<PAGE>
LINCOLN NATIONAL INCOME FUND, INC.
1999 Semi-Annual Report
LINCOLN INVESTMENT MANAGEMENT, INC.
<PAGE>
This Page Intentionally Left Blank
<PAGE>
TABLE OF CONTENTS
Page
- -----------------------------------------------------------------
Manager Profile 1
Investment Policies & Objectives 1
President's Letter 2
Portfolio Performance 4
Total Fund Investments 4
Dividend History 4
Common Stock Market Prices
& Net Asset Value History 5
Shareholder Meeting Results 6
FINANCIAL STATEMENTS:
Statement of Net Assets 7
Statements of Operations 17
Statements of Changes in Net Assets 18
Statements of Cash Flows 19
Financial Highlights 20
Notes to Financial Statements 22
Directors & Officers of the Fund 28
Corporate Information 29
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
$38 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 18 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 Certfied 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 distibuted through regular dividends to shareholders.
Net realized gains, if any, will be distributed annually in cash, provided the
Fund does not have a capital loss carryforward.
The investment portfolio will have a significant component of private
placement investments in fixed-income securities. Some of these may have equity
participation rights either through warrants or convertible features. The Fund
also will invest in publicly traded fixed-income securities and high-yield
equity securities.
The Fund may borrow to purchase securities in an amount not exceeding 20
percent of net assets. The Fund also may invest in non-dollar denominated
securities, however, as of June 30, 1999, has chosen not to do so.
1
<PAGE>
PRESIDENT'S LETTER
Dear Shareholder:
With a continuation of interest rate increases in the second quarter as in the
first quarter, 1999 remains a difficult year for bonds. Every broad bond index
has experienced negative total returns. Lincoln National Income Fund has had a
net asset value (NAV) total return of -2.43%, slightly worse than the Lehman
Corporate Index return of -2.26%. Bond prices have gone down in 1999 as the U.S.
economy has remained robust, with bond market participants anticipating tighter
Federal Reserve Board (Fed) monetary policy to slow economic growth. The Fed did
indeed tighten policy in late June with a 0.25% increase in the Fed Funds rate
to 5%. However, somewhat surprisingly, the Fed changed their policy stance from
a tightening bias to a neutral bias. Notwithstanding this change in policy
stance, the bond market remains very divided on the future course of Fed policy
and interest rate moves.
Although outperforming Treasuries in the first quarter, corporate bonds suffered
due to heavy supply and buyer apathy in May and June, and now have about equal
performance with Treasuries for year-to-date 1999. Credit conditions in 1999,
however, are much tamer than tumultuous 1998.
We continue to trim our holdings of Global Crossing common stock (ticker: GBLX).
We obtained the stock from warrants as part of our mezzanine financing with
Global Crossing in 1997. The company made a tender offer in June, with 2,418 of
our 13,340 shares tendered at a price of $62.75 per share. We felt this was an
incredible value since the stock has been trading in the mid $40's lately. We
would have tendered more at that price if we could, but that is all the company
would take.
We believe the bond market has been sufficiently penalized for inflation fears,
but expect the Fed will need to make one more tightening move this year. This
could lead to a calmer period for fixed-income securities and possibly allow a
gradual decline in interest rates at the longer end of the yield curve.
We expect the credit environment to be relatively benign, as we see no recession
likely over the next twelve months. However, some credit spread volatility is
anticipated as we forecast some Y2K jitters as the year wears on. Nonetheless,
we expect corporate bonds and other "spread products" to approximately "collect
coupon" vis-a-vis Treasuries. We deem the current positioning of the Fund to be
an appropriate risk posture given our forecasted environment.
Sincerely,
/s/ H. Thomas McMeekin
- ----------------------
H. Thomas McMeekin
President
July 26, 1999
2
<PAGE>
ASSET CLASSIFICATION - (UNAUDITED)
As of June 30, 1999
(DOLLARS IN
MILLIONS)
- --------------------------------------------------------------------------------
Public Debt 69.87% $91.6
Private Placements 20.67% $27.1
Government/Gov't Agency 4.27% $5.6
Short-Term Investments 1.98% $2.6
Other Assets 1.76% $2.3
Equities/Partnerships 1.45% $1.9
$131.1
DISTRIBUTION BY QUALITY
As of June 30, 1999
(DOLLARS IN
MILLIONS)
- --------------------------------------------------------------------------------
AAA 3.23% $4.2
AA 3.13% $4.1
A 20.30% $26.6
BBB 33.20% $43.5
BB 7.23% $9.5
B 2.49% $3.3
Not Rated 4.56% $6.0
Private Placements 20.67% $27.1
Short-Term Investments 1.98% $2.6
Equities 1.45% $1.9
Other Assets 1.76% $2.3
3
<PAGE>
PORTFOLIO PERFORMANCE (UNAUDITED)
As of June 30, 1999
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>
YTD 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Lincoln National Income Fund (2.43%) 1.46% 25.68% 56.86% 138.71%
Lehman Corporate Bond Index (2.26%) 2.70% 23.14% 45.32% 118.38%
Standard & Poor's 500* 11.67% 18.64% 104.69% 208.98% 331.70%
* Dividends Reinvested
</TABLE>
TOTAL FUND INVESTMENTS
At Market or Fair Values As of June 30
<TABLE>
<CAPTION>
1999 1998
(000) % OF TOTAL (000) % OF TOTAL
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Public Debt Securities $97,198 74% $103,080 76%
Private Placement Securities 26,603 20% 22,906 17%
Common Stocks & Warrants 467 1% 24 0%
Preferred Stocks 1,539 1% 2,666 2%
Short-Term Investments 2,600 2% 4,095 3%
Partnerships 444 0% 394 0%
Other Assets 2,279 2% 2,166 2%
- --------------------------------------------------------------------------------------------------------
Total Net Assets $131,130 100% $135,331 100%
</TABLE>
DIVIDEND HISTORY
The Fund in its lifetime has distributed common dividends of $30.41 per share
which represents 243.3 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 retentions 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.
ANNUAL ANNUAL
YEAR DIVIDEND YEAR DIVIDEND
- --------------------------------------------------------------------------------
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 1999 0.24*
* Dividends paid as of June 30
4
<PAGE>
COMMON STOCK MARKET PRICES AND NET ASSET VALUE HISTORY
(Unaudited)
1999
<TABLE>
<CAPTION>
MARKET PRICES AND VOLUMES NET ASSET VALUE
HIGH LOW CLOSE VOLUME HIGH LOW CLOSE
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1st Quarter $14.125 $13.063 $13.438 280,700 $13.43 $12.99 $13.24
2nd Quarter 13.500 11.500 11.750 354,081 13.39 12.70 12.83
</TABLE>
1998
<TABLE>
<CAPTION>
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
</TABLE>
1997
<TABLE>
<CAPTION>
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
</TABLE>
1996
<TABLE>
<CAPTION>
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 13.77 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.
5
<PAGE>
SHAREHOLDER MEETING RESULTS (UNAUDITED)
The Fund had its annual Shareholder meeting on April 23, 1999. 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 5,639,679
shares of Common Stock (80.194% of the total outstanding shares) and 40,000 of
Variable Term Preferred (VTP) stock shares (100.00% of the total outstanding
shares) were voted. The following table highlights the results of the vote.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF NUMBER OF
SHARES VOTED SHARES VOTED SHARES
FOR AGAINST ABSTAINED
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PROPOSAL I
Election of Directors--Common Stock
T. Bindley 5,614,638 65,041 -
A. Cepeda 5,613,622 66,057 -
R. Deshaies 5,623,891 55,788 -
C. Freund 5,611,073 68,606 -
T. McMeekin 5,621,689 57,990 -
J. Nick* 5,592,534 87,145 -
D. Toll 5,608,768 70,911 -
Election of Directors--VTP
T. Bindley 40,000 - -
R. Burridge 40,000 - -
A. Cepeda 40,000 - -
R. Deshaies 40,000 - -
C. Freund 40,000 - -
T. Mathers 40,000 - -
T. McMeekin 40,000 - -
J. Nick* 40,000 - -
D. Toll 40,000 - -
PROPOSAL II
Ratification of the Selection of Auditor (PricewaterhouseCoopers LLP) 5,562,546 30,072 47,061
</TABLE>
*resigned as of June 4, 1999
YEAR 2000 (UNAUDITED)
Like any 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.
6
<PAGE>
LINCOLN NATIONAL INCOME FUND, INC.
STATEMENT OF NET ASSETS
AS OF JUNE 30, 1999
INVESTMENTS--NOTES A & B (UNAUDITED) PAR MARKET OR
PUBLIC DEBT SECURITIES (74.2%) AMOUNT FAIR VALUE
- --------------------------------------------------------------------------------
AEROSPACE & DEFENSE (1.6%)
Boeing Capital
9.25%, 4/1/02 $1,000,000 $1,071,250
Raytheon
6.55%, 3/15/10 1,000,000 966,250
---------
2,037,500
---------
AIRLINES (4.0%)
American Airline
9.83%, 1/1/02 730,110 776,932
AMR
10.00%, 4/15/21 1,000,000 1,211,250
Delta Air Lines
9.90%, 6/16/02 1,473,000 1,573,187
United Air Lines
9.35%, 4/7/16 1,500,000 1,649,917
---------
5,211,286
---------
BANKING (7.1%)
Banc One
9.88%, 3/1/09 1,000,000 1,200,000
BankAmerica
10.00%, 2/1/03 1,000,000 1,107,500
First USA Bank Wilmington Delaware
7.65%, 8/1/03 1,000,000 1,040,000
Hong Kong & Shanghai Bank
5.38%, 12/29/49 500,000 377,175
Household International
6.85%, 9/10/04 1,610,000 1,620,063
Lloyds Bank PLC
5.31%, 6/29/49 1,000,000 856,250
Mellon Capital I Notes
7.72%, 12/1/26 400,000 391,000
NationsBank
8.13%, 6/15/02 1,000,000 1,041,250
Standard Charter PLC
5.50%, 11/29/49 1,000,000 660,100
Wells Fargo
6.13%, 11/1/03 1,000,000 981,250
---------
9,274,588
---------
BUILDING & MATERIALS (0.2%)
Toll Brothers
8.75%, 11/15/06 250,000 253,125
---------
253,125
---------
CABLE, MEDIA & PUBLISHING (4.9%)
K-III Communications
8.50%, 2/1/06 250,000 257,188
News America Holdings
9.25%, 2/1/13 1,000,000 1,141,250
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
STATEMENT OF NET ASSETS (continued)
PAR MARKET OR
PUBLIC DEBT SECURITIES (CONTINUED) AMOUNT FAIR VALUE
- --------------------------------------------------------------------------------
CABLE, MEDIA & PUBLISHING (continued)
Tele-Communications
9.25%, 1/15/23 $2,000,000 $2,207,500
Time Warner
9.13%, 1/15/13 1,500,000 1,740,000
Walt Disney
8.88%, 12/15/00 1,000,000 1,038,750
---------
6,384,688
---------
CHEMICALS ( 0.2%)
ISP Holdings
9.00%, 10/15/03 250,000 251,250
---------
251,250
---------
ELECTRONICS & ELECTRICAL EQUIPMENT (0.2%)
Ametek
7.20%, 7/15/08 250,000 231,875
---------
231,875
---------
ENERGY (4.6%)
Ashland
6.86%, 5/1/09 500,000 488,750
Coastal
9.75%, 8/1/03 1,000,000 1,110,000
Enron
9.50%, 6/15/01 1,000,000 1,056,250
Gulf Canada Resources
9.63%, 7/1/05 250,000 256,875
Oryx Energy
10.00%, 4/1/01 1,000,000 1,055,000
Pennzoil
10.13%, 11/15/09 1,000,000 1,015,000
Sun
9.38%, 6/1/16 1,000,000 1,105,000
---------
6,086,875
---------
FINANCE (9.4%)
Avalon Bay Communities
6.80%, 7/15/06 500,000 480,625
Chrysler Finance
9.50%, 12/15/99 1,000,000 1,018,352
Dow Capital
9.00%, 5/15/10 1,000,000 1,123,750
Duke Capital
6.25%, 7/15/05 1,000,000 973,750
Fleet/Norstar Financial Group
8.63%, 1/15/07 1,000,000 1,086,250
General Electric Capital
8.75%, 5/21/07 1,000,000 1,125,000
General Motors Acceptance
8.88%, 6/1/10 1,500,000 1,695,000
Goldman Sachs Group
7.20%, 3/1/07 500,000 503,125
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
STATEMENT OF NET ASSETS (continued)
PAR MARKET OR
PUBLIC DEBT SECURITIES (CONTINUED) AMOUNT FAIR VALUE
- --------------------------------------------------------------------------------
FINANCE (continued)
Greentree Financial
8.65%, 1/15/20 $1,000,000 $1,018,551
Lehman Brothers Holdings
7.38%, 5/15/07 500,000 502,500
Merrill Lynch Mortgage Investors
10.00%, 3/15/10 350,045 373,651
Mid-America Finance
6.38%, 9/1/05 500,000 475,781
Selkirk Cogen Funding
8.65%, 12/26/07 963,405 1,010,232
SMA Finance
6.40%, 11/16/06 1,000,000 977,813
----------
12,364,380
----------
FOOD, BEVERAGE & TOBACCO (1.5%)
Chiquita Brands International
9.63%, 1/15/04 250,000 250,000
Conagra
7.40%, 9/15/04 1,500,000 1,526,250
Marsh Supermarket
8.88%, 8/1/07 250,000 255,000
----------
2,031,250
----------
FORIEGN GOVERNMENTS (1.2%)
Government of Venezuela
9.25%, 9/15/27 500,000 322,500
Quebec Province
11.00%, 6/15/15 1,000,000 1,078,750
Republic of Colombia
7.63%, 2/15/07 300,000 226,500
----------
1,627,750
----------
GOVERNMENT & GOVERNMENT AGENCY (4.2%)
Federal Home Loan Mortgage
7.80%, 9/15/20 529,759 529,759
7.00%, 9/17/31 874,867 864,005
Federal National Mortgage Association
9.00%, 3/1/24 471,491 442,400
6.50%, 12/1/27 1,681,374 1,627,255
Government National Mortgage Association
9.00%, 8/15/21 574,878 616,197
9.00%, 3/15/23 1,383,620 1,478,743
----------
5,558,359
----------
HEALTHCARE & PHARMACEUTICALS (0.2%)
Beckman Instruments
7.10%, 3/4/03 250,000 247,187
----------
247,187
----------
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
STATEMENT OF NET ASSETS (continued)
PAR MARKET OR
PUBLIC DEBT SECURITIES (CONTINUED) AMOUNT FAIR VALUE
- --------------------------------------------------------------------------------
INDUSTRIAL MACHINERY (0.9%)
AGCO
8.50%, 3/15/06 $ 250,000 $ 236,250
Caterpillar Tractor
6.00%, 5/1/07 1,000,000 951,250
----------
1,187,500
----------
INSURANCE (2.0%)
Allstate
7.50%, 6/15/13 1,000,000 1,041,250
Conseco
7.88%, 12/15/00 500,000 507,641
Nationwide
9.88%, 2/15/25 1,000,000 1,132,500
----------
2,681,391
----------
LEISURE, LODGING & ENTERTAINMENT (1.2%)
MGM Grand
6.88%, 2/6/08 1,000,000 892,500
Speedway Motorsports
8.50%, 8/15/07 250,000 257,188
Starwood Hotels & Resorts
6.75%, 11/15/03 500,000 478,750
----------
1,628,438
----------
METALS & MINING (3.2%)
Cyprus Amax Minerals
7.38%, 5/15/07 500,000 468,750
EES Coke Battery
7.13%, 4/15/02 316,000 317,185
Inco
9.60%, 6/15/22 1,000,000 891,250
Noranda
8.00%, 6/1/03 1,500,000 1,520,625
Pohang Iron & Steel
7.13%, 11/1/06 1,000,000 947,500
----------
4,145,310
----------
MISCELLANEOUS (2.3%)
Corp Andina
7.75%, 3/1/04 1,000,000 1,012,500
Pemex 144A
8.45%, 2/15/07 1,000,000 992,500
Service International
6.00%, 12/15/05 1,000,000 922,500
----------
2,927,500
----------
MORTGAGE BACKED (1.9%)
Citicorp Mortgage Securities
Series 1991-6 Class A
8.75%, 5/25/21 500,000 507,969
Commercial Mortgage Asset Trust 1999-C1 A1
6.25%, 8/17/06 987,621 965,091
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
STATEMENT OF NET ASSETS (continued)
PAR MARKET OR
PUBLIC DEBT SECURITIES (CONTINUED) AMOUNT FAIR VALUE
- --------------------------------------------------------------------------------
MORTGAGE BACKED (Continued)
Countrywide Home Loans 1999-1
6.50%, 3/25/29 $1,000,000 $ 940,938
----------
2,413,998
----------
PACKAGING & CONTAINERS (0.2%)
Container Corporation of America
11.25%, 5/1/04 250,000 263,750
----------
263,750
----------
PAPER & FOREST PRODUCTS (1.2%)
Georgia-Pacific
9.50%, 5/15/22 1,500,000 1,610,625
----------
1,610,625
----------
REAL ESTATE (3.1%)
Comp De DeSarollo
10.19%, 5/31/11 500,000 425,000
Duke Realty
7.05%, 3/1/06 500,000 480,625
ERP Operating
6.63%, 4/13/05 400,000 373,000
Highwoods Realty
7.00%, 12/1/06 600,000 564,000
7.50%, 4/15/18 400,000 354,500
Irvine Apartment Communities
7.00%, 10/1/07 1,000,000 867,500
Liberty Property
7.10%, 8/15/04 1,000,000 990,000
----------
4,054,625
----------
RETAIL (0.9%)
Sears Roebuck
9.05%, 2/6/12 1,000,000 1,157,500
----------
1,157,500
----------
TELECOMMUNICATIONS (3.0%)
MCI Communications
7.50%, 8/20/04 1,000,000 1,031,250
Nynex
9.55%, 5/1/10 1,388,122 1,542,551
Rogers Cantel
9.38%, 6/1/08 250,000 263,125
Worldcom
8.88%, 1/15/06 1,000,000 1,065,000
----------
3,901,926
----------
TEXTILES, APPAREL & FURNITURE (1.0%)
Interface
7.30%, 4/1/08 250,000 235,625
Whirlpool
9.00%, 3/1/03 1,000,000 1,072,500
----------
1,308,125
----------
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
STATEMENT OF NET ASSETS (continued)
PAR MARKET OR
PUBLIC DEBT SECURITIES (CONTINUED) AMOUNT FAIR VALUE
- --------------------------------------------------------------------------------
TRANSPORTATION & SHIPPING (2.1%)
Federal Express
9.88%, 4/1/02 $1,250,000 $1,348,438
NWA Trust
10.23%, 6/21/14 444,627 488,534
US Freightways
6.50%, 5/1/09 1,000,000 946,250
----------
2,783,222
----------
UTILITIES (11.9%)
Avon Energy Partners Holdings
7.05%, 12/11/07 1,000,000 991,250
BVPS II Funding
8.33%, 12/1/07 1,490,000 1,542,150
Cleveland Electric
7.63%, 8/1/02 1,000,000 1,020,000
Commonwealth Edison
8.63%, 2/1/22 1,000,000 1,033,750
Connecticut Light & Power
7.25%, 7/1/99 748,000 748,000
Consumers Energy
6.50%, 6/15/05 500,000 496,875
Duquesne Light
8.70%, 6/1/16 985,000 1,062,569
Empresa Nacional Electric
7.75%, 7/15/08 450,000 424,125
Hyder
6.88%, 12/15/07 1,000,000 971,250
New England Telephone & Telegraph
9.00%, 8/1/31 1,000,000 1,078,750
Niagara Mohawk Power
9.25%, 10/1/01 500,000 527,500
PacifiCorp
7.00%, 7/15/09 500,000 502,500
8.29%, 12/30/11 1,000,000 1,105,332
Philadelphia Electric
7.13%, 9/1/02 1,500,000 1,524,375
PP&L Resources
8.50%, 5/1/22 500,000 518,125
System Energy Resources
7.80%, 8/1/00 1,000,000 1,007,500
Texas Utilities
7.38%, 8/1/01 1,000,000 1,020,000
----------
15,574,051
----------
TOTAL PUBLIC DEBT SECURITIES (cost of $97,786,117) 97,198,074
----------
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
STATEMENT OF NET ASSETS (continued)
PAR MARKET OR
PRIVATE PLACEMENT SECURITIES--DEBT (19.9%) AMOUNT FAIR VALUE
- --------------------------------------------------------------------------------
ACCOUNTING FIRMS (0.8%)
Deloitte & Touche LLP
7.41%, 10/1/11 $1,000,000 $ 992,000
----------
992,000
----------
AIRLINES (1.5%)
Northwest Airlines
7.95%, 3/1/15 1,000,000 1,000,000
United Air Lines
8.70%, 10/7/08 858,458 912,614
----------
1,912,614
----------
BANKING (2.3%)
Anglo Irish Bank Corporation
9.10%, 9/30/06 1,000,000 1,070,600
Banco Nacional de Mexico
7.57%, 1/1/01 401,963 402,124
First Hawaiian Bank 144A
6.93%, 12/1/03 500,000 504,375
Interbank/AKK Trust
9.00%, 2/28/01 500,000 486,200
Wells Fargo Capital 144A
8.13%, 12/1/26 500,000 503,125
----------
2,966,424
----------
BUILDING & MATERIALS (0.2%)
Cemex 144A
10.00%, 11/5/99 250,000 252,500
----------
252,500
----------
CHEMICALS (1.2%)
Dow Chemical
17.25%, 1/2/03 1,287,998 1,529,755
----------
1,529,755
----------
CONSUMER PRODUCTS (0.1%)
Behr Process
7.31%, 3/31/04 116,514 116,514
7.56%, 3/31/05 77,676 77,676
----------
194,190
----------
ELECTRONICS & ELECTRICAL EQUIPMENT (0.4%)
Spectrascan
11.25%, 6/30/06 500,000 500,000
----------
500,000
----------
FINANCE (6.0%)
Avianca Airline Ticket Receivable Trust
8.75%, 12/24/05 500,000 496,050
DLJ Mortgage Acceptance Corporation
Series 1995-QT4 Class A
8.18%, 6/26/25 928,454 242,559
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
STATEMENT OF NET ASSETS (continued)
PAR MARKET OR
PRIVATE PLACEMENT SECURITIES--DEBT (continued) AMOUNT FAIR VALUE
- --------------------------------------------------------------------------------
FINANCE (CONTINUED)
Fort Wayne Capital Trust 144A
9.85%, 4/15/27 $1,000,000 $1,135,300
Guangdong International Trust & Investment 144A+
8.75%, 10/24/16 500,000 50,000
Louis Dreyfus Corporation
8.43%, 7/15/01 1,000,000 1,017,800
Merrill Lynch CLO 98 Pilgrim 2
6.62%, 9/23/09 1,000,000 1,055,000
Mutual Fund Fee Trust IV
7.99%, 1/31/05 561,129 558,660
NAL Auto Trust
7.30%, 12/15/00 76,346 76,059
PM Holding
13.50%, 10/30/04 500,000 500,000
Progress Cap Holdings 144A
6.88%, 8/1/01 1,000,000 1,007,500
Refco Group
8.21%, 5/16/02 600,000 610,020
Scotia Pacific 144A
7.11%, 1/20/14 500,000 399,800
Union Acceptance Corporation
8.53%, 8/1/02 800,000 741,000
----------
7,889,748
----------
FOOD, BEVERAGE & TOBACCO (1.5%)
Cambuhy Export Trust
8.12%, 7/5/01 249,953 248,303
Coca-Cola Femsa SA DE 144A
9.40%, 8/15/04 1,000,000 976,600
Dairy Farmers of America Preferred Capital Trust
7.38%, 10/2/12 500,000 475,000
Gruma SA DE CV 144A
7.63%, 10/15/07 250,000 223,750
----------
1,923,653
----------
LEISURE, LODGING & ENTERTAINMENT (1.1%)
New Boston Garden Corporation
8.45%, 9/22/15 914,841 925,453
United States Playing Card Company
12.00%, 11/18/04 500,000 500,000
----------
1,425,453
----------
METALS & MINING (1.1%)
Centennial Resources+
13.00%, 10/31/03 500,000 -
Soc Quimica Y Minera De 144A
7.70%, 9/15/06 1,000,000 883,750
Steel Technologies
8.52%, 3/1/05 500,000 508,250
Worthington Precious Metals
13.50%, 10/30/04 6,270 6,270
----------
1,398,270
----------
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
STATEMENT OF NET ASSETS (continued)
PAR MARKET OR
PRIVATE PLACEMENT SECURITIES--DEBT (CONTINUED) AMOUNT FAIR VALUE
- --------------------------------------------------------------------------------
MISCELLANEOUS (1.7%)
BEA
0.00%, 6/15/10 $1,000,000 $ 961,100
BSI Holdings
10.25%, 9/30/05 299,697 299,697
Earle Palmer Brown
14.00%, 12/16/04 500,000 389,250
Stackpole Magnetic Systems
13.50%, 10/15/05 380,000 380,000
Turkiye Vakiflar Bankasi T.A.O.
7.79%, 12/22/00 262,860 264,648
-----------
2,294,695
-----------
NATURAL GAS (0.7%)
Suburban Propane L.P.
7.54%, 6/30/11 1,000,000 982,900
-----------
982,900
-----------
PAPER & FOREST PRODUCTS (1.0%)
Fibermark
9.38%, 10/15/06 250,000 254,687
West Fraser Mills
8.44%, 6/30/04 1,000,000 1,016,000
-----------
1,270,687
-----------
REAL ESTATE (0.3%)
Carramerica Realty 144A
6.63%, 3/1/05 400,000 374,000
-----------
374,000
-----------
TOTAL PRIVATE PLACEMENT DEBT (cost $27,260,548) $25,906,889
-----------
SHARE
PRIVATE PLACEMENT SECURITIES--EQUITIES (0.5%) AMOUNT
- --------------------------------------------------------------------------------
LEISURE, LODGING & ENTERTAINMENT (0.1%)
Bicycle Holdings 8 118,491
-----------
118,491
-----------
MISCELLANEOUS (0.5%)
Stackpole Magnetic Systems Class B 120,000 189,600
-----------
189,600
-----------
WARRANTS (0.3%)
Centennial Coal* 41 -
Earle Palmer Brown Class A* 16 3,407
Earle Palmer Brown Class B* 511 111,729
Huron Technology* 6,200 145,695
PSC* 16,250 23,563
Stackpole Magnetic Systems* 54,582 86,239
WPM Holdings* 110 17,215
-----------
387,848
-----------
TOTAL PRIVATE PLACEMENT EQUITIES (cost $444,700) 695,939
-----------
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
STATEMENT OF NET ASSETS (continued)
SHARE MARKET OR
COMMON STOCK (0.4%) AMOUNT FAIR VALUE
- --------------------------------------------------------------------------------
Global Crossing 10,922 $ 466,574
-----------
TOTAL COMMON STOCK (cost $0) 466,574
-----------
PREFERRED STOCKS (1.2%)
- --------------------------------------------------------------------------------
Finance (1.2%)
Salomon Financing Trust 120,000 523,750
Transcanada Capital 40,000 1,015,000
-----------
TOTAL PREFERRED STOCKS (cost $1,542,000) 1,538,750
-----------
PARTNERSHIPS (0.3%)
- --------------------------------------------------------------------------------
KBP Holdings* 1 300,000
KBSI Partnership* 1 144,000
MDAS Investors* 1 -
-----------
TOTAL PARTNERSHIPS (cost $443,622) 444,000
-----------
TOTAL LONG-TERM INVESTMENTS (cost $127,476,987) 126,250,226
-----------
PAR
SHORT TERM INVESTMENTS (1.9%) VALUE
- --------------------------------------------------------------------------------
Associates Corporation North America
5.80%, 7/1/99 $1,100,000 1,100,000
Marsh USA
5.15%, 7/8/99 1,500,000 1,500,000
------------
TOTAL SHORT TERM INVESTMENTS (cost $2,600,000) 2,600,000
------------
TOTAL MARKET VALUE OF SECURITIES (98.4%) (cost $130,076,987) 128,850,226
RECEIVABLES AND OTHER ASSETS NET OF LIABILITIES (1.6%) 2,279,872
------------
NET ASSETS (100.0%) $131,130,098
------------
NET ASSET VALUE PER SHARE OF COMMON STOCK OUTSTANDING
($131,130,098 LESS VARIABLE TERM PREFERRED STOCK AT
LIQUIDATION VALUE OF $40,000,000 DIVIDED BY 7,105,635
SHARES OF COMMON STOCK OUTSTANDING) $ 12.83
============
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 7,105,365 shares outstanding 7,105,635
Proceeds in excess of par value of shares issued 83,140,735
Undistributed realized gain on investments, net of taxes paid 584,540
Undistributed net investment income 1,525,949
Net unrealized depreciation of investments (1,226,761)
------------
TOTAL NET ASSETS $131,130,098
============
*Non-Income producing securities.
+Security is in default
The accompanying notes are an integral part of the financial statements.
16
<PAGE>
LINCOLN NATIONAL INCOME FUND, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
----------------------------
1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME:
Interest $5,011,893 $5,297,358
Dividends 67,500 121,251
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 5,079,393 5,418,609
EXPENSES:
Management fees 593,942 571,831
Variable term preferred stock fees 49,099 50,194
Directors fees 35,000 42,777
Professional fees 34,072 20,850
Stock Transfer & dividend disbursing fees 9,750 11,299
New York Stock Exchange fee 8,713 17,670
Printing and Postage 7,333 2,704
Postage and mailing fees 7,159 22,425
Custodian and registrar fees 4,400 5,585
Custody waiver (2,533) -
Other 1,892 14,783
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 748,827 760,118
NET INVESTMENT INCOME 4,330,566 4,658,491
- -------------------------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on:
Investment transactions 414,175 445,235
- --------------------------------------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on:
Investments (6,038,836) (348,511)
- --------------------------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (5,624,661) 96,724
- --------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $(1,294,095) $4,755,215
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
LINCOLN NATIONAL INCOME FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
--------------------------------
1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CHANGES FROM OPERATIONS:
Net investment income $4,330,566 $4,658,491
Net realized gain on investments 414,175 445,235
Net change in unrealized appreciation (depreciation) on investments (6,038,836) (348,511)
- -------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (1,294,095) 4,755,215
CHANGES FROM CAPITAL SHARE TRANSACTIONS:
Par value of shares issued under dividend reinvestment plan 73,066 129,660
Proceeds in excess of par value for shares issued under dividend reinvestment plan 902,311 1,631,720
- -------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL SHARE TRANSACTIONS 975,377 1,761,380
DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Common shareholders (1,698,722) (1,800,571)
Preferred shareholders (987,489) (1,117,164)
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS TO SHAREHOLDERS (2,686,211) (2,917,735)
TOTAL INCREASE (DECREASE) IN NET ASSETS (3,004,929) 3,598,860
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSETS AT BEGINNING OF PERIOD $134,135,027 $131,732,282
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSETS AT END OF PERIOD $131,130,098 $135,331,142
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
18
<PAGE>
LINCOLN NATIONAL INCOME FUND, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
--------------------------------
1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Interest Received $5,037,385 $5,270,274
Dividends Received 67,500 122,379
Operating Expenses Paid (836,070) (754,349)
Purchase of investments securities (7,409,368) (11,020,521)
Proceeds from sale of investment securities 6,580,167 12,812,715
Net proceeds (purchase) of short-term investments 676,417 (802,302)
- -------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,115,960 5,628,196
FINANCING ACTIVITIES:
Proceeds received from dividend reinvestment plan 975,377 1,761,380
Distributions paid to common and preferred shareholders (4,995,944) (7,630,308)
- -------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (4,020,567) (5,868,928)
- -------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH 95,393 (240,732)
- -------------------------------------------------------------------------------------------------------------------------------
CASH AT BEGINNING OF PERIOD 408,587 441,065
- -------------------------------------------------------------------------------------------------------------------------------
CASH AT END OF PERIOD $503,980 $200,333
RECONCILIATION OF INCREASE IN NET ASSETS
Resulting From Operations To Net Cash Provided By Operating Activities
Net increase (decrease) in net assets resulting from operations $(1,294,095) $4,755,215
RECONCILING ADJUSTMENTS:
Net realized and unrealized (gain) loss on investments 5,624,661 (96,724)
Net change of investment securities transactions (152,855) 989,892
Discount accretion on investment income receivable (61,316) (3,916)
Increase (Decrease) in accrued investment income receivable 86,807 (23,168)
Increase in accrued dividend receivable - 1,128
Increase (Decrease) in accrued expenses (87,242) 5,769
- -------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $4,115,960 $5,628,196
</TABLE>
The accompanying notes are an integral part of the financial statements.
19
<PAGE>
LINCOLN NATIONAL INCOME FUND, INC.
FINANCIAL HIGHLIGHTS.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30 YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
(SELECTED DATA FOR EACH COMMON STOCK (UNAUDITED)
OUTSTANDING THROUGHOUT THE PERIOD) 1999 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $13.39 $13.43 $13.47 $14.22 $12.25 $14.63
Income from investment operations:
Net investment income 0.61 1.32 1.40 1.44 1.46 1.47
Net realized and unrealized gain (loss) on investments (0.79) 0.06 0.39 (0.41) 2.17 (2.18)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS (0.18) 1.38 1.79 1.03 3.63 (0.71)
Less dividends and distributions:
Dividends from net investment income
To preferred shareholders (0.14) (0.31) (0.22) (0.24) (0.29) (0.27)
To common shareholders (0.24) (1.04) (1.21) (1.21) (1.16) (1.20)
Distributions from net realized gains:
To preferred shareholders - (0.01) (0.09) (0.07) (0.05) (0.02)
To common shareholders - (0.06) (0.31) (0.26) (0.16) (0.08)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.38) (1.42) (1.83) (1.78) (1.66) (1.57)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $12.83 $13.39 $13.43 $13.47 $14.22 $12.25
- -----------------------------------------------------------------------------------------------------------------------------------
Per Share Market Value, End of Period $11.75 $14.19 $13.06 $12.50 $13.63 $10.75
Total Investment Return
(based on Market Value) (15.66%) 17.42% 17.12% 2.42% 39.07% (19.80%)
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $131,130 $134,135 $131,732 $132,054 $137,163 $123,683
Ratio of expenses to average net assets 1.14%* 1.16% 1.12% 1.11% 1.14% 1.19%
Ratio of net investment income to average net assets 6.56%* 6.20% 7.17% 7.32% 7.44% 7.31%
Portfolio Turnover 5.10% 19.78% 22.63% 22.73% 26.98% 33.64%
</TABLE>
*Annualized
The accompanying notes are an integral part of the financial statements.
20
<PAGE>
LINCOLN NATIONAL INCOME FUND, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
(SELECTED DATA FOR EACH SHARE OF COMMON STOCK YEAR ENDED DECEMBER 31,
OUTSTANDING THROUGHOUT THE PERIOD) 1993 1992 1991 1990 1989
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $14.18 $14.85 $13.40 $14.44 $13.35
Income from investment operations:
Net investment income (loss) 1.56 1.36 1.15 1.17 1.15
Net realized and unrealized gain (loss) on investments 0.92 (0.01) 1.45 1.03 1.11
- -----------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 2.48 1.35 2.60 2.20 2.26
Reduction--Stock Rights Offering - - - - -
Preferred Stock Underwriting Discounts and Offering Costs - (0.23) - - -
Less dividends and distributions:
Dividends from net investment income
To preferred shareholders (0.19) (0.08) - - -
To common shareholders (1.31) (1.31) (1.15) (1.18) (1.16)
Distributions from net realized gains:
To preferred shareholders (0.07) (0.03) - - -
To common shareholders (0.46) (0.37) - - (0.01)
- -----------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (2.03) (1.79) (1.15) (1.18) (1.17)
- -----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $14.63 $14.18 $14.85 $13.40 $14.44
- -----------------------------------------------------------------------------------------------------------------------
PER SHARE MARKET VALUE, END OF PERIOD $15.00 $14.31 $13.81 $11.88 $12.94
Total Investment Return
(based on Market Value) 17.17% 15.78% 25.96% 0.87% 18.80%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $113,181 $109,466 $72,752 $65,652 $70,740
Ratio of expenses to average net assets 1.17% 1.00% 0.97% 0.97% 0.96%
Ratio of net investment income to average net assets 6.76% 7.56% 8.05% 8.49% 8.04%
Portfolio Turnover 43.72% 97.63% 15.07% 28.85% 44.46%
</TABLE>
The accompanying notes are an integral part of the financial statements.
21
<PAGE>
LINCOLN NATIONAL INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
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. Securities
which are restricted in compliance 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 June 30, 1999, the Fund held
$27,046,828 of fair valued securities, representing 20.1% of the Fund.
INCOME TAXES
It is the intention of the Fund to distribute substantially all net investment
income and net short-term 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 short-term 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.
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
22
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
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 with initial purchase date and
cost amount:
23
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
PRIVATE PLACEMENTS--(UNAUDITED)
<TABLE>
<CAPTION>
DATE OF PAR MARKET OR
PRIVATE PLACEMENT SECURITIES--DEBT PURCHASE AMOUNT COST FAIR VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Anglo Irish Bank
9.10%, 9/30/06 9/30/94 $1,000,000 $1,000,000 $1,070,600
Avianca Airline Ticket Receivable Trust
8.75%, 12/24/05 12/24/97 500,000 500,000 496,050
Banco Nacional de Mexico
7.57%, 1/1/01 11/5/96 401,963 401,948 402,124
BEA
0.00%, 6/15/10 4/21/98 1,000,000 963,239 961,100
Behr Process
7.31%, 3/31/04 7/15/97 116,814 116,814 116,514
7.56%, 3/31/05 7/15/97 77,876 77,876 77,676
BSI Holdings
10.25%, 9/30/05 1/23/98 330,000 330,000 299,697
Cambuhy Export Trust
8.12%, 7/5/01 6/11/96 284,021 284,021 248,303
Carramerica Realty 144A
6.63%, 3/1/05 2/18/98 400,000 397,956 374,000
Cemex 144A
10.00%, 11/5/99 12/28/94 250,000 222,500 252,500
Centennial Resources
13.00%, 10/31/03 8/29/96 500,000 500,000 -
Coca-Cola Femsa SA DE 144A
9.40%, 8/15/04 8/5/94 1,000,000 1,000,000 976,600
Dairy Farmers of America Preferred Capital Trust
38%, 10/2/12 10/2/98 500,000 500,000 475,000
Deloitte & Touche LLP
7.41%, 10/1/11 9/25/96 1,000,000 1,000,000 992,000
DLJ Mortgage Acceptance Corporation Series 1995-QT4 Class A
8.18%, 6/26/25 1/25/96 928,454 942,340 242,559
Dow Chemical
17.25%, 1/2/03 3/25/92 1,287,998 1,396,983 1,529,755
Earle Palmer Brown
14.00%, 12/16/04 12/31/98 500,000 389,162 389,250
Fibermark
9.38%, 10/15/06 1/17/97 250,000 256,875 254,687
First Hawaiian Bank 144A
6.93%, 12/1/03 5/28/97 500,000 488,050 504,375
Fort Wayne Capital Trust 144A
9.85%, 4/15/27 4/14/97 1,000,000 1,000,000 1,135,300
Gruma SA DE CV 144A
7.63%, 10/15/07 10/2/97 250,000 249,580 223,750
Guangdong International Trust & Investment 144A
8.75%, 10/24/16 10/17/96 500,000 498,600 50,000
Interbank/ AKK Trust
9.00%, 2/28/01 7/8/97 500,000 485,930 486,200
</TABLE>
24
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
PRIVATE PLACEMENTS--(UNAUDITED)
<TABLE>
<CAPTION>
DATE OF PAR MARKET OR
PRIVATE PLACEMENT SECURITIES--DEBT (continued) PURCHASE AMOUNT COST FAIR VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Louis Dreyfus Corporation
8.43%,07/15/01 7/20/94 $1,000,000 $1,000,000 $1,017,800
Merrill Lynch CLO 98 Pilgrim 2 144A
6.62%, 9/23/09 4/14/98 1,000,000 1,000,000 1,055,000
Mutual Fund Fee Trust IV
7.99%, 1/31/05 4/21/97 686,626 686,626 558,660
NAL Auto Trust
7.30%, 12/15/00 9/26/96 121,372 121,296 76,059
New Boston Garden Corporation
8.45%, 9/22/15 9/22/95 934,073 934,073 925,453
Northwest Airlines
7.95%, 03/01/15 6/18/99 1,000,000 1,000,000 1,000,000
PM Holding
13.50%, 10/30/04 10/31/98 500,000 483,000 500,000
Progress Cap Holdings 144A
6.88%, 8/1/01 8/21/96 1,000,000 1,000,000 1,007,500
Refco Group
8.21%, 5/16/02 5/8/95 800,000 800,000 610,020
Scotia Pacific 144A
7.11%, 1/20/14 7/9/98 500,000 500,000 399,800
Soc Quimica Y Minera De 144A
7.70%, 9/15/06 3/16/98 1,000,000 1,022,370 883,750
Spectrascan
11.25%, 6/30/06 7/12/96 500,000 490,000 500,000
Stackpole Magnetic Systems
13.50%, 10/15/05 9/1/95 380,000 351,500 380,000
Steel Technologies
8.52%, 3/1/05 2/6/95 500,000 523,100 508,250
Suburban Propane L.P.
7.54%, 6/30/11 3/7/96 1,000,000 1,000,000 982,900
Turkiye Vakiflar Bankasi T.A.O.
7.79%, 12/22/00 12/22/97 372,011 372,011 264,648
Union Acceptance Corporation
8.53%, 8/1/02 6/23/97 800,000 812,728 741,000
United Air Line
8.70%, 10/07/08 5/4/95 858,458 855,291 912,614
United States Playing Card Company
12.00%, 11/18/04 11/18/94 500,000 470,000 500,000
Wells Fargo Capital 144A
8.13%, 12/1/26 12/3/96 500,000 521,000 503,125
West Fraser Mills
8.44%, 6/30/04 4/15/94 1,000,000 1,000,000 1,016,000
Worthington Precision Metals
13.50%, 10/30/04 1/30/99 6,270 6,270 6,270
----------- -----------
Total Private Placement Debt $26,394,139 $25,906,889
----------- -----------
</TABLE>
25
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
PRIVATE PLACEMENTS--(UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
DATE OF NUMBER OF MARKET OR
PRIVATE PLACEMENT SECURITIES--EQUITIES PURCHASE SHARES COST FAIR VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Bicycle Holdings 11/18/94 8 $30,000 $118,491
Centennial Coal 8/29/96 41 - -
Earle Palmer Brown Class A 12/31/98 15 3,280 3,407
Earle Palmer Brown Class B 12/31/98 492 107,587 111,729
Huron Technology 2/20/95 6,200 128,333 145,695
PSC 7/12/96 16,250 10,000 23,563
Stackpole Magnetic Class B 9/1/95 120,000 120,000 189,600
Stackpole Magnetic Systems 9/1/95 54,582 28,500 86,239
WPM Holdings 10/30/98 110 17,000 17,215
-------- --------
Total Private Placement Equity $444,700 $695,939
-------- --------
</TABLE>
26
<PAGE>
NOTES TO FINANCIAL STATEMENTS -UNAUDITED-(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 $7,409,368
and $6,580,167 respectively, for the six months ended June 30, 1999.
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
any senior security, including 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. Both
parties are 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 June 30, 1999, the aggregate gross unrealized appreciation on
investments was $3,725,322 and the aggregate gross unrealized depreciation was
$4,952,083.
NOTE E--CAPITAL STOCK TRANSACTIONS
Transactions in capital stock were as follows:
SIX MONTHS ENDED
JUNE 30, 1999
----------------
Shares issued upon reinvestment of
distributions from net
investment income: 73,066
------
NOTE F--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 six months ended June 30, 1999, dividend rates have ranged from
4.25% to 4.85% and the average dividend rate was 4.73%.
NOTE G--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
27
<PAGE>
DIRECTORS & OFFICERS OF THE FUND
DIRECTORS DESCRIPTIONS OF OCCUPATIONS AND RESPONSIBILITIES
Thomas L. Bindley President, Bindley Capital Corporation; Director, Midas,
Inc.; Director, Lincoln National Convertible Securities
Fund, Inc., and Junior Achievement of Chicago
Richard M. Burridge Chairman, The Burridge Group, Inc.; Director, Cincinnati
Financial Corporation; Lincoln National Convertible
Securities Fund, Inc.; 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, Bringham 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; Director, Success Bancshares, Inc.;
Director, Mathers Fund, Inc.; Director, 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.; Executive Vice President
and Chief Investment Officer--Fixed Income, Delaware
Investments; Director, The Lincoln National Life Insurance
Company, Lincoln National Investment Companies, Inc.,
Delaware Management Holdings, Inc., and Vantage Investment
Advisors, Inc.
Daniel R. Toll Director, Kemper National Insurance Companies, Lincoln
National Convertible Securities Fund, Inc., & Mallinckrodt,
Inc.; Director, NICOR, Inc.; Corporate and Civic Director,
Brown Group, Inc.
OFFICERS
H. Thomas McMeekin President
David A. Berry Vice President
David G. Humes Vice President, Treasurer & Controller
David C. Fischer Vice President
Eric E. Miller Secretary
28
<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 not be 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.
29
<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 Securitites Fund, Inc.
LINCOLN NATIONAL INCOME FUND, INC.
1999 Semi-Annual Report
Form 12728-1 8/99
