<PAGE>
LINCOLN NATIONAL INCOME FUND, INC.
1998 Annual Report
LINCOLN INVESTMENT MANAGEMENT, INC.
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Page
- ---------------------------------------------------------------------
<S> <C>
Manager Profile 1
Investment Policies & Objectives 1
President's Letter 2
Portfolio Manager's Discussion 3
Asset Classification 5
Distribution By Quality 5
Portfolio Performance 6
Annual Performance of Lincoln National Income Fund vs. Indices 6
Total Fund Investments 7
Dividend History 7
Common Stock Market Prices & Net Asset Value History 8
Tax Information 8
Shareholder Meeting Results 9
Financial Statements:
Statement of Net Assets 10
Statement of Operations 21
Statements of Changes in Net Assets 22
Statements of Cash Flows 23
Financial Highlights 24
Notes to Financial Statements 26
Report of Independent Accountants 32
Directors & Officers of the Fund 33
Corporate Information 34
</TABLE>
Manager Profile
Throughout its history, your Fund has been managed by investment affiliates of
Lincoln National Corporation. Today, Lincoln Investment Management, Inc. (LIM)
brings to the Fund the skills and expertise that it has developed through
management of client assets for Lincoln National Corporation, as well as
pension plans, foundations, endowments, and other clients.
LIM invests in nearly all domestic capital markets and has developed an
increasing international investment presence. LIM currently has approximately
$40 billion in assets under management. 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, 1998, has chosen not to do so.
1
<PAGE>
President's Letter 1998 Annual Report
Dear Shareholder:
In a turbulent year, we are pleased the Lincoln National Income Fund (the
"Fund") achieved a Net Asset Value ("NAV") total return of 8.03%. Last year
was an incredible year with the most financial market volatility by many
measures since 1987. Strong returns were recorded for large cap stocks (S&P
500 +28.6%), poor returns for small cap stocks (Russell 2000 -2.2%), solid
returns for high-quality bonds (Lehman Government/Corporate +9.47%), and
disappointing returns for low quality bonds (Lehman High Yield +1.9%). Simply,
the market rewarded liquidity and size.
The Fund has typically invested in mid to lower quality bonds, some with
limited liquidity. We believe a total return of just over 8% represents a
solid performance, although slightly behind the Lehman Corporate Index. The
Fund's market return was an outstanding 17.2% as the Fund began the year at a
3% discount to NAV and ended the year with a 6% premium. We are pleased the
market finds substantial value in your Fund and Morningstar has awarded the
Fund a five-star rating.
The global financial turmoil that began in Asia in 1997 continued to be the
story in 1998. The Russian default and resulting "flight to quality" led the
Federal Reserve to act aggressively as they cut the discount rate three times
during the latter part of 1998. Other countries such as Brazil are currently
combating currency issues that diminish global confidence, but we expect 1999
will be a better year for credit risk. Still, credit spreads remain stubbornly
wide and we especially like the corporate bond market, which will remain the
foundation of the Fund's portfolio.
Treasury rates declined another 100 basis points in 1998 to levels not seen
since the 1950's. With rates this low, the Fund has a difficult time
reinvesting at interest rate levels that support the current dividend level.
Repeating our concerns from last year, maintaining the Fund's dividend yield
in this low rate environment will be a challenge. For 1999, about $6 to 7
million of bond maturities and expected calls from the portfolio will need to
be reinvested at today's lower yields. This could lower the Fund's income
roughly $.08 per share for the year.
We do not expect a recession in 1999. The Federal Reserve has taken the
necessary action to keep our economy sound. The United States is by far the
best performing economy in the world, however, many people are concerned Year
2000 ("Y2K") technology issues remain a real risk to the economy. Assessing
its possible magnitude is difficult. We believe Y2K will be more of a severe
inconvenience rather than an economic Armageddon, but it is possible Y2K,
coupled with a slowing world economy, could be enough to cause a recession in
early 2000. As we see these events unfold, we may need to make defensive
adjustments to the portfolio. For now, however, we feel the Fund, with its
balance of interest rate and credit risks, is a very attractive investment for
income-oriented investors in 1999.
Sincerely,
/s/ H. Thomas McMeekin
H. Thomas McMeekin
President
January 29, 1999
2
<PAGE>
Portfolio Manager's Discussion
Review of 1998
Truly it was an incredible year for the markets with a dramatic financial asset
sell-off in the late summer followed by an equally dramatic recovery of U.S.
equities to end the year. The spark for the financial turmoil was the debt
default by Russia that scared an already jittery market into a mini-crash. This
led to a massive flight to quality in the August to October period that
included the near-bankruptcy of the prestigious hedge fund, Long Term Capital
Partners. During this flight to quality, about the only strong performing asset
category was Treasury bonds. Credit risk was significantly repriced to levels
that would indicate a market forecast of a substantial probability of a U.S.
economic recession. The crisis seemed to pass when the Fed eased interest rates
for the third time on October 15.
As opposed to the equity markets, bond risk premiums did not recover
substantially from the worst levels of October as equity market optimism did
not carry over to the bond market. This is because the technology sector, the
primary catalyst for the equity market recovery, does not have a substantial
amount of bonds outstanding. Corporate bonds and mortgage-backed securities
both under-performed Treasuries during the year. Treasury rates declined during
the year about 100 basis points on average; thus, the assumption of interest
rate risk was a good bond market strategy in 1998.
For the year, Lincoln National Income Fund achieved an NAV total return of
8.03%, 144 basis points behind the Lehman Corporate Bond Index return of 9.47%.
The year was unusual in that credit spreads widened substantially in a non-
recession year and the lower the portfolio quality, the lower the total return.
Although we would like to out-perform this index every year, the Fund remains
comfortably ahead of the index over longer periods. Over the last three years,
the Fund achieved an annualized NAV total return of 8.23% compared with 7.32%
for the Lehman Corporate Bond index, a 91 basis point advantage for the Fund.
For the five- year period, the Fund had an average annualized total return of
8.34%, 60 basis points better than the index average of 7.74%.
We are pleased with how the Fund compares to our Morningstar peer group. In
this peer group, we were 15th of 35 funds for NAV return in 1998, but first in
market return with our 17.42% performance. For longer periods, we are 14th of
35 funds in 3-year annualized NAV return and 3rd of 35 in 5-year annualized NAV
return. We are also happy to report that we are first in our peer group in both
10-year NAV and market returns. We are one of the four 5-star funds in our
group of 35 Morningstar peers.
For several years now, the Fund has worked with the private placement staff at
Lincoln Investment Management to invest in subordinated debt deals with equity
kickers. This segment of the market is called the "mezzanine" market, the
financing level between debt and equity. This component of the portfolio has
been roughly 5% of assets over the last several years and has been a key
contributor to the Fund's good returns. In 1998, our net realized and
unrealized gains for these investments were roughly $300,000. We had gains of
approximately $1,300,000 for our investments in Global Crossing, Nebraska Book
Company and Summit Acceptance and write-downs of approximately $1,000,000 for
our investments in Murray's Discount Auto Stores and Centennial Resources. The
total return for this segment of the portfolio was above 15% given the above-
mentioned gains and the high interest coupons for these investments. We plan to
continue our commitment of 5% of assets to these types of investments in the
future.
Murray's and Centennial were both businesses in substantial financial trouble
in 1998 with Murray's narrowly avoiding bankruptcy and Centennial actually
going into bankruptcy. Despite our strenuous workout
3
<PAGE>
Portfolio Manager's Discussion (continued)
efforts, we do not feel that we will be able to achieve much in the way of a
recovery in either of these investments. These are the first problem
investments in our mezzanine segment for several years.
Offsetting these problems in a major way is the significant gain we have in
our equity position in Global Crossing, a trans-Atlantic fiber optic cable
company. The stock was acquired from the exercise of warrants during 1998. The
stock has risen substantially from its IPO in August at $19 per share, as the
firm is expected to be a major carrier of trans-Atlantic internet traffic. The
stock value and unrealized gain as of December 31, 1998, is approximately
$900,000.
Another credit situation that we want to comment on is DLJ Mortgage
Acceptance Corp. Series 1995 QT4 Class A1. This security was valued at $45 at
12/31/97 and at $27 as of 12/31/98. The Fund filed a legal action in federal
court (co-plaintiff with Lincoln National Life Insurance Company) against DLJ
Securities Corporation alleging material omissions by DLJ in selling the 1995
QT4 securities to the Fund. The case is scheduled for trial in July of 1999.
1999 Investment Outlook
With the three rate cuts made during the market turmoil last year, the Fed has
most likely taken the necessary steps to avert a recession in 1999 and, in
fact, may have prepared the economy for a 2.5 to 3.0% GDP growth. We see that
as the most likely scenario. However, there are still reasons to be wary. One
wildcard remaining is the effect on the US economy of solving the Y2K computer
problem. Also, many foreign economies are still in recession. Accordingly, we
believe there is still a recession probability of 20-25% for the US over the
next 12-18 months. We also continue to believe the corporate sector of the
economy will perform worse than the economy in total.
Inflation should be below 1% in 1999 allowing long term Treasury rates to
stay mostly in a 4.5% to 5.5% range. Credit spreads are currently attractive,
and we once again will position the Fund to be overweighted in corporate bonds
versus the index. Credit spreads are pricing in more recession probability
than the equity markets, and thus, don't have that far to widen should an
economic downturn occur. So, notwithstanding the expected weakness of the
corporate sector, we believe corporate bonds are currently attractive. We also
find mortgage-backed securities attractive at current spread levels.
Respectfully,
/s/David C. Fischer
David C. Fischer
Portfolio Manager
January 29, 1999
4
<PAGE>
Asset Classification
As of December 31, 1998
<TABLE>
<CAPTION>
(Dollars in
Millions)
- -------------------------------------
<S> <C> <C>
Public Debt 68.89% $92.4
Government/Gov't
Agency 5.10% $ 6.8
Private Placements 22.87% $30.7
Equities/Partnerships 1.51% $ 2.0
Short-Term
Investments 1.71% $ 2.3
Other Liabilities (0.08)% $(0.1)
</TABLE>
Distribution By Quality
As of December 31, 1998
<TABLE>
<CAPTION>
(Dollars in
Millions)
- -----------------------------------
<S> <C> <C>
Other Liablities (0.08)% $(0.1)
B 1.00% $ 1.3
Equities 1.51% $ 2.0
Short-Term
Investments 1.72% $ 2.3
AAA 2.81% $ 3.8
AA 3.01% $ 4.0
Not Rated 5.65% $ 7.6
BB 5.87% $ 7.9
A 22.12% $29.7
Private Placements 22.82% $30.6
BBB 33.57% $45.0
</TABLE>
5
<PAGE>
Portfolio Performance
As of December 31, 1998
The accompanying 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). This shows each
category's results of what $1,000
invested in 1973 would have grown to
by the end of 1998 assuming
reinvestment of dividends.
[Graph of Portfolio Performance Appears Here]
1973 1978 1985 1988 1993
---- ---- ---- ---- ----
Lincoln National
Income Fund $1,000 $1,383 $3,744 $5,332 $9,537
Lehman Corporate
Bond Index $1,000 $1,386 $3,096 $3,939 $6,757
Standard & Poor's
500 Index $1,000 $1,056 $3,289 $4,789 $9,432
- -
1997 1998
---- ----
Lincoln National
Income Fund $13,180 $14,238
Lehman Corporate
Bond Index $ 9,035 $ 9,784
Standard & Poor's
500 Index $21,546 $27,293
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>
Since
Inception
1 Year 3 Years 5 Years 10 Years 15 Years (26 Years)
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Lincoln National Income
Fund 8.03% 26.76% 49.29% 167.03% 421.43% 1323.80%
Lehman Corporate Bond
Index 9.47% 23.28% 44.79% 148.41% 340.97% 878.40%
Standard & Poor's 500
Index* 28.60% 107.68% 189.37% 469.95% 1061.58% 2629.30%
</TABLE>
* Dividends Reinvested
Annual Performance of Lincoln National Income Fund vs. Indices
<TABLE>
<CAPTION>
Income Lehman S&P 500 Income Lehman S&P 500
Fund Corporate Index Fund Corporate Index
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1973 3.20% 2.28% (14.69%) 1986 17.55% 15.62% 18.67%
1974 (12.60%) 0.17% (26.47%) 1987 5.04% 2.29% 5.25%
1975 13.03% 12.30% 37.23% 1988 15.35% 7.58% 16.56%
1976 17.24% 15.59% 23.93% 1989 17.38% 14.23% 31.63%
1977 7.82% 2.99% (7.13%) 1990 1.31% 8.28% (3.11%)
1978 7.28% 1.18% 6.58% 1991 21.34% 16.13% 30.40%
1979 12.92% 2.30% 18.60% 1992 6.96% 7.58% 7.61%
1980 15.37% 3.06% 32.46% 1993 15.89% 11.03% 10.06%
1981 4.73% 7.26% (4.92%) 1994 (7.52%) (3.93%) 1.31%
1982 26.24% 31.10% 21.55% 1995 27.35% 22.25% 37.53%
1983 14.67% 7.99% 22.56% 1996 5.36% 3.28% 22.94%
1984 16.88% 15.02% 6.27% 1997 11.37% 10.23% 33.36%
1985 17.30% 21.30% 31.73% 1998 8.03% 9.47% 28.60%
</TABLE>
6
<PAGE>
Total Fund Investments
At Market or Fair Values as of December 31,
<TABLE>
<CAPTION>
1998 1997
(000) % of Total (000) % of Total
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Public Debt Securities $ 99,250 74% $102,972 78%
Private Placement Securities 30,680 23% 24,707 19%
Common Stocks & Warrants 9 0% 25 0%
Preferred Stocks 1,578 1% 2,680 2%
Short-Term Investments 2,300 2% 3,293 3%
Partnerships 444 0% 281 0%
Other Assets/(Liabilities) (126) 0% (2,226) (2%)
- ------------------------------------------------------------------------
Total Net Assets $134,135 100% $131,732 100%
</TABLE>
Dividend History
The Fund in its lifetime has distributed common dividends of $30.17 per share
which represents 241.4 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 1988 $1.23
1977 0.90 1989 1.17
1978 0.90 1990 1.18
1979 0.92 1991 1.15
1980 0.97 1992 1.68
1981 1.04 1993 1.77
1982 1.12 1994 1.28
1983 1.14 1995 1.32
1984 1.20 1996 1.47
1985 1.27 1997 1.52
1986 1.17 1998 1.10
1987 1.52
</TABLE>
7
<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 $14.000 $13.125 $13.875 378,500 $13.76 $13.58 $13.75
2nd Quarter 14.188 13.438 14.063 300,000 13.82 13.52 13.69
3rd Quarter 14.375 12.938 14.375 315,400 13.90 13.43 13.90
4th Quarter 14.625 13.938 14.188 181,900 14.17 13.39 13.39
<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
<CAPTION>
1996
Market Prices and Volumes Net Asset Value
High Low Close Volume High Low Close
- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1st Quarter $13.875 $12.875 $13.125 304,700 $14.32 $13.82 $13.83
2nd Quarter 13.250 12.375 13.000 239,200 13.88 13.36 13.71
3rd Quarter 13.125 12.125 13.000 275,300 13.74 13.43 13.77
4th Quarter 13.125 12.250 12.500 433,000 14.27 13.47 13.47
</TABLE>
Shares are listed on the New York Stock Exchange under the trading symbol LND.
Tax Information
(Unaudited)
Income dividends received by a shareholder must be reported for federal income
tax purposes as ordinary income. The Fund distributed $1.10 per share to
common shareholders for the tax year 1998. Common dividend payments made in
April, July, October and mid-January 1999 are taxable in the 1998 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 $ 1.05 $ 54.50*
Long-Term Capital Gains Per Share $ 0.05 $ 1.76*
Corporation's Dividend Received Deduction--Percent 2.112470% 2.112470%
Corporation's Dividend Received Deduction--$ Per
Share $0.032414 $1.664900*
</TABLE>
* Based on 40,000 shares of preferred stock outstanding.
8
<PAGE>
Shareholder Meeting Results (Unaudited)
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.
<TABLE>
<CAPTION>
Number of Number of Number of
Shares Voted Shares Voted Shares
FOR AGAINST ABSTAINED
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
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
(PricewaterhouseCoopers LLP) 5,311,992 18,646 87,263
</TABLE>
Year 2000 (Unaudited)
Like other investment companies, financial and business organizations and
individuals around the world, the Fund could be adversely affected if computer
systems used by the Investment Manager and other service providers do not
properly process and calculate date-related information and data on and after
January 1, 2000. The Fund is taking steps to obtain satisfactory assurances
that the Investment Manager and other major service providers are taking steps
reasonably designed to address the Year 2000 issue with respect to the computer
systems that such service providers use. At this time, however, there can be no
assurance that these steps will be sufficient to avoid any adverse impact to
the Fund.
9
<PAGE>
Lincoln National Income Fund, Inc.
Statement of Net Assets
As of December 31, 1998
<TABLE>
<CAPTION>
Investments--Notes A & B Par Market or
Public Debt Securities (74.0%) Amount Fair Value
- ------------------------------------------------------------
<S> <C> <C>
Aerospace & Defense (1.6%)
McDonnell Douglas
9.25%, 4/1/02 $1,000,000 $ 1,113,750
Raytheon
6.55%, 3/15/10 1,000,000 1,040,000
------------
2,153,750
------------
Airline (5.0%)
American Airline
9.83%, 1/1/02 1,095,818 1,171,764
AMR
10.00%, 4/15/21 1,000,000 1,277,500
Delta Air Lines
9.90%, 6/16/02 1,473,000 1,613,811
United Air Lines
8.70%, 10/7/08 868,970 958,800
9.35%, 4/7/16 1,500,000 1,746,277
------------
6,768,152
------------
Banking (6.0%)
Banc One
9.88%, 3/1/09 1,000,000 1,321,250
BankAmerica
10.00%, 2/1/03 1,000,000 1,156,250
First USA Bank Wilmington Delaware
7.65%, 8/1/03 1,000,000 1,080,000
Hong Kong & Shanghai Bank
5.81%, 12/29/49 500,000 360,375
Lloyds Bank
8.00%, 6/29/49 1,000,000 827,000
Mellon Capital I Notes
7.72%, 12/1/26 400,000 436,000
NationsBank
8.13%, 6/15/02 1,000,000 1,088,750
Standard Charter
6.06%, 11/29/49 1,000,000 614,100
Wells Fargo
6.13%, 11/1/03 1,000,000 1,032,500
------------
7,916,225
------------
Building & Materials (0.2%)
Toll Brothers
8.75%, 11/15/06 250,000 260,000
------------
260,000
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
Statement of Net Assets (continued)
<TABLE>
<CAPTION>
Par Market or
Public Debt Securities (continued) Amount Fair Value
- -------------------------------------------------------------------
<S> <C> <C>
Cable, Media & Publishing (5.0%)
Capital Cities ABC
8.88%, 12/15/00 $1,000,000 $ 1,066,250
K-III Communications
8.50%, 2/1/06 250,000 257,500
News America Holdings
9.25%, 2/1/13 1,000,000 1,242,500
Tele-Communications
9.25%, 1/15/23 2,000,000 2,277,500
Time Warner
9.13%, 1/15/13 1,500,000 1,901,250
------------
6,745,000
------------
Chemicals (0.2%)
ISP Holdings
9.00%, 10/15/03 250,000 264,062
------------
264,062
------------
Electronics & Electrical Equipment (0.2%)
AMETEK
7.20%, 7/15/08 250,000 251,250
------------
251,250
------------
Energy (4.5%)
Coastal
9.75%, 8/1/03 1,000,000 1,178,750
Enron
9.50%, 6/15/01 1,000,000 1,086,250
Gulf Canada Resources
9.63%, 7/1/05 250,000 253,750
Oryx Energy
10.00%, 4/1/01 1,000,000 1,082,500
Pennzoil
10.13%, 11/15/09 1,000,000 1,201,250
Sun
9.38%, 6/1/16 1,000,000 1,213,750
------------
6,016,250
------------
Finance (11.6%)
Avalon Bay Communities
6.80%, 7/15/06 500,000 496,875
Beneficial
6.85%, 9/10/04 1,610,000 1,712,638
Chrysler Finance
9.50%, 12/15/99 1,000,000 1,039,710
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
Statement of Net Assets (continued)
<TABLE>
<CAPTION>
Par Market or
Public Debt Securities
(continued) Amount Fair Value
- -----------------------------------------------------------
<S> <C> <C>
Finance (continued)
Citicorp Mortgage Securities
Series 1991-6 Class B
8.75%, 5/25/21 $ 500,000 $ 510,469
Dow Capital
9.00%, 5/15/10 1,000,000 1,226,250
Duke Capital
6.25%, 7/15/05 1,000,000 1,036,250
Fleet/Norstar Financial Group
8.63%, 1/15/07 1,000,000 1,187,500
General Electric Capital
8.75%, 5/21/07 1,000,000 1,216,250
General Motors Acceptance
8.88%, 6/1/10 1,500,000 1,865,625
Greentree Financial Corporation
8.65%, 1/15/20 1,000,000 1,018,321
Lehman Brothers Holdings
7.38%, 5/15/07 500,000 526,250
Merrill Lynch Mortgage Investors
10.00%, 3/15/10 402,961 429,084
Mid-America Finance
6.38%, 9/1/05 500,000 481,250
NWA Trust
10.23%, 6/21/14 456,935 541,468
Resolution Trust Corporation
8.80%, 8/25/23 60,250 60,250
Selkirk Cogen Funding Corporation
8.65%, 12/26/07 971,951 1,085,676
SMA Finance
6.40%, 11/16/06 1,000,000 1,026,875
------------
15,460,741
------------
Food, Beverage & Tobacco (2.3%)
Chiquita Brands International
9.63%, 1/15/04 250,000 258,750
Conagra
7.40%, 9/15/04 1,500,000 1,590,000
Marsh Supermarket
8.88%, 8/1/07 250,000 262,188
RJR Nabisco
8.75%, 8/15/05 1,000,000 1,040,000
------------
3,150,938
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
Statement of Net Assets (continued)
<TABLE>
<CAPTION>
Par Market or
Public Debt Securities (continued) Amount Fair Value
- ------------------------------------------------------------------
<S> <C> <C>
Government & Government Agency (5.1%)
Federal Home Loan Mortgage Corporation
7.80%, 9/15/20 $ 650,211 $ 668,113
7.00%, 9/17/31 920,924 927,178
Federal National Mortgage Association
9.20%, 12/25/17 146,258 146,885
9.00%, 3/1/24 560,788 606,264
6.50%, 12/1/27 1,840,771 1,856,302
Government National Mortgage Association
9.00%, 8/15/21 691,041 741,357
9.00%, 3/15/23 1,773,665 1,901,147
------------
6,847,246
------------
Healthcare & Pharmaceuticals (0.2%)
Beckman Instruments
7.10%, 3/4/03 250,000 259,062
------------
259,062
------------
Industrial Machinery (1.3%)
AGCO Corporation
8.50%, 3/15/06 250,000 240,000
Black & Decker Corporation
8.91%, 1/21/02 500,000 548,750
Caterpillar Tractor
6.00%, 5/1/07 1,000,000 1,000,000
------------
1,788,750
------------
Insurance (2.2%)
Allstate
7.50%, 6/15/13 1,000,000 1,143,750
Conseco
7.88%, 12/15/00 500,000 501,875
Nationwide
9.88%, 2/15/25 1,000,000 1,238,750
------------
2,884,375
------------
Leisure, Lodging & Entertainment (1.2%)
ITT
6.75%, 11/15/03 500,000 477,500
MGM Grand
6.88%, 2/6/08 1,000,000 915,000
Speedway Motorsports
8.50%, 8/15/07 250,000 263,750
------------
1,656,250
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
Statement of Net Assets (continued)
<TABLE>
<CAPTION>
Par Market or
Public Debt Securities
(continued) Amount Fair Value
- ----------------------------------------------------------
<S> <C> <C>
Metals & Mining (3.3%)
Cyprus Amax Minerals
7.38%, 5/15/07 $ 500,000 $ 503,750
EES Coke Battery
7.13%, 4/15/02 374,250 379,864
Inco
9.60%, 6/15/22 1,000,000 1,142,500
Noranda
8.00%, 6/1/03 1,500,000 1,550,625
Pohang Iron and Steel
7.13%, 11/1/06 1,000,000 863,750
------------
4,440,489
------------
Miscellaneous (1.2%)
Quebec Province
11.00%, 6/15/15 1,000,000 1,106,250
Republic of Colombia
7.63%, 2/15/07 300,000 249,750
Venezuela
9.25%, 9/15/27 500,000 297,500
------------
1,653,500
------------
Packaging & Containers (0.2%)
Container Corporation of America
11.25%, 5/1/04 250,000 260,000
------------
260,000
------------
Paper & Forest Products (1.2%)
Georgia-Pacific
9.50%, 5/15/22 1,500,000 1,650,000
------------
1,650,000
------------
Real Estate (3.2%)
Comp De DeSarollo
10.19%, 5/31/11 500,000 375,000
Duke Realty
7.05%, 3/1/06 500,000 520,000
ERP Operating
6.63%, 4/13/05 400,000 391,500
Highwoods Realty
7.00%, 12/1/06 600,000 603,750
7.50%, 4/15/18 400,000 391,000
Irvine Apartment Communities
7.00%, 10/1/07 1,000,000 956,250
Liberty Property
7.10%, 8/15/04 1,000,000 1,048,750
------------
4,286,250
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
Statement of Net Assets (continued)
<TABLE>
<CAPTION>
Par Market or
Public Debt Securities (continued) Amount Fair Value
- --------------------------------------------------------------
<S> <C> <C>
Retail (0.9%)
Sears Roebuck
9.05%, 2/6/12 $1,000,000 $ 1,271,250
------------
1,271,250
------------
Telecommunications (3.1%)
MCI Communications
7.50%, 8/20/04 1,000,000 1,083,750
Nynex
9.55%, 5/1/10 1,504,680 1,783,046
Rogers Cantel
9.38%, 6/1/08 250,000 265,000
Worldcom
8.88%, 1/15/06 1,000,000 1,090,000
------------
4,221,796
------------
Textiles, Apparel & Furniture (1.0%)
Interface
7.30%, 4/1/08 250,000 255,000
Whirlpool Corporation
9.00%, 3/1/03 1,000,000 1,135,000
------------
1,390,000
------------
Transportation & Shipping (1.1%)
Federal Express
9.88%, 4/1/02 1,250,000 1,407,812
------------
1,407,812
------------
Utilities (12.2%)
Avon Energy Partners Holdings
7.05%, 12/11/07 1,000,000 1,046,250
BVPS II Funding
8.33%, 12/1/07 1,490,000 1,614,787
Cleveland Electric
7.63%, 8/1/02 1,000,000 1,033,750
Commonwealth Edison
8.63%, 2/1/22 1,000,000 1,101,250
Connecticut Light and Power
7.25%, 7/1/99 748,000 748,935
Consumers Energy
6.50%, 6/15/05 500,000 507,500
Duquesne Light
8.70%, 6/1/16 985,000 1,093,350
Empresa Nacional Electric
7.75%, 7/15/08 450,000 426,938
Hyder
6.88%, 12/15/07 1,000,000 1,035,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
Statement of Net Assets (continued)
<TABLE>
<CAPTION>
Par Market or
Public Debt Securities (continued) Amount Fair Value
- ----------------------------------------------------------------------------
<S> <C> <C>
Utilities (continued)
New England Telephone & Telegraph
9.00%, 8/1/31 $1,000,000 $ 1,130,000
Niagara Mohawk Power
9.25%, 10/1/01 500,000 546,250
PacifiCorp
7.00%, 7/15/09 500,000 548,125
8.29%, 12/30/11 1,000,000 1,215,031
Philadelphia Electric
7.13%, 9/1/02 1,500,000 1,590,000
8.50%, 5/1/22 500,000 544,375
System Energy Resources
7.80%, 8/1/00 1,000,000 1,025,000
Texas Utilities
7.38%, 8/1/01 1,000,000 1,040,000
------------
16,246,541
------------
Total Public Debt Securities (cost $95,040,359) 99,249,689
------------
<CAPTION>
Private Placement Securities--Debt (21.7%)
- ----------------------------------------------------------------------------
<S> <C> <C>
Accounting Firms (0.8%)
Deloitte & Touche LLP
7.41%, 10/1/11 1,000,000 1,065,100
------------
1,065,100
------------
Banking (2.4%)
Anglo Irish Bank
9.10%, 9/30/06 1,000,000 1,136,800
Banco Nacional de Mexico
7.57%, 1/1/01 500,000 504,750
First Hawaiian Bank 144A
6.93%, 12/1/03 500,000 531,250
Interbank/AKK Trust
9.00%, 2/28/01 500,000 499,050
Wells Fargo Capital 144A
8.13%, 12/1/26 500,000 563,125
------------
3,234,975
------------
Building & Materials (0.2%)
Cemex 144A
10.00%, 11/5/99 250,000 253,125
------------
253,125
------------
Chemicals (1.3%)
Dow Chemical
17.25%, 1/2/03 1,396,983 1,720,524
------------
1,720,524
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
16
<PAGE>
Statement of Net Assets (continued)
<TABLE>
<CAPTION>
Par Market or
Private Placement Securities--Debt (continued) Amount Fair Value
- -------------------------------------------------------------------------
<S> <C> <C>
Consumer Products (0.1%)
Behr Process Floating Senior Note
7.31%, 3/31/04 $ 116,814 $ 116,814
7.56%, 3/31/05 77,876 77,876
------------
194,690
------------
Electronics & Electrical Equipment (0.4%)
Spectrascan
11.25%, 6/30/06 500,000 500,000
------------
500,000
------------
Finance (6.9%)
Avianca Airline Ticket Receivable Trust
8.75%, 12/24/05 500,000 519,000
DLJ Mortgage Acceptance Corporation
Series 1995-QT4 Class A
8.18%, 6/26/25 907,485 245,021
Fort Wayne Capital Trust 144A
9.85%, 4/15/27 1,000,000 1,233,800
Goldman Sachs Group 144A
7.20%, 3/1/07 500,000 528,125
Guangdong International Trust & Investment 144A
8.75%, 10/24/16 500,000 313,750
Louis Dreyfus
8.43%, 07/15/01 1,000,000 1,040,600
Merrill Lynch CLO 98 Pilgrim 2 144A
6.62%, 9/23/09 1,000,000 970,700
Mutual Fund Fee Trust IV
7.99%, 1/31/05 686,626 701,731
NAL Auto Trust
7.30%, 12/15/00 121,372 121,448
PM Holding
13.50%, 10/30/04 500,000 483,000
Progress Cap Holdings 144A
6.88%, 8/1/01 1,000,000 1,036,250
Refco Group
8.21%, 5/16/02 800,000 825,360
Scotia Pacific 144A
7.11%, 1/20/14 500,000 466,550
Union Acceptance
8.53%, 8/1/02 800,000 749,000
------------
9,234,335
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
Statement of Net Assets (continued)
<TABLE>
<CAPTION>
Par Market or
Private Placement Securities--Debt (continued) Amount Fair Value
- --------------------------------------------------------------------------
<S> <C> <C>
Food, Beverage & Tobacco (1.6%)
Cambuhy Export Trust
8.12%, 7/5/01 $ 284,021 $ 290,781
Coca-Cola Femsa SA DE 144A
9.40%, 8/15/04 1,000,000 1,076,200
Dairy Farmers of America Preferred Capital Trust
7.38%, 10/2/12 500,000 516,450
Gruma SA DE CV 144A
7.63%, 10/15/07 250,000 223,125
------------
2,106,556
------------
Leisure, Lodging & Entertainment (1.1%)
New Boston Garden
8.45%, 9/22/15 934,073 1,031,590
United States Playing Card
12.00%, 11/18/04 500,000 500,000
------------
1,531,590
------------
Metals & Mining (1.1%)
Centennial Resources
13.00%, 10/31/03 500,000 -
Soc Quimica Y Minera De 144A
7.70%, 9/15/06 1,000,000 1,006,250
Steel Technologies
8.52%, 3/1/05 500,000 523,100
------------
1,529,350
------------
Miscellaneous (2.6%)
BEA
6.72%, 6/15/10 1,000,000 1,042,300
BSI Holdings
10.25%, 9/30/05 330,000 330,000
Earle Palmer Brown
14.00%, 12/16/04 500,000 389,240
Stackpole Magnetic Systems
13.50%, 10/15/05 380,000 380,000
Taegu Metropolitan City
8.13%, 03/05/99 1,000,000 997,500
Turkiye Vakiflar Bankasi T.A.O.
7.79%, 12/22/00 372,011 375,954
------------
3,514,994
------------
Natural Gas (0.8%)
Suburban Propane L.P.
7.54%, 6/30/11 1,000,000 1,044,000
------------
1,044,000
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
18
<PAGE>
Statement of Net Assets (continued)
<TABLE>
<CAPTION>
Par Market or
Private Placement Securities--Debt (continued) Amount Fair Value
- -----------------------------------------------------------------------------
<S> <C> <C>
Paper & Forest Products (1.0%)
Fibermark
9.38%, 10/15/06 $ 250,000 $ 253,125
West Fraser Mills
8.44%, 6/30/04 1,000,000 1,033,500
------------
1,286,625
------------
Real Estate (0.3%)
Carramerica Realty 144A
6.63%, 3/1/05 400,000 388,500
------------
388,500
------------
Retail (0.0%)
Murray's Discount Auto Stores
11.00%, 9/30/03 500,000 20,000
------------
20,000
------------
Utilities (1.1%)
Houston Lighting & Power Company
9.80%, 2/15/99 1,500,000 1,508,280
------------
1,508,280
------------
Total Private Placement Debt (cost $29,607,769) 29,132,644
------------
<CAPTION>
Number of
Private Placement Securities--Equities (1.2%) Shares
- -----------------------------------------------------------------------------
<S> <C> <C>
Leisure, Lodging & Entertainment (0.1%)
Bicycle Holdings* 8 146,371
------------
146,371
------------
Miscellaneous (0.8%)
Global Crossing* 19,800 893,475
Stackpole Magnetic Systems Class B 120,000 120,000
------------
1,013,475
------------
Warrants (0.3%)
Centennial Coal* 41 -
Earle Palmer Brown Class A* 15 3,280
Earle Palmer Brown Class B* 492 107,587
Huron Technology* 6,200 226,540
Murray's Discount Auto Stores* 25 -
PSC* 16,250 33,313
Stackpole Magnetic Systems* 54,582 -
WPM Holdings* 110 17,215
------------
387,935
------------
Total Private Placement Equities (cost $466,701) 1,547,781
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
19
<PAGE>
Statement of Net Assets (continued)
<TABLE>
<CAPTION>
Number of Market or
Preferred Stock (1.2%) Shares Fair Value
- ------------------------------------------------------------------------------
<S> <C> <C>
Finance (1.2%)
Salomon Financing Trust I 20,000 $ 532,500
Transcanada Capital 40,000 1,045,000
------------
Total Preferred Stocks (cost $1,542,000) 1,577,500
------------
Common Stock (0.0%)
- ------------------------------------------------------------------------------
Healthcare & Pharmaceuticals (0.0%)
Paracelsus Healthcare 5,825 9,102
------------
Total Common Stock (cost $48,190) 9,102
------------
Partnerships (0.3%)
- ------------------------------------------------------------------------------
KBP Holdings* 1 300,000
KBSI Partnership* 1 144,000
MDAS Investors* 1 -
------------
Total Partnerships (cost $443,622) 444,000
------------
<CAPTION>
Par
Short-Term Investments (1.7%) Amount
- ------------------------------------------------------------------------------
<S> <C> <C>
Signal Finance Mortgage
5.75%, 1/4/99 $2,300,000 2,300,000
------------
Total Short-Term Investments (cost $2,300,000 ) 2,300,000
------------
Total Market Value of Securities (100.1%) (cost
$129,448,641) 134,260,716
Liabilities Net of Receivables and Other Assets (-
0.1%) (125,689)
------------
Net Assets (100.0%) $134,135,027
------------
Net Asset Value Per Share of Common Stock
Outstanding ($134,135,027 Less Variable Term
Preferred Stock at Liquidation Value of $40,000,000
Divided by 7,032,569 Shares of Common Stock
Outstanding) $ 13.39
============
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
7,032,569 shares 7,032,569
Proceeds in excess of par value of shares issued 82,238,424
Undistributed realized gain on investments, net of
taxes paid 170,365
Undistributed net investment loss (118,406)
Net unrealized appreciation of investments 4,812,075
------------
Total Net Assets $134,135,027
============
</TABLE>
*Non income producing security
The accompanying notes are an integral part of the financial statements.
20
<PAGE>
Lincoln National Income Fund, Inc.
Statement of Operations
Year Ended December 31, 1998
<TABLE>
<S> <C>
Investment Income:
Interest $10,562,956
Dividends 227,955
- -------------------------------------------------------------------
Total Investment Income 10,790,911
Expenses:
Management fees -- Note C 1,172,539
Variable term preferred stock fees 114,803
Directors fees 87,917
Professional fees 57,862
Printing, stationery, & supplies 43,404
Stock transfer & dividend disbursing fees 18,598
New York Stock Exchange fee 17,670
Postage & mailing fees 15,746
Custodian & registrar fees 9,797
Other 17,400
- -------------------------------------------------------------------
Total Operating Expenses 1,555,736
Net Investment Income 9,235,175
Net Realized and Unrealized Gain (Loss) on Investments
Transactions:
</TABLE>
<TABLE>
<S> <C>
Net realized gain on investment transactions 547,870
Net change in unrealized depreciation of investments (257,904)
- -------------------------------------------------------------------
Net Realized and Unrealized Gain on Investments 289,966
- -------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations $9,525,141
- -------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
21
<PAGE>
Lincoln National Income Fund, Inc.
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Changes from Operations:
Net investment income $ 9,235,175 $ 9,577,539
Net realized gain on investments 547,870 3,030,309
Net change in unrealized depreciation of
investments (257,904) (368,480)
- ------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations 9,525,141 12,239,368
Changes from Capital Share Transactions:
Par value of shares issued under dividend
reinvestment plan 200,374 -
Proceeds in excess of par value for shares issued
under dividend reinvestment plan 2,522,734 -
- ------------------------------------------------------------------------------
Net Increase from Capital Share Transactions 2,723,108 -
Distributions to Shareholders from Net Investment
Income:
Common shareholders (7,188,525) (8,266,956)
Preferred shareholders (2,235,024) (1,539,469)
- ------------------------------------------------------------------------------
Total Distributions to Shareholders from Net
Investment Income (9,423,549) (9,806,425)
Distributions to Shareholders from Net Realized
Gains:
Common shareholders (322,096) (2,117,980)
Preferred shareholders (99,859) (636,338)
- ------------------------------------------------------------------------------
Total Distributions to Shareholder from the
Realized Gains (421,955) (2,754,318)
- ------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets 2,402,745 (321,375)
- ------------------------------------------------------------------------------
Net Assets, beginning of year 131,732,282 132,053,657
- ------------------------------------------------------------------------------
Net Assets, End of Year $134,135,027 $131,732,282
- ------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
22
<PAGE>
Lincoln National Income Fund, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities:
Interest Received $ 10,507,376 $ 11,070,191
Dividends Received 288,780 214,745
Operating Expenses Paid (1,482,821) (1,498,516)
Purchase of investments securities (29,938,261) (29,429,640)
Proceeds from sale of investment securities 29,033,490 30,690,334
Net proceeds of short-term investments 1,093,752 1,307,210
- -------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 9,502,316 12,354,324
Financing Activities:
Distributions paid to common and preferred
shareholders (12,257,902) (12,005,560)
Increase from capital share transactions 2,723,108 -
- -------------------------------------------------------------------------------
Net Cash Used in Financing Activities (9,534,794) (12,005,560)
- -------------------------------------------------------------------------------
Increase (Decrease) in Cash (32,478) 348,764
- -------------------------------------------------------------------------------
Cash at Beginning of Year 441,065 92,301
- -------------------------------------------------------------------------------
Cash at End of Year $408,587 $441,065
Reconciliation of Increase in Net Assets
Resulting from Operations to Net Cash Provided by
Operating Activities:
Net increase in net assets resulting from
operations $ 9,525,141 $ 12,239,368
Reconciling Adjustments:
Net proceeds of investment securities 188,981 2,567,904
Net realized and unrealized (gain) loss on
investments (289,966) (2,661,829)
Discount accretion on investment income receivable (181,689) (7,408)
Increase in accrued investment income receivable 126,110 246,973
Increase (Decrease) in accrued dividend receivable 60,825 (31,475)
Increase in accrued expenses 72,914 791
- -------------------------------------------------------------------------------
Net Cash Provided by Operating Activities $ 9,502,316 $ 12,354,324
</TABLE>
The accompanying notes are an integral part of the financial statements.
23
<PAGE>
Lincoln National Income Fund, Inc.
Financial Highlights
<TABLE>
<CAPTION>
(Selected data for each share of Year Ended December 31,
common -------------------------------------------
stock outstanding throughout the
year) 1998 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 13.43 $ 13.47 $ 14.22 $ 12.25
Income from investment operations:
Net investment income 1.32 1.40 1.44 1.46
Net realized and unrealized gain
(loss) on investments 0.06 0.39 (0.41) 2.17
- -------------------------------------------------------------------------------
Total from Investment Operations 1.38 1.79 1.03 3.63
Reduction--stock rights offering - - - -
Preferred stock underwriting
discounts and offering costs - - - -
Less dividends and distributions:
Dividends from net investment
income:
To preferred shareholders (0.31) (0.22) (0.24) (0.29)
To common shareholders (1.04) (1.21) (1.21) (1.16)
Distributions from net realized
gains:
To preferred shareholders (0.01) (0.09) (0.07) (0.05)
To common shareholders (0.06) (0.31) (0.26) (0.16)
- -------------------------------------------------------------------------------
Total Distributions (1.42) (1.83) (1.78) (1.66)
- -------------------------------------------------------------------------------
Net Asset Value, End of Year $ 13.39 $ 13.43 $ 13.47 $ 14.22
- -------------------------------------------------------------------------------
Per Share Market Value, End of
Year $ 14.19 $ 13.06 $ 12.50 $ 13.63
Total Investment Return
(based on Market Value) 17.42% 17.12% 2.42% 39.07%
Ratios and Supplemental Data:
Net assets, end of year (000
omitted) $134,135 $131,732 $132,054 $137,163
Ratio of expenses to average net
assets 1.16% 1.12% 1.11% 1.14%
Ratio of net investment income to
average net assets 6.84% 7.17% 7.32% 7.44%
Portfolio Turnover 19.78% 22.63% 22.73% 26.98%
</TABLE>
The accompanying notes are an integral part of the financial statements.
24
<PAGE>
Lincoln National Income Fund, Inc.
Financial Highlights
<TABLE>
<CAPTION>
(Selected data for each Year Ended December 31,
share of common -------------------------------------------------------
stock outstanding
throughout the year) 1994 1993 1992 1991 1990 1989
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $ 14.63 $ 14.18 $ 14.85 $ 13.40 $ 14.44 $ 13.35
Income from investment
operations:
Net investment income 1.47 1.56 1.36 1.15 1.17 1.15
Net realized and
unrealized gain (loss)
on investments (2.18) 0.92 (0.01) 1.45 (1.03) 1.11
- ---------------------------------------------------------------------------------
Total from Investment
Operations (0.71) 2.48 1.35 2.60 0.14 2.26
Reduction--stock rights
offering (0.10) - - - - -
Preferred stock
underwriting discounts
and offering costs - - (0.23) - - -
Less dividends and
distributions:
Dividends from net
investment income:
To preferred
shareholders (0.27) (0.19) (0.08) - - -
To common shareholders (1.20) (1.31) (1.31) (1.15) (1.18) (1.16)
Distributions from net
realized gains:
To preferred
shareholders (0.02) (0.07) (0.03) - - -
To common shareholders (0.08) (0.46) (0.37) - - (0.01)
- ---------------------------------------------------------------------------------
Total Distributions (1.57) (2.03) (1.79) (1.15) (1.18) (1.17)
- ---------------------------------------------------------------------------------
Net Asset Value, End of
Year $ 12.25 $ 14.63 $ 14.18 $ 14.85 $ 13.40 $ 14.44
- ---------------------------------------------------------------------------------
Per Share Market Value,
End of Year $ 10.75 $ 15.00 $ 14.31 $ 13.81 $ 11.88 $ 12.94
Total Investment Return
(based on Market Value) (19.80%) 17.17% 15.78% 25.96% 0.87% 18.80%
Ratios and Supplemental
Data:
Net assets, end of year
(000 omitted) $123,683 $113,181 $109,466 $72,752 $65,652 $70,740
Ratio of expenses to
average net assets 1.19% 1.17% 1.00% 0.97% 0.97% 0.96%
Ratio of net investment
income to average net
assets 7.31% 6.76% 7.56% 8.05% 8.49% 8.04%
Portfolio Turnover 33.64% 43.72% 97.63% 15.07% 28.85% 44.46%
</TABLE>
The accompanying notes are an integral part of the financial statements.
25
<PAGE>
Notes to Financial Statements
Note A--Summary of Accounting Policies
Lincoln National Income Fund, Inc. (the "Fund"), is registered under the
Investment Company Act of 1940, as amended, as a closed-end, diversified
management investment company, incorporated under the laws of Maryland. Fund
shares are listed on the New York Stock Exchange under the symbol LND.
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Investments
Cost represents original cost except in those cases where there is original-
issue discount as defined by the Internal Revenue Service, and in those cases
the cost figure shown is amortized cost. Original-issue discount is being
amortized over the period to the next expected call date.
Investments in securities traded on a national exchange are valued at their
last reported sale price on the date of valuation. 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 mean price. Securities which are
restricted in reliance with SEC Rule 144A, are valued at a composite price as
determined by a pricing source. If a composite price from a pricing source is
not available, values are based on the last reported mean price on the date of
valuation from the issuance's underwriter or independent broker. Money Market
securities having less than 60 days to maturity are valued at amortized cost,
which approximates market value.
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 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.
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. As of December 31, 1998, the Fund held
$31,124,425 of fair valued securities, representing 23.2% of the Fund.
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.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of increases and decreases in net assets from operations
during the reporting period. Actual results could differ from those estimates.
26
<PAGE>
Notes to Financial Statements (continued)
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.
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 following is a list of private placements securities with initial purchase
date and cost amount:
27
<PAGE>
Private Placements
<TABLE>
<CAPTION>
Private Placement Securities-- Date of Par Market or
Debt Purchase Amount Cost Fair Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Anglo Irish Bank
9.10%, 9/30/06 9/30/1994 $1,000,000 $1,000,000 $1,136,800
Avianca Airline Ticket Receivable
Trust
8.75%, 12/24/05 12/24/1997 500,000 500,000 519,000
Banco Nacional de Mexico
7.57%, 1/1/01 11/5/1996 500,000 499,982 504,750
BEA
0.00%, 6/15/10 4/21/1998 1,000,000 963,239 1,042,300
Behr Process Floating Senior Note
7.31%, 3/31/04 7/15/1997 116,814 116,814 116,814
7.56%, 3/31/05 7/15/1997 77,876 77,876 77,876
BSI Holdings
10.25%, 9/30/05 1/23/1998 330,000 330,000 330,000
Cambuhy Export Trust
8.12%, 7/5/01 6/11/1996 284,021 284,021 290,781
Carramerica Realty 144A
6.63%, 3/1/05 2/18/1998 400,000 397,956 388,500
Cemex 144A
10.00%, 11/5/99 12/28/1994 250,000 222,500 253,125
Centennial Resources
13.00%, 10/31/03 8/29/1996 500,000 500,000 -
Coca-Cola Femsa SA DE 144A
9.40%, 8/15/04 8/5/1994 1,000,000 1,000,000 1,076,200
Dairy Farmers of America
Preferred Capital Trust
7.38%, 10/2/12 10/2/1998 500,000 500,000 516,450
Deloitte & Touche LLP
7.41%, 10/1/11 9/25/1996 1,000,000 1,000,000 1,065,100
DLJ Mortgage Acceptance
Corporation
Series 1995-QT4 Class A
8.18%, 6/26/25 1/25/1996 907,485 921,665 245,021
Dow Chemical
17.25%, 1/2/03 3/25/1992 1,396,983 1,396,983 1,720,524
Earle Palmer Brown
14.00%, 12/16/04 12/31/1998 500,000 389,162 389,240
Fibermark
9.38%, 10/15/06 1/17/1997 250,000 256,875 253,125
First Hawaiian Bank 144A
6.93%, 12/1/03 5/28/1997 500,000 488,050 531,250
Fort Wayne Capital Trust 144A
9.85%, 4/15/27 4/14/1997 1,000,000 1,000,000 1,233,800
Goldman Sachs Group 144A
7.20%, 3/1/07 2/26/1997 500,000 499,750 528,125
Gruma SA DE CV 144A
7.63%, 10/15/07 10/2/1997 250,000 249,580 223,125
</TABLE>
28
<PAGE>
Private Placements (continued)
<TABLE>
<CAPTION>
Private Placement Securities-- Date of Par Market or
Debt (continued) Purchase Amount Cost Fair Value
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Guangdong International Trust &
Investment 144A
8.75%, 10/24/16 10/17/1996 $ 500,000 $ 498,600 $ 313,750
Houston Lighting & Power
9.80%, 2/15/99 2/17/1989 1,500,000 1,467,165 1,508,280
Interbank/AKK Trust
9.00%, 2/28/01 7/8/1997 500,000 485,930 499,050
Louis Dreyfus
8.43%, 07/15/01 7/20/1994 1,000,000 1,000,000 1,040,600
Merrill Lynch CLO 98 Pilgrim 2
144A
6.62%, 9/23/09 4/14/1998 1,000,000 1,000,000 970,700
Murray's Discount Auto Stores
11.00%, 9/30/03 10/2/1995 500,000 478,000 20,000
Mutual Fund Fee Trust IV
7.99%, 1/31/05 4/21/1997 686,626 686,626 701,731
NAL Auto Trust
7.30%, 12/15/00 9/26/1996 121,372 121,296 121,448
New Boston Garden
8.45%, 9/22/15 9/22/1995 934,073 934,073 1,031,590
PM Holding
13.50%, 10/30/04 10/31/1998 500,000 483,000 483,000
Progress Cap Holdings 144A
6.88%, 8/1/01 8/21/1996 1,000,000 1,000,000 1,036,250
Refco Group
8.21%, 5/16/02 5/8/1995 800,000 800,000 825,360
Scotia Pacific 144A
7.11%, 1/20/14 7/9/1998 500,000 500,000 466,550
Soc Quimica Y Minera De 144A
7.70%, 9/15/06 3/16/1998 1,000,000 1,022,370 1,006,250
Spectrascan
11.25%, 6/30/06 7/12/1996 500,000 490,000 500,000
Stackpole Magnetic Systems
13.50%, 10/15/05 9/1/1995 380,000 351,500 380,000
Steel Technologies
8.52%, 3/1/05 2/6/1995 500,000 523,100 523,100
Suburban Propane L.P.
7.54%, 6/30/11 3/7/1996 1,000,000 1,000,000 1,044,000
Taegu Metropolitan City
8.13%, 03/05/99 3/5/1998 1,000,000 995,918 997,500
Turkiye Vakiflar Bankasi T.A.O.
7.79%, 12/22/00 12/22/1997 372,011 372,011 375,954
Union Acceptance
8.53%, 8/1/02 6/23/1997 800,000 812,728 749,000
United States Playing Card
Company
12.00%, 11/18/04 11/18/1994 500,000 470,000 500,000
</TABLE>
29
<PAGE>
Private Placements (continued)
<TABLE>
<CAPTION>
Private Placement Date of Par Market or
Securities--Debt (continued) Purchase Amount Cost Fair Value
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Wells Fargo Capital 144A
8.13%, 12/1/26 12/3/1996 $ 500,000 $ 521,000 $ 563,125
West Fraser Mills
8.44%, 6/30/04 4/15/1994 1,000,000 1,000,000 1,033,500
----------- -----------
Total Private Placement Debt $29,607,769 $29,132,644
----------- -----------
<CAPTION>
Private Placement Number of
Securities--Equities Shares
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Bicycle Holdings 11/18/1994 8 30,000 146,371
Centennial Coal 8/29/1996 41 - -
Earle Palmer Brown Class A 12/31/1998 15 3,280 3,280
Earle Palmer Brown Class B 12/31/1998 492 107,587 107,587
Global Crossing 6/30/1997 19,800 - 893,475
Huron Technology 2/20/1995 6,200 128,334 226,540
Murray's Discount Auto Stores 10/2/1995 25 22,000 -
PSC 7/12/1996 16,250 10,000 33,313
Stackpole Magnetic Class B 9/1/1995 120,000 120,000 120,000
Stackpole Magnetic Systems 9/1/1995 54,582 28,500 -
WPM Holdings 10/30/1998 110 17,000 17,215
----------- -----------
Total Private Placement Equity $ 466,701 $ 1,547,781
----------- -----------
</TABLE>
30
<PAGE>
Notes to Financial Statements (continued)
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 $29,938,261
and $29,013,868 respectively, for the year ended December 31, 1998.
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 1.50% 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. In addition, Delaware Service Company, which is an affiliate of the
Advisor, provides accounting and administrative services for the fund and is
paid directly by the advisor.
Note D--Income Taxes
The cost of investments for federal income tax purposes is the same as for book
purposes. At December 31, 1998, the aggregate gross unrealized appreciation of
investments was $8,160,774 and the aggregate gross unrealized depreciation was
$3,348,699.
Note E--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 shares. 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 Funds common
stock upon non-compliance with certain provisions of the Articles
Supplementary, purchase of futures or options, issuance of debt, short sale of
securities, mergers, changing the fund's pricing service and investing in
reverse repurchase agreements, and requires the Fund to meet certain asset
maintenance tests. The shares of the VTP may be redeemed at the option of the
Fund in accordance with the terms of the Articles Supplementary. The mandatory
redemption provisions of the Articles Supplementary require the Fund under
certain conditions to redeem shares of the VTP if certain asset maintenance
tests are not maintained or if credit rating provisions are not met.
During the year ended December 31, 1998 dividend rates have ranged from 4.80%
to 5.50% and the average dividend rate was 5.36%.
Note F--Market and Credit Risk
The Fund may invest in securities that have high market or credit risk. These
securities may be accompanied by a higher degree of susceptibility to adverse
economic and competitive industry conditions.
31
<PAGE>
Report of Independent Accountants
To the Shareholders and Board of Directors
of Lincoln National Income Fund, Inc.
In our opinion, the accompanying statement of net assets of Lincoln National
Income Fund, Inc. (the "Fund"), and the related statements of operations, of
changes in net assets, and of cash flows, and the financial highlights present
fairly, in all material respects, the financial position of Lincoln National
Income Fund, Inc. at December 31, 1998, the results of its operations for the
year then ended, the changes in its net assets, and its cash flows, for each
of the two years in the period then ended, and the financial highlights for
each of the periods presented, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of
the Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 19, 1999
32
<PAGE>
Directors & Officers of the Fund
<TABLE>
<CAPTION>
Directors Descriptions of Occupations and Responsibilities
<C> <S>
Thomas L. Bindley President, Bindley Capital Corporation; Director, Midas, Inc.; Director, Lincoln National
Convertible Securities Fund, Inc., and Junior Achievement of Chicago member, Board of Vistors,
McDonough School of Business at Georgetown University
Richard M. Burridge Chairman, The Burridge Group, Inc.; Director, Cincinnati Financial Corporation; Lincoln National
Convertible Securities Fund Inc., Health Services Corporation of Illinois (Blue Cross of Illinois),
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, Bingham and Women's Hospital (Harvard Medical School teaching
affiliate); Corporate Director of Partners Health System; Director, Lincoln National Convertible
Securities Fund, Inc.
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 Investment Advisors, Inc.
Daniel R. Toll Director, Kemper National Insurance Company, Lincoln National Convertible Securities Fund, Inc., &
Mallinckrodt, Inc.
<CAPTION>
Officers
<C> <S>
H. Thomas McMeekin President
David A. Berry Vice President
David C. Fischer Vice President
David G. Humes Vice President, Treasurer & Controller
Cynthia A. Rose Secretary
</TABLE>
33
<PAGE>
Corporate Information
Dividend Disbursing Agent, Transfer Agent and Reinvestment Plan Agent
Equiserve--First Chicago Division 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
Administrator
Delaware Service Company 1818 Market Street Philadelphia, PA 19103
Independent Accountants
PricewaterhouseCoopers LLP 2400 Eleven Penn Center Philadelphia, PA 19103
Stock Exchange
The Fund's stock is traded on the New York Stock Exchange (NYSE) under the
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 Equiserve, the Plan agent. You will receive a
statement each time shares are distributed by the Fund or purchased for you.
There is no direct charge for Plan participation. The administrative costs of
the Plan are borne by the Fund.
If your dividends and other distributions are reinvested, they will be
subject to capital gains and income taxes as if they were paid to you in cash.
You may terminate your participation in the Plan at any time by giving
written notice to the Plan agent.
For additional information on the Plan, please write Equiserve, P.O. Box
2500, Jersey City, NJ 07303-2500, or call 1-800-317-4445.
34
<PAGE>
Lincoln Investment Management, Inc.
200 east Berry Street
Fort Wayne, Indiana 46802
Lincoln Investment Management, Inc. is the
investment manager for the Lincoln National
Income Fund, Inc.
Form 12728-1 2/99
Lincoln National Income Fund, Inc.
1998 Annual Report
