UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number: 811-4656
Exact name of registrant as specified in charter:
Lincoln National Convertible Securities Fund, Inc.
Address of principal executive offices:
2005 Market Street
Philadelphia, PA 19103
Name and address of agent for service:
Richelle S. Maestro, Esq.
2005 Market Street
Philadelphia, PA 19103
Registrant's telephone number, including area code: (800) 523-1918
Date of fiscal year end: 12/31
Date of reporting period: 12/31/03
Item 1. Reports to Stockholders
Delaware
Investments(SM)
--------------------------------------
CLOSED-END A member of Lincoln Financial Group(R)
Annual Report DECEMBER 31, 2003
- --------------------------------------------------------------------------------
LINCOLN NATIONAL CONVERTIBLE SECURITIES FUND, INC.
[LOGO] POWERED BY RESEARCH.(SM)
Table
OF CONTENTS
- -----------------------------------------------------------------
PORTFOLIO MANAGEMENT REVIEW 1
- -----------------------------------------------------------------
PERFORMANCE SUMMARY 2
- -----------------------------------------------------------------
FINANCIAL STATEMENTS:
Statement of Net Assets 4
Statement of Operations 6
Statements of Changes in Net Assets 7
Financial Highlights 8
Notes to Financial Statements 9
- -----------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS 11
- -----------------------------------------------------------------
BOARD OF DIRECTORS/OFFICERS 12
- -----------------------------------------------------------------
Funds are not FDIC insured and are not guaranteed. It is possible to lose the
principal amount invested.
Mutual fund advisory services provided by Delaware Management Company, a series
of Delaware Management Business Trust, which is a registered investment advisor.
(C) 2004 Delaware Distributors, L.P.
Portfolio Lincoln National Convertible Securities Fund, Inc.
MANAGEMENT REVIEW January 9, 2004
Fund Manager
Damon J. Andres
Senior Portfolio Manager
Q: Please discuss the Fund's performance and the convertible market in general
during the 12-month period.
A: For the year ended December 31, 2003, Lincoln National Convertible Securities
Fund, Inc. posted a +26.21% total return (shares at net asset value with
distributions reinvested), outperforming the Merrill Lynch Convertible
Securities Index which gained +25.80%. The Lipper Convertible Securities
Closed-End Funds Average returned +29.18% during the same period. The Lipper
Convertible Securities Closed-End Funds Average represents the average return of
14 closed-end convertible securities funds tracked by Lipper Inc.
Following three extremely challenging years, the environment grew favorable for
convertible securities in 2003. While high premiums early in the year
contributed to little equity sensitivity, it increased as the stock market
gained momentum -- a factor that enabled convertibles to participate in the
market rally. The Fund's strongest performers included technology, basic
materials, and consumer discretionary. In general, convertibles tied to
underlying securities with lower credit qualities delivered the best
performance. On the other hand, consumer staples and financials lagged the
broader index.
The year witnessed significant new issuance -- over 250 new issues were brought
to market, generating nearly $90 billion. There were also a record number of
redemptions as convertibles either matured or were called before their scheduled
maturity. During the period, $60 billion exited the convertible market. This new
issuance and redemption activity was largely driven by the need for companies to
fund growth, following a sustained period of weak earnings. The low interest
rate environment has made it more affordable for companies to obtain financing
or refinance existing debt. As a result, costly convertibles were replaced at
more attractive terms. Finally, demand for convertibles increased, a factor that
helped propel valuations and led to strong performance for the year.
Q: How did the Fund's investment strategy impact performance?
A: The Fund focuses on higher-rated credit issues to help minimize downside
market risk. However, as we mentioned, lower-quality issues delivered the
strongest performance. This factor, coupled with our underweighted position in
technology, contributed to the Fund's slight underperformance relative to the
Lipper Convertible Securities Closed-End Funds Average. While the portfolio
maintained an overall higher than average credit quality relative to the other
funds included in this Lipper Average, we selectively managed lower credit
quality securities -- a strategy that worked to our advantage.
Q: Which securities contributed positively to performance?
A: The consumer discretionary sector benefited from strong spending, as
consumers grew increasingly optimistic about the prospects for the U.S. economy.
Our Ford Capital Trust II convertible preferred was one of the strongest
portfolio performers in this sector.
A convertible in Tyco International (a manufacturing company that provides
products and services in diverse areas such as electronics, fire and security,
healthcare, and telecommunications) also generated attractive returns. Finally,
a convertible security in El Paso Energy, one of North America's leading
independent natural gas producers, was a positive contributor to Fund
performance.
Q: Can you provide some examples of securities that detracted from performance?
A: While consumer staples tend to be somewhat resistant to the effects of an
economic slowdown, they do not fare as well during periods of recovery. One such
example is consumer foods maker General Mills, which experienced weak equity
performance. A large convertible position in CV Therapeutics, a
biopharmaceutical company that specializes in treatments for cardiovascular
disease, was negatively impacted by delayed clinical trials of a new drug.
Finally, Brinker International, a multi-unit restaurant management company, was
a negative contributor to performance for the year. The company suffered from
slow expansion of its franchise and the effects of the economic downturn.
Despite these events, we are confident about the long-term business prospects
for each of these companies.
Q: Can you describe the Fund's positioning at year-end?
A: Late in the year, we added to our technology weighting and increased
portfolio diversification by adding to existing positions in small-cap names.
Our strategy also included decreasing portfolio exposure to investment-grade
convertibles, which lagged the broader index in 2003. We believe that our
conservative, highly diversified approach offers investors a strategic way to
capture the upside potential of equities with less overall volatility.
1
Lincoln National
CONVERTIBLE SECURITIES FUND, INC.
Fund Performance
Fund Basics Average Annual Total Returns
As of December 31, 2003 Through December 31, 2003 10 Years Five Years One Year
- ----------------------------------------------- --------------------------------------------------------------------------------
Fund Objective: At Market Price +6.27% +6.67% +18.87%
The Fund seeks a high level of total return At Net Asset Value +6.63% +4.57% +26.21%
through a combination of capital appreciation --------------------------------------------------------------------------------
and current income.
Returns reflect reinvestment of all distributions and capital gain tax credits.
- ----------------------------------------------- Performance does not include the sales charge or any brokerage commissions for
Total Fund Net Assets: purchases made since inception. Past performance is not a guarantee of future
$87.06 million results.
- ----------------------------------------------- The performance table and graph on the following page do not reflect the
Number of Holdings: deduction of taxes the shareholder would pay on Fund distributions or
69 redemptions of Fund shares.
- -----------------------------------------------
Your Fund Manager:
Damon J. Andres earned a bachelor's degree in
business administration with an emphasis in
finance and accounting from the University of
Richmond. Prior to joining Delaware
Investments in 1994, Mr. Andres performed
investment-consulting services with Cambridge
Associates, Inc. in Arlington, Virginia. Mr.
Andres is a CFA charterholder.
- -----------------------------------------------
NYSE Symbol:
LNV
2
Performance of a $10,000 Investment
December 31, 1993 to December 31, 2003
Lincoln National Lincoln National
Convertible Convertible
Merrill Lynch Securities Fund - Securities Fund -
Convertible Class A Shares Class A Shares
Securities Index Market Price NAV
12/31/1993 $10,000 $10,000 $10,000
12/31/1994 $9,292 $8,551 $9,804
12/31/1995 $11,592 $10,224 $11,725
12/31/1996 $13,245 $12,715 $14,119
12/31/1997 $15,759 $14,945 $15,978
12/31/1998 $17,052 $12,490 $15,165
12/31/1999 $24,610 $15,184 $21,016
12/31/2000 $21,738 $15,604 $18,302
12/31/2001 $20,879 $16,005 $18,672
12/31/2002 $19,844 $14,509 $15,022
12/31/2003 $24,963 $19,002 $18,370
Chart assumes $10,000 invested on December 31, 1993 and reflects the
reinvestment of all distributions and capital gain tax credits at market value.
Performance of the Fund and the Merrill Lynch Convertible Securities Index at
market value are based on market performance during the period. Performance of
the Fund at net asset value is based on the fluctuations in net asset value
during the period. Investments in the Fund are not available at net asset value.
The Merrill Lynch Convertible Securities Index is an unmanaged index of domestic
convertible securities. Performance does not include any brokerage commissions
for purchases. You cannot invest directly in an index. Past performance is not a
guarantee of future results.
Market Price vs. Net Asset Value
December 31, 2002 to December 31, 2003
Lincoln National Convertible Securities Fund - Market Price vs. NAV
NAV Market Price
12/31/2002 $12.56 $12.09
01/31/2003 $12.77 $12.94
02/28/2003 $12.88 $12.33
03/31/2003 $13.09 $12.78
04/30/2003 $13.37 $13.23
05/31/2003 $13.97 $13.95
06/30/2003 $13.97 $14.08
07/31/2003 $14.11 $13.69
08/31/2003 $14.08 $13.50
09/30/2003 $14.15 $12.98
10/31/2003 $14.49 $13.19
11/30/2003 $14.66 $13.20
12/31/2003 $14.93 $13.50
Past performance is not a guarantee of future results.
3
Statement Lincoln National Convertible Securities Fund, Inc.
OF NET ASSETS December 31, 2003
Principal Market
Amount Value
- --------------------------------------------------------------------------------
Convertible Bonds - 54.66%
- --------------------------------------------------------------------------------
Aerospace & Defense - 1.93%
*EDO 144A 5.25% 4/15/07 $1,500,000 $ 1,681,875
-----------
1,681,875
-----------
Automobiles & Automotive Parts - 1.13%
Sonic Automotive 5.25% 5/7/09 1,000,000 980,000
-----------
980,000
-----------
Banking, Finance & Insurance - 3.46%
PMI Group 2.50% 7/15/21 1,250,000 1,370,312
++XL Capital
2.53% 5/23/21 800,000 515,000
*144A 2.59% 5/23/21 1,750,000 1,126,563
-----------
3,011,875
-----------
Cable, Media & Publishing - 6.18%
EchoStar Communications
5.75% 5/15/08 500,000 528,750
*144A 5.75% 5/15/08 500,000 528,750
Liberty Media (Convertible to Motorola)
3.50% 1/15/31 1,000,000 842,500
Liberty Media (Convertible to Viacom)
3.25% 3/15/31 1,000,000 1,045,000
Mediacom Communications 5.25% 7/1/06 2,500,000 2,431,250
-----------
5,376,250
-----------
Computers & Technology - 3.26%
CNET Networks 5.00% 3/1/06 1,700,000 1,644,750
*Documentum 144A 4.50% 4/1/07 1,000,000 1,196,250
-----------
2,841,000
-----------
Electronics & Electrical Equipment - 2.91%
Amkor Technology
5.75% 6/1/06 1,500,000 1,522,500
*144A 5.75% 6/1/06 1,000,000 1,015,000
-----------
2,537,500
-----------
Energy - 3.10%
Centerpoint Energy 3.75% 5/15/23 600,000 640,500
*Centerpoint Energy 144A 3.75% 5/15/23 1,930,000 2,060,275
-----------
2,700,775
-----------
Food, Beverage & Tobacco - 5.97%
++Brinker International 2.27% 10/10/21 2,000,000 1,357,500
*Bunge Limited 144A 3.75% 11/15/22 1,500,000 1,756,875
++*General Mills 144A 1.76% 10/28/22 2,950,000 2,079,750
-----------
5,194,125
-----------
Healthcare & Pharmaceuticals - 11.56%
*AmerisourceBergen 144A 5.00% 12/1/07 900,000 1,084,500
*Cephalon 144A 2.50% 12/15/06 1,000,000 958,750
*CV Therapeutics 144A 4.75% 3/7/07 2,000,000 1,837,499
++Laboratory Corporation of America
1.519% 9/11/21 1,000,000 716,250
*144A 2.00% 9/11/21 1,550,000 1,110,188
Medarex 4.50% 7/1/06 1,000,000 928,750
Medtronic 1.25% 9/15/21 1,500,000 1,543,125
*OSI Pharmaceuticals 144A 4.00% 2/1/09 500,000 501,250
Province Healthcare 4.25% 10/10/08 1,400,000 1,387,750
-----------
10,068,062
-----------
Leisure, Lodging & Entertainment - 3.89%
*Eastman Kodak 144A 3.375% 10/15/33 1,750,000 1,951,250
*Regal Entertainment 144A 3.75% 5/15/08 1,270,000 1,435,100
-----------
3,386,350
-----------
Principal Market
Amount Value
- --------------------------------------------------------------------------------
Convertible Bonds (continued)
- --------------------------------------------------------------------------------
Miscellaneous - 1.62%
*Tyco International 144A 2.75% 1/15/18 $1,100,000 $ 1,409,375
-----------
1,409,375
-----------
Retail - 8.69%
Barnes & Noble
5.25% 3/15/09 400,000 434,500
*144A 5.25% 3/15/09 1,500,000 1,629,375
++Lowe's 1.93% 2/16/21 1,750,000 1,610,000
School Specialty
6.00% 8/1/08 400,000 464,000
*144A 6.00% 8/1/08 1,500,000 1,740,000
++TJX 1.75% 2/13/21 2,000,000 1,685,000
-----------
7,562,875
-----------
Transportation & Shipping - 0.96%
*ExpressJet 144A 4.25% 8/1/23 750,000 840,938
-----------
840,938
-----------
Total Convertible Bonds (cost $43,126,079) 47,591,000
-----------
Number of
Shares
- --------------------------------------------------------------------------------
Convertible Preferred Stock - 33.98%
- --------------------------------------------------------------------------------
Aerospace & Defense - 1.49%
Northrop Grumman 7.25% 12,500 1,296,250
-----------
1,296,250
-----------
Automobiles & Automotive Parts - 3.72%
Ford Capital Trust II 6.50% 20,000 1,117,000
Tower Automotive Capital Trust 6.75% 60,650 1,766,431
*Tower Automotive Capital Trust 144A 6.75% 12,125 353,141
-----------
3,236,572
-----------
Banking, Finance & Insurance - 9.10%
Chubb 7.00% 85,000 2,449,700
Citigroup 2.00% 30,000 1,153,140
Saint Paul 9.00% 10,000 739,500
Travelers Property Casualty 4.50% 55,000 1,347,500
*Washington Mutual 144A 5.375% 40,000 2,226,400
-----------
7,916,240
-----------
Cable, Media & Publishing - 2.33%
Equity Securities Trust I 6.50% 40,000 998,800
Interpublic Group 5.375% 18,000 1,032,300
-----------
2,031,100
-----------
Consumer Products - 0.79%
Newell Financial Trust I 5.25% 15,000 690,000
-----------
690,000
-----------
Energy - 7.20%
Amerada Hess 7.00% 5,000 274,250
Centerpoint Energy 2.00% 26,000 838,760
Chesapeake Energy 6.75% 10,000 920,000
*Chesapeake Energy 144A 6.00% 10,000 757,500
El Paso Energy Capital Trust I 4.75% 34,600 1,167,750
Unocal Capital Trust 6.25% 19,800 1,009,800
*Williams 144A 5.50% 20,000 1,302,500
-----------
6,270,560
-----------
Environmental Services - 1.15%
Allied Waste Industries 6.25% 13,100 1,002,150
-----------
1,002,150
-----------
4
Statement Lincoln National Convertible Securities Fund, Inc.
OF NET ASSETS (CONTINUED)
Number of Market
Shares Value
- --------------------------------------------------------------------------------
Convertible Preferred Stock (continued)
- --------------------------------------------------------------------------------
Food, Beverage & Tobacco - 1.27%
Constellation 5.75% 36,000 $ 1,108,080
------------
1,108,080
------------
Healthcare & Pharmaceuticals - 0.67%
Hybridon PIK 6.50% 21,490 580,230
------------
580,230
------------
Paper & Forest Products - 6.26%
International Paper Capital 5.25% 65,000 3,298,750
Temple-Inland 7.50% 37,000 2,150,440
------------
5,449,190
------------
Total Convertible Preferred Stock
(cost $28,977,708) 29,580,372
------------
- --------------------------------------------------------------------------------
Common Stock - 6.23%
- --------------------------------------------------------------------------------
Banking & Finance - 2.92%
Sovereign Bancorp 106,710 2,534,363
------------
2,534,363
------------
Electronics & Electrical Equipment - 1.91%
+Benchmark Electronics 47,878 1,666,633
------------
1,666,633
------------
REITs - 1.40%
+Host Marriott 74,900 922,768
+First Potomac Realty Trust 15,900 297,966
------------
1,220,734
------------
Total Common Stock (cost $3,158,353) 5,421,730
------------
- --------------------------------------------------------------------------------
Preferred Stock - 3.66%
- --------------------------------------------------------------------------------
Energy - 1.27%
Chesapeake Energy 5.00% 10,000 1,108,750
------------
1,108,750
------------
REITs - 2.39%
SL Green Realty 7.625% 80,000 2,080,000
------------
2,080,000
------------
Total Preferred Stock (cost $3,000,000) 3,188,750
------------
Principal
Amount
- --------------------------------------------------------------------------------
Commercial Paper - 3.10%
- --------------------------------------------------------------------------------
++Prudential Funding 0.93% 1/2/04 $2,700,000 2,700,000
------------
Total Commercial Paper (cost $2,700,000) 2,700,000
------------
Total Market Value of Securities - 101.63%
(cost $80,962,140) $88,481,852
Liabilities Net of Receivables and
Other Assets - (1.63%) (1,419,213)
------------
Net Assets Applicable to 5,832,823 Common
Shares ($0.001 Par Value) Outstanding;
Equivalent to $14.93 per share - 100.00% $87,062,639
============
Components of Net Assets at December 31, 2003:
Paid in capital $112,614,550
Distributions in excess of net investment income (991,580)
Accumulated net realized loss on investments (32,080,043)
Net unrealized appreciation of investments 7,519,712
------------
Total net assets $ 87,062,639
============
+Non-income producing security for the year ended December 31, 2003.
++Zero coupon bond. The interest rate shown is the yield at the time of
purchase.
*Security exempt from registration under Rule 144A of the Securities Act of
1933. See Note G in "Notes to Financial Statements".
PIK - Payment in kind
REIT - Real Estate Investment Trust
See accompanying notes.
5
Statement Lincoln National Convertible Securities Fund, Inc.
OF OPERATIONS Year Ended December 31, 2003
Investment Income:
Interest $2,248,856
Dividends 1,481,137 $ 3,729,993
---------- -----------
Expenses:
Management fees 718,904
Legal fees 180,200
Reports to shareholders 106,510
Directors fees 96,000
Audit and related fees 46,150
Stock transfer & dividend disbursing fees 40,378
NYSE fees 25,000
Custodian fees 6,129
Other 9,774 1,229,045
----------
Less expenses absorbed or waived (56,971)
Less expenses paid indirectly (809)
-----------
Total expenses 1,171,265
-----------
Net Investment Income 2,558,728
-----------
Net Realized and Unrealized Gain (Loss) on Investments:
Net realized loss on investments (6,370,418)
Net change in unrealized appreciation/depreciation of investments 22,513,794
-----------
Net Realized and Unrealized Gain on Investments 16,143,376
-----------
Net Increase in Net Assets Resulting from Operations $18,702,104
===========
See accompanying notes
6
Statements Lincoln National Convertible Securities Fund, Inc.
OF CHANGES IN NET ASSETS
Year Ended
12/31/03 12/31/02
Increase (Decrease) in Net Assets from Operations:
Net investment income $ 2,558,728 $ 3,253,756
Net realized loss on investments (6,370,418) (19,454,474)
Net change in unrealized appreciation/depreciation of investments 22,513,794 (2,925,482)
------------ ------------
Net increase (decrease) in net assets resulting from operations 18,702,104 (19,126,200)
------------ ------------
Dividends and Distributions to Shareholders from:
Net investment income (2,093,627) (3,305,081)
In excess of net investment income* -- (1,456,681)
Return of capital (2,802,895) (661,892)
------------ ------------
(4,896,522) (5,423,654)
------------ ------------
Capital Stock Transactions:
Retirement of shares repurchased through Buy-Back program - Note E -- (617,056)
Proceeds for shares issued under dividend reinvestment plan 85,494 --
------------ ------------
Increase (decrease) in net assets resulting from capital share transactions 85,494 (617,056)
------------ ------------
Net Increase (Decrease) in Net Assets 13,891,076 (25,166,910)
------------ ------------
Net Assets:
Beginning of year 73,171,563 98,338,473
------------ ------------
End of year $ 87,062,639 $ 73,171,563
============ ============
Distributions in excess of net investment income $ (991,580) $ (1,456,681)
============ ============
*Dividends that were declared in 2002 and payable in 2003.
See accompanying notes
7
Financial
HIGHLIGHTS
Selected data for each share of Common Stock outstanding throughout each period
were as follows:
Lincoln National Convertible Securities Fund, Inc.
Year Ended
12/31/03 12/31/02 12/31/01 12/31/00(3) 12/31/99
Net asset value, beginning of period $12.560 $16.760 $17.190 $21.590 $16.360
Income (loss) from investment operations:(1)
Net investment income 0.439 0.560 0.830 0.910 0.840
Anti-dilutive impact due to capital shares repurchased -- 0.010 0.110 0.120 --
Net realized and unrealized gain (loss) on investments (net of taxes) 2.771 (3.840) (0.610) (4.550) 5.250
------- ------- ------- ------- -------
Total from investment operations 3.210 (3.270) 0.330 (3.520) 6.090
------- ------- ------- ------- -------
Less dividends and distributions to common shareholders from:
Net investment income (0.359) (0.570) (0.760) (0.880) (0.860)
In excess of net investment income(2) -- (0.250) -- -- --
Return of capital (0.481) (0.110) -- -- --
------- ------- ------- ------- -------
Total dividends and distributions (0.840) (0.930) (0.760) (0.880) (0.860)
------- ------- ------- ------- -------
Net asset value, end of period $14.930 $12.560 $16.760 $17.190 $21.590
======= ======= ======= ======= =======
Per Share Market Value, End of Period $13.500 $12.090 $14.360 $14.750 $16.000
Total Investment Return Based on Market Value 18.87% (9.35%) 2.57% (2.62%) 21.57%
Ratios and supplemental data:
Net assets, end of period (000 omitted) $87,063 $73,172 $98,338 $106,227 $137,580
Ratio of expenses to average net assets 1.46% 1.46% 1.54% 1.23% 1.05%
Ratio of expenses to average net assets
prior to expenses waived and expenses paid indirectly 1.53% 1.76% 1.74% 1.28% 1.06%
Ratio of net investment income to average net assets 3.18% 3.89% 4.88% 4.10% 4.98%
Ratio of net investment income to average net assets
prior to expenses waived and expenses paid indirectly 3.11% 3.59% 4.68% 4.05% 4.97%
Portfolio turnover 56% 77% 124% 121% 128%
(1) The average shares outstanding method has been applied for per share
information.
(2) Dividends that were declared in 2002 and payable in 2003.
(3) Total investment return based on market value does not include the impact of
the capital gains tax credit of $0.816 per share.
See accompanying notes
8
Notes Lincoln National Convertible Securities Fund, Inc.
TO FINANCIAL STATEMENTS December 31, 2003
Lincoln National Convertible Securities Fund, Inc. (the "Fund") is registered
under the Investment Company Act of 1940, as amended, as a closed-end,
diversified management investment company, incorporated under the laws of
Maryland. Fund shares are listed on the New York Stock Exchange under the symbol
LNV.
Note A -- Summary of Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Investments -- Equity securities, except those traded on the Nasdaq Stock
Market, Inc. (NASDAQ), are valued at the last quoted sales price as of time of
the regular close of the New York Stock Exchange (NYSE) on the valuation date.
Securities traded on the NASDAQ are valued in accordance with the NASDAQ
Official Closing Price, which may not be the last sales price. If on a
particular day an equity security does not trade, then the mean between the bid
and asked prices will be used. Long-term debt securities are valued by an
independent pricing service and such prices are believed to reflect the fair
value of such securities. Short-term debt securities having less than 60 days to
maturity are valued at amortized cost, which approximates market value. 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. In determining whether market quotations are
readily available or fair valuation will be used, various factors will be taken
into consideration, such as market closures, or with respect to foreign
securities, aftermarket trading or significant events after local market trading
(e.g., government actions or pronouncements, trading volume or volatility on
markets, exchanges among dealers, or news events).
Income Taxes -- It is the intention of the Fund to distribute substantially all
net investment income and net realized gains. The Fund intends to continue to
qualify for tax treatment accorded to "regulated investment companies" as
defined by the applicable provisions of the Internal Revenue Code. On such
basis, under present law, the Fund will not incur any liability for income taxes
on the portion of its net investment income and net realized gains distributed
to shareholders.
Distributions -- The Fund has a managed distribution policy. Under the policy,
the Fund declares and pays quarterly distributions and is managed with a goal of
generating as much of the distribution as possible from ordinary income (net
investment income and short-term capital gains). The balance of the distribution
then comes from long-term capital gains, and, if necessary, a return of capital.
Effective July 1, 2003, the current annualized rate is $0.64 per share. The Fund
continues to evaluate its quarterly distribution in light of ongoing economic
and market conditions and may change the amount of the quarterly distributions
in the future.
Use of Estimates -- The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Other -- Security transactions are recorded on the date the securities are
purchased or sold (trade date). Cost of securities sold is determined on a
specific identification method. Dividend income is recorded on the ex-dividend
date. Interest income is recorded on the accrual basis. Discounts on
non-convertible debt securities are amortized to interest income over the lives
of the respective securities. Distributions to common shareholders are recorded
on the ex-dividend date.
The Fund receives earnings credits from the custodian when positive balances are
maintained, which are used to offset custody fees. The earnings credits for the
year ended December 31, 2003 were approximately $809. The expense paid under
this agreement is included in its respective expense caption on the Statement of
Operations with the corresponding expense offset shown as "expenses paid
indirectly".
Note B -- Investments
The aggregate cost of investments purchased and the aggregate proceeds from
investments sold (exclusive of U.S. government securities and short-term
investments) amounted to $43,114,702 and $51,666,956, respectively, for the year
ended December 31, 2003.
At December 31, 2003, the cost of investments for federal income tax purposes
was $80,962,140. At December 31, 2003, net unrealized appreciation was
$7,519,712, the aggregate gross unrealized appreciation on investments was
$10,951,835, and the aggregate gross unrealized depreciation was $3,432,123.
Note C -- Dividend and Distribution Information
Income and long-term capital gain distributions are determined in accordance
with federal income tax regulations, which may differ from accounting principles
generally accepted in the United States. The tax character of dividends and
distributions paid during the years ended December 31, 2003 and 2002 were as
follows:
2003 2002
Ordinary income $2,093,627 $3,305,081
In excess of net investment income -- 1,456,681
Return of capital 2,802,895 661,892
---------- ----------
Total $4,896,522 $5,423,654
========== ==========
As of December 31, 2003, the components of net assets on a tax basis were as
follows:
Shares of beneficial interest $112,614,550
Other temporary differences* (991,580)
Capital loss carryforwards (32,080,043)
Unrealized appreciation on investments 7,519,712
------------
Net Assets $ 87,062,639
============
*Other temporary differences includes dividends that were declared in 2003 and
payable in 2004.
For federal income tax purposes, capital loss carryforwards may be carried
forward and applied against future capital gains. Such capital loss
carryforwards expire as follows: $7,044,778 expires in 2009, $11,847,326 expires
in 2010, $13,187,939 expires in 2011.
Note D -- Management Fees and Other Transactions with Affiliates
In accordance with the terms of its investment management agreement, the Fund
pays Delaware Management Company (DMC), a series of Delaware Management Business
Trust and the investment manager, a management fee of 0.21875% of net assets of
the Fund as of the close of business on the last business day of each quarter
(0.875% on an annual basis). DMC had elected to waive 0.30% of its management
fee through March 31, 2003.
Certain officers and directors of the Fund are also officers or directors of DMC
and receive no compensation from the Fund. The compensation of unaffiliated
directors of the Fund is borne by the Fund.
The Fund has engaged Delaware Service Company, Inc. (DSC), an affiliate of DMC,
to provide accounting and administration services which are paid for by DMC out
of its investment advisory fees.
At December 31, 2003, the Fund had liabilities payable to affiliates as follows:
Investment management fee payable to DMC $177,799
Other expenses payable to DMC and affiliates* 101,250
*DMC, as part of its administrative services, pays Fund operating expenses on
behalf of the Fund and is reimbursed on a periodic basis. Such expenses include
items such as printing of shareholder reports, professional fees, stock
exchange fees, custodian fees and directors' fees.
Note E -- Capital Shares
On March 22, 2000, the Board of Directors authorized the repurchase by the Fund
of up to 5% of the Fund's outstanding common stock, for the purposes of
enhancing shareholder value. The Fund's Board has authorized management of the
Fund to repurchase such shares in open market
9
Notes Lincoln National Convertible Securities Fund, Inc.
TO FINANCIAL STATEMENTS (CONTINUED)
transactions at prevailing market prices from time to time and in a manner
consistent with the Fund continuing to seek to achieve its investment objective.
The Board's actions were taken in light of the significant discounts at which
the Fund's shares were trading, in order to provide additional liquidity to
shareholders and to enhance the net asset value of the shares. On February 2,
2001, the Board of Directors extended the share repurchase program by
authorizing the repurchase of an additional 5% of the Fund's outstanding common
stock upon completion of the initial buyback program.
Weighted
Period Shares Average Discount
Ended Repurchased Cost Discount Range
- ------ ----------- ------ ---------- --------
12/31/00 192,450 $3,353,064 19.32% 6.97% -- 30.28%
12/31/01 311,700 4,800,263 11.85% 6.62% -- 20.80%
12/31/02 41,350 617,056 8.45% 5.91% -- 12.05%
There were no shares repurchased during the year ended December 31, 2003.
Shares issued under the dividend reinvestment plan were as follows:
Shares
------
Year ended December 31, 2003 6,098
Note F-- Contingencies
In May 2000, a suit was filed against the Lincoln National Convertible
Securities Fund, Inc. (the "Fund") and its Directors in the United States
District Court for the Eastern District of Pennsylvania (the "District Court").
Goldstein v. Lincoln National Convertible Securities Fund, Inc., Case No.
00-CV-2653. The plaintiff was a stockholder of the Fund who, in April 2000,
expressed an intention (a) to nominate candidates for the two director positions
that were to be filled at the Fund's 2000 annual meeting in May, (b) to move
that the shareholders pass a certain resolution at the 2000 annual meeting in
May and (c) to solicit proxies. The Fund informed him that it would not permit
him to raise the matters he wished to raise at the 2000 annual meeting because
he had failed to notify the Fund of his intentions prior to a January 2000
deadline that had been announced in the Fund's proxy statement for the prior
year. In the action, the plaintiff claimed that it was illegal for the Fund to
enforce this deadline and that the defendants made false and misleading
statements in the proxy materials that the Fund disseminated in connection with
the 2000 annual meeting. The primary relief that the plaintiff sought was an
order compelling the Fund to put up two classes of its staggered board for
election at the 2001 annual meeting -- the class that would ordinarily be put up
for election at that meeting but also the class that was elected at the 2000
annual meeting. The Fund asserted counterclaims against the plaintiff,
contending that arrangements he had with various beneficial holders of the
Fund's shares gave rise to violations of the federal securities laws. On April
27, 2001, the District Court found in favor of the plaintiff. This ruling was
based on the District Court's conclusion that the published deadline for
submitting shareholder proposals was invalid and unenforceable because it was
not also reflected in the Fund's bylaws. The District Court also ruled in favor
of the plaintiff with respect to the Fund's counterclaim. The District Court
issued an order setting aside the election of the Fund's Class 1 Directors at
the 2000 annual meeting and ordered that a new election be conducted with
respect to the Class 1 Director positions. The Board of Directors appealed the
ruling of the District Court in this case. In March 2003, the Fund and its
Directors reached a financial settlement with the plaintiff, the entire cost of
which was borne by the Fund's investment advisor. The District Court's decision
in favor of the plaintiff was subsequently vacated in April 2003.
In addition, in January 2001, an action was filed against the Fund and its
directors in the Circuit Court for Baltimore City in Baltimore, Maryland.
Daniels v. Lincoln National Convertible Securities Fund, Inc. (Daniels I). This
action purports to have been brought on behalf of a class consisting of all the
Fund's shareholders. The allegations in this action are functionally identical
to those in the action described above.
In September 2001, the plaintiff in Daniels I filed a separate class action
complaint in the District Court for the Southern District of New York. In
addition to the Fund and its directors, the complaint in Daniels v. Lincoln
National Convertible Securities Fund, Inc. (Daniels II) names Lincoln Investment
Management (the Fund's investment advisor prior to January 1, 2001) and Delaware
Management Company (the Fund's current investment advisor) as defendants. The
complaint alleges that the defendants engaged in a joint transaction in
contravention of Section 17(d) of the Investment Company Act of 1940.
Specifically, the complaint alleges that the Directors and the Fund's investment
advisor improperly used Fund assets to finance a proxy contest against Mr.
Goldstein and related litigation. The plaintiff seeks unspecified damages and
attorney's fees.
Note G - Market and Credit Risks
The Fund may invest up to 50% of its total assets in illiquid securities, which
may include securities with contractual restrictions on resale, securities
exempt from registration under Rule 144A of the Securities Act of 1933, as
amended, and other securities which may not be readily marketable. The relative
illiquidity of these securities may impair the Fund from disposing of them in a
timely manner and at a fair price when it is necessary or desirable to do so.
Note H - Important Fund Information
Appointment of New Independent Auditors--
The Audit Committee and the Board of Directors decided not to retain
PricewaterhouseCoopers LLP for the 2003 fiscal year and, instead, approved the
appointment of Ernst & Young LLP as the Fund's independent auditors on February
25, 2003. The reports of PricewaterhouseCoopers LLP on the Fund's financial
statements for fiscal years 2001 and 2002 contained no adverse opinions or
disclaimers of opinion, nor were they qualified or modified in any way as to
uncertainty, audit scope, or accounting principles. In addition, during fiscal
years 2001 and 2002 and through February 25, 2003, there were no disagreements
with PricewaterhouseCoopers LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure.
Note I - Tax Information (Unaudited)
The information set forth below is for the Fund's fiscal year as required by
federal laws. Please consult your tax advisor for proper treatment of this
information.
For the fiscal year ended December 31, 2003, the Fund designates distributions
paid during the year as follows:
(A) (B)
Long-Term Ordinary (C)
Capital Gains Income Return of Total (D)
Distributions Distributions Capital Distribution Qualifying
(Tax Basis) (Tax Basis) (Tax Basis) (Tax Basis) Dividends(1)
------------- ------------- ----------- ------------ ------------
-- 47% 53% 100% 4.64%
(A) (B) and (C) are based on a percentage of the Fund's total distributions.
(D) is based on a percentage of ordinary income of the Fund.
(1) Qualifying dividends represent dividends which qualify for the corporate
dividends received deductions.
For the fiscal year ended December 31, 2003, certain dividends may be subject to
a maximum tax rate of 15%, as provided for by the Jobs and Growth Tax Relief
Reconciliation Act of 2003. The Fund has designated $118,641 to be taxed at a
maximum rate of 15%. Complete information was computed and reported in
conjunction with your 2003 Form 1099-DIV.
10
Report
OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors
Lincoln National Convertible Securities Fund, Inc.
We have audited the accompanying statement of net assets of Lincoln National
Convertible Securities Fund, Inc. (the "Fund") as of December 31, 2003, and the
related statement of operations, statement of changes in net assets, and
financial highlights for the year 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 audit. The statement of changes in net assets
for the year ended December 31, 2002, and the financial highlights for each of
the four years in the period ended December 31, 2002, were audited by other
auditors whose report dated February 14, 2003, expressed an unqualified opinion
on such financial statement and financial highlights.
We conducted our audit 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, 2003, by correspondence with
the 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
audit provides 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 Convertible Securities Fund, Inc. at December 31, 2003, and the
results of its operations, the changes in its net assets, and its financial
highlights for the year then ended, in conformity with accounting principles
generally accepted in the United States.
Ernst & Young LLP
Philadelphia, Pennsylvania
February 13, 2004
11
Board of Directors and Officers
An investment company is governed by a Board of Directors, which has oversight
responsibility for the management of the company's business affairs. Directors
establish procedures and oversee and review the performance of the investment
manager and others that perform services for the company. The independent fund
directors, in particular, are advocates for shareholder interests. Following is
a list of the Fund's Directors and certain background and related information.
Principal Number of Other
Name, Position(s) Occupation(s) Portfolios in Fund Directorships
Address Held with Length of Time During Complex Overseen Held by
and Birthdate Registrant Served* Past 5 Years by Director Director
- ------------------------------------------------------------------------------------------------------------------------------------
DIRECTORS
Patrick P. Coyne(1) President 1 Year Executive Vice President/ 2 President and Director,
2005 Market Street Managing Director/ Lincoln National
Philadelphia, PA 19103 Chief Investment Officer- Income Fund, Inc.
Fixed Income (since 2003);
April 14, 1963 Mr. Coyne has served in
various executive capacities
at different times
at Delaware Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
Richard M. Burridge, Sr.(2) Director 18 Years Vice President, 2 Director, Lincoln
1 N. Wacker Drive UBS/PaineWebber National Income
Suite 2500 (since 2000); Fund, Inc.
Chicago, IL 60606 Chairman,
The Burridge Group, Inc.
March 19, 1929 (1996-2000).
- ------------------------------------------------------------------------------------------------------------------------------------
H. Thomas McMeekin(3) Director 14 Years Managing Director, 2 Director, Lincoln
Suite 5600 Prudential Investment Management National Income
180 N. Stetson Street (since 2001); Fund, Inc.
Chicago, IL 60610 Managing Partner,
Griffin Investments
June 17, 1953 (since 2000);
Executive Vice President
and Chief Investment Officer -
Fixed Income,
Delaware Investments (1999-2000);
President and Director,
Lincoln Investment Management, Inc.,
Executive Vice President and
Chief Investment Officer,
Lincoln National Corporation
(until 2000).
- ------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT DIRECTORS
Thomas L. Bindley Independent 6 Years President, Bindley 2 Director, Midas, Inc.
707 Skokie Boulevard Director Capital Corporation and Lincoln National
Suite 600 (since 1998); Income Fund, Inc.
Northbrook, IL 60062 Executive Vice President
and Chief Financial Officer,
November 8, 1943 Whitman Corporation
(until 1998).
- ------------------------------------------------------------------------------------------------------------------------------------
Adela Cepeda Independent 12 Years President, 2 Director, Fort
Suite 4975 Director A.C. Advisory, Inc. Dearborn Income
161 N. Clark Street (since 1995). Securities, Inc.,
Chicago, IL 60601 Lincoln National
Income Fund, Inc.,
April 30, 1958 Amalgamated
Bank of Chicago,
AmalgaTrust Co., Inc.
and Wyndham
International, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
12
Principal Number of Other
Name, Position(s) Occupation(s) Portfolios in Fund Directorships
Address Held with Length of Time During Complex Overseen Held by
and Birthdate Registrant Served* Past 5 Years by Director/Officer Director/Officer
- ------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT DIRECTORS (CONTINUED)
Roger J. Deshaies Independent 12 Years Senior Vice President- 2 Director, Partners
Executive Offices Director Finance, Brigham & Health System and
PBB-Admin. 4 Women's Hospital Lincoln National
c/o Receiving (since 1998); Income Fund, Inc.
29 Shattuck Street Senior Vice President -
Boston, MA 02115 Finance, Parkview
Health System (until 1998).
August 5, 1949
- ------------------------------------------------------------------------------------------------------------------------------------
Daniel R. Toll Independent 18 Years President, Heller 2 Director, Lincoln
560 Green Bay Road Director International Corporation National Income
Suite 300 (until 1984). Fund, Inc.
Winnetka, IL 60093
December 3, 1927
- ------------------------------------------------------------------------------------------------------------------------------------
OFFICERS
Michael P. Bishof Chief Financial 5 Years Mr. Bishof has served in 2 None
2005 Market Street Officer/Treasurer various executive
Philadelphia, PA 19103 capacities at different
times at Delaware
August 18, 1962 Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
David F. Connor Secretary 4 Years Vice President and 2 None
2005 Market Street Deputy General Counsel,
Philadelphia, PA 19103 Delaware Investments
(since 2000); Vice
December 2, 1963 President and Assistant
General Counsel,
Prudential Investments
(1998-2000); Associate,
Drinker Biddle & Reath
LLP (until 1998).
- ------------------------------------------------------------------------------------------------------------------------------------
* The Directors of the Fund serve for a one-year term. At each annual meeting
of shareholders, the entire Board of Directors will be elected and each
newly elected Director will serve for a one-year term and until his or her
successor is elected and qualified.
(1) Executive Officer of the Fund's investment advisor.
(2) Mr. Burridge is considered to be an "interested director" by virtue of his
affiliation with a registered broker-dealer that has executed portfolio
transactions for and sold shares of investment companies managed by the
Fund's investment advisor.
(3) Mr. McMeekin is considered to be an "interested director" because he
currently owns stock of Lincoln National Corporation (LNC), of which the
Fund's investment advisor is a wholly-owned subsidiary.
Delaware
Investments(SM)
- --------------------------------------
A member of Lincoln Financial Group(R)
This annual report is for the information of Lincoln National Convertible
Securities Fund, Inc. shareholders. The return and principal value of an
investment in the Fund will fluctuate so that shares, when resold, may be worth
more or less than their original cost.
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940 that the Fund may, from time to time, purchase shares of its
own Common Stock on the open market at market prices.
Corporate Information Automatic Dividend Reinvestment Plan
Investment Advisor Any registered shareholder of Lincoln dividend period and must be received by
Delaware Management Company National Convertible Securities Fund, the Plan agent not less than five
2005 Market Street Inc. may participate in the Automatic business days and no more than 30 days
Philadelphia, PA 19103-7094 Dividend Reinvestment Plan (the "Plan"). prior to the dividend payment date.
If you are a beneficial owner whose
Administrator shares are registered in the name of Shares will be held by the Plan agent.
Delaware Service Company, Inc. another (e.g., in a broker's "street You will receive a statement each time
2005 Market Street name") and desire to participate in the shares are distributed by the Fund or
Philadelphia, PA 19103-7094 Plan, you must become a registered purchased for you.
holder by transferring the shares to
Independent Auditors your name. There is no direct charge for Plan
Ernst & Young LLP participation. The administrative costs
2001 Market Street To participate in the Plan, you must of the Plan are borne by the Fund.
Philadelphia, PA 19103-7042 complete and forward an authorization
card to Mellon Investor Services LLC, If your dividends and other
Dividend Disbursing Agent, Transfer the Plan agent. This card authorizes the distributions are reinvested, they will
Agent and Reinvestment Plan Agent Plan agent to receive your dividends and be subject to capital gains and income
Mellon Investor Services LLC other distributions from the Fund in taxes as if they were paid to you in
Overpeck Centre additional shares of common stock. The cash.
85 Challenger Road additional shares will be issued by the
Ridgefield Park, NJ 07666 Fund, if the net asset value per share You may terminate your participation in
800 851-9677 is equal to or lower than the market the Plan at any time by giving written
price of the Fund's common stock plus notice to the Plan agent.
Stock Exchange brokerage commissions. If the net asset
The Fund's stock is traded on the New York value per share is higher than the For additional information on the Plan,
Stock Exchange (NYSE) under the symbol LNV. market price of the Fund's common stock please write to:
plus brokerage commissions, the Mellon Investor Services LLC
For Securities Dealers and Financial additional shares will be purchased in Overpeck Centre
Institutions Representatives the open market and the cost of the 85 Challenger Road
800 362-7500 brokerage commissions will be charged to Ridgefield Park, NJ 07666
each participant on a pro-rata basis. or call 800 851-9677.
The Plan also allows the Plan agent to
accept optional cash contributions. Each
optional cash contribution by a
participant must be not less than $100
and not more than $3,000 per
- --------------------------------------------------------------------------------
A description of the policies and procedures that the Fund uses to determine how
to vote proxies (if any) relating to portfolio securities is available without
charge (i) upon request, by calling 800 523-1918; (ii) on the Fund's website at
http://www.delawareinvestments.com; and (iii) on the Commission's website at
http://www.sec.gov.; and beginning no later than August 31, 2004, information
(if any) regarding how the Fund voted proxies relating to portfolio securities
during the most recent 12-month period ended June 30 is available without charge
(i) through the Fund's website at http://www.delawareinvestments.com; and (ii)
on the Commission's website at http://www.sec.gov.
- --------------------------------------------------------------------------------
(8534) Printed in the USA
AR-LNCS [12/03] IVES 2/04 J9542 EXP: 2/05
Item 2. Code of Ethics
The registrant has adopted a code of ethics that applies to the
registrant's principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant or a
third party. A copy of the registrant's Code of Business Ethics has been posted
on Delaware Investments' internet website at www.delawareinvestments.com. Any
amendments to the Code of Business Ethics, and information on any waiver from
its provisions granted by the registrant, will also be posted on this website
within five business days of such amendment or waiver and will remain on the
website for at least 12 months.
Item 3. Audit Committee Financial Expert
The registrant's Board of Directors has determined that Roger J.
Deshaies, Chairman of the registrant's Audit Committee, is an audit committee
financial expert, as defined below. For purposes of this item, an "audit
committee financial expert" is a person who has the following attributes:
a. An understanding of generally accepted accounting principles and
financial statements;
b. The ability to assess the general application of such principles in
connection with the accounting for estimates, accruals, and reserves;
c. Experience preparing, auditing, analyzing, or evaluating financial
statements that present a breadth and level of complexity of accounting issues
that are generally comparable to the breadth and complexity of issues that can
reasonably be expected to be raised by the registrant's financial statements, or
experience actively supervising one or more persons engaged in such activities;
d. An understanding of internal controls and procedures for financial
reporting; and
e. An understanding of audit committee functions.
An "audit committee financial expert" shall have acquired such attributes
through:
a. Education and experience as a principal financial officer, principal
accounting officer, controller, public accountant, or auditor or experience in
one or more positions that involve the performance of similar functions;
b. Experience actively supervising a principal financial officer,
principal accounting officer, controller, public accountant, auditor, or person
performing similar functions;
c. Experience overseeing or assessing the performance of companies or
public accountants with respect to the preparation, auditing, or evaluation of
financial statements; or
d. Other relevant experience.
The registrant's Board of Directors has also determined that Mr.
Deshaies is independent. In order to be "independent" for purposes of this item,
the Audit Committee member may not: (i) other than in his or her capacity as a
member of the Board of Directors or any committee thereof, accept directly or
indirectly any consulting, advisory or other compensatory fee from the issuer;
or (ii) be an "interested person" of the registrant as defined in Section
2(a)(19) of the Investment Company Act of 1940.
Item 4. Principal Accountant Fees and Services
(a) Audit fees.
The aggregate fees billed for services provided to the Registrant by
its independent auditors for the audit of the Registrant's annual financial
statements and for services normally provided by the independent auditors in
connection with statutory and regulatory filings or engagements were $27,000
for the fiscal year ended December 31, 2003.
The aggregate fees billed for services provided to the Registrant by
its former independent auditors for the audit of the Registrant's annual
financial statements and for services normally provided by the former
independent auditors in connection with statutory and regulatory filings or
engagements were $33,150 for the fiscal year ended December 31, 2002.
(b) Audit-related fees.
The aggregate fees billed by the Registrant's independent auditors for
services relating to the performance of the audit of the Registrant's financial
statements and not reported under paragraph (a) of this Item were $0 for the
fiscal year ended December 31, 2003.
The aggregate fees billed for services relating to the performance of
the audit of the financial statements of the Registrant's investment adviser and
other service providers under common control with the adviser and that relate
directly to the operations or financial reporting of the Registrant were $0 for
the Registrant's fiscal year ended December 31, 2003.
The aggregate fees billed by the Registrant's former independent
auditors for services relating to the performance of the audit of the
Registrant's financial statements and not reported under paragraph (a) of this
Item were $0 for the fiscal year ended December 31, 2002.
The aggregate fees billed by the Registrant's former independent
auditors for services relating to the performance of the audit of the financial
statements of the Registrant's investment adviser and other service providers
under common control with the adviser and that relate directly to the operations
or financial reporting of the Registrant were $0 for the Registrant's fiscal
year ended December 31, 2002.
(c) Tax fees.
The aggregate fees billed by the Registrant's independent auditors for
tax-related services provided to the Registrant were $1,500 for the fiscal year
ended December 31, 2003. The percentage of these fees relating to services
approved by the Registrant's Audit Committee pursuant to the de minimis
exception from the pre-approval requirement in Rule 2-01(c)(7)(i)(C) of
Regulation S-X was 0%. These tax-related services were as follows: review of
income tax and excise tax returns.
The aggregate fees billed by the Registrant's independent auditors for
tax-related services provided to the Registrant's investment adviser and
other service providers under common control with the adviser and that relate
directly to the operations or financial reporting of the Registrant were
$0 for the Registrant's fiscal year ended December 31, 2003.
The aggregate fees billed by the Registrant's former independent
auditors for tax-related services provided to the Registrant were $6,150 for the
fiscal year ended December 31, 2002. The percentage of these fees relating to
services approved by the Registrant's Audit Committee pursuant to the de minimis
exception from the pre-approval requirement in Rule 2-01(c)(7)(i)(C) of
Regulation S-X was 0%. These tax-related services were as follows: review of
income tax and excise tax returns; and tax advisory services.
The aggregate fees billed by the Registrant's former independent
auditors for tax-related services provided to the Registrant's adviser and other
service providers under common control with the adviser and that relate directly
to the operations or financial reporting of the Registrant were $0 for the
Registrant's fiscal year ended December 31, 2002.
(d) All other fees.
The aggregate fees billed for all services provided by the independent
auditors to the Registrant other than those set forth in paragraphs (a), (b) and
(c) of this Item were $0 for the fiscal year ended December 31, 2003.
The aggregate fees billed for all services other than those set forth
in paragraphs (b) and (c) of this Item provided by the Registrant's independent
auditors to the Registrant's adviser and other service providers under common
control with the adviser and that relate directly to the operations or financial
reporting of the Registrant were $0 for the Registrant's fiscal year ended
December 31, 2003.
The aggregate fees billed for all services provided by the former
independent auditors to the Registrant other than those set forth in paragraphs
(a), (b) and (c) of this Item were $0 for the fiscal year ended December 31,
2002.
The aggregate fees billed for all services other than those set forth
in paragraphs (b) and (c) of this Item provided by the Registrant's former
independent auditors to the Registrant's adviser and other service providers
under common control with the adviser and that relate directly to the operations
or financial reporting of the Registrant were $0 for the Registrant's fiscal
year ended December 31, 2002.
(e) The Registrant's Audit Committee has not established pre-approval
policies and procedures as permitted by Rule 2-01(c)(7)(i)(B) of
Regulation S-X.
(f) Not applicable.
(g) The aggregate non-audit fees billed by the Registrant's current and
former independent auditors for services rendered to the Registrant and
to its investment adviser and other service providers under common
control with the adviser were $155,400 and $39,300 for the Registrant's
fiscal years ended December 31, 2003 and December 31, 2002,
respectively.
(h) In connection with its selection of the independent auditors, the
Registrant's Audit Committee has considered the independent auditors' provision
of non-audit services to the Registrant's investment adviser and other service
providers under common control with the adviser that were not required to be
pre-approved pursuant to Rule 2-01(c)(7)(ii) of Regulation S-X. The Audit
Committee has determined that the independent auditors' provision of these
services is compatible with maintaining the auditors' independence.
Item 5. Audit Committee of Listed Registrants
The registrant has a separately-designated standing Audit Committee
established in accordance with Section 3(a)(58)(A) of the Securities Exchange
Act of 1934. The members of the registrant's Audit Committee are Roger J.
Deshaies, Thomas L. Bindley, Adela Cepeda and Daniel R. Toll.
Item 6. [Reserved]
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies
The registrant has formally delegated to its investment adviser (the
"Adviser") the ability to make all proxy voting decisions in relation to
portfolio securities held by the registrant. If and when proxies need to be
voted on behalf of the registrant, the Adviser will vote such proxies pursuant
to its Proxy Voting Policies and Procedures (the "Procedures"). The Adviser has
established a Proxy Voting Committee (the "Committee") which is responsible for
overseeing the Adviser's proxy voting process for the registrant. One of the
main responsibilities of the Committee is to review and approve the Procedures
to ensure that the Procedures are designed to allow the Adviser to vote proxies
in a manner consistent with the goal of voting in the best interests of the
registrant.
In order to facilitate the actual process of voting proxies, the
Adviser has contracted with Institutional Shareholder Services ("ISS") to
analyze proxy statements on behalf of the registrant and other Adviser clients
and vote proxies generally in accordance with the Procedures. The Committee is
responsible for overseeing ISS's proxy voting activities. If a proxy has been
voted for the registrant, ISS will create a record of the vote. Beginning no
later than August 31, 2004, information (if any) regarding how the registrant
voted proxies relating to portfolio securities during the most recent 12-month
period ended June 30 is available without charge (i) through the registrant's
website at http://www.delawareinvestments.com; and (ii) on the Commission's
website at http://www.sec.gov.
The Procedures contain a general guideline that recommendations of
company management on an issue (particularly routine issues) should be given a
fair amount of weight in determining how proxy issues should be voted. However,
the Adviser will normally vote against management's position when it runs
counter to its specific Proxy Voting Guidelines (the "Guidelines"), and the
Adviser will also vote against management's recommendation when it believes that
such position is not in the best interests of the registrant.
As stated above, the Procedures also list specific Guidelines on how to
vote proxies on behalf of the registrant. Some examples of the Guidelines are as
follows: (i) generally vote for shareholder proposals asking that a majority or
more of directors be independent; (ii) generally vote against proposals to
require a supermajority shareholder vote; (iii) votes on mergers and
acquisitions should be considered on a case-by-case basis, determining whether
the transaction enhances shareholder value; (iv) generally vote against
proposals to create a new class of common stock with superior voting rights; (v)
generally vote re-incorporation proposals on a case-by-case basis; (vi) votes
with respect to management compensation plans are determined on a case-by-case
basis; and (vii) generally vote for reports on the level of greenhouse gas
emissions from a company's operations and products.
Because the registrant has delegated proxy voting to the Adviser, the
registrant is not expected to encounter any conflict of interest issues
regarding proxy voting and therefore does not have procedures regarding this
matter. However, the Adviser does have a section in its Procedures that
addresses the possibility of conflicts of interest. Most proxies which the
Adviser receives on behalf of the registrant are voted by ISS in accordance with
the Procedures. Because almost all registrant proxies are voted by ISS pursuant
to the pre-determined Procedures, it normally will not be necessary for the
Adviser to make an actual determination of how to vote a particular proxy,
thereby largely eliminating conflicts of interest for the Adviser during the
proxy voting process. In the very limited instances where the Adviser is
considering voting a proxy contrary to ISS's recommendation, the Committee will
first assess the issue to see if there is any possible conflict of interest
involving the Adviser or affiliated persons of the Adviser. If a member of the
Committee has actual knowledge of a conflict of interest, the Committee will
normally use another independent third party to do additional research on the
particular proxy issue in order to make a recommendation to the Committee on how
to vote the proxy in the best interests of the registrant. The Committee will
then review the proxy voting materials and recommendation provided by ISS and
the independent third party to determine how to vote the issue in a manner which
the Committee believes is consistent with the Procedures and in the best
interests of the registrant.
Item 8. Purchases of Equity Securities by Closed-End Management Investment
Companies and Affiliated Purchasers
Required only for periods ending on or after June 15, 2004.
Item 9. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 10. Controls and Procedures
The registrant's principal executive officer and principal financial
officer have evaluated the registrant's disclosure controls and procedures
within 90 days of the filing of this report and have concluded that they are
effective in providing reasonable assurance that the information required to be
disclosed by the registrant in its reports or statements filed under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the Securities and
Exchange Commission.
There were no significant changes in the registrant's internal control
over financial reporting that occurred during the registrant's last fiscal
half-year (the registrant's second fiscal half-year in the case of an annual
report) that have materially affected, or are reasonably likely to materially
affect, the registrant's internal control over financial reporting.
Item 11. Exhibits
(a) (1) Code of Ethics
Not applicable.
(2) Certifications of Principal Executive Officer and Principal Financial
Officer pursuant to Rule 30a-2 under the Investment Company Act of 1940
are attached hereto as Exhibit 99.CERT.
(3) Written solicitations to purchase securities pursuant to Rule 23c-1
under the Securities Exchange Act of 1934.
Not applicable.
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 are
furnished herewith as Exhibit 99.906CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf, by the undersigned, thereunto duly authorized.
Name of Registrant: Lincoln National Convertible Securities Fund, Inc.
PATRICK P. COYNE
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By: Patrick P. Coyne
Title: President
Date: March 5, 2004
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Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
PATRICK P. COYNE
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By: Patrick P. Coyne
Title: President
Date: March 5, 2004
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MICHAEL P. BISHOF
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By: Michael P. Bishof
Title: Chief Financial Officer
Date: March 5, 2004
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