[LOGO OF DELAWARE INVESTMENTS]
Lincoln National
International Fund, Inc.
Annual Report
December 31, 1998
<PAGE>
Lincoln National International 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 International Fund, Inc.
Managed by: [LOGO OF DELAWARE INVESTMENTS]
The Fund returned 14.65% for the year ended December 31, 1998 versus its
benchmark, the Morgan Stanley EAFE Index, which returned 20.3% for the year.
Since May 1998, Lincoln National International Fund has been managed by Liz
Desmond and Clive Gillmore, Directors and Senior Portfolio Managers of Delaware
Investment Advisers Ltd. The Fund's objective is to achieve long-term capital
appreciation. The Fund is invested predominately in companies whose primary
operations are outside the United States of America. Investments are selected
using rigorous valuation techniques that focus on the future long-term flow of
income from the business. We focus on understanding the fundamental operations
of businesses. We invest in companies which they believe the market is
undervaluing.
Despite substantial volatility in global stock markets, 1998 was again a strong
year for equity market returns. Global stock markets rose in aggregate over 20%
during the year. But what was striking about the past twelve months was the
divergence of returns across the world. Markets in Europe and North America
shook off concerns from Asia, Japan's continued procrastination of reforming its
financial institutions, Russia's devaluation of the Ruble, and economic problems
in Latin America to provide returns of over 28% based on market indices. Asian
markets were not so sanguine. Markets continued to fall well into the third
quarter and, despite a rally in the last three months of the year, were either
still down over twelve months or showed low single digit gains.
Japan still faces considerable economic uncertainty. Attempts to resuscitate
the economy through government initiated spending have built up substantial
debt. Japan is now running a fiscal deficit in the order of 8% of GDP and the
bail out of the banking sector is likely to exacerbate the problem. Fears
surrounding the funding of this debt resulted in a doubling of the yield on
Japanese government bonds in the final quarter of 1998. The Financial
Supervisory Agency, set up in the summer to improve regulation of the banking
sector, has now closed two large banks and several mergers are under
discussion. We believe that the Japanese government is addressing many of the
underlying problems associated with their economy; the pace of change, however,
remains too slow for the market. We are only holding selected investments in
Japan where we believe the company is internationally competitive and the
inefficiency of the stock market has resulted in an undervaluation of the
holding.
Japan aside, Asia's crisis has now lightened considerably. Asian exports have
recovered and current accounts are massively in the black. In 1998, South Korea
had a surplus of almost 9% of GNP and Thailand 8% of GNP. While the corporate
restructuring process will take time and the lack of transparency in China is of
concern, the evidence is now mounting that Asia could well be on the way to
recovery.
In Europe, 1998 saw a convergence of interest rates as markets prepared for the
advent of the Euro on January 1, 1999. The launch of the Euro has been extremely
smooth and its initial performance in the first few working days of January has
been strong, rising against both the dollar and sterling. Our analysis of the
Euro indicates that at current levels it is fairly valued against the U.S.
dollar.
1998 saw the largest amount of mergers ever (more than $2.4 trillion) and
December saw the world's biggest with the merger of Exxon and Mobil ($86
billion). Other large mergers announced in 1998 included Travelers/Citicorp ($73
billion) and Zeneca/Astra ($32 billion). 1998 was particularly notable for the
large number of European/US mergers, such as Daimler/Chrysler, Deutsche
Bank/Bankers Trust and BP/Amoco. American and European companies increasingly
seem to believe
<PAGE>
that mergers are the great panacea bringing about economies of scale and margin
enhancing cost savings, despite evidence that they are not necessarily a great
cure-all in the long term interests of shareholders. We normally do not invest
in companies on the back of merger or takeover rumors and we will continue to
invest where long term fundamental analysis shows clear value.
Upon taking over management of the Fund in May 1998, we restructured the
investments away from the European financial sector and smaller European
markets, which had benefited from the interest rate convergence demanded by the
Euro. The valuations on those stocks and markets had become stretched. We
refocused the portfolio by increasing its investments in Australia and New
Zealand, which had been tarnished by their geographical proximity to Asia, and
by making further investments in the United Kingdom, which has been forgotten
in the "Euro euphoria" gripping continental European investments.
Our ongoing strategy for the Fund has three key
elements at this time:
o A continued low weighting in the overvalued Japanese market
o An overweighted position in the Australasian arkets
o An overweighted position in the United Kingdom and selected European markets
On reflection, 1998 was a difficult year for value investors and we were no
exception. As in the United States, market frenzies in peripheral European
markets and in European technology, mobile communications, and financial stocks
pushed valuations to levels we consider unsustainable, given the longer term
earnings outlook. Our greater focus on core European markets, such as the United
Kingdom and Germany, and a heavier weighting towards manufacturing companies
which have sustainable yields of three to four per cent, as well as an early
move to pick up value in the Pacific region meant our returns lagged behind
those of the broad market indices. Despite selected areas of overvaluation, we
continue to believe that underlying valuations support stock markets in much of
Asia, the United Kingdom and selected markets in Continental Europe. We would
comment that it would be a brave investor who would expect markets to repeat in
1999 the euphoria mingled with relief that greeted the end of 1998.
Elizabeth A. Desmond
Clive Gillmore
Growth of $10,000 invested 5/1/91 through 12/31/98
5/1/91 12/31/98
International Fund $10,000 $18,687
Morgan Stanley EAFE Index $10,000 $19,078
This chart illustrates, hypothetically, that $10,000 was invested in the
International Fund on 5/1/91. 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 $19,078. For comparison, look at how the
Morgan Stanley EAFE Index did over the same period. With dividends and capital
gains, if any, reinvested, the same $10,000 investment would have grown to
$18,687. 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 +14.65%
- ------------------------------------------------------------------
Five Years + 8.40%
- ------------------------------------------------------------------
Lifetime
(since 5/1/91) + 8.78%
- ------------------------------------------------------------------
<PAGE>
Lincoln National
International Fund, Inc.
Statement of Net Assets
December 31, 1998
Investments:
Number Market
Common Stock: of Shares Value
- --------------------------------------------------------------------------
Argentina: 0.5%
- --------------------------------------------------------------------------
Argentinian Investment Fund* 135,700 $ 2,514,521
- --------------------------------------------------------------------------
Australia: 10.9%
- --------------------------------------------------------------------------
Amcor Limited 2,886,500 12,308,006
CSR Limited 3,395,900 8,285,605
Foster's Brewing Group 5,160,800 13,948,765
National Australia Bank 967,500 14,554,006
Orica 1,037,100 5,384,245
- --------------------------------------------------------------------------
54,480,627
Belgium: 2.2%
- --------------------------------------------------------------------------
Electrabel S.A. 24,654 10,832,374
- --------------------------------------------------------------------------
France: 7.0%
- --------------------------------------------------------------------------
Alcatel 56,200 6,878,776
Compagnie de Saint Gobain 66,100 9,332,483
Elf Aquitaine 81,500 9,421,257
Societe Generale 59,150 9,579,042
- --------------------------------------------------------------------------
35,211,558
Germany: 10.2%
- --------------------------------------------------------------------------
Bayer AG 345,500 14,504,367
Bayerische Hypo-und Vereinsbank AG 127,000 10,045,745
Continental AG 178,600 4,962,785
Rheinisch Westfaelisches Elektric 206,900 11,423,819
Siemens AG 155,900 10,245,266
- --------------------------------------------------------------------------
51,181,982
Hong Kong: 3.7%
- --------------------------------------------------------------------------
Hong Kong Electric 1,633,000 4,953,275
Jardine Matheson Holdings Limited 1,350,000 3,483,000
Peregrine Investment Holdings Limited*2,484,500 3,207
Wharf (Holdings) Limited 7,062,000 10,300,174
- --------------------------------------------------------------------------
18,739,656
India: 0.4%
- --------------------------------------------------------------------------
The India Magnum Fund* 69,385 1,734,625
- --------------------------------------------------------------------------
Japan: 12.8%
- --------------------------------------------------------------------------
Canon 667,000 14,195,235
Eisai Co. Limited 746,000 14,463,091
Hitachi Limited 1,408,000 8,685,610
Matsushita Electric Industrial 825,000 14,533,371
Nichido Fire & Marine 476,000 2,328,089
West Japan Railway 2,271 10,006,605
- --------------------------------------------------------------------------
64,212,001
Malaysia: 0.9%
- --------------------------------------------------------------------------
Sime Darby Berhad 5,300,000 4,557,791
- --------------------------------------------------------------------------
Netherlands: 6.6%
- --------------------------------------------------------------------------
Elsevier-CVA 519,900 7,283,082
ING Groep N.V. 160,400 9,782,492
Royal Dutch Petroleum 323,100 16,091,193
- --------------------------------------------------------------------------
33,156,767
New Zealand: 4.0%
- --------------------------------------------------------------------------
Carter Holt Harvey Limited 5,390,700 4,822,197
Telecom Corporation of New Zealand 3,467,600 15,053,372
- --------------------------------------------------------------------------
19,875,569
Spain: 6.5%
- --------------------------------------------------------------------------
Banco Central Hispanoamericano 549,450 6,531,387
Iberdrola S.A. 840,900 15,750,205
Number Market
of Shares Value
- --------------------------------------------------------------------------
NH Hoteles S.A.* 20 $ 291
Telefonica de Espana 229,927 10,235,208
- --------------------------------------------------------------------------
32,517,091
United Kingdom: 31.4%
ASDA Group 1,236,000 3,283,687
Associated British Food 836,600 7,780,831
Bass 863,200 12,099,580
BG 2,429,300 15,294,108
Blue Circle Industry 2,160,900 12,431,095
Boots 851,100 14,413,326
British Airways 1,688,300 11,391,719
Cable & Wireless 1,117,500 13,700,327
GKN 877,000 11,682,363
Glaxo Wellcome 458,200 15,655,910
Great Universal Stores 901,800 9,411,334
PowerGen 1,214,500 15,946,590
Rio Tinto 947,900 10,906,044
Taylor Woodrow 1,433,400 3,576,425
- --------------------------------------------------------------------------
157,573,339
Total Common Stock: 97.1%
(Cost $490,417,045) 486,587,901
- --------------------------------------------------------------------------
Warrants/ Rights:
- --------------------------------------------------------------------------
Wharf Holdings Warrants 353,100 29,169
Telefonica Sa Bonus Rights 229,927 204,380
- --------------------------------------------------------------------------
Total Warrants/ Rights: 0.0%
(Cost $0) 233,549
- --------------------------------------------------------------------------
Par
Repurchase Agreement: Amount
- --------------------------------------------------------------------------
State Street Bank and Trust Co.
Repurchase Agreement, dated 12/31/98, 4.45%,
maturing 1/4/99, collateralized by $11,185,000
U.S. Treasury Bonds, 10.375%, 11/15/09,
market value $14,436,301 $14,151,000 14,151,000
- --------------------------------------------------------------------------
Total Repurchase Agreement: 2.8%
(Cost $14,151,000) 14,151,000
- --------------------------------------------------------------------------
Total Investments: 99.9%
(Cost $504,568,045) 500,972,450
- --------------------------------------------------------------------------
Other Assets Over Liabilities: 0.1% 681,852
- --------------------------------------------------------------------------
Net Assets: 100.0%
(Equivalent to $15.982 per share
based on 31,388,376 shares issued and outstanding) $501,654,302
- --------------------------------------------------------------------------
*Non-income producing security.
See accompanying notes to financial statements
<PAGE>
Lincoln National International Fund, Inc.
Statement of Operations
Year ended December 31, 1998
Investment income:
Dividends $13,091,730
- ------------------------------------------------------------------------------
Interest 573,841
- ------------------------------------------------------------------------------
Less: Foreign withholding tax (1,160,151)
- ------------------------------------------------------------------------------
Total investment income 12,505,420
- ------------------------------------------------------------------------------
Expenses:
Management fees 3,837,594
- ------------------------------------------------------------------------------
Accounting fees 317,215
- ------------------------------------------------------------------------------
Custodial fees 257,585
- ------------------------------------------------------------------------------
Printing and postage 79,563
- ------------------------------------------------------------------------------
Directors fees 4,200
- ------------------------------------------------------------------------------
Other 34,263
- ------------------------------------------------------------------------------
Total expenses 4,530,420
- ------------------------------------------------------------------------------
Net investment income 7,975,000
- ------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments and foreign currency:
Net realized gain (loss) on:
Investment transactions 118,414,678
- ------------------------------------------------------------------------------
Foreign currency transactions (10,568)
- ------------------------------------------------------------------------------
Net realized gain on investment and
foreign currency transactions 118,404,110
- ------------------------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) of:
Investments (62,471,677)
- ------------------------------------------------------------------------------
Foreign currency 561,031
- ------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of investments
and foreign currency (61,910,646)
- ------------------------------------------------------------------------------
Net realized and unrealized gain on investments
and foreign currency 56,493,464
- ------------------------------------------------------------------------------
Net increase in net assets
resulting from operations $64,468,464
==============================================================================
Statements of Changes in Net Assets
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Year ended Year ended
12/31/98 12/31/97
----------------------------------------
<S> <C> <C>
Changes from operations:
- ----------------------------------------------------------------------------------------------------------
Net investment income $ 7,975,000 $ 2,085,136
- ----------------------------------------------------------------------------------------------------------
Net realized gain on investment and foreign currency transactions 118,404,110 18,026,179
- ----------------------------------------------------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) of investments and foreign currency (61,910,646) 6,771,330
- ----------------------------------------------------------------------------------------------------------
Net increase in net assets
resulting from operations 64,468,464 26,882,645
- ----------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income (5,842,740) -
- ----------------------------------------------------------------------------------------------------------
Net realized gain on investments (18,026,179) (21,685,866)
- ----------------------------------------------------------------------------------------------------------
Total distributions to shareholders (23,868,919) (21,685,866)
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from capital share transactions (5,174,443) 20,657,759
- ----------------------------------------------------------------------------------------------------------
Total increase in net assets 35,425,102 25,854,538
- ----------------------------------------------------------------------------------------------------------
Net Assets, beginning of year 466,229,200 440,374,662
- ----------------------------------------------------------------------------------------------------------
Net Assets, end of year $501,654,302 $466,229,200
==========================================================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
Lincoln National International 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 $ 14.673 $ 14.556 $ 13.398 $ 13.027 $ 12.642
Income from investment operations:
Net investment income(2) 0.253 0.066 0.071 0.069 0.033
Net realized and unrealized gain
on investments 1.838 0.771 1.244 0.892 0.385
-------------------------------------------------------------------------
Total from investment operations 2.091 0.837 1.315 0.961 0.418
-------------------------------------------------------------------------
Less dividends and distributions:
Dividends from net investment income (0.189) - (0.071) (0.069) (0.033)
Distributions from net realized gain on
investment transactions (0.593) (0.720) (0.086) (0.521) -
-------------------------------------------------------------------------
Total dividends and distributions (0.782) (0.720) (0.157) (0.590) (0.033)
-------------------------------------------------------------------------
Net asset value, end of year $ 15.982 $ 14.673 $ 14.556 $ 13.398 $ 13.027
=========================================================================
Total Return (1) 14.65% 6.00% 9.52% 8.89% 3.28%
Ratios and supplemental data:
Ratio of expenses to average net assets 0.93% 0.93% 1.19% 1.27% 1.24%
Ratio of net investment income
to average net assets 1.63% 0.44% 0.51% 0.59% 0.25%
Portfolio Turnover 123.11% 77.58% 68.67% 63.15% 52.78%
Net assets, end of year (000 omitted) $501,654 $466,229 $440,375 $358,391 $316,350
</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).
(2) Per share information for the year ended December 31, 1998 was based on the
average shares outstanding method.
See accompanying notes to financial statements.
<PAGE>
Lincoln National International Fund, Inc.
Notes to Financial Statements
December 31, 1998
The Fund: Lincoln National International 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 long-term capital appreciation.
The Fund trades in securities issued outside the United States - mostly stocks,
with an occasional bond or money market security.
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.
Forward foreign currency contracts are valued at the forward exchange rates
prevailing on the day of valuation. 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. Realized gains or
losses from investment transactions are reported on an identified cost basis.
Foreign Currency Transactions: The books and records of the Fund are maintained
in U.S. dollars. All assets and liabilities denominated in a foreign currency
are translated into U.S. dollars based upon foreign exchange rates prevailing at
the end of the year. Income and expenses and purchases and sales of investments
are translated into U.S. dollars at the rate of exchange prevailing on the
respective dates of such transactions. It is not practical to isolate that
portion of both realized and unrealized gains and losses on investments in
equity securities that result from fluctuations in foreign currency exchange
rates in the statement of operations. The Fund does isolate that portion of
gains and losses on investments in debt securities which are due to changes in
the foreign exchange rate from that which are due to changes in market prices of
debt securities.
Reported net realized gains and losses on foreign currency transactions arise
from sales and maturities of forward foreign currency contracts, currency gains
and losses between the trade and settlement dates on securities transactions,
and the differences between the amounts of dividends, interest, and foreign
withholding taxes recorded on the Fund's books and the U.S. dollar equivalent of
the amounts actually received or paid. Net change in unrealized appreciation or
depreciation on translation of assets and liabilities in foreign currencies
arise from changes in the value of other assets and liabilities at the end of
the period resulting from changes in the exchange rates.
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.
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.
Withholding taxes on foreign interest and dividends have been provided for in
accordance with the applicable country's tax rates.
<PAGE>
Notes to Financial Statements - (Continued)
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 $ 531,214
- ------------------------------------------------------------
Foreign currency 3,298,681
- ------------------------------------------------------------
Receivable for dividends earned 1,271,846
- ------------------------------------------------------------
Receivable for interest earned 1,749
- ------------------------------------------------------------
Receivable for capital shares sold 44,202
- ------------------------------------------------------------
Payable for securities purchased (4,458,791)
- ------------------------------------------------------------
Payable for capital shares redeemed (8,899)
- ------------------------------------------------------------
Management fees payable (450,176)
- ------------------------------------------------------------
Other, net 452,026
- ------------------------------------------------------------
$ 681,852
==========
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 .90%
of the first $200,000,000 of the average daily net assets of the Fund, .75% of
the next $200,000,000, and .60% of the average daily net assets of the Fund in
excess of $400,000,000. The sub-advisor, Delaware Investment Advisors Ltd.
("DIAL"), an affiliate of the Advisor, is paid directly by the Advisor.
Effective May 1, 1998, DIAL became the sub-advisor of the Fund. Additionally, on
May 1, 1998 the fund terminated its sub-advisor agreement with Clay Finley Inc.
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** $ 313,884
- ------------------------------------------------------------------------------
Paid in capital in excess of par value of shares issued 381,753,476
- ------------------------------------------------------------------------------
Undistributed net investment income 4,206,828
- ------------------------------------------------------------------------------
Accumulated net realized gain on investments 118,414,678
- ------------------------------------------------------------------------------
Net unrealized depreciation of investments and foreign currencies (3,034,564)
- ------------------------------------------------------------------------------
$501,654,302
============
** 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 depreciation at December 31, 1998 are as
follows:
Aggregate Aggregate Gross Gross Net
Cost of Proceeds Unrealized Unrealized Unrealized
Purchases From Sales Appreciation Depreciation Appreciation
------------------------------------------------------------------------
$579,867,960 $598,734,228 $39,613,104 $(43,208,699) $(3,595,595)
<PAGE>
Notes to Financial Statements - (Continued)
6. Supplemental Financial Instrument Information
Forward Foreign Currency Contracts: The Fund may purchase or sell forward
foreign currency contracts to hedge risks of fluctuations in specific
transactions or portfolio positions. Forward foreign currency contracts obligate
the Fund to take or deliver a foreign currency at a future date at a specified
price. The realized and unrealized gain or loss on the contracts is reflected in
the accompanying financial statements. The Fund is subject to the credit risks
that the counter parties to these contracts will fail to perform; although this
risk is minimized by purchasing such agreements from financial institutions with
long standing, superior performance records. In addition, the Fund is subject to
the market risks associated with unanticipated movements in the value of a
foreign currency relative to the U.S. dollar. Forward foreign currency contracts
that were open at December 31, 1998 were as follows:
Contract to Foreign In Unrealized
Deliver Currency Exchange For Settlement Date Gain
- -----------------------------------------------------------------------------
(21,877,794) Great Britain Pound $ 36,700,000 January 1999 $466,396
Repurchase Agreements: The Fund, through its custodian, receives delivery of the
underlying securities, whose market value is required to be at least 102% of the
repurchase price. However, in the event of default or bankruptcy by the
counterparty to the agreement, realization of the collateral may be subject to
legal proceedings.
7. Credit and Market Risks
The Fund invests in foreign securities. As a result, there may be additional
risks, such as the investments being subject to restrictions as to repatriation
of cash back to the United States and to political or economic uncertainties.
Distribution of investments for the Fund, by industry, as a percentage of total
investments, consisted of the following at December 31, 1998:
Energy 20.5%
----------------------------------------
Consumer Products and Services 20.2
----------------------------------------
Electrical and Electronics 16.9
----------------------------------------
Banking, Finance and Insurance 13.0
----------------------------------------
Healthcare and Pharmaceuticals 8.6
----------------------------------------
Telecommunications 8.0
----------------------------------------
Industrial 5.9
----------------------------------------
Transportation 4.4
----------------------------------------
Others 2.5
----------------------------------------
100.0%
======
8. 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: 3,664,156 $57,112,244 1,595,567 $23,868,919 (5,646,496) $(86,155,606) (386,773) $(5,174,443)
Year ended
December 31, 1997: 2,736,777 40,729,431 1,702,170 23,752,137 (2,918,129) (43,823,809) 1,520,818 20,657,759)
</TABLE>
9. 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 International Fund, Inc.
Report of Ernst & Young LLP, Independent Auditors
To the Shareholders and Board of Directors
Lincoln National International Fund, Inc.
We have audited the accompanying statement of net assets of Lincoln National
International 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 International 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
