[FIDELITY INVESTMENTS LOGO]
Lincoln National
Equity-Income Fund, Inc.
Annual Report
December 31, 1998
<PAGE>
Lincoln National Equity-Income 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 Equity-Income Fund, Inc.
Managed by: [FIDELITY INVESTMENTS LOGO]
The Fund returned 12.73% for the year ended December 31, 1998. Its appropriate
benchmark, the S&P 500 Index returned 28.76% for 1998.
Financials remain the portfolio's largest sector commitment, and certain
financial holdings were among the portfolio's top contributors. Disappointing
earnings due to the low oil price and weakness in chemical margins adversely
impacted certain positions, such as Occidental Petroleum. During the last
quarter of 1998, we added a variety of stocks including financials that we
believed were undervalued or misperceived after the third quarter 1998 market
pullback.
The largest contributors to performance, versus the benchmark, included good
security selection in the consumer non-durables and capital goods sectors,
particularly retailing, media and leisure, and industrial machinery companies.
However, underexposure to the narrowing group of strong-performing growth
stocks, including dominant technology companies, was disadvantageous to the
portfolio's return versus the S&P 500 Index. Underexposure to dominant large-cap
technology stocks also was a significant detractor from relative return versus
the S&P 500 Index. Finally, value-oriented investing, as is this Fund's
mandate, did not fare as well as growth-oriented investing which was a major
factor in underperformance relative to the benchmark.
Stephen R. Petersen
Growth of $10,000 invested 1/3/94 through 12/31/98
1/3/94 12/31/98
Equity-Income Fund $10,000 $29,366
S&P 500 Index $10,000 $25,123
This chart illustrates, hypothetically, that $10,000 was invested in the
Equity-Income 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 $25,123. For comparison, look at how the S&P 500
Index did over the same period. With dividends and capital gains, if any,
reinvested, the same $10,000 investment would have grown to $29,366. 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 +12.73%
- --------------------------------------------
Lifetime
(since 1/3/94) +20.23%
- --------------------------------------------
<PAGE>
Lincoln National
Equity-Income Fund, Inc.
Statement of Net Assets
December 31, 1998
Investments:
Par Market
Long-Term Debt Investments: Amount** Value
- ---------------------------------------------------------------------------
Daimler-Benz Capital (Germany)
4.125%, 7/5/03 830,000 $ 898,499
- ---------------------------------------------------------------------------
Total Long-Term Debt Investments: 0.1%
(Cost $542,255) 898,499
- ---------------------------------------------------------------------------
Convertible Bonds:
Automobiles & Auto Parts: 0.0%
- ---------------------------------------------------------------------------
Magna International 144A
4.875%, 2/15/05 $ 250,000 256,563
- ---------------------------------------------------------------------------
Banking, Finance & Insurance: 0.0%
- ---------------------------------------------------------------------------
Loews
3.125%, 9/15/07 400,000 317,000
- ---------------------------------------------------------------------------
Cable, Media & Publishing: 0.3%
- ---------------------------------------------------------------------------
Jacor Communications
0.00%, 6/12/11 610,000 532,988
0.00%, 2/9/18 310,000 147,250
News America Holdings
0.00%, 3/11/13 4,070,000 2,345,338
- ---------------------------------------------------------------------------
3,025,576
Computers & Technology: 0.4%
- ---------------------------------------------------------------------------
Apple Computer
6.00%, 6/1/01 690,000 974,625
Apple Computer 144A
6.00%, 6/1/01 140,000 197,750
Micron Technology
7.00%, 7/1/04 1,430,000 1,549,763
Quantum
7.00%, 8/1/04 720,000 696,600
Softkey International 144A
5.50%, 11/1/00 770,000 758,450
- ---------------------------------------------------------------------------
4,177,188
Electronics & Electrical Equipment : 0.1%
- ---------------------------------------------------------------------------
Sunbeam
0.00%, 3/25/18 5,180,000 653,975
- ---------------------------------------------------------------------------
Industrial Machinery: 0.1%
- ---------------------------------------------------------------------------
Matsushita Electric Industries (Japan)
1.30%, 3/29/02 30,000,000 338,400
1.40%, 3/31/04 15,000,000 171,183
- ---------------------------------------------------------------------------
509,583
Leisure, Lodging & Entertainment: 0.0%
- ---------------------------------------------------------------------------
Hilton Hotels
5.00%, 5/15/06 180,000 164,925
- ---------------------------------------------------------------------------
Metals & Mining: 0.0%
- ---------------------------------------------------------------------------
Hexcel
7.00%, 8/1/03 210,000 174,038
- ---------------------------------------------------------------------------
Miscellaneous: 0.1%
- ---------------------------------------------------------------------------
ADT Operations Lyons
0.00%, 7/6/10 380,000 774,250
- ---------------------------------------------------------------------------
Real Estate: 0.0%
- ---------------------------------------------------------------------------
Liberty Property Trust
8.00%, 7/1/01 10,000 17,425
- ---------------------------------------------------------------------------
Par Market
Amount Value
- ---------------------------------------------------------------------------
Retail: 0.2%
- ---------------------------------------------------------------------------
Baker (J.)
7.00%, 6/1/02 $260,000 $ 175,500
Charming Shoppes
7.50%, 7/15/06 200,000 183,500
Home Depot
3.25%, 10/1/01 650,000 1,711,125
Rite-Aid Notes 144A
5.25%, 9/15/02 360,000 524,250
- ---------------------------------------------------------------------------
2,594,375
Transportation & Shipping: 0.1%
- ---------------------------------------------------------------------------
Continental Airlines
6.75%, 4/15/06 320,000 387,600
- ---------------------------------------------------------------------------
Total Convertible Bonds: 1.3%
(Cost $11,527,583) 13,052,498
- ---------------------------------------------------------------------------
Number
Common Stock: of Shares
- ---------------------------------------------------------------------------
Aerospace & Defense: 2.7%
- ---------------------------------------------------------------------------
Allied-Signal 158,000 7,001,375
Coltec Industries* 26,700 520,650
General Dynamics 32,200 1,887,725
General Motors Class H 21,100 837,406
Loral Space and Communications 144A 24,800 441,750
Northrop 21,300 1,557,563
Textron 100,600 7,639,313
United Technologies 67,200 7,308,000
- ---------------------------------------------------------------------------
27,193,782
Automobiles & Auto Parts: 2.0%
- ---------------------------------------------------------------------------
Bayerische Motoren Werke (BMW) AG (Germany) 1,700 1,334,503
Bayerische Motoren Werke (BMW) New (Germany)* 340 260,779
Cooper Industries 18,598 886,892
DaimlerChrysler AG (Germany)* 62,363 5,990,746
Ford Motor 63,700 3,738,394
Meritor Automotive 58,433 1,238,049
Navistar International* 23,400 666,900
Pep Boys 60,200 944,388
TRW 66,200 3,719,613
Volvo AB (Sweden) 48,600 1,112,600
- ---------------------------------------------------------------------------
19,892,864
Banking, Finance & Insurance: 24.3%
- ---------------------------------------------------------------------------
Aetna 6,500 511,063
Allstate 240,810 9,301,284
American Bankers Insurance Group 25,800 1,248,075
American Express 189,700 19,396,824
Associates First Capital Class A 199,908 8,471,102
BankAmerica 268,640 16,151,980
Bank of New York 624,900 25,152,225
Bank of Nova Scotia (Canada) 68,300 1,505,634
Bank One 386,965 19,759,400
Chase Manhattan 84,200 5,730,863
Chubb 11,600 752,550
Cigna 30,000 2,319,374
Citigroup 414,100 20,497,949
Comerica 65,400 4,459,463
Edperbrascan Class A (Canada) 209,500 2,914,664
Enhance Financial Services Group 7,892 236,760
Federal Home Loan Bank 12,200 786,138
Federal National Mortgage Association 332,300 24,590,200
First Marathon (Canada) 97,300 1,128,070
Fleet Financial Group 133,300 5,956,844
Fremont General 138,794 3,435,152
Hartford Financial Services 131,300 7,205,088
Highlands Insurance Group* 30,970 404,546
Household International 216,044 8,560,743
Humana* 30,700 546,844
Lehman Brothers Holdings 37,780 1,664,681
Marsh & McLennan 18,000 1,051,875
National Bank of Canada (Canada) 174,600 2,828,269
Nomura Securities (Japan) 26,000 225,688
PMI Group 19,400 957,875
ReliaStar Financial 86,000 3,966,750
<PAGE>
Number Market
Common Stock: of Shares Value
- ---------------------------------------------------------------------------
Royal Bank of Canada (Canada) 50,000 $ 2,500,000
Salomon Inc. Exchangeable Notes (Due
February 1, 2001-DECS)* 9,000 596,250
SLM Holding 34,700 1,665,600
Societe Generale (France) 1 162
Torchmark 62,000 2,189,375
Transamerica 200 23,100
Travelers Property Casualty Class A 51,600 1,599,599
U.S. Bancorp 141,900 5,037,450
United Healthcare 16,600 714,838
Waddell & Reed Financial 15,183 353,005
Waddell & Reed Financial Class A 23,627 559,665
Washington Mutual 248,133 9,475,578
Wells Fargo 338,166 13,505,505
- ---------------------------------------------------------------------------
239,938,100
Buildings & Materials: 0.3%
- ---------------------------------------------------------------------------
Fluor 15,300 651,206
Masco 81,800 2,351,750
Premark International 11,100 384,338
- ---------------------------------------------------------------------------
3,387,294
Cable, Media & Publishing: 2.8%
- ---------------------------------------------------------------------------
CBS 128,185 4,198,058
Donnelley & Sons 49,700 2,177,481
Dun and Bradstreet 32,400 1,022,625
Infinity Broadcasting Class A* 27,700 758,288
New England Business Service 15,500 606,438
Readers Digest Association 46,000 1,158,625
Time Warner 161,566 10,027,189
Viacom Class B * 95,300 7,052,200
Wallace Computer Services 37,500 989,063
- ---------------------------------------------------------------------------
27,989,967
Chemicals: 3.0%
- ---------------------------------------------------------------------------
Dexter 42,200 1,326,663
DuPont(E.I.)deNemours 61,400 3,258,038
Great Lakes Chemical 74,900 2,996,000
Hanna (M.A.) 74,000 911,125
Hercules 71,900 1,968,263
Hoechst AG (Germany) 45,700 1,889,724
IMC Fertilizer Group 80,900 1,729,238
Lawter International 27,800 323,175
Millenium Chemicals 62,842 1,248,985
Monsanto 80,400 3,819,000
Nalco Chemical 33,300 1,032,300
Octel* 11,200 155,400
Olin 53,700 1,520,381
Solutia 97,500 2,181,562
Takeda Chemical Industries (Japan) 28,000 1,073,364
Union Carbide 54,300 2,307,750
Washington Water Power* 59,900 1,153,075
Witco 72,900 1,161,843
- ---------------------------------------------------------------------------
30,055,886
Computers & Technology: 2.6%
- ---------------------------------------------------------------------------
Compaq Computer 12,001 503,292
EG&G 34,700 965,094
Electronic Data Systems 132,800 6,673,200
First Data 47,100 1,492,481
International Business Machines 39,800 7,353,050
NCR* 52,700 2,200,225
Unisys* 167,118 5,755,126
Xerox 5,100 601,800
- ---------------------------------------------------------------------------
25,544,268
Consumer Products: 6.6%
- ---------------------------------------------------------------------------
Avon Products 31,600 1,398,300
Clorox 21,100 2,464,744
General Electric 378,600 38,640,862
Gillete 46,600 2,251,363
Kimberly-Clark 90,300 4,921,350
Maytag 8,900 554,025
Minnesota Mining & Manufacturing 21,900 1,557,638
Modis Professional Services* 40,100 581,450
Procter & Gamble 25,800 2,355,863
Snap-on 69,700 2,426,431
Unilever NV ADR 24,800 2,056,850
Unilever NV-CVA (Netherlands) 1,200 102,588
Unilever (United Kingdom) 514,600 5,762,891
- ---------------------------------------------------------------------------
65,074,355
Number Market
of Shares Value
- ---------------------------------------------------------------------------
Electronics & Electrical Equipment: 3.1%
- ---------------------------------------------------------------------------
AMP 33,320 $ 1,734,723
Cilcorp 14,100 862,744
Eaton 23,500 1,661,156
Emerson Electric 69,800 4,366,863
Honeywell 16,800 1,265,250
Motorola 97,600 5,959,700
Raytheon Class A 4,648 240,244
Raytheon Class B 151,200 8,051,400
Schlumberger Limited 59,300 2,735,212
Siemens AG (Germany) 47,200 3,101,838
Texas Instruments 14,700 1,257,769
- ---------------------------------------------------------------------------
31,236,899
Energy: 9.2%
- ---------------------------------------------------------------------------
Amerada Hess 65,600 3,263,600
Amoco 102,800 6,065,200
Anadarko Petroleum 49,400 1,525,225
Atlantic Richfield 8,600 561,150
British Petroleum ADR 177,724 16,883,779
Canadian Hunter* 5,025 32,822
Chevron 118,872 9,858,945
Coastal 40,600 1,418,463
Compagnie Francaise de Petroleum Total ADR 72,633 3,613,492
Conoco* 60,500 1,262,938
Duke Energy 35,276 2,259,869
Elf Aquitaine ADR 66,300 3,754,238
Exxon 65,400 4,782,375
Mobil 38,900 3,389,163
Occidental Petroleum 227,800 3,844,125
Phillips Petroleum 60,900 2,595,863
Questar 103,200 1,999,500
Royal Dutch Petroleum ADR 160,500 7,683,938
Santa Fe Energy Resources* 33,989 250,669
Sempra Energy 120,415 3,055,530
Texaco 5,203 275,109
Total SA (France) 53,254 5,393,708
US Industries 54,280 1,010,965
USX-Marathon Oil 136,400 4,109,049
Ultramar Diamond Shamrock 36,700 889,975
Unocal 37,300 1,088,694
Valero Energy 22,400 476,000
- ---------------------------------------------------------------------------
91,344,384
Environmental Services: 1.7%
- ---------------------------------------------------------------------------
Allied Waste Industries* 48,300 1,141,088
Browning Ferris 82,887 2,357,099
Burlington Resources 77,700 2,782,631
Halliburton 191,900 5,685,038
Waste Management 103,960 4,847,135
- ---------------------------------------------------------------------------
16,812,991
Food, Beverage & Tobacco: 3.7%
- ---------------------------------------------------------------------------
Anheuser Busch 37,000 2,428,124
Bestfoods 32,600 1,735,950
Corn Products 37,250 1,131,469
DiMon 28,500 211,969
Goodman Fielder Limited (Australia) 199,897 201,691
Heinz (H.J.) 37,700 2,134,763
McDonald's 55,800 4,275,674
PepsiCo 25,200 1,031,625
Philip Morris 420,900 22,518,149
RJR Nabisco Holdings 3,860 114,594
The Seagram Company 24,300 923,400
The Seagram Company (Canada) 9,900 376,664
- ---------------------------------------------------------------------------
37,084,072
Healthcare & Pharmaceuticals: 6.8%
- ---------------------------------------------------------------------------
American Home Products 154,200 8,683,388
Baxter International 44,100 2,836,181
Bristol-Myers Squibb 75,600 10,116,224
Columbia/HCA Healthcare 198,000 4,900,499
IMS Health 7,200 543,150
Johnson & Johnson 54,000 4,529,250
Lilly (Eli) 28,900 2,568,487
Merck & Company 50,200 7,413,912
<PAGE>
Number Market
of Shares Value
- ---------------------------------------------------------------------------
Schering-Plough 241,800 $ 13,359,450
Tyco International 170,334 12,849,570
- ---------------------------------------------------------------------------
67,800,111
Industrial Machinery: 0.7%
- ---------------------------------------------------------------------------
American Standard* 55,800 2,005,313
Ingersoll-Rand 54,250 2,546,359
Pall 34,900 883,406
Parker Hannifin 48,450 1,586,738
- ---------------------------------------------------------------------------
7,021,816
Leisure, Lodging & Entertainment: 0.8%
- ---------------------------------------------------------------------------
Circus Circus Enterprises* 39,000 446,063
King World Productions* 38,100 1,121,569
Mirage Resorts* 33,400 498,913
Starwood Hotels & Resorts Trust 123,934 2,811,751
Viad 83,800 2,545,424
- ---------------------------------------------------------------------------
7,423,720
Metals & Mining: 1.6%
- ---------------------------------------------------------------------------
Alcan Aluminum 60,700 1,642,694
Alcan Aluminum (Canada) 64,900 1,759,210
Aluminum Company of America 91,341 6,810,613
Case 12,000 261,750
DoFasco (Canada) 71,800 919,190
Inland Steel 63,147 1,065,605
Kaiser Aluminum* 39,582 192,962
Newmont Mining 50,800 917,575
Noranda (Canada) 20,100 200,212
Phelps Dodge 31,700 1,612,738
USX-U.S. Steel Group 23,700 545,100
- ---------------------------------------------------------------------------
15,927,649
Miscellaneous: 0.7%
- ---------------------------------------------------------------------------
AC Nielson* 56,500 1,596,125
Berkshire Hathaway Class A* 43 3,038,000
Manpower 36,800 926,900
Ogden 47,400 1,187,963
- ---------------------------------------------------------------------------
6,748,988
Packaging & Containers: 0.1%
- ---------------------------------------------------------------------------
Domtar 500 2,938
Domtar (Canada) 89,700 518,514
- ---------------------------------------------------------------------------
521,452
Paper & Forest Products: 1.1%
- ---------------------------------------------------------------------------
Boise Cascade 1,900 58,900
Bowater 22,800 944,775
Champion International 54,000 2,187,000
Fort James 47,300 1,892,000
Georgia-Pacific 47,800 2,799,288
Nexfor 8,764 34,631
Weyerhaeuser 59,600 3,028,425
- ---------------------------------------------------------------------------
10,945,019
Real Estate: 0.6%
- ---------------------------------------------------------------------------
Alexandria R.E. Equities 10,500 324,844
Crescent Real Estate Equities 56,300 1,294,900
Duke Realty Investments 14,500 337,125
Equity Office Properties Trust 34,600 830,400
Equity Residential Properties 46,100 1,864,169
Fastighets AB Tornet (Sweden) 19,520 284,700
Macerich 14,700 376,688
Mandamus Fastigheter (Sweden)* 1,610 9,016
Weeks 11,100 312,881
- ---------------------------------------------------------------------------
5,634,723
Retail: 4.3%
- ---------------------------------------------------------------------------
Charming Shoppes* 50,900 216,325
Dayton Hudson 78,400 4,253,200
Federated Department Stores* 85,863 3,740,407
Footstar* 46,377 1,159,425
Harcourt General 44,900 2,388,119
Harsco 68,600 2,088,013
Hudson's Bay (Canada) 84,800 1,071,770
Intimate Brands 14,300 427,213
Limited 88,822 2,586,941
Number Market
of Shares Value
- ---------------------------------------------------------------------------
Liz Claiborne 19,700 $ 621,781
Payless ShoeSource* 11,600 549,550
Sears Roebuck 27,900 1,185,750
Sherwin-Williams 24,800 728,500
TJX 266,187 7,719,423
Toys R Us* 27,900 470,813
Tupperware 26,200 430,663
Wal-Mart Stores 155,300 12,647,244
Public Storage 23,700 641,381
- ---------------------------------------------------------------------------
42,926,518
Telecommunications: 8.4%
- ---------------------------------------------------------------------------
Alcatel (France) 24,440 2,991,410
Alstom (France)* 26,541 622,167
ALLTEL 41,400 2,476,238
Ameritech 147,400 9,341,475
AT & T 247,800 18,646,950
Bell Atlantic 243,476 13,832,480
BellSouth 180,600 9,007,425
GTE 105,200 7,094,425
MCI Worldcom* 95,455 6,851,879
Niagara Mohawk Power* 119,100 1,920,488
SBC Communications 155,900 8,360,138
Sprint 27,000 2,271,375
- ---------------------------------------------------------------------------
83,416,450
Textiles, Apparel & Furniture: 0.4%
- ---------------------------------------------------------------------------
Kellwood 33,600 840,000
NIKE 41,500 1,683,344
Newell 16,100 664,125
Stevens & Stevens 20,900 200,509
Unifi 18,100 354,081
- ---------------------------------------------------------------------------
3,742,059
Transportation & Shipping: 1.3%
- ---------------------------------------------------------------------------
Brunswick 41,300 1,022,174
Burlington Northern Santa Fe 169,200 5,710,500
CSX 102,200 4,241,300
Norfolk Southern 26,400 836,549
Ryder Systems 56,600 1,471,600
- ---------------------------------------------------------------------------
13,282,123
Utilities: 2.6%
- ---------------------------------------------------------------------------
Allegheny Energy 95,500 3,294,750
American Electric Power 93,800 4,414,462
Central & South West 37,300 1,023,418
Cinergy 43,000 1,478,125
CMP GROUP 48,400 913,550
CMS Energy 12,200 590,938
Consolidated Edison 45,575 2,409,778
DPL 66,000 1,427,250
Entergy 171,800 5,347,274
Illinova 4,400 110,000
PG&E 102,245 3,220,716
Pinnacle West Capital 19,900 843,263
- ---------------------------------------------------------------------------
25,073,524
Total Common Stock: 91.4%
(Cost $639,543,081) 906,019,014
- ---------------------------------------------------------------------------
Preferred Stock:
- ---------------------------------------------------------------------------
Aetna 12,400 943,175
Airtouch Communications 28,600 1,701,700
Automatic Com Exchange Securities 17,800 271,450
Chancellor Media 144A 13,800 1,288,575
Chiquita Brands Class A 15,500 544,438
Chiquita Brands Class B 7,300 308,425
Conseco 6,100 646,600
Conseco Finance Trust IV 16,500 636,281
DECS Trust 30,000 281,250
Federal Mogul Financial Trust 7,500 495,938
Houston Industries 25,500 2,712,563
Ingersoll-Rand 49,600 985,800
International Paper 5,600 275,100
Kmart Financing 24,700 1,431,056
Life RE Capital Trust II 3,700 281,200
<PAGE>
Number Market
of Shares Value
- ---------------------------------------------------------------------------
Loral Space & Communication 28,700 $1,521,100
MediaOne Group Series D 31,700 3,011,500
MediaOne Group 21,000 1,396,500
Merrill Lynch 11,900 282,625
Occidental Petroleum 14,100 661,819
Premier Parks 24,500 1,451,625
Readers Digest Association 43,100 1,120,600
Salomon 16,700 782,813
Texas Utilities 38,800 1,872,100
Tosco 144A 3,200 152,400
Tribune 8,600 211,775
Union Pacific Capital Trust 144A 34,500 1,582,688
Union Pacific Capital Trust 34,100 1,564,338
Wang Laboratories 144A 10,700 633,975
Wang Laboratories Series B 9,900 586,575
WBK Strypes Trust 17,100 539,719
Williams 3,600 509,400
- ---------------------------------------------------------------------------
Total Preferred Stock: 3.1%
(Cost $24,279,758) 30,685,103
- ---------------------------------------------------------------------------
Par
Repurchase Agreement: Amount
- ---------------------------------------------------------------------------
State Street Bank and Trust Co.
Repurchase Agreement,
dated 12/31/98, 4.45%, maturing 1/4/99,
collateralized by $38,200,000 U.S. Treasury
Bonds 6.25%, 2/28/02,
market value $40,735,563 $39,932,000 39,932,000
- ---------------------------------------------------------------------------
Total Repurchase Agreement: 4.0%
(Cost $39,932,000) 39,932,000
- ---------------------------------------------------------------------------
Total Investments: 99.9%
(Cost $715,824,677) 990,587,114
- ---------------------------------------------------------------------------
Other Assets Over Liabilities: 0.1% 1,389,582
- ---------------------------------------------------------------------------
Net Assets: 100.0%
(Equivalent to $21.715 per share based
on 45,680,879 shares issued
and outstanding) $991,976,696
- ---------------------------------------------------------------------------
* Non-income producing security
** Par amounts for foreign debt are expressed in local currency
DECS - Dividend Enhanced Convertible Stock
See accompanying notes to financial statements.
<PAGE>
Lincoln National Equity-Income Fund, Inc.
Statement of Operations
Year ended December 31, 1998
Investment income:
Dividends $18,582,521
- --------------------------------------------------------------------------
Interest 1,820,176
- --------------------------------------------------------------------------
Less: Foreign withholding tax (281,840)
- --------------------------------------------------------------------------
Total investment income 20,120,857
- --------------------------------------------------------------------------
Expenses:
Management fees 6,639,317
- --------------------------------------------------------------------------
Accounting fees 352,206
- --------------------------------------------------------------------------
Printing and postage 127,084
- --------------------------------------------------------------------------
Custodial fees 68,253
- --------------------------------------------------------------------------
Pricing 28,346
- --------------------------------------------------------------------------
Directors fees 4,200
- --------------------------------------------------------------------------
Other 24,051
- --------------------------------------------------------------------------
Total expenses 7,243,457
- --------------------------------------------------------------------------
Net investment income 12,877,400
- --------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments
and foreign currency:
Net realized gain (loss) on:
Investment transactions 39,921,335
- --------------------------------------------------------------------------
Foreign currency transactions (89,300)
- --------------------------------------------------------------------------
Net realized gain on investment and
foreign currency transactions 39,832,035
- --------------------------------------------------------------------------
Net change in unrealized appreciation of:
Investments 52,367,856
- --------------------------------------------------------------------------
Foreign currency 8,472
- --------------------------------------------------------------------------
Net change in unrealized appreciation of investments
and foreign currency 52,376,328
- --------------------------------------------------------------------------
Net realized and unrealized gain on investments
and foreign currency 92,208,363
- --------------------------------------------------------------------------
Net increase in net assets
resulting from operations $105,085,763
==========================================================================
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 $ 12,877,400 $ 9,232,321
- ----------------------------------------------------------------------------
Net realized gain on investment
and foreign currency related transactions 39,832,035 17,621,623
- ----------------------------------------------------------------------------
Net change in unrealized appreciation
of investments and foreign currency 52,376,328 137,804,605
- ----------------------------------------------------------------------------
Net increase in net assets
resulting from operations 105,085,763 164,658,549
- ----------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income (19,770,253) -
- ----------------------------------------------------------------------------
Net realized gain on investment transactions (17,621,623) (12,117,083)
- ----------------------------------------------------------------------------
Total distributions to shareholders (37,391,876) (12,117,083)
- ----------------------------------------------------------------------------
Net increase in net assets
resulting from capital share transactions 113,212,973 201,375,033
- ----------------------------------------------------------------------------
Total increase in net assets 180,906,860 353,916,499
- ----------------------------------------------------------------------------
Net Assets, beginning of year 811,069,836 457,153,337
- ----------------------------------------------------------------------------
Net Assets, end of year $991,976,696 $811,069,836
============================================================================
See accompanying notes to financial statements.
<PAGE>
Lincoln National Equity-Income 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(3)
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $20.118 $15.780 $13.507 $10.335 $10.000
Income from investment operations:
Net investment income(2) 0.282 0.229 0.288 0.275 0.258
Net realized and unrealized gain
on investment and foreign currency 2.204 4.511 2.451 3.218 0.335
-------------------------------------------------------
Total from investment operations 2.486 4.740 2.739 3.493 0.593
-------------------------------------------------------
Less dividends and distributions:
Dividends from net investment income (0.460) - (0.288) (0.275) (0.258)
Distributions from net realized gain on
investment transactions (0.429) (0.402) (0.178) (0.046) -
-------------------------------------------------------
Total dividends and distributions (0.889) (0.402) (0.466) (0.321) (0.258)
-------------------------------------------------------
Net asset value, end of period $ 21.715 $ 20.118 $ 15.780 $ 13.507 $ 10.335
=======================================================
Total Return(1) 12.73% 30.67% 19.81% 34.74% 5.65%
Ratios and supplemental data:
Ratio of expenses to average net assets 0.79% 1.02% 1.08% 1.15% 1.26%
Ratio of net investment income
to average net assets 1.40% 1.46% 1.99% 2.27% 2.48%
Portfolio Turnover 29.04% 17.81% 22.17% 27.81% 33.40%
Net assets, end of period (000 omitted) $991,977 $811,070 $457,153 $238,771 $78,861
</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.
(3) The per share data, total return, ratios and portfolio turnover are
calculated for the period from commencement of investment activity on May 1,
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 Equity-Income Fund, Inc.
Notes to Financial Statements
December 31, 1998
The Fund: Lincoln National Equity-Income 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 achieve reasonable income by investing primarily in
income-producing equity securities. The Fund invests mostly in high-income
stocks and some high-yielding bonds.
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. 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.
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 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 $257,862
- -------------------------------------------------
Foreign currency 83,858
- -------------------------------------------------
Receivable for dividends earned 1,742,938
- -------------------------------------------------
Receivable for interest earned 133,681
- -------------------------------------------------
Receivable for securities sold 3,637,351
- -------------------------------------------------
Receivable for capital shares sold 159,608
- -------------------------------------------------
Payable for securities purchased (3,856,849)
- -------------------------------------------------
Payable for capital shares redeemed (47,866)
- -------------------------------------------------
Management fees payable (580,063)
- -------------------------------------------------
Other, net (140,938)
- -------------------------------------------------
$1,389,582
==========
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 $500 million on the average daily net assets of the Fund and .70% of the
excess over $500 million. The sub-advisor, Fidelity Investments, 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. In return 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** $ 456,808
- ------------------------------------------------------------------------------
Paid in capital in excess of par value of shares issued 674,625,210
- ------------------------------------------------------------------------------
Undistributed net investment income 2,250,168
- ------------------------------------------------------------------------------
Accumulated net realized gain on investments 39,921,335
- ------------------------------------------------------------------------------
Net unrealized appreciation of investments and foreign currencies 274,723,175
- ------------------------------------------------------------------------------
$991,976,696
============
** 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
------------------------------------------------------------------------
$313,779,291 $259,040,822 $308,815,824 $(34,053,387) $274,762,437
<PAGE>
Notes to Financial Statements - (Continued)
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. 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. At
December 31, 1998, the Fund did not have investments in excess of 5% of net
assets in any individual foreign country. The Fund may invest in illiquid
securities which may include securities with contractual restrictions on resale,
securities exempt from registration under Rule 144A of the Securities Act of
1933, as amended, and other securities which may be readily marketable. The
relative illiquidity of some of these securities may adversely affect the Fund's
ability to dispose of such securities in a timely manner and at a fair price
when it is necessary to liquidate such securities.
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: 5,350,747 $111,802,363 1,852,270 $37,391,876 (1,837,911) $(35,981,266) 5,365,106 $113,212,973
Year ended
December 31, 1997: 10,211,887 183,197,996 1,183,804 19,052,519 (51,029) (875,482) 11,344,662 201,375,033
</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 Equity-Income Fund, Inc.
Report of Ernst & Young LLP, Independent Auditors
To the Shareholders and Board of Directors
Lincoln National Equity-Income Fund, Inc.
We have audited the accompanying statement of net assets of Lincoln National
Equity-Income 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 Equity-Income 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
