[LOGO OF DELAWARE INVESTMENTS]
Lincoln National
International Fund, Inc.
Annual Report
December 31, 1999
<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]
1999 was a strong year for international equity markets. The Fund achieved
strong absolute returns rising 17.8% but our defensive, value investment
approach could not keep up with the MSCI EAFE Index,* whose markets charged with
telecommunications and internet euphoria, rose 27.3%. We held a number of
companies that returned more than 80% last year including: Siemens and Alcatel,
telecommunications equipment suppliers in Germany and France, Telefonica, the
Spanish telephone utility and Canon and Hitachi, Japanese manufacturers of
computers, components and peripherals. But the narrow nature of equity markets
in 1999 made these stocks an exception. Across international markets, despite
strong aggregate returns, the majority of stocks actually fell in price.
This was particularly evident in Japan where strong performances from both the
yen and the market achieved a return of 62% for US dollar investors and yet 60%
of stocks declined in price. In 1999, investors focused a lot of energy on the
good news coming out of Japan: beginning signs of economic recovery and
tantalizing forays into corporate restructuring. While we acknowledge the
progress of the past eighteen months, the pace of change is still very slow, the
economic recovery fragile, and most companies continue to destroy shareholder
value. Stock valuations do not generally reflect this reality.
The single minded focus of investors, strong economic growth and low inflation
has left large sections of the international stock markets offering even better
value than twelve months ago. We continue to focus on identifying long term
value for your portfolio. We are holding only a few select companies in Japan,
which we believe offer long term value. We are focusing on the abundant value
opportunities in Australasia and the United Kingdom and we have substantial
holdings in Continental Europe where valuations are supported by the weakness of
the Euro in 1999.
Elizabeth A. Desmond
Clive Gillmore
Growth of $10,000 invested 5/1/91 through 12/31/99
5/1/91 12/31/99
International Fund $10,000 $22,459
Morgan Stanley EAFE Index $10,000 $23,725
This chart illustrates, hypothetically, that $10,000 was invested in the
International Fund on 5/1/91. 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 $22,459. 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 $23,725.
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 +17.75%
- --------------------------------------------
Five Years +11.28%
- --------------------------------------------
Lifetime
(since 5/1/91) + 9.78%
- --------------------------------------------
* MSCI EAFE Index consists of more than 900 securities from selected countries
in Europe, Australia and the Far East. An investor cannot invest directly in
the above index/indexes, which is/are unmanaged.
International Fund 1
<PAGE>
Lincoln National
International Fund, Inc.
Statement of Net Assets
December 31, 1999
Investments:
Par** Market
Long-Term Debt Investments: Amount Value
- -----------------------------------------------------------------------------
BG Transco Holdings (United Kingdom)
7.06%, 12/14/09 281,543 $ 457,403
4.19%, 12/14/22 281,543 453,471
7.00%, 12/16/24 281,543 441,697
- -----------------------------------------------------------------------------
Total Long-Term Debt Investments: 0.2%
(Cost $1,376,340) 1,352,571
- -----------------------------------------------------------------------------
Number
Common Stock: of Shares
- -----------------------------------------------------------------------------
Australia: 10.4%
- -----------------------------------------------------------------------------
Amcor Limited 2,351,000 11,019,226
CSR Limited 3,762,900 9,147,234
Foster's Brewing Group 5,160,800 14,817,121
National Australia Bank 922,700 14,124,784
Orica 1,037,100 5,594,086
- -----------------------------------------------------------------------------
54,702,451
Belgium: 1.5%
- -----------------------------------------------------------------------------
Electrabel SA 24,654 8,064,231
- -----------------------------------------------------------------------------
France: 11.1%
- -----------------------------------------------------------------------------
Alcatel 68,500 15,718,736
Compagnie De Saint-Gobain 57,050 10,719,935
Societe Generale 59,150 13,751,781
Total Fina 18,111,958
- -----------------------------------------------------------------------------
58,302,410
Germany: 10.9%
- -----------------------------------------------------------------------------
Bayer 336,400 15,980,494
Bayerische Hypo-und Vereinsbank AG 201,400 13,742,994
Continental 178,600 3,586,052
Rheinisch Westfaelisches Elek 206,900 8,225,263
Siemens 122,100 15,606,718
- -----------------------------------------------------------------------------
57,141,521
Hong Kong: 3.7%
- -----------------------------------------------------------------------------
Hong Kong Electric* 2,473,000 7,730,610
Jardine Matheson Holdings Limited 1,452,000 5,720,880
Peregrine Investment Holdings 2,484,500 3,196
Wharf Holdings 2,593,000 6,020,924
- -----------------------------------------------------------------------------
19,475,610
Japan: 15.0%
- -----------------------------------------------------------------------------
Canon* 480,000 19,082,494
Eisai* 495,000 9,524,356
Hitachi* 1,112,000 17,857,329
Matsushita Elecric Industrial* 559,000 15,490,524
Nichido Fire & Marine* 1,061,000 6,108,866
West Japan Railway* 10,715,553
- -----------------------------------------------------------------------------
78,779,122
Malaysia: 1.0%
- -----------------------------------------------------------------------------
Sime Darby Berhad 4,236,200 5,373,215
- -----------------------------------------------------------------------------
Netherlands: 6.6%
- -----------------------------------------------------------------------------
Elsevier-CVA 757,900 9,046,671
ING Groep 183,977 11,098,709
Royal Dutch Petroleum 236,500 14,483,847
- -----------------------------------------------------------------------------
34,629,227
New Zealand: 3.3%
- -----------------------------------------------------------------------------
Carter Holt Harvey 4,063,700 5,308,208
Telecom Corporation of New Zealand 2,518,200 11,841,836
- -----------------------------------------------------------------------------
17,150,044
Number Market
South Africa: 1.9 of Shares Value
- -----------------------------------------------------------------------------
Sanlam Limited 5,051,500 $ 7,058,148
Sasol Limited 394,600 3,237,579
- -----------------------------------------------------------------------------
10,295,727
Spain: 7.2%
- -----------------------------------------------------------------------------
Banco Santander Central Hispanoamericano 1,008,437 11,407,942
Iberdrola 682,000 9,444,849
Telefonica de Espana* 685,298 17,105,008
- -----------------------------------------------------------------------------
37,957,799
United Kingdom: 26.4%
- -----------------------------------------------------------------------------
Associated British Foods 736,208 4,050,683
Bass 948,100 11,764,944
BG Group 1,962,044 12,569,489
Blue Circle Industry 1,856,100 10,617,031
Boots 1,316,399 12,838,560
British Airways 1,688,300 10,986,175
Cable & Wireless plc 1,117,500 18,892,353
GKN 877,000 14,231,724
Glaxo Wellcome 413,600 11,713,912
Great Universal Stores 901,800 5,001,829
PowerGen 1,253,100 8,928,167
Rio Tinto 602,040 14,465,056
Taylor Woodrow 1,433,400 3,101,445
- -----------------------------------------------------------------------------
139,161,368
Total Common Stock: 99.0%
(Cost $467,167,471) 521,032,725
- -----------------------------------------------------------------------------
Par
Repurchase Agreement: Amount
- -----------------------------------------------------------------------------
State Street Bank and Trust Co.
Repurchase Agreement, dated 12/31/99, 2.50%,
maturing 1/3/00, collateralized by $1,785,000
U.S. Treasury Bond, 11.250%, 2/15/15,
market value $2,603,869 $2,552,000 2,552,000
- -----------------------------------------------------------------------------
Total Repurchase Agreement: 0.5%
(Cost $2,552,000) 2,552,000
- -----------------------------------------------------------------------------
Total Investments: 99.7%
(Cost $471,095,811) 524,937,296
- -----------------------------------------------------------------------------
Other Assets Over Liabilities: 0.3% 1,379,881
- -----------------------------------------------------------------------------
Net Assets: 100.0%
(Equivalent to $14.374 per share based
on 36,613,704 shares issued and outstanding) $526,317,177
- -----------------------------------------------------------------------------
Components of Net Assets at December 31, 1999:
- -----------------------------------------------------------------------------
Common Stock, par value $.01 per share,
100,000,000 authorized shares $ 366,137
Paid in capital in excess of par value of
shares issued 457,464,217
Undistributed net investment income*** 11,243,520
Accumulated net realized gain on investments 3,410,348
Net unrealized appreciation of investments
and foreign currencies 53,832,955
- -----------------------------------------------------------------------------
Total Net Assets $526,317,177
- -----------------------------------------------------------------------------
* Non-income producing security.
** Par amounts for foreign debt are in local currency.
*** Undistributed net investment income includes net realized gain on foreign
currencies. Net realized gains on foreign currencies are treated as net
investment income in accordance with provisions of the Internal Revenue
Code.
See accompanying notes to financial statements
International Fund 2
<PAGE>
Lincoln National International Fund, Inc.
Statement of Operations
Year ended December 31, 1999
Investment income:
Dividends $16,451,839
- -----------------------------------------------------------------------------
Interest 350,630
- -----------------------------------------------------------------------------
Less: Foreign withholding tax (1,441,455)
- -----------------------------------------------------------------------------
Total investment income 15,361,014
- -----------------------------------------------------------------------------
Expenses:
Management fees 3,998,445
- -----------------------------------------------------------------------------
Accounting fees 342,597
- -----------------------------------------------------------------------------
Custody fees 260,396
- -----------------------------------------------------------------------------
Printing and postage 84,319
- -----------------------------------------------------------------------------
Professional fees 29,439
- -----------------------------------------------------------------------------
Directors fees 4,200
- -----------------------------------------------------------------------------
Other 48,242
- -----------------------------------------------------------------------------
Total expenses 4,767,638
- -----------------------------------------------------------------------------
Net investment income 10,593,376
- -----------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency:
Net realized gain (loss) on:
Investment transactions 12,170,607
- -----------------------------------------------------------------------------
Foreign currency transactions 2,282,172
- -----------------------------------------------------------------------------
Net realized gain on investment and
foreign currency transactions 14,452,779
- -----------------------------------------------------------------------------
Net change in unrealized appreciation/depreciation of:
Investments 57,437,078
- -----------------------------------------------------------------------------
Foreign currency (569,559)
- -----------------------------------------------------------------------------
Net change in unrealized appreciation/depreciation
of investments and foreign currency 56,867,519
- -----------------------------------------------------------------------------
Net realized and unrealized gain on investments
and foreign currency 71,320,298
- -----------------------------------------------------------------------------
Net increase in net assets
resulting from operations $81,913,674
- -----------------------------------------------------------------------------
Statements of Changes in Net Assets
Year ended Year ended
12/31/99 12/31/98
----------------------------
Changes from operations:
Net investment income $ 10,593,376 $ 7,975,000
- -----------------------------------------------------------------------------
Net realized gain on investment and foreign
currency transactions 14,452,779 118,404,110
- -----------------------------------------------------------------------------
Net change in unrealized
appreciation/depreciation of investments
and foreign currency 56,867,519 (61,910,646)
- -----------------------------------------------------------------------------
Net increase in net assets
resulting from operations 81,913,674 64,468,464
- -----------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income (17,725,584) (5,842,740)
- -----------------------------------------------------------------------------
Net realized gain on investment transactions (109,585,193) (18,026,179)
- -----------------------------------------------------------------------------
Total distributions to shareholders (127,310,777) (23,868,919)
- -----------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from capital share transactions 70,059,978 (5,174,443)
- -----------------------------------------------------------------------------
Total increase in net assets 24,662,875 35,425,102
- -----------------------------------------------------------------------------
Net Assets, beginning of year 501,654,302 466,229,200
- -----------------------------------------------------------------------------
Net Assets, end of year $526,317,177 $501,654,302
- -----------------------------------------------------------------------------
See accompanying notes to financial statements.
International Fund 3
<PAGE>
Lincoln National International Fund, Inc.
Financial Highlights
(Selected data for each capital share outstanding throughout each year)
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997 1996 1995
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 15.982 $ 14.673 $ 14.556 $ 13.398 $ 13.027
Income from investment operations:
Net investment income(2) 0.294 0.253 0.066 0.071 0.069
Net realized and unrealized gain
on investments and foreign currency 2.182 1.838 0.771 1.244 0.892
--------------------------------------------------
Total from investment operations 2.476 2.091 0.837 1.315 0.961
--------------------------------------------------
Less dividends and distributions:
Dividends from net investment income (0.529) (0.189) - (0.071) (0.069)
Distributions from net realized gain on
investment transactions (3.555) (0.593) (0.720) (0.086) (0.521)
--------------------------------------------------
Total dividends and distributions (4.084) (0.782) (0.720) (0.157) (0.590)
--------------------------------------------------
Net asset value, end of year $ 14.374 $ 15.982 $ 14.673 $ 14.556 $ 13.398
--------------------------------------------------
Total Return(1) 17.75% 14.65% 6.00% 9.52% 8.89%
Ratios and supplemental data:
Ratio of expenses to average net assets 0.92% 0.93% 0.93% 1.19% 1.27%
Ratio of net investment income
to average net assets 2.05% 1.63% 0.44% 0.51% 0.59%
Portfolio Turnover 11.51% 123.11% 77.58% 68.67% 63.15%
Net assets, end of year (000 omitted) $526,317 $501,654 $466,229 $440,375 $358,391
</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 years ended December 31, 1999 and 1998 were
based on the average shares outstanding method.
See accompanying notes to financial statements.
International Fund 4
<PAGE>
Lincoln National International Fund, Inc.
Notes to Financial Statements
December 31, 1999
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 the 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 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
Security Valuation: All equities 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. 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. Foreign dividends are
also recorded on the ex-dividend date or as soon after the ex-dividend date that
the Fund is aware of such dividends, net of all non-rebatable tax withholdings.
Withholding taxes on foreign interest and dividends have been provided for in
accordance with the applicable country's tax rules and rates. 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 period. 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 denominated in foreign
currencies arise from changes in the value of such assets and liabilities at the
end of the period resulting from changes in 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.
International Fund 5
<PAGE>
Notes to Financial Statements - (Continued)
2. Management Fees and Other Transactions With Affiliates
Lincoln Investment Management Company (the "Advisor") and its affiliates manage
the Fund's investment portfolios 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 Advisers Ltd.
("DIAL"), which is 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 asset 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 of the Fund is borne by the Fund.
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 Appreciation
- -------------------------------------------------------------------------------
$57,827,459 $91,963,125 $106,403,794 $(52,562,312) $53,841,482
4. Supplemental Financial Instrument Information
Forward Foreign Currency Contracts: The Fund may enter into 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 financial instrument of 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. At year ended
December 31, 1999 the Fund had no open forward foreign currency contracts.
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. The Advisor is responsible for determining that the value of
the collateral is at least equal to 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.
International Fund 6
<PAGE>
Notes to Financial Statements - (Continued)
5. 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, 1999:
Banking, Finance and Insurance 14.7%
-----------------------------------------
Energy 10.8
-----------------------------------------
Electrical and Electronics 10.0
-----------------------------------------
Utilities 9.7
-----------------------------------------
Telecommunications 8.8
-----------------------------------------
Buildings and Materials 7.5
-----------------------------------------
Food, Beverage & Tobacco 5.8
-----------------------------------------
Retail 4.5
-----------------------------------------
Chemicals 4.1
-----------------------------------------
Transportation 4.1
-----------------------------------------
Healthcare and Pharmaceuticals 4.0
-----------------------------------------
Others (individually less than 4%) 16.0
-----------------------------------------
100.0%
======
6. Summary of Changes From Capital Share Transactions
<TABLE>
<CAPTION>
Shares Issued Upon Net Increase (Decrease)
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: 5,327,475 $76,666,823 9,311,698 $127,310,777 (9,413,845) $(133,917,622) 5,225,328 $70,059,978
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)
</TABLE>
7. Distributions to Shareholders
The Fund declares and distributes dividends from net investment income, if any,
semi-annually. Distributions of net realized gains, if any, are declared and
distributed annually.
International Fund 7
<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, 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 International 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
International Fund 8
