[LINCOLN FINANCIAL GROUP LOGO]
Lincoln National
Managed Fund, Inc.
Annual Report
December 31, 1998
<PAGE>
Lincoln National Managed 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 Managed Fund, Inc.
Managed by: [LINCOLN FINANCIAL GROUP LOGO]
For the year ended December 31, 1998, the Fund returned 12.72%. Its customized
benchmark, (55% S&P 500 Index; 40% Lehman Brothers Government/Corporate Bond
Index, and 5% Salomon Brothers 90 Day T-Bill) returned 19.9%.
The asset allocation on December 31, 1998 was 56.2% equities; 40.2% fixed-income
and 3.6% cash and other assets.
In reviewing last year's commentary I was able to recall the great number of
significant events, which by themselves, should have resulted in lower equity
prices and yet the market was able to post another strong double digit gain. It
was clearly the consensus that a fourth straight year of plus twenty-percent
returns for the S&P 500 Index was unlikely.
Had you had a crystal ball in December 1997 which foresaw the following:
o Unemployment rates below 5%
o The bombing of Iraq
o Russian devaluation of the Ruble
o Continuation of the Asian currency crisis
o Political changes in Britain, Japan and Germany
o Failure of Long-Term Capital Management Hedge Fund
o Impeachment of the President of the United States
Another record breaking year would not have been expected for the S&P 500 Index.
Once again the best news for the U.S. equity markets was that inflation
remained under control. In 1998 the CPI was even lower than in 1997. There was
tremendous volatility during the year. Gains for the first half of the year were
wiped out in a few weeks during the third quarter, only to reach new heights in
the fourth quarter. The Federal Reserve ("Fed") was both the scourge and savior
of market performance.
There was a distinct market capitalization bias last year, with small cap stocks
falling way behind their larger capitalized brethren. Large cap growth was
especially strong. The Nasdaq 100 Index, which has member firms such as
Microsoft, Intel and Cisco rose by 82.7%. If 1998 does have a legacy for
investors it might be that of the "Year of the Internet." Amazon.com rose
$291.13 or 966.4% while Yahoo was up 584.3% on the Nasdaq, while on the NYSE
America Online gained 585.6%
Heading into the fourth quarter many analysts were anticipating further
continuation of Armageddon in the equity markets. The Fed's 'puny' .25% cut in
the funds rate on September 29 precipitated another sell off and analysts began
to question the Fed's resolve for further rate cuts. Given the unlikely
assistance from the Fed, analysts began rounding up the usual suspects -- the
crisis in Russia, continuation of the Asian currency crisis, problems in Latin
America, impeachment of the President and high market valuations, to question
the dangers in the equity market. In addition, the failure of Long-Term Capital
Management raised the possibility of a credit crunch.
The 5% Fed Funds rate that analysts wanted to see did take place in October.
What was surprising was that the cut in rates took place between official
Federal Open Market Committee meetings. This marked the first time in four
years that the Fed cut rates between meetings. The Fed made another strong
statement by once again lowering rates in November. This helped to maintain
market confidence.
<PAGE>
From quarterly market lows on October 8, there has been an impressive upward
trend. More importantly, there has been an improvement in market breadth. Small
Cap stocks as represented by the Russell 2000 index still finished the year with
a loss, falling 3.45% (pre-dividends). Since October 8, however, this index was
up 35.99%, even better than the S&P 500 Index's performance.
Although there was no further action by the Fed in December, it became clear
that the Fed would be watching events overseas and would not be compelled to
confine itself to just looking at domestic inflation rates to determine policy.
For the fourth quarter, all equity indices had outstanding returns. The S&P 500
Index (pre-dividends) was up 20.92% while the Russell 2000 rose 16.05%. The
Nasdaq 100 Index, dominated by firms like Intel and Microsoft, rose by 34.52%.
Many Internet companies experienced explosive gains during the quarter.
International stocks as measured by the EAFE Index were able to keep pace. In
dollar terms the Morgan Stanley EAFE Index was up 19.73%.
Bonds, however, did not fare as well. The lowering of rates by the Fed was
countered by the reversal of the flight to quality investments and concern that
the economy wasn't as weak as suggested.
The latest threat to the equity market is Latin America, especially Brazil. It
appears that we are experiencing rolling global currency shocks, similar to the
rolling recessions experienced in the United States. While Brazil's direct
impact on the U.S. is near 2%, its impact on the rest of Latin America is more
significant. Beyond the actual trading dollars, there is the psychological
damage that Brazil's economic problems can have on consumer confidence
throughout the region. The damage to the U.S. economy should be negligible in
the near term. The Fed will stand ready to protect the economy, with further
rate cuts if warranted.
I'm much more comfortable with the prospects for small cap stocks than I have
been at any time in the past year. Holdings may well exceed the neutral
position. Equities in general should range from 55-60% of net assets in the
first quarter of 1999, with cash at 2-4%.
Jay M. Yentis, CFA
Growth of $10,000 invested 1/1/89 through 12/31/98
1/1/89 12/31/98
Managed Fund $10,000 $57,904
Salomon Brothers 90 Day Treasury Bill $10,000 $33,250
Lehman Brothers Government/Corporate Bond Index $10,000 $24,402
S&P 500 Index $10,000 $16,963
This chart illustrates, hypothetically, that $10,000 was invested in the Managed
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 $33,250. For comparison, look at how the Indices did over
the same period. 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 +12.72%
- --------------------------------------------
Five Years +14.32%
- --------------------------------------------
Ten Years +12.77%
- --------------------------------------------
<PAGE>
Lincoln National Managed Fund, Inc.
Statement of Net Assets
December 31, 1998
Investments:
Par Market
Long-Term Debt Investments: Amount Value
- ---------------------------------------------------------------------------
U.S. Government and Agency Obligations: 23.5%
- ---------------------------------------------------------------------------
Federal Farm Credit Bank
5.75%, 3/23/05 $ 24,000,000 $ 24,601,994
Federal Home Loan Mortgage Corporation
6.39%, 10/15/06 1,987,252 2,028,239
6.00%, 6/11/08 13,800,000 14,457,262
5.125%, 10/15/08 44,800,000 44,405,975
7.30%, 12/1/12 2,924,997 3,002,692
8.50%, 1/1/17 542,405 577,491
7.50%, 5/25/20 4,000,000 4,079,207
Federal National Mortgage Association
0.00%, 8/7/01 7,000,000 6,159,035
6.73%, 8/1/05 2,080,161 2,158,167
7.175%, 10/1/05 3,889,666 4,103,598
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 11,500,000 7,820,029
0.00%, 7/5/14 2,500,000 1,046,018
7.15%, 10/1/15 2,771,266 2,889,045
7.00%, 10/1/25 1,993,763 2,042,985
6.50%, 6/1/28 14,799,940 14,915,571
Government National Mortgage Association
6.50%, 12/15/23 998,437 1,015,598
U.S. Treasury Bill
4.97%, 7/22/99 (+) 1,200,000 1,167,186
U.S. Treasury Bond
6.125%, 11/15/27 6,000,000 6,707,927
U.S. Treasury Note
4.50%, 9/30/00 13,000,000 12,982,004
10.75%, 8/15/05 15,000,000 20,015,361
6.125%, 8/15/07 18,000,000 19,705,318
U.S. Treasury Strip
0.00%, 2/15/11 24,000,000 12,840,792
0.00%, 5/15/05 15,320,000 11,350,476
- ---------------------------------------------------------------------------
225,623,687
Asset Backed: 0.0%
- ---------------------------------------------------------------------------
Mid-State Trust
7.625%, 4/1/22 132,251 137,017
- ---------------------------------------------------------------------------
Automobile & Auto Parts: 0.3%
- ---------------------------------------------------------------------------
Daimler Chrysler
7.45%, 2/1/97 1,000,000 1,152,500
Goodyear Tire & Rubber
6.625%, 12/1/06 1,250,000 1,329,687
- ---------------------------------------------------------------------------
2,482,187
Banking, Finance & Insurance: 7.8%
- ---------------------------------------------------------------------------
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 1,600,000 1,762,000
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
Finova Capital
6.12%, 5/28/02 1,000,000 997,500
First of America Capital Trust I
8.12%, 1/31/27 2,000,000 2,280,000
Par Market
Amount Value
- ---------------------------------------------------------------------------
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
Ford Motor Credit
7.95%, 5/17/99 2,000,000 2,021,210
General Electric Capital
8.30%, 9/20/09 3,000,000 3,630,000
General Motors Acceptance Corporation
7.875%, 3/7/01 1,500,000 1,573,125
8.875%, 6/1/10 1,500,000 1,865,625
Household Finance
9.625%, 7/15/00 875,000 927,500
Hydro-Quebec
7.20%, 10/5/09 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) 1,600,000 1,223,840
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
NationsBank
8.125%, 6/15/02 1,000,000 1,088,750
Nynex Capital Funding
7.63%, 10/15/09 3,000,000 3,524,653
PNC Funding
6.875%, 7/15/07 1,663,000 1,793,961
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%, 6/24/05 600,000 597,750
SouthTrust Bank of Birmingham
7.69%, 5/15/25 2,750,000 3,348,125
Standard Chartered Notes
5.9375%, 12/29/49 3,000,000 1,847,700
State Street Capital Class 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
- ---------------------------------------------------------------------------
74,141,357
Building & Materials: 0.2%
- ---------------------------------------------------------------------------
Champion International
7.70%, 12/15/99 1,500,000 1,524,375
- ---------------------------------------------------------------------------
Cable, Media & Publishing: 0.4%
- ---------------------------------------------------------------------------
News America Holdings
8.45%, 8/1/34 1,500,000 1,760,625
Time Warner
9.125%, 1/15/13 2,000,000 2,535,000
- ---------------------------------------------------------------------------
4,295,625
Chemicals: 0.0%
- ---------------------------------------------------------------------------
ISP Holdings
9.00%, 10/15/03 350,000 369,688
- ---------------------------------------------------------------------------
Consumer Products: 0.3%
- ---------------------------------------------------------------------------
Westvaco
8.30%, 8/1/22 2,500,000 2,759,375
- ---------------------------------------------------------------------------
<PAGE>
Par Market
Amount Value
- ---------------------------------------------------------------------------
Electronics & Electrical Equipment: 0.1%
- ---------------------------------------------------------------------------
Consumers Energy
6.50%, 6/15/05 $ 1,000,000 $ 1,015,000
- ---------------------------------------------------------------------------
Energy: 0.3%
- ---------------------------------------------------------------------------
Commonwealth Edison
9.375%, 2/15/00 500,000 521,250
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
- ---------------------------------------------------------------------------
3,223,750
Environmental Services: 0.2%
- ---------------------------------------------------------------------------
Waste Management
6.625%, 7/15/02 2,000,000 2,055,000
- ---------------------------------------------------------------------------
Food, Beverage & Tobacco: 0.1%
- ---------------------------------------------------------------------------
Nabisco
7.55%, 6/15/15 750,000 762,187
- ---------------------------------------------------------------------------
Healthcare & Pharmaceuticals: 0.2%
- ---------------------------------------------------------------------------
Allegiance
7.30%, 10/15/06 1,000,000 1,102,500
Tenet Healthcare
8.00%, 1/15/05 350,000 362,250
Lilly (Eli)
8.375%, 2/7/05 2,250,000 2,558,025
- ---------------------------------------------------------------------------
4,022,775
Leisure, Lodging & Entertainment: 0.2%
- ---------------------------------------------------------------------------
Darden Restaurants
6.375%, 2/1/06 1,500,000 1,520,625
- ---------------------------------------------------------------------------
Metals & Mining: 0.7%
- ---------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------
6,678,247
Miscellaneous: 0.5%
- ---------------------------------------------------------------------------
Buckeye Cellulose
8.50%, 12/15/05 175,000 181,563
Manitoba
7.75%, 7/17/16 1,500,000 1,781,250
Republic of Korea
8.875%, 4/15/08 1,600,000 1,652,000
- ---------------------------------------------------------------------------
3,614,813
Retail: 0.3%
- ---------------------------------------------------------------------------
Sears Roebuck
9.05%, 2/6/12 2,500,000 3,178,125
Service Corporation International
7.00%, 6/1/15 1,000,000 1,038,750
- ---------------------------------------------------------------------------
4,216,875
Telecommunications: 0.7%
- ---------------------------------------------------------------------------
Litton Industries
6.98%, 3/15/36 1,000,000 1,082,500
Pacificorp
9.15%, 8/9/11 1,500,000 1,950,000
Qwest Communications International
0.00%, 2/1/08 350,000 263,375
Southwestern Bell Capital
7.13%, 6/1/05 2,000,000 2,177,500
Par Market
Amount Value
- ---------------------------------------------------------------------------
U.S. Cellular
7.25%, 8/15/07 $ 1,500,000 $ 1,582,500
- ---------------------------------------------------------------------------
7,055,875
Transportation & Shipping: 1.2%
- ---------------------------------------------------------------------------
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 Transportation
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 1,196,997
General American Transportation
7.50%, 2/28/15 1,424,882 1,586,963
Norfolk Southern
7.05%, 5/1/37 2,000,000 2,182,500
United Airlines
9.35%, 4/7/16 1,500,000 1,746,277
- ---------------------------------------------------------------------------
11,534,727
Utilities: 3.2%
- ---------------------------------------------------------------------------
Colonial Gas Series A
6.81%, 5/19/27 1,500,000 1,578,750
Detriot Edison
6.56%, 5/1/01 2,000,000 2,062,500
DQI II Funding
8.70%, 6/1/16 2,462,000 2,732,820
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
Nevada Power
7.06%, 5/1/00 1,500,000 1,537,500
Noble Affiliates
7.25%, 10/15/23 600,000 624,750
Old Dominion Electric
7.48%, 12/1/13 1,500,000 1,693,125
Pacific Gas and Electric
6.25%, 8/1/03 2,000,000 2,067,500
Pennsylvania Power & Light
7.70%, 10/1/09 3,000,000 3,431,250
PSI Energy
8.57%, 12/27/11 500,000 630,000
Public Service Company of Colorado
6.375%, 11/1/05 1,500,000 1,571,250
South Carolina Electric
9.00%, 7/15/06 2,500,000 3,031,250
Texas Gas Transmissions
8.625%, 4/1/04 2,000,000 2,300,000
Texas Utilities
7.375%, 8/1/01 1,500,000 1,560,000
Washington Water Public
8.01%, 12/17/01 1,000,000 1,057,500
- ---------------------------------------------------------------------------
30,952,508
Total Long-Term Debt Investments: 40.2%
(Cost $370,079,915) 387,985,693
- ---------------------------------------------------------------------------
Number
Common Stock: of Shares
- ---------------------------------------------------------------------------
Aerospace & Defense: 1.1%
- ---------------------------------------------------------------------------
General Dynamics 5,500 322,438
Gulfstream Aerospace* 52,900 2,816,925
Kellstrom Industries* 10,900 313,375
United Technologies 67,300 7,318,875
- ---------------------------------------------------------------------------
10,771,613
Automobiles & Auto Parts: 1.4%
- ---------------------------------------------------------------------------
Ford Motor 57,000 3,345,187
Goodrich (B.F.) 97,600 3,501,400
Group 1 Automotive* 32,500 845,000
<PAGE>
Number Market
of Shares Value
- ---------------------------------------------------------------------------
Hertz Class A 9,600 $ 438,000
Monaco Coach* 5,000 132,500
Navistar International* 82,100 2,339,850
Republic Industries 152,300 2,246,425
Smith (A.O.) 28,500 700,031
- ---------------------------------------------------------------------------
13,548,393
Banking, Finance & Insurance: 8.2%
- ---------------------------------------------------------------------------
Allstate 92,820 3,585,173
American International Group 56,800 5,488,300
AmSouth Bancorporation 81,000 3,695,625
BankAmerica 60,090 3,612,911
Bank of Boston 105,800 4,119,587
Bank One 122,852 6,273,130
Bankers Trust New York 41,000 3,502,937
Chase Manhattan 130,200 8,861,737
Citigroup 138,049 6,833,426
Comerica 66,050 4,503,784
Conseco 157,800 4,822,763
Dime Bancorp 41,700 1,102,444
Dime Community Bancshares 30,000 623,437
Fidelity National Financial 25,080 764,940
Firstfed Financial* 42,200 754,325
Gallagher (Arthur J.) 16,100 710,413
Klamath First Bancorp 40,500 782,156
Marsh & McLennan 86,300 5,043,156
Metris 25,308 1,270,145
Paine Webber Group 106,600 4,117,425
RenaissanceRe Holdings* 18,500 677,563
SLM Holding 98,000 4,704,000
TR Financial 21,500 844,547
United Bankshares 25,800 686,119
Washington Mutual 39,480 1,507,643
- ---------------------------------------------------------------------------
78,887,686
Buildings & Materials: 1.0%
- ---------------------------------------------------------------------------
Cal Dive International* 37,600 770,800
Centex 90,500 4,078,156
Kaufman & Broad Home 35,800 1,029,250
M.D.C. Holdings 40,100 857,137
Nortek* 24,300 671,287
Standard Pacific 51,900 733,087
USG 28,900 1,472,094
- ---------------------------------------------------------------------------
9,611,811
Cable, Media & Publishing: 1.7%
- ---------------------------------------------------------------------------
Big Flower Holdings* 35,500 783,219
Donnelley & Sons 75,100 3,290,319
Hollinger International 50,200 699,663
McGraw-Hill 62,700 6,387,563
New York Times 143,800 4,988,063
R.H.Donnelley 18,280 266,203
- ---------------------------------------------------------------------------
16,415,030
Chemicals: 1.2%
- ---------------------------------------------------------------------------
Commercial Metals Company 29,600 821,400
Dow Chemical 54,500 4,956,094
First Commonwealth Financial 29,300 717,850
Lilly Industries 33,700 671,894
Lyondell Petrochemicals 79,300 1,427,400
NL Industries 47,400 672,487
Quaker Chemical 45,600 820,800
Schulman (A) 37,000 835,969
URS Corp* 35,000 818,125
- ---------------------------------------------------------------------------
11,742,019
Computers & Technology: 7.2%
- ---------------------------------------------------------------------------
American Power Conversion* 46,200 2,236,369
Apple Computer* 145,100 5,944,566
Bell & Howell* 20,200 763,813
CHS Electronics* 41,800 707,988
Cisco Systems* 9,200 854,163
Dell Computer* 70,400 5,154,600
Electronics Arts* 23,300 1,306,256
Esterline Technologies* 34,300 746,025
FactSet Research Systems* 14,600 901,550
HBO 171,200 4,916,650
Number Market
of Shares Value
- ---------------------------------------------------------------------------
Hyperion Solutions* 30,730 $ 555,061
Ingram Micro Class A* 22,900 798,638
Intelligroup* 49,200 876,375
International Business Machines 19,000 3,510,250
Keane* 25,000 998,437
Lexmark International Group Class A* 51,200 5,145,600
Microsoft* 79,400 10,999,381
MTS Systems 58,300 779,763
NeoMagic* 34,000 751,187
Network Associates* 22,650 1,502,686
Oceaneering International* 61,000 915,000
RWD Technologies 37,300 804,281
Splash Technology Holdings* 94,800 708,037
Storage Technology* 63,600 2,261,775
Summit Design* 81,800 754,094
Sun Microsystems* 104,000 8,898,500
Symantec* 43,400 941,237
Xerox 41,000 4,838,000
- ---------------------------------------------------------------------------
69,570,282
Consumer Products: 3.2%
- ---------------------------------------------------------------------------
Clorox 42,800 4,999,575
General Electric 147,200 15,023,600
Maytag 10,000 622,500
Procter & Gamble 101,800 9,295,613
WD-40 24,800 714,550
- ---------------------------------------------------------------------------
30,655,838
Electronics & Electrical Equipment: 1.2%
- ---------------------------------------------------------------------------
DSP Group* 41,300 854,394
FirstEnergy 24,200 788,013
Honeywell 61,800 4,654,313
Intel 38,600 4,575,306
Sawtek* 32,700 574,294
- ---------------------------------------------------------------------------
11,446,320
Energy: 3.6%
- ---------------------------------------------------------------------------
Ashland 19,600 948,150
Atlantic Richfield 75,800 4,945,950
ENSCO International 130,600 1,395,787
Exxon 134,600 9,842,625
Friede Goldman International* 64,000 728,000
Gulf Island Fabrication* 58,000 453,125
Helmerich & Payne 44,600 864,125
New Jersey Resources 14,900 588,550
Occidental Petroleum 98,800 1,667,250
Oryx Energy* 49,300 662,469
Royal Dutch Petroleum 94,000 4,500,250
Sun 37,700 1,359,556
Texaco 103,800 5,488,425
USX-Marathon Group 31,700 954,963
- ---------------------------------------------------------------------------
34,399,225
Environmental Services: 0.1%
- ---------------------------------------------------------------------------
Horizon Offshore* 87,200 485,050
- ---------------------------------------------------------------------------
Food, Beverage & Tobacco: 4.4%
- ---------------------------------------------------------------------------
Canandaigua Brands Class A* 15,000 867,187
CKE Restaurants 84,920 2,499,833
Coca Cola 81,200 5,430,250
ConAgra 59,100 1,861,650
Foodmaker* 39,000 860,437
General Mills 45,400 3,529,850
Heinz (H.J.) 114,150 6,463,744
Omega Protein* 75,400 763,425
Philip Morris 175,800 9,405,300
Pilgrims Pride 33,300 663,919
Quaker Oats 87,400 5,200,300
Ralcorp Holdings* 39,500 720,875
Riviana Foods 31,900 777,563
Ryan's Family Steakhouses 64,100 797,244
Suiza Foods* 48,100 2,450,094
- ---------------------------------------------------------------------------
42,291,671
<PAGE>
Number Market
of Shares Value
- ---------------------------------------------------------------------------
Healthcare & Pharmaceuticals: 7.3%
- ---------------------------------------------------------------------------
ADAC Laboratories* 26,100 $ 521,184
Ameripath* 67,000 604,047
Amgen* 80,900 8,454,050
Arterial Vascular Engineering 97,600 5,114,850
Beverly Enterprises* 90,000 607,500
Bristol-Myers Squibb 59,200 7,921,700
CareMatrix* 26,200 802,375
Hanger Orthopedic Group* 33,500 753,750
Integrated Health Services* 42,200 596,075
Johnson & Johnson 10,800 905,850
Lilly (Eli) 39,700 3,528,337
Lincare Holdings* 131,800 5,342,019
Matria Healthcare* 273,200 781,181
Medicis Pharmaceutical Class A* 12,000 715,500
Merck & Company 42,800 6,321,025
Owens & Minor 42,700 672,525
Pfizer 49,200 6,171,525
PharMerica 40,959 247,034
Protein Design Labs 31,100 721,131
Rexall Sundown 36,200 504,537
Roberts Pharmacueticals 35,000 761,250
Safeskin* 33,000 795,094
Schering-Plough 197,600 10,917,400
The Cooper Companies* 43,500 899,906
Theragenics* 48,000 807,000
Tyco International 68,800 5,190,100
- ---------------------------------------------------------------------------
70,656,945
Industrial Machinery: 0.7%
- ---------------------------------------------------------------------------
Cascade 45,400 717,887
Caterpillar 35,500 1,633,000
Deere & Company 43,000 1,424,375
Gardner Denver* 51,600 761,100
Ingersoll-Rand 37,300 1,750,769
- ---------------------------------------------------------------------------
6,287,131
Leisure, Lodging & Entertainment: 0.3%
- ---------------------------------------------------------------------------
Anchor Gaming* 14,900 842,781
Eastman Kodak 11,700 842,400
Silver Leaf Resorts* 85,000 791,563
- ---------------------------------------------------------------------------
2,476,744
Metals & Mining: 0.5%
- ---------------------------------------------------------------------------
ARMCO* 182,600 798,875
Hecla Mining* 205,600 745,300
Terex* 27,700 791,181
USX-U.S. Steel Group 105,000 2,415,000
- ---------------------------------------------------------------------------
4,750,356
Miscellaneous: 0.6%
- ---------------------------------------------------------------------------
Advo* 28,700 756,963
Barnes Group 23,200 681,500
Insight Enterprises* 14,900 758,969
International Specialty Products* 47,300 641,506
LeaRonal 28,850 977,294
Media Arts Group* 52,500 738,281
Plantronics 9,600 825,600
Remedytemp Class A 29,500 445,266
- ---------------------------------------------------------------------------
5,825,379
Paper & Forest Products: 0.2%
- ---------------------------------------------------------------------------
Fort James 23,500 940,000
Republic Group 45,290 908,631
- ---------------------------------------------------------------------------
1,848,631
Retail: 3.1%
- ---------------------------------------------------------------------------
Ames Department Stores* 28,600 770,413
Best Buy 9,500 583,063
Cato Class A 66,300 652,641
Cost Plus* 21,400 670,087
Family Dollar Stores 288,400 6,344,800
Footstar* 11,400 285,000
Number Market
of Shares Value
- ---------------------------------------------------------------------------
Fossil* 28,200 $ 807,225
Jostens 84,500 2,212,844
Kroger* 12,900 780,450
Lowe's Companies 27,200 1,392,300
Micro Warehouse* 22,200 748,556
Musicland Stores* 52,700 787,206
Rent-Way 20,300 493,544
Russ Berrie 33,100 777,850
Safeway* 15,800 962,813
TJX 147,600 4,280,400
Trans World Entertainment* 45,950 874,486
Unisource World Wide 115,000 833,750
Wal-Mart Stores 75,300 6,132,244
- ---------------------------------------------------------------------------
30,389,672
Telecommunications: 5.7%
- ---------------------------------------------------------------------------
Ameritech 156,800 9,937,200
AT&T 87,400 6,576,850
Bell Atlantic 124,628 7,080,427
BellSouth 165,600 8,259,300
Dycom* 15,100 862,587
General Instrument* 69,200 2,348,475
GTE 58,300 3,931,606
Lucent Technologies 19,400 2,134,000
Melita International 42,200 875,650
Tellabs* 50,700 3,476,119
U.S.West 140,900 9,105,663
World Access 33,500 717,109
- ---------------------------------------------------------------------------
55,304,986
Textiles, Apparel & Furniture: 1.0%
- ---------------------------------------------------------------------------
Johnson Controls 80,300 4,737,700
Miller (Herman) 58,200 1,560,487
Nautica Enterprises* 51,700 770,653
Tommy Hilfiger 61,900 3,714,000
- ---------------------------------------------------------------------------
10,782,840
Transportation & Shipping: 0.7%
- ---------------------------------------------------------------------------
Alaska Air Group* 13,900 615,075
AMR 45,600 2,707,500
Amtran Airlines* 31,500 844,594
America West Holdings Class B* 51,800 880,600
Atlas Air 15,900 778,106
M.S. Carriers 24,300 792,787
- ---------------------------------------------------------------------------
6,618,662
Utilities: 1.8%
- ---------------------------------------------------------------------------
Black Hills 27,550 726,631
Calpine 30,000 757,500
Energy East 70,700 3,994,550
General Public Utilities 40,100 1,771,919
Laclede Gas 25,500 682,125
MDU Resources Group 25,100 660,444
Northwestern 28,800 761,400
PECO Energy 71,400 2,972,025
Texas Utilities 77,200 3,604,275
Unicom 45,400 1,750,737
- ---------------------------------------------------------------------------
17,681,606
Total Common Stock: 56.2%
(Cost $356,294,560) 542,447,890
- ---------------------------------------------------------------------------
Rights:
- ---------------------------------------------------------------------------
Baxter International Contingent Value Rights* 93,900 7,512
- ---------------------------------------------------------------------------
Total Rights: 0.0%
(Cost $0) 7,512
- ---------------------------------------------------------------------------
<PAGE>
Par Market
Money Market Instruments: Amount Value
- ---------------------------------------------------------------------------
Corporate Asset Funding
5.3456%, 1/15/99 $1,900,000 $ 1,896,084
Dun & Bradstreet
5.8999%, 1/14/99 4,700,000 4,689,986
Marsh & McLennan
5.3999%, 1/12/99 1,000,000 998,350
Merrill Lynch
5.2508%, 1/25/99 7,200,000 7,175,040
Metlife Funding
5.3258%, 1/12/99 1,000,000 998,381
Signal Finance Mortgage
5.75%, 1/4/99 5,600,000 5,600,000
Volkswagen Of America
5.474%, 1/19/99 7,000,000 6,980,925
- ---------------------------------------------------------------------------
Total Money Market Instruments: 2.9%
(Cost $28,338,766) 28,338,766
- ---------------------------------------------------------------------------
Total Investments: 99.3%
(Cost $754,713,241) 958,779,861
- ---------------------------------------------------------------------------
Other Assets Over Liabilities: 0.7% 6,706,175
- ---------------------------------------------------------------------------
Net Assets: 100.0%
(Equivalent to $18.971 per share based on
50,892,536 shares issued and outstanding) $965,486,036
- ---------------------------------------------------------------------------
** Non income producing security.
PIK - Pay in kind security.
(1) Step-up bond
(+) Fully or Partially pledged as collateral for open futures contracts.
See accompanying notes to financial statements.
<PAGE>
Lincoln National Managed Fund, Inc.
Statement of Operations
Year ended December 31, 1998
Investment income:
Interest $ 25,756,878
- -------------------------------------------------------------------
Dividends 8,102,335
- -------------------------------------------------------------------
Total investment income 33,859,213
- -------------------------------------------------------------------
Expenses:
Management fees 3,283,079
- -------------------------------------------------------------------
Accounting fees 349,418
- -------------------------------------------------------------------
Printing and postage 126,075
- -------------------------------------------------------------------
Directors fees 4,200
- -------------------------------------------------------------------
Other 42,156
- -------------------------------------------------------------------
Total expenses 3,804,928
- -------------------------------------------------------------------
Net investment income 30,054,285
- -------------------------------------------------------------------
Net realized and unrealized gain
on investments and futures contracts:
Net realized gain on investment transactions and
futures contracts 44,287,952
- -------------------------------------------------------------------
Net change in unrealized appreciation of
investments and futures contracts 34,012,132
- -------------------------------------------------------------------
Net realized and unrealized gain on
investments and futures contracts 78,300,084
- -------------------------------------------------------------------
Net increase in net assets
resulting from operations $108,354,369
===================================================================
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 $ 30,054,285 $ 29,120,567
Net realized gain on investment transactions and
futures contracts 44,287,952 62,174,659
Net change in unrealized appreciation
on investments and future contracts 34,012,132 59,803,118
Net increase in net assets
resulting from operations 108,354,369 151,098,344
Distributions to shareholders from:
Net investment income (54,174,323) -
Net realized gain on investments (62,174,659) (18,028,760)
Total distributions to shareholders (116,348,982) (18,028,760)
Net increase in net assets
resulting from capital share transactions 122,835,134 41,835,514
Total increase in net assets 114,840,521 174,905,098
Net Assets, beginning of year 850,645,515 675,740,417
Net Assets, end of year $965,486,036 $850,645,515
See accompanying notes to financial statements.
<PAGE>
Lincoln National Managed Fund, Inc.
Financial Highlights
(Selected data for each capital share outstanding throughout the year)
<TABLE>
<CAPTION>
Period ended December 31,
1998 1997 1996 1995 1994
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $19.304 $16.266 $15.895 $12.783 $14.152
Income (loss) from investment operations:
Net investment income 0.599 0.661 0.628 0.623 0.628
Net realized and unrealized gain (loss)
on investments 1.632 2.811 1.291 3.132 (0.814)
-------------------------------------------------------
Total from investment operations 2.231 3.472 1.919 3.755 (0.186)
-------------------------------------------------------
Less dividends and distributions:
Dividends from net investment income (1.162) - (0.628) (0.623) (0.628)
Distributions from net realized gain on
investment transactions (1.402) (0.434) (0.920) (0.020) (0.555)
-------------------------------------------------------
Total dividends and distributions (2.564) (0.434) (1.548) (0.643) (1.183)
-------------------------------------------------------
Net asset value, end of year $18.971 $19.304 $16.266 $15.895 $12.783
=======================================================
Total Return(1) 12.72% 21.82% 12.05% 29.29% (1.84%)
Ratios and supplemental data:
Ratio of expenses to average net assets 0.42% 0.42% 0.43% 0.43% 0.44%
Ratio of net investment income
to average net assets 3.31% 3.77% 4.05% 4.37% 4.45%
Portfolio Turnover 57.36% 53.40% 108.86% 112.52% 160.79%
Net assets, end of year (000 omitted) $965,486 $850,646 $675,740 $589,165 $442,140
</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 Managed Fund, Inc.
Notes to Financial Statements
December 31, 1998
The Fund: Lincoln National Managed 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 Lincoln National
Life Insurance Company and Lincoln National Life Insurance Company of New York
(the "Companies") for allocation to their variable annuity products.
The Fund's investment objective is to maximize long-term total return (capital
gains plus income) consistent with prudent investment strategy. The Fund invests
in a mix of stocks, bonds, and money market securities, as determined by an
investment committee.
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. Financial futures are valued at the settlement price
established each day by the board of trade or exchange on which they are traded.
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. Dividend income is recorded on the ex-dividend
date and 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 arrangement amounted to $11,841.
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 $ 192,016
- -------------------------------------------------
Receivable for dividends earned 796,772
- -------------------------------------------------
Receivable for interest earned 5,745,169
- -------------------------------------------------
Receivable for securities sold 2,102,889
- -------------------------------------------------
Receivable for capital shares sold 267,648
- -------------------------------------------------
Payable for securities purchased (1,528,284)
- -------------------------------------------------
Payable for capital shares redeemed (2,691)
- -------------------------------------------------
Management fees payable (287,920)
- -------------------------------------------------
Other, net (579,424)
- -------------------------------------------------
$6,706,175
============
<PAGE>
Notes to Financial Statements - (Continued)
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. The sub-advisor of the equity securities held by the
Fund, Vantage Investment Advisors, an affiliate of the Advisor, is paid directly
by the Advisor.
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 of the Fund 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** $ 508,925
- ----------------------------------------------------------------------
Paid in capital in excess of par value of shares issued 711,441,544
- ----------------------------------------------------------------------
Undistributed net investment income 5,000,529
- ----------------------------------------------------------------------
Accumulated net realized gain on investments and
futures contracts 44,287,952
- ----------------------------------------------------------------------
Net unrealized appreciation on investments and
futures contracts 204,247,086
- ----------------------------------------------------------------------
$965,486,036
=============
** The Fund has 100,000,000 authorized shares.
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
------------------------------------------------------------------------
$542,357,409 $490,874,777 $225,104,553 $(21,037,933) $204,066,620
6. Supplemental Financial Instrument Information
Financial Futures Contracts: The Fund may purchase or sell financial futures
contracts, which are exchange traded. The Fund bears the market risk that arises
from changes in the value of these financial instruments. The Fund deposits with
its custodian a specified amount of cash or eligible securities called "initial
margin" or "variation margin". The market value of investments pledged to cover
margin requirements for open positions at December 31, 1998 was $1,167,186.
Unrealized gain or loss on the contracts is reflected in the accompanying
financial statements. The Fund is subject to the market risks of unexpected
changes in the underlying markets and interest rates. Financial futures
contracts open at December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Notional Unrealized
Contracts Cost Amount Expiration Dates Gain (Loss)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
113 S&P 500 stock index contracts $33,759,767 March 1999 $1,425,608
149 Russell 2000 stock index contracts (30,435,984) March 1999 (1,245,142)
----------
$ 180,466
==========
<PAGE>
Notes to Financial Statements - (Continued)
7. Summary of Changes From Capital Share Transactions
</TABLE>
<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: 2,294,167 $42,347,303 6,521,374 $116,348,981 (1,988,346) $(35,861,150) 6,827,195 $122,835,134
Year ended
December 31, 1997: 1,267,957 22,772,807 2,677,655 43,933,612 (1,423,434) (24,870,905) 2,522,178 41,835,514
</TABLE>
8. 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.
<PAGE>
Lincoln National Managed Fund, Inc.
Report of Ernst & Young LLP, Independent Auditors
To the Shareholders and Board of Directors
Lincoln National Managed Fund, Inc.
We have audited the accompanying statement of net assets of Lincoln National
Managed 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 Managed 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
