Lincoln National Income Fund, Inc.
1997 Annual Report
<TABLE>
<CAPTION>
Table of Contents
<S> <C>
Page
Manager Profile .. ................................................................ 1
Investment Policies & Objectives ........................................... 1
President's Letter .................................................................. 2
Portfolio Manager's Discussion ............................................... 3
Asset Classification ................................................................ 4
Distribution By Quality ........................................................... 4
Portfolio Performance .............................................................. 5
Annual Performance of the Fund vs. Indices ............................ 5
Total Fund Investments .......................................................... 6
Dividend History ................................................................... 6
Tax Information .................................................................... 6
Shareholder Meeting Results ................................................. 7
Common Stock Market Prices & Net Asset Value History .... 8
FINANCIAL STATEMENTS:
Financial Highlights ........................................................... 9
Statement of Net Assets ................................................... 11
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 .................................... 28
Directors & Officers of the Fund ........................................ 29
Corporate Information ...................................................... 30
</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 $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 December 31,
1997, has chosen not to do so.
<PAGE>
President's Letter
January 27, 1998
Dear Shareholders:
We are pleased to report that Lincoln National Income Fund
achieved a net asset value total return in 1997 of 11.37%, another
year of good performance relative to the Lehman Corporate Bond
index which returned 10.23%. With the January 1998 distribution
of $.70 per common share, the Fund paid 1997 dividends of $1.52
per common share which gives the Fund a trailing dividend
yield of approximately 11%.
This year marked the 25th anniversary of operations for the Fund.
We are proud of the performance we have given our investors over
the years. For the twenty-five year period, we have achieved an
average annualized return of 10.9% as compared to 9.2% per year
for the Lehman Corporate Bond index. The Fund has achieved
excellent returns over the years while simultaneously providing
good dividend income and safety of investment value.
For the three year and five year periods, the Fund achieved average
annual NAV total returns of 14.33% and 9.88% respectively. This
ranked the Fund 3rd of 32 funds in our Morningstar peer group for
the 3 year period and 5th for the 5 year period. The Fund also
ranks first in this peer group over the 10 year period ended
12/31/97. We believe that the Fund has well deserved its 4-Star
Morningstar rating.
As we enter 1998, interest rates are at their lowest levels since the
early 1970's. We want to state once again that the current level of
rates pose a reinvestment challenge to the Fund and are likely to
continue to put downward pressure on the income dividends that
the Fund is able to pay. Fortunately, the Fund has
locked in for long periods many investments from the past when
rates were higher. However, in 1998 the Fund expects about
$9,000,000 of pay downs and maturities of its investments that will
need to be reinvested in the market. With interest rates where they
are now, we expect yields of approximately 6.5-7.0%
on average for these new investments. Obviously, interest rates
could go higher by the time these monies are available for
reinvestment, but the point is that as the marginal investment yield
declines, our dividend yield will be moving toward this lower yield
level over time.
As we have in the last few years, we will aggressively seek out
bonds and other securities to find attractive yields commensurate
with the risk. The core of the Fund will remain a BBB-rated
corporate bond fund. However, conventional private placements,
private placements with equity components, foreign bonds, and
innovative structured finance investments will continue to be
utilized in order to find attractive yields. These investments will
be used with utmost prudence and diversification since we do not
plan to increase the risk profile of the Fund just to target a certain
dividend level.
Our outlook for 1998 is for slower U.S. GDP growth largely
because of the Asia financial problems. The Fund has a small
exposure to this region, thus we focus most of our attention on
assessing the likelihood of a domestic credit deterioration.
Although corporate bond spreads have widened recently and
this market is projected for heavy new issuance in the first quarter
of this year, we believe that 1998 will be a relatively attractive year
for the U.S. corporate bond market. The Fund's balance of interest
rate and credit risks are appropriate given the current level of
interest rates and the current state of the US economic cycle.
We would also like to acknowledge the contributions of Fred
Young as a Director who has served throughout the Fund's history
and contributed significantly to the Fund's success. Fred has
decided to retire from the Board in April of this year. His insight
and guidance have helped the Fund to achieve its fine dividend
history and his contributions will be missed. We wish him
continued success.
We thank you for your continued interest in your Fund.
Sincerely,
/s/ H. Thomas McMeekin
H. Thomas McMeekin
President
January 27, 1998
2
<PAGE>
Portfolio Manager's Discussion
1997 Review
As Tom McMeekin pointed out in the President's letter, 1997 was
a good year for bonds, particularly the Lincoln National Income
Fund. With interest rates on long Treasuries at the beginning of
the year lower than 7%, a double digit return was a pleasant
surprise. Our net asset value (NAV) return of 11.37%
outperformed the Lehman Corporate Bond index by
approximately 110 basis points. Our balance in taking modestly
greater interest rate and credit risk than the index helped us
achieve this index-beating performance. The Fund's market return
was even better at 17.1% as the discount to NAV for the Fund
narrowed during the year about 5% to 2.8% at December 31.
The biggest story for the year was the financial markets crisis in
Asia which led to massive financial markets down drafts in many
Asian countries. This crisis began in Thailand in the middle of the
year, but grew in intensity until it roiled the U.S. equity markets
with a 550 point Dow decline in late October. The U.S. equity
markets have remained volatile ever since. Since October 15, long
Treasury bonds have returned over 6% while equities have moved
mostly sideways. Treasury bonds have benefited from a flight to
quality and were the best domestic bond sector in late 1997.
Corporate bonds, the mainstay of our Fund, lagged Treasuries but
still provided good total returns late in the year.
The Fund was not immune to the financial problems in Asia, as
we had several positions in bonds of companies in Asia. These
names include Hong Kong Shanghai Bank, Standard Chartered
Bank, Pohang Iron and Steel, and AST Research (a subsidiary of
Samsung Electronics). These dollar-denominated bonds are down
in price over 20%. However, these holdings only comprise about
3% of the Fund's assets. We were fortunate to be able to sell out of
the bonds of Korea Development Bank in the early stages of the
turmoil.
The year began with a slight bear market in bonds, with long-term
Treasuries going higher than 7% by April. Interest rates spent
most of the rest of the year declining and finished the year below
6%.
For the year, the yield on long-term Treasuries declined by about
70 basis points (.7%), but short-term interest rates did not decline
very much at all giving rise to what we call a "flat" yield curve. At
12/31/97, there was only a 28 basis point spread between the yield
on the 2 year Treasury bond and the 30 year Treasury bond. The
normal spread between the 2 year and 30 year Treasury bond is
closer to 100 basis points. Interest rates are now lower than the
levels they reached in October 1993 and January 1996, and are the
lowest they have been since the early 1970's.
The economy remained good throughout the year with GDP
growth of 3.9%. Surprising many market participants, inflation
was very low once again in spite of the good economic growth.
The Consumer Price index increased by only 1.7%--the lowest
since 1986. The CPI ex food and energy, the so-called "core"
inflation, was the lowest since the early 1960's.
Corporate bonds relative to Treasuries had their worst year since
1991. Most of this under-performance was in the fourth quarter in
reaction to the Asia financial crisis. Corporate bonds
under-performed a duration equivalent Treasury by 29 basis points
in 1997. Notwithstanding weakness in investment grade
corporates, High Yield bonds were strong with the Lehman High
Yield index returning 12.76%. The Fund for several years has
maintained a core investment of 10-15% of assets in the public
high yield market and these investments once again were
beneficial to the Fund's performance.
Our investments in private placements are at 18.75% of assets
which is close to our target level. Once again, our private bonds
with equity components have been a great source of total return.
The payoff of the equity appreciation rights of our investment in
Desert Eagle Distributing produced a capital gain of $2,200,000,
an annualized total return of approximately 25%, and a boost to
1997 total return by over 100 basis points. We continue to work
closely with our private placement staff in finding additional
attractive opportunities for the Fund.
3
<PAGE>
1998 Outlook
For the coming year, we see inflation between 1.5% and 1.9% and
economic growth between 1% and 2%. Both of our forecasts are
slightly lower than the current consensus forecast. The Asia crisis
is not behind us yet, and world financial markets remain volatile.
This crisis kept the Federal Reserve from tightening monetary
policy in late 1997, and the U.S. slowdown resulting from the
expected Asia recessions will most likely lead to an easing in rates
by the Federal Reserve later in 1998. In this environment, we
expect interest rates to decline further in 1998. However, interest
rates are very low by recent standards, so we want to be careful
about being too optimistic.
New issuance of corporate bonds will be huge in the first quarter
as corporate treasurers take advantage of current low interest rates.
Conversely, Treasury supply will be down dramatically as the
Treasury budget is close to a surplus. As a result, we expect
corporate bonds to under-perform Treasuries early in the year. A
spread sector that we favor now is commercial mortgage-backed
securities, and we plan to use a small amount of these in lieu of
corporate bonds in the Fund.
Notwithstanding the Asia concern, we think a U.S. recession in
1998 is a low probability, and, accordingly, we do not foresee a
significant credit scare during the year. After the expected first
quarter supply and demand imbalance, we see corporate bonds
out-performing Treasury securities slightly for the entire year.
Corporate bonds will remain the core of our Fund, but we
anticipate continuing to grow the Fund's investments in areas such
as innovative structured finance transactions and modest amounts
of higher-yielding foreign investments. With interest rates as low
as they are, our primary challenge for 1998 is finding investments
with yields high enough to maintain the dividend at levels of recent
years.
/s/David C. Fischer
Portfolio Manager
Asset Classification
As of December 31, 1997 (Dollars in Millions)
[PIE CHART]
Public Debt 72.97%
Government/Gov't Agency 5.16%
Private Placements 18.75%
Equities/Partnerships 2.28%
Short-Term Investments 2.51%
Other Liabilities -1.67%
Distribution By Quality
As of December 31, 1997 (Dollars in Millions)
[BAR GRAPH]
AAA 6.71%
AA 3.33%
A 22.72%
BBB 33.26%
BB 7.69%
B 1.35%
Not Rated 3.07%
Private Placements 18.75%
Equities 2.28%
Short-Term Investments 2.51%
Other Liabilities -1.67%
4
<PAGE>
Portfolio Performance
As of December 31,
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 1997 assuming reinvestment of dividends.
MOUNTAIN GRAPH
1973 1978 1985 1988 1993 1997
Income Fund $1,000 $1,383 $3,744 $5,332 $9,537 $13,180
Lehman Corporate
Bond Index $1,000 $1,386 $3,096 $3,939 $6,757 $9,035
S&P 500 $1,000 $1,056 $3,289 $4,789 $9,432 $21,546
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 25 Yrs
<S> <C> <C> <C> <C> <C>
<C>
Income Fund 11.37% 49.43% 60.15% 185.12% 453.47%
1217.96%
Lehman Corporate
Bond Index 10.23% 39.18% 48.45% 146.79% 339.76%
803.52%
S & P 500 Index* 33.36% 125.48% 151.42% 424.46%
1023.88% 2054.63%
* Dividends Reinvested
</TABLE>
Annual Performance of Lincoln National Income Fund vs. Indices
<TABLE>
<CAPTION>
Income Lehman S&P 500
Fund Corporate Index
<S> <C> <C> <C>
1973 3.20% 2.28% -14.69%
1974 -12.60% 0.17% -26.47%
1975 13.03% 12.30% 37.23%
1976 17.24% 15.59% 23.93%
1977 7.82% 2.99% -7.13%
1978 7.28% 1.18% 6.58%
1979 12.92% 2.30% 18.60%
1980 15.37% 3.06% 32.46%
1981 4.73% 7.26% -4.92%
1982 26.24% 31.10% 21.55%
1983 14.67% 7.99% 22.56%
1984 16.88% 15.02% 6.27%
1985 17.30% 21.30% 31.73%
1986 17.55% 15.62% 18.67%
1987 5.04% 2.29% 5.25%
1988 15.35% 7.58% 16.56%
1989 17.38% 14.23% 31.63%
1990 1.31% 8.28% -3.11%
1991 21.34% 16.13% 30.40%
1992 6.96% 7.58% 7.61%
1993 15.89% 11.03% 10.06%
1994 -7.52% -3.93% 1.31%
1995 27.35% 22.25% 37.53%
1996 5.36% 3.28% 22.94%
1997 11.37% 10.23% 33.36%
</TABLE>
5
<PAGE>
Total Fund Investments
At Market or Fair Values As of December 31,
<TABLE>
<CAPTION>
1997 1996
(000) % of Total (000) % of
Total
<S> <C> <C> <C>
<C>
Public Debt Securities $102,972 78% $104,616 79%
Private Placement Securities 24,707 19% 22,756 17%
Common Stocks & Warrants 25 0% 272 0%
Preferred Stocks 2,680 2% 1,570 1%
Short-Term Investments 3,293 3% 4,600 3%
Partnerships 281 0% 50 0%
Other Assets/(Liabilities) (2,226) -2% (1,810) -1%
Total Net Assets $131,732 100% $132,054 100%
</TABLE>
Dividend History
The Fund in its lifetime has distributed common dividends of
$29.06 per share which represents 232.5 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.
<TABLE>
<CAPTION>
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
</TABLE>
Tax Information
Income dividends received by a shareholder must be reported for
federal income tax purposes as ordinary income. The Fund
distributed $ 1.52 per share to common shareholders for the tax
year 1997. Common dividend payments made in April, July,
October and mid-January 1998 are taxable in the 1997 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 $1.25
$38.49 *
Long-Term Capital Gains Per Share $0.27
$15.91 *
Corp. Dividend Received Deduction - Percent 1.960230%
1.960230%
Corp. Dividend Received Deduction - $ Per Share $0.029796
$1.067000 *
Percentage of Long-Term Gain eligible for 28% treatment
7.24% 7.24%
* Based on 40,000 shares of preferred stock outstanding.
</TABLE>
6
<PAGE>
SHAREHOLDER MEETING RESULTS
The Fund had its annual Shareholder meeting on April 22, 1997.
Two proposals were presented to shareholders for vote. Proposal I
"Election of Directors" and Proposal II "Ratification of the
Selection of Auditor". A total of 5,689,126 shares of Common
Stock (83.27% of the total outstanding shares) and 35,000 of
Variable Term Preferred (VTP) stock shares (87.50% of the total
outstanding shares) were voted. The following table highlights the
results of the vote.
<TABLE>
<CAPTION>
Number of Number of Number of
Shares Voted Shares Voted Shares Voted
FOR AGAINST ABSTAINED
<S> <C> <C> <C>
Proposal I
Election of Directors-Common Stock
A. Cepeda 5,430,518 258,608 ----
R. Deshaies 5,439,837 249,289 ----
C. Freund 5,438,439 250,687 ----
T. McMeekin 5,437,690 251,436 ----
D. Toll 5,445,827 243,299 ----
A. Warner 5,416,341 272,785 ----
F. Young 5,422,463 266,663 ----
Election of Directors-VTP
R. Burridge 35,000 ---- ----
A. Cepeda 35,000 ---- ----
R. Deshaies 35,000 ---- ----
C. Freund 35,000 ---- ----
T. Mathers 35,000 ---- ----
T. McMeekin 35,000 ---- ----
D. Toll 35,000 ---- ----
A. Warner 35,000 ---- ----
F. Young 35,000 ---- ----
Proposal II
Ratification of the Selection of
Auditor
(Coopers & Lybrand) 5,583,933 40,505 99,688
</TABLE>
7
<PAGE>
Common Stock Market Prices and Net Asset Value History
(Unaudited)
<TABLE>
<CAPTION>
1997
Market Prices and Volumes Net Asset Value
High Low Close Volume High Low
Close
<S> <C> <C> <C> <C> <C>
<C> <C>
1st Quarter $13.000 $12.375 $12.750 498,900 $13.77
$13.42 $13.42
2nd Quarter 13.250 12.375 13.250 351,100 13.68
13.16 13.64
3rd Quarter 14.000 13.063 13.875 381,700 14.12
13.62 14.12
4th Quarter 14.000 12.875 13.063 335,200 14.19
13.43 13.43
1996
Market Prices and Volumes Net Asset Value
High Low Close Volume High Low
Close
1st Quarter $13.875 $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
</TABLE>
Shares are listed on the New York Stock Exchange under the
trading symbol
LND.
8
<PAGE>
FINANCIAL HIGHLIGHTS
Years Ended December 31,
(Selected data for each share of common stock
outstanding throughout the year)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
NAV, Beg. of Period $13.47 $14.22 $12.25 $14.63 $14.18
Net Investment Income 1.40 1.44 1.46 1.47 1.56
Net Realized & Unrealized
Gain\(Loss) 0.39 (0.41) 2.17 (2.18) 0.92
Total From Investment
Operations 1.79 1.03 3.63 (0.71) 2.48
Reduction -
Stock Rights Offering ---- ---- ---- (0.10) ----
Preferred Stock Underwriting
Discounts and Offering
Costs ---- ---- ---- ---- ----
Less Distributions:
Dividends from Net Investment Income:
To Preferred
Shareholders (0.22) (0.24) (0.29) (0.27) (0.19)
To Common
Shareholders (1.21) (1.21) (1.16) (1.20) (1.31)
Dividends from Net Realized Gains:
To Preferred
Shareholders (0.09) (0.07) (0.05) (0.02) (0.07)
To Common
Shareholders (0.31) (0.26) (0.16) (0.08) (0.46)
Total Distributions (1.83) (1.78) (1.66) (1.57) (2.03)
NAV, End of Period $13.43 $13.47 $14.22 $12.25 $14.63
Per Share Market
Value,End of Period $13.06 $12.50 $13.63 $10.75 $15.00
Total Investment Return (based on
Market Value) 17.12% 2.42% 39.07% (19.80%) 17.17%
Ratios/Supplemental Data
Net Assets, End of
Period (000) $131,732 132,054 137,163 123,683 113,181
Ratio-Expenses to Average
Net Assets 1.12% 1.11% 1.14% 1.19% 1.17%
Ratio-NII to Average
Net Assets 7.17% 7.32% 7.44% 7.31% 6.76%
Portfolio Turnover
Rate 22.63% 22.73% 26.98% 33.64% 43.72%
</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.
9
<PAGE>
<TABLE>
<CAPTION>
1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C>
NAV, Beg. of Period $14.85 $13.40 $14.44 $13.35 $12.83
Net Investment Income 1.36 1.15 1.17 1.15 1.16
Net Realized & Unrealized
Gain\(Loss) (0.01) 1.45 (1.03) 1.11 0.59
Total From Investment
Operations 1.35 2.60 0.14 2.26 1.75
Reduction - Stock
Rights Offering ---- ---- ---- ---- ----
Preferred Stock Underwriting
Discounts and Offering
Costs (0.23) ---- ---- ---- ----
Less Distributions:
Dividends from Net Investment Income:
To Preferred
Shareholders (0.08) ---- ---- ---- ----
To Common
Shareholders (1.31) (1.15) (1.18) (1.16) (1.16)
Dividends from Net Realized Gains:
To Preferred
Shareholders (0.03) ---- ---- ---- ----
To Common
Shareholders (0.37) ---- ---- (0.01) (0.07)
Total Distributions (1.79) (1.15) (1.18) (1.17) (1.23)
NAV, End of Period $14.18 $14.85 $13.40 $14.44 $13.35
Per Share Market Value,
End of Period $14.31 $13.81 $11.88 $12.94 $11.88
Total Investment Return (based
on Market Value) 15.78% 25.96% 0.87% 18.80% 13.96%
Ratios/Supplemental Data
Net Assets, End of
Period (000) $109,466 $72,752 $65,652 $70,740 $65,383
Ratio--Expenses to Average
Net Assets 1.00% 0.97% 0.97% 0.96% 0.97%
Ratio--NII to Average
Net Assets 7.56% 8.05% 8.49% 8.04% 8.43%
Portfolio Turnover
Rate 97.63% 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.
10
<PAGE>
Statement of Net Assets
As of December 31, 1997
<TABLE>
<CAPTION>
Par
Market or
Investments-Notes A & B Amount Cost
Fair Value
Public Debt Securities (78.2%)
<S> <C> <C>
<C>
AGCO Corporation
8.50% Senior Subordinated Note, 3/15/06 $250,000
$256,250 $255,000
AK Steel Corporation
10.75% Guaranteed Senior Note, 4/1/04 250,000
251,250 266,562
AllState Corporation
7.50% Debenture, 6/15/13 1,000,000
911,180 1,084,410
AMR Corporation
10.00% Bond, 4/15/21 1,000,000
1,028,860 1,324,890
American Airlines 1988-A Grantor Trusts
9.83% Equipment Note Pass Through
Certificates Series 1988-A3, 1/1/02 1,157,445
1,157,445 1,194,252
Ametek Inc.
9.75% Senior Notes, 3/15/04 250,000
264,062 266,250
AST Research Inc.
7.45% Senior Notes, 10/1/02 1,000,000
998,470 795,600
Banc One Corporation
9.875% Subordinated Notes, 3/1/09 1,000,000
1,152,890 1,251,410
BankAmerica Corporation
10.00% Subordinated Notes, 2/1/03 1,000,000
1,183,100 1,155,700
Black & Decker Corporation
8.91% Medium Term Note, 1/21/02 500,000
542,425 545,300
BVPS II Funding Corporation
8.33% Collateralized Lease Bond, 12/1/07 1,490,000
1,536,279 1,544,012
Capital Cities/ABC Inc.
8.875% Senior Notes, 12/15/00 1,000,000
1,006,630 1,075,280
Caterpillar Inc.
6.00% Debenture, 5/1/07 1,000,000
896,446 961,480
Cemex SA
10.00% Eurobond MTN, 11/5/99 250,000
222,500 256,875
Chiquita Brands International Inc.
9.625% Senior Notes, 1/15/04 250,000
252,500 265,000
Chrysler Financial Corporation
9.50% Senior Notes, 12/15/99 1,000,000
1,120,000 1,063,910
Citicorp Mortgage Securities Inc.
8.75% REMIC 91-6 Class B, 5/25/21 500,000
505,703 507,031
Cleveland Electric Illuminating Company
7.625% First Mortgage Bonds, 8/1/02 1,000,000
961,790 1,033,000
Coastal Corporation
9.75% Debenture, 8/1/03 1,000,000
1,150,890 1,151,470
Columbia HCA Healthcare Corporation
6.875% Medium Term Note, 7/15/01 1,000,000
999,690 984,430
Commonwealth Edison Company
8.625% First Mortgage Bonds, 2/1/22 1,000,000
939,620 1,082,490
Compania De Desarrollo Aeropuerto Eldorado SA
10.19% Senior Note, 5/31/11 500,000
500,000 523,030
</TABLE>
The accompanying notes are an integral part of the financial
statements.
11
<PAGE>
Statement of Net Assets
As of December 31, 1997
<TABLE>
<CAPTION>
Par
Market or
Amount Cost
Fair Value
Public Debt Securities (continued)
<S> <C>
<C> <C>
ConAgra Inc.
7.40% Subordinated Debt Securities, 9/15/04 1,500,000
1,495,140 1,574,565
Connecticut Light & Power Company
7.25% 1st Refunding Mortgage, 7/1/99 1,000,000
1,003,430 998,580
Container Corporation of America
11.25% Senior Notes Series A, 5/1/04 250,000
258,750 275,625
Cyprus Amax Minerals Company
7.375% Note, 5/15/07 500,000
517,255 522,885
Delta Air Lines Inc.
9.90% Equipment Trust Certificates
Series 1988 C, 6/16/02 1,473,000
1,564,297 1,651,837
Donaldson Lufkin & Jenrette Mortgage Acceptance Corp.
7.71% Mortgage Pass ThruClass A, 6/26/25 940,638
955,340 423,287
Dow Capital B.V.
9.00% Guaranteed Debenture, 5/15/10 1,000,000
1,186,170 1,188,410
Duquesne II Funding Corporation
8.70% Collateralized Lease Bonds, 6/1/16 990,000
990,000 1,105,553
EES Coke Battery Company
7.125% Senior Note Series A, 4/15/02 471,250
471,250 476,740
EI Dupont Nemour
8.25% Debenture, 1/15/22 1,000,000
1,097,680 1,086,750
Enron Corporation
9.50% Senior Fixed Rate Note, 6/15/01 1,000,000
1,141,040 1,095,910
Federal Express Corporation - Global
9.875% Note, 4/1/02 1,250,000
1,400,000 1,413,212
Federal Home Loan Mortgage Corporation (FHLMC)
7.80% REMIC Series 46 Class B, 9/15/20 903,602
798,877 933,186
7.00% Pass Through Series 7 Class A, 9/17/31 980,368
953,714 977,917
Federal National Mortgage Association (FNMA)
9.20% Guaranteed REMIC 88-14, 12/25/17 540,008
528,726 551,705
9.00% Trust Series 265 Class C, 3/1/24 713,166
766,654 778,911
First Hawaiian Bank
6.93% Series A Note, 12/1/03 500,000
488,050 509,600
First Interstate Bancorp
8.15% Subordinated Notes, 3/15/02 1,000,000
1,000,000 1,004,100
First Nationwide Holdings
10.625% Senior Subordinated Note, 10/1/03 250,000
271,562 280,000
First USA Bank Wilmington Delaware
7.65% Subordinated Notes, 8/1/03 1,000,000
1,000,000 1,059,190
Fleet/Norstar Financial Group Inc.
8.625% Subordinated Note, 1/15/07 1,000,000
1,044,630 1,135,310
General Electric Capital Corporation
8.75% Notes, 5/21/07 1,000,000
1,108,350 1,170,210
General Motors Acceptance Corporation
8.875% Notes, 6/1/10 1,500,000
1,656,000 1,795,710
Georgia Pacific Corporation
9.50% Debentures, 5/15/22 1,500,000
1,551,450 1,705,200
</TABLE>
The accompanying notes are an integral part of the financial
statements.
12
<PAGE>
Statement of Net Assets
As of December 31, 1997
<TABLE>
<CAPTION>
Par
Market or
Amount Cost
Fair Value
Public Debt Securities (continued)
<S> <C>
<C> <C>
Goldman Sachs Group L.P.
7.20% Medium Term Notes, 3/1/07 500,000
499,750 529,950
Government National Mortgage Association (GNMA)
9.00% Pass-Thru Pool #309771, 8/15/21 1,047,773
1,129,663 1,140,428
9.00% Pass-Thru Pool #349329, 3/15/23 2,237,839
2,412,713 2,418,791
Greentree Financial Corporation
8.65% Series 94-96 Sub.Note, 1/15/20 1,000,000
988,594 1,048,906
Gruma SA DE CV
7.625% Note, 10/15/07 250,000 249,580
247,077
Gulf Canada Resources LTD
9.625% Subordinated Debenture, 7/1/05 250,000
262,500 271,250
HongKong & Shanghai Bank
6.3125% Floating Rate Notes, 12/29/49 500,000
408,500 396,250
Houston Lighting & Power Company
9.80% MTN Series B, 2/15/99 1,500,000
1,467,165 1,556,250
INCO LTD
9.60% Debentures, 6/15/22 1,000,000
1,084,580 1,126,750
Interbank/AKK Trust
9.00% Note Series 1995 C, 2/28/01 500,000
485,930 497,180
ISP Holdings Inc.
9.00% Note Series B, 10/15/03 250,000
259,219 259,062
ITT Corporation
6.75% Note, 11/15/03 500,000
481,825 487,485
K-III Communications Inc.
8.50% Company Guarantee Series B, 2/1/06 250,000
252,187 253,750
Lehman Brothers Holdings Inc.
7.375% Senior Notes, 5/15/07 500,000
522,740 535,685
Lloyds Bank PLC
6.1875% Floating Rate Notes, 6/29/49 1,000,000
835,000 885,000
Long Island Lighting Company
9.75% General Refunding Mortgage, 5/1/21 2,000,000
2,013,290 2,059,780
Macmillan Bloedel LTD
8.50% Debentures, 1/15/04 500,000
523,390 543,075
MacSaver Financial Services
7.60% Senior Note, 8/1/07 500,000
499,335 430,530
Marsh Supermarkets Inc.
8.875% Senior Note, 8/1/07 250,000
247,812 251,875
McDonnell Douglas Corporation
9.25% Notes, 4/1/02 1,000,000
1,142,300 1,120,570
MCI Communications Corporation
7.50% Senior Notes, 8/20/04 1,000,000
1,013,020 1,052,840
Mellon Capital I
7.72% Bonds Series A, 12/1/26 400,000
400,000 416,112
Merrill Lynch Mortgage Investors Inc.
10.00% Pass-thru Series 90-A1, 3/15/10 528,105
525,148 574,213
NAL Auto Trust
7.30% 1996-3 Class A, 12/15/00 246,183
246,037 244,798
</TABLE>
The accompanying notes are an integral part of the financial
statements.
13
<PAGE>
Statement of Net Assets
As of December 31, 1997
<TABLE>
<CAPTION>
Par
Market or
Amount Cost
Fair Value
Public Debt Securities (continued)
<S> <C>
<C> <C>
Nationsbank Corporation
8.125% Subordinated Note, 6/15/02 1,000,000
997,500 1,072,660
Nationwide
9.875% Contingent Surplus Notes, 2/15/25 1,000,000
1,092,350 1,171,100
New England Telephone & Telegraph Company
9.00% Debentures, 8/1/31 1,000,000
1,007,300 1,113,810
News America Holdings Inc.
9.25% Senior Debentures, 2/1/13 1,000,000
1,110,980 1,197,530
Niagara Mohawk Power Corporation
9.25% First Mortgage Bonds, 10/1/01 500,000
503,490 537,580
Noranda Inc.
8.00% Yankee Bond, 6/1/03 1,500,000
1,500,000 1,589,115
NWA Trust
10.23% Asset-Backed Class B, 6/21/14 463,086 545,212
566,855
Nynex Corporation
9.55% Debenture, 5/1/10 1,615,508
1,943,553 1,860,048
Oryx Energy Company
10.00% Debenture, 4/1/01 1,000,000
1,036,380 1,098,010
Owens Corning Fiberglass Corporation
9.375% Debenture, 6/1/12 1,000,000
1,185,720 1,233,360
PacifiCorp
8.29% Secured MTN, 12/30/11 1,000,000 1,000,000
1,156,090
7.00% First Mortgage Bond 7/15/09 500,000 497,995
519,100
Peco Energy Company
7.125% 1st Mortgage Bond, 9/1/02 1,500,000 1,500,375
1,552,020
Pennsylvania Power & Light
8.50% First Mortgage Bonds, 5/1/22 500,000 534,295
559,950
Pennzoil Company
10.125% Debentures, 11/15/09 1,000,000 1,134,440
1,273,560
Pohang Iron & Steel Company
7.125% Note, 11/1/06 1,000,000 976,480
706,880
Progress Capital Holdings LTD
6.88% Medium Term Note, 8/1/01 1,000,000 1,000,000
1,018,210
Province de Quebec
11.00% Yankee Bond, 6/15/15 1,000,000 1,072,720
1,139,040
Republic of Brazil
10.125% Global Bond, 5/15/27 250,000 238,437
234,375
Republic of Colombia
7.625% Global Bond, 2/15/07 300,000 294,045
282,102
Republic of Venezuela
9.25% Global Bond, 9/15/27 500,000 471,878
447,995
Resolution Trust Corporation
8.80% Pass-thru Ser. 92-C1, 8/25/23 302,428 301,583
302,428
RJR Nabisco Inc.
8.75% Note, 8/15/05 1,000,000 987,390
1,080,440
Rogers Cantel Inc.
9.375% Senior Debenture, 6/1/08 250,000 270,625
262,500
</TABLE>
The accompanying notes are an integral part of the financial
statements.
14
<PAGE>
Statement of Net Assets
As of December 31, 1997
<TABLE>
<CAPTION>
Par
Market or
Amount Cost
Fair Value
Public Debt Securities (continued)
<S> <C>
<C> <C>
Russian Federation
10.00% Bond, 6/27/07 250,000 247,910
231,625
Sears Roebuck & Company
9.05% Medium Term Note, 2/6/12 1,000,000 1,059,380
1,230,820
Selkirk Cogen Funding Corporation
8.65% First Mortgage Series A, 12/26/07 983,391
1,025,726 1,080,117
Sequa Corporation
8.75% Senior Note, 12/15/01 250,000
250,937 253,750
Showboat Inc.
9.25% First Mortgage Bond, 5/1/08 250,000
212,500 266,250
Specialty Paperboard Inc.
9.375% Senior Note, 10/15/06 250,000 256,875
260,000
Speedway Motorsports Inc.
8.50% Senior Note, 8/15/07 250,000 252,950
255,000
Standard Charter PLC
6.1875% Floating Rate Senior Note, 11/29/49 1,000,000
877,400 690,000
Sun Inc.
9.375% Debenture, 6/1/16 1,000,000
1,182,350 1,145,410
Systems Energy Resources
7.80% Senior Note, 8/1/00 1,000,000
1,000,000 1,015,530
Tata Electric Company (India)
7.875% Note, 8/19/07 250,000 249,028
216,500
Tele-Communications Inc.
9.25% Debenture, 1/15/23 2,000,000
1,993,580 2,245,380
Tenet Healthcare Corporation
10.125% Senior Subordinated Note, 3/1/05 250,000
266,875 272,812
Texas Utilities Electric Company
7.375% First Mortgage Bond, 8/1/01 1,000,000
999,375 1,035,420
Time Warner Inc.
9.125% Senior Note, 1/15/13 1,500,000
1,614,600 1,791,345
Toll Brothers Inc.
8.75% Senior Subordinated Note, 11/15/06 250,000
257,187 261,875
Trico Marine Services Inc.
8.50% Senior Note, 8/1/05 250,000 252,187
253,437
United Airlines Inc.
8.70% Pass-thru Trust Series 92-A1, 10/7/08 909,893
906,535 1,042,746
9.35% Pass-thru Series 92-A, 4/7/16 1,500,000
1,516,845 1,782,510
Van Kampen Merritt Companies, Inc.
9.75% Senior Secured Note, 2/15/03 250,000
260,000 259,513
Viacom Inc.
7.75% Senior Note, 6/1/05 1,000,000
966,115 1,020,180
Virginia Electric & Power Company
9.35% Medium Term Note Series A, 6/22/98 1,000,000
991,640 1,016,010
Wells Fargo Capital A
8.13% Bond, 12/1/26 500,000 521,000
532,300
</TABLE>
The accompanying notes are an integral part of the financial
statements.
15
<PAGE>
Statement of Net Assets
As of December 31, 1997
<TABLE>
<CAPTION>
Par
Market or
Amount Cost
Fair Value
Public Debt Securities (continued)
<S> <C>
<C> <C>
Whirlpool Corporation
9.00% Debenture, 3/1/03 1,000,000
1,087,820 1,113,890
Worldcom Inc.
8.875% Senior Notes, 1/15/06 1,000,000
1,082,500 1,075,000
Total Public Debt Securities
99,570,686 102,971,560
Private Placement Securities (18.8%)
Notes A & B
DEBT
Anglo Irish Bank Corporation
9.10% Notes Series A, 9/30/06 9/30/94 1,000,000
1,000,000 1,132,483
Avianca Airline Ticket Receivable Trust
8.75% Structured Receivable Note,
12/24/05 12/24/97 500,000
500,000 500,592
Banco Nacional de Mexico
7.57% Senior Certificate,1/1/01 11/05/96 500,000
499,982 500,005
Behr Process Corporation Floating Senior
Floating Rate Senior note, 7.688%,
3/31/04 7/15/97 119,400 119,400 119,400
Floating Rate Senior note, 7.938%,
3/31/05 7/15/97 79,600 79,600 79,600
Cambuhy Export Trust
8.12% Trust Certificates Series 96-1,
7/1/01 6/11/96 393,165 393,165 398,086
Centennial Resources Inc.
13.00% Senior Subordinated Note,
10/31/03 8/29/96 500,000 500,000 500,000
Coca-Cola Femsa SA DE
9.40% Convertible Senior Note,
8/15/04 8/5/94 1,000,000 1,000,000
1,037,807
Concordia Maritime
9.29% 1st Preferred Ship Mortgage,
6/30//99 4/15/94 1,000,000 1,000,000
1,031,077
Deloitte & Touche LLP
7.41% Guaranteed Senior Note,
10/1/11 9/25/96 1,000,000 1,000,000
1,051,119
Dow Chemical Co.
17.25% Certificate of Interest,
1/2/03 3/25/92 1,589,679 1,589,679
2,036,777
Fort Wayne Capital Trust I
9.85% Senior Note 4/15/27 4/14/97 1,000,000 1,000,000
1,095,267
Global Telesystems Holding
12.00%, Senior Note 3/31/04 6/30/97 400,000 400,000
400,000
Guangdong International Trust & Investment
8.75% Yankee Bond, 10/24/16 10/17/96 500,000
498,600 429,425
Huron Technologies Corporation
14.0% 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 1,053,527
Murray's Discount Auto Stores, Inc.
11.00% Senior Subordinated Note,
9/30/03 10/2/95 500,000 478,000 500,000
Mutual Fund Fee Trust IV
7.99%, Series 1997-2 Asset Backed
1/31/05 4/21/97 846,612 846,612 860,086
Nebraska Book Company, Inc.
12.00% Senior Subordinated Note,
8/31/05 8/31/95 500,000 500,000 500,000
</TABLE>
The accompanying notes are an integral part of the financial
statements.
16
<PAGE>
Statement of Net Assets
As of December 31, 1997
<TABLE>
<CAPTION>
Date Of
Initial Par
Market or
Purchase Amount Cost Fair Value
Private Placement Securities - DEBT (continued)
<S> <C> <C>
<C> <C>
New Boston Garden Corporation
8.45% Senior Secured Note,
9/22/15 9/22/95 952,136 952,136 1,028,766
Penn Fuel Gas Inc.
7.51% Senior Note, 4/15/14 5/25/94 1,000,000
1,000,000 1,055,859
Refco Group, LTD
8.21% Senior Note, 5/16/02 5/8/95 1,000,000
1,000,000 1,027,975
Spectrascan Inc.
11.25% Senior Subordinated Note,
6/30/06 7/12/96 500,000 490,000 500,000
Stackpole Magnetic Systems, Inc.
13.50% Senior 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
529,554
Suburban Propane L.P.
7.54% Senior Note, 6/30/11 3/7/96 1,000,000
1,000,000 1,031,900
Summit Acceptance Corporation
12.00%, Senior Subordinated Note,
3/31/02 4/7/97 500,000 477,500
477,500
The Money Store Inc.
9.00% Senior Note, 3/31/02 2/22/95 1,000,000
1,000,000 1,071,906
Turkiye Vakiflar Bankasi T.A.O.
7.790% Trust Certificates, 12/22/00 12/22/97 500,000
500,000 501,454
United States Playing Card Company
12.00% Subordinated Note, 11/18/04 11/18/97 500,000
470,000 500,000
Union Acceptance Corporation
8.530% Senior Note 8/1/02 6/23/97 1,000,000
1,015,910 975,000
West Fraser Mills LTD
8.44% Guaranteed Senior Note,
6/30/04 4/15/94 1,000,000 1,000,000
1,091,640
ZCC Mezzanine Fund I
12.00% Senior Participating Notes,
8/31/07 10/23/97 30,820 30,820 30,820
Total Private Placement Debt
22,614,571 23,977,625
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) 8/29/96 1 1
1
Global Telesystems Holdings
14% Preference Shares 6/30/97 107
107,122 107,122
GT Parent Holdings Inc. *
Stock Warrants 6/30/97 132 1
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
252,455
</TABLE>
The accompanying notes are an integral part of the financial
statements.
17
<PAGE>
Statement of Net Assets
As of December 31, 1997
<TABLE>
<CAPTION>
Date Of
Initial
Market or
Purchase Quantity Cost Fair Value
Private Placement Securities - EQUITIES (continued)
<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
Nebraska Book Company, Inc. *
Common Stock 8/31/95 3,704 37,040
70,969
Stock Warrants
(entitled to purchase 7,071 shares of
common stock for $10 per share.
Expires 8/31/05) 8/31/95 1 1
64,770
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
65,812
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 9/1/95 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
22,500
Total Private Placement Equities
505,498 729,659
Total Private Placement Securities
23,120,069 24,707,284
Preferred Stocks (2.0%)
Loewen Group Inc.
9.45% Capital Series A 40,000 1,000,000
1,085,000
Salomon Financing Trust I
9.183% Guaranteed Preferred Stock 20,000 500,000
540,000
Transcanada Capital
8.75% preferred stock 40,000
1,042,000 1,055,000
Total Preferred Stocks
2,542,000 2,680,000
Common Stocks (0.0%)
Authorized Distribution Network, Inc. * 10,945
1,227 154
Paracelsus Healthcare Corporation * 7,500
62,047 25,312
Total Common Stocks
63,274 25,466
Partnerships (0.2%)
KBP Holdings, L.P.
250,000 250,000
MDAS Investors, L.P.
49,622 31,320
Total Partnerships
299,622 281,320
</TABLE>
The accompanying notes are an integral part of the financial
statements.
18
<PAGE>
Statement of Net Assets
As of December 31, 1997
<TABLE>
<CAPTION>
Date Of
Initial Par
Market or
Purchase Amount Cost Fair Value
<S> <C> <C>
<C> <C>
Total Long-Term Investments
125,595,651 130,665,630
Short-Term Investments (2.5%)
EI Dupont Nemour
6.05%, 1/5/98 3,300,000 3,292,790
3,292,790
Total Investments (101.7%)
128,888,441 133,958,420
Excess of Liabilities Over Other Assets (-1.7%) - Note D
(2,226,138)
Net Assets (100%) - Note E
$131,732,282
</TABLE>
.
Net asset value per share of common stock outstanding
($131,732,282 less Variable Term Preferred stock at
liquidation value of $40,000,000 divided by 6,832,195
shares of common stock outstanding) - Note E
$13.43
* Non-Income Producing
The accompanying notes are an integral part of the financial
statements
19
<PAGE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1997 1996
<S> <C> <C>
Investment Income:
Income:
Interest $10,830,626 $11,189,443
Dividends 246,220 131,389
Total Income 11,076,846 11,320,832
Expenses:
Management fees - Note C 1,137,657 1,141,090
Variable term preferred stock fees 110,164 104,448
Director fees 82,500 80,750
Professional fees 45,324 52,516
Printing, stationery, and supplies 15,349 22,406
Stock transfer fee 44,511 24,961
Postage and mailing fees 18,043 19,885
New York Stock Exchange fee 16,170 16,170
Custodian and registrar fees 7,548 4,641
Other 22,041 27,054
Total Operating Expenses 1,499,307 1,493,921
Net Investment Income 9,577,539 9,826,911
Net realized and unrealized gain(loss)
on investments:
Net realized gain on investments 3,030,309 2,343,208
Decrease in net unrealized
appreciation of investments (368,480) (5,172,687)
Net Realized & Unrealized Gain(Loss)
on Investments 2,661,829 (2,829,479)
Net Increase in Net Assets Resulting
from Operations $12,239,368 $6,997,432
</TABLE>
The accompanying notes are an integral part of the financial
statements.
20
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1997 1996
<S> <C> <C>
Changes from operations:
Net investment income $9,577,539 $9,826,911
Net realized gain on investments 3,030,309 2,343,208
Decrease in net unrealized
appreciation of investments (368,480) (5,172,687)
Net increase in net assets resulting
from operations 12,239,368 6,997,432
Distributions to shareholders from net
investment income:
Common shareholders (8,266,956) (8,217,231)
Preferred shareholders (1,539,469) (1,651,693)
Total distributions to shareholders
from net investment income (9,806,425) (9,868,924)
Distributions to shareholders from net
realized gains:
Common shareholders (2,117,980) (1,757,774)
Preferred shareholders (636,338) (480,535)
Total distributions to shareholders
from net realized gains (2,754,318) (2,238,309)
Total decrease in net assets (321,375) (5,109,801)
Net assets at beginning of year 132,053,657 137,163,458
Net assets at end of year * $131,732,282 $132,053,657
</TABLE>
* Includes undistributed net investment income as of December
31,:1997 - $ 238,241; 1996 - $ 191,136.
The accompanying notes are an integral part of the financial
statements
21
<PAGE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1997 1996
<S> <C> <C>
Operating Activities:
Interest Received $11,070,191 $11,274,047
Dividends Received 214,745 117,789
Operating Expenses Paid (1,498,516) (1,511,800)
Net Cash Provided by
Operating Activities 9,786,420 9,880,036
Investing Activities:
Purchase of investment securities (29,429,640) (30,509,905)
Proceeds from sale of investment
securities 30,690,334 33,479,851
Net proceeds(purchase) of short-term
investments 1,307,210 (2,602,334)
Net Cash Provided by Investing
Activities 2,567,904 367,612
Financing Activities:
Distributions paid to common and
preferred shareholders (12,005,560) (11,134,097)
Net Cash Used in Financing
Activities (12,005,560) (11,134,097)
Increase(Decrease) in Cash 348,764 (886,449)
Cash at Beginning of Year 92,301 978,750
Cash at End of Year - Note D $441,065 $92,301
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 $12,239,368 $6,997,432
Reconciling Adjustments:
Net realized and unrealized (gain)
loss on investments (2,661,829) 2,829,479
Discount accretion on investment
securities (7,408) (6,878)
Decrease in accrued investment income
receivable 246,973 91,483
Increase in accrued
dividend receivable (31,475) (13,600)
Increase(Decrease) in accrued
expenses 791 (17,880)
Net Cash Provided by Operating
Activities $9,786,420 $9,880,036
</TABLE>
The accompanying notes are an integral part of the financial
statements
22
<PAGE>
PORTFOLIO of INVESTMENTS BY INDUSTRY
CLASSIFICATION
As of December 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
Market or Percent of
Fair Value Net Assets
<S> <C> <C>
Accounting Firms
Deloitte & Touche LLP 1,051,119 0.8%
Aerospace
McDonnell Douglas Corporation 1,120,570
Sequa Corporation 253,750
1,374,320 1.0%
Airline
AMR Corporation 2,519,142
Delta Air Lines Inc. 1,651,837
United Airlines Inc. 2,825,256
6,996,235 5.3%
Bank
Anglo Irish Bank Corporation 1,132,483
Banc One Corporation 1,251,410
Banco Nacional De Mexico 500,005
BankAmerica Corporation 1,155,700
First Hawaiian Bank 509,600
First Interstate Bancorp 1,004,100
First Nationwide Holdings 280,000
First USA Bank 1,059,190
Fleet/Norstar Group 1,135,310
HongKong & Shanghai Bank 396,250
Lloyds Bank PLC 885,000
Mellon Capital I 416,112
Nationsbank Corporation 1,072,660
Standard Charter PLC 690,000
Wells Fargo Capital A 532,300
12,020,120 9.1%
Broadcasting/Publishing
Capital Cities/ABC Inc. 1,075,280
K-III Communications Inc. 253,750
News America Holdings Inc. 1,197,530
2,526,560 1.9%
Brokerage
Goldman Sachs Group 529,950
Lehman Brothers Holding Inc. 535,685
Refco Group 1,027,975
Salomon Inc. 540,000
2,633,610 2.0%
Chemicals
Dow Chemical Co. 2,036,777
EI Dupont Nemour 1,086,750
ISP Holdings Inc. 259,062
3,382,589 2.6%
Electrical and Electronics
AST Research Inc. 795,600
PSC Inc. 65,812
Spectrascan Inc. 500,000
1,361,412 1.0%
Energy
Enron Corporation 1,095,910
Gulf Canada Resources LTD 271,250
Peco Energy Company 1,552,020
Systems Energy Resources 1,015,530
3,934,710 3.0%
Entertainment
Bicycle Holding Inc. 97,865
New Boston Garden Corporation 1,028,766
Showboat Inc. 266,250
Speedway Motorsports Inc. 255,000
Time Warner Inc. 1,791,345
United States Playing Card Company 500,000
Viacom Inc. 1,020,180
4,959,406 3.8%
Finance
Chrysler Financial Corporation 1,063,910
Dow Capital 1,188,410
Duquesne II Funding Corporation 1,105,553
Fort Wayne Capital Trust I 1,095,267
General Electric Capital Corporation 1,170,210
General Motors Acceptance Corporation 1,795,710
Progress Capital Holdings LTD 1,018,210
Selkirk Cogen Funding Corporation 1,080,117
Summit Acceptance Corporation 500,000
The Money Store 1,071,906
Union Acceptance Corporation 975,000
Van Kampen Merritt Companies Inc. 259,513
12,323,806 9.4%
Finance - Structured
Avianca Airline Ticket Receivable Trust 500,592
Citicorp Mortgage Securities Inc. 507,031
DLJ Mortgage Pass-thru 423,287
Greentree Financial Corporation 1,048,906
Interbank/AKK Trust 497,180
Merrill Lynch Mortgage Investors Inc. 574,213
Mutual Fund Fee Trust IV 860,086
NAL Auto Trust 244,798
NWA Trust 566,855
Resolution Trust Corporation 302,428
ZCC Mezzanine Fund I 30,820
5,556,196 4.2%
</TABLE>
23
PORTFOLIO of INVESTMENTS BY INDUSTRY
CLASSIFICATION
Continued (Unaudited)
<TABLE>
<CAPTION>
Market or Percent of
Fair Value Net Assets
<S> <C> <C>
Food and Beverage
Cambuhy Export Trust 398,086
Chiquita Brands 265,000
Coca-Cola Femsa SA DE 1,037,807
Conagra Inc. 1,574,565
Marsh Supermarkets Inc. 251,875
RJR Nabisco Inc. 1,080,440
4,607,773 3.5%
Foreign and Foreign Government
Cemex SA 256,875
Compania De Desarrollo Aero 523,030
Gruma SA DE CV 247,077
Guangdong International Trust 429,425
Noranda Inc. 1,589,115
Province de Quebec 1,139,040
Republic of Brazil 234,375
Republic of Colombia 282,102
Republic of Venezuela 447,995
Russian Federation 231,625
Tata Electric Company (India) 216,500
Turkiye Vakiflar Bankasi T.A.O. 501,454
6,098,613 4.6%
Forest Products
Macmillan Bloedel LTD 543,075
West Fraser Mills LTD 1,091,640
1,634,715 1.2%
Funeral Homes
Loewen Group Inc. 1,085,000 0.8%
Government/Government Agency
Federal Home Loan Mortgage Corp. 1,911,103
Federal National Mortgage Association 1,330,616
Government National Mortgage Assoc. 3,559,219
6,800,938 5.2%
Health Care
Columbia HCA Healthcare Corporation 984,430
Paracelsus Healthcare 25,312
Tenet Healthcare 272,812
1,282,554 1.0%
Heavy Machinery
AGCO Corporation 255,000
Caterpillar Inc. 961,480
1,216,480 0.9%
Home Construction
Owens Corning Fiberglass Corporation 1,233,360
Toll Brothers Inc. 261,875
1,495,235 1.1%
Household Products
Behr Process Corporation 199,000
Black & Decker Corporation 545,300
Whirlpool Corporation 1,113,890
1,858,190 1.4%
Industrial
Ametek Inc. 266,250 0.2%
Insurance
AllState Corporation 1,084,410
Nationwide 1,171,100
2,255,510 1.7%
Metals/Mining
Centennial Resources Inc. 500,001
Cyprus Amax Minerals Co. 522,885
EES Coke Battery Company 476,740
INCO LTD 1,126,750
2,626,376 2.0%
Miscellaneous
Authorized Distribution Network Inc. 154
Huron Technologies Inc. 802,455
ITT Corporation 487,485
KPB Holdings, L.P. 250,000
Louis Dreyfus Corporation 1,053,527
Nebraska Book Company, Inc. 635,739
Stackpole Magnetic Systems 428,163
3,657,523 2.8%
Natural Gas
Coastal Corporation 1,151,470
Penn Fuel Gas Inc. 1,055,859
Suburban Propane L.P. 1,031,900
3,239,229 2.5%
Paper and Paper Products
Container Corporation of America 275,625
Specialty Paperboard Inc. 260,000
535,625 0.4%
Petroleum
Oryx Energy Company 1,098,010
Pennzoil Company 1,273,560
Sun Inc. 1,145,410
Trico Marine Services Inc. 253,437
3,770,417 2.9%
Public Utility
BVPS II Funding Corporation 1,544,012
Cleveland Electric Illuminating Co. 1,033,000
Commonwealth Edison Inc. 1,082,490
Connecticut Light & Power 998,580
Houston Lighting & Power Company 1,556,250
Long Island Lighting Company 2,059,780
Niagara Mohawk Power Corporation 537,580
PacifiCorp 1,675,190
Pennsylvania Power & Light 559,950
Texas Utilities Electric Company 1,035,420
Transcanada Capital 1,055,000
Virginia Electric & Power Company 1,016,010
14,153,262 10.7%
</TABLE>
24
PORTFOLIO of INVESTMENTS BY INDUSTRY
CLASSIFICATION
Continued (Unaudited)
<TABLE>
<CAPTION>
Market or Percent of
Fair Value Net Assets
<S> <C> <C>
Retail
MacSaver Financial Services 430,530
MDAS Investors Limited Partnership 31,320
Murray's Discount Auto Stores Inc. 500,001
Sears Roebuck & Company 1,230,820
2,192,671 1.7%
Steel
AK Steel Corporation 266,562
Pohang Iron & Steel Company 706,880
Steel Technologies 529,554
1,502,996 1.1%
Telecommunications
Global Telesystems Holdings Ltd. 507,123
MCI Communications Corporation 1,052,840
New England Telephone & Telegraph 1,113,810
Nynex Corporation 1,860,048
Rogers Cantel Inc. 262,500
Tele-Communications Inc. 2,245,380
Worldcom Inc. 1,075,000
8,116,701 6.2%
Transportation
Concordia Maritime 1,031,077
Federal Express Corporation 1,413,212
Georgia Pacific Corporation 1,705,200
4,149,489 3.1%
Total Long-Term Investments $130,665,630 99.2%
</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 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
25
<PAGE>
Notes to Financial Statements (continued)
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 December 31, 1997, the value of all
private placement securities, which totaled $24,707,284 and
represents 18.8% 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 $29,428,811and $30,695,509,
respectively, as of December 31, 1997; and $30,511,111 and
$33,476,659, respectively as of December 31, 1996.
Note C - Management Fees and Other Transactions with
Affiliates
Under an agreement between the Fund and Lincoln Investment
Management, Inc.(Advisor), the Advisor manages the Fund's
investment portfolio, maintains its accounts and records, and
furnishes the services of individuals to perform executive and
administrative functions of the Fund. In return for these services,
the Advisor receives a management fee of .1875% of net assets of
the Fund as of the close of business on the last business day of the
quarter (.75% on an annual basis) plus 1.5% of the net cash
dividends and interest earned and actually received in cash less
interest on borrowed
26
<PAGE>
funds and dividends paid on the Variable Term Preferred Stock.
Certain officers and directors of the Fund are also officers or
directors of theAdvisor. 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 $441,065
Accrued interest income receivable 2,374,639
Accrued dividend income receivable 60,825
Receivable for investments securities sold 19,622
Management fee payable (287,299)
Accrued dividends payable - common (4,782,537)
Accrued dividends payable - VTP (50,607)
Other - net (1,846)
($2,226,138)
Note E - Net Assets
Net assets at December 31, 1997, consisted of the following:
Preferred Stock, par value $1.00 per share
(authorized 1,000,000 shares) Variable Term
Preferred Stock (VTP), issued and outstanding
40,000 shares, liquidation preference $1,000
per share $40,000,000
Common Stock, par value $1.00 per share
(authorized 10,000,000 shares), issued
and outstanding 6,832,195 shares 6,832,195
Proceeds in excess of par value of shares
issued 73,101,180
Undistributed realized gain on investments,
net of taxes paid 6,490,687
Undistributed net investment income 238,241
Net unrealized appreciation of
investments 5,069,979
Total Net Assets $131,732,282
Note F - Income Taxes
The cost of investments for federal income tax purposes is the
same as for book purposes. At December 31, 1997, the aggregate
gross unrealized appreciation on investments was $7,043,286 and
the aggregate gross unrealized depreciation was $1,973,307.
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 theVTP if certain asset
maintenance tests are not maintained or if credit rating provisions
are not met.
During the year ended December 31, 1997, dividend rates have
ranged from 5.100% to 6.500% and the average dividend rate was
5.425%.
27
<PAGE>
Note H - Unaudited Quarterly Results of Operations
The following is a tabulation of the unaudited quarterly results of
operations. Per share data is based on common shares outstanding
at the end of each quarter:
1997 March 31 June 30 Sept. 30 Dec. 31
($000)
Investment Income $2,761 $2,776 $2,782 $2,758
Net Investment Income 2,385 2,372 2,431 2,390
Net Realized and Unrealized
Gain(Loss) Investments (2,255) 1,626 3,289 2
Per Share Amounts:
Net Investment Income 0.35 0.35 0.35 0.35
Net Realized and Unrealized
Gain(Loss) on Investments (0.33) 0.24 0.48 0.00
1996
Investment Income ($ 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 (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
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, 1997, 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, 1997, 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, 1997, the results of its operations, cashflows and
changes in its net assets for each of the two years in the period then
ended, and the financial highlights for each of the ten years in the
period then ended, in conformity with generally accepted
accounting principles.
Fort Wayne, Indiana
January 27, 1998
28
<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 Iincome 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 HealthSystem; Director
Lincoln National Convertible
Securities Fund, Inc., Hospital
Laundry Services, Inc., and
Signature Care, Inc. Director and
Treasurer, PineValley 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., Mallinckrodt Group
Inc., and NICOR, 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 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, Treasurer
Ann L. Warner Vice President
Cynthia A. Rose Secretary
29
<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
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 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.
30
