[LOGO OF VANTAGE INVESTMENT ADVISORS]
Lincoln National
Special Opportunities Fund, Inc.
Semi-Annual Report
June 30, 1999
<PAGE>
Lincoln National Special Opportunities Fund, Inc.
Index
Commentary
Statement of Net Assets
Statement of Operations
Statements of Changes in Net Assets
Financial Highlights
Notes to Financial Statements
<PAGE>
Lincoln National
Special Opportunities Fund, Inc.
Managed by: [LOGO OF VANTAGE INVESTMENT ADVISORS]
The Fund had a return of 3.3% for the first six months of 1999 while its
benchmark, the S&P Mid-Cap 400 Index, returned 6.9% for the same period.
1999 has been an unusual year of "feast or famine" in which certain segments
earned double-digit returns while others were in negative territory. Such was
the case with the medium sized companies in which the Special Opportunities Fund
invests. For the first quarter, growth-oriented companies dominated value
companies substantially. Value companies rebounded in the second quarter and
outpaced growth companies with the Special Opportunities Fund topping the
mid-cap value index.
The Special Opportunities Fund provides risk-controlled, conservative exposure
to attractively priced medium sized companies. The Fund has substantial
investments in cyclical companies that tend to rise and fall with the economic
outlook. Given increased consumer economic optimism, this exposure helped
returns as these stocks rallied in the second quarter. The Fund also has a
significant exposure to utility companies, which suffered earlier this year with
the rise in oil prices.
The economy is well positioned for future economic growth and equity investors
have reasons for continued optimism. Medium sized companies are attractive
relative to large companies and should the market sustain its bull run, these
companies will likely end up toward the top performers.
Enrique Chang
Yifeng Yang
Special Opportunities Fund 1
<PAGE>
Lincoln National
Special Opportunities Fund, Inc.
Statement of Net Assets - Unaudited
June 30, 1999
Investments:
Number Market
Common Stock: of Shares Value
- --------------------------------------------------------------------------
Aerospace & Defense: 1.9%
- --------------------------------------------------------------------------
Cordant Technologies 173,100 $ 7,821,956
Gulfstream Aerospace* 115,200 7,783,200
- --------------------------------------------------------------------------
15,605,156
Automobiles & Auto Parts: 1.9%
- --------------------------------------------------------------------------
Cummins Engine 138,000 7,883,250
Navistar International 153,000 7,650,000
- --------------------------------------------------------------------------
15,533,250
Banking, Finance & Insurance: 13.6%
- --------------------------------------------------------------------------
Aetna 86,000 7,691,625
Astorial Financial 181,000 7,947,031
Bear Stearns 152,038 7,107,777
Dime Bancorp 388,000 7,808,500
Edwards (A.G.) 263,950 8,512,388
Everest Reinsurance Holdings 226,000 7,373,250
First American Financial 278,500 4,978,188
Firstplus Financial Group* 359,500 112,344
Golden West Financial 61,600 6,036,800
GreenPoint Financial 240,000 7,875,000
Lehman Brothers Holdings 138,000 8,590,500
Old Republic International 402,550 6,969,147
PNC Financial Group 140,200 8,079,025
Unionbancal Corporation 233,000 8,417,125
Washington Federal 352,000 7,887,000
XL Capital Ltd. - Class A 91,177 5,151,501
- --------------------------------------------------------------------------
110,537,201
Buildings & Materials: 4.9%
- --------------------------------------------------------------------------
Centex 198,200 7,444,888
Lafarge 222,600 7,888,388
Louisiana-Pacific 368,400 8,749,500
Premark International 225,900 8,471,250
USG 131,500 7,364,000
- --------------------------------------------------------------------------
39,918,026
Cable, Media & Publishing: 3.9%
- --------------------------------------------------------------------------
Central Newspapers-Class A 218,600 8,224,825
Knight-Ridder 147,000 8,075,813
New England Business Service 257,200 7,941,050
New York Times 213,700 7,866,831
- --------------------------------------------------------------------------
32,108,519
Chemicals: 6.6%
- --------------------------------------------------------------------------
Dexter 198,700 8,109,444
Dow Chemical 59,400 7,536,375
FMC 117,800 8,047,213
Idacorp 251,200 7,912,800
Lubrizol 264,400 7,419,725
RPM/Ohio 550,000 7,803,125
W.R. Grace* 416,600 7,655,025
- --------------------------------------------------------------------------
54,483,707
Computers & Technology: 8.8%
- --------------------------------------------------------------------------
Apple Computer* 178,000 8,254,750
BMC Software* 165,000 8,904,844
Compuware* 249,100 7,916,709
Deluxe 219,700 8,554,569
Diebold 235,400 6,767,750
EG&G 257,900 9,187,688
Keane 271,800 6,149,475
Sterling Software 315,000 8,406,563
Tech Data* 200,000 7,643,750
- --------------------------------------------------------------------------
71,786,098
Number Market
of Shares Value
- --------------------------------------------------------------------------
Consumer Products: 1.9%
- --------------------------------------------------------------------------
Brinker International* 276,500 $ 7,517,344
United Stationers 363,700 8,012,766
- --------------------------------------------------------------------------
15,530,110
Electronics & Electrical Equipment: 2.9%
- --------------------------------------------------------------------------
National Service Industries 210,000 7,560,000
Thomas & Betts 180,000 8,505,000
Vitesse Semiconductor* 119,800 8,105,219
- --------------------------------------------------------------------------
24,170,219
Energy: 4.5%
- --------------------------------------------------------------------------
Ashland 180,000 7,222,500
Equitable Resources 231,200 8,727,800
Kerr-McGee 139,423 6,997,292
Sunoco 218,800 6,605,025
Ultramar Diamond Shamrock 353,400 7,708,538
- --------------------------------------------------------------------------
37,261,155
Food, Beverage & Tobacco: 6.3%
- --------------------------------------------------------------------------
Ball 147,300 6,223,425
Earthgrains 330,100 8,520,706
Fortune Brands 186,700 7,724,713
Gallaher Group 127,200 3,108,450
IBP 338,000 8,027,500
International Multifoods 336,000 7,581,000
Interstate Bakeries 331,300 7,433,544
Universal 112,700 3,204,906
- --------------------------------------------------------------------------
51,824,244
Healthcare & Pharmaceuticals: 3.6%
- --------------------------------------------------------------------------
Beverly Enterprises* 985,900 7,948,819
Lincare Holdings* 258,400 6,468,075
Mallinckrodt 232,000 8,439,000
Mylan Laboratories 258,200 6,842,300
- --------------------------------------------------------------------------
29,698,194
Industrial Machinery 4.5%
- --------------------------------------------------------------------------
American Standard* 167,800 7,949,525
Briggs & Stratton 125,500 7,247,625
McDermott International 268,500 7,585,125
Milacron 351,900 6,510,150
Trinity Industries 225,000 7,537,500
- --------------------------------------------------------------------------
36,829,925
Leisure, Lodging & Entertainment: 1.9%
- --------------------------------------------------------------------------
Mandalay Resorts Group* 350,000 7,393,750
Viad 262,300 8,114,906
- --------------------------------------------------------------------------
15,508,656
Metals & Mining: 3.9%
- --------------------------------------------------------------------------
AK Steel Holding 309,100 6,954,750
Mueller Industries* 256,200 8,694,788
USX-U.S. Steel Group 270,000 7,290,000
Worthington Industries 556,500 9,130,078
- --------------------------------------------------------------------------
32,069,616
Miscellaneous: 1.0%
- --------------------------------------------------------------------------
AC Nielson* 280,000 8,470,000
- --------------------------------------------------------------------------
Paper & Forest Products: 0.9%
- --------------------------------------------------------------------------
Georgia-Pacific 163,200 7,731,600
- --------------------------------------------------------------------------
Retail: 7.5%
- --------------------------------------------------------------------------
Dollar Tree Stores* 189,300 8,323,284
K Mart* 473,000 7,774,938
Longs Drug Stores 217,400 7,513,888
Neiman-Marcus Group* 287,600 7,387,725
Staples* 234,793 7,256,571
TJX 234,600 7,815,113
Toys R Us* 348,000 7,199,250
Zale* 201,700 8,068,000
- --------------------------------------------------------------------------
61,338,769
Telecommunications: 3.3%
- --------------------------------------------------------------------------
Alltel 116,600 8,336,900
Brightpoint* 463,300 2,823,234
- --------------------------------------------------------------------------
Special Opportunities Fund 2
<PAGE>
Number Market
Telecommunications (Cont.) of Shares Value
- --------------------------------------------------------------------------
General Instrument* 187,000 $ 7,947,500
L-3 Communications* 165,000 7,971,563
- --------------------------------------------------------------------------
27,079,197
Textiles, Apparel & Furniture: 2.7%
- --------------------------------------------------------------------------
Johnson Controls 122,000 8,456,125
Tommy Hilfiger* 102,400 7,520,000
Westpoint Stevens 220,300 6,567,694
- --------------------------------------------------------------------------
22,543,819
Transportation & Shipping: 2.7%
- --------------------------------------------------------------------------
Continental Airlines-Class B* 177,400 6,696,850
Delta Air Lines 138,900 8,004,113
UAL* 118,800 7,722,000
- --------------------------------------------------------------------------
22,422,963
Utilities: 7.6%
- --------------------------------------------------------------------------
Allegheny Energy 249,000 7,983,563
Ameren 213,000 8,173,875
Conectiv 327,000 7,991,063
Entergy 242,100 7,565,625
General Public Utilities 191,200 8,066,250
Northeast Utilities* 442,500 7,826,719
Rochester Gas & Electric 268,700 7,271,694
Unicom 187,500 7,230,469
- --------------------------------------------------------------------------
62,109,258
Total Common Stock: 96.8%
(Cost $ 698,953,283) 794,559,682
- --------------------------------------------------------------------------
Par
Money Market Instruments: Amount
- --------------------------------------------------------------------------
Caterpillar
5.85%, 7/1/99 $5,500,000 5,500,000
Georgia Power
4.935%, 7/12/99 5,750,000 5,741,373
Marsh USA
5.15%, 7/8/99 5,000,000 5,000,000
5.14%, 7/23/99 1,000,000 1,000,000
Mobil Corporation
5.128%, 7/6/99 3,900,000 3,897,227
U.S. Treasury Bill(+)
4.715%, 4/27/00 1,000,000 962,542
- --------------------------------------------------------------------------
Total Money Market Instruments: 2.7%
(Cost $22,101,142) 22,101,142
- --------------------------------------------------------------------------
Total Investments: 99.5%
(Cost $721,054,425) 816,660,824
- --------------------------------------------------------------------------
Other Assets over Liabilites: 0.5% 4,105,751
- --------------------------------------------------------------------------
Total Net Assets: 100.0%
(Equivalent to $30.798 per share
based on 26,649,972 shares issued
and outstanding) $820,766,575
- --------------------------------------------------------------------------
Components of Net Assets at June 30, 1999:
- --------------------------------------------------------------------------
Common Stock, $.01 par value
50,000,000 authorized shares $ 266,500
Paid in capital in excess of par value
of shares issued 646,414,594
Undistributed net investment income 5,503,360
Accumulated net realized gain on
investments and futures contracts 72,340,187
Net unrealized appreciation of investments
and futures contracts 96,241,934
- --------------------------------------------------------------------------
Total Net Assets $ 820,766,575
- --------------------------------------------------------------------------
(+) Fully or partially pledged as collateral for open futures contracts.
* Non-income producing security.
See accompanying notes to financial statements.
Special Opportunities Fund 3
<PAGE>
Lincoln National Special Opportunities Fund, Inc.
Statement of Operations - Unaudited
June 30, 1999
Investment income:
Dividends $6,559,408
- -----------------------------------------------------------------------------
Interest 728,063
- -----------------------------------------------------------------------------
Total investment income 7,287,471
- -----------------------------------------------------------------------------
Expenses:
Management fees 1,500,055
- -----------------------------------------------------------------------------
Accounting fees 166,800
- -----------------------------------------------------------------------------
Printing and postage 63,400
- -----------------------------------------------------------------------------
Legal fees 21,160
- -----------------------------------------------------------------------------
Custody fees 22,976
- -----------------------------------------------------------------------------
Directors fees 2,100
- -----------------------------------------------------------------------------
Other 9,962
- -----------------------------------------------------------------------------
1,786,453
- -----------------------------------------------------------------------------
Less expense paid indirectly (2,342)
- -----------------------------------------------------------------------------
Total expenses 1,784,111
- -----------------------------------------------------------------------------
Net investment income 5,503,360
- -----------------------------------------------------------------------------
Net realized and unrealized gain (loss)on
investments and futures contracts:
Net realized gain on investment transactions and
futures contracts 85,139,945
- -----------------------------------------------------------------------------
Net change in unrealized depreciation of investments
and futures contracts (71,718,649)
- -----------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and futures contracts 13,421,296
- -----------------------------------------------------------------------------
Net increase in net assets
resulting from operations $18,924,656
- -----------------------------------------------------------------------------
Statements of Changes in Net Assets
Six months
ended
6/30/99 Year ended
(Unaudited) 12/31/98
-------------------------------
Changes from operations:
- ------------------------------------------------------------------------------
Net investment income $ 5,503,360 $ 12,907,984
- ------------------------------------------------------------------------------
Net realized gain on investments 85,139,945 73,392,994
- ------------------------------------------------------------------------------
Net change in unrealized appreciation or
(depreciation) of investments and
futures contracts (71,718,649) (27,321,101)
- ------------------------------------------------------------------------------
Net increase in net assets
resulting from operations 18,924,656 58,979,877
- ------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income (2,327,225) (22,448,658)
- ------------------------------------------------------------------------------
Net realized gain on investments (86,192,752) (75,795,433)
- ------------------------------------------------------------------------------
Total distributions to shareholder (88,519,977) (98,244,091)
- ------------------------------------------------------------------------------
Net increase/(decrease) in net assets
resulting from capital share transactions (27,434,494) 84,238,365
- ------------------------------------------------------------------------------
Total increase/(decrease) in net assets (97,029,815) 44,974,151
- ------------------------------------------------------------------------------
Net Assets, at beginning of period 917,796,390 872,822,239
- ------------------------------------------------------------------------------
Net Assets, at end of period $820,766,575 $917,796,390
- ------------------------------------------------------------------------------
See accompanying notes to financial statements.
Special Opportunities Fund 4
<PAGE>
Lincoln National Special Opportunities Fund, Inc.
Financial Highlights
(Selected data for each capital share outstanding throughout each period)
<TABLE>
<CAPTION>
Six months
ended
6/30/99 Year ended December 31,
(Unaudited) 1998 1997 1996 1995 1994
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 33.416 $ 35.056 $ 29.423 $ 27.383 $ 22.164 $ 24.478
Income from investment operations:
Net investment income 0.217 0.470 0.477 0.548 0.616 0.565
Net realized and unrealized gain (loss)
on investments and futures contracts 0.781 1.795 7.293 3.867 6.131 (0.942)
---------------------------------------------------------------
Total from investment operations 0.998 2.265 7.770 4.415 6.747 (0.377)
---------------------------------------------------------------
Less dividends and distributions:
Dividends from net investment income (0.095) (0.862) - (0.548) (0.616) (0.565)
Distributions from net realized gain on
investment transactions (3.521) (3.043) (2.137) (1.827) (0.912) (1.372)
---------------------------------------------------------------
Total dividends and distributions (3.616) (3.905) (2.137) (2.375) (1.528) (1.937)
---------------------------------------------------------------
Net asset value, end of period $ 30.798 $ 33.416 $ 35.056 $ 29.423 $ 27.383 $ 22.164
---------------------------------------------------------------
Total Return(1) 3.25% 6.79% 28.15% 16.51% 31.86% (1.00%)
Ratios and supplemental data:
Ratio of expenses to average net assets 0.44%(2) 0.42% 0.42% 0.44% 0.45% 0.48%
Ratio of net investment income
to average net assets 1.35%(2) 1.44% 1.57% 2.00% 2.39% 2.49%
Portfolio Turnover 44.71% 76.27% 73.74% 88.17% 90.12% 74.63%
Net assets, end of period (000 omitted) $820,767 $917,796 $872,822 $648,592 $505,755 $318,417
</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) Annualized
See accompanying notes to financial statements.
Special Opportunities Fund 5
<PAGE>
Lincoln National Special Opportunities Fund, Inc.
Notes to Financial Statements - Unaudited
June 30, 1999
The Fund: Lincoln National Special Opportunities Fund, Inc. (the "Fund") is
registered as an open-end, non-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 and variable universal life products.
The Fund's investment objective is to maximize capital appreciation. The Fund
primarily invests in mid-size companies whose stocks have significant growth
potential. Current income is a secondary consideration.
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. Financial futures are valued at the
settlement price established each day by the board of trade or exchange on which
they are traded. Other securities and assets for which market quotations are not
readily available are valued at fair value as determined in good faith by or
under the direction of the Fund's Board of Directors. Money market instruments
having less than 60 days to maturity are stated at amortized cost, which
approximates market value.
Investment Transactions and Investment Income: Investment transactions are
accounted for on the trade date. Dividend income is recorded on the ex-dividend
date and interest income is recorded on the accrual basis and includes
amortization of premium and discount. Realized gains or losses from investment
transactions are reported on an identified cost basis.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of increases and decreases in net assets
from operations during the reporting period. Actual results could differ from
those estimates.
Expenses: The custodian bank of the Fund has agreed to waive its custodial fees
when the Fund maintains a prescribed amount of cash on deposit in certain
non-interest bearing accounts. For the six months ended June 30, 1999, the
custodial fees offset arrangements amounted to $2,341.
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. Management Fees and Other Transactions With Affiliates
Lincoln Investment Management Company (the "Advisor") and its affiliates manage
the Fund's investment portfolio and maintain its accounts and records. For these
services, the Advisor receives a management fee at an annual rate of .48% of the
first $200,000,000 of the average daily net assets of the Fund, .40% of the next
$200,000,000, and .30% of the average daily net assets of the Fund in excess of
$400,000,000. The sub-advisor for the Fund, Vantage Investment Advisors, an
affiliate of the Advisor, is paid directly by the Advisor.
Delaware Service Company ("Delaware"), an affiliate of the Advisor, provides
accounting services and other administration support to the Fund. For these
services, the Fund pays Delaware a monthly fee based on average net assets,
subject to certain minimums. If the aggregate annual expenses of the Fund,
including the management fee, but excluding taxes, interest, brokerage
commissions relating to the purchase or sale of portfolio securities and
extraordinary non-recurring expenses, exceed 1.50% of the average daily net
assets of the Fund, the Advisor will reimburse the Fund in the amount of such
excess. No reimbursement was due for the six months ended June 30, 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 is borne by the Fund.
Special Opportunities Fund 6
<PAGE>
Notes to Financial Statements - Unaudited - (Continued)
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 six months ended June 30, 1999 and the
aggregate gross unrealized appreciation, the aggregate gross unrealized
depreciation and the net unrealized appreciation at June 30, 1999 are as
follows:
<TABLE>
<CAPTION>
Aggregate Aggregate Gross Gross Net
Cost of Proceeds Unrealized Unrealized Unrealized
Purchases From Sales Appreciation Depreciation Appreciation
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$355,044,780 $422,892,725 $136,636,702 $(41,030,303) $95,606,399
</TABLE>
4. Supplemental Financial Instrument Information
Financial Futures Contracts: The Fund may purchase or sell financial futures
contracts, which are exchange traded, to hedge fluctuation risks of acverse
changes in exchange markets or interest rates. The Fund bears the market risk
that arises from changes in the value of these financial instruments.. The Fund
deposits with its custodian a specified amount of cash or eligible securities
called "initial margin" or "variation margin". The market value of investments
pledged to cover margin requirements for open positions at June 30, 1999 was
$962,542. Unrealized gain or loss on the contracts is reflected in the
accompanying financial statements. The Fund is subject to the market risks of
unexpected changes in the underlying markets and interest rates. Financial
futures contracts open at June 30, 1999 were as follows:
<TABLE>
<CAPTION>
Notional Unrealized
Contract Cost Amount Expiration Date Gain
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
420 S&P 400 midcap stock index contracts $16,977,156 September 1999 $635,535)
</TABLE>
5. Summary of Changes From Capital Share Transactions
<TABLE>
<CAPTION>
Shares Issued Upon Net Increase (Decreawse)
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>
Six months ended
June 30, 1999 (unaudited): 583,667 $19,218,415 2,933,077 $88,519,977 (4,332,518) $(135,172,886) (815,774) $(27,434,494)
Year ended
December 31, 1998: 2,038,875 66,140,393 2,995,446 98,244,091 (2,466,167) (80,146,119) 2,568,154 84,238,365
</TABLE>
6. 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.
Special Opportunities Fund 7
