[LOGO OF LINCOLN FINANCIAL GROUP]
Lincoln National
Bond Fund, Inc.
Annual Report
December 31, 1998
<PAGE>
Lincoln National Bond Fund, Inc.
Index
Commentary
Statement of Net Assets
Statement of Operations
Statements of Changes in Net Assets
Financial Highlights
Notes to Financial Statements
Report of Ernst & Young LLP, Independent Auditors
<PAGE>
Lincoln National Bond Fund, Inc.
Managed by: [LOGO OF LINCOLN FINANCIAL GROUP]
For the year ended December 31, 1998, the Bond Fund achieved a total return of
9.56%. Its benchmark, the Lehman Government/Corporate Index, had a return of
9.5% in 1998.
Truly it was an incredible year for the markets with a dramatic financial asset
sell-off in the late summer followed by an equally dramatic recovery of U.S.
equities to end the year. The spark for the financial turmoil was the debt
default by Russia that scared an already jittery market into a mini-crash. This
led to a massive flight to quality in the August to October period that included
the near-bankruptcy of the prestigious hedge fund, Long Term Capital Partners.
During this flight to quality, the only good performing asset category was
Treasury bonds. Credit risk was significantly repriced to levels that would
indicate a market forecast of a substantial probability of a U.S. economic
recession. The crisis seemed to pass when the Federal Reserve Board (the "Fed")
eased interest rates for the third time on October 15.
As opposed to the equity markets, bond risk premiums did not recover
substantially from the worst levels of October. This is probably because the
technology sector, the primary catalyst for the equity market recovery, does
not have a substantial amount of bonds outstanding. Nonetheless, the bond market
did not recover to the same level of optimism as the equity market averages.
Corporate bonds and mortgage-backed securities both under-performed Treasuries
during the year. Treasury rates declined during the year on average by about 100
basis points, thus the assumption of interest rate risk was a good bond market
strategy in 1998.
The Fund had two strategies in 1998: first an over-weighting of corporate bonds
to the index and, second, a portfolio duration longer than the index. As
mentioned above, the corporate positioning was an under-performing tactic for
the Fund, but this was more than compensated for by the duration positioning of
the Fund.
It was a good year for high quality bonds, such as those in the Bond Fund's
portfolio. Lower quality bonds, however, had poor returns. The High Yield market
achieved only a 1.9% return and the emerging markets bond market return was
substantially negative at (14.5%).
With the three rate cuts made during the market turmoil last year, the Fed has
most likely taken the necessary steps to avert a recession in 1999 and in fact
may have set the economy up for a 2.5-3.0% GDP growth. We see that as the most
likely scenario. However, there are still reasons to be wary. One wildcard that
remains is the effect on the U.S. economy of solving the Y2K computer problem.
Also, many foreign economies are still in recession. Accordingly, we believe
that there is still a recession probability of 20-25% for the U.S. over the next
12-18 months. We also continue to believe that the corporate sector of the
economy will perform worse than the economy in total.
Inflation should be below 1% in 1999 allowing long Treasury rates to stay mostly
in a 4.5% to 5.5% range. Credit spreads are currently attractive, and we once
again will position the Fund to be over-weighted in corporate bonds versus the
index. Credit spreads are pricing in more recession probability than the equity
markets, and, thus, don't have that far to widen should an economic downturn
occur. So, notwithstanding the expected weakness of the corporate sector, we
believe corporate bonds are currently attractive. We also find mortgage-backed
securities attractive at current spread levels.
David C. Fischer
<PAGE>
Growth of $10,000 invested 1/1/89 through 12/31/98
1/1/89 12/31/98
Bond Fund $10,000 $24,402
Lehman Brothers Government/Corporate Bond Index $10,000 $23,892
This chart illustrates, hypothetically, that $10,000 was invested in the Bond
Fund on 1/1/89. As the chart shows, by December 31, 1998, the value of the
investment at net asset value, with any dividends and capital gains reinvested,
would have grown to $23,892. For comparison, look at how the Lehman Brothers
Government/ Corporate Bond Index did over the same period. With dividends and
capital gains, if any, reinvested, the same $10,000 investment would have grown
to $24,402. Past performance is not indicative of future performance. Remember,
an investor cannot invest directly in an index.
Average annual return Ended
on investments 12/31/98
- --------------------------------------------------------
One Year +9.56%
- --------------------------------------------------------
Five Years +6.91%
- --------------------------------------------------------
Ten Years +9.10%
- --------------------------------------------------------
Lincoln National Bond Fund, Inc.
Statement of Net Assets
December 31, 1998
Investments:
Par Market
Long-Term Debt Investments: Amount Value
- ----------------------------------------------------------------------------
U.S. Government & Agency Obligations: 48.9%
- ----------------------------------------------------------------------------
Federal Farm Credit Bank
5.97%, 3/11/05 $31,025,000 $32,156,054
5.75%, 3/23/05 17,200,000 17,631,429
Federal Home Loan Mortgage Corporation
5.835%, 8/19/05 29,015,000 29,919,728
6.3889%, 10/10/06 1,987,252 2,028,239
6.00%, 6/11/08 8,700,000 9,114,361
7.30%, 12/1/12 2,924,997 3,002,692
3.50%, 12/12/21 2,000,000 1,781,783
Federal National Mortgage Association
6.80%, 8/1/05 913,056 958,709
7.175%, 10/1/05 2,526,922 2,665,902
6.655%, 11/1/05 970,499 992,335
6.66%, 12/1/05 1,940,395 2,018,011
7.043%, 7/1/06 2,437,766 2,541,371
0.00%, 7/24/06 9,500,000 6,460,024
7.15%, 10/1/15 2,771,266 2,889,045
8.00%, 4/1/17 138,406 144,851
7.00%, 10/1/25 1,993,763 2,042,985
6.50%, 12/1/27 15,646,550 15,778,567
Government National Mortgage Association
9.00%, 5/15/17 93,662 100,481
9.00%, 9/15/19 434,561 466,202
6.50%, 11/15/23 713,956 726,227
U.S. Treasury Bond
12.00%, 8/15/13 500,000 763,529
6.125%, 11/15/27 14,700,000 16,434,422
U.S.Treasury Note
6.50%, 8/31/01 3,575,000 3,742,501
U.S.Treasury Strip
0.00%, 5/15/05 9,840,000 7,290,384
0.00%, 11/15/09 13,000,000 7,442,793
0.00%, 2/15/11 16,500,000 8,828,045
- ----------------------------------------------------------------------------
177,920,670
Collateralized Mortgage Obligations: 0.3%
- ----------------------------------------------------------------------------
Household Affinity Credit Card
6.05%, 5/5/01 1,000,000 1,006,876
Mid-State Trust
7.625%, 4/4/22 132,251 137,017
- ----------------------------------------------------------------------------
1,143,893
Automobiles & Auto Parts: 0.7%
- ----------------------------------------------------------------------------
Daimler Chrysler
7.45%, 2/1/2097 1,000,000 1,152,500
Goodyear Tire & Rubber
6.625%, 12/1/06 1,250,000 1,329,688
- ----------------------------------------------------------------------------
2,482,188
Banking, Finance & Insurance: 18.9%
- ----------------------------------------------------------------------------
Ahmanson, H. F.
8.25%, 10/1/02 2,000,000 2,162,500
Aristar Financial
7.50%, 7/1/99 1,500,000 1,513,125
Bank One
9.875%, 3/1/09 500,000 660,625
Banque Paribas-NY
8.35%, 6/15/07 1,400,000 1,541,750
Barnett Bank
6.90%, 9/1/05 1,500,000 1,603,125
Barnett Capital Trust I
8.06%, 12/1/26 1,900,000 2,111,375
Citicorp Notes
6.33%, 1/5/06 1,600,000 1,648,000
Comerica Bank
7.875%, 9/15/26 1,500,000 1,770,000
Dow Capital
9.00%, 5/15/10 3,000,000 3,678,750
<PAGE>
Par Market
Amount Value
- ----------------------------------------------------------------------------
Finova Capital
6.12%, 5/28/02 $ 1,000,000 $ 997,500
First Bank System
6.875%, 9/15/07 1,000,000 1,076,250
First of America Capital Trust I
8.12%, 1/31/27 2,000,000 2,280,000
First Security
7.00%, 7/15/05 1,000,000 1,085,000
First Union
8.00%, 8/15/09 2,000,000 2,385,000
First USA Bank
5.75%, 1/15/99 2,000,000 2,000,000
Fleet Financial Group
7.25%, 9/1/99 1,000,000 1,013,987
General Motors Acceptance Corporation
8.17%, 1/2/00 339,353 349,205
7.875%, 3/7/01 1,500,000 1,573,125
8.875%, 6/1/10 1,500,000 1,865,625
Harris Bankcorp
9.375%, 6/1/01 250,000 272,813
Household Finance
9.625%, 7/15/00 875,000 927,500
Hydro-Quebec
7.20%, 10/5/09 (1) 3,000,000 3,625,754
International Lease Finance
8.25%, 1/15/00 2,000,000 2,060,000
John Deere Capital
8.625%, 8/1/19 2,000,000 2,267,500
Lehman Brothers Holdings
8.875%, 3/1/02 1,000,000 1,067,500
Mellon Capital I Notes
7.72%, 12/1/26 1,500,000 1,635,000
Mercantile Bancorp
7.30%, 6/15/07 1,325,000 1,450,875
Midland Bank
5.69%, 9/29/49 (1) 1,400,000 1,070,860
Morgan Stanley Group
6.875%, 3/1/07 2,250,000 2,368,125
National Westminister Bank
9.45%, 5/1/01 500,000 538,750
Nynex Capital Funding
7.63%, 10/15/09 (1) 3,000,000 3,524,653
PNC Funding
6.875%, 7/15/07 1,187,000 1,280,476
Salomon Brothers
7.25%, 1/15/00 1,000,000 1,017,500
Salomon Smith Barney
7.875%, 10/1/99 3,000,000 3,059,252
Simon DeBartolo Group
7.125%, 6/24/05 520,000 518,050
SouthTrust Bank of Birmingham
7.69%, 5/15/25 2,750,000 3,348,125
Standard Chartered
5.9375%, 12/29/49 2,500,000 1,539,750
State Street Capital Series B
8.035%, 3/15/27 1,400,000 1,571,500
Union Bank Switzerland
7.25%, 7/15/06 2,250,000 2,446,875
Wachovia Capital Trust I
7.64%, 1/15/27 1,900,000 2,004,500
- ----------------------------------------------------------------------------
68,910,300
Building & Materials: 0.7%
- ----------------------------------------------------------------------------
Champion International
7.70%, 12/15/99 1,500,000 1,524,375
Georgia-Pacific
9.95%, 6/15/02 1,000,000 1,115,000
- ----------------------------------------------------------------------------
2,639,375
Cable, Media & Publishing: 1.2%
- ----------------------------------------------------------------------------
News America Holdings
8.45%, 8/1/34 1,500,000 1,760,625
Time Warner
9.13%, 1/15/13 2,000,000 2,535,000
- ----------------------------------------------------------------------------
4,295,625
Par Market
Amount Value
- ----------------------------------------------------------------------------
Chemicals: 0.1%
- ----------------------------------------------------------------------------
ISP Holdings
9.00%, 10/15/03 $ 300,000 $ 316,875
Electronics & Electrical Equipment: 0.1%
- ----------------------------------------------------------------------------
Consumers Energy
6.50%, 6/15/05 500,000 507,500
- ----------------------------------------------------------------------------
Energy: 1.2%
- ----------------------------------------------------------------------------
Commonwealth Edison
9.375%, 2/15/00 500,000 521,250
Consumers Energy
6.20%, 5/1/08 1,000,000 1,018,750
Enron
9.50%, 6/15/01 1,000,000 1,086,250
Petro-Canada
8.60%, 10/15/01 1,500,000 1,616,250
- ----------------------------------------------------------------------------
4,242,500
Environmental Services: 0.5%
- ----------------------------------------------------------------------------
Waste Management
6.625%, 7/15/02 1,750,000 1,798,125
- ----------------------------------------------------------------------------
Food, Beverage & Tobacco: 0.2%
- ----------------------------------------------------------------------------
Nabisco
7.55%, 6/15/15 750,000 762,187
- ----------------------------------------------------------------------------
Healthcare & Pharmaceuticals: 1.0%
- ----------------------------------------------------------------------------
Allegiance
7.30%, 10/15/06 750,000 826,875
Lilly (Eli)
8.375%, 2/7/05 2,250,000 2,558,025
Tenet Healthcare
8.00%, 1/15/05 300,000 310,500
- ----------------------------------------------------------------------------
3,695,400
Leisure, Lodging & Entertainment: 0.4%
- ----------------------------------------------------------------------------
Darden Restaurants
6.375%, 2/1/06 1,500,000 1,520,625
- ----------------------------------------------------------------------------
Metals & Mining: 2.0%
- ----------------------------------------------------------------------------
Alcan Aluminum
8.875%, 1/15/22 500,000 554,375
Cyprus Amax Minerals
7.375%, 5/15/07 2,500,000 2,518,750
Inco
9.60%, 6/15/22 1,300,000 1,485,250
Newmont Gold
8.91%, 1/5/09 665,276 759,247
Placer Dome
7.37%, 6/3/26 1,000,000 1,012,500
Placer Dome Series A
7.31%, 1/26/21 1,000,000 902,500
- ----------------------------------------------------------------------------
7,232,622
Miscellaneous: 1.0%
- ----------------------------------------------------------------------------
Buckeye Cellulose
8.50%, 12/15/05 150,000 155,625
Manitoba
7.75%, 7/17/16 1,500,000 1,781,250
Republic of Korea
8.875%, 4/15/08 1,500,000 1,548,750
- ----------------------------------------------------------------------------
3,485,625
Paper & Forest Products: 0.6%
- ----------------------------------------------------------------------------
James River
6.70%, 11/15/03 2,000,000 2,062,500
- ----------------------------------------------------------------------------
Retail: 1.0%
- ----------------------------------------------------------------------------
Sears Roebuck
9.05%, 2/6/12 2,000,000 2,542,500
Service Corp International
7.00%, 6/1/15 1,000,000 1,038,750
- ----------------------------------------------------------------------------
3,581,250
<PAGE>
Par Market
Amount Value
- ----------------------------------------------------------------------------
Telecommunications: 3.3%
- ----------------------------------------------------------------------------
AT&T Capital
7.47%, 5/11/05 $ 2,750,000 $ 2,863,437
Litton Industries
6.98%, 3/15/36 1,000,000 1,082,500
Nynex
9.55%, 5/1/10 1,354,960 1,605,628
Pacificorp
9.15%, 8/9/11 2,000,000 2,600,000
Qwest Communications International
0.00%, 2/1/08 300,000 225,750
Rochester Telephone
9.00%, 7/19/00 2,000,000 2,110,000
U.S. Cellular
7.25%, 8/15/07 1,500,000 1,582,500
- ----------------------------------------------------------------------------
12,069,815
Transportation & Shipping: 2.1%
- ----------------------------------------------------------------------------
American Airline
10.18%, 1/2/13 1,500,000 1,862,573
Burlington Northern Railroad
6.94%, 1/2/14 471,446 493,341
Chicago & Northwestern Holdings
6.25%, 7/30/12 1,327,977 1,386,076
CSX
7.25%, 5/1/27 1,000,000 1,080,000
Federal Express
7.96%, 3/28/17 1,129,243 1,196,998
United Airlines
9.35%, 4/7/16 1,500,000 1,746,277
- ----------------------------------------------------------------------------
7,765,265
Utilities: 8.2%
- ----------------------------------------------------------------------------
Colonial Gas Series A
6.81%, 5/19/27 1,500,000 1,578,750
Detroit Edison
6.56%, 5/1/01 2,000,000 2,062,500
Duquesne Light
8.70%, 6/1/16 2,474,000 2,746,140
Great Lakes Power
9.00%, 8/1/04 1,500,000 1,681,875
Houston Light & Power Capital Trust II
8.257%, 2/1/37 1,900,000 2,097,125
MidAmerican Energy
6.50%, 12/15/01 1,250,000 1,295,313
National Rural Utility
7.20%, 10/1/15 1,000,000 1,090,000
Nevada Power
7.06%, 5/1/00 1,500,000 1,537,500
New Jersey Bell
7.85%, 11/15/29 1,950,000 2,364,375
Noble Affiliates
7.25%, 10/15/23 600,000 624,750
Old Dominion Electric
8.76%, 12/1/22 1,600,000 1,846,000
Pennsylvania Power & Light
7.70%, 10/1/09 3,000,000 3,431,250
PSI Energy
8.56%, 12/27/11 2,000,000 2,517,500
Public Service
6.375%, 11/1/05 1,500,000 1,571,250
Texas Gas Transmissions
8.625%, 4/1/04 1,000,000 1,150,000
Washington Water Public
8.01%, 12/17/01 2,000,000 2,115,000
- ----------------------------------------------------------------------------
29,709,328
Par Market
Amount Value
- ----------------------------------------------------------------------------
Total Long Term Debt Investments: 92.4%
(Cost $318,798,742) $336,141,668
- ----------------------------------------------------------------------------
Money Market Instruments:
- ----------------------------------------------------------------------------
American Honda Finance
5.4144%, 1/11/99 $6,000,000 5,991,050
Prudential Funding
5.1093%, 1/25/99 1,100,000 1,096,304
Salomon Smith Barney Holdings
5.42%, 1/6/99 2,500,000 2,498,142
Signal Finance Mortgage
5.75%, 1/4/99 5,000,000 5,000,000
Volkswagen of America
5.474%, 1/19/99 8,200,000 8,177,655
- ----------------------------------------------------------------------------
Total Money Market Instruments: 6.3%
(Cost $22,763,151) 22,763,151
- ----------------------------------------------------------------------------
Total Investments: 98.7%
(Cost $341,561,893) 358,904,819
- ----------------------------------------------------------------------------
Other Assets Over Liabilities: 1.3% 4,902,997
- ----------------------------------------------------------------------------
Net Assets: 100.0%
(Equivalent to $12.689 per share
based on 28,670,937 shares
issued and outstanding) $363,807,816
- ----------------------------------------------------------------------------
(1) Step-up bond
See accompanying notes to financial statements.
<PAGE>
Lincoln National Bond Fund, Inc.
Statement of Operations
Year ended December 31, 1998
Investment income:
Interest $20,230,119
- ----------------------------------------------------------------------------
Total investment income 20,230,119
- ----------------------------------------------------------------------------
Expenses:
Management fees 1,421,361
- ----------------------------------------------------------------------------
Accounting fees 145,477
- ----------------------------------------------------------------------------
Printing and postage 54,579
- ----------------------------------------------------------------------------
Directors fees 4,200
- ----------------------------------------------------------------------------
Other 19,730
- ----------------------------------------------------------------------------
Total expenses 1,645,347
- ----------------------------------------------------------------------------
Net investment income 18,584,772
- ----------------------------------------------------------------------------
Net realized and unrealized gain on investments:
Net realized gain on investment transactions 4,018,704
- ----------------------------------------------------------------------------
Net change in unrealized appreciation
of investments 5,821,604
- ----------------------------------------------------------------------------
Net realized and unrealized gain on investments 9,840,308
- ----------------------------------------------------------------------------
Net increase in net assets
resulting from operations $28,425,080
============================================================================
Statements of Changes in Net Assets
Years ended December 31, 1998 and 1997
Year ended Year ended
12/31/98 12/31/97
------------------------------
Changes from operations:
- ----------------------------------------------------------------------------
Net investment income $ 18,584,772 $ 17,113,168
- ----------------------------------------------------------------------------
Net realized gain on investment transactions 4,018,704 701,047
- ----------------------------------------------------------------------------
Net change in unrealized appreciation
of investments 5,821,604 5,841,862
- ----------------------------------------------------------------------------
Net increase in net assets
resulting from operations 28,425,080 23,656,077
- ----------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income (32,304,033) -
- ----------------------------------------------------------------------------
Total distributions to shareholders (32,304,033) -
- ----------------------------------------------------------------------------
Net increase in net assets
resulting from capital share transactions 87,303,598 3,399,189
- ----------------------------------------------------------------------------
Total increase in net assets 83,424,645 27,055,266
- ----------------------------------------------------------------------------
Net Assets, beginning of year 280,383,171 253,327,905
- ----------------------------------------------------------------------------
Net Assets, end of year $363,807,816 $280,383,171
============================================================================
See accompanying notes to financial statements.
<PAGE>
Lincoln National Bond Fund, Inc.
Financial Highlights
(Selected data for each capital share outstanding throughout the year)
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996 1995 1994
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 12.861 $ 11.766 $ 12.247 $ 10.941 $ 12.693
Income (loss) from investment operations:
Net investment income 0.662 0.785 0.767 0.803 0.741
Net realized and unrealized gain (loss)
on investments 0.494 0.310 (0.481) 1.306 (1.233)
--------------------------------------------------------
Total from investment operations 1.156 1.095 0.286 2.109 (0.492)
--------------------------------------------------------
Less dividends and distributions:
Dividends from net investment income (1.328) - (0.767) (0.803) (0.741)
Distributions from net realized gain on
investment transactions - - - - (0.519)
--------------------------------------------------------
Total dividends and distributions (1.328) - (0.767) (0.803) (1.260)
--------------------------------------------------------
Net asset value, end of year $ 12.689 $ 12.861 $ 11.766 $ 12.247 $ 10.941
========================================================
Total Return(1) 9.56% 9.30% 2.31% 18.95% (4.18%)
Ratios and supplemental data:
Ratio of expenses to average net assets 0.52% 0.53% 0.51% 0.49% 0.50%
Ratio of net investment income
to average net assets 5.90% 6.45% 6.56% 6.90% 6.40%
Portfolio Turnover 51.33% 56.16% 142.19% 139.61% 213.26%
Net assets, end of year (000 omitted) $363,808 $280,383 $253,328 $250,816 $195,010(1)
</TABLE>
(1) Total return percentages in this table are calculated on the basis
prescribed by the Securities and Exchange Commission. These percentages are
based on the underlying mutual fund shares. The total return percentages in
the table are NOT calculated on the same basis as the performance
percentages in the letter at the front of this booklet (those percentages
are based upon the change in unit value). See accompanying notes to
financial statements.
<PAGE>
Lincoln National Bond Fund, Inc.
Notes to Financial Statements
December 31, 1998
The Fund: Lincoln National Bond Fund, Inc. (the "Fund") is registered as an
open-end, diversified management investment company under the Investment Company
Act of 1940, as amended. The Fund's shares are sold only to The Lincoln National
Life Insurance Company and Lincoln Life & Annuity Company of New York (the
"Companies") for allocation to their variable annuity products.
The Fund's investment objective is to maximize current income consistent with a
prudent investment strategy. The Fund invests primarily in medium and long-term
corporate and government bonds.
1. Significant Accounting Policies
Investment Valuation: Portfolio securities which are traded on an exchange are
valued at the last reported sale price on the exchange or market where primarily
traded or listed or, in the absence of recent sales, at the mean between the
last reported bid and asked prices. Long-term debt investments are valued at
their mean quotations. Other securities and assets for which market quotations
are not readily available are valued at fair value as determined in good faith
by or under the direction of the Fund's Board of Directors. Money market
instruments having less than 60 days to maturity are stated at amortized cost,
which approximates market value.
Investment Transactions and Investment Income: Investment transactions are
accounted for on the trade date. Interest income is recorded on the accrual
basis and includes amortization of any premium and discount. Realized gains or
losses from investment transactions are reported on an identified cost basis.
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.
Expenses: The custodian bank of the Fund has agreed to waive its custodial fees
when the Fund maintains a prescribed amount of cash on deposit in certain
non-interest bearing accounts. For the year ended December 31, 1998, the
custodial fees offset agreement amounted to $13,773.
Taxes: The Fund has complied with the special provisions of the Internal Revenue
Code for regulated investment companies. As such, the Fund is not subject to
U.S. federal income taxes to the extent that it distributes all of its taxable
income for its fiscal year.
2. Other Assets Over Liabilities
The statement of net assets account "Other Assets Over Liabilities" at December
31, 1998 consisted of the following assets (liabilities):
Cash overdraft $(110,663)
- -----------------------------------------------------------
Receivable for interest earned 5,129,899
- -----------------------------------------------------------
Receivable for capital shares sold 77,507
- -----------------------------------------------------------
Payable for capital shares redeemed (23)
- -----------------------------------------------------------
Management fees payable (136,636)
- -----------------------------------------------------------
Other, net (57,087)
- -----------------------------------------------------------
$4,902,997)
-------------
-------------
3. Management Fees and Other Transactions With Affiliates
Lincoln Investment Management Company (the "Advisor") and its affiliates manage
the Fund's investment portfolio and maintain its accounts and records. For these
services, the Advisor receives a management fee at an annual rate of .48% of the
first $200,000,000 of the average daily net assets of the Fund, .40% of the next
$200,000,000, and .30% of the average daily net assets of the Fund in excess of
$400,000,000.
<PAGE>
Notes to Financial Statements - (Continued)
Delaware Service Company ("Delaware"), an affiliate of the Advisor, provides
accounting services and other administration support to the Fund. For these
services, the Fund pays Delaware a monthly fee based on average net assets,
subject to certain minimums.
If the aggregate annual expenses of the Fund, including the management fee, but
excluding taxes, interest, brokerage commissions relating to the purchase or
sale of portfolio securities and extraordinary non-recurring expenses, exceed
1.50% of the average daily net assets of the Fund, the Advisor will reimburse
the Fund in the amount of such excess. No reimbursement was due for the year
ended December 31, 1998.
Certain officers and directors of the Fund are also officers or directors of the
Companies and receive no compensation from the Fund. The compensation of
unaffiliated directors is borne by the Fund.
4. Analysis of Net Assets
Net Assets at December 31, 1998 consisted of the following:
Common Stock, par value $.01 per share** $ 286,709
- --------------------------------------------------------------------------
Paid in capital in excess of par value of shares issued 345,871,211
- --------------------------------------------------------------------------
Undistributed net investment income 3,393,907
- --------------------------------------------------------------------------
Accumulated net realized loss on investments (3,086,937)
- --------------------------------------------------------------------------
Net unrealized appreciation of investments 17,342,926
- --------------------------------------------------------------------------
$363,807,816
==============
** The Fund has 50,000,000 authorized.
5. Investments
The cost of investments for federal income tax purposes approximates cost for
book purposes. The aggregate cost of investments purchased and the aggregate
proceeds from investments sold for the year ended December 31, 1998 and the
aggregate gross unrealized appreciation, the aggregate gross unrealized
depreciation and the net unrealized appreciation at December 31, 1998 are as
follows:
Aggregate Aggregate Gross Gross Net
Cost of Proceeds Unrealized Unrealized Unrealized
Purchases From Sales Appreciation Depreciation Appreciation
--------------------------------------------------------------------
$214,507,127 $149,592,385 $18,228,334 $(885,408) $17,342,926
6. Summary of Changes From Capital Share Transactions
<TABLE>
<CAPTION>
Shares Issued Upon Net Increase
Capital Reinvestment of Capital Shares Resulting From Capital
Shares Sold Dividends Redeemed Share Transactions
------------------------------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Shares Amount
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year ended
December 31, 1998: 6,299,076 $80,781,622 2,614,466 $32,304,034 (2,044,330) $(25,782,058) 6,869,212 $87,303,598
Year ended
December 31, 1997: 1,115,273 14,114,365 1,416,753 16,821,434 (2,261,364) (27,536,610) 270,662 3,399,189
</TABLE>
7. Distributions to Shareholders
The Fund declares and distributes dividends on net investment income, if any,
semi-annually. Distributions of net realized gains, if any, are declared and
distributed annually.
8. Capital Loss Carryforward
As of December 31, 1998, the Fund had $3,086,937 of unused capital loss
carryforward for federal tax purposes. The loss carry-forward expires in the
years 2002 to 2004.
<PAGE>
Lincoln National Bond Fund, Inc.
Report of Ernst & Young LLP, Independent Auditors
To the Shareholders and Board of Directors
Lincoln National Bond Fund, Inc.
We have audited the accompanying statement of net assets of Lincoln National
Bond Fund, Inc. (the "Fund") as of December 31, 1998, and the related statement
of operations for the year then ended, the statements of changes in net assets
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. These financial statements
and financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 1998, by correspondence with the Fund's
custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Lincoln National Bond Fund, Inc. at December 31, 1998, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and its financial highlights for each of
the five years in the period then ended, in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
Philadelphia, Pennsylvania
February 5, 1999
