[LOGO OF VANTAGE INVESTMENT ADVISORS]
Lincoln National
Special Opportunities Fund, Inc.
Annual Report
December 31, 1998
<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
Report of Ernst & Young LLP, Independent Auditors
<PAGE>
Lincoln National
Special Opportunities Fund, Inc.
Managed by: [LOGO OF VANTAGE INVESTMENT ADVISORS]
The Fund returned 6.79% for the year ended December 31, 1998. It's benchmark,
the S&P Mid-Cap 400 Index, returned 19.11% for the year.
1998 was an unusual year for equities as investors favored big companies and big
ideas. It is unusual that big companies outperformed, smaller companies within
the context of a continued bull market. Typically, smaller companies outperform
in bull markets, and large stocks provide the buffer in a down market.
Big Companies: Large companies as represented by the S&P 500 Index returned 9%
more for the year than the S&P Mid Cap 400. Apparently, some investors, worried
about a market downturn, flocked to the largest companies.
Big Ideas: Many companies that were expensive based on objective valuation
measures outperformed the market substantially. Companies such as Amazon.Com
and Yahoo which have not reported earnings in the past three years have exploded
onto the scene. Investors clearly bought the ideas behind these companies as
opposed to the earnings.
The Special Opportunities Fund provides risk-controlled exposure to medium sized
companies with attractive valuations. However, larger companies and companies
with higher valuations delivered the strongest returns. As a result, the Fund
lagged the broader market.
Given the fact the market has been on a strong rally for several years,
investors were anxious about any signals of decline. While macroeconomic events
such as Fed Policy and the economic crises in Asia, Russia, and Emerging
Markets clearly set a tone for the market, investors reacted swiftly and
strongly to corporate earnings announcements during the year, rewarding
companies for earnings growth and penalizing those that fell short of
expectations.
Companies well positioned to benefit from Internet expansion saw earnings
estimates and stock prices rise. While some companies were unproven, Sun
Microsystems, a holding in the Fund, offers hardware and software applications
that have become the industry standard for the Internet. It is an ideal holding
for Special Opportunities Fund as it has a proven history of earnings growth and
is attractively priced. The company was near the top of the winners list for the
Fund this year. Solid consumer confidence and a healthy economy also boosted
earnings for retail stocks during the year with Tommy Hilfiger and Staples
leading the way for the Special Opportunities Fund.
On the down side, record low oil prices directly impacted those companies with
oil-related earnings. As oil prices dropped, so did earnings estimates for oil
companies including Occidental Petroleum and Oryx Energy.
While the recent returns of medium sized value stocks have been disappointing
relative to large stocks, we anticipate that a reversal of fortune is in the
cards. Large stocks have climbed to the point where they are more expensive
relative to medium sized companies. In addition, the economic environment is
ripe for a continued bull market. Since attractively valued companies have
historically outperformed more expensive companies, and smaller companies have
delivered higher returns than larger companies in bull markets, we are
optimistic for the Fund in the year to come.
T. Scott Wittman
<PAGE>
Growth of $10,000 invested 1/1/89 through 12/31/98
1/1/89 12/31/98
Special Opportunities Fund $10,000 $58,292
S&P Midcap 400 Index $10,000 $46,469
This chart illustrates, hypothetically, that $10,000 was invested in the Special
Opportunities Fund on 1/1/89. 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 $46,469. For comparison, look at how the S&P
Midcap 400 Index did over the same period. With dividends and capital gains, if
any, reinvested, the same $10,000 investment would have grown to $58,292. 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 + 6.79%
- --------------------------------------------
Five Years +15.79%
- --------------------------------------------
Ten Years +16.60%
- --------------------------------------------
Lincoln National
Special Opportunities Fund, Inc.
Statement of Net Assets
December 31, 1998
Investments:
Number Market
Common Stock: of Shares Value
- ---------------------------------------------------------------------------
Aerospace & Defense: 1.9%
- ---------------------------------------------------------------------------
Cordant Technologies 232,300 $ 8,711,250
Gulfstream Aerospace * 163,100 8,685,075
- ---------------------------------------------------------------------------
17,396,325
Automobiles & Auto Parts: 1.0%
- ---------------------------------------------------------------------------
Navistar International * 318,000 9,063,000
- ---------------------------------------------------------------------------
Banking, Finance & Insurance: 13.0%
- ---------------------------------------------------------------------------
AmSouth Bancorporation 195,700 8,928,813
Astoria Financial 193,000 8,865,937
Bankers Trust New York 85,000 7,262,187
Bear Stearns 168,799 6,308,863
Cigna 116,200 8,983,713
Dime Bancorp 343,800 9,089,213
Edwards (A.G.) 220,950 8,230,387
EXEL Limited 91,177 6,838,275
First American Financial 278,500 8,946,812
Firstar 95,800 8,933,350
Firstplus Financial Group * 359,500 988,625
MBIA 124,000 8,129,750
Old Republic International 438,650 9,869,625
PNC Financial Group 158,200 8,562,575
SLM Holding 194,650 9,343,200
- ---------------------------------------------------------------------------
119,281,325
Buildings & Materials: 4.6%
- ---------------------------------------------------------------------------
Carpenter Technology 194,200 6,590,663
Centex 198,200 8,931,387
Lafarge 222,600 9,015,300
Premark International 251,400 8,704,725
USG 178,000 9,066,875
- ---------------------------------------------------------------------------
42,308,950
Cable, Media & Publishing: 4.0%
- ---------------------------------------------------------------------------
Central Newspapers Class A 134,800 9,629,775
Gannett 133,900 8,862,506
New England Business Service 247,200 9,671,700
New York Times 253,200 8,782,875
- ---------------------------------------------------------------------------
36,946,856
Chemicals: 5.9%
- ---------------------------------------------------------------------------
Avery Dennison 151,900 6,844,994
Dexter 273,000 8,582,438
Dow Chemical 89,000 8,093,438
Idacorp 251,200 9,090,300
International Flavors & Fragrances 204,800 9,049,600
Lubrizol 179,400 4,608,338
Lyondell Petrochemicals 320,400 5,767,200
W.R. Grace * 127,600 2,001,725
- ---------------------------------------------------------------------------
54,038,033
Computers & Technology: 9.4%
- ---------------------------------------------------------------------------
American Power Conversion * 192,500 9,318,203
BMC Software * 182,800 8,151,738
Compuware * 112,900 8,816,784
Deluxe 241,700 8,837,156
Diebold 235,400 8,400,838
EG&G 324,300 9,019,594
Ingram Micro Class A * 179,800 6,270,525
Keane * 225,200 8,993,925
Sterling Software * 340,000 9,201,250
Sun Microsystems * 104,200 8,915,613
- ---------------------------------------------------------------------------
85,925,626
Consumer Products: 3.1%
- ---------------------------------------------------------------------------
Brinker International * 333,200 9,621,150
Clorox 78,000 9,111,375
United Stationers * 351,100 9,457,756
- ---------------------------------------------------------------------------
28,190,281
<PAGE>
Number Market
of Shares Value
- ---------------------------------------------------------------------------
Electronics & Electrical: 2.7%
- ---------------------------------------------------------------------------
Advanced Micro Devices 300,000 $ 8,681,250
New Century Energies 149,575 7,291,781
Vitesse Semiconductor * 184,700 8,415,394
- ---------------------------------------------------------------------------
24,388,425
Energy: 4.3%
- ---------------------------------------------------------------------------
Occidental Petroleum 204,100 3,444,187
Oryx Energy * 304,400 4,090,375
Peoples Energy 187,000 7,456,625
Phillips Petroleum 162,800 6,939,350
Sun 243,800 8,792,038
Ultramar Diamond Shamrock 368,400 8,933,700
- ---------------------------------------------------------------------------
39,656,275
Food, Beverage & Tobacco: 6.1%
- ---------------------------------------------------------------------------
Ball 203,900 9,328,425
Earthgrains 285,100 8,820,281
Fortune Brands 252,900 7,997,963
Gallagher Group Plc 127,200 3,458,250
International Multifoods 361,000 9,318,313
Interstate Bakeries 331,300 8,758,744
Universal 242,600 8,521,325
- ---------------------------------------------------------------------------
56,203,301
Healthcare & Pharmaceuticals: 6.2%
- ---------------------------------------------------------------------------
Arterial Vascular Engineering * 200,000 10,481,250
Beverly Enterprises * 1,420,900 9,591,075
Health Management Associates Class A * 391,575 8,467,809
Lincare Holdings * 224,600 9,103,318
McKesson 112,100 8,862,906
Mylan Laboratories 318,200 10,023,300
- ---------------------------------------------------------------------------
56,529,658
Industrial Machinery: 5.3%
- ---------------------------------------------------------------------------
American Standard * 262,800 9,444,375
Briggs & Stratton 154,300 7,695,713
Deere & Co. 28,700 950,687
Ingersoll-Rand 187,550 8,803,127
Milacron 442,500 8,518,125
National-Oilwell * 358,000 4,005,125
Trinity Industries * 229,900 8,851,150
- ---------------------------------------------------------------------------
48,268,302
Leisure, Lodging & Entertainment: 1.9%
- ---------------------------------------------------------------------------
Outback Steakhouse * 220,300 8,770,694
Viad 292,300 8,878,613
- ---------------------------------------------------------------------------
17,649,307
Metals & Mining: 1.8%
- ---------------------------------------------------------------------------
Bethlehem Steel * 1,056,300 8,846,513
USX-U.S. Steel Group 342,000 7,866,000
- ---------------------------------------------------------------------------
16,712,513
Miscellaneous: 0.9%
- ---------------------------------------------------------------------------
AC Nielson * 310,000 8,757,500
- ---------------------------------------------------------------------------
Retail: 7.0%
- ---------------------------------------------------------------------------
Dollar Tree Stores * 213,000 9,298,781
Neiman-Marcus Group * 342,800 8,548,575
Ross Stores 249,400 9,812,331
Safeway * 153,624 9,361,463
Staples * 202,662 8,860,129
TJX 329,600 9,558,400
Zales * 285,700 9,213,825
- ---------------------------------------------------------------------------
64,653,504
Telecommunications: 2.8%
- ---------------------------------------------------------------------------
ALLTEL 142,600 8,529,263
Brightpoint * 581,300 7,938,378
General Instrument * 263,200 8,932,350
- ---------------------------------------------------------------------------
25,399,991
Textiles, Apparel & Furniture: 3.6%
- ---------------------------------------------------------------------------
ASARCO 387,000 5,829,187
Johnson Controls 144,000 8,496,000
Number Market
of Shares Value
- ---------------------------------------------------------------------------
Tommy Hilfiger * 154,300 $ 9,258,000
Westpoint Stevens * 301,000 9,490,906
- ---------------------------------------------------------------------------
33,074,093
Transportation & Shipping: 2.6%
- ---------------------------------------------------------------------------
AMR * 137,800 8,181,875
Continental Airlines-Class B * 235,100 7,875,850
Delta Air Lines 156,600 8,143,200
- ---------------------------------------------------------------------------
24,200,925
Utilities: 4.2%
- ---------------------------------------------------------------------------
Allegheny Energy 249,000 8,590,500
Baltimore Gas & Electric 217,800 6,724,575
General Public Utilities 191,200 8,448,650
Rochester Gas & Electric 268,700 8,396,875
Unicom 167,500 6,459,217
- ---------------------------------------------------------------------------
38,619,817
Total Common Stock: 92.3%
(Cost $683,051,576) 847,264,007
- ---------------------------------------------------------------------------
Par
Money Market Instruments: Amount
- ---------------------------------------------------------------------------
American Honda Finance
5.4144%, 1/11/99 $4,200,000 4,193,735
5.30%, 1/14/99 5,800,000 5,800,000
Amoco Chemicals
5.92%, 1/29/99 7,300,000 7,300,000
Caterpillar
5.237%, 2/4/99 2,500,000 2,487,722
Commercial Credit Corporation
5.3266%, 2/2/99 2,100,000 2,090,107
Corporate Asset Funding
5.3456%, 1/15/99 1,100,000 1,097,733
5.4358%, 1/21/99 5,500,000 5,483,500
5.35%, 1/27/99 9,500,000 9,463,293
Flour Corporation
5.53%, 1/13/99 3,400,000 3,400,000
GTE Funding
5.207%, 2/17/99 3,300,000 3,277,769
Merrill Lynch
5.2508%, 1/25/99 6,300,000 6,278,160
Signal Finance Mortgage
5.75%, 1/4/99 2,000,000 2,000,000
U.S. Treasury Bill(+)
5.11%, 4/29/99 2,440,000 2,404,002
Wells Fargo
5.4544%, 1/29/99 2,000,000 1,991,569
5.2190%, 3/10/99 6,600,000 6,535,672
- ---------------------------------------------------------------------------
Total Money Market Instruments: 7.0%
(Cost $63,803,262) 63,803,262
- ---------------------------------------------------------------------------
Total Investments: 99.3%
(Cost $746,854,838) 911,067,269
- ---------------------------------------------------------------------------
Other Assets Over Liabilities: 0.7% 6,729,121
- ---------------------------------------------------------------------------
Net Assets: 100.0%
(Equivalent to $33.416 per share
based on 27,465,746 shares
issued and outstanding) $917,796,390
===========================================================================
(+) Fully or partially pledged as collateral for open futures contracts.
* Non-income producing security.
See accompanying notes to financial statements.
<PAGE>
Lincoln National Special Opportunities Fund, Inc.
Statement of Operations
Year ended December 31, 1998
Investment income:
Dividends $13,257,131
- ------------------------------------------------------------------------
Interest 3,400,522
- ------------------------------------------------------------------------
Total investment income 16,657,653
- ------------------------------------------------------------------------
Expenses:
Management fees 3,248,791
- ------------------------------------------------------------------------
Accounting fees 345,723
- ------------------------------------------------------------------------
Printing and postage 125,777
- ------------------------------------------------------------------------
Directors fees 4,200
- ------------------------------------------------------------------------
Other 25,178
- ------------------------------------------------------------------------
Total expenses 3,749,669
- ------------------------------------------------------------------------
Net investment income 12,907,984
- ------------------------------------------------------------------------
Net realized and unrealized gain on
investments and futures contracts:
Net realized gain on investment transactions and
futures contracts 73,392,994
- ------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation)
of investments and futures contracts (27,321,101)
- ------------------------------------------------------------------------
Net realized and unrealized gain on
investments and futures contracts 46,071,893
- ------------------------------------------------------------------------
Net increase in net assets
resulting from operations $58,979,877
========================================================================
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 $ 12,907,984 $ 11,867,899
- -----------------------------------------------------------------------------
Net realized gain on investment transactions
and futures contracts 73,392,994 75,795,433
- -----------------------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) of investments and
futures contracts (27,321,101) 96,003,484
- -----------------------------------------------------------------------------
Net increase in net assets
resulting from operations 58,979,877 183,666,816
- -----------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income (22,448,658) -
- -----------------------------------------------------------------------------
Net realized gain on investments (75,795,433) (47,162,977)
- -----------------------------------------------------------------------------
Total distributions to shareholders (98,244,091) (47,162,977)
- -----------------------------------------------------------------------------
Net increase in net assets
resulting from capital share transactions 84,238,365 87,726,664
- -----------------------------------------------------------------------------
Total increase in net assets 44,974,151 224,230,503
- -----------------------------------------------------------------------------
Net Assets, beginning of year 872,822,239 648,591,736
- -----------------------------------------------------------------------------
Net Assets, end of year $917,796,390 $872,822,239
=============================================================================
See accompanying notes to financial statements.
<PAGE>
Lincoln National Special Opportunities Fund, Inc.
Financial Highlights
(Selected data for each capital share outstanding throughout the year)
<TABLE>
<CAPTION>
Period ended December 31,
1998 1997 1996 1995 1994
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 35.056 $ 29.423 $ 27.383 $ 22.164 $24.478
Income (loss) from investment operations:
Net investment income 0.470 0.477 0.548 0.616 0.565
Net realized and unrealized gain (loss) on
investments and futures contracts 1.795 7.293 3.867 6.131 (0.942)
--------------------------------------------------------
Total from investment operations 2.265 7.770 4.415 6.747 (0.377)
--------------------------------------------------------
Less dividends and distributions:
Dividends from net investment income (0.862) - (0.548) (0.616) (0.565)
Distributions from net realized gain on
investment transactions (3.043) (2.137) (1.827) (0.912) (1.372)
--------------------------------------------------------
Total dividends and distributions (3.905) (2.137) (2.375) (1.528) (1.937)
--------------------------------------------------------
Net asset value, end of year $ 33.416 $ 35.056 $ 29.423 $ 27.383 $22.164
========================================================
Total Return(1) 6.79% 28.15% 16.51% 31.86% (1.00%)
Ratios and supplemental data:
Ratio of expenses to average net assets 0.42% 0.42% 0.44% 0.45% 0.48%
Ratio of net investment income
to average net assets 1.44% 1.57% 2.00% 2.39% 2.49%
Portfolio Turnover 76.27% 73.74% 88.17% 90.12% 74.63%
Net assets, end of year (000 omitted) $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).
See accompanying notes to financial statements.
<PAGE>
Lincoln National Special Opportunities Fund, Inc.
Notes to Financial Statements
December 31, 1998
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.
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 year ended December 31, 1998, the
custodial fees offset arrangements amounted to $14,929.
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 Over Liabilities
The statement of net assets account "Other Assets Over Liabilities" at December
31, 1998 consisted of the following assets (liabilities):
Cash $ 536,410
- ---------------------------------------------------
Receivable for dividend earned 1,283,594
- ---------------------------------------------------
Receivable for interest earned 30,038
- ---------------------------------------------------
Receivable for securities sold 8,075,563
- ---------------------------------------------------
Receivable for capital shares sold 19,675
- ---------------------------------------------------
Payable for securities purchased (4,152,502)
- ---------------------------------------------------
Payable for capital shares redeemed (106,020)
- ---------------------------------------------------
Management fees payable (270,110)
- ---------------------------------------------------
Other, net 1,312,473
- ---------------------------------------------------
$6,729,121
===========
<PAGE>
Notes to Financial Statements - (Continued)
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 .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 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** $ 274,657
- ------------------------------------------------------------------------
Paid in capital in excess of par value of shares issued 673,840,931
- ------------------------------------------------------------------------
Undistributed net investment income 2,327,225
- ------------------------------------------------------------------------
Accumulated net realized gain on investments
and futures contracts 73,392,994
- ------------------------------------------------------------------------
Net unrealized appreciation of investments
and futures contracts 167,960,583
- ------------------------------------------------------------------------
$917,796,390
=============
** 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
------------------------------------------------------------------------
$633,522,451 $638,162,989 $209,899,287 $(45,686,856) $164,212,431
6. Supplemental Financial Instrument Information
Financial Futures Contracts: The Fund may purchase or sell financial futures
contracts, which are exchange traded. 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 December 31, 1998 was
$2,404,002. 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 December 31, 1998 were as follows:
Notional Unrealized
Contracts Cost Amount Expiration Dates Gain
- ---------------------------------------------------------------------------
260 S&P 400 midcap stock
index contracts $47,179,340 March 1999 $3,748,152
<PAGE>
Notes to Financial Statements - (Continued)
7. 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: 2,038,875 $66,140,393 2,995,446 $98,244,091 (2,466,167) $(80,146,119) 2,568,154 $84,238,365
Year ended
December 31, 1997: 2,437,238 78,263,255 2,072,674 58,607,959 (1,656,123) (49,144,550) 2,853,789 87,726,664
</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.
<PAGE>
Lincoln National Special Opportunities Fund, Inc.
Report of Ernst & Young LLP, Independent Auditors
To the Shareholders and Board of Directors
Lincoln National Special Opportunities Fund, Inc.
We have audited the accompanying statement of net assets of Lincoln National
Special Opportunities Fund, Inc. (the "Fund") as of December 31, 1998, and the
related statement of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the five years in the period then ended.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 1998, by correspondence with the Fund's
custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Lincoln National Special Opportunities Fund, Inc. at December 31, 1998, the
results of its operations for the year then ended, the changes in its net assets
for each of the two years in the period then ended, and its financial highlights
for each of the five years in the period then ended, in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Philadelphia, Pennsylvania
February 5, 1999
