[LOGO OF LINCOLN FINANCIAL GROUP]
Lincoln National
Bond Fund, Inc.
Annual Report
December 31, 1999
<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]
The Fund had a return of (3.3)% for the 1999 fiscal year while its benchmark,
the Lehman Brothers Government/Corporate Bond Index,* returned (2.1)% for the
same period.
Interest rates rose significantly in 1999, resulting in negative bond returns
for the year. The reason: a reversal of the 1998 flight to quality in the
investment markets. The market was surprised at how quickly the world economy
recovered from the 1998 crisis, and the rate rise was a take-back from the
earlier, panicked levels.
Unfortunately, our interest rate positioning throughout the year was too
optimistic. We believed that the market would keep interest rates low if there
was low inflation. With the exception of oil, inflation did stay low with the
CPI (excluding food and energy) rising only about 2.0%. But the interest rate
markets were again worried about economic growth being too fast and inflation
ultimately returning, and rates rose on the inflation fears.
For most of the year, we maintained a duration positioning longer than the
benchmark (Lehman Government/Corporate Index) by about 0.3 years. This was the
primary determinant of our poor relative performance to the index.
Although corporate bonds performed well in the year compared to Treasuries, our
holdings contained a few of the problem names for the year such as Waste
Management Corporation and Service Corp. International. These credit problems
prevented our corporate bond over-weighting from offsetting materially our
incorrect interest rate call.
The economy is strong and has momentum. Right now, an overheating economy is a
bigger risk than a recession. Clearly the Fed will raise rates to slow the
economy; the question is: how many increases will it take? 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 a 0.75% 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 increases of
0.25% each will be enough to achieve this. Our forecast is that GDP growth is
very strong in the first quarter of 2000, but moderates to average 3% growth
thereafter.
David C. Fischer
Growth of $10,000 invested 1/1/90 through 12/31/99
1/1/90 12/31/99
Bond Fund $10,000 $20,439
Lehman Brothers Government/Corporate Bond Index $10,000 $23,877
This chart illustrates, hypothetically, that $10,000 was invested in the Bond
Fund on 1/1/90. As the chart shows, by December 31, 1999, the value of the
investment at net asset value, with any dividends and capital gains reinvested,
would have grown to $20,439. 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 $23,877. Past performance is not indicative of future performance. Remember,
an investor cannot invest directly in an index.
Average annual return Ended
on investments 12/31/99
- --------------------------------------------------
One Year -3.27%
- --------------------------------------------------
Five Years +7.11%
- --------------------------------------------------
Ten Years +7.41%
- --------------------------------------------------
* Lehman Brothers Gov't/Corp Bond Index - Measures performance of diversified,
investment grade, bond issues. An investor cannot invest directly in the above
index/indexes, which is/are unmanaged.
Bond Fund 1
<PAGE>
Lincoln National Bond Fund, Inc.
Statement of Net Assets
December 31, 1999
Investments:
Par Market
Long-Term Debt Investments: Amount Value
- -----------------------------------------------------------------------------
U.S. Government & Agency Obligations: 35.6%
- -----------------------------------------------------------------------------
Federal Farm Credit Bank
5.75%, 3/23/05 $13,200,000 $12,564,881
Federal Home Loan Bank
5.84%, 8/19/05 29,015,000 27,592,284
6.00%, 6/11/08 8,700,000 8,126,099
Federal Home Loan Mortgage Corporation
7.30%, 12/1/12 2,897,136 2,898,946
Federal National Mortgage Association
6.50%, 8/15/04 8,340,000 8,238,223
6.80%, 8/1/05 896,405 867,209
7.18%, 10/1/05 2,500,125 2,458,573
6.66%, 11/1/05 959,324 920,721
6.66%, 12/1/05 1,917,361 1,831,482
7.04%, 7/1/06 2,394,244 2,370,301
0.00%, 7/24/06 9,500,000 6,050,009
7.15%, 10/1/15 2,683,655 2,615,597
8.00%, 4/1/17 85,978 87,456
7.00%, 10/1/25 1,528,083 1,485,584
6.50%, 12/1/27 13,644,190 12,902,287
Government National Mortgage Association
9.00%, 5/15/17 59,299 62,746
9.00%, 9/15/19 280,605 297,178
6.50%, 11/15/23 615,700 583,953
U.S.Treasury Note
6.50%, 8/31/01 6,275,000 6,300,606
4.75%, 2/15/04 13,700,000 12,925,272
U.S. Treasury Strip
0.00%, 11/15/09 13,000,000 6,574,738
- -----------------------------------------------------------------------------
117,754,145
Collateralized Mortgage Obligations: 5.2%
- -----------------------------------------------------------------------------
CMAT 1999-C1 A1
6.25%, 8/17/06 2,402,463 2,316,687
Federal Home Loan Mortgage
3.50%, 12/15/21 2,000,000 1,708,860
6.39%, 10/15/06 1,957,792 1,909,459
Federal National Mortgage Association
7.50%, 11/16/29 2,000,200 1,977,698
Federal National Mortgage Association
CMO Ser 1996-23
6.50%, 9/25/21 3,546,934 3,498,764
Mid-State Trust
7.63%, 4/1/22 65,814 65,885
Norwest Asset Sec Corp Ser99-5
6.25%, 3/25/14 4,738,058 4,572,226
Vanderbilt Mortgage SER99-A CL 1A2 144A
5.97%, 3/7/12 1,300,000 1,270,750
- -----------------------------------------------------------------------------
17,320,329
Automobile & Auto Parts: 0.6%
- -----------------------------------------------------------------------------
Daimler-Chrysler
7.45%, 2/1/97 1,000,000 935,872
Goodyear Tire & Rubber
6.63%, 12/1/06 1,250,000 1,194,991
- -----------------------------------------------------------------------------
2,130,863
Banking, Finance & Insurance: 27.4%
- -----------------------------------------------------------------------------
Ahmanson, H. F
8.25%, 10/1/02 2,000,000 2,052,498
Associates Corporation NA
6.25%, 11/1/08 5,000,000 4,616,393
Banc One
9.88%, 3/1/09 500,000 576,112
Bank One Texas
6.25%, 2/15/08 1,750,000 1,607,722
Banque Paribas-NY
8.35%, 6/15/07 1,400,000 1,436,421
Barnett Bank
6.90%, 9/1/05 1,500,000 1,464,971
Par Market
Amount Value
Banking, Finance & Insurance (Cont.)
- -----------------------------------------------------------------------------
Barnett Capital Trust I
8.06%, 12/1/26 $1,900,000 $1,809,958
Bear Stearns
7.00%, 3/1/07 1,000,000 961,892
7.63%, 12/7/09 3,000,000 2,949,738
Beaver Valley Funding
9.00%, 6/1/17 300,000 302,548
Citicorp Notes
6.33%, 1/5/06 1,600,000 1,512,340
Comerica Bank
7.88%, 9/15/26 1,500,000 1,437,858
Dow Capital
9.00%, 5/15/10 3,000,000 3,256,589
Fannie Mae- When Issued
0.00%, 6/1/17 52,040,000 14,959,221
Finova Capital
6.12%, 5/28/02 1,000,000 973,107
First Bank System
6.88%, 9/15/07 1,000,000 957,629
First Chicago
7.00%, 10/16/06 3,300,000 3,201,129
First Security
7.00%, 7/15/05 1,000,000 956,413
First Union
8.00%, 8/15/09 2,000,000 2,049,503
First of America Capital Trust I
8.12%, 1/31/27 2,000,000 1,907,615
General Motors Acceptance
8.17%, 1/2/00 61,487 62,472
8.88%, 6/1/10 1,500,000 1,611,079
Harris Bankcorp
9.38%, 6/1/01 250,000 257,351
Household Finance
9.63%, 7/15/00 875,000 887,704
Hydro-Quebec
7.20% 10/5/09 (1) 3,000,000 3,314,803
International Lease Finance
8.25%, 1/15/00 2,000,000 2,001,084
John Deere Capital
8.63%, 8/1/19 2,000,000 2,059,159
Lehman Bros
7.38%, 1/15/07 4,000,000 3,902,895
Mellon Capital I Notes
7.72%, 12/1/26 1,500,000 1,379,772
Mercantile Bancorp
7.30%, 6/15/07 1,325,000 1,296,760
Midland Bank
6.25% 9/29/49 1,400,000 1,163,330
Morgan Stanley Group
6.88%, 3/1/07 2,250,000 2,178,931
National Westminister Bank
9.45%, 5/1/01 500,000 516,590
Nynex Capital Funding
7.63% 10/15/09 (1) 3,000,000 3,103,113
Paine Weber
6.38%, 5/15/04 3,300,000 3,149,556
PNC Funding
6.88%, 7/15/07 1,187,000 1,133,092
PSE&G Capital 144A
6.25%, 5/15/03 2,500,000 2,402,658
Salomon Brothers
7.25%, 1/15/00 1,000,000 1,000,295
Simon DeBartolo Group
7.13%, 6/24/05 520,000 489,644
SouthTrust Bank of Birmingham
7.69%, 5/15/25 2,750,000 2,728,388
Standard Chartered PLC Notes
6.28%, 12/29/49 2,500,000 1,763,375
State Street Capital-B
8.04%, 3/15/27 1,400,000 1,322,643
Union Bank Switzerland
7.25%, 7/15/06 2,250,000 2,178,646
Wachovia Capital Trust I
7.64%, 1/15/27 1,900,000 1,740,979
- -----------------------------------------------------------------------------
90,633,976
Building & Materials: 0.3%
- -----------------------------------------------------------------------------
Georgia-Pacific
9.95%, 6/15/02 1,000,000 1,055,763
- -----------------------------------------------------------------------------
Bond Fund 2
<PAGE>
Par Market
Amount Value
Cable, Media & Publishing: 1.2%
- -----------------------------------------------------------------------------
Century Communications
0.00%, 1/15/08 $ 300,000 $ 133,500
Charter Communications
8.63%, 4/1/09 300,000 278,250
News America Holdings
8.45%, 8/1/34 1,500,000 1,520,162
Time Warner
9.13%, 1/15/13 2,000,000 2,195,294
- -----------------------------------------------------------------------------
4,127,206
Chemicals: 0.2%
- -----------------------------------------------------------------------------
ISP Holdings
9.00%, 10/15/03 300,000 295,500
Polymer Group
9.00%, 7/1/07 300,000 294,000
- -----------------------------------------------------------------------------
589,500
Energy: 1.9%
- -----------------------------------------------------------------------------
Central Power & Light
6.63%, 7/1/05 3,000,000 2,861,635
Consumers Energy
6.20%, 5/1/08 1,000,000 949,634
Enron
9.50%, 6/15/01 1,000,000 1,030,806
Petro-Canada
8.60%, 10/15/01 1,500,000 1,538,195
- -----------------------------------------------------------------------------
6,380,270
Environmental Services: 0.3%
- -----------------------------------------------------------------------------
Waste Management
6.63%, 7/15/02 875,000 822,739
- -----------------------------------------------------------------------------
Food, Beverage & Tobacco: 0.2%
- -----------------------------------------------------------------------------
Nabisco
7.55%, 6/15/15 750,000 703,326
- -----------------------------------------------------------------------------
Healthcare & Pharmaceuticals: 1.0%
- -----------------------------------------------------------------------------
Allegiance
7.30%, 10/15/06 750,000 742,409
Lilly (Eli)
8.38%, 2/7/05 2,250,000 2,344,725
Tenet Healthcare
8.00%, 1/15/05 300,000 289,347
- -----------------------------------------------------------------------------
3,376,481
Leisure, Lodging & Entertainment: 0.4%
- -----------------------------------------------------------------------------
Darden Restaurants
6.38%, 2/1/06 1,500,000 1,386,460
- -----------------------------------------------------------------------------
Metals & Mining: 2.0%
- -----------------------------------------------------------------------------
AK Steel
7.88%, 2/15/09 300,000 285,750
Alcan Aluminum
8.88%, 1/15/22 500,000 526,103
Cyprus Amax Minerals
7.38%, 5/15/07 2,500,000 2,370,188
Inco
9.60%, 6/15/22 1,000,000 944,860
Newmont Gold
8.91%, 1/5/09 642,312 667,617
Placer Dome
7.37%, 6/3/26 1,000,000 936,497
Placer Dome-Series A
7.31%, 1/26/21 1,000,000 826,982
- -----------------------------------------------------------------------------
6,557,997
Miscellaneous: 2.4%
Buckeye Cellulose
8.50%, 12/15/05 150,000 147,000
Corp Andina
7.75%, 3/1/04 2,000,000 2,007,397
ENSERCH
6.25%, 1/1/03 2,500,000 2,428,011
Par Market
Amount Value
Miscellaneous (Cont.)
- -----------------------------------------------------------------------------
ESI Tractebel
7.99%, 12/30/11 $ 300,000 $ 270,750
Manitoba
7.75%, 7/17/16 1,500,000 1,537,998
Republic of Korea
8.88%, 4/15/08 1,500,000 1,578,960
- -----------------------------------------------------------------------------
7,970,116
Real Estate: 0.1%
- -----------------------------------------------------------------------------
Toll Corp
8.13%, 2/1/09 300,000 278,250
- -----------------------------------------------------------------------------
Retail: 0.9%
- -----------------------------------------------------------------------------
Sears Roebuck
9.05%, 2/6/12 2,000,000 2,131,734
Service Corp International
7.00%, 6/1/15 1,000,000 831,578
- -----------------------------------------------------------------------------
2,963,312
Telecommunications: 3.3%
- -----------------------------------------------------------------------------
AT&T Capital
7.47%, 5/11/05 2,750,000 2,718,741
Litton Industries
6.98%, 3/15/36 1,000,000 965,845
Nynex
9.55%, 5/1/10 1,250,000 1,344,350
Pacificorp
9.15%, 8/9/11 2,000,000 2,226,035
Qwest Communications International
0.00%, 2/1/08 (1) 300,000 229,500
Rochester Telephone
9.00%, 7/19/00 2,000,000 2,002,025
U.S. Cellular
7.25%, 8/15/07 1,500,000 1,446,488
- -----------------------------------------------------------------------------
10,932,984
Transportation & Shipping: 5.1%
- -----------------------------------------------------------------------------
American Airline
10.18%, 1/2/13 1,500,000 1,668,481
Bombardier 144A
6.00%, 1/15/02 3,000,000 2,924,887
Burlington Northern Railroad
6.94%, 1/2/14 453,633 421,851
Chicago & Northwestern Transportation
6.25%, 7/30/12 1,278,268 1,200,253
CSX
7.25%, 5/1/27 1,000,000 972,102
Federal Express
7.96%, 3/28/17 1,129,243 1,106,500
Norfolk Southern
6.20%, 4/15/09 2,000,000 1,791,169
Ryder System
6.27%, 7/29/02 3,000,000 2,923,215
United Airlines
9.35%, 4/7/16 1,500,000 1,538,235
US Freightways
6.50%, 5/1/09 2,500,000 2,262,588
- -----------------------------------------------------------------------------
16,809,281
Utilities: 8.4%
- -----------------------------------------------------------------------------
AES Corp
9.50%, 6/1/09 300,000 303,000
Calpine Corp
7.75%, 4/15/09 300,000 285,000
Colonial Gas-Series A
6.81%, 5/19/27 1,500,000 1,490,629
Consumers Energy
6.50%, 6/15/05 500,000 493,245
Detriot Edison
6.56%, 5/1/01 2,000,000 1,981,887
Duquesne Light
8.70%, 6/1/16 2,419,000 2,554,696
Great Lakes Power
9.00%, 8/1/04 1,500,000 1,525,498
Bond Fund 3
<PAGE>
Par Market
Utilities (Cont.) Amount Value
- -----------------------------------------------------------------------------
Houston Light & Power Capital Trust II
8.26%, 2/1/37 $1,900,000 $1,771,809
MidAmerican Energy
6.50%, 12/15/01 1,250,000 1,234,535
National Rural Utility
7.20%, 10/1/15 1,000,000 951,824
Nevada Power
7.06%, 5/1/00 1,500,000 1,501,349
New Jersey Bell
7.85%, 11/15/29 1,950,000 1,954,184
Noble Affiliates
7.25%, 10/15/23 600,000 528,802
Old Dominion Electric
8.76%, 12/1/22 1,600,000 1,654,718
PSI Energy
8.85%, 1/15/22 1,980,000 2,093,388
Public Service
6.38%, 11/1/05 1,500,000 1,417,853
SCANA
7.44%, 10/19/04 3,000,000 2,975,799
Texas Gas Transmissions
8.63%, 4/1/04 1,000,000 1,034,901
Washington Water Public
8.01%, 12/17/01 2,000,000 2,018,416
- -----------------------------------------------------------------------------
27,771,533
Total Long-Term Debt Investments: 96.5%
(Cost $331,741,644) 319,564,531
- -----------------------------------------------------------------------------
Money Market Instruments:
- -----------------------------------------------------------------------------
Associates Corp North America
4.00%, 1/3/00 6,200,000 6,200,000
- -----------------------------------------------------------------------------
Total Money Market Instruments: 1.9%
(Cost $6,200,000) 6,200,000
- -----------------------------------------------------------------------------
Total Investments: 98.4%
(Cost $337,941,644) 325,764,531
- -----------------------------------------------------------------------------
Other Assets Over Liabilities: 1.6% 5,158,219
- -----------------------------------------------------------------------------
Net Assets: 100.0%
(Equivalent to $11.436 per share
based on 28,937,943 shares
issued and outstanding) $330,922,750
- -----------------------------------------------------------------------------
Components of Net Assets at December 31, 1999:
- -----------------------------------------------------------------------------
Common Stock, par value $.01 per share,
50,000,000 authorized shares $289,379
Paid in capital in excess of par value of shares issued 347,798,233
Undistributed net investment income 1,328,798
Accumulated net realized loss on investments (6,316,547)
Net unrealized depreciation of investments (12,177,113)
- -----------------------------------------------------------------------------
Total Net Assets $330,922,750
- -----------------------------------------------------------------------------
(1) Step-up Bond
See accompanying notes to financial statements.
Bond Fund 4
<PAGE>
Lincoln National Bond Fund, Inc.
Statement of Operations
Year ended December 31, 1999
Investment income:
Interest $ 22,800,935
- -----------------------------------------------------------------------------
Total investment income 22,800,935
- -----------------------------------------------------------------------------
Expenses:
Management fees 1,552,439
- -----------------------------------------------------------------------------
Accounting fees 164,311
- -----------------------------------------------------------------------------
Printing and postage 76,252
- -----------------------------------------------------------------------------
Legal fees 27,850
- -----------------------------------------------------------------------------
Custody fees 9,639
- -----------------------------------------------------------------------------
Directors fees 4,200
- -----------------------------------------------------------------------------
Other 20,625
- -----------------------------------------------------------------------------
1,855,316
- -----------------------------------------------------------------------------
Less expenses paid indirectly (9,639)
- -----------------------------------------------------------------------------
Total expenses 1,845,677
- -----------------------------------------------------------------------------
Net investment income 20,955,258
- -----------------------------------------------------------------------------
Net realized and unrealized loss on
investments:
Net realized loss on investment transactions (3,138,359)
- -----------------------------------------------------------------------------
Net change in unrealized appreciation/depreciation
of investments (29,520,039)
- -----------------------------------------------------------------------------
Net realized and unrealized loss on investments (32,658,398)
- -----------------------------------------------------------------------------
Net decrease in net assets
resulting from operations $(11,703,140)
- -----------------------------------------------------------------------------
Statements of Changes in Net Assets
Year ended Year ended
12/31/99 12/31/98
Changes from operations:
- --------------------------------------------------------------------------------
Net investment income $ 20,955,258 $ 18,584,772
- --------------------------------------------------------------------------------
Net realized gain (loss) on investment transactions (3,138,359) 4,018,704
- --------------------------------------------------------------------------------
Net change in unrealized appreciation/
depreciation of investments (29,520,039) 5,821,604
- --------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations (11,703,140) 28,425,080
- --------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income (23,020,367) (32,304,033)
- --------------------------------------------------------------------------------
Total distributions to shareholders (23,020,367) (32,304,033)
- --------------------------------------------------------------------------------
Net increase in net assets
resulting from capital share transactions 1,838,441 87,303,598
- --------------------------------------------------------------------------------
Total increase(decrease) in net assets (32,885,066) 83,424,645
- --------------------------------------------------------------------------------
Net Assets, beginning of year 363,807,816 280,383,171
- --------------------------------------------------------------------------------
Net Assets, end of year $330,922,750 $363,807,816
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
Bond Fund 5
<PAGE>
Lincoln National Bond Fund, Inc.
Financial Highlights
(Selected data for each capital share outstanding throughout the year)
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997 1996 1995
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 12.689 $ 12.861 $ 11.766 $ 12.247 $ 10.941
Income (loss) from investment operations:
Net investment income 0.772 0.662 0.785 0.767 0.803
Net realized and unrealized gain (loss)
on investments (1.180) 0.494 0.310 (0.481) 1.306
-------------------------------------------------
Total from investment operations (0.408) 1.156 1.095 0.286 2.109
-------------------------------------------------
Less dividends:
Dividends from net investment income (0.845) (1.328) - (0.767) (0.803)
-------------------------------------------------
Total dividends (0.845) (1.328) - (0.767) (0.803)
-------------------------------------------------
Net asset value, end of year $ 11.436 $ 12.689 $ 12.861 $ 11.766 $ 12.247
-------------------------------------------------
Total Return(1) (3.27%) 9.56% 9.30% 2.31% 18.95%
Ratios and supplemental data:
Ratio of expenses to average net assets 0.53% 0.52% 0.53% 0.51% 0.49%
Ratio of net investment income
to average net assets 6.02% 5.90% 6.45% 6.56% 6.90%
Portfolio Turnover 39.11% 51.33% 56.16% 142.19% 139.61%
Net assets, end of year (000 omitted) $330,923 $363,808 $280,383 $253,328 $250,816
</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.
Bond Fund 6
<PAGE>
Lincoln National Bond Fund, Inc.
Notes to Financial Statements
December 31, 1999
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 and variable
universal life 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
Security Valuation: All equity securities are valued at the last quoted sales
price as of the close of the New York Stock Exchange (NYSE) on the valuation
date. If on a particular day an equity security does not trade, then the mean
between the bid and asked prices will be used. 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 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, 1999, the
custodial fees offset agreement amounted to $9,639.
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. 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.
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, 1999.
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.
Bond Fund 7
<PAGE>
Notes to Financial Statements - (Continued)
3. 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, 1999 and the
aggregate gross unrealized appreciation, the aggregate gross unrealized
depreciation and the net unrealized depreciation at December 31, 1999 are as
follows:
Aggregate Aggregate Gross Gross Net
Cost of Proceeds Unrealized Unrealized Unrealized
Purchases From Sales Appreciation Depreciation Depreciation
----------------------------------------------------------------------
$145,587,895 $131,527,405 $1,935,014 $(14,112,127) $(12,177,113)
4. 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, 1999: 3,927,624 $47,592,208 1,980,915 $23,020,366 (5,641,533) $(68,774,133) 267,006 $ 1,838,441
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
</TABLE>
5. 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.
6. Capital Loss Carryforward
As of December 31, 1999, the Fund had $5,647,879 of unused capital loss
carryforward for federal tax purposes. The loss carryforward expires in the
years 2002 to 2007.
Bond Fund 8
<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, 1999, 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 auditing standards generally accepted
in the United States. 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, 1999, 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, 1999, 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 accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
February 4, 2000
Bond Fund 9
