[LYNCH & MAYER LOGO]
Lincoln National
Aggressive Growth Fund, Inc.
Annual Report
December 31, 1998
<PAGE>
Lincoln National Aggressive Growth 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
Aggressive Growth Fund, Inc.
Managed by: [LYNCH & MASTER LOGO]
The Fund produced a return of (6.20)% for the year ended December 31, 1998. Its
benchmark, the S&P Mid-Cap 400 Index, had a return of 19.11% for 1998.
1998 will be remembered as the year of the ".com". Stocks of the new era of
technology and commerce led their sector for the year. It is certain that the
web-based companies will lead the future path of commerce. However, a ten-fold
price appreciation on an initial offering does leave professional investors
skeptical on the short-term values assigned to these companies. It is probable
that these stocks will provide investors with a good entry point only after they
have corrected back to reasonable levels.
The Fund's continued emphasis on the smaller stocks in the mid cap universe
adversely impacted results in 1998. The Fund's overweighting in consumer
cyclicals was a drag on the Fund's performance in the last quarter of the year.
The absence of web stocks in the Fund created an uphill performance battle for
the Fund in 1998. The influence of the weakening Asian economies caused declines
in commodity prices, which were completely underestimated on our part. This
resulted in the massive corporate restructuring which materialized in the
individual companies held in the Fund.
We believe that it is likely that the current larger-cap, higher
price-to-earnings leadership of the market will continue to dominate during the
first half of 1999. The new bull that emerges after that will likely see a
rotation in strength back down the capitalization curve and into the more
cyclical stock that would benefit the Aggressive Growth Fund.
Ed Petner
Growth of $10,000 invested 1/3/94 through 12/31/98
1/3/94 12/31/98
Aggressive Growth Fund $10,000 $23,700
S&P 400 $10,000 $16,427
This chart illustrates, hypothetically, that $10,000 was invested in the
Aggressive Growth Fund on 1/3/94. 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 $16,427. For comparison,
look at how the S&P Mid-Cap 400 Index did over the same period. With
dividends and capital gains, if any, reinvested, the same $10,000 investment
would have grown to $23,700. 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 (6.20)%
- ---------------------------------------------
Lifetime
(since 1/3/94) +10.44%
- ---------------------------------------------
<PAGE>
Lincoln National
Aggressive Growth Fund, Inc.
Statement of Net Assets
December 31, 1998
Investments:
Number Market
Common Stock: of Shares Value
- ------------------------------------------------------------------------------
Automobiles & Auto Parts: 1.9%
- ------------------------------------------------------------------------------
Tower Automotive * 252,400 $ 6,294,225
- ------------------------------------------------------------------------------
Banking, Finance & Insurance: 7.2%
- ------------------------------------------------------------------------------
AllAmerica Financial 97,500 5,642,812
Ambac Financial Group 96,600 5,814,112
American Bankers Insurance Group 65,600 3,173,400
Peoples Heritage Financial Group 302,400 6,057,450
Washington Mutual 89,300 3,410,144
- ------------------------------------------------------------------------------
24,097,918
Buildings & Materials: 0.9%
- ------------------------------------------------------------------------------
J. Ray McDermott, S.A * 125,900 3,076,681
- ------------------------------------------------------------------------------
Cable, Media & Publishing: 15.9%
- ------------------------------------------------------------------------------
Chancellor Media Class A * 270,600 12,946,519
Emmis Broadcasting * 120,800 5,239,700
Fox Entertainment Group * 324,800 8,180,900
Jacor Communications * 194,900 12,607,594
Lamar Advertising * 20,000 750,000
USA Networks * 408,900 13,532,034
- ------------------------------------------------------------------------------
53,256,747
Chemicals: 3.9%
- ------------------------------------------------------------------------------
Dial 296,300 8,555,662
ITT Educational Services * 134,300 4,566,200
- ------------------------------------------------------------------------------
13,121,862
Computers & Technology: 11.2%
- ------------------------------------------------------------------------------
BEA Systems * 260,800 3,202,950
Electronics Arts * 164,600 9,227,888
Mercury Interactive * 94,000 5,939,625
Network Associates * 178,850 11,865,580
Unisys * 212,800 7,328,300
- ------------------------------------------------------------------------------
37,564,343
Electronics & Electrical Equipment: 1.7%
- ------------------------------------------------------------------------------
Altera * 92,200 5,606,912
Energy: 2.2%
Anadarko Petroleum 239,600 7,397,650
Cross Timbers Oil 15,000 112,500
- ------------------------------------------------------------------------------
7,510,150
Environmental Services: 4.9%
- ------------------------------------------------------------------------------
Eastern Environmental Services * 372,300 11,017,753
Republic Services Class A * 287,600 5,302,625
- ------------------------------------------------------------------------------
16,320,378
Food, Beverage & Tobacco: 2.7%
- ------------------------------------------------------------------------------
CEC Entertainment * 36,600 1,015,650
Whitman 311,900 7,914,463
- ------------------------------------------------------------------------------
8,930,113
Healthcare & Pharmaceuticals: 11.4%
- ------------------------------------------------------------------------------
Allegiance 71,100 3,315,038
Alza * 145,200 7,586,700
Biochem Pharma* 178,400 5,117,850
Boston Scientific * 182,000 4,879,875
Centocor * 169,100 7,620,069
Forest Laboratories * 99,400 5,286,837
Orthodontic Centers of America * 222,300 4,320,956
- ------------------------------------------------------------------------------
38,127,325
Number Market
Common Stock: of Shares Value
- ------------------------------------------------------------------------------
Industrial Machinery: 1.4%
- ------------------------------------------------------------------------------
McDermott International 193,400 $ 4,774,562
- ------------------------------------------------------------------------------
Leisure, Lodging & Entertainment: 2.0%
- ------------------------------------------------------------------------------
Bally Total Fitness Holdings * 263,100 6,544,612
- ------------------------------------------------------------------------------
Metals & Mining: 3.0%
- ------------------------------------------------------------------------------
Outdoor Systems * 338,837 10,165,110
- ------------------------------------------------------------------------------
Miscellaneous: 5.9%
- ------------------------------------------------------------------------------
DeVry * 141,000 4,318,125
Metamor Worldwide * 296,700 7,361,869
Metzler Group * 169,400 8,242,369
- ------------------------------------------------------------------------------
19,922,363
Retail: 8.3%
- ------------------------------------------------------------------------------
Family Dollar Stores 384,650 8,462,300
Tandy 260,200 10,716,987
Zale 266,600 8,597,850
- ------------------------------------------------------------------------------
27,777,137
Telecommunications: 6.7%
- ------------------------------------------------------------------------------
Antec * 140,500 2,836,344
Brightpoint * 260,900 3,562,916
ECI Telecommunications 82,100 2,906,853
Intermedia Communications * 239,300 4,142,882
SkyTel Communications * 180,600 3,967,556
True North Communications 194,000 5,213,750
- ------------------------------------------------------------------------------
22,630,301
Textiles, Apparel & Furniture: 1.6%
- ------------------------------------------------------------------------------
Jones Apparel Group * 249,400 5,502,388
- ------------------------------------------------------------------------------
Transportation & Shipping: 0.9%
- ------------------------------------------------------------------------------
CNF Transportation 84,400 3,170,275
- ------------------------------------------------------------------------------
Common Stock: 93.7%
(Cost $262,167,473) 314,393,402
- ------------------------------------------------------------------------------
Par
Repurchase Agreement: Amount
- ------------------------------------------------------------------------------
State Street Bank & Trust Co. Repurchase
Agreement, dated 12/31/98, 4.45%,
maturing 1/4/99, collateralized by $23,495,000
U.S.Treasury Notes, 5.50%, 5/31/00,
market value $23,873,035 $23,402,000 23,402,000
- ------------------------------------------------------------------------------
Total Repurchase Agreement: 7.0%
(Cost $23,402,000) 23,402,000
- ------------------------------------------------------------------------------
Total Investments: 100.7%
(Cost $285,569,473) 337,795,402
- ------------------------------------------------------------------------------
Other Assets Under Liabilities: (0.7)% (2,428,964)
- ------------------------------------------------------------------------------
Net Assets: 100.0%
(Equivalent to $13.367 per share
based on 25,088,320 shares
issued and outstanding) $335,366,438
==============================================================================
* Non-income producing security.
See accompanying notes to financial statements.
<PAGE>
Lincoln National Aggressive Growth Fund, Inc.
Statement of Operations
Year ended December 31, 1998
Investment income:
Interest $ 1,626,886
- ----------------------------------------------------------------------------
Dividends 1,134,096
- ----------------------------------------------------------------------------
Total investment income 2,760,982
- ----------------------------------------------------------------------------
Expenses:
Management fees 2,476,022
- ----------------------------------------------------------------------------
Accounting fees 153,235
- ----------------------------------------------------------------------------
Printing and postage 62,569
- ----------------------------------------------------------------------------
Custodial fees 14,748
- ----------------------------------------------------------------------------
Directors fees 4,200
- ----------------------------------------------------------------------------
Other 20,338
- ----------------------------------------------------------------------------
Total expenses 2,731,112
- ----------------------------------------------------------------------------
Net investment income 29,870
- ----------------------------------------------------------------------------
Net realized and unrealized loss on investments:
Net realized loss on investment transactions (20,687,677)
- ----------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation)
of investments (2,668,620)
- ----------------------------------------------------------------------------
Net realized and unrealized loss on investments (23,356,297)
- ----------------------------------------------------------------------------
Net decrease in net assets
resulting from operations $(23,326,427)
=============================================================================
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 $ 29,870 $ 473,358
- ----------------------------------------------------------------------------
Net realized gain (loss) on investments (20,687,677) 45,635,441
- ----------------------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) of investments (2,668,620) 14,000,694
- ----------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations (23,326,427) 60,109,493
- ----------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income (473,358) -
- ----------------------------------------------------------------------------
Net realized gain on investments (45,635,441) (11,900,740)
- ----------------------------------------------------------------------------
Total distributions to shareholders (46,108,799) (11,900,740)
- ----------------------------------------------------------------------------
Net increase in net assets
resulting from capital share transactions 62,038,964 51,945,184
- ----------------------------------------------------------------------------
Total increase (decrease) in net assets (7,396,262) 100,153,937
- ----------------------------------------------------------------------------
Net Assets, beginning of year 342,762,700 242,608,763
- ----------------------------------------------------------------------------
Net Assets, end of year $335,366,438 $342,762,700
============================================================================
See accompanying notes to financial statements.
<PAGE>
Lincoln National Aggressive Growth Fund, Inc.
Financial Highlights
(Selected data for each capital share outstanding throughout the period)
<TABLE>
<CAPTION>
Period ended December 31,
1998 1997 1996 1995 1994(2)
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 16.385 $ 13.980 $ 12.183 $ 9.048 $ 10.000
Income (loss) from investment operations:
Net investment income 0.001 0.023 0.004 0.007 0.019
Net realized and unrealized gain (loss)
on investments (0.810) 3.055 1.989 3.135 (0.952)
Total from investment operations (0.809) 3.078 1.993 3.142 (0.933)
Less dividends and distributions:
Dividends from net investment income (0.023) - (0.004) (0.007) (0.019)
Distributions from net realized gain on
investment transactions (2.186) (0.673) (0.192) - -
-----------------------------------------------------
Total dividends and distributions (2.209) (0.673) (0.196) (0.007) (0.019)
-----------------------------------------------------
Net asset value, end of period $ 13.367 $ 16.385 $ 13.980 $ 12.183 $ 9.048
=====================================================
Total Return(1) (6.20%) 23.09% 17.02% 34.15% (9.37%)
Ratios and supplemental data:
Ratio of expenses to average net assets 0.81% 0.81% 0.82% 0.94% 1.11%
Ratio of net investment income
to average net assets 0.01% 0.16% 0.03% 0.06% 0.21%
Portfolio Turnover 102.33% 105.07% 77.51% 85.82% 100.31%
Net assets, end of period (000 omitted) $335,366 $342,763 $242,609 $138,471 $60,697
</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) The per share data, total return, ratios and portfolio turnover are
calculated for the period from commencement of investment activity on
January 3, 1994 through December 31, 1994. Accordingly, the total return,
ratios, and portfolio turnover have NOT been calculated on an annualized
basis.
See accompanying notes to financial statements.
<PAGE>
Lincoln National Aggressive Growth Fund, Inc.
Notes to Financial Statements
December 31, 1998
The Fund: Lincoln National Aggressive Growth 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 capital appreciation. The Fund
invests in stocks of smaller, lesser-known companies, which have a chance to
grow significantly in a short time.
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. 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.
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 Under Liabilities
The statement of net assets account "Other Assets Under Liabilities" at December
31, 1998 consisted of the following assets (liabilities):
Cash overdraft $(320,052)
- ---------------------------------------------------
Receivable for dividends earned 125,731
- ---------------------------------------------------
Receivable for interest earned 2,893
- ---------------------------------------------------
Receivable for securities sold 1,056,740
- ---------------------------------------------------
Receivable for capital shares sold 1,135,671
- ---------------------------------------------------
Payable for securities purchased (4,165,905)
- ---------------------------------------------------
Management fees payable (263,442)
- ---------------------------------------------------
Other, net (600)
- ---------------------------------------------------
$(2,428,964)
============
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 .75%
of the first $200,000,000 of the average daily net assets of the Fund, .70% of
the next $200,000,000, and .65% of the average daily net assets of the Fund in
excess of $400,000,000. The sub-advisor, Lynch & Mayer, 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.
<PAGE>
Notes to Financial Statements - (Continued)
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** $ 250,883
- ----------------------------------------------------------------------
Paid in capital in excess of par value of shares issued 303,547,433
- ----------------------------------------------------------------------
Undistributed net investment income 29,870
- ----------------------------------------------------------------------
Accumulated net realized loss on investments (20,687,677)
- ----------------------------------------------------------------------
Net unrealized appreciation of investments 52,225,929
- ----------------------------------------------------------------------
$335,366,438
============
** The Fund has 50,000,000 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
- -------------------------------------------------------------------------------
$346,991,350 $314,566,309 $65,340,717 $(13,114,788) $52,225,929
6. Supplemental Financial Instrument Information
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.
7. Summary of Changes From Capital Share Transactions
<TABLE>
<CAPTION>
Shares
Issued Upon Capital Net Increase
Capital Reinvestment Shares Resulting From Capital
Shares Sold of 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: 2,713,832 $38,444,307 3,125,236 $46,108,799 (1,669,529) $(22,514,142) 4,169,539 $62,038,964
Year ended
December 31, 1997: 3,320,603 49,037,657 892,895 11,957,816 (648,693) (9,050,289) 3,564,805 51,945,184
</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.
9. Capital Loss Carryforward
As of December 31, 1998, the Fund had approximately $20,687,677 of unused
capital loss carryforward for federal tax purposes. The loss carryforward
expires in 2006.
<PAGE>
Lincoln National Aggressive Growth Fund, Inc.
Report of Ernst & Young LLP, Independent Auditors
To the Shareholders and Board of Directors
Lincoln National Aggressive Growth Fund, Inc.
We have audited the accompanying statement of net assets of Lincoln National
Aggressive Growth 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 periods indicated therein. 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 Aggressive Growth 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 periods indicated therein, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
February 5, 1999
