Lincoln National Income Fund, Inc.
1998 Semi - Annual Report
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Table of Contents
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Page
Manager Profile ................................................... 1
Investment Policies & Objectives .................................. 1
President's Letter ................................................ 2
Asset Classification .............................................. 2
Distribution By Quality ........................................... 2
Portfolio Performance ............................................. 3
Total Fund Investments ............................................ 3
Dividend History .................................................. 3
Shareholder Meeting Results ....................................... 4
FINANCIAL STATEMENTS:
Financial Highlights ......................................... 5
Statement of Net Assets ...................................... 7
Statements of Operations ..................................... 16
Statements of Changes in Net Assets .......................... 17
Statements of Cash Flows ..................................... 18
Portfolio of Investments by Industry Classification .......... 19
Notes to Financial Statements ................................ 21
Common Stock Market Prices & Net Asset Value History ............. 24
Directors & Officers of the Fund ................................. 25
Corporate Information ............................................ 26
</TABLE>
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
$37 billion in assets under management. The amount and breadth of this
investment expertise 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 private 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, 1998, has chosen not to do so.
<PAGE>
President's Letter
July 27,1998
Dear Shareholders:
For the six months ended June 30, 1998, Lincoln National Income Fund provided a
market return of 9.70%, which was more than double the Lehman Corporate Bond
index of 4.15% for the same period. The market return for the Fund ranked it the
highest among its Morningstar peers in its category. The Fund's net asset value
return for the same period was 3.89%.
The Asian markets negatively impacted the Fund's returns during the second
quarter. While the Fund's emerging market holdings represent only 4% of the
portfolio, the uncertainty about this region adversely impacted the returns of
the Fund by approximately 0.55% for the quarter. We continue to monitor the
investments in this region, but currently feel the holdings are still
appropriate investments for the Fund. In our view, the Asian situation will be a
long and painful process to work through, but we do not believe the securities
held by the Fund are currently at risk of default.
The downturn in the Asian economies has contributed to a slowdown in the U.S.
manufacturing sector and has helped send bond yields to new lows. As interest
rates remain in a relatively narrow range and uncertainty in the markets over
Asia continue, a move to higher quality bonds will continue. The domestic
economy continues to show modest growth and we remain constructive on U. S.
fixed income market.
As higher yielding securities are called and replaced with lower yielding
securities, the ability to maintain income dividends at current levels of
approximately 7.5% will be a challenge. We continue to look for appropriate
securities in order to meet the investment objectives of the Fund. We feel that
the Fund continues to be an excellent investment for income-oriented investors.
Sincerely,
/s/ H. Thomas McMeeking
H. Thomas McMeekin, President
Asset Classification
As of June 30, 1998
Dollars in Millions)
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Public Debt 70.30% $95.2
Government/Gov't Agency 5.90% $ 7.9
Private Placements 16.90% $22.9
Equities/Partnerships 2.20% $ 3.1
Short-Term Investments 3.00% $ 4.1
Other Liabilities 1.70% $ 2.2
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Distribution By Quality
As of June 30, 1998
(Dollars in Millions)
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<S> <C> <C>
AAA .................... 5.90% $ 8.0
AA ..................... 3.25% $ 4.4
A ..................... 21.71% $29.4
BBB .................... 35.60% $48.2
BB ..................... 5.72% $ 7.7
B ..................... 1.12% $ 1.5
Not Rated ................. 2.89% $ 3.9
Private Placements ............. 16.90% $22.9
Equities .................. 2.20% $ 3.1
Short-Term Investments ........... 3.00% $ 4.1
Other Assets ................ 1.70% $ 2.2
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<PAGE>
Portfolio Performance
As of June 30, 1998
The following table displays the net asset value total return for the
Fund on a annualized basis compared to the Lehman Corporate Bond Index
and Standard & Poor's 500 Index of common stocks.
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YTD 1 Year 3 Year 5 Years 10 Years
<S> <C> <C> <C> <C> <C>
Lincoln National Income Fund 3.89% 11.89% 9.66% 8.39% 9.98%
Lehman Corporate Bond Index 4.15% 11.38% 7.49% 6.87% 9.01%
Standard & Poor's 500* 17.30% 30.15% 30.19% 23.04% 18.53%
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* Dividends Reinvested
Total Fund Investments
At Market or Fair Values As of June 30,
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1998 1997
(000) % of Total (000) % of Total
<S> <C> <C> <C> <C>
Public Debt Securities $ 103,080 76% $ 102,323 77%
Private Placement Securities 22,906 17% 25,861 19%
Common Stocks & Warrants 24 0% 337 1%
Preferred Stocks 2,666 2% 2,649 2%
Short-Term Investments 4,095 3% 0 0%
Partnerships 394 0% 281 0%
Other Assets/(Liabilities) 2,166 2% 1,772 1%
Total Net Assets $ 135,331 100% $ 133,223 100%
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Dividend History
The Fund in its lifetime has distributed common dividends of $29.32
per share which represents 235.6 percent of its offering price of
$12.50 per share 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.
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Annual Annual
Year Dividend Year Dividend
<S> <C> <C> <C>
1976 and Prior $3.15 1987 $1.52
1977 0.90 1988 1.23
1978 0.90 1989 1.17
1979 0.92 1990 1.18
1980 0.97 1991 1.15
1981 1.04 1992 1.68
1982 1.12 1993 1.77
1983 1.14 1994 1.28
1984 1.20 1995 1.32
1985 1.27 1996 1.47
1986 1.17 1997 1.52
1998 0.26*
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* Dividends Paid as of June 30.
<PAGE>
SHAREHOLDER MEETING RESULTS
The Fund had its annual Shareholder meeting on April 24, 1998. Two proposals
were presented to shareholders for vote. Proposal I "Election of Directors" and
Proposal II "Ratification of the Selection of Auditor". A total of 5,396,201
shares of Common Stock (77.92% of the total outstanding shares) and 21,700 of
Variable Term Preferred (VTP) stock shares (54.25% of the total outstanding
shares) were voted. The following table highlights the results of the vote.
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Number of Number of Number of
Shares Voted Shares Voted Shares
FOR AGAINST ABSTAINED
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Proposal I
Election of
Directors-Common
Stock
T. Bindley 5,266,453 129,748 --
A. Cepeda . 5,282,996 113,205 --
R. Deshaies 5,291,451 104,750 --
C. Freund . 5,269,243 126,958 --
T. McMeekin 5,286,803 109,398 --
D. Toll ... 5,270,195 126,006 --
A. Warner . 5,275,432 120,769 --
Election of
Directors-VTP
T. Bindley 21,700 -- --
R. Burridge 21,700 -- --
A. Cepeda 21,700 -- --
R. Deshaies 21,700 -- --
C. Freund 21,700 -- --
T. Mathers 21,700 -- --
T. McMeekin 21,700 -- --
D. Toll 21,700 -- --
A. Warner 21,700 -- --
Proposal II
Ratification of the
Selection of Auditor 5,311,992 18,646 87,263
(PricewaterhouseCoopers L.L.P.)
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<PAGE>
FINANCIAL HIGHLIGHTS
(Selected data for each share of common stock
outstanding throughout the year)
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Six Months Ended Years Ended
June 30, December 31,
1998 1997 1997 1996
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Net Asset Value, Beginning of Period .....$ 13.43 $ 13.47 $ 13.47 $ 14.22
Net Investment Income .................... 0.67 0.69 1.40 1.44
Net Realized & Unrealized Gain\(Loss) .... 0.01 (0.09) 0.39 (0.41)
Total From Investment Operations ....... 0.68 0.60 1.79 1.03
Reduction - Stock Rights Offering ........ -- -- -- --
Preferred Stock Underwriting Discounts
and Offering Costs ..................... -- -- -- --
Less Distributions:
Dividends from Net Investment Income:
To Preferred Shareholders ............... (0.16) (0.15) (0.22) (0.24)
To Common Shareholders .................. (0.26) (0.28) (1.21) (1.21)
Dividends from Net Realized Gains:
To Preferred Shareholders ............... 0.00 -- (0.09) (0.07)
To Common Shareholders ................... 0.00 -- (0.31) (0.26)
Total Distributions ...................(0.42) (0.43) (1.83) (1.78)
Net Asset Value, End of Period ...........$ 13.69 $ 13.64 $ 13.06 $13.47
Per Share Market Value, End of Period ....$ 14.06 $ 13.13 $ 13.06 $12.50
Total Investment Return (based on
Market Value) ..................... 9.70% 7.33% 17.12% 2.42%
Ratios/Supplemental Data
Net Assets, End of Period (000) ....... 135,331 133,223 $ 131,732 $132,054
Ratio--Expenses to Average Net Assets . 0.59% 0.59% 1.12% 1.11%
Ratio--Net Inv. Inc. to Average Net Assets 3.44% 3.60% 7.17% 7.32%
Portfolio Turnover Rate ................. 9.12% 11.51% 22.63% 22.73%
</TABLE>
( ) Denotes deduction
The accompanying notes are an integral part of the financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS
(Selected data for each share of common stock
outstanding throughout the year)
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<CAPTION>
Years Ended December 31,
1995 1994 1993 1992
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period .......$ 12.25 $14.63 $14.18 $14.85
Net Investment Income ..................... 1.46 1.47 1.56 1.36
Net Realized & Unrealized Gain\(Loss) ...... 2.17 (2.18) 0.92 (0.01)
Total From Investment Operations ......... 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 ................. (0.29) (0.27) (0.19) (0.08)
To Common Shareholders .................... (1.16) (1.20) (1.31) (1.31)
Dividends from Net Realized Gains:
To Preferred Shareholders ................. (0.05) (0.02) (0.07) (0.03)
To Common Shareholders .....................(0.16) (0.08) (0.46) (0.37)
Total Distributions ..................... (1.66) (1.57) (2.03) (1.79)
Net Asset Value, End of Period ............$ 14.22 $12.25 $14.63 $14.18
Per Share Market Value, End of Period .....$ 13.63 $10.75 $15.00 $14.31
Total Investment Return (based on
Market Value) ..................... 39.07% (19.80%) 17.17% 15.78%
Ratios/Supplemental Data
Net Assets, End of Period (000) .......... $137,163 $123,683 $113,181 $109,466
Ratio--Expenses to Average Net Assets ...... 1.14% 1.19% 1.17% 1.00%
Ratio--Net Inv. Inc. to Average Net Assets .. 7.44% 7.31% 6.76% 7.56%
Portfolio Turnover Rate ..................... 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.
FINANCIAL HIGHLIGHTS
(Selected data for each share of common stock
outstanding throughout the year)
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<CAPTION>
Years Ended December 31,
1991 1990 1989 1988
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Net Asset Value, Beginning of Period ..... $13.40 $14.44 $13.35 $12.83
Net Investment Income .................... 1.15 1.17 1.15 1.16
Net Realized & Unrealized Gain\(Loss) .... 1.45 (1.03) 1.11 0.59
Total From Investment Operations ....... 2.60 0.14 2.26 1.75
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)
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)
Net Asset Value, End of Period ............$14.85 $13.40 $14.44 $13.35
Per Share Market Value, End of Period .....$13.81 $11.88 $12.94 $11.88
Total Investment Return (based on
Market Value) ..................... 25.96% 0.87% 18.80% 13.96%
Ratios/Supplemental Data
Net Assets, End of Period (000) ........ $72,752 $65,652 $70,740 $65,383
Ratio--Expenses to Average Net Assets .... 0.97% 0.97% 0.96% 0.97%
Ratio--Net Inv. Inc. to Average Net Assets 8.05% 8.49% 8.04% 8.43%
Portfolio Turnover Rate .................. 15.07% 28.85% 44.46% 63.39%
</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
As of June 30, 1998 (unaudited)
<TABLE>
<CAPTION>
Par Market or
Investments-Notes A & B Amount Cost Fair Value
Public Debt Securities (76.2%)
<S> <C> <C> <C>
AGCO Corporation
8.50% Senior Subordinated Note, 3/15/06 ...... $ 250,000 $ 256,250 $ 258,125
AllState Corporation
7.50% Debenture, 6/15/13 ..................... 1,000,000 911,180 1,101,000
AMR Corporation
10.00% Bond, 4/15/21 ......................... 1,000,000 1,028,860 1,367,470
American Airlines 1988-A Grantor Trusts
9.83% Equipment Note Pass Through
Certificates Series 1988-A3, 1/1/02 .......... 1,095,818 1,095,818 1,116,190
Ametek Inc. .............................
9.75% Senior Notes, 3/15/04 .................... 250,000 264,062 263,750
Banc One Corporation
9.875% Subordinated Notes, 3/1/09 ............ 1,000,000 1,152,890 1,263,560
BankAmerica Corporation
10.00% Subordinated Notes, 2/1/03 ............ 1,000,000 1,183,100 1,153,510
BEA Collateralized Bond Obligation
6.72%, Series 1998-1, 6/15/10 ............... 1,000,000 963,239 963,238
Beckman Instruments, Inc. .............................
7.100% Senior Notes, 3/4/03 .................... 250,000 250,000 250,752
Black & Decker Corporation
8.91% Medium Term Note, 1/21/02 ................ 500,000 542,425 544,385
BVPS II Funding Corporation
8.33% Collateralized Lease Bond, 12/1/07 ..... 1,490,000 1,536,279 1,532,480
Capital Cities/ABC Inc. ............................
8.875% Senior Notes, 12/15/00 ................ 1,000,000 1,006,630 1,065,890
Carramerica Realty Corp. .............................
6.625% Senior Notes, 3/1/05 ............. ...... 400,000 397,956 397,892
Caterpillar Inc. .............................
6.00% Debenture, 5/1/07 ...................... 1,000,000 900,361 975,670
Cemex SA
10.00% Eurobond Medium-Term Note, 11/5/99 ...... 250,000 222,500 256,875
Chiquita Brands International Inc. .............................
9.625% Senior Notes, 1/15/04 ................... 250,000 252,500 260,625
Chrysler Financial Corporation
9.50% Senior Notes, 12/15/99 ................. 1,000,000 1,120,000 1,048,590
Citicorp Mortgage Securities Inc. .............................
8.75% REMIC 91-6 Class B, 5/25/21 .............. 500,000 505,703 504,687
Cleveland Electric Illuminating Company
7.625% First Mortgage Bonds, 8/1/02 .......... 1,000,000 961,790 1,036,080
Coastal Corporation
9.75% Debenture, 8/1/03 .................. ... 1,000,000 1,150,890 1,151,740
Commonwealth Edison Company
8.625% First Mortgage Bonds, 2/1/22 .......... 1,000,000 939,620 1,093,310
Compania De Desarrollo Aeropuerto Eldorado SA
10.19% Senior Note, 5/31/11 .................... 500,000 500,000 490,000
</TABLE>
<PAGE>
Statement of Net Assets (Continued)
(unaudited)
<TABLE>
<CAPTION>
Public Debt Securities (continued)
Par Market or
Amount Cost Fair Value
<S> <C> <C> <C>
ConAgra Inc. .............................
7.40% Subordinated Debt Securities, 9/15/04 $1,500,000 $1,495,140 $1,582,245
Connecticut Light & Power Company
7.25% 1st Refunding Mortgage, 7/1/99 ...... 1,000,000 1,003,430 998,970
Consumer's Energy Company
6.500%, Senior Notes, 6/15/18 ............. 500,000 496,565 491,025
Container Corporation of America
11.25% Senior Notes Series A, 5/1/04 ...... 250,000 258,750 272,500
Cyprus Amax Minerals Company
7.375% Note, 5/15/07 ...................... 500,000 517,255 528,980
Delta Air Lines Inc. ................................
9.90% Equipment Trust Certificates
Series 1988 C, 6/16/02 .................... 1,473,000 1,564,297 1,644,722
Donaldson Lufkin & Jenrette Mortgage Acceptance Corp.
7.71% Mortgage Pass Through Class A, 6/26/25 937,859 952,514 300,115
Dow Capital B.V
9.00% Guaranteed Debenture, 5/15/10 ....... 1,000,000 1,186,170 1,206,230
Duke Realty L.P. .................................
7.050% Notes, 3/1/16 ...................... 500,000 499,680 508,490
Duquesne II Funding Corporation
8.70% Collateralized Lease Bonds, 6/1/16 ... 990,000 990,000 1,108,384
EES Coke Battery Company
7.125% Senior Note Series A, 4/15/02 ....... 424,750 424,750 425,701
EI Dupont Nemour
8.25% Debenture, 1/15/22 .................. 1,000,000 1,097,680 1,093,800
Empressa Nacional De Electricidad SA
7.75% Note, 7/15/08 ....................... 450,000 447,638 449,671
Enron Corporation
9.50% Senior Fixed Rate Note, 6/15/01 ..... 1,000,000 1,141,040 1,088,530
Equity Residential Properties Operating L.P. ........
6.63% Notes, 4/13/15 ...................... 400,000 400,000 401,888
Federal Express Corporation - Global
9.875% Note, 4/1/02 ....................... 1,250,000 1,400,000 1,403,450
Federal Home Loan Mortgage Corporation (FHLMC)
7.80% REMIC Series 46 Class B, 9/15/20 .... 762,393 674,034 786,904
7.00% Pass Through Series 7 Class A, 9/17/31 . 977,972 951,384 985,307
Federal National Mortgage Association (FNMA)
9.20% Guaranteed REMIC 88-14, 12/25/17 .... 317,636 311,001 321,241
9.00% Trust Series 265 Class C, 3/1/24 .... 647,857 696,447 705,355
First Hawaiian Bank
6.93% Series A Note, 12/1/03 .............. 500,000 488,050 511,200
First Nationwide Holdings
10.625% Senior Subordinated Note, 10/1/03 . 250,000 271,562 276,250
First USA Bank Wilmington Delaware
7.65% Subordinated Notes, 8/1/03 .......... 1,000,000 1,000,000 1,067,550
Fleet/Norstar Financial Group Inc. ..................
8.625% Subordinated Note, 1/15/07 ......... 1,000,000 1,044,630 1,147,670
</TABLE>
<PAGE>
Statement of Net Assets (Continued)
(unaudited)
<TABLE>
<CAPTION>
Public Debt Securities (continued)
Par Market or
Amount Cost Fair Value
<S> <C> <C> <C>
General Electric Capital Corporation
8.75% Notes, 5/21/07 ...................... $1,000,000 $1,108,350 $1,185,750
General Motors Acceptance Corporation
8.875% Notes, 6/1/10 ...................... 1,500,000 1,656,000 1,821,330
Georgia Pacific Corporation
9.50% Debentures, 5/15/22 ................. 1,500,000 1,551,450 1,700,820
Goldman Sachs Group L.P. .....
7.20% Medium Term Notes, 3/1/07 500,000 499,750 531,950
Government National Mortgage Association (GNMA)
9.00% Pass-Thru Pool #309771, 8/15/21 869,281 937,230 936,137
9.00% Pass-Thru Pool #349329, 3/15/23 2,115,293 2,280,596 2,272,036
Greentree Financial Corporation
8.65% Series 94-96 Sub.Note, 1/15/20 1,000,000 988,594 1,036,667
Gruma SA DE CV
7.625% Note, 10/15/07 ........ 250,000 249,580 251,355
Gulf Canada Resources LTD
9.625% Subordinated Debenture, 7/1/05 250,000 262,500 268,125
Highwood Forsyth Realty L.P. .
7.00% Senior Notes, 12/1/06 .. 600,000 603,900 605,628
7.50% Senior Notes, 4/15/18 .. 400,000 398,556 412,348
HongKong & Shanghai Bank
6.3125% Floating Rate Notes, 12/29/49 500,000 408,500 366,250
Houston Lighting & Power Company
9.80% Medium Term Note Series B, 2/15/99 1,500,000 1,467,165 1,535,400
INCO LTD
9.60% Debentures, 6/15/22 .... 1,000,000 1,084,580 1,123,840
Interbank/AKK Trust
9.00% Note Series 1995 C, 2/28/01 . 500,000 485,930 494,290
Interface, Inc. ..............
7.30% Senior Notes, 4/1/08 ... 250,000 249,985 251,837
ISP Holdings Inc. ............
9.00% Note Series B, 10/15/03 250,000 259,219 259,375
ITT Corporation
6.75% Note, 11/15/03 ......... 500,000 481,825 483,365
K-III Communications Inc. ....
8.50% Company Guarantee Series B, 2/1/06 250,000 252,187 254,375
Lehman Brothers Holdings Inc.
7.375% Senior Notes, 5/15/07 . 500,000 522,740 531,125
Lloyds Bank PLC
6.1875% Floating Rate Notes, 6/29/49 1,000,000 835,000 885,000
Macmillan Bloedel LTD
8.50% Debentures, 1/15/04 .... 500,000 523,390 531,240
Marsh Supermarkets Inc. ......
8.875% Senior Note, 8/1/07 ... 250,000 247,812 255,625
McDonnell Douglas Corporation
9.25% Notes, 4/1/02 .......... 1,000,000 1,142,300 1,108,470
</TABLE>
<PAGE>
Statement of Net Assets (Continued)
(unaudited)
<TABLE>
<CAPTION>
Public Debt Securities (continued)
Par Market or
Amount Cost Fair Value
<S> <C> <C> <C>
MCI Communications Corporation
7.50% Senior Notes, 8/20/04 .. $1,000,000 $1,013,020 $1,062,860
Mellon Capital I
7.72% Bonds Series A, 12/1/26 400,000 400,000 430,072
Merrill Lynch Mortgage Investors Inc.
10.00% Pass-thru Series 90-A1, 3/15/10 463,913 461,315 502,431
Merrill Lynch
6.623% CLO 98-Pilgrim-Amer. Cl. A2, 9/23/09 1,000,000 1,000,000 1,004,062
MGM Grand, Inc. ..............
6.875% Collateral Notes, 2/6/08 1,000,000 987,580 992,110
Mid-America Mortgage
6.376% Trust Series 98-1, 3/3/03 . 500,000 491,484 496,094
NAL Auto Trust
7.30% 1996-3 Class A, 12/15/00 ... 208,813 208,690 206,660
Nationsbank Corporation
8.125% Subordinated Note, 6/15/02 .. 1,000,000 997,500 1,073,530
Nationwide
9.875% Contingent Surplus Notes, 2/15/25 .. 1,000,000 1,092,350 1,208,980
New England Telephone & Telegraph Company
9.00% Debentures, 8/1/31 ................... 1,000,000 1,007,300 1,123,350
News America Holdings Inc.
9.25% Senior Debentures, 2/1/13 ............ 1,000,000 1,110,980 1,216,230
Niagara Mohawk Power Corporation
9.25% First Mortgage Bonds, 10/1/01 ........ 500,000 503,490 538,990
Noranda Inc.
8.00% Yankee Bond, 6/1/03 .................. 1,500,000 1,500,000 1,590,450
NWA Trust
10.23% Asset-Backed Note Class B, 6/21/14 ... 456,970 537,970 569,405
Nynex Corporation
9.55% Debenture, 5/1/10 ..................... 1,504,680 1,810,221 1,738,312
Oryx Energy Company
10.00% Debenture, 4/1/01 .................... 1,000,000 1,036,380 1,083,760
Owens Corning Fiberglass Corporation
9.375% Debenture, 6/1/12 ..... .............. 1,000,000 1,185,720 1,252,230
PacifiCorp
8.29% Secured Medium Term Note, 12/30/11 .....1,000,000 1,000,000 1,167,940
7.00% 1st Mortgage Bond MTN Series H, 7/15/09.. 500,000 497,995 525,570
Peco Energy Company
7.125% 1st Refunding Mortgage Bond, 9/1/02 .. 1,500,000 1,500,375 1,556,070
Pennsylvania Power & Light
8.50% First Mortgage Bonds, 5/1/22 .......... 500,000 534,295 561,635
Pennzoil Company
10.125% Debentures, 11/15/09 . .............. 1,000,000 1,134,440 1,264,360
Pohang Iron & Steel Company
7.125% Note, 11/1/06 ......... .............. 1,000,000 976,480 767,180
Progress Capital Holdings LTD
6.88% Medium Term Note, 8/1/01 .............. 1,000,000 1,000,000 1,021,990
</TABLE>
<PAGE>
Statement of Net Assets (Continued)
(unaudited)
<TABLE>
<CAPTION>
Public Debt Securities (continued)
Par Market or
Amount Cost Fair Value
<S> <C> <C> <C>
Province de Quebec
11.00% Yankee Bond, 6/15/15 .. ..............$1,000,000 $1,072,720 $1,121,450
Republic of Brazil
10.125% Global Bond, 5/15/27 . .............. 250,000 238,437 215,250
Republic of Colombia
7.625% Global Bond, 2/15/07 .. .............. 300,000 294,045 269,150
Republic of Venezuela
9.25% Global Bond, 9/15/27 ... .............. 500,000 471,878 387,500
Resolution Trust Corporation
8.80% Mortgage Pass-thru Ser .92-C1, 8/25/23 . 156,464 156,028 156,464
RJR Nabisco Inc.
8.75% Note, 8/15/05 .......... .............. 1,000,000 987,390 1,035,260
Rogers Cantel Inc.
9.375% Senior Debenture, 6/1/08 ............. 250,000 270,625 259,375
Russian Federation
10.00% Bond, 6/27/07 ......... 250,000 247,910 188,125
Sears Roebuck & Company
9.05% Medium Term Note, 2/6/12 1,000,000 1,059,380 1,255,200
Selkirk Cogen Funding Corporation
8.65% First Mortgage Series A, 12/26/07 971,950 1,013,792 1,079,661
SMA Finance Corp, Inc. .......
6.40% MBS 98-C1 ClassA2, 11/16/19 1,000,000 1,000,000 1,006,562
Sociedad Quimica Y Minera De Chili
7.70% Notes, 9/15/06 ......... 1,000,000 1,022,370 1,031,000
Specialty Paperboard Inc. ....
9.375% Senior Note, 10/15/06 . 250,000 256,875 261,250
Speedway Motorsports Inc. ....
8.50% Senior Note, 8/15/07 ... 250,000 252,950 258,750
Standard Charter PLC
6.1875% Floating Rate Sr. Note, 11/29/49 1,000,000 877,400 660,000
Sun Inc. .....................
9.375% Debenture, 6/1/16 ..... 1,000,000 1,182,350 1,169,470
Systems Energy Resources
7.80% Senior Note, 8/1/00 .... 1,000,000 1,000,000 1,015,740
Tele-Communications Inc. .....
9.25% Debenture, 1/15/23 ..... 2,000,000 1,993,580 2,299,620
Texas Utilities Electric Company
7.375% First Mortgage Bond, 8/1/01 1,000,000 999,375 1,035,290
Time Warner Inc. .............
9.125% Senior Note, 1/15/13 .. 1,500,000 1,614,600 1,846,110
Toll Brothers Inc. ...........
8.75% Senior Subordinated Note, 11/15/06 250,000 257,187 258,750
Trico Marine Services Inc. ...
8.50% Senior Note, 8/1/05 .... 250,000 252,187 243,125
</TABLE>
<PAGE>
Statement of Net Assets (Continued)
(unaudited)
<TABLE>
<CAPTION>
Public Debt Securities (continued)
Par Market or
Amount Cost Fair Value
<S> <C> <C> <C>
United Airlines Inc. .........
8.70% Pass-thru Trust Series 92-A1,10/7/08 900,220 896,898 1,005,573
9.35% Pass-thru Series 92-A, 4/7/16 1,500,000 1,516,845 1,813,545
Wells Fargo & Co. ............
6.125% Senior Subordinated Notes,11/1/03 1,000,000 999,320 1,000,020
Wells Fargo Capital A
8.13% Bond, 12/1/26 .......... 500,000 521,000 556,220
Whirlpool Corporation
9.00% Debenture, 3/1/03 ...... 1,000,000 1,087,820 1,110,840
Worldcom Inc. ................
8.875% Senior Notes, 1/15/06 . 1,000,000 1,082,500 1,082,500
Total Public Debt Securities . 99,564,256 103,080,406
Date of
Initial
Purchase
Private Placement Securities (16.9%)
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 $1,145,300
Avianca Airline Ticket Receivable Trust
8.75% Structured Note, 12/24/05 12/24/97 500,000 500,000 509,300
Banco Nacional de Mexico
7.57% Senior Certificate, 1/1/01 11/05/96 500,000 499,982 501,806
Behr Process Corporation - Floating Rate
7.688% Senior Note, 3/31/04 7/15/97 118,800 118,800 118,800
7.938% Senior Note, 3/31/05 7/15/97 79,200 79,200 79,200
BSI Holdings, Inc. ...........
10.25% Senior Notes, 9/30/05 01/23/98 330,000 330,000 330,000
Cambuhy Export Trust Certificates
8.12%, Series 96-1, 7/5/01 6/11/96 347,333 347,333 352,335
Centennial Resources Inc. ....
13.00% Sr Subordinated Note,10/31/03 8/29/96 500,000 500,000 325,000
Coca-Cola Femsa SA DE
9.40% Convertible Senior Note,8/15/04 8/5/94 1,000,000 1,000,000 1,064,000
Deloitte & Touche LLP
7.41% Guaranteed Senior Note,10/1/11 9/25/96 1,000,000 1,000,000 1,056,600
Dow Chemical Co. .............
17.25% Certificate of Interest,1/2/03 3/25/92 1,497,314 1,497,314 1,883,292
Fort Wayne Capital Trust I
9.85% Senior Note, 4/15/27 4/14/97 1,000,000 1,000,000 1,215,500
Guangdong International Trust & Investment
8.75% Yankee Bond, 10/24/16 .. 10/17/96 500,000 498,600 380,055
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 1,051,850
</TABLE>
<PAGE>
Statement of Net Assets (Continued)
(unaudited)
<TABLE>
<CAPTION>
Private Placement Securities (continued)
Date
Initial Par Market or
Purchase Amount Cost Fair Value
<S> <C> <C> <C> <C>
Murray's Discount Auto Stores, Inc.
11.00% Sr Subordinated Note, 9/30/03 10/2/95 $500,000 $478,000 $500,000
Mutual Fund Fee Trust IV
7.99%, Series 1997-2, 1/31/05 4/21/97 759,907 759,907 771,412
New Boston Garden Corporation
8.45% Senior Secured Note, 9/22/15 9/22/95 940,220 940,220 1,029,720
Penn Fuel Gas Inc. ...........
7.51% Senior Note, 4/15/14 ... 5/25/94 1,000,000 1,000,000 1,065,510
Refco Group, LTD
8.21% Senior Note, 5/16/02 ... 5/8/95 800,000 800,000 826,248
Spectrascan Inc. .............
11.25% Sr Subordinated Note, 6/30/06 7/12/96 $500,000 $490,000 $500,000
Stackpole Magnetic Systems, Inc.
13.50% Sr Subordinated Note,10/15/05 9/1/95 380,000 351,500 380,000
Steel Technologies Inc. ......
8.52% Senior Note, 3/1/05 .... 2/6/95 500,000 500,000 527,550
Suburban Propane L.P. ........
7.54% Senior Note, 6/30/11 ... 3/7/96 1,000,000 1,000,000 1,040,310
Summit Acceptance Corporation
12.00% Sr Subordinated Note,3/31/02 4/7/97 500,000 477,500 477,500
Taegu Metropolitan City (Korea)
8.131% Term Loan, 3/5/99 ..... 3/05/98 1,000,000 976,417 984,900
The Money Store Inc. .........
9.00% Senior Note, 3/31/02 ... 2/22/95 1,000,000 1,000,000 1,088,270
Turkiye Vakiflar Bankasi T.A.O.
7.790% Trust Certificates, 12/22/00 12/22/97 431,962 431,962 433,772
United States Playing Card Company
12.00% Subordinated Note, 11/18/04 11/18/94 500,000 470,000 500,000
Union Acceptance Corporation
8.530% Senior Note, 8/1/02 6/23/97 1,000,000 1,015,910 985,000
West Fraser Mills LTD
8.44% Guaranteed Sr Note, 6/30/04 4/15/94 1,000,000 1,000,000 1,051,620
Total Private Placement Debt 21,484,312 22,724,850
Quantity
Private Placement Securities - Equities
Bicycle Holding Inc. *..........
Common Stock .................. 11/18/94 8 30,000 97,865
Centennial Coal, Inc. *.........
Stock Warrants
(entitled to purchase 37 shares of common
stock for $0.01 per share. Expires
9/1/06) ....................... 08/29/96 1 1 1
GT Parent Holdings Inc. *
Stock Warrants ............... 6/30/97 132 1 1
</TABLE>
<PAGE>
Statement of Net Assets (Continued)
(unaudited)
<TABLE>
<CAPTION>
Private Placement Securities (continued)
Date
Initial Par Market or
Purchase Amount Cost Fair Value
<S> <C> <C> <C> <C>
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) 10/2/95 1 22,000 1
PSC, Inc. *....................
Stock Warrants
(entitled to purchase 16,250 shares of
common stock for $10 per share. Expires
7/12/06) ................... 7/12/96 1 10,000 13,000
Stackpole Magnetic Systems *...
Stock Warrants
(entitled to purchase 54,582 shares of
common stock for $0.01 per share. Expires
9/01/05) ..................... 9/1/95 1 28,500 14,683
8.00% Cumulative Convertible
Preferred Stock 9/1/95 120,000 120,000 33,480
Summitt Acceptance Corporation *
Stock Warrants (entitled to purchase 23,167
shares of common stock for $.01/share.
Expires 4/7/04) .............. 4/7/97 2 22,500 22,530
Total Private Placement Equities 233,002 181,561
Total Private Placement Securities 21,717,314 22,906,411
Number of
Shares
Preferred Stocks (2.0%)
Loewen Group Inc. ...........................
9.45% Capital Series A ............ 40,000 1,000,000 1,082,480
Salomon Financing Trust I
9.183% Guaranteed Preferred Stock . 20,000 500,000 538,740
Transcanada Capital
8.75% preferred stock ............. 40,000 1,042,000 1,045,000
Total Preferred Stocks ............ 2,542,000 2,666,220
Common Stocks (0.0%)
Authorized Distribution Network, Inc. * 10,945 1,227 154
Paracelsus Healthcare Corporation * 7,500 62,047 23,438
Total Common Stocks 63,274 23,592
Partnerships (0.3%)
KBP Holdings, L.P. 250,000 250,000
KBSI Partnership, L.P. 144,000 144,000
MDAS Investors, L.P. 49,622 1
Total Partnerships 443,622 394,001
Total Long-Term Investments 124,330,466 129,070,630
</TABLE>
<PAGE>
Statement of Net Assets (Continued)
(unaudited)
<TABLE>
<CAPTION>
Par Market or
Amount Cost Fair Value
<S> <C> <C> <C> <C>
Short-Term Investments (3.0%)
Cargill
5.16%, 7/08/98 $2,000,000 $1,997,453 $1,997,452
Merrill Lynch
5.13%, 7/06/98 2,100,000 2,097,640 2,097,640
Total Short-Term Investments 4,095,093 4,095,092
Total Investments (98.4%) 128,425,559 133,165,722
Excess of Other Assets Over Liabilities (1.6%)- Note D 2,165,420
Net Assets (100%) - Note E $135,331,142
</TABLE>
Net asset value per share of common stock outstanding
($135,331,142 less Variable Term Preferred stock at
liquidation value of $40,000,000 divided by 6,961,855
shares of common stock outstanding) - Note E $13.69
* Non-Income Producing
<PAGE>
STATEMENTS OF OPERATIONS*
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
Investment Income:
<S> <C> <C> <C> <C>
Income:
Interest ..................$ 2,686,487 $ 2,718,994 $ 5,297,358 $ 5,422,745
Dividends ................. 60,127 57,374 121,251 114,747
Total Income .............. 2,746,614 2,776,368 5,418,609 5,537,492
Expenses:
Management fees - Note C .... 291,804 287,149 571,831 563,713
Variable term preferred
stock fees ................. 25,272 28,604 50,194 49,988
Director fees ............... 20,027 20,500 42,777 38,000
Professional fees ........... 3,000 8,533 20,850 22,533
Printing, stationery,
and supplies ................ 1,577 24,972 2,704 25,810
Stock transfer & dividend
disbursing fees ............. 4,208 10,946 11,299 30,120
Postage and mailing fees .... 20,998 13,197 22,425 13,197
New York Stock Exchange fee . 1,500 -- 17,670 16,170
Custodian and registrar fees . 3,723 1,861 5,585 3,743
Other ........................ 4,592 8,849 14,783 17,603
Total Operating Expenses ..... 376,701 404,611 760,118 780,877
Net Investment Income ...... 2,369,913 3,271,757 4,658,491 4,756,615
Net realized and unrealized gain(loss)
on investments:
Net realized gain on
investments .............. 27,724 193,181 445,235 247,270
Decrease in net unrealized
appreciation of investments ..(409,067) 1,432,489 (348,511) (876,679)
Net Realized & Unrealized Gain(Loss)
on Investments ...............(381,343) 1,625,670 96,724 (629,409)
Net Increase in Net Assets Resulting
from Operations ...........$ 1,988,570 $ 3,997,427 $ 4,755,215 4,127,206
</TABLE>
* Unaudited
The accompanying notes are an integral part of the financial statements.
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS*
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Changes from operations:
Net investment income .... $2,369,913 $2,371,757 $4,658,491 $4,756,615
Net realized gains on
investments .............. 27,724 193,181 445,235 247,270
Decrease in net unrealized
appreciation of investments .. (409,067) 1,432,489 (348,511) (876,679)
Net increase in net assets resulting
from operations ........ 1,988,570 3,997,427 4,755,215 4,127,206
Changes from Capital Share Transactions:
Par value of shares issued under
dividend reinvestment plan ... 36,583 -- 129,660 --
Proceeds in excess of par value
for shares issued under dividend
reinvestment plan 458,020 -- 1,631,720 --
Net increase from capital share
transactions ...... 494,603 -- 1,761,380 --
Distributions to shareholders from net
investment income:
Common shareholders ..... (1,800,571) (1,913,015) (1,800,571) (1,913,015)
Preferred shareholders ..... (554,686) (517,504) (1,117,164) (1,045,257)
Total distributions to
shareholders from net
investment income .......... (2,355,257) (2,430,519) (2,917,735) (2,958,272)
Total increase in net assets 127,916 1,566,908 3,598,860 1,168,934
Net assets at beginning
of period ...... 135,203,226 131,655,683 131,732,282 132,053,657
Net assets at end
of period * .......... $135,331,142 $133,222,591 $135,331,142 $133,222,591
</TABLE>
* Includes undistributed net investment income as of June 30, 1998 - $1,813,286;
1997 - $1,989,479.
The accompanying notes are an integral part of the financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS~
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Operating Activities:
Interest Received ......$2,294,124 $2,909,553 $5,270,274 $5,395,123
Dividends Received ..... 65,004 57,374 122,379 92,874
Operating Expenses Paid (363,998) (387,036) (754,349) (768,870)
Net Cash Provided
by Operating Activities 1,995,130 2,579,891 4,638,304 4,719,127
Investing Activities:
Purchase of investment
securities ...... (3,297,305) (11,942,713) (11,020,521) (16,993,306)
Proceeds from sale of investment
securities ...... 6,158,183 11,229,719 12,812,715 15,240,660
Net proceeds(purchase) of short-term
investments ..... (3,118,675) 1,100,959 (802,302) 4,600,000
Net Cash Provided
by Investing Activities (257,797) 387,965 989,892 2,847,354
Financing Activities:
Proceeds received from dividend
reinvestment plan ..... 494,602 -- 1,761,380 --
Distributions paid to common and
preferred shareholders (2,310,172) (2,400,615) (7,630,308) (7,126,576)
Net Cash Used in
Financing Activities .. (2,310,172) (2,400,615) (5,868,928) (7,126,576)
Increase(Decrease)
in Cash ............ (572,839) 567,241 (240,732) 439,905
Cash at Beginning
of Period .......... 773,172 (35,035) 441,065 92,301
Cash at End
of Period - Note D . $ 200,333 $ 532,206 $ 200,333 $ 532,206
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 ........ $1,988,570 $3,997,427 $4,755,215 $4,127,206
Reconciling Adjustments:
Net realized and unrealized (gain)
loss on investments 381,343 (1,625,670) (96,724) 629,409
Discount accretion on investment
securities ........ (1,961) (1,834) (3,916) (3,575)
(Increase)Decrease in accrued investment
income receivable . (362,139) 192,393 (23,168) (24,046)
Increase in accrued
dividend receivable (3,749) -- 1,128 (21,875)
Increase(Decrease) in
accrued expenses (6,934) 17,575 5,769 12,008
Net Cash Provided by Operating
Activities ..... $1,995,130 $2,579,891 $4,638,304 $4,719,127
</TABLE>
~Unaudited
The accompanying notes are an integral part of the financial statements.
<PAGE>
PORTFOLIO of INVESTMENTS BY INDUSTRY CLASSIFICATION
As of June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
Market or Percent of
Fair Value Net Assets
<S> <C> <C>
Accounting Firms
Deloitte & Touche LLP ....................... $ 1,056,600 0.8%
Aerospace
McDonnell Douglas Corporation ............... 1,108,470 0.8%
Airline
AMR Corporation ............................. 2,483,660
Delta Air Lines Inc. ........................ 1,644,722
United Airlines Inc. ........................ 2,819,118
6,947,500 5.1%
Bank
Anglo Irish Bank Corporation ................ 1,145,300
Banc One Corporation ........................ 1,263,560
Banco Nacional de Mexico .................... 501,806
BankAmerica Corporation ..................... 1,153,510
First Hawaiian Bank ......................... 511,200
First Nationwide Holdings ................... 276,250
First USA Bank .............................. 1,067,550
Fleet/Norstar Group ......................... 1,147,670
HongKong & Shanghai Bank .................... 366,250
Lloyds Bank PLC ............................. 885,000
Mellon Capital I ............................ 430,072
Nationsbank Corporation ..................... 1,073,530
Standard Charter PLC ........................ 660,000
Wells Fargo Capital A ....................... 1,556,240
12,037,938 8.9%
Broadcasting/Publishing
Capital Cities/ABC Inc. ..................... 1,065,890
K-III Communications Inc. ................... 254,375
News America Holdings Inc. .................. 1,216,230
2,536,495 1.9%
Brokerage
Goldman Sachs Group ......................... 531,950
Lehman Brothers Holding Inc. ................ 531,125
Refco Group ................................. 826,248
Salomon Inc. ................................ 538,740
2,428,063 1.8%
Chemicals
Dow Chemical Co. ............................ 1,883,292
EI Dupont Nemour ............................ 1,093,800
ISP Holdings Inc. ........................... 259,375
3,236,467 2.4%
Electrical and Electronics
PSC Inc. .................................... 13,000
Spectrascan Inc. ............................ 500,000
513,000 0.4%
Energy
Empressa Nacional De Electricidad SA ... 449,671
Enron Corporation ...................... 1,088,530
Gulf Canada Resources LTD .............. 268,125
Peco Energy Company .................... 1,556,070
Systems Energy Resources ............... 1,015,740
4,378,136 3.2%
Entertainment
Bicycle Holding Inc. ................... 97,865
MGM Grand, Inc. ........................ 992,110
New Boston Garden Corporation .......... 1,029,720
Speedway Motorsports Inc. .............. 258,750
Time Warner Inc. ....................... 1,846,110
United States Playing Card Company ..... 500,000
4,724,555 3.5%
Finance
Chrysler Financial Corporation ......... 1,048,590
Dow Capital ............................ 1,206,230
Duquesne II Funding Corporation ........ 1,108,384
Fort Wayne Capital Trust I ............. 1,215,500
General Electric Capital Corporation ... 1,185,750
General Motors Acceptance Corporation .. 1,821,330
Progress Capital Holdings LTD .......... 1,021,990
Selkirk Cogen Funding Corporation ...... 1,079,661
SMA Finance Corp, Inc. ................. 1,006,562
Summit Acceptance Corporation .......... 500,030
The Money Store ........................ 1,088,270
Union Acceptance Corporation ........... 985,000
13,267,297 9.8%
Finance - Structured
Avianca Airline Ticket Receivable Trust 509,300
BEA Collateralized Bond Obligation ..... 963,238
Citicorp Mortgage Securities Inc. ...... 504,687
DLJ Mortgage Pass-thru ................. 300,115
Greentree Financial Corporation ........ 1,036,667
Interbank/AKK Trust .................... 494,290
Merrill Lynch CLO ...................... 1,004,062
Merrill Lynch Mortgage Investors Inc. .. 502,431
Mid-America Mortgage ................... 496,094
Mutual Fund Fee Trust IV ............... 771,412
NAL Auto Trust ......................... 206,660
NWA Trust .............................. 569,405
Resolution Trust Corporation ........... 156,464
7,514,825 5.6%
</TABLE>
<PAGE>
PORTFOLIO of INVESTMENTS BY INDUSTRY CLASSIFICATION
Continued (Unaudited)
<TABLE>
<CAPTION>
Fair Value Percent of
Market or Net Assets
<S> <C> <C>
Food and Beverage
Cambuhy Export Trust ................... 352,335
Chiquita Brands ........................ 260,625
Coca-Cola Femsa SA DE .................. 1,064,000
Conagra Inc. ........................... 1,582,245
Marsh Supermarkets Inc. ................ 255,625
RJR Nabisco Inc. ....................... 1,035,260
4,550,090 3.4%
Foreign and Foreign Government
Cemex SA ............................... $ 256,875
Compania De Desarrollo Aero ............ 490,000
Gruma SA DE CV ......................... 251,355
Guangdong International Trust .......... 380,055
Noranda Inc. ........................... 1,590,450
Province de Quebec ..................... 1,121,450
Republic of Brazil ..................... 215,250
Republic of Colombia ................... 269,150
Republic of Venezuela .................. 387,500
Russian Federation ..................... 188,125
Sociedad Quimica y Minera de Chile ..... 1,031,000
Taegu Metropolitan City (Korea) ........ 984,900
Turkiye Vakiflar Bankasi T.A.O ......... 433,772
7,599,882 5.6%
Forest Products
Macmillan Bloedel ...................... 531,240
West Fraser Mills LTD .................. 1,051,620
1,582,860 1.2%
Funeral Homes
Loewen Group Inc. ...................... 1,082,480 0.8%
Government/Government Agency
Federal Home Loan Mortgage Corp. ....... 1,772,211
Federal National Mortgage Association .. 1,026,596
Government National Mortgage Assoc ..... 3,208,173
6,006,980 4.4%
Health Care
Beckman Instruments Inc. ............... 250,752
Paracelsus Healthcare .................. 23,438
274,190 0.2%
Heavy Machinery
AGCO Corporation ....................... 258,125
Caterpillar Inc. ....................... 975,670
1,233,795 0.9%
Home Construction
BSI Holdings, Inc. ..................... 474,000
Owens Corning Fiberglass Corporation ... 1,252,230
Toll Brothers Inc. ..................... 258,750
1,984,980 1.5%
Household Products
Behr Process Corporation ............... 198,000
Black & Decker Corporation ............. 544,385
Interface, Inc. ........................ 251,837
Whirlpool Corporation .................. 1,110,840
2,105,062 1.6%
Industrial
Ametek Inc. ........................... 263,750 0.2%
Insurance
AllState Corporation ................... 1,101,000
Nationwide ............................. 1,208,980
2,309,980 1.7%
Metals/Mining
Centennial Resources Inc. .............. 325,001
Cyprus Amax Minerals Co. ............... 528,980
EES Coke Battery Company ............... 425,701
INCO LTD ............................... 1,123,840
2,403,522 1.8%
Miscellaneous
Authorized Distribution Network Inc. ... 154
Huron Technologies Inc. ................ 550,000
ITT Corporation ........................ 483,365
KPB Holdings, L.P. ..................... 250,000
Louis Dreyfus Corporation .............. 1,051,850
Stackpole Magnetic Systems ............. 428,163
2,763,532 2.0%
Natural Gas
Coastal Corporation .................... 1,151,740
Consumer's Energy Company .............. 491,025
Penn Fuel Gas Inc. ..................... 1,065,510
Suburban Propane L.P. .................. 1,040,310
3,748,585 2.8%
Paper and Paper Products
Container Corporation of America ....... 272,500
Specialty Paperboard Inc. .............. 261,250
533,750 0.4%
Petroleum
Oryx Energy Company .................... 1,083,760
Pennzoil Company ....................... 1,264,360
Sun Inc. ............................... 1,169,470
Trico Marine Services Inc. ............. 243,125
3,760,715 2.8%
</TABLE>
<PAGE>
PORTFOLIO of INVESTMENTS BY INDUSTRY CLASSIFICATION
Continued (Unaudited)
<TABLE>
<CAPTION>
Market or Percent of
Fair Value Net Assets
<S> <C> <C>
Public Utility
BVPS II Funding Corporation ............ 1,532,480
Cleveland Electric Illuminating Co. .... 1,036,080
Commonwealth Edison Inc. ............... 1,093,310
Connecticut Light & Power .............. 998,970
Houston Lighting & Power Company ....... 1,535,400
Niagara Mohawk Power Corporation ....... 538,990
PacifiCorp ............................. 1,693,510
Pennsylvania Power & Light ............. 561,635
Texas Utilities Electric Company ....... 1,035,290
Transcanada Capital .................... 1,045,000
11,070,665 8.2%
Real Estate Investment Trusts
Carramerica Realty Corp. ............... 397,892
Duke Realty L.P. ....................... 508,490
Equity Residential Prop.Operating L.P. . 401,888
Highwood Forsyth Realty L.P. ........... 1,017,976
2,326,246 1.7%
Retail
MDAS Investors Limited Partnership ..... 1
Murray's Discount Auto Stores Inc. ..... 500,001
Sears Roebuck & Company ................ 1,255,200
1,755,202 1.3%
Steel
Pohang Iron & Steel Company ............ 767,180
Steel Technologies ..................... 527,550
1,294,730 1.0%
Telecommunications
Global Telesystems Holdings Ltd. ....... 1
MCI Communications Corporation ......... 1,062,860
New England Telephone & Telegraph ...... 1,123,350
Nynex Corporation ...................... 1,738,312
Rogers Cantel Inc. ..................... 259,375
Tele-Communications Inc. ............... 2,299,620
Worldcom Inc. .......................... 1,082,500
7,566,018 5.6%
Transportation
Federal Express Corporation ............ 1,403,450
Georgia Pacific Corporation ............ 1,700,820
3,104,270 2.3%
Total Long-Term Investments ............ $129,070,630 95.4%
</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 private 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.
Private placement securities are restricted as to resale. Except for certain
private placement securities traded in a secondary market system for trading
restricted securities, private placement securities have no quoted market
values. The amounts shown as fair values for private placement securities with
no available quoted market values represent values approved by the Board of
Directors. Many factors are considered in arriving at fair
<PAGE>
Notes to Financial Statements (continued)
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 30,1998, the value of all private placement securities, which totaled
$22,906,411 and represents 16.9% 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 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
Private 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 private 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 private
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 private 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
$11,419,966 and $12,232,245, respectively, as of June 30,1998; and $17,786,859
and $15,223,768, respectively as of June 30, 1997.
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
<PAGE>
Notes to Financial Statements (continued)
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.
Certain officers and directors of the Fund are also officers or directors of the
Advisor. The compensation of unaffiliated directors of the Fund is borne by the
Fund.
Note D - Excess of Other Assets over Liabilities
The net asset caption "excess of other assets over liabilities" consisted of the
following:
Cash ............................................. $ 200,333
Accrued interest income receivable................ 2,397,807
Accrued dividend income receivable ............... 59,697
Receivable for investments securities sold ....... 322,513
Management fee payable ........................... (287,712)
Payable for securities sold ...................... (399,445)
Accrued dividends payable - VTP .................. (120,571)
Other - net ...................................... (7,202)
$ 2,165,420
Note E - Net Assets
Net assets at June 30,1998, 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 6,961,855 shares ...................... 6,961,855
Proceeds in excess of par value of shares
issued ................................................ 74,732,896
Undistributed realized gain on investments,
net of taxes paid ..................................... 7,082,942
Undistributed net investment income ................... 1,813,286
Net unrealized appreciation of investments ............ 4,740,163
Total Net Assets ...................................... $135,331,142
Note F - Income Taxes
The cost of investments for federal income tax purposes is the same as for book
purposes. At June 30, 1998, the aggregate gross unrealized appreciation on
investments was $6,922,954 and the aggregate gross unrealized depreciation was
$2,182,791.
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 period ended June 30,1998, dividend rates have ranged from 5.379% to
5.500% and the average dividend rate was 5.469%.
Note H - Subsequent Event
On July 9, 1998, the Board of Directors declared a $.26 per share distribution.
The dividend is payable July 31, 1998 to shareholders of record as of July 20,
1998.
<PAGE>
Common Stock Market Prices and Net Asset Value History (Unaudited)
<TABLE>
<CAPTION>
1998
Market Prices and Volumes Net Asset Value
High Low Close Volume High Low Close
<S> <C> <C> <C> <C> <C> <C> <C>
1st Quarter $14.00 $13.00 $13.87 488,400 $13.76 $13.43 $13.750
2nd Quarter 14.25 13.43 14.06 276,700 13.82 13.52 13.690
1997
Market Prices and Volumes Net Asset Value
High Low Close Volume High Low Close
1st Quarter $13.00 $12.37 $12.75 498,900 $13.77 $13.42 $13.42
2nd Quarter 13.25 12.37 13.25 351,100 13.68 13.16 13.64
3rd Quarter 14.00 13.06 13.87 381,700 14.12 13.62 14.12
4th Quarter 14.00 12.87 13.06 335,200 14.19 13.43 13.43
1996
Market Prices and Volumes Net Asset Value
High Low Close Volume High Low Close
1st Quarter $13.87 $12.87 $13.12 304,700 $14.32 $13.82 $13.83
2nd Quarter 13.25 12.37 13.00 239,200 13.88 13.36 13.71
3rd Quarter 13.12 12.12 13.00 275,300 13.74 13.43 13.77
4th Quarter 13.12 12.25 12.50 433,000 14.27 13.47 13.47
1995
Market Prices and Volumes Net Asset Value
High Low Close Volume High Low Close
1st Quarter $12.25 $10.62 $12.00 229,000 $13.25 $12.25 $13.19
2nd Quarter 13.00 11.75 12.87 328,000 14.25 13.19 14.14
3rd Quarter 13.00 12.25 12.75 218,100 14.30 13.82 14.22
4th Quarter 14.25 12.50 13.62 277,500 14.54 14.17 14.22
</TABLE>
Shares are listed on the New York Stock Exchange under the trading symbol LND.
<PAGE>
Directors & Officers of the Fund
<TABLE>
<CAPTION>
Directors Descriptions of Occupations and Responsibilities
<S> <C>
Thomas L. Bindley Director, Lincoln National Convertible Securities
Fund, Inc.
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. Member,
School of Business Advisory Board, Indiana-Purdue
University of Fort Wayne.
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., 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., Mallinckrodt Group Inc., and NICOR,
Inc.
Ann L. Warner Senior Vice President and Director Risk
Management, Lincoln Investment Management, Inc;
Director, Lincoln National Convertible Securities
Fund, Inc.
</TABLE>
Officers
H. Thomas McMeekin, President
David A. Berry, Vice President
David C. Fischer, Vice President
David G. Humes, Vice President, Controller, Treasurer
Ann L. Warner, Vice President
Cynthia A. Rose, Secretary
<PAGE>
Corporate Information
Dividend Disbursing Agent, Transfer Agent and Reinvestment Plan Agent
First Chicago Trust Company of New York
P.O. Box 2500
Jersey City NJ 07303-2500
1-800-317-4445
Investment Advisor
Lincoln Investment Management, Inc.
200 East Berry Street
Fort Wayne, IN 46802
(219) 455-2210
Independent Accountants
PriceWaterhouseCoopers
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 First Chicago, 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
First Chicago, P.O. Box 2500 Jersey City, NJ 07303-2500 or call 1-800-317-4445.