[JANUS LOGO]
Lincoln National
Capital Appreciation Fund, Inc.
Annual Report
December 31, 1998
<PAGE>
Lincoln National Capital Appreciation 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
Capital Appreciation Fund, Inc.
Managed by: [JANUS LOGO]
The Fund returned 37.96% for the year ended December 31, 1998. It's benchmark,
the S&P 500 Index, returned 28.76% in 1998.
The past year was a study in contrasts. The first half of the year was similar
to the narrow markets of the past few years, when liquidity needs made the
mega-cap companies the most attractive. Although the rally was broad in the
first quarter, in the second quarter, the market narrowed significantly. In
July and August, nagging concerns over the flailing Japanese economy combined
with disturbing developments in Russia and Brazil ignited a sell-off that
lasted the remainder of the third quarter. The many faces of the summer's
tumult frightened many investors out of riskier securities. This
much-publicized "flight-to-quality" created a liquidity crunch that forced the
Federal Reserve to lower interest rates three times. Peripherally, this sent a
clear message to investors that the Fed regarded the developments in emerging
markets as a serious threat to the health of the U.S. economy.
As a result, the market rallied, and although the rally was initially broad,
towards the end of the year it narrowed once again. However, the narrow rallies
of the recent past were selective on the basis of liquidity, the fourth quarter
rally was led by companies exhibiting solid fundamentals. This run-up was
somewhat surprising, especially when one considers the prevalence of potential
negative distractions: the attack on Iraq; the impeachment of our President; and
a bevy of earnings pre-warnings by several multinational corporations. The
market assumed a "teflon-like" quality in which even the most negative events
could not transform the bulls into bears.
Considering the negative news that dominated the headlines during the past
twelve months, our performance is that much more gratifying. However, we should
note that--the summer's financial crisis notwithstanding--much of the negative
news was simply irrelevant to the domestic economic picture. If one were to ask
a cross-section of Americans how the Presidential impeachment and concurrent
attack on Iraq influenced their consumption, the average American would probably
say that it would be negligible.
Conversely, the events in the Pacific Rim had a very real impact on the global
economy. As the U.S. macroeconomic tailwind diminished, many companies endured
difficult sailing. Fortunately, at the beginning of 1998, we decided to pare
back the number of our holdings and concentrate in the companies that we
believed possessed an irrepressible vigor. That is not to say that we had
foreseen any of the summer's drama. Instead, the depth of our research on these
companies was such that we felt they were poised for growth and had such
tremendous momentum that the business environment would have to make an acute
turn for the worse before their progress could be hindered.
Although each of the Fund's holdings were selected one at a time, some themes
emerged. Our technology stocks had a stellar year. For example, Cisco Systems
has entrenched itself as the dominant hardware supplier to the Internet, and we
believe that the Internet story has yet to unfold completely. Our cable holdings
also helped performance. Much of the cable industry is either completing or near
the completion of an upgrade of it cable lines. This new pipeline will have
substantial broadband capabilities, allowing for an expansion in product
breadth, from telephone to Internet access. In addition, two of our holdings,
Time Warner and Comcast, possess substantial assets that complement their core
businesses. For instance, Time Warner's music business is picking up steam and
its television programming unit has several popular shows in syndication. With
minimal incremental costs, these syndicated shows are cash cows.
<PAGE>
Our pharmaceutical companies also contributed positively. Our drug holdings have
held onto a scarce competitive edge: pricing power. Many of our holdings, such
as Pfizer and Warner-Lambert, have recently released blockbuster drugs, yet also
have full research and development pipelines. However, concern is mounting in
Washington about drug price inflation. We will monitor this situation closely.
While much of the Fund performed well, our financial holdings, such as
BankAmerica and Morgan Stanley Dean Witter, were disappointing. We sold these
companies after we grew concerned that the quality of some of their assets was
deteriorating along with their profitability. As the financial stocks fell
substantially in the summer, we sold into the decline.
While the next six months might not offer the most ideal environment for many
businesses, from a fundamental perspective, we like our holdings. The prominent
themes in the Fund--technology, pharmaceuticals, and cable--are ones upon which
we believe our culture will become increasingly reliant. Should 1999 look
anything like the fourth quarter of 1998, we believe that the market will
appreciate the fundamental merits of our holdings and will pay a premium to
access their reliable earnings growth.
Jim Craig
Growth of $10,000 invested 1/3/94 through 12/31/98
1/3/94 12/31/98
Capital Appreciation Fund $10,000 $29,366
S&P 500 Index $10,000 $26,964
This chart illustrates, hypothetically, that $10,000 was invested in the Capital
Appreciation 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 $26,964. 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 +37.96%
- ------------------------------------------------
Lifetime
(since 1/3/94) +21.94%
- ------------------------------------------------
<PAGE>
Lincoln National
Capital Appreciation Fund, Inc.
Statement of Net Assets
December 31, 1998
Investments:
Number Market
Common Stock: of Shares Value
- ---------------------------------------------------------------------------
Automobile & Auto Parts: 1.3%
- ---------------------------------------------------------------------------
Federal-Mogul 174,425 $ 10,378,288
- ---------------------------------------------------------------------------
Banking, Finance & Insurance: 12.4%
- ---------------------------------------------------------------------------
American Express 80,000 8,180,000
Bank of New York 545,725 21,965,431
Federal Home Loan 98,865 6,370,613
Federal National Mortgage 90,035 6,662,590
Firstar 64,370 6,002,503
M & T Bank 13,450 6,979,709
Newcourt Credit Group 290,475 10,148,470
Northern Trust 54,005 4,713,624
Progressive 34,440 5,833,275
Schwab (Charles) 327,600 18,407,025
- ---------------------------------------------------------------------------
95,263,240
Cable, Media & Publishing: 18.5%
- ---------------------------------------------------------------------------
Adelphia Communications Class A* 176,915 8,104,918
Chancellor Media Class A* 150,660 7,208,139
Cox Communications Class A* 265,130 18,327,111
Infinity Broadcasting Class A* 268,820 7,358,948
MediaOne Group 256,060 12,034,820
Meredith 151,225 5,727,647
Tele-Communications Class A Liberty Media* 192,555 8,875,582
Tele-Communications Class A* 159,485 8,826,498
Time Warner 662,222 41,099,153
Univision Communications Class A* 201,450 7,289,972
Wolters Kluwer NV (Netherlands) 84,242 18,029,275
- ---------------------------------------------------------------------------
142,882,063
Chemicals: 0.7%
- ---------------------------------------------------------------------------
Cytec Industries* 107,780 2,290,325
Monsanto 67,510 3,206,725
- ---------------------------------------------------------------------------
5,497,050
Computers & Technology: 28.7%
- ---------------------------------------------------------------------------
America Online 120,000 19,200,000
Automatic Data Processing 100,000 8,018,750
Cadence Design Systems* 337,185 10,031,254
Cisco Systems* 378,718 35,161,599
Dell Computer* 100,000 7,321,875
EMC 231,510 19,678,350
HBO & Company 549,000 15,766,594
International Business Machines 104,495 19,305,451
Linear Technology 240,700 21,550,172
Microsoft* 250,000 34,632,813
Oracle* 50,000 2,157,813
Sun Microsystems* 198,970 17,024,371
Veritas Software* 64,610 3,868,524
Wind River Systems* 165,000 7,744,688
- ---------------------------------------------------------------------------
221,462,254
Electronics & Electrical Equipment: 5.4%
- ---------------------------------------------------------------------------
Maxim Integrated Products* 366,700 16,008,747
Nokia 104,910 12,635,098
Pittway 99,374 3,285,553
Texas Instruments 110,000 9,411,875
- ---------------------------------------------------------------------------
41,341,273
Food, Beverage & Tobacco: 0.6%
- ---------------------------------------------------------------------------
U.S. Foodservice* 88,725 4,347,525
- ---------------------------------------------------------------------------
Healthcare & Pharmaceuticals: 15.1%
- ---------------------------------------------------------------------------
Alza* 127,365 6,654,821
McKesson 165,580 13,091,169
Medtronic 90,000 6,682,500
Merck & Company 45,480 6,716,828
Number Market
Common Stock: of Shares Value
- ---------------------------------------------------------------------------
Omnicare 66,250 $ 2,302,188
Pfizer 213,285 26,753,937
Pharmacia & Upjohn 114,680 6,493,755
Schering-Plough 157,110 8,680,328
Tyco International 370,244 27,930,282
Warner-Lambert 151,825 11,415,342
- ---------------------------------------------------------------------------
116,721,150
Industrial Machinery: 1.2%
- ---------------------------------------------------------------------------
Dionex* 247,500 9,126,563
- ---------------------------------------------------------------------------
Leisure, Lodging & Entertainment: 0.7%
- ---------------------------------------------------------------------------
Carnival Cruise Lines 118,450 5,685,600
- ---------------------------------------------------------------------------
Metals & Mining: 0.5%
- ---------------------------------------------------------------------------
Outdoor Systems* 121,330 3,639,900
- ---------------------------------------------------------------------------
Miscellaneous: 1.1%
- ---------------------------------------------------------------------------
Robert Half International* 180,657 8,073,110
- ---------------------------------------------------------------------------
Retail: 5.2%
- ---------------------------------------------------------------------------
Costco Companies 214,020 15,483,009
Home Depot 62,990 3,854,201
Meyer(Fred)* 76,300 4,597,075
Staples* 200,000 8,743,750
Wal-Mart Stores 92,010 7,493,064
- ---------------------------------------------------------------------------
40,171,099
Telecommunications: 7.3%
- ---------------------------------------------------------------------------
Clear Channel Communications 188,505 10,273,523
Comcast - Special Class A 555,155 32,598,003
Hyperion Telecommunications* 105,000 1,601,251
MCI Worldcom* 162,860 11,690,294
- ---------------------------------------------------------------------------
56,163,071
Total Common Stock: 98.7%
(Cost $509,179,105) 760,752,186
- ---------------------------------------------------------------------------
Par
Money Market Instruments: Amount
- ---------------------------------------------------------------------------
CIT Group Holdings
5.17%, 1/4/99 $8,500,000 8,496,248
- ---------------------------------------------------------------------------
Total Money Market Instruments: 1.1%
(Cost $8,496,248) 8,496,248
- ---------------------------------------------------------------------------
Total Investments: 99.8%
(Cost $517,675,353) 769,248,434
- ---------------------------------------------------------------------------
Other Assets Over Liabilities: 0.2% 1,487,918
- ---------------------------------------------------------------------------
Net Assets: 100.0%
(Equivalent to $21.772 per share
based on 35,400,021 shares
issued and outstanding) $770,736,352
===========================================================================
* Non income producing security.
See accompanying notes to financial statements.
<PAGE>
Lincoln National Capital Appreciation Fund, Inc.
Statement of Operations
Year ended December 31, 1998
Investment income:
Dividends $ 2,617,237
- -----------------------------------------------------------------------------
Interest 2,035,124
- -----------------------------------------------------------------------------
Less: Foreign withholding tax (87,950)
- -----------------------------------------------------------------------------
Total investment income 4,564,411
- -----------------------------------------------------------------------------
Expenses:
Management fees 4,265,160
- -----------------------------------------------------------------------------
Accounting fees 236,512
- -----------------------------------------------------------------------------
Printing and postage 66,234
- -----------------------------------------------------------------------------
Custodial fees 63,026
- -----------------------------------------------------------------------------
Directors fees 4,200
- -----------------------------------------------------------------------------
Other 25,104
- -----------------------------------------------------------------------------
Total expenses 4,660,236
- -----------------------------------------------------------------------------
Net investment loss (95,825)
- -----------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments and
foreign currency:
Net realized gain (loss) on:
Investment transactions 7,561,560
- -----------------------------------------------------------------------------
Foreign currency transactions (423,575)
- -----------------------------------------------------------------------------
Net realized gain on investments
and foreign currency transactions 7,137,985
- -----------------------------------------------------------------------------
Net change in unrealized appreciation of:
- -----------------------------------------------------------------------------
Investments 187,311,547
- -----------------------------------------------------------------------------
Foreign currency 4,592
- -----------------------------------------------------------------------------
Net change in unrealized appreciation on investments and
foreign currency 187,316,139
- -----------------------------------------------------------------------------
Net realized and unrealized gain on investments and foreign
currency 194,454,124
- -----------------------------------------------------------------------------
Net increase in net assets
resulting from operations $194,358,299
=============================================================================
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 (loss) $ (95,825) $ 1,290,717
- ----------------------------------------------------------------------------
Net realized gain on investment
and foreign currency transactions 7,137,985 47,580,432
- ----------------------------------------------------------------------------
Net change in unrealized appreciation
of investments and foreign currency 187,316,139 28,947,184
- ----------------------------------------------------------------------------
Net increase in net assets
resulting from operations 194,358,299 77,818,333
- ----------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income (1,290,717) -
- ----------------------------------------------------------------------------
Net realized gain on investments (47,582,501) (10,296,305)
- ----------------------------------------------------------------------------
Total distributions to shareholders (48,873,218) (10,296,305)
- ----------------------------------------------------------------------------
Net increase in net assets
resulting from capital share transactions 174,215,604 116,271,782
- ----------------------------------------------------------------------------
Total increase in net assets 319,700,685 183,793,810
- ----------------------------------------------------------------------------
Net Assets, beginning of year 451,035,667 267,241,857
- ----------------------------------------------------------------------------
Net Assets, end of year $770,736,352 $451,035,667
- ----------------------------------------------------------------------------
See accompanying notes to financial statements.
<PAGE>
Lincoln National Capital Appreciation 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 $17.530 $14.504 $12.916 $10.152 $10.000
Income (loss) from investment operations:
Net investment income (loss)(2) (0.003) 0.050 0.135 0.116 0.134
Net realized and unrealized gain
on investments and foreign currency 6.127 3.510 2.051 2.764 0.152
-------------------------------------------------------
Total from investment operations 6.124 3.560 2.186 2.880 0.286
-------------------------------------------------------
Less dividends and distributions:
Dividends from net investment income (0.050) - (0.135) (0.116) (0.134)
Distributions from net realized gain on
investment transactions (1.832) (0.534) (0.463) - -
-------------------------------------------------------
Total dividends and distributions (1.882) (0.534) (0.598) (0.116) (0.134)
-------------------------------------------------------
Net asset value, end of period $21.772 $17.530 $14.504 $12.916 $10.152
=======================================================
Total Return(1) 37.96% 25.29% 18.02% 28.69% 2.71%
Ratios and supplemental data:
Ratio of expenses to average net assets 0.83% 0.89% 0.93% 1.07% 1.18%
Ratio of net investment income (loss)
to average net assets (0.01%) 0.35% 0.99% 1.00% 1.33%
Portfolio Turnover 77.99% 137.07% 92.73% 195.63% 185.28%
Net assets, end of period (000 omitted) $770,736 $451,036 $267,242 $127,936 $ 52,904
</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
January 3, 1994 through December 31, 1994. Accordingly, the total return,
ratios, and portfolio turnover have NOT been calculated on an annualized
basis. See accompanying notes to financial statements.
<PAGE>
Lincoln National Capital Appreciation Fund, Inc.
Notes to Financial Statements
December 31, 1998
The Fund: Lincoln National Capital Appreciation Fund, Inc. (the "Fund") is
registered as an open-end diversified management investment company under the
Investment Company Act of 1940, as amended. The Fund's shares are sold only to
The Lincoln National Life Insurance Company and Lincoln Life & Annuity Company
of New York (the "Companies") for allocation to their variable annuity products.
The Fund's investment objective is to maximize long-term growth of capital in a
manner consistent with preservation of capital. The Fund primarily buys stocks
in a large number of companies of all sizes if the companies are competing well
and if their products or services are in high demand. It may also buy money
market securities and bonds, including high-risk 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. 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 $ 89,003
- -------------------------------------------------
Receivable for dividends earned 160,308
- -------------------------------------------------
Receivable for securities sold 1,309,269
- -------------------------------------------------
Receivable for capital shares sold 465,030
- -------------------------------------------------
Payable for securities purchased (19,511)
- -------------------------------------------------
Payable for capital shares redeemed (869)
- -------------------------------------------------
Management fees payable (428,823)
- -------------------------------------------------
Other, net (86,489)
- -------------------------------------------------
$1,487,918
==========
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 average
daily net assets of the Fund on the first $500 million and .70% in excess of
$500 million. The sub-advisor, Janus Capital Management, 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** $ 354,000
- ------------------------------------------------------------------------
Paid in capital in excess of par value of shares issued 511,245,188
- ------------------------------------------------------------------------
Accumulated net realized gain on investments 7,559,491
- ------------------------------------------------------------------------
Net unrealized appreciation of investments and
- ------------------------------------------------------------------------
foreign currencies 251,577,673
- ------------------------------------------------------------------------
$770,736,352
============
** The Fund has 50,000,000 authorized shares.
<PAGE>
Notes to Financial Statements - (Continued)
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
------------------------------------------------------------------------
$551,843,683 $413,999,356 $256,261,250 $(4,688,169) $251,573,081
6. 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.
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: 7,536,050 $138,042,283 2,876,629 $48,873,218 (741,305) $(12,699,897) 9,671,374 $174,215,604
Year ended
December 31, 1997: 6,645,666 106,951,391 836,415 12,215,979 (178,409) (2,895,588) 7,303,672 116,271,782
</TABLE>
8. Distributions to Shareholders
The Fund declares and distributes a dividend on net investment income, if any,
semi-annually. Distributions of net realized gains, if any, are declared and
distributed annually.
<PAGE>
Lincoln National Capital Appreciation Fund, Inc.
Report of Ernst & Young LLP, Independent Auditors
To the Shareholders and Board of Directors
Lincoln National Capital Appreciation Fund, Inc.
We have audited the accompanying statement of net assets of Lincoln National
Capital Appreciation 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 Capital Appreciation 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
