 13.27
3rd Quarter 13.375 11.375 12.250 323,400 13.35 12.75 12.75
4th Quarter 12.250 10.750 10.750 214,600 12.76 12.25 12.25
</TABLE>
Shares are listed on the New York Stock Exchange under the trading symbol LND.
<PAGE>
Directors & Officers of the Fund
Directors Descriptions of Occupations and Responsibilities
Richard M. Burridge Chairman, The Burridge Group, Inc.; Director, Cincinnati
Financial Corporation, Lincoln National Convertible
Securities Fund Inc. andSt. 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 Health System;
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.
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 Investment Management Inc.and Lincoln National
Convertible Securities Fund, Inc.; Director, The Lincoln
National Life Insurance Company, Lincoln National
Investment Companies, Inc., 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 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 and Treasurer
Ann L. Warner Vice President
Cindy Rose Secretary
<PAGE>
Corporate Information
Dividend Disbursing Agent, Transfer Agent
and Reinvestment Plan Agent
Boston EquiServe L.P.
Investor Relations
P.O. Box 8200
Boston, MA 02266-8200
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 transferring the shares 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 8200 Boston, MA 02266-8200 or call 1-800-730-6001.
