Lincoln National Income Fund, Inc.
1996 Annual Report
<TABLE>
<CAPTION>
Table of Contents Page
<S> <C>
Manager Profile ......................................... 2
Investment Policies & Objectives ........................ 2
President's Letter ...................................... 3
Portfolio Manager's Discussion ........................... 4
Asset Classification .................................... 5
Distribution By Quality .................................. 5
Portfolio Performance .................................. 5
Annual Performance of the Fund vs. Indices ............... 6
Total Fund Investments .................................. 6
Dividend History ........................................ 6
Tax Information ...................................... 7
Shareholder Meeting Results .............................. 7
FINANCIAL STATEMENTS:
Financial Highlights ............................... 8
Statement of Net Assets ............................. 10
Statements of Operations ............................ 20
Statements of Changes in Net Assets ................. 21
Statements of Cash Flows ........................... 22
Portfolio of Investments by Industry Classification . 23
Notes to Financial Statements ...................... 25
Report of Independent Accountants ...................... 29
Common Stock Market Prices & Net Asset Value History ..... 30
Directors & Officers of the Fund ........................ 31
Corporate Information ................................... 32
</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 $35 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 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
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 December 31, 1996,
has chosen not to do so.
<PAGE>
President's Letter
January 29, 1997
Dear Shareholders:
Lincoln National Income Fund had attractive performance compared to
the Lehman Corporate Index in 1996, with a net asset value (NAV)
total return of 5.36 percent, more than 2 percent over the Lehman
benchmark.
As a result, we were pleased to continue to pay a very attractive
dividend in 1996. On December 18, 1996, the Board of Directors
declared a regular quarterly income dividend of $.28 a share, an
extra income dividend of $.09 and a capital gains dividend of $.25,
bringing the total payout for the year to $ 1.46 per share.
Overall, bond investors were disappointed in 1996, given the
expectation the Federal Reserve Board (Fed) would ease interest
rates at the beginning of the year. The Fed did ease modestly once
in late January, but much less than the bond market expected. It did
not need to ease more since the economy proved stronger than the
consensus forecast in the first part of the year. The
inflation-loathing
bond market doesn't believe growth can occur without inflation. As a
result, investors sold at the first sign the economy was, in fact,
fairly robust. The start of 1996 looked very reminiscent to the bond
market debacle that occured in 1994.
Economic activity moderated in the second half of 1996 and bonds
recouped some of their earlier losses. For the year, the Lehman
Corporate index had a total return of 3.28 percent (price return of
approximately -4.0 percent and income return of about 7.3 percent).
The Lincoln National Income Fund's annualized NAV return over five
years is 8.99 percent, which ranks us sixth of 32 in our Morningstar
peer group.
Our outlook for 1997 is for Gross Domestic Product growth of between
1.5 and 3.0 percent with only a slight chance of recession.
Inflation should not exceed the 1996 high of 3.2 percent and will
stay in a range of 2.0 to 3.25 percent. Given the benign inflation
outlook, we believe long Treasury rates will be in a narrow range
between 6.25 and 7.00 percent.
The Fund has 13 percent of assets in less-than-investment grade
bonds and 17 percent of assets in private placements. We don't
expect much change in these levels during 1997. We are at modest
sector overweights in banking, airlines, and cable & media. The
Fund, factoring in the leverage, has a duration of 6.8 years,
slightly longer than the bond market average. We continue to
believe the Fund remains an excellent investment for income-oriented
investors. Our goal is to continue to generate sufficient returns to
maintain dividends at high levels.
Sincerely,
/s/ H. Thomas McMeekin
H. Thomas McMeekin
President
<PAGE>
Portfolio Manager's Discussion
The bond market suffered through a significant sell-off during the
first half of 1996 with interest rates on long Treasuries rising 120
basis points. The market meandered until the election, and then, in
a sigh of relief, rallied nicely to recoup about half of their
year-to-date price losses. Given this environment, we were pleased
that the Fund had a net asset value (NAV) total return of 5.36%.
Steps we have taken over the last two years to shorten the average
maturity and duration of the Fund have enabled the Fund to post
better total returns in bond bear markets.
In our Morningstar peer group, we finished in the middle of the pack
for 1996 return, ranking 15th of 32 funds in the general closed-end
fund category. This is significant progress from the fourth
quartile performance of 1994, the previous year of a bond bear
market. Our goal, however, is to be near the top of our peer group
in the longer comparison periods. We have achieved this goal by
ranking sixth in this peer group over the last five years.
In 1995, the market theme was "soft landing." In 1996, it was
"Goldilocks," meaning "not too hot, not too cold." Translated, this
economic nirvana occurs when growth is strong enough to keep
corporate profits rising but not so fast that the Federal Reserve
Board (FED) tightens monetary policy. Although the bond market
fared "too hot" early in the year, "Goldilocks" ultimately prevailed
and the equity markets were especially appreciative.
Our 1997 outlook for economic growth calls for continued "not too
hot, not too cold," but we remain alert for abrupt changes in
business conditions. We know that this economic expansion, albeit
not especially robust, has now gone on for six years. We plan to
get out in front of any recessionary expectations. If we see an
economic deterioration, we will move to reduce holdings of bonds of
BBB-rated cyclicals and our 13 percent stake in less-than-investment
grade bonds. However, the economy looks good for now, and we
consider a 1997 recession unlikely.
We expect continued low and stable inflation in 1997, leading to
interest rates in a fairly narrow range. We don't want to be too
complacent with this view, however, since our experience as manager
of a levered bond fund makes us well aware of the risks of a sudden
increase in forecasted inflation. As we have over the last two
years, we will continue to reduce the interest rate risk of the Fund
by aggressively searching for short maturity, but high-yielding
securities.
<PAGE>
Asset Classification
As of December 31, 1996 (Dollars in Millions)
[Pie Chart]
Public Debt 73.26% $96.7
Government/Gov't Agency 6.00% $7.9
Direct Placements 17.24% $22.8
Equities/Partnerships 1.39% $1.9
Short-Term Investments 3.48% $4.6
Other Liabilities -1.37% ($1.8)
Distribution By Quality
As of December 31, 1996 (Dollars in Millions)
[Bar Graph]
AAA 7.72% $10.2
AA 2.45% $3.2
A 23.71% $31.3
BBB 32.47% $42.9
BB 9.72% $12.8
B 1.20% $1.6
Not Rated 1.99% $2.6
Direct Placements 17.24% $22.8
Equities 1.39% $1.9
Short-Term Investments 3.48% $4.6
Other Liabilities (1.37%) ($1.8)
Portfolio Performance
As of December 31, 1996
The following graph presents the cumulative net asset value total
return for the Fund compared to the Lehman Corporate Bond Index and
the Standard & Poor's 500 Index of common stocks (with dividends
reinvested). The graph below shows each category's results of what $
1,000 invested in 1973 would have grown to by the end of 1996
assuming reinvestment of dividends.
[Mountain Graph]
Income Fund $11,834
Lehman $ 8,197
S&P 500 $16,157
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.
<TABLE>
<CAPTION>
1 Yr. 3 Yrs. 5 Yrs. 10 Yrs. 15 Yrs. 24 Yrs.
<S> <C> <C> <C> <C> <C> <C>
Lincoln National Income Fund 5.36% 24.10% 53.83% 166.71% 510.61% 1083.41%
Lehman Corporate Bond Index 3.28% 21.30% 45.17% 129.01% 423.02% 719.67%
Standard & Poor's 500* 22.94% 71.29% 102.87% 313.91% 927.35% 1515.65%
</TABLE>
<PAGE>
Annual Performance of Lincoln National Income Fund vs. Indices
<TABLE>
<CAPTION>
Income Lehman S&P 500 Income Lehman S&P 500
Fund Corporate Index Fund Corporate Index
<S> <C> <C> <C> <C> <C> <C> <C>
1973 3.20% 2.28% -14.69% 1985 17.30% 21.30% 31.73%
1974 -12.60% 0.17% -26.47% 1986 17.55% 15.62% 18.67%
1975 13.03% 12.30% 37.23% 1987 5.04% 2.29% 5.25%
1976 17.24% 15.59% 23.93% 1988 15.35% 7.58% 16.56%
1977 7.82% 2.99% -7.13% 1989 17.38% 14.23% 31.63%
1978 7.28% 1.18% 6.58% 1990 1.31% 8.28% -3.11%
1979 12.92% 2.30% 18.60% 1991 21.34% 16.13% 30.40%
1980 15.37% 3.06% 32.46% 1992 6.96% 7.58% 7.61%
1981 4.73% 7.26% -4.92% 1993 15.89% 11.03% 10.06%
1982 26.24% 31.10% 21.55% 1994 -7.52% -3.93% 1.31%
1983 14.67% 7.99% 22.56% 1995 27.35% 22.25% 37.53%
1984 16.88% 15.02% 6.27% 1996 5.36% 3.28% 22.94%
</TABLE>
Total Fund Investments
At Market or Fair Values As of December 31,
<TABLE>
<CAPTION>
1996 1995
(000) % of Total (000) % of Total
<S> <C> <C> <C> <C>
Public Debt Securities $104,616 79% $109,552 80%
Direct Placement Securitie 22,756 17% 22,301 16%
Common Stocks & Warrants 272 0% 1,279 1%
Preferred Stocks 1,570 1% 1,870 1%
Short-Term Investments 4,600 3% 1,998 2%
Partnerships 50 0% 50 0%
Other Assets/(Liabilities) (1,810) -1% 113 0%
Total Net Assets $132,054 100% $137,163 100%
</TABLE>
Dividend History
The Fund in its lifetime has distributed common dividends of $27.54
which represents 220.3 percent of its offering price of $12.50 as
adjusted for the 1993 common stock split. On February 27, 1992 the
Fund changed its policy of retaining long-term capital gains to one
of distributing them. Previous year 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 1986 $1.17
1976 0.87 1987 1.52
1977 0.90 1988 1.23
1978 0.90 1989 1.17
1979 0.92 1990 1.18
1980 0.97 1991 1.15
1981 1.04 1992 1.68
1982 1.12 1993 1.77
1983 1.14 1994 1.28
1984 1.20 1995 1.32
1985 1.27 1996 1.46
</TABLE>
<PAGE>
Tax Information
Income dividends received by a shareholder must be reported for
federal income tax purposes as ordinary income. The Fund distributed
$ 1.46 per share to common holders for the tax year 1996. Common
dividend payments made in April, July, October and mid-January 1997
are taxable in the 1996 tax year.
In accordance with the Tax Reform Act of 1986, regulated investment
companies are required to distribute at least 98 percent of their
net investment income earned in the calendar year to avoid a 4
percent federal excise tax on undistributed net investment income.
Under the act, dividends declared in December, payable to
shareholders of record on a date in December and paid before the
following February 1, are treated as paid by the Fund and received
by the shareholders in December.
The extent to which the following dividend payments qualify (as
provided by the Internal Revenue Code and subject to certain
limitations set forth therein) for the dividend received deduction
for corporations, is shown in the table below.
<TABLE>
<CAPTION>
Common Preferred
Shareholders Shareholders
<S> <C> <C>
Ordinary Income Dividend Amount Per Share $1.29 $45.21 *
Long-Term Capital Gains Per Share $0.17 $8.10 *
Corporation's Dividend Received Deduction - % 1.085210% 1.085210%
Corporation's Dividend Received Deduction - $ $0.019231 $3.284735
</TABLE>
* Based on 40,000 shares of preferred stock outstanding.
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 Auditor". 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 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 5,351,636 78,035 ----
R. Deshaies 5,360,405 69,266 ----
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 Directors-Variable Term Preferred Stock
R. Burridge 34,000 ---- ----
A. Cepeda 34,000 ---- ----
R. Deshaies 34,000 ---- ----
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 (Coopers & Lybrand L.L.P.)
5,346,255 25,586 57,830
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
Years Ended December 31,
(Selected data for each share of common stock
outstanding throughout the year)
<TABLE>
<CAPTION>
-------------- Year Ending --------------
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $14.22 $12.25 $14.63 $14.18 $14.85
Net Investment Income 1.44 1.46 1.47 1.56 1.36
Net Realized & Unrealized Gain\(Loss) (0.41) 2.17 (2.18) 0.92 (0.01)
Total From Investment Operations 1.03 3.63 (0.71) 2.48 1.35
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 (0.24) (0.29) (0.27) (0.19) (0.08)
To Common Shareholders (1.21) (1.16) (1.20) (1.31) (1.31)
Dividends from Net Realized Gains:
To Preferred Shareholders (0.07) (0.05) (0.02) (0.07) (0.03)
To Common Shareholders (0.26) (0.16) (0.08) (0.46) (0.37)
Total Distributions (1.78) (1.66) (1.57) (2.03) (1.79)
Net Asset Value, End of Period $13.47 $14.22 $12.25 $14.63 $14.18
Per Share Market Value, End of Period $12.50 $13.63 $10.75 $15.00 $14.31
Total Investment Return (based on
Market Value) 2.42% 39.07% (19.80%) 17.17% 15.78%
Ratios/Supplemental Data
Net Assets, End of Period (000) $132,054 $137,163 $123,683 $113,181 $109,466
Ratio-Expenses to Average Net Asset 1.11% 1.14% 1.19% 1.17% 1.00%
Ratio-Net Income to Average Net Asset 7.32% 7.44% 7.31% 6.76% 7.56%
Portfolio Turnover Rate 22.73% 26.98% 33.64% 43.72% 97.63%
</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>
<TABLE>
<CAPTION>
------------ Year Ending -------------
1991 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $13.40 $14.44 $13.35 $12.83 $13.68
Net Investment Income 1.15 1.17 1.15 1.16 1.21
Net Realized & Unrealized Gain\(Loss) 1.45 (1.03) 1.11 0.59 (0.54)
Total From Investment Operations 2.60 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 (1.15) (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 (1.15) (1.18) (1.17) (1.23) (1.52)
Net Asset Value, End of Period $14.85 $13.40 $14.44 $13.35 $12.83
Per Share Market Value, End of Period $13.81 $11.88 $12.94 $11.88 $11.50
Total Investment Return (based on
Market Value) 25.96% 0.87% 18.80% 13.96% 1.13%
Ratios/Supplemental Data
Net Assets, End of Period (000) $72,752 $65,652 $70,740 $65,383 $62,870
Ratio - Expenses to Average Net Asset 0.97% 0.97% 0.96% 0.97% 0.93%
Ratio - Net Income to Average Net Asset 8.05% 8.49% 8.04% 8.43% 8.93%
Portfolio Turnover Rate 15.07% 28.85% 44.46% 63.39% 46.71%
</TABLE>
( ) Denotes deduction
The accompanying notes are an integral part of the financial statements.
<PAGE>
Statement of Net Assets
As of December 31, 1996
<TABLE>
<CAPTION>
Par Market or
Investments-Notes A & B Amount Cost Fair Value
Public Debt Securities (79.2%)
<S> <C> <C> <C>
ADT Operations Inc.
8.25% Senior Notes, 8/1/00 $250,000 $250,000 $260,945
Airplanes Pass Through Trust
10.875% Subordinated Bond Series 1, 3/15/19 250,000 256,562 280,075
AK Steel Corporation
10.75% Guaranteed Senior Note, 4/1/04 250,000 251,250 273,125
AllState Corporation
7.50% Debenture, 6/15/13 1,000,000 911,180 1,015,560
AMR Corporation
10.00% Bond, 4/15/21 1,000,000 1,028,860 1,232,430
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 1,329,785
Ametek Inc.
9.75% Senior Notes, 3/15/04 250,000 264,063 266,563
Banc One Corporation
9.875% Subordinated Notes, 3/1/09 1,000,000 1,152,890 1,211,720
BankAmerica Corporation
10.00% Subordinated Notes, 2/1/03 1,000,000 1,183,100 1,153,260
Black & Decker Corporation
8.91% Medium Term Note, 1/21/02 500,000 542,425 544,345
Blount Inc.
9.00% Senior Subordinated Notes, 6/15/03 500,000 516,250 511,250
BVPS II Funding Corporation
8.33% Collateralized Lease Bond, 12/1/07 1,490,000 1,536,279 1,468,976
Capital Cities/ABC Inc.
8.875% Senior Notes, 12/15/00 1,000,000 1,006,630 1,080,240
Caterpillar Inc.
6.00% Debenture, 5/1/07 1,000,000 889,037 922,440
Cemex SA
10.00% Eurobond Medium-Term Note, 11/5/99 250,000 222,500 259,375
Chiquita Brands International Inc.
9.625% Senior Notes, 1/15/04 250,000 252,500 258,750
Chrysler Financial Corporation
9.50% Senior Notes, 12/15/99 1,000,000 1,120,000 1,082,460
Citicorp Mortgage Securities Inc.
8.75% REMIC 91-6 Class B, 5/25/21 500,000 505,703 507,500
Cleveland Electric Illuminating Company
7.625% First Mortgage Bonds, 8/1/02 1,000,000 961,790 994,730
Coastal Corporation
9.75% Debenture, 8/1/03 1,000,000 1,150,890 1,144,980
Coca-Cola Enterprises Inc.
8.00% Note, 1/4/05 1,000,000 1,130,150 1,082,020
Commonwealth Edison Company
8.625% First Mortgage Bonds, 2/1/22 1,000,000 939,620 1,040,420
Compania De Desarrollo Aeropuerto Eldorado SA
10.19% Senior Note, 5/31/11 500,000 500,000 536,875
ConAgra Inc.
7.40% Subordinated Debt Securities, 9/15/04 1,500,000 1,495,140 1,522,665
Connecticut Light & Power Company
7.25% 1st Refunding Mortgage, 7/1/99 1,000,000 1,003,430 1,004,560
Container Corporation of America
11.25% Senior Notes Series A, 5/1/04 250,000 258,750 270,625
Cyprus Amax Minerals Company
7.375% Note, 5/15/07 500,000 517,255 504,055
Dayton Hudson Corporation
10.00% Debenture, 1/1/11 1,000,000 1,248,660 1,222,660
Delta Air Lines Inc.
9.90% Equipment Trust Certificates
Series 1988 C, 6/16/02 1,473,000 1,564,297 1,654,326
Donaldson Lufkin & Jenrette Corp.
7.71% Mortgage Pass Through Class A, 6/26/25 966,875 981,982 725,156
Dow Capital B.V.
9.00% Guaranteed Debenture, 5/15/10 1,000,000 1,186,170 1,140,040
Duquesne II Funding Corporation
8.70% Collateralized Lease Bonds, 6/1/16 990,000 990,000 1,070,002
EI Dupont Nemour
8.25% Debenture, 1/15/22 1,000,000 1,097,680 1,039,450
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
Statement of Net Assets (Continued)
<TABLE>
<CAPTION>
Par Market or
Amount Cost Fair Value
Public Debt Securities (continued)
<S> <C> <C> <C>
Enron Corporation
9.50% Senior Fixed Rate Note, 6/15/01 1,000,000 1,141,040 1,106,830
Essex Group Inc.
10.00% Senior Note, 5/1/03 250,000 243,125 259,375
Federal Express Corporation - Global
9.875% Note, 4/1/02 1,250,000 1,400,000 1,413,350
Federal Home Loan Mortgage Corporation (FHLMC)
7.80% REMIC Series 46 Class B, 9/15/20 1,065,033 941,598 1,085,204
7.00% Pass Through Series 7 Class A, 9/17/31 989,508 962,606 958,586
Federal National Mortgage Association (FNMA)
9.20% Guaranteed REMIC 88-14, 12/25/17 863,855 845,804 883,481
9.00% Trust Series 265 Class C, 3/1/24 801,436 861,543 836,498
Federated Department Stores
10.00% Senior Note, 2/15/01 250,000 250,000 271,300
First Interstate Bancorp
8.15% Subordinated Notes, 3/15/02 1,000,000 1,000,000 1,018,090
First USA Bank Wilmington Delaware
7.65% Subordinated Notes, 8/1/03 1,000,000 1,000,000 997,870
Fleet/Norstar Financial Group Inc.
8.625% Subordinated Note, 1/15/07 1,000,000 1,044,630 1,101,670
Ford Holdings Inc.
9.25% Guaranteed Notes, 7/15/97 1,000,000 998,710 1,017,780
General Electric Capital Corporation
8.75% Notes, 5/21/07 1,000,000 1,108,350 1,133,130
General Motors Acceptance Corporation
8.875% Notes, 6/1/10 1,500,000 1,656,000 1,729,020
Georgia Pacific Corporation
9.50% Debentures, 5/15/22 1,500,000 1,551,450 1,652,490
Goldman Sachs Group L.P.
7.875% Medium Term Notes, 1/15/03 500,000 523,340 520,625
Government National Mortgage Association (GNMA)
9.00% Pass-Thru Pool #309771, 8/15/21 1,158,557 1,249,100 1,231,616
9.00% Pass-Thru Pool #349329, 3/15/23 2,754,545 2,969,773 2,921,939
Greentree Financial Corporation
8.65% Subordinated Note Class B1, 11/15/19 1,000,000 988,594 1,037,500
HongKong & Shanghai Bank
5.813% Subordinated Notes, 12/29/49 500,000 408,500 433,000
Houston Lighting & Power Company
9.80% Medium Term Note Series B, 2/15/99 1,500,000 1,467,165 1,599,105
INCO LTD
9.60% Debentures, 6/15/22 1,000,000 1,084,580 1,102,240
Keystone Group Inc.
9.75% Senior Secured Notes, 9/1/03 200,000 192,000 217,586
Lehman Brothers Holdings Inc.
7.375% Senior Notes, 5/15/07 500,000 522,740 515,070
Lloyds Bank PLC
6.25% Subordinated Notes, 6/29/49 1,000,000 835,000 892,500
Long Island Lighting Company
9.75% General Refunding Mortgage, 5/1/21 2,000,000 2,013,290 2,045,980
Louisiana Power & Light Company
10.67% Waterford Secured Lease, 1/2/17 1,000,000 996,250 1,070,480
Macmillan Bloedel LTD
8.50% Debentures, 1/15/04 500,000 523,390 531,995
MARK IV Industries Inc.
8.75% Senior Subordinated Notes, 4/1/03 250,000 250,000 257,813
McDonnell Douglas Corporation
9.25% Notes, 4/1/02 1,000,000 1,142,300 1,118,090
MCI Communications Corporation
7.50% Senior Notes, 8/20/04 1,000,000 1,013,020 1,042,900
Mellon Capital I
7.72% Bonds, Series A 12/1/26 400,000 400,000 389,500
Merrill Lynch Mortgage Investors Inc.
10.00% Pass-thru Series 90-A1, 3/15/10 660,255 656,558 719,480
NAL Auto Trust
7.30% 1996-3 Class A, 12/15/00 474,707 474,412 474,410
National Westminster Bank PLC
6.813% Subordinated Notes, 8/29/49 1,000,000 875,000 893,750
Nationsbank Corporation
8.125% Subordinated Note, 6/15/02 1,000,000 997,500 1,060,300
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
Statement of Net Assets (Continued)
<TABLE>
<CAPTION>
Par Market or
Amount Cost Fair Value
Public Debt Securities (continued)
<S> <C> <C> <C>
Nationwide
9.875% Contingent Surplus Notes, 2/15/25 1,000,000 1,092,350 1,098,770
New England Telephone & Telegraph Company
9.00% Debentures, 8/1/31 1,000,000 1,007,300 1,107,650
News America Holdings Inc.
9.25% Senior Debentures, 2/1/13 1,000,000 1,110,980 1,116,100
Niagara Mohawk Power Corporation
9.25% First Mortgage Bonds, 10/1/01 500,000 503,490 510,490
Noram Energy Inc.
10.00% Debenture, 11/15/19 1,000,000 1,117,400 1,111,300
Noranda Inc.
8.00% Yankee Bond, 6/1/03 1,500,000 1,500,000 1,580,835
NWA Trust
10.23% Asset-Backed Note Class B, 6/21/14 475,389 559,697 541,659
Nynex Corporation
9.55% Debenture, 5/1/10 1,720,561 2,069,938 1,948,002
Olympic Financial LTD
13.00% Senior Note, 5/1/00 250,000 253,438 277,500
Oryx Energy Company
10.00% Debenture, 4/1/01 1,000,000 1,036,380 1,096,330
PacifiCorp
8.29% Secured Medium Term Note, 12/30/11 1,000,000 1,000,000 1,104,810
Peco Energy Company
7.125% 1st Refunding Mortgage Bond, 9/1/02 1,500,000 1,500,375 1,523,550
Pennsylvania Power & Light
8.50% First Mortgage Bonds, 5/1/22 500,000 534,295 527,560
Pennzoil Company
10.125% Debentures, 11/15/09 1,000,000 1,134,440 1,171,130
Progress Capital Holdings LTD
6.88% Medium Term Note, 8/1/01 1,000,000 1,000,000 1,001,310
Province de Quebec
11.00% Yankee Bond, 6/15/15 1,000,000 1,072,720 1,158,250
Resolution Trust Corporation
8.80% Mortgage Pass-thru Ser. 92-C1, 8/25/23 426,960 425,767 428,828
RJR Nabisco Inc.
9.25% Debenture, 8/15/13 2,000,000 1,830,060 1,994,760
Safeway Stores Inc.
9.875% Senior Subordinated Debenture, 3/15/07 250,000 274,375 290,118
Scotsman Group Inc.
9.50% Senior Secured Note, 12/15/00 250,000 232,812 258,125
Sears Roebuck & Company
10.00% Medium Term Note, 2/3/12 1,000,000 1,156,840 1,260,730
9.05% Medium Term Note, 2/6/12 1,000,000 1,059,380 1,173,000
Sequa Corporation
8.75% Senior Note, 12/15/01 250,000 250,937 252,500
Showboat Inc.
9.25% First Mortgage Bond, 5/1/08 250,000 212,500 245,000
Sun Inc.
9.375% Debenture, 6/1/16 1,000,000 1,182,350 1,057,810
Sweetheart Cup Company
9.625% Senior Secured Note, 9/1/00 250,000 241,562 257,500
Systems Energy Resources
7.800% Senior Note, 8/1/00 1,000,000 1,000,000 1,005,500
Tele-Communications Inc.
9.25% Debenture, 1/15/23 2,000,000 1,993,580 1,927,720
Tenet Healthcare Corporation
10.125% Senior Subordinated Note, 3/1/05 250,000 266,875 276,250
Texas Instruments Inc.
8.75% Note, 4/1/07 1,000,000 1,067,180 1,122,720
Texas Utilities Electric Company
7.375% First Mortgage Bond, 8/1/01 1,000,000 999,375 1,028,700
Time Warner Inc.
9.125% Senior Note, 1/15/13 $500,000 $530,840 $541,755
Travelers Inc.
8.625% Note, 2/1/07 1,500,000 1,582,140 1,648,215
Turner Broadcasting Systems Inc.
7.40% Senior Note, 2/1/04 250,000 249,612 248,752
UNC Inc.
9.125% Senior Note, 7/15/03 250,000 250,000 252,813
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
Statement of Net Assets (Continued)
<TABLE>
<CAPTION>
Par Market or
Amount Cost Fair Value
Public Debt Securities (continued)
<S> <C> <C> <C>
Union Oil Company of California
9.75% Guaranteed Note, 12/1/00 1,000,000 1,119,400 1,106,750
Uniroyal Chemical Co. Inc.
9.00% Senior Note, 9/1/00 250,000 236,875 260,625
United Airlines Inc.
8.70% Pass-thru Trust Series 92-A1, 10/7/08 947,536 944,039 1,005,989
9.35% Pass-thru Series 92-A, 4/7/16 1,500,000 1,516,845 1,661,565
United Mexican States
7.64% Bond, 8/6/01 1,000,000 995,000 1,001,250
Van Kampen Merritt Companies, Inc.
9.75% Senior Secured Note, 2/15/03 250,000 260,000 266,665
Viacom Inc.
7.75% Senior Note, 6/1/05 1,500,000 1,486,985 1,468,935
Virginia Electric & Power Company
9.35% Medium Term Note Series A, 6/22/98 1,000,000 991,640 1,043,660
Wells Fargo Capital A
8.13% Bond, 12/1/26 500,000 521,000 502,150
Total Public Debt Securities 102,108,469 104,615,547
Date of
Initial
Purchase
Direct Placement Securities (17.2%)
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 1,094,600
Banco Nacional de Mexico
7.57% Fixed Rate Senior Certificate 11/15/96 500,000 499,982 500,000
Cambuhy Export Trust
8.12% Trust Certificates Series 96-1 6/11/96 479,483 479,483 478,821
Centennial Resources Inc.
13.00% Sr. Subordinated Note, 10/31/03 8/29/96 500,000 499,999 499,999
Coca-Cola Femsa SA DE
9.40% Convertible Senior Note,8/15/04 8/15/04 1,000,000 1,000,000 1,031,540
Concordia Maritime
9.29% 1st Preferred Ship Mortgage 4/15/94 1,000,000 1,000,000 1,018,804
Deloitte & Touche LLP
7.41% Guaranteed Senior Note 10/1/11 9/25/96 1,000,000 1,000,000 1,010,312
Desert Eagle Distributing of El Paso Inc.
13.00% Sr. 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 1,752,990 1,752,990 2,306,233
Guangdong International Trust & Investment
8.75% Yankee Bond, 10/24/16 10/17/96 500,000 498,600 523,071
Huron Technologies Corporation
14.00% Subordinated Note, 5/15/05 2/20/95 550,000 421,667 550,000
Louis Dreyfus Corporation
8.43% Senior Note, 7/15/01 7/20/94 1,000,000 1,000,000 1,034,409
Murray's Discount Auto Stores, Inc.
11.00% Sr Subordinated Note, 9/30/03 10/2/95 500,000 478,000 478,000
Nebraska Book Company, Inc.
12.00% Sr Subordinated Note,8/31/05 8/31/95 500,000 500,000 500,000
New Boston Garden Corporation
8.45% Sr Secured Note, 9/22/15 9/22/95 974,524 974,524 968,254
Penn Fuel Gas Inc.
7.51% Senior Note, 4/15/14 5/25/94 1,000,000 1,000,000 1,001,574
Refco Group, LTD
8.21% Senior Note, 5/16/02 5/08/95 1,000,000 1,000,000 1,027,479
Spectrascan Inc.
11.25% Sr Subordinated Note, 6/30/06 7/12/96 500,000 490,000 490,000
Stackpole Magnetic Systems, Inc.
13.50% Sr Subordinated Note, 10/15/05 9/01/95 380,000 351,500 351,500
Steel Technologies Inc.
8.52% Senior Note, 3/1/05 2/06/95 500,000 500,000 525,790
Suburban Propane L.P.
7.54% Senior Note, 6/30/11 3/07/96 1,000,000 1,000,000 985,209
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
Statement of Net Assets (Continued)
<TABLE>
<CAPTION>
Direct Placements Securities - Debt (continued)
Par Market or
Amount Cost Fair Value
<S> <C> <C> <C>
The Money Store Inc.
9.00% Senior Note, 3/31/02 2/22/95 1,000,000 1,000,000 1,067,476
United States Playing Card Company
12.00% Subordinated Note, 11/18/04 11/18/94 500,000 470,000 500,000
West Fraser Mills LTD
8.44% Guaranteed Senior Note, 6/30/04 4/15/94 1,000,000 1,000,000 1,055,523
Total Direct Placement Debt 19,446,245 20,748,594
Quantity
EQUITIES
Bicycle Holding Inc. *
Common Stock 11/18/94 8 30,000 62,842
Centennial Coal, Inc. *
Stock Warrants
(entitled to purchase 37 shares of common
stock for $0.01 per share. Expires
9/01/06) 8/29/96 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) 5/07/92 3 219,426 1,598,647
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) 5/07/92 1 1,074 1
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 10/02/95 1 22,000 22,000
8/31/03)
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
PSC, Inc. *
Stock Warrants 07/12/96 1 10,000 10,075
(entitled to purchase 16,250 shares
Of common stock for $10 per share.
Expires 7/12/2006)
Stackpole Magnetic Systems *
Stock Warrants
(entitled to purchase 54,582 shares
Of common stock for $0.01 per share.
Expires 9/01/05) 9/01/95 1 28,500 28,383
8.00% Cumulative Convertible Preferred 9/01/95 120,000 120,000 120,000
Total Direct Placement Equities 596,374 2,007,308
Total Direct Placement Securities 20,042,619 22,755,902
Number of
Shares
Preferred Stocks (1.2%)
Loewen Group Inc.
Capital Series A 40,000 1,000,000 1,060,000
Salomon Financing Trust I 9.183%
Guaranteed Preferred Stock 20,000 500,000 510,000
Total Preferred Stocks 1,500,000 1,570,000
</TABLE>
<PAGE>
Statement of Net Assets (Continued)
<TABLE>
<CAPTION>
Market or
Shares Cost Fair Value
<S> <C> <C> <C>
Common Stocks (0.2%)
Authorized Distribution Network, Inc. * 10,945 1,227 153
Paracelsus Healthcare Corporation * 7,500 62,048 27,188
Steel Dynamics Holdings Inc. * 15,992 60,647 244,678
Total Common Stocks 123,922 272,019
Partnerships (0.0%)
MDAS Investors, L.P. 50,000 50,000
Total Long-Term Investments 123,825,009 129,263,468
Par
Amount
Short-Term Investments (3.5%)
Associates Corporation of North America
7.00%, 1/2/97 4,600,000 4,600,000 4,600,000
Total Investments (101.4%) $128,425,009 133,863,468
Excess of Liabilities Over Other Assets (- Note D (1,809,811)
Net Assets (100%) - Note E $132,053,657
Net asset value per share of common stock outstanding
($132,053,657 less Variable Term Preferred stock at
liquidation value of $40,000,000 divided by 6,832,195
shares of common stock outstanding) - Note E $13.47
<PAGE>
STATEMENTS OF OPERATIONS
</TABLE>
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1996 1995
<S> <C> <C>
Investment Income:
Income:
Interest $11,189,443 $11,264,854
Dividends 131,389 202,283
Total Income 11,320,832 11,467,137
Expenses:
Management Fees - Note C 1,141,090 1,152,920
Variable Term Preferred Stock Auction Fe 104,448 110,088
Director Fees 80,750 76,000
Professional fees 52,516 47,696
Printing, stationery, and supplies 22,406 35,923
Stock Transfer & dividend disbursing fee 24,961 27,838
Postage and mailing fees 19,885 24,529
New York Stock Exchange fee 16,170 16,630
Custodian and registrar fees 4,641 8,130
Other 27,054 20,345
Total Operating Expenses 1,493,921 1,520,099
Net Investment Income 9,826,911 9,947,038
Net realized and unrealized gain(loss)
on investments:
Net realized gain on investments 2,343,208 1,454,490
Increase(decrease) in net unrealized
appreciation of investments (5,172,687) 13,361,992
Net Realized & Unrealized Gain(Loss)
on Investments (2,829,479) 14,816,482
Net Increase in Net Assets Resulting
from Operations $6,997,432 $24,763,520
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1996 1995
<S> <C> <C>
Changes from operations:
Net Investment Income $9,826,911 $9,947,038
Net realized gain on investments 2,343,208 1,454,490
Increase(Decrease) in Net Unrealized
appreciation of investments (5,172,687) 13,361,992
Net Increase in Net Assets Resulting
from Operations 6,997,432 24,763,520
Distributions to shareholders from net
investment income:
Common Shareholders (8,217,231) (7,910,319)
Preferred Shareholders (1,651,693) (1,998,934)
Total Distributions to Shareholders
from Net Investment Income (9,868,924) (9,909,253)
Distributions to shareholders from net
realized gains:
Common Shareholders (1,757,774) (1,108,178)
Preferred Shareholders (480,535) (340,009)
Total Distributions to Shareholders
from Net Realized Gains (2,238,309) (1,448,187)
Changes from capital shares transactions:
Proceeds from Stock Rights Offering - Note H 0 74,348
Total Increase(Decrease) in Net Assets (5,109,801) 13,480,428
Net assets at beginning of period 137,163,458 123,683,030
Net Assets at End of Year * $132,053,657 $137,163,458
</TABLE>
* Includes undistributed net investment income as of: 1996 - $ 191,136;
1995 - $ 128,250.
The accompanying notes are an integral part of the financial statements
<PAGE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1996 1995
<S> <C> <C>
Operating Activities:
Interest Received $11,274,047 $11,260,282
Dividends Received 117,789 202,283
Operating Expenses Paid (1,511,800) (1,574,681)
Net Cash Provided by Operating Activities 9,880,036 9,887,884
Investing Activities:
Purchase of investment securities (30,509,905) (37,765,009)
Proceeds from sale of investment
securities 33,479,851 37,645,687
Net proceeds(purchase) of short-term
investments (2,602,334) 757,426
Net Cash Provided by Investing Activities 367,612 638,104
Financing Activities:
Distributions paid to common and
preferred shareholders (11,134,097) (10,531,834)
Net Cash Used in Financing Activities (11,134,097) (10,531,834)
Decrease in Cash (886,449) (5,846)
Cash at Beginning of Year 978,750 984,596
Cash at End of Year - Note D $92,301 $978,750
RECONCILIATION OF INCREASE(DECREASE) IN
NET ASSETS RESULTING FROM OPERATIONS TO
NET CASH PROVIDED BY OPERATING ACTIVITIES
Net increase in net assets resulting
from operations $6,997,432 $24,763,520
Reconciling Adjustments:
Net realized and unrealized (gain)
loss on investments 2,829,479 (14,816,482)
Discount accretion on investment
securities (6,878) (6,386)
Decrease in accrued investment income
receivable 91,483 1,815
(Increase)decrease in accrued
dividend receivable (13,600) 0
Decrease in accrued expenses (17,880) (54,583)
Net Cash Provided by Operating
Activities $9,880,036 $9,887,884
</TABLE>
<PAGE>
PORTFOLIO of INVESTMENTS BY INDUSTRY CLASSIFICATION
As of December 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Market or Percent of
Fair Value Net Assets
<S> <C> <C>
Accounting Firms
Deloitte & Touche LLP $1,010,312 0.8%
Aerospace
McDonnell Douglas Corporation 1,118,090
Sequa Corporation 252,500
UNC Inc. 252,813
1,623,403 1.2%
Airline
AMR Corporation 2,562,215
Delta Air Lines Inc. 1,654,326
United Airlines Inc. 2,667,554
6,884,095 5.2%
Bank
Anglo Irish Bank Corporation 1,094,600
Banc One Corporation 1,211,720
Banco Nacional De Mexico 500,000
BankAmerica Corporation 1,153,260
First Interstate Bancorp 1,018,090
First USA Bank 997,870
Fleet/Norstar Group 1,101,670
HongKong & Shanghai Bank 433,000
Lloyds Bank PLC 892,500
Mellon Capital I 389,500
National Westminster Bank PLC 893,750
Nationsbank Corporation 1,060,300
Wells Fargo Capital A 502,150
11,248,410 8.5%
Broadcasting/Publishing
Capital Cities/ABC Inc. 1,080,240
News America Holdings Inc. 1,116,100
Turner Broadcasting Inc. 248,752
2,445,092 1.9%
Brokerage
Goldman Sachs Group 520,625
Lehman Brothers Holding Inc. 515,070
Refco Group 1,027,479
Salomon Inc. 510,000
2,573,174 1.9%
Chemicals
Dow Chemical Co. 2,306,233
EI Dupont Nemour 1,039,450
Uniroyal Chemical Co. Inc. 260,625
3,606,308 2.7%
Electrical and Electronics
ADT Operations Inc. 260,945
MARK IV Industries Inc. 257,813
PSC Inc. 10,075
Spectrascan Inc. 490,000
Texas Instruments Inc. 1,122,720
2,141,553 1.6%
Energy
Enron Corporation $1,106,830
Peco Energy Company 1,523,550
Systems Energy Resources 1,005,500
3,635,880 2.8%
Entertainment
Bicycle Holding Inc. 62,842
New Boston Garden Corporation 968,254
Showboat Inc. 245,000
Time Warner Inc. 541,755
United States Playing Card Company 500,000
Viacom Inc. 1,468,935
3,786,786 2.9%
</TABLE>
<PAGE>
PORTFOLIO of INVESTMENTS BY INDUSTRY CLASSIFICATION (Continued)
(Unaudited)
<TABLE>
<CAPTION>
Market or Percent of
Fair Value Net Assets
<S> <C> <C>
Finance
Chrysler Financial Corporation 1,082,460
Dow Capital 1,140,040
Duquesne II Funding Corporation 1,070,002
Ford Holdings Inc. 1,017,780
General Electric Capital Corporation 1,133,130
General Motors Acceptance Corporation 1,729,020
Olympic Financial LTD 277,500
Progress Capital Holdings LTD 1,001,310
The Money Store 1,067,476
Van Kampen Merritt Companies, Inc. 266,665
9,785,383 7.4%
Finance - Structured
Airplanes Pass Through Trust 280,075
Citicorp Mortgage Securities Inc. 507,500
DLJ Mortgage Pass-thru 725,156
Greentree Financial Corporation 1,037,500
Merrill Lynch Mortgage Investors Inc. 719,480
NAL Auto Trust 474,410
NWA Trust 541,659
Resolution Trust Corporation 428,828
4,714,608 3.6%
Food and Beverage
Cambuhy Export Trust 478,821
Chiquita Brands 258,750
Coca-Cola Enterprises Inc. 1,082,020
Coca-Cola Femsa SA DE 1,031,540
Conagra Inc. 1,522,665
Desert Eagle Distributing 3,348,648
RJR Nabisco Inc. 1,994,760
Safeway Inc. 290,118
10,007,322 7.6%
Foreign and Foreign Government
Cemex SA 259,375
Compania De Desarrollo Aero 536,875
Guangdong International Trust 523,071
Noranda Inc. 1,580,835
Province de Quebec 1,158,250
United Mexican States 1,001,250
5,059,656 3.8%
Forest Products
Macmillan Bloedel LTD $531,995
West Fraser Mills LTD 1,055,523
1,587,518 1.2%
Funeral Homes
Loewen Group Inc. 1,060,000 0.8%
Government/Government Agency
Federal Home Loan Mortgage Corp. 2,043,790
Federal National Mortgage Association 1,719,979
Government National Mortgage Assoc. 4,153,555
7,917,324 6.0%
Health Care
Paracelsus Healthcare 27,188
Tenet Healthcare 276,250
303,438 0.2%
Heavy Machinery
Caterpillar Inc. 922,440 0.7%
Household Products
Black & Decker Corporation 544,345
Scotsman Group 258,125
802,470 0.6%
Industrial
Ametek Inc. 266,563
Blount Inc. 511,250
Essex Group Inc. 259,375
1,037,188 0.8%
</TABLE>
<PAGE>
PORTFOLIO of INVESTMENTS BY INDUSTRY CLASSIFICATION (Continued)
(Unaudited)
<TABLE>
<CAPTION>
Market or Percent of
Fair Value Net Assets
<S> <C> <C>
Insurance
AllState Corporation 1,015,560
Nationwide 1,098,770
Travelers Inc. 1,648,215
3,762,545 2.8%
Metals/Mining
Centennial Resources Inc. 500,000
Cyprus Amax Minerals Co. 504,055
INCO LTD 1,102,240
2,106,295 1.6%
Miscellaneous
Authorized Distribution Network Inc. 153
Huron Technologies Inc. 678,319
Keystone Group 217,586
Louis Dreyfus Corporation 1,034,409
Nebraska Book Company, Inc. 537,040
Stackpole Magnetic Systems 499,883
2,967,390 2.2%
Natural Gas
Coastal Corporation 1,144,980
Noram Energy Inc. 1,111,300
Penn Fuel Gas Inc. 1,001,574
Suburban Propane L.P. 985,209
4,243,063 3.2%
Paper and Paper Products
Container Corporation of America $270,625
Sweetheart Cup Company 257,500
528,125 0.4%
Petroleum
Oryx Energy Company 1,096,330
Pennzoil Company 1,171,130
Sun Inc. 1,057,810
Union Oil Company of California 1,106,750
4,432,020 3.4%
Public Utility
BVPS II Funding Corporation 1,468,976
Cleveland Electric Illuminating Co. 994,730
Commonwealth Edison Inc. 1,040,420
Connecticut Light & Power 1,004,560
Houston Lighting & Power Company 1,599,105
Long Island Lighting Company 2,045,980
Louisiana Power & Light Company 1,070,480
Niagara Mohawk Power Corporation 510,490
PacifiCorp 1,104,810
Pennsylvania Power & Light 527,560
Texas Utilities Electric Company 1,028,700
Virginia Electric & Power Company 1,043,660
13,439,471 10.2%
Retail
Dayton Hudson Corporation 1,222,660
Federated Department Stores 271,300
MDAS Investors Limited Partnership 50,000
Murray's Discount Auto Stores, Inc. 500,000
Sears Roebuck & Company 2,433,730
4,477,690 3.4%
Steel
AK Steel Corporation 273,125
Steel Dynamics Holdings Inc. 244,678
Steel Technologies 525,790
1,043,593 0.8%
Telecommunications
MCI Communications Corporation 1,042,900
New England Telephone & Telegraph 1,107,650
Nynex Corporation 1,948,002
Tele-Communications Inc. 1,927,720
6,026,272 4.6%
</TABLE>
<PAGE>
PORTFOLIO of INVESTMENTS BY INDUSTRY CLASSIFICATION (Continued)
(Unaudited)
<TABLE>
<CAPTION>
Market or Percent of
Fair Value Net Assets
<S> <C> <C>
Transportation
Concordia Maritime 1,018,804
Federal Express Corporation 1,413,350
Georgia Pacific Corporation 1,652,490
4,084,644 3.1%
Total Long-Term Investments 129,263,468 97.9%
</TABLE>
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
<PAGE>
Notes to Financial Statements (Continued)
Note A - Summary of Accounting Policies (continued)
persons. As of December 31, 1996, the value of all direct placement
securities, which totaled $22,755,902 and represents 17.2% 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.
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 $30,511,111 and $33,476,659, respectively, as of
December 31, 1996; and $37,538,341 and $36,093,716, respectively as
of December 31, 1995.
<PAGE>
Notes to Financial Statements (Continued)
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
atleast 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 December 31,
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 Liabilities over Other Assets
The net asset caption "excess of liabilities over other assets"
consisted of the following:
Cash $92,301
Accrued interest income receivable 2,605,549
Accrued dividend income receivable 29,350
Receivable for investments securities sold 14,447
Management fee payable (285,868)
Accrued dividends payable - common (4,235,961)
Accrued dividends payable - VTP (42,000)
Other - net 12,371
($1,809,811)
Note E - Net Assets
Net assets at December 31, 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 6,490,687
Undistributed net investment income 191,136
Net unrealized appreciation of investments 5,438,459
Total Net Assets $132,053,657
<PAGE>
Notes to Financial Statements
(continued)
Note F - Income Taxes
The cost of investments for federal income tax purposes is the same
as for book purposes. At December 31, 1996, the aggregate gross
unrealized appreciation on investments was $6,675,556 and the
aggregate gross unrealized depreciation was $1,237,097.
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 December 31, 1996, dividend rates have ranged
from 5.00% to 5.40% and the average dividend rate was 5.21%.
Note H - Rights Offering
On July 28, 1994, the Fund received proceeds from a three-for-one
rights offering. The shares were issued at a price of $ 12.61 per
common share which represented 95% of the June 30, 1994, net asset
value. The offering was fully subscribed and an additional
1,697,886 common shares were issued on July 28, 1994. The proceeds
of $ 21,410,343 were reduced by approximately $ 160,000 of
anticipated expenses associated with rights offering. Through
September 1995, all expenses associated with this rights offering
were paid ($ 85,652). Therefore, the remaining $ 74,348 was added
back into the Fund's net assets.
Note I - Unaudited Quarterly Results of Operations
The following is a tabulation of the unaudited quarterly results of
operations. Per share data is based on shares outstanding at the end
of each quarter:
<TABLE>
<CAPTION>
March 31 June 30 Sept. 30 Dec. 31
<S> <C> <C> <C> <C>
1996
Investment Income ($ 000) $2,828 $2,810 $2,865 $2,818
Net Investment Income ($ 000) 2,448 2,445 2,510 2,424
Net Realized and Unrealized Gain(Loss)
on Investments ($ 000) (4,597) (776) 287 2,257
Per Share Amounts:
Net Investment Income 0.36 0.36 0.37 0.35
Net Realized and Unrealized Gain(Loss)
on Investments (0.67) (0.11) 0.04 0.33
1995
Investment Income ($ 000) $2,822 $2,909 $2,865 $2,871
Net Investment Income ($ 000) 2,463 2,504 2,491 2,489
Net Realized and Unrealized Gain on
Investments ($ 000) 4,547 6,510 482 3,277
Per Share Amounts:
Net Investment Income 0.36 0.37 0.36 0.37
Net Realized and Unrealized Gain on
Investments 0.67 0.95 0.07 0.48
</TABLE>
<PAGE>
Report of Independent Accountants
To the shareholders and Board of Directors of Lincoln National
Income Fund, Inc.
We have audited the accompanying statement of net assets of Lincoln
National Income Fund, Inc., including the portfolio of investments
in securities as of December 31, 1996, and and the related
statements of operations, cash flows and changes in net assets for
each of the two years in the period then ended, and the financial
highlights for each of the ten years in the period then ended. These
financial statements and financial highlights are the responsibility
of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of securities owned as of
December 31, 1996, by correspondence with the custodian. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of Lincoln National Income Fund, Inc. as of
December 31, 1996, the results of its operations, cash flows and
changes in its net assets for each of the two years in the period
then ended, and the financial highlights for each of the ten years
in the period then ended, in conformity with generally accepted
accounting principles.
/s/ Coopers & Lybrand L.L.P.
Fort Wayne, Indiana
January 29, 1997
<PAGE>
Common Stock Market Prices and Net Asset Value History
(Unaudited)
<TABLE>
<CAPTION>
1996
Market Prices and Volumes Net Asset Value
High Low Close Volume High Low Close
<S> <C> <C> <C> <C> <C> <C> <C>
1st Quarter $13.875 $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. 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 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
Harold McElraft Vice President, Treasurer
Ann L. Warner Vice President
C. Suzanne Womack 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.
