<PAGE>
LINCOLN NATIONAL INCOME FUND, INC.
1999 Annual Report
LINCOLN INVESTMENT MANAGEMENT, INC.
<PAGE>
TABLE OF CONTENTS
Page
- --------------------------------------------------------------------
Manager Profile
Investment Policies & Objectives
President's Letter 1
Portfolio Manager's Discussion 2
Portfolio Performance 4
Annual Performance of the Fund vs. Index 5
Total Fund Investments 6
Dividend History 6
Common Stock Market Prices & Net Asset
Value History 7
Tax Information 8
FINANCIAL STATEMENTS:
Statement of Net Assets 9
Statement of Operations 19
Statements of Changes in Net Assets 20
Statements of Cash Flows 21
Financial Highlights 22
Notes to Financial Statements 23
Report of Independent Accountants 29
Directors & Officers of the Fund 30
Corporate Information 31
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 has approximately $37 billion
in assets under management as of December 31, 1999. 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
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 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
percent of net assets. The Fund also may invest in non-dollar denominated
securities, however, as of December 31, 1999, has chosen not to do so.
<PAGE>
LINCOLN NATIONAL INCOME FUND, INC.
PRESIDENT'S LETTER TO SHAREHOLDERS FOR THE YEAR ENDED 1999
Dear Shareholder:
The international financial crisis that began in July, 1998 with several Asian
currency devaluations is but a distant memory. The crisis spread quickly and
moved around the world culminating with a debt default in Russia and the near
collapse of the world's most prestigious hedge fund. There was a flight to
quality bonds, the Federal Reserve Bank (Fed) reacted with three easings and
people who owned U.S. Treasuries were treated very well.
The saga reversed in 1999, especially for equity holders. Gone were concerns
about foreign problems causing a U.S. recession. In fact, the U.S. finished
perhaps its best financial market decade seemingly invincible. However, the bond
market, still mired in a bear market, was back to worrying about economic growth
being too fast and inflation making a comeback.
Thus, interest rates on intermediate-term Treasury securities increased in
yield about 175 basis points (1.75%) in the year to 6.44%. Ten-year treasuries
had a total return of -8.25% in 1999. Corporate bonds rose in yield a slightly
smaller amount as credit spreads to Treasuries narrowed modestly. The increase
in interest rates gave the Fund a net asset value (NAV) return of -1.73%. This
compares to negative returns for major bond indices, including -1.96% for the
Lehman Corporate index and -0.82% for the Lehman Aggregate index.
The Fund suffered in 1999 a substantial change in its stock price vis-a-vis
the Fund's NAV, resulting in a severely negative market return for the year,
- -25.34%. The Fund began the year trading at a premium to NAV and ended the year
with a 20.40% discount. It was a year marked by substantial widening of
discounts to NAV for virtually all closed-end bond funds, and our 20% discount
is in line with our peer group. The Fund's Board continues to scrutinize the
discount and to consider appropriate alternatives to help enhance shareholder
value.
Although the supremacy of the NASDAQ in 1999 has few people interested in
income-oriented investments, we believe that some day a sector rotation will
occur with bonds and value stocks rallying from their depressed levels. For
bonds, credit spreads are near their widest levels (excluding recessionary
periods) in a decade, and real yields on long Treasuries are over 4%, very
attractive historically. So, bonds offer attractive compensation for the two
major risk categories they entail: credit and inflation. Thus, we feel that
buyers of bonds and bond funds should be rewarded with solid investment returns
in the new decade, a period that will likely bring with it lower financial
market returns. The Fund's trailing dividend yield is approximately 8%, and
this, coupled with any contraction in the Fund's discount, should give
shareholders high income and good total returns for the early 2000's.
We are saddened to note the passing of longtime Fund director Charles "Chic"
Freund in late 1999. Chic's guidance and service contributed significantly to
the Fund's success over the years. Chic will be sincerely missed by all of us
who had the pleasure to be associated with him.
Sincerely,
/s/ H. Thomas McMeekin
H. Thomas McMeekin
President
January 7, 2000
1
<PAGE>
LINCOLN NATIONAL INCOME FUND, INC.
PORTFOLIO MANAGER'S DISCUSSION FOR THE YEAR ENDED 1999
Review of 1999:
It was the second year for negative total returns for bonds in the 1990's (1994
was the other). Negative total returns on bonds are rare since bonds pay a
relatively high income. For prices to decline enough to overwhelm income,
interest rates have to rise a lot. As Tom McMeekin pointed out in his
President's letter, interest rates did indeed rise substantially--for corporate
bonds, by about 150 basis points in the year. Lincoln National Income Fund's
portfolio holdings were negatively impacted by the changes (bond prices decline
when interest rates rise). The Fund's net asset value (NAV) per share declined
during the year from $13.39 to $12.17, a decline of 9.1%. The Fund's coupon
(income) return of about 7.4% gave rise to a combined NAV return of -1.73%.
This decline in net asset value is what we would have expected for a move in
interest rates of that magnitude and given the Fund's sensitivity to interest
rates. The Fund maintained a duration of its bond holdings during the year on
average of roughly 4.2. Duration is a statistical measure of a bond portfolio's
sensitivity to interest rates, with 4.2 meaning that the portfolio will change
in value approximately 4.2% for every 1% change in interest rates. The Fund,
however, is also levered (via our variable term preferred stock), so the
interest rate sensitivity rises to about a 6.2 duration, considering the
leverage. The 1.5% increase in rates then estimates about a 9% decline in value.
This decline in price of 9% was in line with the bond market in total and
roughly the same as the price decline in the Lehman Corporate Bond index.
As Tom McMeekin stated in his letter, the interest rate increase for 1999 can
be attributed to the reversal of the big decline in rates that occurred in 1998.
We were surprised at how quickly the world economy recovered from the 1998
crisis, and the rate rise was totally justified given the change in economic
conditions. Rates in 1998 were not that attractive, artificially low because of
the flight to quality. Today interest rates are higher and real interest rates
(Treasury rates after inflation) are about 4.25% higher than the historical
average of about 3.5%. Although bonds are currently out of favor considering the
sensation in the stock market, bonds are now better positioned for good returns
over inflation in the years ahead.
Our sector allocations did not change much during the year, with investment
grade public corporate bonds comprising about 70% of our holdings at the
beginning and end of the year. Private placements were 21% of assets at
year-end, down slightly from the 23% level a year ago.Residential
mortgage-backed securities also held constant at approximately 5% of assets. We
did build a commercial mortgage-backed securities portfolio during the year, and
this sector now comprises about 3% of the portfolio.
Our mezzanine portfolio continues to be about 4% of assets. Our holdings of
Global Crossing common stock, acquired through warrants in a mezzanine debt deal
in 1997, provided us additional gains in 1999. We finally sold the last of these
shares in January, 2000 for a total realized gain of $1,385,000. This has been a
tremendously successful investment for the Fund, providing an internal rate of
return of 145% on our initial $500,000 subordinated debt investment. We funded
three new mezzanine debt investments in 1999, each $500,000, with an average
coupon in excess of 12%. We continue our policy of investing side by side with
Lincoln National Life Insurance Company on these investments, subject to the
review and approval of the Board of Director's Joint Transaction Committee
before each mezzanine investment.
We have been watching the weakness in the real estate investment trust (REIT)
equity markets over the last year and have noticed that the dividend yields are
now attractive relative to bonds. In October, we went to the Board asking for a
new allocation to REIT stocks up to 10% of the Fund's assets. This recommended
new sector was approved, and we are currently implementing this strategy in
early 2000. We estimate REIT stocks are poised for total returns of 10-12% over
the next several years, with approximately 2/3 of this return coming from
dividends.
2
<PAGE>
PORTFOLIO MANAGER'S DISCUSSION (continued)
OUTLOOK FOR 2000:
The economy is strong and has momentum. Right now, an overheating economy is a
bigger risk than a recession. Clearly the Federal Reserve (Fed) will tighten to
slow the economy; the question is: how many tightenings will it take? Fed
Chairman Alan Greenspan would like to pull off a soft landing, where he slows
the economy to reduce inflation risk while minimizing damage to the stock
market. Our view is that 75 basis points of increase in Fed Funds will occur in
the year 2000 to dampen the economy. The Fed appears to have adopted a 3.5% GDP
growth "speed limit," and we feel three tightenings of 25 basis points each will
be enough to achieve this. Our forecast is that GDP growth will be very strong
in the first quarter of 2000, but will be moderate to an average 3% growth rate
thereafter.
With the economy doing well, credit conditions should generally be good. We
are comfortable with our corporate bond portfolio given this outlook, and may
also consider increasing somewhat our allocation to high yield bonds. First,
however, we need to reallocate some cash in the portfolio to affect the REIT
investments. The market yield of the portfolio is 8.1% at December 31, 1999, the
highest level in over two years. With reinvestment rates now relatively high
again, and if our REIT investments give us the returns we expect, there should
be less pressure on the need for dividend cuts in the future. The trailing
dividend yield of the Fund at the Fund's NAV is 8.13%, meaning that market rates
and the Fund's payout rate are almost at parity.
Respectfully,
/s/ David C. Fischer
David C. Fischer
Portfolio Manager
January 11, 2000
3
<PAGE>
ASSET CLASSIFICATION
As of December 31, 1999
(Dollars in
Millions)
- -------------------------------------------------------------
Public Debt 70.30% $89.0
Government/Gov't Agency 4.11% $ 5.2
Private Placements Debt 19.75% $25.0
Private Placements Equity 0.63% $ 0.8
Equities/Partnerships 2.21% $ 2.8
Short-Term Investments 3.00% $ 3.8
DISTRIBUTION BY QUALITY
As of December 31, 1999
(Dollars in Millions)
AAA 10.42% 13.2
AA 4.66% 5.9
A 26.12% 33.1
BBB 41.78% 52.6
BB 6.78% 8.6
B 4.17% 5.3
CCC 0.40% 0.5
Equities 2.67% 3.6
Short-Term Investments 3.00% 3.8
------ ------
100.0% $126.6
*Ratings are by nationally recognized statistical rating organizations or, if
unrated, the internal rating assigned by the Advisor.
PORTFOLIO PERFORMANCE
As of December 31, 1999
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 the end of 1999 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>
<TABLE>
<CAPTION>
1973 1978 1985 1988 1993 1997 1998 1999
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income Fund NAV ($13,992) $1,000 $1,383 $3,744 $5,332 $ 9,537 $13,180 $14,238 $13,992
Lehman Corporate Bond Index ($9,592) $1,000 $1,386 $3,096 $3,939 $ 6,757 $9,035 $9,784 $9,592
Income Fund-Market ($12,891) $1,000 $1,093 $3,829 $5,234 $10,925 $14,705 $17,266 $12,891
</TABLE>
4
<PAGE>
The following table displays the net asset value total return for the Fund on a
cumulative basis compared to the Lehman Corporate Bond Index.
<TABLE>
<CAPTION>
Since
Inception
1 Year 3 Year 5 Years 10 Years 15 Years (26 Years)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Lincoln National Income Fund -1.73% 18.23% 58.65% 120.31% 327.20% 1158.20%
Lehman Corporate Bond Index -1.96% 17.03% 47.76% 113.21% 275.88% 859.25%
</TABLE>
ANNUAL PERFORMANCE OF LINCOLN NATIONAL INCOME FUND (NAV) VS LEHMAN CORPORATE
BOND INDEX
<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%
</TABLE>
5
<PAGE>
TOTAL FUND INVESTMENTS
At Market or Fair Values as of December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
(000) % of Total (000) % OF TOTAL
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Public & Government Debt Securities $94,131 74% $99,250 74%
Private Placement Securities 25,839 21% 30,292 23%
Common Stocks & Warrants 546 0% 397 0%
Preferred Stocks 1,413 1% 1,578 1%
Short-Term Investments 3,800 3% 2,300 2%
Partnerships 835 1% 444 0%
Other Assets/(Liabilities) 5 0% (126) 0%
- -----------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS $126,569 100% $134,135 100%
</TABLE>
DIVIDEND HISTORY
The Fund in its lifetime has distributed common dividends of $31.15 per share,
which represents 249.2 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
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 0.99
6
<PAGE>
COMMON STOCK MARKET PRICES AND NET ASSET VALUE HISTORY (Unaudited)
<TABLE>
<CAPTION>
1999
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 13.563 11.500 11.750 261,800 13.39 12.70 12.83
3rd Quarter 11.813 10.563 10.938 317,200 12.92 12.43 12.72
4th Quarter 12.500 9.625 9.688 369,700 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.
7
<PAGE>
TAX INFORMATION (UNAUDITED)
Income dividends received by a shareholder must be reported for federal income
tax purposes as ordinary income. The Fund distributed $ 0.99 per share to common
shareholders for the tax year 1999. Common dividend payments made in April,
July, October and mid-January 2000 are taxable in the 1999 tax year.
In accordance with the Tax Reform Act of 1986, regulated investment companies
are required to distribute at least 98 percent of their net investment income
earned in the calendar year to avoid a 4 percent federal excise tax on
undistributed net investment income and undistributed capital gains for the
twelve months ended October 31. Under the act, dividends declared in December,
payable to shareholders of record on a date in December and paid before the
following February 1, are treated as paid by the Fund and received by the
shareholders in December.
The extent to which the following dividend payments qualify (as provided by
the Internal Revenue Code and subject to certain limitations set forth therein)
for the dividend received deduction for corporations is shown in the table
below:
<TABLE>
<CAPTION>
Common Preferred
Shareholders Shareholders
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Ordinary Income Dividend Amount Per Share $0.99 $49.50*
Long-Term Capital Gains Per Share $0.00 $1.69*
Corporation's Dividend Received Deduction--Percent 1.54% 1.54%
Corporation's Dividend Received Deduction--$ Per Share $0.01935 $3.44115
</TABLE>
* Based on 40,000 shares of preferred stock outstanding.
8
<PAGE>
LINCOLN NATIONAL INCOME FUND, INC.
STATEMENT OF NET ASSETS
December 31, 1999
INVESTMENTS-NOTES A & B PAR MARKET OR
PUBLIC DEBT SECURITIES (74.4%) AMOUNT FAIR VALUE
- --------------------------------------------------------------------------------
AEROSPACE & DEFENSE (1.5%)
Boeing Capital
9.25%, 4/1/02 $1,000,000 $1,040,243
Raytheon
6.55%, 3/15/10 1,000,000 898,779
----------
1,939,022
----------
AIRLINES (3.3%)
AMR
10.00%, 4/15/21 1,000,000 1,146,192
Delta Air Lines
9.90%, 6/16/02 1,473,000 1,538,363
United Airlines
9.35%, 4/7/16 1,500,000 1,538,235
----------
4,222,790
----------
ASSET BACKED SECURITIES (1.5%)
Green Tree Lease Finance 1998-1B
6.66%, 10/20/04 475,217 471,916
Honda Auto Lease Trust Series 99-A A4
6.65%, 7/15/05 500,000 496,468
Vanderbilt Mortgage Finance Ser98-C Cl 1A2 144A
6.32%, 6/7/16 1,000,000 945,795
----------
1,914,179
----------
BANKING (7.2%)
Banc One
9.88%, 3/1/09 1,000,000 1,152,224
BankAmerica
10.00%, 2/1/03 1,000,000 1,076,133
First USA Bank Wilmington Delaware
7.65%, 8/1/03 1,000,000 1,005,776
Hong Kong & Shanghai Bank
6.38%, 12/29/49 500,000 398,575
Household International
6.85%, 9/10/04 1,610,000 1,572,794
Lloyds Bank PLC
5.56%, 6/29/49 1,000,000 864,900
Mellon Capital Notes
7.72%, 12/1/26 400,000 367,939
NationsBank
8.13%, 6/15/02 1,000,000 1,025,710
Standard Charter PLC
5.38%, 11/29/49 1,000,000 708,200
Wells Fargo
6.13%, 11/1/03 1,000,000 963,219
----------
9,135,470
----------
BUILDING & MATERIALS (0.2%)
Toll Brothers
8.75%, 11/15/06 250,000 245,625
----------
245,625
----------
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
- --------------------------------------------------------------------------------
CABLE, MEDIA & PUBLISHING (4.8%)
K-III Communications
8.50%, 2/1/06 $ 250,000 $ 245,313
News America Holdings
9.25%, 2/1/13 1,000,000 1,097,532
Tele-Communications
9.25%, 1/15/23 2,000,000 2,082,017
Time Warner
9.13%, 1/15/13 1,500,000 1,646,471
Walt Disney
8.88%, 12/15/00 1,000,000 1,019,517
----------
6,090,850
----------
CHEMICALS (0.2%)
ISP Holdings
9.00%, 10/15/03 250,000 246,250
----------
246,250
----------
COLLATERALIZED MORTGAGE OBLIGATIONS (0.8%)
First Union-Lehman Brothers
6.65%, 12/18/07 1,000,000 951,917
----------
951,917
----------
ELECTRONICS & ELECTRICAL EQUIPMENT (0.2%)
Ametek
7.20%, 7/15/08 250,000 214,543
----------
214,543
----------
ENERGY (4.4%)
Coastal
9.75%, 8/1/03 1,000,000 1,065,739
Enron
9.50%, 6/15/01 1,000,000 1,030,806
Gulf Canada Resources
9.63%, 7/1/05 250,000 255,625
Oryx Energy
10.00%, 4/1/01 1,000,000 1,031,213
Pennzoil
10.13%, 11/15/09 1,000,000 1,090,773
Sun
9.38%, 6/1/16 1,000,000 1,051,958
----------
5,526,114
----------
FINANCE (8.5%)
Avalon Bay Communities
6.80%, 7/15/06 500,000 460,872
Dow Capital
9.00%, 5/15/10 1,000,000 1,085,529
Duke Capital
6.25%, 7/15/05 1,000,000 941,663
Fleet/Norstar Financial Group
8.63%, 1/15/07 1,000,000 1,047,793
General Electric Capital
8.75%, 5/21/07 1,000,000 1,076,733
General Motors Acceptance
8.88%, 6/1/10 1,500,000 1,611,078
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
- --------------------------------------------------------------------------------
FINANCE (CONTINUED)
Goldman Sachs Group
7.20%, 3/1/07 $500,000 $485,835
Greentree Financial
8.65%, 1/15/20 905,077 890,807
Lehman Brothers Holdings
7.38%, 5/15/07 500,000 501,248
Merrill Lynch Mortgage Investors
10.00%, 3/15/10 307,530 322,567
Mid-America Finance
6.38%, 9/1/05 500,000 477,344
Selkirk Cogen Funding
8.65%, 12/26/07 934,180 941,783
SMA Finance
6.40%, 11/16/06 1,000,000 949,844
----------
10,793,096
----------
FOOD, BEVERAGE & TOBACCO (1.5%)
Chiquita Brands International
9.63%, 1/15/04 250,000 181,250
Conagra
7.40%, 9/15/04 1,500,000 1,488,673
Marsh Supermarket
8.88%, 8/1/07 250,000 240,625
----------
1,910,548
----------
FOREIGN GOVERNMENTS (1.3%)
Government of Venezuela
9.25%, 9/15/27 500,000 332,500
Quebec Province
11.00%, 6/15/15 1,000,000 1,055,897
Republic of Colombia
7.63%, 2/15/07 300,000 253,500
----------
1,641,897
----------
GOVERNMENT & GOVERNMENT AGENCY (4.1%)
Federal Home Loan Mortgage
7.80%, 9/15/20 429,847 432,406
7.00%, 9/17/31 870,738 838,403
Federal National Mortgage Association
9.00%, 3/1/24 426,751 442,687
6.50%, 12/1/27 1,605,199 1,517,916
Government National Mortgage Association
9.00%, 8/15/21 553,226 585,209
9.00%, 3/15/23 1,251,642 1,321,656
----------
5,138,277
----------
HEALTHCARE & PHARMACEUTICALS (0.2%)
Beckman Instruments
7.10%, 3/4/03 250,000 243,510
----------
243,510
----------
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
- --------------------------------------------------------------------------------
INDUSTRIAL MACHINERY (1.3%)
AGCO
8.50%, 3/15/06 $250,000 $233,438
Caterpillar Tractor
6.00%, 5/1/07 1,000,000 918,637
Setech Lewis Supply
13.50%, 6/30/05 500,000 443,250
----------
1,595,325
----------
INSURANCE (1.8%)
Allstate
7.50%, 6/15/13 1,000,000 980,909
Conseco
7.88%, 12/15/00 300,000 299,964
Nationwide
9.88%, 2/15/25 1,000,000 1,045,302
----------
2,326,175
----------
LEISURE, LODGING & ENTERTAINMENT (1.3%)
MGM Grand
6.88%, 2/6/08 1,000,000 886,995
Speedway Motorsports
8.50%, 8/15/07 250,000 241,250
Starwood Hotels & Resorts
6.75%, 11/15/03 500,000 467,905
----------
1,596,150
----------
METALS & MINING (3.3%)
Cyprus Amax Minerals
7.38%, 5/15/07 500,000 474,038
EES Coke Battery
7.13%, 4/15/02 267,000 267,103
Inco
9.60%, 6/15/22 1,000,000 944,860
Noranda
8.00%, 6/1/03 1,500,000 1,502,903
Pohang Iron & Steel
7.13%, 11/1/06 1,000,000 932,670
----------
4,121,574
----------
MISCELLANEOUS (2.3%)
Ashland
6.86%, 5/1/09 500,000 462,658
Corp Andina
7.75%, 3/1/04 1,000,000 1,003,698
Pemex 144A
8.45%, 2/15/07 1,000,000 991,250
Service International
6.00%, 12/15/05 665,000 503,890
----------
2,961,496
----------
MORTGAGE BACKED SECURITIES (2.4%)
American Airlines
9.83%, 1/1/02 730,110 771,209
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
STATEMENT OF NET ASSETS (continued)
PAR MARKET OR
PUBLIC DEBT SECURITIES (CONTINUED) AMOUNT FAIR VALUE
- --------------------------------------------------------------------------------
MORTGAGE BACKED SECURITIES (CONTINUED)
Citicorp Mortgage Securities
Series 1991-6 Class A
8.75%, 5/25/21 $480,523 $485,103
Commercial Mortgage Asset Ttrust 1999-C1 A1
6.25%, 8/17/06 960,985 926,675
Countrywide Home Loans 1999-1
6.50%, 3/25/29 1,000,000 905,000
----------
3,087,987
----------
PACKAGING & CONTAINERS (0.2%)
Container Corporation of America
11.25%, 5/1/04 250,000 261,250
----------
261,250
----------
PAPER & FOREST PRODUCTS (1.3%)
Georgia-Pacific
9.50%, 5/15/22 1,500,000 1,583,166
----------
1,583,166
----------
REAL ESTATE (3.1%)
Comp De DeSarollo
10.19%, 5/31/11 492,475 408,754
Duke Realty
7.05%, 3/1/06 500,000 469,582
ERP Operating
6.63%, 4/13/05 400,000 369,719
Highwoods Realty
7.00%, 12/1/06 600,000 544,053
7.50%, 4/15/18 400,000 336,277
Irvine Apartment Communities
7.00%, 10/1/07 1,000,000 878,379
Liberty Property
7.10%, 8/15/04 1,000,000 952,834
----------
3,959,598
----------
RETAIL (0.8%)
Sears Roebuck
9.05%, 2/6/12 1,000,000 1,065,867
----------
1,065,867
----------
TELECOMMUNICATIONS (2.8%)
MCI Communications
7.50%, 8/20/04 1,000,000 1,009,941
Nynex
9.55%, 5/1/10 1,388,122 1,492,898
Worldcom
8.88%, 1/15/06 1,000,000 1,042,784
----------
3,545,623
----------
TEXTILES, APPAREL & FURNITURE (1.0%)
Interface
7.30%, 4/1/08 250,000 204,988
Whirlpool
9.00%, 3/1/03 1,000,000 1,047,266
----------
1,252,254
----------
The accompanying notes are an integral part of the financial statements.
13
<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 $1,315,904
NWA Trust
10.23%, 6/21/14 438,473 463,356
US Freightways
6.50%, 5/1/09 1,000,000 905,035
----------
2,684,295
----------
UTILITIES (11.0%)
Avon Energy Partners Holdings
7.05%, 12/11/07 1,000,000 946,023
BVPS II Funding
8.33%, 12/1/07 1,490,000 1,482,348
Cleveland Electric
7.63%, 8/1/02 1,000,000 1,000,946
Commonwealth Edison
8.63%, 2/1/22 1,000,000 1,004,311
Consumers Energy
6.50%, 6/15/05 500,000 493,245
Duquesne Light
8.70%, 6/1/16 969,000 1,023,357
Empresa Nacional Electric
7.75%, 7/15/08 450,000 427,714
Hyder
6.88%, 12/15/07 1,000,000 922,041
New England Telephone & Telegraph
9.00%, 8/1/31 1,000,000 1,034,227
Niagara Mohawk Power
9.25%, 10/1/01 500,000 515,306
PacifiCorp
7.00%, 7/15/09 500,000 478,926
8.29%, 12/30/11 1,000,000 1,044,757
Philadelphia Electric
7.13%, 9/1/02 1,500,000 1,498,192
System Energy Resources
7.80%, 8/1/00 1,000,000 1,001,396
Texas Utilities
7.38%, 8/1/01 1,000,000 1,004,091
----------
13,876,880
----------
TOTAL PUBLIC DEBT SECURITIES (cost $97,260,030) 94,131,728
----------
PRIVATE PLACEMENT SECURITIES--DEBT (19.7%)
- --------------------------------------------------------------------------------
ACCOUNTING FIRMS (0.8%)
Deloitte & Touche LLP
7.41%, 10/1/11 1,000,000 963,700
----------
963,700
----------
AIRLINES (1.5%)
Northwest Airlines
7.95%, 3/1/15 1,000,000 1,029,080
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
- --------------------------------------------------------------------------------
AIRLINES (CONTINUED)
United Air Lines
8.70%, 10/7/08 $824,489 $844,891
----------
1,873,971
----------
AUTOMOBILE & AUTO PARTS (0.3%)
Continental Auto Receivables Series A
12.00%, 4/30/05 455,000 400,400
----------
400,400
----------
BANKING (2.1%)
Anglo Irish Bank
9.10%, 9/30/06 1,000,000 1,054,500
Banco Nacional de Mexico
7.57%, 1/1/01 280,177 280,233
First Hawaiian Bank 144A
6.93%, 12/1/03 500,000 493,431
Interbank/ AKK Trust
9.00%, 2/28/01 375,000 371,738
Wells Fargo Capital 144A
8.13%, 12/1/26 500,000 472,202
----------
2,672,104
----------
CHEMICALS (1.1%)
Dow Chemical
17.25%, 1/2/03 1,169,613 1,347,979
----------
1,347,979
----------
COLLATERALIZED MORTGAGE OBLIGATIONS (0.4%)
Commercial Mortgage Pass-Through Certificates
Series AMC Class A
7.71%, 10/12/09 494,813 533,642
----------
533,642
----------
ELECTRONICS & ELECTRICAL EQUIPMENT (0.4%)
Spectrascan
11.25%, 6/30/06 500,000 500,000
----------
500,000
----------
FINANCE (5.6%)
Avianca Airline Ticket Receivable Trust
8.75%, 12/24/05 500,000 458,200
DLJ Mortgage Acceptance
Series 1995-QT4 Class A
4.70%, 6/26/25 919,369 133,309
Fort Wayne Capital Trust 144A
9.85%, 4/15/27 1,000,000 1,125,300
Guangdong International Trust & Investment 144A
8.75%, 10/24/16 500,000 50,000
Louis Dreyfus
8.43%, 7/15/01 1,000,000 1,002,900
Merrill Lynch CLO 98 Pilgrim 2
6.62%, 9/23/09 1,000,000 893,200
Mutual Fund Fee Trust IV
7.99%, 1/31/05 408,871 427,718
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
STATEMENT OF NET ASSETS (continued)
PAR MARKET OR
PRIVATE PLACEMENT SECURITIES--DEBT (CONTINUED) AMOUNT FAIR VALUE
- --------------------------------------------------------------------------------
FINANCE (CONTINUED)
NAL Auto Trust
7.30%, 12/15/00 $40,289 $39,873
PM Holding
13.50%, 10/30/04 500,000 500,000
Progress Cap Holdings 144A
6.88%, 8/1/01 1,000,000 995,976
Refco Group
8.21%, 5/16/02 600,000 600,360
Scotia Pacific 144A
7.11%, 1/20/14 500,000 410,000
Union Acceptance
8.53%, 8/1/02 600,000 561,000
----------
7,197,836
----------
FOOD, BEVERAGE & TOBACCO (1.3%)
Coca-Cola Femsa SA DE 144A
9.40%, 8/15/04 1,000,000 1,017,000
Dairy Farmers of America Preferred Capital Trust
7.38%, 10/2/12 500,000 457,350
Gruma SA DE CV 144A
7.63%, 10/15/07 250,000 218,120
----------
1,692,470
----------
LEISURE, LODGING & ENTERTAINMENT (1.1%)
New Boston Garden
8.45%, 9/22/15 901,333 883,847
United States Playing Card Company
12.00%, 11/18/04 500,000 500,000
----------
1,383,847
----------
METALS & MINING (1.1%)
Centennial Resources +
13.00%, 10/31/03 500,000 0
Soc Quimica Y Minera De 144A
7.70%, 9/15/06 1,000,000 945,515
Steel Technologies
8.52%, 3/1/05 428,500 431,585
Worthington Precious Metals
13.50%, 10/30/04 12,618 12,618
----------
1,389,718
----------
MISCELLANEOUS (2.1%)
BEA
6.72%, 6/15/10 1,000,000 950,000
BSI Holdings
8.50%, 9/30/05 324,000 324,000
Earle Palmer Brown
14.00%, 12/16/04 511,969 398,568
Elastomeric Technologies Preferred Rubber
Compounding
13.80%, 10/8/07 500,000 476,000
Stackpole Magnetic Systems
13.50%, 10/15/05 380,000 380,000
The accompanying notes are an integral part of the financial statements.
16
<PAGE>
STATEMENT OF NET ASSETS (continued)
PAR MARKET OR
PRIVATE PLACEMENT SECURITIES--DEBT (CONTINUED) AMOUNT FAIR VALUE
- --------------------------------------------------------------------------------
MISCELLANEOUS (CONTINUED)
Turkiye Vakiflar Bankasi T.A.O.
7.79%, 12/22/00 $166,666 $167,100
----------
2,695,668
----------
NATURAL GAS (0.8%)
Suburban Propane L.P.
7.54%, 6/30/11 1,000,000 957,300
----------
957,300
----------
PAPER & FOREST PRODUCTS (0.8%)
Fibermark
9.38%, 10/15/06 250,000 253,125
West Fraser Mills
8.44%, 6/30/04 780,000 785,304
----------
1,038,429
----------
REAL ESTATE (0.3%)
Carramerica Realty 144A
6.63%, 3/1/05 400,000 366,658
----------
366,658
----------
TOTAL PRIVATE PLACEMENT DEBT - (cost $26,835,372) 25,013,722
----------
NUMBER OF
PRIVATE PLACEMENT SECURITIES--EQUITIES (0.7%) SHARES
- --------------------------------------------------------------------------------
LEISURE, LODGING & ENTERTAINMENT (0.1%)
Bicycle Holdings 8 100,197
----------
100,197
----------
MISCELLANEOUS (0.2%)
Stackpole Magnetic Systems Class B 120,000 240,000
----------
240,000
----------
WARRANTS (0.4%)
Centennial Coal* 41 0
Continental Auto Receivables* 8,967 59,991
Earle Palmer Brown Class A* 16 3,407
Earle Palmer Brown Class B* 511 111,729
Elastomeric Technologies* 111 24,000
Huron Technology* 6,200 103,041
PSC* 16,250 0
Setech* 17,304 56,756
Stackpole Magnetic Systems * 54,582 109,164
WPM Holdings* 110 17,215
----------
485,303
----------
TOTAL PRIVATE PLACEMENT - EQUITIES (cost $585,461) 825,500
----------
COMMON STOCK (0.4%)
- --------------------------------------------------------------------------------
Global Crossing 10,922 545,759
----------
TOTAL COMMON STOCK (cost $0) 545,759
----------
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
STATEMENT OF NET ASSETS (continued)
NUMBER OF MARKET OR
PREFERRED STOCKS (1.1%) SHARES FAIR VALUE
- --------------------------------------------------------------------------------
Salomon Financing Trust I 9.50% 20,000 $510,000
Transcanada Capital 8.75% 40,000 902,500
----------
TOTAL PREFERRED STOCK (cost $1,542,000) 1,412,500
----------
PARTNERSHIPS (0.7%)
- --------------------------------------------------------------------------------
KBP Holdings* 1 457,236
KBSI Partnership* 1 377,340
MDAS Investors* 1 0
----------
TOTAL PARTNERSHIPS (cost $443,622) 834,576
----------
PAR
SHORT TERM INVESTMENTS (3.0%) AMOUNT
- --------------------------------------------------------------------------------
Associates Corp North America
4.00%, 1/3/00 $3,800,000 3,800,000
----------
TOTAL SHORT TERM INVESTMENTS (cost $3,800,000) 3,800,000
----------
TOTAL MARKET VALUE OF SECURITIES (100.0%)
(cost $130,466,485) 126,563,785
RECEIVABLES AND OTHER ASSETS NET OF LIABILITIES (0.0%) 5,592
------------
NET ASSETS (100.0%) $126,569,377
------------
NET ASSET VALUE PER SHARE OF COMMON STOCK OUTSTANDING
($126,569,377 LESS VARIABLE TERM PREFERRED STOCK AT
LIQUIDATION VALUE OF $40,000,000 DIVIDED BY 7,114,831
SHARES OF COMMON STOCK OUTSTANDING) $ 12.17
==========
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
Accumulated net realized gain on investments 200,677
Distributions in excess of net investment income (87,456)
Net unrealized depreciation of investments (3,902,700)
----------
TOTAL NET ASSETS $126,569,377
============
* Non income producing security
+ Security is currently in default
The accompanying notes are an integral part of the financial statements.
18
<PAGE>
LINCOLN NATIONAL INCOME FUND, INC.
STATEMENT OF OPERATIONS
Year Ended December 31, 1999
INVESTMENT INCOME:
Interest $10,252,665
Dividends 137,646
- --------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 10,390,311
EXPENSES:
Management fees - Note C 1,119,388
Variable term preferred stock fees 112,775
Directors fees 80,987
Professional fees 73,857
Printing and Postage 21,333
Stock Transfer & dividend disbursing fees 18,750
Custodian and registrar fees 8,917
Other 42,982
- --------------------------------------------------------------------------------
1,478,989
- --------------------------------------------------------------------------------
Expenses paid indirectly - Note A (11,463)
- --------------------------------------------------------------------------------
TOTAL EXPENSES 1,467,526
NET INVESTMENT INCOME 8,922,785
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investment 214,842
Net change in unrealized appreciation/depreciation of investments (8,714,775)
- --------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS (8,499,933)
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $422,852
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
19
<PAGE>
LINCOLN NATIONAL INCOME FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1999 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CHANGES FROM OPERATIONS:
Net investment income $8,922,785 $9,235,175
Net realized gain on investments 214,842 547,870
Net change in unrealized appreciation/depreciation of investments (8,714,775) (257,904)
- --------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 422,852 9,525,141
CHANGES FROM CAPITAL SHARE TRANSACTIONS:
Par value of shares issued under dividend reinvestment plan 82,262 200,374
Proceeds in excess of par value for shares issued under
dividend reinvestment plan 1,007,237 2,522,734
- --------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL SHARE TRANSACTIONS 1,089,499 2,723,108
DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Common shareholders (7,030,431) (7,188,525)
Preferred shareholders (1,979,810) (2,235,024)
- --------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME (9,010,241) (9,423,549)
DISTRIBUTIONS TO SHAREHOLDERS FROM NET REALIZED GAINS:
Common shareholders - (322,096)
Preferred shareholders (67,760) (99,859)
- --------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS TO SHAREHOLDERS FROM NET REALIZED GAINS (67,760) (421,955)
- --------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (7,565,650) 2,402,745
- --------------------------------------------------------------------------------------------------------------
NET ASSETS, BEGINNING OF YEAR 134,135,027 131,732,282
- --------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR $126,569,377 $134,135,027
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
20
<PAGE>
LINCOLN NATIONAL INCOME FUND, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Interest Received $10,168,068 $10,507,376
Dividends Received 137,646 288,780
Operating Expenses Paid (1,483,831) (1,482,821)
Purchase of investments securities (14,841,230) (29,938,261)
Proceeds from sale of investment securities 11,180,375 29,033,490
Net proceeds of short-term investments 3,059,835 1,093,752
- ------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,220,863 9,502,316
FINANCING ACTIVITIES:
Distributions paid to common and preferred shareholders (9,546,078) (12,257,902)
Proceeds received from dividend reinvestment plan 1,089,499 2,723,108
- ------------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (8,456,579) (9,534,794)
- ------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH (235,716) (32,478)
- ------------------------------------------------------------------------------------------------------
CASH, BEGINNING OF YEAR $408,587 $441,065
- ------------------------------------------------------------------------------------------------------
CASH, END OF YEAR $172,871 $408,587
RECONCILIATION OF INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Net increase in net assets resulting from operations $422,852 $9,525,141
Reconciling Adjustments:
Net realized and unrealized (gain) loss on investments 8,499,933 (289,966)
Net proceeds (purchase) of investment securities (601,020) 188,981
Discount accretion on investment income receivable (120,548) (181,689)
Increase in accrued investment income receivable 35,952 126,110
Increase in accrued dividend receivable - 60,825
Increase (Decrease) in accrued expenses (16,306) 72,914
- ------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $8,220,863 $9,502,316
- ------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
21
<PAGE>
LINCOLN NATIONAL INCOME FUND, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
(SELECTED DATA FOR EACH COMMON STOCK YEAR ENDED DECEMBER 31,
OUTSTANDING THROUGHOUT THE YEAR) -----------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $13.39 $13.43 $13.47 $14.22 $12.25
Income from investment operations:
Net investment income 1.26 1.32 1.40 1.44 1.46
Net realized and unrealized gain (loss) on investments (1.20) 0.06 0.39 (0.41) 2.17
- ------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.06 1.38 1.79 1.03 3.63
Less dividends and distributions:
Dividends from net investment income
To preferred shareholders (0.28) (0.31) (0.22) (0.24) (0.29)
To common shareholders (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 DIVIDENDS AND DISTRIBUTIONS (1.28) (1.42) (1.83) (1.78) (1.66)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $12.17 $13.39 $13.43 $13.47 $14.22
- ------------------------------------------------------------------------------------------------------------------------
Per Share Market Value, End of Year $9.69 $14.19 $13.06 $12.50 $13.63
Total Investment Return (based on Market Value) (25.34%) 17.42% 17.12% 2.42% 39.07%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of year (000 omitted) $126,569 $134,135 $131,732 $132,054 $137,163
Ratio of expenses to average net assets 1.12% 1.16% 1.12% 1.11% 1.14%
Ratio of expenses to average net assets
prior to expenses paid indirectly 1.13% N/A N/A N/A N/A
Ratio of net investment income to average net assets 6.80% 6.84% 7.17% 7.32% 7.44%
Ratio of net investment income prior
to expenses paid indirectly to average net assets 6.81% N/A N/A N/A N/A
Portfolio Turnover 10.29% 19.78% 22.63% 22.73% 26.98%
</TABLE>
The accompanying notes are an integral part of the financial statements.
22
<PAGE>
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
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 at purchase
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
<PAGE>
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 the
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 December 31, 1999, the Fund held
$26,673,798 of fair valued securities, representing 21.07% 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 incurany liability for income taxes on the portion of its net
investment income and net realized gains distributed to shareholders.
23
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
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 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.
The Fund receives earnings credits from the custodian when positive balances
are maintained, which are used to offset custody fees. These credits were
$11,463 for the year ended December 31, 1999. 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 follow is a list of private placements with initial purchase date, cost
amount and market value as of December 31, 1999:
24
<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 09/30/1994 $1,000,000 $1,000,000 $1,054,500
Avianca Airline Ticket Receivable Trust
8.75%, 12/24/05 12/24/1997 500,000 500,000 458,200
Banco Nacional de Mexico
7.57%,1/1/01 11/05/1996 280,177 280,166 280,233
BEA
0.00%, 6/15/10 04/21/1998 1,000,000 963,239 950,000
BSI Holdings
10.25%, 9/30/05 01/23/1998 324,000 324,000 324,000
Carramerica Realty 144A
6.63%, 3/1/05 02/18/1998 400,000 397,956 366,658
Centennial Resources
13.00%, 10/31/03 08/29/1996 500,000 500,000 -
Coca-Cola Femsa SA DE 144A
9.40%, 8/15/04 08/05/1994 1,000,000 1,000,000 1,017,000
Commercial Mortgage Pass-Through Certificates
Series AMC Class A
7.71%, 10/12/09 09/29/1999 494,813 494,813 533,642
Continental Auto Receivables
Series A
12.00%, 4/30/05 07/29/1999 455,000 401,890 400,400
Dairy Farmers of America Preferred Capital Trust
7.38%, 10/2/12 10/02/1998 500,000 500,000 457,350
Deloitte & Touche LLP
7.41%, 10/1/11 09/25/1996 1,000,000 1,000,000 963,700
DLJ Mortgage Acceptance Corporation
Series 1995-QT4 Class A
8.18%, 6/26/25 01/25/1996 919,369 933,119 133,309
Dow Chemical
17.25%, 1/2/03 03/25/1992 1,169,613 1,169,613 1,347,979
Earle Palmer Brown
14.00%, 12/16/04 12/31/1998 511,969 409,561 398,568
Elastomeric Technologies Preferred Rubber
Compounding
13.80%, 10/8/07 01/08/1999 500,000 476,386 476,000
Fibermark
9.38%, 10/15/06 01/17/1997 250,000 256,875 253,125
First Hawaiian Bank 144A
6.93%, 12/1/03 05/28/1997 500,000 488,050 493,431
Fort Wayne Capital Trust 144A
9.85%, 4/15/27 04/14/1997 1,000,000 1,000,000 1,125,300
Gruma SA DE CV 144A
7.63%, 10/15/07 10/02/1997 250,000 249,580 218,120
Guangdong International Trust & Investment 144A
8.75%, 10/24/16 10/17/1996 500,000 498,600 50,000
Interbank/ AKK Trust
9.00%, 2/28/01 07/08/1997 375,000 364,448 371,738
Louis Dreyfus Corporation
8.43%, 07/15/01 07/20/1994 1,000,000 1,000,000 1,002,900
Merrill Lynch CLO 98 Pilgrim 2
6.62%, 9/23/09 04/14/1998 1,000,000 1,000,000 893,200
</TABLE>
25
<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>
Mutual Fund Fee Trust IV
7.99%, 1/31/05 04/21/1997 $408,871 $428,833 $427,718
NAL Auto Trust
7.30%, 12/15/00 09/26/1996 40,289 40,264 39,873
New Boston Garden Corporation
8.45%, 9/22/15 09/22/1995 901,333 901,332 883,847
Northwest Airlines
7.95%, 03/01/15 06/18/1999 1,000,000 1,000,000 1,029,080
PM Holding
13.50%, 10/30/04 10/31/1998 500,000 483,000 500,000
Progress Cap Holdings 144A
6.88%, 8/1/01 08/21/1996 1,000,000 1,000,000 995,976
Refco Group
8.21%, 5/16/02 05/08/1995 600,000 600,000 600,360
Scotia Pacific 144A
7.11%, 1/20/14 07/09/1998 500,000 500,000 410,000
Soc Quimica Y Minera De 144A
7.70%, 9/15/06 03/16/1998 1,000,000 1,022,370 945,515
Spectrascan
11.25%, 6/30/06 07/12/1996 500,000 490,000 500,000
Stackpole Magnetic Systems
13.50%, 10/15/05 09/01/1995 380,000 351,500 380,000
Steel Technologies
8.52%, 3/1/05 02/06/1995 428,500 428,500 431,585
Suburban Propane L.P.
7.54%, 6/30/11 03/07/1996 1,000,000 1,000,000 957,300
Turkiye Vakiflar Bankasi T.A.O.
7.79%, 12/22/00 12/22/1997 166,666 166,666 167,100
Union Acceptance Corporation
8.53%, 8/1/02 06/23/1997 600,000 609,546 561,000
United Air Lines
8.70%, 10/07/08 05/04/1995 824,489 821,447 844,891
United States Playing Card Company
12.00%, 11/18/04 11/18/1994 500,000 470,000 500,000
Wells Fargo Capital 144A
8.13%, 12/1/26 12/03/1996 500,000 521,000 472,202
West Fraser Mills
8.44%, 6/30/04 04/15/1994 780,000 780,000 785,304
Worthington Precision Metals
13.50%, 10/30/04 01/30/1999 12,618 12,618 12,618
----------- -----------
TOTAL PRIVATE PLACEMENT DEBT $26,835,372 $25,013,722
----------- -----------
</TABLE>
26
<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>
Bicycle Holdings 11/18/1994 8 $30,000 $100,197
Centennial Coal 08/29/1996 41 - -
Continental Auto Receivables 07/29/1999 8,967 60,000 59,991
Earle Palmer Brown Class A 12/31/1998 16 3,280 3,407
Earle Palmer Brown Class B 12/31/1998 511 107,587 111,729
Elastomeric Technologies 10/08/1999 111 24,000 24,000
Huron Technology 02/20/1995 6,200 128,338 103,041
PSC 07/12/1996 16,250 10,000 -
Setech 07/19/1999 17,304 56,756 56,756
Stackpole Magnetic Systems 09/01/1995 54,582 28,500 109,164
Stackpole Magnetic Systems Class B 09/01/1995 120,000 120,000 240,000
WPM Holdings 10/30/1998 110 17,000 17,215
-------- --------
TOTAL PRIVATE PLACEMENT EQUITY $585,461 $825,500
-------- --------
</TABLE>
27
<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 $14,841,230
and $11,180,375 respectively, for the year ended December 31, 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 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. At December 31, 1999, the aggregate gross unrealized appreciation on
investments was $2,663,976 and the aggregate gross unrealized depreciation was
$6,566,676.
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,
<PAGE>
purchase of futures or options, issuance of debt, short sale of securities,
mergers, changing the fund's pricing service and investing in reverse repurchase
agreements, and requires the Fund to meet certain asset maintenance tests. The
shares of the VTP may be redeemed at the option of the Fund in accordance with
the terms of the Articles Supplementary. The mandatory redemption provisions of
the Articles Supplementary require the Fund under certain conditions to redeem
shares of the VTP if certain asset maintenance tests are not maintained or if
credit rating provisions are not met.
During the year ended December 31, 1999, dividend rates have ranged from
4.50% to 6.00% and the average dividend rate was 5.08%.
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.
28
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of The Lincoln National Income Fund:
In our opinion, the accompanying statement of net assets, and the related
statements of operations, of changes in net assets, of cash flows and the
financial highlights present fairly, in all material respects, the financial
position of The Lincoln National Income Fund (the "Fund") at December 31, 1999,
the results of its operations for the year then ended, the changes in its net
assets and its cash flows for each of the two years in the period then ended and
the financial highlights for each of the five years in the period then ended, in
conformity with accounting principles generally accepted in the United States.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States, which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at December 31, 1999 by correspondence with the custodian, provide
a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Philadelphia, PA
February 22, 2000
29
<PAGE>
DIRECTORS & OFFICERS OF THE FUND
<TABLE>
<CAPTION>
<S> <C>
DIRECTORS DESCRIPTIONS OF OCCUPATIONS AND RESPONSIBILITIES
Thomas L. Bindley President, Bindley Capital Corporation; Director, Midas, Inc., Strategic Equipment
and Supply Corporation, Lincoln National Convertible Securities Fund, Inc., and
Junior Achievement of Chicago.
Richard M. Burridge Chairman, The Burridge Group, Inc.; 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.
Roger J. Deshaies Senior Vice President, Finance, Brigham and Women's Hospital (Harvard Medical
School teaching affiliate); Corporate Director of 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 Investment Management, Inc. and Lincoln National
Convertible Securities Fund, Inc.; Director, The Lincoln National Life Insurance
Company, Lincoln National Investment Companies, Inc., Delaware Management Holdings,
Inc., and Vantage Investment Advisors, Inc.; Executive Vice President and Chief
Investment Officer, Lincoln National Corporation; Executive Vice President and
Chief Investment Officer--Fixed Income, Delaware Investments
Daniel R. Toll Director, Kemper Insurance Companies, Lincoln National Convertible Securities Fund,
Inc. and 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
Eric E. Miller Secretary
</TABLE>
30
<PAGE>
CORPORATE INFORMATION
<TABLE>
<CAPTION>
<S> <C>
DIVIDEND DISBURSING AGENT, TRANSFER AGENT AND AUTOMATIC DIVIDEND REINVESTMENT PLAN
REINVESTMENT PLAN AGENT
Any registered shareholder of Lincoln National Income Fund, Inc.
Equiserve--First Chicago Division may participate in the Automatic Dividend Reinvestment Plan (the
P.O. Box 2500 Plan). If you are a beneficial owner whose shares are registered
Jersey City, NJ 07303-2500 in the name of another (e.g., in a broker's "street name") and
1-800-317-4445 desires to participate in the Plan, you must become a registered
holder by transferring the shares to your name.
INVESTMENT ADVISOR To participate in the Plan, you must complete and forward an
authorization card to the Plan agent. This card authorizes the
Lincoln Investment Management, Inc. Plan agent to receive your dividends and other distributions from
200 East Berry Street the Fund in additional shares of common stock. The additional
Fort Wayne, IN 46802 shares will be issued by the Fund, if the net asset value per
(219) 455-2210 share is equal to or lower than the market price of the Fund's
Common Stock plus brokerage commissions. If the net asset value
ADMINISTRATOR per share is higher than the market price of the Fund's Common
Stock plus brokerage commissions, the additional shares will be
Delaware Service Company, Inc. purchased in the open market and the cost of the brokerage
1818 Market Street commissions will be charged to each participant on a pro-rata
Philadelphia, PA 19103 basis. The Plan also allows the Plan agent to accept optional
cash contributions. Each optional cash contribution by a
INDEPENDENT ACCOUNTANTS 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
PricewaterhouseCoopers LLP less than five business days and no more than thirty days prior
2400 Eleven Penn Center to the dividend payment date.
Philadelphia, PA 19103 Shares will be held by Equiserve, the Plan agent. You will
receive a statement each time shares are distributed by the Fund
STOCK EXCHANGE or purchased for you.
There is no direct charge for Plan participation. The
The Fund's stock is traded on the New York Stock administrative costs of the Plan are borne by the Fund.
Exchange (NYSE) under the symbol of LND. 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.
</TABLE>
31
<PAGE>
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<PAGE>
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<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.
1999 Annual Report
Form 12728-1 2/00
