[LOGO OF VANTAGE INVESTMENT ADVISORS]
Lincoln National
Special Opportunities Fund, Inc.
Annual Report
December 31, 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
Report of Ernst & Young LLP, Independent Auditors
<PAGE>
Lincoln National
Special Opportunities Fund, Inc.
Managed by: [LOGO OF VANTAGE INVESTMENT ADVISORS]
The Special Opportunities Fund delivered -4.5% for the year, lagging the S&P 400
Index* return of 14.7%. The Fund has remained true to its mandate to invest in
medium-sized companies that are attractively priced. While stocks as measured by
widely quoted measures performed well in 1999, those market indices represent an
average of stock returns in which certain stocks performed well and others did
not. The market favored high-priced growth companies. Medium-sized growth
companies outperformed value companies by over 50% for 1999 as measured by the
Russell MidcapTM Indexes.
There will be periods when certain market segments outperform others, although
there have been few as dramatic as what was experienced in 1999. It may be
tempting to chase some high-flying growth stocks that have performed so well.
However, successful long-term investing allows common sense, not greed, to
direct decisions. The Special Opportunities Fund provides exposure to a
well-defined market segment that has been out of favor. It offers
diversification for an equity portfolio employing a fundamentally sound
investment approach and is a prudent investment choice for the long-term
investor.
Enrique Chang
Yifeng Yang
Growth of $10,000 invested 1/1/90 through 12/31/99
1/1/90 12/31/98
Special Opportunities Fund $10,000 $33,410
S&P Midcap 400 Index $10,000 $66,872
This chart illustrates, hypothetically, that $10,000 was invested in the Special
Opportunities Fund on 1/1/90. As the chart shows, by December 31, 1999, the
value of the investment at net asset value, with any dividends and capital gains
reinvested, would have grown to $33,410. 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 $66,872. Past
performance is not indicative of future performance. Remember, an investor
cannot invest directly in an index.
Average annual return Ended
on investments 12/31/99
- --------------------------------------------
One Year - 4.45%
- --------------------------------------------
Five Years +14.97%
- --------------------------------------------
Ten Years +12.82%
- --------------------------------------------
* Standard & Poor's Midcap 400 Index - Measures performance of 400 medium-sized
companies. An investor cannot invest directly in the above index/indexes,
which is/are unmanaged.
Special Opportunities Fund 1
<PAGE>
Lincoln National
Special Opportunities Fund, Inc.
Statement of Net Assets
December 31, 1999
Investments:
Number Market
Common Stock: of Shares Value
- ------------------------------------------------------------------------------
Aerospace & Defense: 1.1%
- ------------------------------------------------------------------------------
Cordant Technologies 108,500 $ 3,580,500
Northrop 71,600 3,870,875
- ------------------------------------------------------------------------------
7,451,375
Automobiles & Auto Parts : 2.8%
- ------------------------------------------------------------------------------
Cooper Tire & Rubber 404,200 6,290,362
Cummins Engine 137,000 6,618,812
Magna International Class A 30,400 1,288,200
Navistar International * 89,100 4,221,113
- ------------------------------------------------------------------------------
18,418,487
Banking, Finance & Insurance : 18.3%
- ------------------------------------------------------------------------------
Aetna 102,500 5,720,781
Allmerica Financial 24,500 1,362,812
AmSouth Bancorporation 274,800 5,307,075
Astoria Financial 183,000 5,587,219
Bear Stearns 104,439 4,464,767
CIT Group 292,000 6,168,500
Conseco 260,000 4,647,500
Cullen Frost Bankers 48,600 1,251,450
Dime Bancorp 240,100 3,631,512
Edwards (A.G.) 238,950 7,661,334
Everest Reinsurance Holdings 156,200 3,485,212
Finova Group 48,800 1,732,400
First American Financial 152,200 1,892,987
Firstplus Financial Group * 359,500 25,165
Golden State * 317,000 5,468,250
GreenPoint Financial 160,200 3,814,763
Lehman Brothers Holdings 98,800 8,367,125
Loews Corporation 71,300 4,327,019
Mercantile Bankshares 40,500 1,294,734
Old Republic International 317,450 4,325,256
Pacific Century Financial 363,600 6,794,775
Pacificare Health Systems * 26,600 1,410,631
PNC Financial Group 113,200 5,037,400
Provident Financial Group 34,700 1,247,031
Roslyn Bancorp 153,800 2,830,881
SouthTrust 148,100 5,595,403
Unionbancal 149,900 5,911,681
Washington Federal 290,000 5,709,375
XL Capital Class A 126,177 6,545,432
- ------------------------------------------------------------------------------
121,618,470
Buildings & Materials: 3.8%
- ------------------------------------------------------------------------------
American Standard * 159,000 7,294,125
Fortune Brands 186,700 6,172,769
Louisiana-Pacific 222,600 3,172,050
Pulte 284,300 6,396,750
USG 54,600 2,573,025
- ------------------------------------------------------------------------------
25,608,719
Business Services: 1.5%
- ------------------------------------------------------------------------------
Deluxe 219,700 6,028,019
Tech Data * 135,400 3,676,956
- ------------------------------------------------------------------------------
9,704,975
Cable, Media & Publishing: 2.8%
- ------------------------------------------------------------------------------
Central Newspapers Class A 120,500 4,744,687
Knight-Ridder 106,000 6,307,000
Metro-Goldwyn-Mayer * 118,200 2,785,088
New York Times 63,500 3,119,438
Times Mirror Class A 20,600 1,380,200
- ------------------------------------------------------------------------------
18,336,413
Chemicals: 4.0%
- ------------------------------------------------------------------------------
Dow Chemical 49,300 6,587,712
FMC 120,900 6,929,081
Number Market
Chemicals (Cont.) of Shares Value
- ------------------------------------------------------------------------------
Lubrizol 219,200 $ 6,767,800
RPM/Ohio 326,200 3,323,163
W.R. Grace & Company * 235,800 3,271,725
- ------------------------------------------------------------------------------
26,879,481
Computers & Technology: 5.9%
- ------------------------------------------------------------------------------
Adaptec * 27,700 1,380,672
Apple Computer 85,200 8,756,963
Compuware * 179,400 6,677,044
Diebold 258,100 6,065,350
Michron Technology * 89,700 6,974,175
Perkinelmer 20,300 846,256
Siebel Systems * 39,500 3,322,938
Symantec * 86,900 5,102,659
- ------------------------------------------------------------------------------
39,126,057
Electronics & Electrical: 4.8%
- ------------------------------------------------------------------------------
Analog Devices * 18,500 1,720,500
Johnson Controls 108,000 6,142,500
National Service Industries 210,000 6,195,000
Thomas & Betts 139,400 4,443,375
Vishay Intertechnology * 251,400 7,950,525
Whirlpool 81,500 5,302,594
- ------------------------------------------------------------------------------
31,754,494
Energy: 9.6%
- ------------------------------------------------------------------------------
Apache 119,600 4,417,725
Ashland 180,000 5,928,750
Equitable Resources 162,500 5,423,437
Kerr-McGee 145,923 9,047,226
Murphy Oil 136,500 7,831,688
Noble Drilling * 48,700 1,594,925
Occidental Petroleum 331,300 7,164,363
Pioneer Natural Resources * 346,200 3,094,163
Questar 210,000 3,150,000
Tosco 47,300 1,285,969
Ultramar Diamond Shamrock 261,400 5,930,513
USX-Marathon Group 360,800 8,907,250
- ------------------------------------------------------------------------------
63,776,009
Food, Beverage & Tobacco: 3.7%
- ------------------------------------------------------------------------------
Dean Foods 85,300 3,390,675
Earthgrains 153,400 2,473,575
Gallagher Group 127,200 1,955,700
IBP 273,000 4,914,000
International Multifoods 202,000 2,676,500
Nabisco Group Holdings 110,600 1,175,125
RJ Reynolds Tobacco Holdings 70,900 1,249,613
Supervalu 325,600 6,512,000
- ------------------------------------------------------------------------------
24,347,188
Healthcare & Pharmaceuticals : 3.6%
- ------------------------------------------------------------------------------
Allergan 83,900 4,174,025
Interim Services * 177,700 4,398,075
IVAX * 85,600 2,204,200
Lincare Holdings * 35,800 1,242,931
Mallinckrodt 186,800 5,942,575
United Healthcare 115,500 6,135,937
- ------------------------------------------------------------------------------
24,097,743
Industrial Machinery: 2.3%
- ------------------------------------------------------------------------------
Briggs & Stratton 125,500 6,729,937
Tecumseh Products Class A 42,800 2,018,288
Trinity Industries 225,000 6,398,437
- ------------------------------------------------------------------------------
15,146,662
Leisure, Lodging & Entertainment: 2.9%
- ------------------------------------------------------------------------------
Brinker International * 276,500 6,636,000
Harrah's Entertainment 56,900 1,504,294
Hasbro 150,000 2,859,375
Mandalay Resorts Group * 261,800 5,268,725
Royal Caribbean Cruises 62,000 3,057,375
- ------------------------------------------------------------------------------
19,325,769
Metals & Mining: 1.8%
- ------------------------------------------------------------------------------
Ball 103,300 4,067,437
Mueller Industries * 102,300 3,708,375
Special Opportunities Fund 2
<PAGE>
Number Market
Metals & Mining (Cont.) of Shares Value
- ------------------------------------------------------------------------------
USX-U.S. Steel Group 19,500 $ 643,500
Worthington Industries 206,900 3,420,316
- ------------------------------------------------------------------------------
11,839,628
Multifamily Reits: 0.5%
- ------------------------------------------------------------------------------
Avalonbay Communities 88,900 3,050,381
- ------------------------------------------------------------------------------
Office/Industrial Reits: 1.2%
- ------------------------------------------------------------------------------
Equity Office Properties Trust 192,400 4,737,850
Highwoods Properties 152,400 3,543,300
- ------------------------------------------------------------------------------
8,281,150
Packaging & Containers: 0.2%
- ------------------------------------------------------------------------------
Crown Cork & Seal 59,100 1,322,363
- ------------------------------------------------------------------------------
Paper & Forest Products: 3.1%
- ------------------------------------------------------------------------------
Georgia-Pacific 163,200 8,282,400
Georgia-Pacific (Timber Group) 172,400 4,245,350
Westvaco 52,100 1,699,762
Weyerhaeuser 92,700 6,657,019
- ------------------------------------------------------------------------------
20,884,531
Retail: 4.1%
- ------------------------------------------------------------------------------
Dollar Tree Stores * 35,000 1,694,219
Federated Department Stores * 123,200 6,229,300
K Mart * 396,000 3,984,750
Longs Drug Stores 146,300 3,776,369
Sherwin-Williams 135,600 2,847,600
Toys R Us * 155,700 2,228,456
Tupperware 146,000 2,472,875
Zale * 88,300 4,271,513
- ------------------------------------------------------------------------------
27,505,082
Retail Strip Centers Reits: 0.6%
- ------------------------------------------------------------------------------
New Plan Excel Realty Trust 275,500 4,356,344
- ------------------------------------------------------------------------------
Self-Storage Reits: 0.4%
- ------------------------------------------------------------------------------
Public Storage 124,000 2,813,250
- ------------------------------------------------------------------------------
Telecommunications: 2.8%
- ------------------------------------------------------------------------------
Alltel 70,100 5,796,394
L-3 Communications * 50,400 2,097,900
Nextel Communications * 12,200 1,257,744
Telephone & Data Systems 47,700 6,010,200
United States Cellular * 36,000 3,633,750
- ------------------------------------------------------------------------------
18,795,988
Textiles, Apparel & Furniture: 0.6%
- ------------------------------------------------------------------------------
Jones Apparel Group * 11,000 298,375
Lear * 104,900 3,356,800
Tommy Hilfiger * 30,000 699,375
- ------------------------------------------------------------------------------
4,354,550
Transportation & Shipping: 2.7%
- ------------------------------------------------------------------------------
Continental Airlines Class B * 74,500 3,305,937
Delta Air Lines 123,900 6,171,769
Tidewater 42,100 1,515,600
UAL * 89,900 6,972,869
- ------------------------------------------------------------------------------
17,966,175
Utilities: 11.3%
- ------------------------------------------------------------------------------
Allegheny Energy 161,600 4,353,100
Ameren 193,000 6,320,750
Conectiv 327,000 5,497,687
Constellation Energy 171,000 4,959,000
Dominion Resources/Virginia 180,600 7,088,550
DTE Energy 171,000 5,365,125
Entergy 374,200 9,635,650
FirstEnergy 250,000 5,671,875
General Public Utilities 191,200 5,724,050
Idacorp 115,200 3,088,800
Public Service Enterprise Group 172,000 5,987,750
RGS Energy Group 140,700 2,893,144
Number Market
Utilities (Cont.) of Shares Value
- ------------------------------------------------------------------------------
Texas Utilities 176,500 $ 6,276,781
Wisconsin Energy 105,600 2,032,800
- ------------------------------------------------------------------------------
74,895,062
Total Common Stock: 96.4%
(Cost $646,656,681) 641,656,346
- ------------------------------------------------------------------------------
Par
Money Market Instruments: Amount
- ------------------------------------------------------------------------------
American Honda Finance
5.94%, 1/24/00 $6,700,000 6,700,000
Associate Corporation North America
4.00%, 1/3/00 3,000,000 3,000,000
Merrill Lynch & Company
6.02%, 1/18/00 4,500,000 4,487,314
Moat Funding
6.29%, 1/14/00 5,200,000 5,188,264
U. S. Treasury Bill (+)
4.72%, 4/27/00 1,000,000 985,440
- ------------------------------------------------------------------------------
Total Money Market Instruments: 3.1%
(Cost $20,361,018) 20,361,018
- ------------------------------------------------------------------------------
Total Investments: 99.5%
(Cost $667,017,699) 662,017,364
- ------------------------------------------------------------------------------
Other Assets over Liabilites: 0.5% 3,624,179
- ------------------------------------------------------------------------------
Total Net Assets: 100.0%
(Equivalent to $28.225 per share
based on 23,583,905 shares issued
and outstanding) $665,641,543
- ------------------------------------------------------------------------------
Components of Net Assets at December 31, 1999:
- ------------------------------------------------------------------------------
Common Stock, par value $.01 per share,
50,000,000 authorized shares $235,839
Paid in capital in excess of par value of
shares issued 571,270,946
Undistributed net investment income 2,224,191
Accumulated net realized gain on investments
and futures contracts 96,142,815
Net unrealized depreciation of investments
and futures contracts (4,232,248)
- ------------------------------------------------------------------------------
Total Net Assets $665,641,543
- ------------------------------------------------------------------------------
(+) 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
Year ended December 31, 1999
Investment income:
Dividends $ 13,286,842
- ------------------------------------------------------------------------------
Interest 1,346,039
- ------------------------------------------------------------------------------
Total investment income 14,632,881
- ------------------------------------------------------------------------------
Expenses:
Management fees 2,868,328
- ------------------------------------------------------------------------------
Accounting fees 320,030
- ------------------------------------------------------------------------------
Printing and postage 85,795
- ------------------------------------------------------------------------------
Custody fees 38,455
- ------------------------------------------------------------------------------
Legal fees 36,889
- ------------------------------------------------------------------------------
Directors fees 4,200
- ------------------------------------------------------------------------------
Other 39,379
- ------------------------------------------------------------------------------
3,393,076
- ------------------------------------------------------------------------------
Less expense paid indirectly (7,637)
- ------------------------------------------------------------------------------
Total expenses 3,385,439
- ------------------------------------------------------------------------------
Net investment income 11,247,442
- ------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and futures contracts:
Net realized gain on investment transactions 118,518,834
- ------------------------------------------------------------------------------
Net realized gain on futures contracts 980,538
- ------------------------------------------------------------------------------
Net change in unrealized appreciation/depreciation
of investments and futures contracts (172,192,831)
- ------------------------------------------------------------------------------
Net realized and unrealized loss on investments
and futures contracts (52,693,459)
- ------------------------------------------------------------------------------
Net decrease in net assets resulting from operations $(41,446,017)
- ------------------------------------------------------------------------------
Statements of Changes in Net Assets
Year ended Year ended
12/31/99 12/31/98
---------------------------
Changes from operations:
Net investment income $ 11,247,442 $ 12,907,984
- -------------------------------------------------------------------------------
Net realized gain on investment transactions and
futures contracts 119,499,372 73,392,994
- -------------------------------------------------------------------------------
Net change in unrealized appreciation/depreciation
on investments and futures contracts (172,192,831) (27,321,101)
- -------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations (41,446,017) 58,979,877
- -------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income (9,023,251) (22,448,658)
- -------------------------------------------------------------------------------
Net realized gain on investment transactions (86,192,752) (75,795,433)
- -------------------------------------------------------------------------------
Total distributions to shareholders (95,216,003) (98,244,091)
- -------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from capital share transactions (115,492,827) 84,238,365
- -------------------------------------------------------------------------------
Total increase (decrease) in net assets (252,154,847) 44,974,151
- -------------------------------------------------------------------------------
Net Assets, at beginning of year 917,796,390 872,822,239
- -------------------------------------------------------------------------------
Net Assets, at end of year $665,641,543 $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 year)
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997 1996 1995
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 33.416 $ 35.056 $ 29.423 $ 27.383 $ 22.164
Income (loss) from investment operations:
Net investment income 0.482 0.470 0.477 0.548 0.616
Net realized and unrealized gain (loss)
on investments and futures contracts (1.779) 1.795 7.293 3.867 6.131
-------------------------------------------------
Total from investment operations (1.297) 2.265 7.770 4.415 6.747
-------------------------------------------------
Less dividends and distributions:
Dividends from net investment income (0.373) (0.862) - (0.548) (0.616)
Distributions from net realized gain on
investment transactions (3.521) (3.043) (2.137) (1.827) (0.912)
-------------------------------------------------
Total dividends and distributions (3.894) (3.905) (2.137) (2.375) (1.528)
-------------------------------------------------
Net asset value, end of year $ 28.225 $ 33.416 $ 35.056 $ 29.423 $ 27.383
-------------------------------------------------
Total Return(1) (4.45)% 6.79% 28.15% 16.51% 31.86%
Ratios and supplemental data:
Ratio of expenses to average net assets 0.44% 0.42% 0.42% 0.44% 0.45%
Ratio of net investment income
to average net assets 1.46% 1.44% 1.57% 2.00% 2.39%
Portfolio Turnover 96.49% 76.27% 73.74% 88.17% 90.12%
Net assets, end of year (000 omitted) $665,652 $917,796 $872,822 $648,592 $505,755
</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.
Special Opportunities Fund 5
<PAGE>
Lincoln National Special Opportunities Fund, Inc.
Notes to Financial Statements
December 31, 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 the Lincoln Life & Annuity
Company of New York (the "Companies") for allocation to their variable annuity
products and variable universal life products.
1. Significant Accounting Policies
Security Valuation: All equity securities are valued at the last quoted sales
price as of the close of the New York Stock Exchange (NYSE) on the valuation
date. If on a particular day an equity security does not trade, then the mean
between the bid and asked prices will be used. 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 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, 1999, the
custodial fees offset arrangements amounted to $7,637.
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 portfolios 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, 1999.
Certain officers and directors of the Fund are also officers or directors of the
Companies and receive no compensation from the Fund. The compensation of
unaffiliated directors of the Fund is borne by the Fund.
Special Opportunities Fund 6
<PAGE>
Notes to Financial Statements - (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 year ended December 31, 1999 and the
aggregate gross unrealized appreciation, the aggregate gross unrealized
depreciation and the net unrealized appreciation at December 31, 1999 are as
follows:
Aggregate Aggregate Gross Gross Net
Cost of Proceeds Unrealized Unrealized Unrealized
Purchases From Sales Appreciation Depreciation Depreciation
- ------------------------------------------------------------------------------
$715,592,239 $870,511,382 $65,182,761 $(74,278,921) $(9,096,160)
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 adverse
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 December 31, 1999 was
$985,440. 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, 1999 were as follows:
Notional Expiration Unrealized
Contract to buy Cost Amount Date Gain
- -------------------------------------------------------------------------------
56 S&P 400 midcap stock index contracts $11,808,104 March 2000 $768,087
5. Summary of Changes From Capital Share Transactions
<TABLE>
<CAPTION>
Shares Issued Upon Net Increase (Decrease)
Capital Reinvestment of Capital Shares Resulting From Capital
Shares Sold Dividends Redeemed Share Transactions
-------------------------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Shares Amount
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year ended
December 31, 1999: 1,227,943 $37,679,780 3,171,453 $95,216,003 (8,281,237) $(248,388,610) (3,881,841) $(115,492,827)
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 from net investment income, if any,
semi-annually. Distributions of net realized gains, if any, are declared and
distributed annually.
Special Opportunities Fund 7
<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, 1999, and the
related statement of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the five years in the period then ended.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights. Our procedures included
confirmation of securities owned as of December 31, 1999, by correspondence with
the Fund's custodian and brokers. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Lincoln National Special Opportunities Fund, Inc. at December 31, 1999, the
results of its operations for the year then ended, the changes in its net assets
for each of the two years in the period then ended, and its financial highlights
for each of the five years in the period then ended, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
February 4, 2000
