<PAGE>
LINCOLN NATIONAL INCOME FUND, INC.
2000 Semi-Annual Report
LINCOLN INVESTMENT MANAGEMENT, INC.
<PAGE>
TABLE OF CONTENTS
Page
------------------------------------------------------------------
Manager Profile
Investment Policies & Objectives
President's Letter 1
Portfolio Performance 2
Performance of the Fund vs. Indices 3
Total Fund Investments 3
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 18
Statements of Changes in Net Assets 19
Statements of Cash Flows 20
Financial Highlights 21
Notes to Financial Statements 22
Directors & Officers of the Fund 28
Corporate Information 29
MANAGER PROFILE
Throughout it's history, your Fund has been managed by investment affiliates
of Lincoln National Corporation (LNC). Today, Lincoln Investment Management,
Inc. (LIM) brings to the Fund the skills and expertise that it has developed
through management of client assets for LNC, 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 had approximately $35 billion
in assets under management as of June 30, 2000. The amount and breadth of this
investment expertise allows LIM to deliver substantial value to the investment
process.
<PAGE>
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
many of the individuals involved with your Fund over the past 19 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 Fund. 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, and the Fund may invest up to 10% of its assets in real
estate investment trusts (REITs).
The Fund may borrow to purchase securities in an amount not exceeding 20% of
net assets. However, while the Fund has Variable Term Preferred Stock issued and
outstanding, it may only borrow from banks for emergency or temporary purposes
in an amount not to exceed 5% of the Fund's total assets and subject to certain
other restrictions. The Fund may also invest in non-dollar denominated
securities, however, as of June 30, 2000, has chosen not to do so.
<PAGE>
PRESIDENT'S LETTER
Dear Shareholder:
The first half of the year has been another turbulent time in the financial
markets. Although we are in a period of global economic stability, the U.S.
equity and fixed income markets have been quite volatile. The year began with a
continuation of the momentum investing in equities that has been prevalent over
the past few years. The fixed income market has been trying to understand the
impact of the federal government repurchase of Treasury bonds with budget
surplus dollars. Coupled with the Treasury buy-backs is the impact of higher
interest rates on the economy. Despite improving trends in the fixed income
market since mid-May, corporate bonds had their worst half of the year versus
Treasury bonds since 1989.
Lincoln National Income Fund achieved an attractive investment return of
4.22% versus the Lehman Corporate Index return of 2.68% for the first six months
of 2000. Much of the 1.54% of outperformance is the result of an asset
allocation decision we made to buy undervalued, but fundamentally strong REIT
equities. As of June 30, 2000, the REIT holdings represented about 7.8% of net
assets and had returned approximately 20% year to date. Accordingly, we are
considering a move back into bonds with a portion of these funds and anticipate
this reallocation will help support the Fund's dividend for the second half of
the year.
We expect the Federal Reserve will need to tighten only 25-50 basis points
more this year to achieve its desired economic slowdown. Assuming the Federal
Reserve is successful in slowing down the economy without a recession,
fundamentally sound corporate bonds remain attractive at present levels.
Corporate bonds will remain the foundation of the Fund's portfolio, and we are
comfortable about their prospects over the next twelve months.
Sincerely,
/s/ H. Thomas McMeekin
-----------------------------
H. Thomas McMeekin
President
July 26, 2000
1
<PAGE>
ASSET CLASSIFICATION
As of June 30, 2000
(Dollars in
Millions)
Public Debt 61.98% $79.7
Government/Gov't Agency 3.81% $ 4.9
Private Placements Debt 20.45% $26.3
Private Placements Equity 0.70% $ 0.9
Equities/Partnerships 1.72% $ 2.2
REIT's 7.84% $10.1
Short-Term Investments 3.50% $ 4.5
DISTRIBUTION BY QUALITY
As of June 30, 2000
(Dollars in
Millions)
AAA 9.80% $ 12.6
AA 5.05% $ 6.5
A 22.86% $ 29.4
BBB 36.24% $ 46.6
BB 6.07% $ 7.8
B 5.75% $ 7.4
CCC 0.47% $ 0.6
Equities 10.26% $ 13.2
Short-Term Investments 3.50% $ 4.5
------- ------
100.00% $128.6
PORTFOLIO PERFORMANCE
As of June 30, 2000
The following graph presents the cumulative market value and net asset value
total return for the Fund compared to the Lehman Corporate Bond Index. The graph
below shows each category's results of what $1,000 invested in 1973 would have
grown to by June 30, 2000 assuming reinvestment of dividends and adjusting for
stock splits. The Fund's shares were initially offered with a sales charge of
8%. Performance since inception does not include this or any brokerage
commission for purchases made since inception. Past performance does not
guarantee future results.
<PAGE>
Private Placements Equity 0.70%
Equities/Partnerships 1.72%
Government/Gov't. Agency 3.81%
Short-Term Investments 3.50%
REITs 7.84%
Private Placements Debt 20.45%
Public Debt 61.98%
AAA 9.80%
AA 5.05%
A 22.86%
BBB 36.24%
BB 6.07%
B 5.75%
CCC 0.47%
Equities 10.26%
Short-Term Investments 3.50%
<TABLE>
<CAPTION>
Income Fund NAV ($14,582) Lehman Corporate Bond Index ($9,849) Income Fund - Market ($14,640)
<S> <C> <C> <C>
1973 $ 1,000 $1,000 $ 1,000
1978 $ 1,382.54 $1,385.86 $ 1,093
1985 $ 3,740 $3,095.58 $ 3,829
1988 $ 5,274 $3,938.58 $ 5,234
1993 $ 9,284 $6,757.48 $10,925
1997 $12,831 $9,035.19 $14,705
1998 $13,962 $9,784.21 $17,266
1999 $13,992 $9,592 $12,891
2000 $14,582 $9,849 $14,640
</TABLE>
2
<PAGE>
The following table displays the net asset value total return for the Fund on an
annualized basis compared to the Lehman Corporate Bond Index.
<TABLE>
<CAPTION>
YTD 1 Year 3 Year 5 Years 10 Years
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Lincoln National Income Fund 4.22% 4.96% 6.02% 7.03% 8.84%
Lehman Corporate Bond Index 2.68% 3.00% 5.34% 5.98% 8.18%
</TABLE>
ANNUAL PERFORMANCE OF LINCOLN NATIONAL INCOME FUND VS. INDICES
<TABLE>
<CAPTION>
Income Lehman Income Lehman
Fund Corporate Fund Corporate
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1973 3.20% 2.28% 1987 5.04% 2.29%
1974 (12.60%) 0.17% 1988 15.35% 7.58%
1975 13.03% 12.30% 1989 17.38% 14.23%
1976 17.24% 15.59% 1990 1.31% 8.28%
1977 7.82% 2.99% 1991 21.34% 16.13%
1978 7.28% 1.18% 1992 6.96% 7.58%
1979 12.92% 2.30% 1993 15.89% 11.03%
1980 15.37% 3.06% 1994 (7.52%) (3.93%)
1981 4.73% 7.26% 1995 27.35% 22.25%
1982 26.24% 31.10% 1996 5.36% 3.28%
1983 14.67% 7.99% 1997 11.37% 10.23%
1984 16.88% 15.02% 1998 8.03% 8.29%
1985 17.30% 21.30% 1999 (1.73%) (1.96%)
1986 17.55% 15.62% 2000 4.22% 2.68%
</TABLE>
TOTAL FUND INVESTMENTS
At Market or Fair Values As of June 30,
<TABLE>
<CAPTION>
2000 1999
(000) % of Total (000) % of Total
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Public Debt Securities $84,606 66% $97,198 74%
Private Placement Securities 27,194 21% 26,603 20%
Common Stocks & Warrants 10,197 8% 467 1%
Preferred Stocks 1,438 1% 1,539 1%
Short-Term Investments 4,500 4% 2,600 2%
Partnerships 635 0% 444 0%
Other Assets/(Liabilities) (62) 0% 2,279 2%
-----------------------------------------------------------------------------------------------------------
Total Net Assets $128,508 100% $131,130 100%
</TABLE>
3
<PAGE>
DIVIDEND HISTORY
The Fund in its lifetime has distributed common dividends of $31.39 per share
which represents 251.12 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.
Annual Annual
Year Dividend Year Dividend
----------------------------------------------------------------------------
1977 and Prior $4.06 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 1.46
1985 1.27 1997 1.52
1986 1.17 1998 1.10
1987 1.52 1999 0.99
1988 1.23 2000 0.24*
*Dividends paid as of June 30, 2000.
4
<PAGE>
COMMON STOCK MARKET PRICES AND NET ASSET VALUE HISTORY (Unaudited)
<TABLE>
<CAPTION>
2000
Market Prices and Volumes Net Asset Value
High Low Close Volume High Low Close
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1st Quarter $10.813 $9.5625 $10.2500 464,300 $12.47 $12.06 $12.47
2nd Quarter 11.313 10.000 10.750 394,300 12.53 12.08 12.44
1999
Market Prices and Volumes Net Asset Value
High Low Close Volume High Low Close
---------------------------------------------------------------------------------------------------------------------------
1st Quarter $14.125 $13.0625 $13.4375 280,700 $13.43 $12.99 $13.24
2nd Quarter 13.563 11.500 11.750 261,800 13.39 12.70 12.83
3rd Quarter 11.8125 10.5625 10.9375 317,200 12.92 12.43 12.72
4th Quarter 12.50 9.625 9.6875 369,700 12.72 12.17 12.17
1998
Market Prices and Volumes Net Asset Value
High Low Close Volume High Low Close
---------------------------------------------------------------------------------------------------------------------------
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
1997
Market Prices and Volumes Net Asset Value
High Low Close Volume High Low Close
---------------------------------------------------------------------------------------------------------------------------
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>
Shares are listed on the New York Stock Exchange under the trading symbol LND.
5
<PAGE>
SHAREHOLDER MEETING RESULTS
The Fund held its annual shareholders meeting on May 5, 2000. Two proposals were
presented to shareholders for vote. Proposal I, "Election of Class 1 Directors"
and Proposal II "Ratification of the Selection of Auditor." A total of 5,545,937
shares of Common Stock (77.513% of the total outstanding shares) and 37,600 of
Variable Term Preferred (VTP) stock shares (94.00% of the total outstanding
preferred shares) were voted or abstained.
The following table highlights the results of the vote.
<TABLE>
<CAPTION>
Number of Number of Number of
Shares Voted Shares Voted Shares
FOR AGAINST WITHHELD/ABSTAINED
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Proposal I
Election of Class 1 Directors-
Common Stock and VTP R. Deshaies 5,477,600 N/A 105,938
Election of Class 1 Directors-VTP Only A. Cepeda 37,600 N/A --
Proposal II
Ratification of the Selection of
Auditor (PricewaterhouseCoopers LLP) 5,497,355 38,987 47,195
</TABLE>
In addition, the terms of office of the following directors continued after
the meeting: Thomas L. Bindley, Richard M. Burridge, Thomas N. Mathers, H.
Thomas McMeekin and Daniel R. Toll.
The Board of Directors of the Fund has implemented a staggered Board
consisting of three Classes of Directors. The seven directors have been divided
into three separate Classes as follows: two directors constituting Class 1
directors were elected at the 2000 Annual Meeting to a three-year term of office
and until their successors are elected and qualified; two directors constituting
Class 2 directors have a term of office until the 2001 annual meeting of
shareholders and until their successors are elected and qualified; and three
directors constituting Class 3 directors have a term of office until the 2002
annual meeting of shareholders and until their successors are elected and
qualified. The directors in each Class are set forth below.
CLASS OF DIRECTORS NAMES OF DIRECTORS
------------------ ------------------
Class 1: Adela Cepeda and Roger J. Deshaies
Class 2: Richard M. Burridge and Thomas N. Mathers
Class 3: Thomas L. Bindley, H. Thomas McMeekin
and Daniel R. Toll
At each annual meeting of shareholders, directors will be elected to succeed
the Class of directors whose terms expire at that meeting, and each newly
elected director will serve for a three-year term and until their successors are
elected and qualified. Subject to the limitations imposed by the Investment
Company Act of 1940, as amended, a vacancy which occurs during a term may be
filled by the Board. A replacement selected by the Board will serve the
remainder of the vacated term until the annual meeting of shareholders at which
that Class of directors is up for election and until his or her successor is
elected and qualified.
Pursuant to the Fund's Charter, two of the directors are to be elected solely
by the holders of the VTP stock, and the remaining directors are to be elected
by the holders of the outstanding shares of the Common Stock and VTP Stock
voting together as a single class. Ms. Cepeda was elected solely by the holders
of VTP Stock at the 2000 Annual Meeting; Mr. Burridge, a Class 2 director, will
continue to serve as the second LNIF Board member elected solely by the holders
of VTP Stock.
6
<PAGE>
LINCOLN NATIONAL INCOME FUND, INC.
STATEMENT OF NET ASSETS - UNAUDITED
June 30, 2000
PAR MARKET OR
PUBLIC DEBT SECURITIES (65.9%) AMOUNT FAIR VALUE
--------------------------------------------------------------------------------
AEROSPACE & DEFENSE (1.5%)
Boeing Capital
9.25% 4/1/02 $1,000,000 $ 1,034,098
Raytheon
6.55% 3/15/10 1,000,000 904,661
-----------
1,938,759
-----------
AIRLINES (3.2%)
AMR
10.00% 4/15/21 1,000,000 1,023,698
Delta Air Lines
9.90% 6/16/02 1,473,000 1,505,578
United Airlines
9.35% 4/7/16 1,500,000 1,572,645
-----------
4,101,921
----------
ASSET BACKED SECURITIES (1.4%)
Green Tree Lease Finance 1998-1B
6.66% 10/20/04 354,527 349,957
Honda Auto Lease Trust Series 99-A A4
6.65% 7/15/05 500,000 496,480
Vanderbilt Mortgage Ser98-C CL 1A2 144A
6.32% 6/7/16 1,000,000 944,295
-----------
1,790,732
-----------
BANKING (5.0%)
Banc One
9.88% 3/1/09 1,000,000 1,118,058
BankAmerica
10.00% 2/1/03 1,000,000 1,057,666
First USA Bank Wilmington Delaware
7.65% 8/1/03 1,000,000 1,004,146
Hong Kong & Shanghai Bank
6.38% 12/29/49 500,000 377,675
Lloyds Bank PLC
6.31% 6/29/49 1,000,000 837,350
Mellon Capital Notes
7.72% 12/1/26 400,000 355,318
NationsBank
8.13% 6/15/02 1,000,000 1,013,519
Standard Charter PLC
6.31% 11/29/49 1,000,000 686,700
-----------
6,450,432
-----------
BUILDINGS & MATERIALS (0.2%)
Toll Brothers
8.75% 11/15/06 250,000 240,625
-----------
240,625
-----------
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 (3.9%)
K-III Communications
8.50% 2/1/06 $ 250,000 $ 237,500
News America Holdings
9.25% 2/1/13 1,000,000 1,062,949
Tele-Communications
9.25% 1/15/23 2,000,000 2,134,688
Time Warner
9.13% 1/15/13 1,500,000 1,630,976
-----------
5,066,113
-----------
CHEMICALS (0.2%)
ISP Holdings
9.00% 10/15/03 250,000 234,063
-----------
234,063
-----------
COLLATERALIZED MORTGAGE OBLIGATIONS (0.7%)
First Union-Lehman Brothers
6.65% 12/18/07 1,000,000 954,652
-----------
954,652
-----------
ELECTRONICS & ELECTRICAL EQUIPMENT (0.2%)
Ametek
7.20% 7/15/08 250,000 227,559
-----------
227,559
-----------
ENERGY (4.3%)
Coastal
9.75% 8/1/03 1,000,000 1,064,697
Enron
9.50% 6/15/01 1,000,000 1,017,584
Gulf Canada Resources
9.63% 7/1/05 250,000 255,625
Oryx Energy
10.00% 4/1/01 1,000,000 1,019,251
Pennzoil
10.13% 11/15/09 1,000,000 1,138,930
Sun
9.38% 6/1/16 1,000,000 1,041,472
-----------
5,537,559
-----------
FINANCE (8.6%)
Avalon Bay Communities
6.80% 7/15/06 500,000 466,245
Bear Stearns
7.63% 12/7/09 1,000,000 957,519
Dow Capital
9.00% 5/15/10 1,000,000 1,055,589
Duke Capital
6.25% 7/15/05 1,000,000 948,976
Fleet/Norstar Financial Group
8.63% 1/15/07 1,000,000 1,041,041
General Electric Capital
8.75% 5/21/07 1,000,000 1,075,809
General Motors Acceptance
8.88% 6/1/10 1,500,000 1,599,293
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)
Goldman Sachs Group
7.20% 3/1/07 $ 500,000 $ 475,971
Greentree Financial
8.65% 1/15/20 734,084 728,593
Merrill Lynch Mortgage Investors
10.00% 3/15/10 270,570 275,721
Mid-America Finance
6.38% 9/1/05 500,000 480,781
Selkirk Cogen Funding
8.65% 12/26/07 915,868 934,836
SMA Finance
6.40% 11/16/06 1,000,000 943,750
-----------
10,984,124
-----------
FOOD, BEVERAGE & TOBACCO (1.5%)
Chiquita Brands International
9.63% 1/15/04 250,000 201,250
Conagra
7.40% 9/15/04 1,500,000 1,477,428
Marsh Supermarket
8.88% 8/1/07 250,000 233,750
-----------
1,912,428
-----------
FOREIGN GOVERNMENTS (0.4%)
Government of Venezuela
9.25% 9/15/27 500,000 330,625
Republic of Colombia
7.63% 2/15/07 300,000 218,250
-----------
548,875
-----------
GOVERNMENT & GOVERNMENT AGENCY (3.8%)
Federal Home Loan Mortgage
7.80% 9/15/20 397,268 397,875
7.00% 9/17/31 810,165 797,980
Federal National Mortgage Association
9.00% 3/1/24 401,265 420,576
6.50% 12/1/27 1,552,153 1,469,695
Government National Mortgage Association
9.00% 8/15/21 525,642 549,132
9.00% 3/15/23 1,242,711 1,296,692
-----------
4,931,950
-----------
HEALTHCARE & PHARMACEUTICALS (0.2%)
Beckman Instruments
7.10% 3/4/03 250,000 240,841
-----------
240,841
-----------
INDUSTRIAL MACHINERY (1.2%)
AGCO
8.50% 3/15/06 250,000 230,938
Caterpillar Tractor
6.00% 5/1/07 1,000,000 924,451
Setech Lewis Supply
13.50% 6/30/05 500,000 443,250
-----------
1,598,639
-----------
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
--------------------------------------------------------------------------------
Insurance (1.7%)
Allstate
7.50% 6/15/13 $1,000,000 $ 957,625
Conseco
7.88% 12/15/00 133,000 117,705
Nationwide
9.88% 2/15/25 1,000,000 1,043,487
-----------
2,118,817
-----------
LEISURE, LODGING & ENTERTAINMENT (1.2%)
MGM Grand
6.88% 2/6/08 1,000,000 898,579
Speedway Motorsports
8.50% 8/15/07 250,000 233,750
Starwood Hotels & Resorts
6.75% 11/15/03 500,000 464,429
-----------
1,596,758
-----------
METALS & MINING (2.5%)
Cyprus Amax Minerals
7.38% 5/15/07 500,000 479,851
EES Coke Battery
7.13% 4/15/02 210,000 206,006
Inco
9.60% 6/15/22 1,000,000 982,542
Noranda
8.00% 6/1/03 1,500,000 1,497,525
-----------
3,165,924
-----------
MISCELLANEOUS (2.0%)
Ashland
6.86% 5/1/09 500,000 460,938
Corp Andina
7.75% 3/1/04 1,000,000 990,813
Pemex Finance
8.45% 2/15/07 1,000,000 983,110
Service International
6.00% 12/15/05 232,361 126,637
-----------
2,561,498
-----------
MORTGAGE BACKED SECURITIES (2.1%)
American Airlines
9.83% 1/1/02 548,734 553,744
Citicorp Mortgage Securities
Series 1991-6 Class A
8.75% 5/25/21 392,837 393,328
Commercial Mortgage Asset Trust 1999-C1 A1
6.25% 8/17/06 932,231 892,757
Countrywide Home Loans 1999-1
6.50% 3/25/29 1,000,000 915,000
-----------
2,754,829
-----------
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
--------------------------------------------------------------------------------
PACKAGING & CONTAINERS (0.2%)
Container Corporation of America
11.25% 5/1/04 $ 250,000 $ 253,750
-----------
253,750
-----------
PAPER & FOREST PRODUCTS (1.2%)
Georgia-Pacific
9.50% 5/15/22 1,500,000 1,505,895
-----------
1,505,895
-----------
REAL ESTATE (3.1%)
Comp De DeSarollo
10.19% 5/31/11 484,975 340,695
Duke Realty
7.05% 3/1/06 500,000 487,995
ERP Operating
6.63% 4/13/05 400,000 380,875
Highwoods Realty
7.00% 12/1/06 600,000 546,595
Highwoods Realty
7.50% 4/15/18 400,000 333,131
Irvine Apartment Communities
7.00% 10/1/07 1,000,000 885,210
Liberty Property
7.10% 8/15/04 1,000,000 958,999
-----------
3,933,500
-----------
RETAIL (0.9%)
Sears Roebuck
9.05% 2/6/12 1,000,000 1,088,502
-----------
1,088,502
-----------
TELECOMMUNICATIONS (1.8%)
MCI Communications
7.50% 8/20/04 1,000,000 1,001,481
Nynex
9.55% 5/1/10 1,265,767 1,340,629
-----------
2,342,110
-----------
TEXTILES, APPAREL & FURNITURE (1.0%)
Interface
7.30% 4/1/08 250,000 193,750
Whirlpool
9.00% 3/1/03 1,000,000 1,033,665
-----------
1,227,415
-----------
TRANSPORTATION & SHIPPING (2.1%)
Federal Express
9.88% 4/1/02 1,250,000 1,297,421
NWA Trust
10.23% 12/21/12 438,473 489,433
US Freightways
6.50% 5/1/09 1,000,000 910,265
-----------
2,697,119
-----------
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
--------------------------------------------------------------------------------
UTILITIES (9.8%)
Avon Energy Partners Holdings
7.05% 12/11/07 $1,000,000 $ 927,154
BVPS II Funding
8.33% 12/1/07 1,436,000 1,409,190
Cleveland Electric
7.63% 8/1/02 1,000,000 995,725
Commonwealth Edison
8.63% 2/1/22 1,000,000 989,514
Consumers Energy
6.50% 6/15/05 500,000 466,643
Empresa Nacional Electric
7.75% 7/15/08 450,000 418,874
Hyder
6.88% 12/15/07 1,000,000 848,037
New England Telephone & Telegraph
9.00% 8/1/31 1,000,000 1,047,374
Niagara Mohawk Power
9.25% 10/1/01 500,000 508,616
PacifiCorp
7.00% 7/15/09 500,000 471,957
8.29% 12/30/11 1,000,000 1,027,245
Philadelphia Electric
7.13% 9/1/02 1,500,000 1,490,234
System Energy Resources
7.80% 8/1/00 1,000,000 999,747
Texas Utilities
7.38% 8/1/01 1,000,000 1,000,704
-----------
12,601,014
-----------
Total Public Debt Securities (cost $88,117,260) 84,606,403
-----------
PRIVATE PLACEMENT SECURITIES-DEBT (20.5%)
--------------------------------------------------------------------------------
Accounting Firms (0.8%)
Deloitte & Touche LLP
7.41% 10/1/11 1,000,000 996,200
-----------
996,200
-----------
AIRLINES (1.4%)
Northwest Airlines
7.95% 3/1/15 994,628 1,010,443
United Air Lines
8.70% 10/7/08 813,063 823,767
-----------
1,834,210
-----------
AUTOMOBILES & AUTO PARTS (0.3%)
Continental Auto Receivables Series A
12.00% 4/30/05 500,000 445,400
-----------
445,400
-----------
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 (continued) AMOUNT FAIR VALUE
--------------------------------------------------------------------------------
BANKING (1.9%)
Anglo Irish Bank
9.10% 9/30/06 $1,000,000 $ 1,058,700
Banco Nacional de Mexico
7.57% 1/1/01 153,707 153,169
First Hawaiian Bank
6.93% 12/1/03 500,000 488,665
Interbank/ AKK Trust
9.00% 2/28/01 250,000 250,000
Wells Fargo Capital
8.13% 12/1/26 500,000 453,027
-----------
2,403,561
-----------
CHEMICALS (0.9%)
Dow Chemical
17.25% 1/2/03 1,041,017 1,175,412
-----------
1,175,412
-----------
COLLATERALIZED MORTGAGE OBLIGATIONS (0.4%)
Commercial Mortgage Pass-Through Certificates
Series AMC Class A
7.71% 10/12/09 478,779 477,773
-----------
477,773
-----------
ELECTRONICS & ELECTRICAL EQUIPMENT (0.4%)
Spectrascan
12.00% 6/30/06 500,000 500,000
-----------
500,000
-----------
FINANCE (5.2%)
Avianca Airline Ticket Receivable Trust
11.75% 12/24/05 447,939 405,161
Fort Wayne Capital Trust
9.85% 4/15/27 1,000,000 1,145,000
Guangdong International Trust & Investment+
8.75% 10/24/16 500,000 75,000
Louis Dreyfus
8.43% 7/15/01 1,000,000 999,600
Merrill Lynch CLO 98 Pilgrim 2
6.62% 9/23/09 1,000,000 880,120
Mutual Fund Fee Trust IV
7.99% 1/31/05 298,238 299,371
NAL Auto Trust
7.30% 12/15/00 11,966 11,749
PM Holding
13.50% 10/30/04 500,000 500,000
Progress Capital Holdings
6.88% 8/1/01 1,000,000 991,320
Refco Group
8.21% 5/16/02 400,000 397,680
Scotia Pacific
7.11% 1/20/14 500,000 390,000
Union Acceptance
8.53% 8/1/02 600,000 571,500
-----------
6,666,501
-----------
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
--------------------------------------------------------------------------------
FOOD, BEVERAGE & TOBACCO (1.3%)
Coca-Cola Femsa SA DE
9.40% 8/15/04 $1,000,000 $ 1,005,600
Dairy Farmers of America Preferred Capital Trust
7.38% 10/2/12 500,000 454,500
Gruma SA DE CV
7.63% 10/15/07 250,000 214,063
-----------
1,674,163
-----------
LEISURE, LODGING & ENTERTAINMENT (0.7%)
New Boston Garden
8.45% 9/22/15 894,364 877,639
-----------
877,639
-----------
METALS & MINING (1.0%)
Soc Quimica Y Minera De
7.70% 9/15/06 1,000,000 952,657
Steel Technologies
8.52% 3/1/05 357,000 357,071
Worthington Precious Metals
13.50% 10/30/04 19,045 19,045
-----------
1,328,773
-----------
MISCELLANEOUS (3.6%)
BEA
6.72% 6/15/10 1,000,000 897,800
BSI Holdings
9.06% 9/30/05 322,000 322,000
CIC Acquisition (Conso International)
12.00% 3/6/08 500,000 420,000
Earle Palmer Brown
14.00% 12/16/04 519,677 519,677
Elastomeric Technologies Preferred Rubber
Compounding
13.80% 10/8/07 500,000 476,000
Glass Equipment Development 144A
13.50% 6/2/08 500,000 457,415
John Zelenka Evergreen Nursery
13.00% 5/4/07 476,190 435,573
Stackpole Magnetic Systems
13.50% 10/15/05 380,000 380,000
Therma-Tru
12.00% 5/15/09 750,000 576,000
Turkiye Vakiflar Bankasi T.A.O.
7.79% 12/22/00 98,628 98,628
-----------
4,583,093
-----------
NATURAL GAS (0.7%)
Suburban Propane L.P.
7.54% 6/30/11 1,000,000 961,500
-----------
961,500
-----------
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
--------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS (0.8%)
Fibermark
9.38% 10/15/06 $ 250,000 $ 241,250
West Fraser Mills
8.44% 6/30/04 780,000 781,560
-----------
1,022,810
-----------
REAL ESTATE (0.3%)
CarrAmerica Realty
6.63% 3/1/05 400,000 371,739
-----------
371,739
-----------
TELECOMMUNICATIONS (0.8%)
Deutsche Telekom Finance
8.25% 6/15/30 1,000,000 1,018,992
-----------
1,018,992
-----------
Total Private Placement Debt - (cost $26,062,657) 26,337,766
-----------
NUMBER
PRIVATE PLACEMENT SECURITIES-EQUITIES (0.7%) OF SHARES
--------------------------------------------------------------------------------
LEISURE, LODGING & ENTERTAINMENT (0.0%)
Bicycle Holdings 1 240
-----------
240
-----------
MISCELLANEOUS (0.1%)
Stackpole Magnetic Systems Class B 120,000 135,600
-----------
135,600
-----------
WARRANTS (0.6%)
Centennial Coal* 41 0
CIC Acquisition (Conso International)
Class A Voting Warrants (Clawback Position)* 679 0
CIC Acquisition (Conso International)
Class B Non-Voting Warrants (Clawback Provision)* 2,731 0
CIC Acquisition (Conso International)
Warrants for Preferred Stock (Clawback Provision)* 392 0
CIC Acquisition (Conso International)
Class A Voting Warrants* 679 8,128
CIC Acquisition (Conso International)
Class B Non-Voting Warrants* 2,731 32,684
CIC Acquisition (Conso International)
Warrants for Preferred Stock* 392 39,204
Continental Auto Receivables* 9,506 63,593
Earle Palmer Brown Class A* 16 183
Earle Palmer Brown Class B* 511 5,993
Elastomeric Technologies* 111 24,000
Franklin Nursery* 20 40,617
GED Holdings* 3,049 42,582
Huron Technology* 6,200 124,430
PSC* 16,250 0
Setech* 17,304 56,756
Stackpole Magnetic Systems * 54,582 61,677
Therma-Tru Holdings* 452 175,772
WPM Holdings* 110 44,968
-----------
720,587
-----------
Total Private Placement Securities - Equities (cost $893,063) $ 856,427
-----------
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
STATEMENT OF NET ASSETS (continued)
NUMBER OF MARKET OR
COMMON STOCK (7.9%) SHARES FAIR VALUE
--------------------------------------------------------------------------------
HEALTHCARE & PHARMACEUTICALS (0.0%)
Paracelsus Healthcare 2,661 $ 146
-----------
146
-----------
MISCELLANEOUS (0.1%)
Franklin Nursery Investors LLC 120,746 120,746
-----------
120,746
-----------
REAL ESTATE (7.8%)
AMB Property 20,000 456,250
Archstone Communities Trust 25,500 537,093
Avalonbay Communities 25,000 1,043,750
CarrAmerica Realty 41,000 1,086,500
Duke-Weeks Realty 50,000 1,118,750
Equity Office Properties Trust 50,200 1,383,637
Equity Residential Properties 25,000 1,150,000
Kimco Realty 15,000 615,000
ProLogis 50,000 1,065,624
Simon Property Group 25,000 554,687
Spieker Properties 20,900 987,524
Washington Real Estate Trust 4,300 76,863
-----------
10,075,678
-----------
Total Common Stock (cost $9,127,048) 10,196,570
-----------
PREFERRED STOCK (1.1%)
--------------------------------------------------------------------------------
Salomon Financing Trust I 9.50% 20,000 505,000
Transcanada Capital 40,000 932,500
-----------
Total Preferred Stock (cost $1,542,000) 1,437,500
-----------
PARTNERSHIPS (0.5%)
--------------------------------------------------------------------------------
KBP Holdings 1 334,134
KBSI Partnership 1 301,201
MDAS Investors 1 0
-----------
Total Partnerships (cost $443,622) 635,335
-----------
PAR
SHORT TERM INVESTMENTS (3.5%) AMOUNT
--------------------------------------------------------------------------------
General Electric Capital
6.95% 7/3/00 $3,100,000 3,100,000
Gillette
7.03% 7/5/00 1,400,000 1,400,000
-----------
Total Short Term Investments (cost $4,500,000) 4,500,000
-----------
Total Market Value of Securities (100.1%) (cost $131,685,650) 128,570,001
-----------
Payables and Other Liabilities Net of Assets (-0.1%) (61,574)
-----------
The accompanying notes are an integral part of the financial statements.
16
<PAGE>
STATEMENT OF NET ASSETS (continued)
NET ASSETS (100.0%) $128,508,427
------------
NET ASSET VALUE PER SHARE OF COMMON STOCK OUTSTANDING
($128,508,427 LESS VARIABLE TERM PREFERRED STOCK AT
LIQUIDATION VALUE OF $40,000,000 DIVIDED BY 7,114,831
SHARES OF COMMON STOCK OUTSTANDING) $ 12.44
============
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 7,114,831 shares 7,114,831
Proceeds in excess of par value of shares issued 83,244,025
Undistributed net investment income 1,586,957
Undistributed realized loss on investments, net of taxes paid (321,737)
Net unrealized depreciation of investments (3,115,649)
------------
TOTAL NET ASSETS $128,508,427
============
* Non-Income producing security.
+ Security currently in default.
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
Lincoln National Income Fund, Inc.
Statements of Operations
(Unaudited)
Six Months Ended June 30,
-------------------------
2000 1999
--------------------------------------------------------------------------------
Investment income:
Interest $4,950,607 $5,011,893
Dividends 339,958 67,500
--------------------------------------------------------------------------------
Total investment income 5,290,565 5,079,393
Expenses:
Management fees 560,301 593,942
Variable term preferred stock fees 53,543 49,099
Directors fees 33,000 35,000
Professional fees 52,448 34,072
Printing and Postage 12,695 7,333
Stock Transfer & dividend disbursing fees 8,550 9,750
New York Stock Exchange fee 9,500 8,713
Postage and mailing fees 5,250 7,159
Custodian and registrar fees -- 4,400
Other 1,400 1,892
--------------------------------------------------------------------------------
736,687 751,360
--------------------------------------------------------------------------------
Expenses paid indirectly (3,066) (2,533)
--------------------------------------------------------------------------------
Total expenses 733,621 748,827
Net investment income 4,556,944 4,330,566
Net realized and unrealized gain (loss) on investments:
Net realized gain (loss)
on:
Investment transactions (522,414) 414,175
Net change in unrealized appreciation/depreciation of:
Investments 787,051 (6,038,836)
--------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments 264,637 (5,624,661)
--------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations $4,821,581 ($1,294,095)
--------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
18
<PAGE>
Lincoln National Income Fund, Inc.
Statements of Changes in Net Assets
(Unaudited)
Six Months Ended June 30,
-------------------------
2000 1999
--------------------------------------------------------------------------------
Changes from operations:
Net investment income $4,556,944 $4,330,566
Net realized gain (loss) on investments (522,414) 414,175
Net change in unrealized appreciation/depreciation
on investments 787,051 (6,038,836)
Net increase (decrease) in net assets resulting
from operations 4,821,581 (1,294,095)
Changes from Capital Share Transactions:
Par value of shares issued under dividend
reinvestment plan -- 73,066
Proceeds in excess of par value for shares
issued under dividend reinvestment
plan -- 902,311 Net increase in net assets
resulting from capital share
transactions -- 975,377
Distributions To Shareholders From Net
Investment Income:
Common shareholders (1,707,559) (1,698,722)
Preferred shareholders (1,174,972) (987,489)
Total distributions to shareholders (2,882,531) (2,686,211)
Total increase (decrease) in net assets 1,939,050 (3,004,929)
Net Assets at beginning of period 126,569,377 134,135,027
Net Assets at End of Period $128,508,427 $131,130,098
The accompanying notes are an integral part of the financial statements.
19
<PAGE>
Lincoln National Income Fund, Inc.
Statements of Cash Flows
(Unaudited)
Six Months Ended June 30,
-------------------------
2000 1999
--------------------------------------------------------------------------------
Operating Activities:
Interest Received $4,847,451 $5,037,385
Dividends Received 263,844 67,500
Operating Expenses Paid (775,475) (836,070)
Purchase of investments securities (12,113,630) (7,409,439)
Proceeds from sale of investment securities 13,214,735 6,580,167
Net proceeds (purchase) of short-term investments (657,313) 676,417
--------------------------------------------------------------------------------
Net Cash Provided By Operating Activities 4,779,612 4,115,960
Financing Activities:
Distributions paid to common and preferred
shareholders (4,698,964) (4,995,944)
Proceeds received from dividend reinvestment plan -- 975,377
--------------------------------------------------------------------------------
Net Cash Used In Financing Activities (4,698,964) (4,020,567)
--------------------------------------------------------------------------------
Increase In Cash 80,648 95,393
--------------------------------------------------------------------------------
Cash at Beginning of Period $172,871 $408,587
--------------------------------------------------------------------------------
Cash at End of Period $253,519 $503,980
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 $4,821,581 $(1,294,095)
Reconciling Adjustments:
Net realized and unrealized (gain) loss
on investments (264,637) 5,624,661
Net proceeds (purchase) of investment securities 443,791 (152,855)
Discount accretion on investment income
receivable (74,784) (61,316)
Increase (decrease) in accrued investment income
receivable (28,371) 86,807
Decrease in accrued dividend receivable (76,114) --
Decrease in accrued expenses (41,854) (87,242)
--------------------------------------------------------------------------------
Net Cash Provided By Operating Activities $4,779,612 $4,115,960
The accompanying notes are an integral part of the financial statements.
20
<PAGE>
Lincoln National Income Fund, Inc.
Financial Highlights
<TABLE>
<CAPTION>
Six Months
Ended June 30, Year Ended December 31,
---------------------------------------------------------------------------
(Selected data for each share (Unaudited)
outstanding throughout the period) 2000 1999 1998 1997 1996 1995
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $12.17 $13.39 $13.43 $13.47 $14.22 $12.25
Income from investment operations:
Net investment income 0.61 1.26 1.32 1.40 1.44 1.46
Net realized and unrealized gain (loss) on investments 0.06 (1.20) 0.06 0.39 (0.41) 2.17
------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.67 0.06 1.38 1.79 1.03 3.63
Less dividends and distributions:
Dividends from net investment income
To preferred shareholders (0.16) (0.28) (0.31) (0.22) (0.24) (0.29)
To common shareholders (0.24) (0.99) (1.04) (1.21) (1.21) (1.16)
Distributions from net realized gains:
To preferred shareholders -- (0.01) (0.01) (0.09) (0.07) (0.05)
To common shareholders -- -- (0.06) (0.31) (0.26) (0.16)
------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.40) (1.28) (1.42) (1.83) (1.78) (1.66)
------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $12.44 $12.17 $13.39 $13.43 $13.47 $14.22
------------------------------------------------------------------------------------------------------------------------------------
Per Share Market Value, End of Period $10.75 $9.69 $14.19 $13.06 $12.50 $13.63
Total Investment Return (based on Market Value) 13.57% (25.34%) 17.42% 17.12% 2.42% 39.07%
Ratios and supplemental data:
Net assets, end of period (000 omitted) $128,508 $126,569 $134,135 $131,732 $132,054 $137,163
Ratio of expenses to average net assets 1.16%* 1.12% 1.16% 1.12% 1.11% 1.14%
Ratio of expenses to average net assets prior
to expenses paid indirectly 1.16%* 1.13% N/A N/A N/A N/A
Ratio of net investment income to average net assets 7.21%* 6.80% 6.84% 7.17% 7.32% 7.44%
Ratio of net investment income prior 7.21%* 6.79% N/A N/A N/A N/A
to expenses paid indirectly
Portfolio Turnover 10.41% 10.29% 19.78% 22.63% 22.73% 26.98%
</TABLE>
* Annualized
The accompanying notes are an integral part of the financial statements.
21
<PAGE>
Notes to Financial Statements
June 30, 2000
(Unaudited)
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.
Note A - Summary of Accounting Policies
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 sale price at the close of that exchange; if on a particular day an
exchange-listed security does not trade, then the mean between the bid and asked
will be used. Equity securities traded in the over-the-counter market are valued
at the last sale price at the close of the New York Stock Exchange. If a
non-exchange listed security does not trade on a particular day, then the mean
between the bid and asked price will be used as long as it continues to reflect
the value of the security. Debt securities are valued by using market quotations
or a matrix method provided by a pricing service. If prices are not available
from the pricing service, then quotations will be obtained from broker/dealers
and the securities will be valued at the mean between bid and offer. Securities
for which quotations are not available are priced at "fair value," as discussed
below. Money market instruments 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 determined by the Fund's
Securities Valuation Committee according to the Fund's pricing procedures, as
approved and reviewed by the Board of Directors. Many factors are considered in
arriving at fair value, including, where applicable: fundamental analytical data
relating to the investment; the nature and duration of restrictions on
disposition of the securities; evaluation of the forces which influence the
market in which these securities are purchased and sold; the type of security;
any available financial statements; cost at date of purchase, plus or minus any
applicable amortization of premiums or discounts; the size of the holding;
discount from market value of unrestricted securities of the same class at the
time of purchase; any special reports prepared by analysts; information as to
any transactions or offers with respect to the security; the existence of merger
proposals or tender offers affecting the security; the price and extent of
trading in similar securities of comparable companies; for foreign securities,
the ability to repatriate currency and/or any restrictions implemented by a
foreign government; foreign ownership and share prices versus local ownership
share prices and/or the volume of securities traded; and price comparisons
(discount/premium of the locally traded shares versus depositary receipt ).
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
Lincoln Investment Management, Inc. (Advisor) or affiliated companies.
Valuations are determined according to pricing procedures approved and reviewed
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, 2000, the Fund held
$27,194,193 of fair valued securities, representing 21.16% 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.
22
<PAGE>
Notes to Financial Statements (continued)
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 in the terms of the loan agreement, which is recorded when
received.
Distributions to common shareholders are booked
on the ex-dividend date and distributions to preferred shareholders are accrued
daily and paid every 28 days.
The Fund receives earnings credits from the custodian when positive balances
are maintained, which are used to offset custody fees. These credits were $3,066
for the six months ended June 30, 2000. The expenses paid under this arrangement
is included in its respective expense caption on the Statement of Operations
with the corresponding expense offset shown on "Expenses paid indirectly."
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 list of private placements with initial purchase date,
cost amount and market value as of June 30, 2000:
23
<PAGE>
PRIVATE PLACEMENTS
<TABLE>
<CAPTION>
DATE OF PAR MARKET OR
PRIVATE PLACEMENT SECURITIES--DEBT PURCHASE AMOUNT COST FAIR VALUE
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Anglo Irish Bank
9.10%,9/30/06 9/30/94 $1,000,000 $1,000,000 $1,058,700
Avianca Airline Ticket Receivable Trust
11.75%,12/24/05 12/24/97 447,939 447,939 405,161
Banco Nacional de Mexico
7.57%,1/1/01 11/5/96 153,707 280,166 153,169
BEA
6.72%,6/15/10 4/21/98 1,000,000 963,239 897,800
BSI Holdings
9.06%,9/30/05 1/23/98 322,000 322,000 322,000
Carramerica Realty
6.63%,3/1/05 2/18/98 400,000 397,956 371,739
CIC Acquisition (Conso International)
12.00% 3/6/08 3/6/00 500,000 420,000 420,000
Coca-Cola Femsa SA DE
9.40%,8/15/04 8/5/94 1,000,000 1,000,000 1,005,600
Commercial Mortgage Pass-Through Certificates
Series AMC Class A
7.71%, 10/12/09 9/29/99 478,779 478,779 477,773
Continental Auto Receivables
Series A
12.00%, 4/30/05 7/29/99 500,000 450,270 445,400
Dairy Farmers of America Preferred Capital Trust
7.38%,10/2/12 10/2/98 500,000 500,000 454,500
Deloitte & Touche LLP
7.41%,10/1/11 9/25/96 1,000,000 1,000,000 996,200
Deutsche Telekom Finance
8.25% 6/15/30 6/29/00 1,000,000 1,014,280 1,018,992
Dow Chemical
17.25%,1/2/03 3/25/92 1,041,017 1,041,017 1,175,412
Earle Palmer Brown
14.00%,12/16/04 12/31/98 519,677 421,994 519,677
Elastomeric Technologies Preferred Rubber
Compounding
13.80%, 10/8/07 1/8/99 500,000 477,240 476,000
Fibermark
9.38%,10/15/06 1/17/97 250,000 256,875 241,250
First Hawaiian Bank
6.93%,12/1/03 5/28/97 500,000 488,050 488,665
Fort Wayne Capital Trust
9.85%,4/15/27 4/14/97 1,000,000 1,000,000 1,145,000
Glass Equipment Development 144A
13.50% 6/2/08 6/2/00 500,000 457,417 457,415
Gruma SA DE CV
7.63%,10/15/07 10/2/97 250,000 249,580 214,063
Guangdong International Trust & Investment
8.75%,10/24/16 10/17/96 500,000 498,600 75,000
Interbank/ AKK Trust
9.00%,2/28/01 7/8/97 250,000 242,965 250,000
John Zelenka Evergreen Nursery
13.00% 5/4/07 5/4/00 476,190 436,120 435,573
</TABLE>
24
<PAGE>
PRIVATE PLACEMENTS (CONTINUED)
<TABLE>
<CAPTION>
DATE OF PAR MARKET OR
PRIVATE PLACEMENT SECURITIES--DEBT (CONTINUED) PURCHASE AMOUNT COST FAIR VALUE
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Louis Dreyfus
8.43%,07/15/01 7/20/94 $1,000,000 $ 1,000,000 $ 999,600
Merrill Lynch CLO 98 Pilgrim 2
6.62%,9/23/09 4/14/98 1,000,000 1,000,000 880,120
Mutual Fund Fee Trust IV
7.99%,1/31/05 4/21/97 298,238 298,238 299,371
NAL Auto Trust
7.30%,12/15/00 9/26/96 11,966 11,959 11,749
New Boston Garden
8.45%,9/22/15 9/22/95 894,364 894,364 877,639
Northwest Airlines
7.95%, 03/01/15 6/18/99 994,628 994,628 1,010,443
PM Holding
13.50%,10/30/04 10/31/98 500,000 483,000 500,000
Progress Cap Holdings
6.88%,8/1/01 8/21/96 1,000,000 1,000,000 991,320
Refco Group
8.21%,5/16/02 5/8/95 400,000 400,000 397,680
Scotia Pacific
7.11%,1/20/14 7/9/98 500,000 500,000 390,000
Soc Quimica Y Minera De
7.70%,9/15/06 3/16/98 1,000,000 1,022,370 952,657
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 2/6/95 357,000 357,000 357,071
Suburban Propane L.P.
7.54%,6/30/11 3/7/96 1,000,000 1,000,000 961,500
Therma-Tru
12.00% 5/15/09 5/9/00 750,000 576,829 576,000
Turkiye Vakiflar Bankasi T.A.O.
7.79%,12/22/00 12/22/97 98,628 98,628 98,628
Union Acceptance
8.53%,8/1/02 6/23/97 600,000 609,546 571,500
United Air Lines
8.70%, 10/07/08 5/4/95 813,063 810,063 823,767
Wells Fargo Capital
8.13%,12/1/26 12/3/96 500,000 521,000 453,027
West Fraser Mills
8.44%,6/30/04 4/15/94 780,000 780,000 781,560
Worthington Precision Metals
13.50%, 10/30/04 1/30/99 19,045 19,045 19,045
----------- -----------
Total Private Placement Debt $27,062,657 $26,337,766
----------- -----------
</TABLE>
<PAGE>
25
PRIVATE PLACEMENTS (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 1 $ 31 $ 240
Centennial Coal 8/29/96 41 -- --
CIC Acquisition (Conso International)
Class A Voting Warrants (Clawback Position) 3/6/00 679 -- --
CIC Acquisition (Conso International)
Class B Non-Voting Warrants (Clawback Provision) 3/6/00 2,731 -- --
CIC Acquisition (Conso International)
Warrants for Preferred Stock (Clawback Provision) 3/6/00 392 -- --
CIC Acquisition (Conso International)
Class A Voting Warrants 3/6/00 679 8,126 8,128
CIC Acquisition (Conso International)
Class B Non-Voting Warrants 3/6/00 2,731 32,670 32,684
CIC Acquisition (Conso International)
Warrants for Preferred Stock 3/6/00 392 39,204 39,204
Continental Auto Receivables 7/29/99 9,506 60,000 63,593
Earle Palmer Brown Class A 12/31/98 16 3,280 183
Earle Palmer Brown Class B 12/31/98 511 107,587 5,993
Elastomeric Technologies 10/8/99 111 24,000 24,000
Franklin Nursery 5/4/00 20 40,617 40,617
GED Holdings 6/2/00 3,049 42,583 42,582
Huron Technology 2/20/95 6,200 128,333 124,430
PSC 7/12/96 16,250 10,000 --
Setech 7/19/99 17,304 56,756 56,756
Stackpole Magnetic Systems 9/1/95 54,582 28,500 61,677
Stackpole Magnetic Systems Class B 9/1/95 120,000 120,000 135,600
Therma-Tru Holdings 5/9/00 452 174,376 175,772
WPM Holdings 10/30/98 110 17,000 44,968
Total Private Placement Equity $893,063 $856,427
-------- --------
</TABLE>
26
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The aggregate cost of investments purchased and the aggregate proceeds from
investments sold (exclusive of short-term investments) amounted to $14,044,190
and $13,214,735 respectively, as of June 30, 2000.
NOTE C - MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Under an agreement between the Fund and the 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 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 and receive no compensation from the Fund. 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
services for the Fund.
NOTE D - INCOME TAXES
The cost of investments for federal income tax purposes is the same as for
book purposes. As of June 30, 2000, the aggregate gross unrealized appreciation
on investments was $2,545,248 and the aggregate gross unrealized depreciation
was $5,660,897.
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 share. During 1992, the
underwriting discount and other expenses incurred in the issuance of the
preferred stock aggregated $1,120,016 and were recorded as a reduction of net
assets applicable to common shares. Dividends are cumulative from the date of
the original issue and reset every 28 days through an auction process. The
Articles Supplementary, which establish and fix the rights and preferences of
the VTP, places restrictions on the payments of dividends on the Fund's common
stock upon non-compliance with certain provisions of the Articles Supplementary,
purchase of futures or options, issuance of debt, short sale of securities,
mergers, changing the Fund's pricing service and investing in reverse repurchase
agreements, and requires the Fund to meet certain asset maintenance tests. The
shares of the VTP may be redeemed at the option of the Fund in accordance with
the terms of the Articles Supplementary. The mandatory redemption provisions of
the Articles Supplementary require the Fund under certain conditions to redeem
shares of the VTP if certain asset maintenance tests are not maintained or if
credit rating provisions are not met.
For the six months ended June 30, 2000, dividend rates have ranged from 5.0%
to 6.405% and the average dividend rate was 5.83%.
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.
27
<PAGE>
DIRECTORS & OFFICERS OF THE FUND
DIRECTORS DESCRIPTIONS OF OCCUPATIONS AND RESPONSIBILITIES
Thomas L. Bindley President, Bindley Capital Corporation; Director,
Midas, Inc.; Director, Strategic Equipment and
Supply Corporation; Director, Lincoln National
Convertible Securities Fund, Inc.; Director,
Junior Achievement of Chicago.
Richard M. Burridge Vice President, Paine Webber; Consultant,
Cincinnati Financial Corporation; Director,
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; Trustee, Ravina Festival Association;
Trustee, Window to the World Communications, Inc.
(PBS, Channel 11).
Roger J. Deshaies Senior Vice President, Finance, Brigham and
Women's Hospital; Corporate Director, Partners
Health System; 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 President and Director, Lincoln National
Convertible Securities Fund, Inc.; Managing
Partner, Griffin Investments, LLC.
Daniel R. Toll Director, Lincoln National Convertible Securities
Fund, Inc.; Director, Wiss, Janney, Elstner
Associates, Inc.; Trustee, INEX Insurance
Exchange.
OFFICERS
H. Thomas McMeekin President
David A. Berry Vice President
David C. Fisher Vice President
Michael P. Bishof Treasurer
Michael D. Mabry 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, Inc.
1818 Market Street
Philadelphia, PA 19103
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers L.L.P.
Two Commerce Square
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 Equiserve, 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 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 Fund, Inc.
LINCOLN NATIONAL INCOME FUND, INC.
2000 Semi-Annual Report
Form 12728-1 8/00 (3607) (J6170)
