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: 811-4659
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: December 31
Date of reporting period: December 31, 2004
Item 1. Reports to Stockholders
Delaware
Investments(SM)
--------------------------------------
CLOSED END A member of Lincoln Financial Group(R)
ANNUAL REPORT DECEMBER 31, 2004
- --------------------------------------------------------------------------------
LINCOLN NATIONAL CONVERTIBLE SECURITIES FUND, INC.
{LOGO] POWERED BY RESEARCH.(SM)
TABLE
OF CONTENTS
- --------------------------------------------------------------------
PORTFOLIO MANAGEMENT REVIEW 1
- --------------------------------------------------------------------
PERFORMANCE SUMMARY 3
- --------------------------------------------------------------------
SECTOR ALLOCATION 5
- --------------------------------------------------------------------
FINANCIAL STATEMENTS:
Statement of Net Assets 6
Statement of Operations 8
Statements of Changes in Net Assets 9
Financial Highlights 10
Notes to Financial Statements 11
- --------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM 14
- --------------------------------------------------------------------
OTHER FUND INFORMATION 15
- --------------------------------------------------------------------
BOARD OF DIRECTORS AND OFFICERS 16
- --------------------------------------------------------------------
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)2005 Delaware Distributors, L.P.
PORTFOLIO
MANAGEMENT REVIEW
LINCOLN NATIONAL CONVERTIBLE SECURITIES FUND, INC.
January 10, 2005
FUND MANAGER
Damon J. Andres
Senior Portfolio Manager
Q: HOW DID THE FUND PERFORM VERSUS ITS BENCHMARK INDEX AND FUND PEER GROUP FOR
THE 12-MONTH PERIOD ENDED DECEMBER 31, 2004?
A: Lincoln National Convertible Securities Fund, Inc. returned +5.36% (shares at
net asset value with distributions reinvested) for the fiscal year ended
December 31, 2004. During the same 12-month period, the Fund's benchmark, the
Merrill Lynch Convertible Securities Index, rose +9.61% and its peer group, the
Lipper Closed-End Convertible Securities Funds Average, appreciated +9.68%
(source: Lipper Inc. Both returns are based on market performance during the
period.). The Lipper Closed-End Convertible Securities Funds Average represents
the average return of 13 closed-end convertible securities funds tracked by
Lipper, Inc.
Q: HOW DID CONVERTIBLE SECURITIES PERFORM VERSUS OTHER MAJOR ASSET CLASSES, SUCH
AS STOCKS AND BONDS, FOR THE 12-MONTH PERIOD ENDED DECEMBER 31, 2004?
A: As an asset class, convertible securities outperformed some of the major
domestic stock benchmarks, like the Dow Jones Industrial Average (+5.31%) and
the Nasdaq Composite Index (+9.15%), but trailed the S&P 500 Index (+10.88%),
which is a measure of large-company domestic stocks. Due in measure to a
favorable stock market, convertible bonds outperformed a broad-based pool of
traditional bonds, as measured by the Lehman Brothers Aggregate Bond Index,
which appreciated +4.34% (source: Lipper Inc.).
Q: FOR A PROSPECTIVE INVESTOR, COULD YOU BRIEFLY DESCRIBE HOW CONVERTIBLE BONDS
WORK, AND WHO SHOULD CONSIDER OWNING THEM?
A: Like traditional bonds, convertible bonds can be thought of as long-term
corporate IOUs. They differ given the ability of investors to exchange a
company's convertible bond for its common stock at a designated "conversion"
price. When its market value is far from the conversion price, a convertible
bond typically trades much like a traditional bond, rising in price when
interest rates fall and declining in value as interest rates move up. When the
value of the underlying stock nears its conversion price, a convertible bond
typically begins trading more in line with the underlying common stock.
Convertible bonds generally increase in value when the underlying stock
appreciates in value, albeit to a lesser degree. However, when the underlying
stock declines in value, a convertible bond will generally not decline in value
to the same extent. Convertible securities may appeal to investors seeking both
income and the potential for capital appreciation.
Generally, our investment process involves a focus on the "middle" of the
convertible securities market. We favor total return opportunities, generally
excluding securities that function strictly as debt instruments, as well as
those that behave too much like equities.
Unfortunately, navigating the convertible bond market may be quite a challenge
for investors wishing to buy and sell their own securities. For one, convertible
securities generally trade in an over-the-counter market. This means that
pricing is often not readily available to the non-professional investor, and
that having multiple dealer contacts can be critical to receiving fair trade
execution and pricing. Given the complexity inherent in investing in convertible
securities, we believe that all but the most sophisticated investors should rely
on professional money managers to gain exposure to this asset class.
Q: WHAT WAS THE NATURE OF THE CONVERTIBLE SECURITIES MARKET FOR THE FISCAL YEAR?
A: Within the convertible securities market, speculative-grade convertibles
outperformed their investment-grade counterparts. The Merrill Lynch Speculative
Grade Convertibles Index gained +12.91% for the 12-month period while the
Merrill Lynch Investment Grade Convertibles Index appreciated +7.14%. In
comparing growth versus value-oriented convertibles, the former outperformed the
latter by a wide margin. Merrill Lynch's Growth Convertibles Index gained
+15.20% while Merrill Lynch's Value Convertibles Index rose by +5.66%. By
company size, large-capitalization convertibles were the best performer during
2004. The Merrill Lynch Large Cap Convertibles Index climbed +10.24% while its
Mid Cap Convertibles Index rose +8.89% and the Merrill Lynch Small Cap
Convertibles Index appreciated +8.61%. Lastly, $72 billion in convertibles were
redeemed making 2004 a record year (source: Merrill Lynch).
1
Q: DESCRIBE PERFORMANCE ATTRIBUTION FOR THE FUND FOR THE 12 MONTHS ENDED
DECEMBER 31, 2004.
A: Among market sectors represented in the benchmark index, utilities
convertibles had the best showing in 2004, returning 23 percent (source: Merrill
Lynch & Co.). Among portfolio positions in this group, we closed the fiscal year
holding the convertible bonds and preferred stock of Centerpoint Energy. The
materials and energy sectors each appreciated 12 percent for the fiscal year
(source: Merrill Lynch & Co.), with International Paper Capital and Halliburton,
respectively, representing some of the Fund's larger portfolio weightings at
period-end in these outperforming areas of the convertibles market.
By contrast, the transportation sector underperformed during 2004. The Fund held
two convertible bond positions - ExpressJet Holdings and Northwest Airlines --
in that sector at period-end. The telecommunications sector returned five
percent for the 12-month period (source: Merrill Lynch & Co.). Fairchild
Semiconductor International was our largest convertible bond position
representing the technology sector at period-end, which as a sector returned
just over five percent for the 12-month period (source: Merrill Lynch & Co.).
Q: COULD YOU DESCRIBE SOME OF THE MAJOR COMPONENTS OF THE FUND?
A: Convertible bonds represented approximately 53 percent of the Fund's total
net assets. The Fund's highest weighting in this asset class was the healthcare
and pharmaceutical sector. Convertible preferred stock represented 29 percent of
the Fund's total net assets as of fiscal year-end. The Fund's highest weighting
in this asset class was to the banking, finance, and insurance sector as of
December 31, 2004.
2
PERFORMANCE SUMMARY
LINCOLN NATIONAL CONVERTIBLE SECURITIES FUND, INC.
The performance data quoted represent past performance; past performance does
not guarantee future results. Investment return and principal value will
fluctuate so your shares, when sold, may be worth more or less than their
original cost. Current performance may be lower or higher than the performance
data quoted. A rise/fall in interest rates can have a significant impact on bond
prices and the net asset value (NAV) of the Fund. Funds that invest in bonds can
lose their value as interest rates can rise and an investor can lose principal.
FUND BASICS
As of December 31, 2004 FUND PERFORMANCE
- -------------------------------------------------- Average Annual Total Returns
FUND OBJECTIVE: Through December 31, 2004 10 Years Five Years One Year
The Fund seeks a high level of total return ----------------------------------------------------------------------------
through a combination of capital appreciation At Market Price +8.50% +3.61% +5.12%
and current income. At Net Asset Value +7.40% -1.01% +5.36%
- -------------------------------------------------- ----------------------------------------------------------------------------
TOTAL FUND NET ASSETS:
$87.63 million Returns reflect the reinvestment of all distributions and capital gains tax
- -------------------------------------------------- credits. Distributions are assumed, for this calculation, to be reinvested
NUMBER OF HOLDINGS: at prices obtained under the Fund's dividend reinvestment plan. Fund
65 performance at net asset value reflects reinvestments of distributions at
- -------------------------------------------------- net asset value. Performance does not include any brokerage commissions for
YOUR FUND MANAGER: purchases made since inception.
Damon J. Andres earned a bachelor's degree in
business administration with an emphasis in The performance table does not reflect the deduction of taxes the
finance and accounting from the University of shareholder would pay on Fund distributions or on the sale of Fund shares.
Richmond. Prior to joining Delaware Investments
in 1994, Mr. Andres performed investment Performance of the Fund at net asset value is based on the fluctuations in
consulting services as a Consulting Associate net asset value during the period. Investments in the Fund are not available
with Cambridge Associates, Inc. in Arlington, at net asset value.
Virginia. He is also a CFA charterholder.
- -------------------------------------------------- An expense waiver was in effect for the period shown. Performance would have
NYSE SYMBOL: been lower had the expense waiver not been in effect.
LNV
- --------------------------------------------------
3
PERFORMANCE SUMMARY
LINCOLN NATIONAL CONVERTIBLE SECURITIES FUND, INC.
PERFORMANCE OF A $10,000 INVESTMENT
December 31, 1994 to December 31, 2004
GROWTH OF $10,000 PLOT POINTS
FOR THE LINCOLN NATIONAL
(CLOSED-END)
CONVERTIBLE SECURITIES FUND
LINCOLN NATIONAL MERRILL LYNCH LINCOLN CONVERTIBLE LINCOLN CONVERTIBLE
(CLOSED-END) CONVERTIBLE INDEX SECURITIES SECURITIES
CONVERTIBLE SECURITIES FUND SECURITIES INDEX RETURNS FUND @ NAV FUND @ MARKET
- ------------------------------------------------------------------------------------------------------------
$10,000.00
31-Dec-95 $12,475.00 0.2475 $11,959.00 $12,009.00
31-Dec-96 $14,258.93 0.143 $14,402.22 $15,191.38
31-Dec-97 $16,965.27 0.1898 $16,299.00 $18,269.16
31-Dec-98 $18,358.12 0.0821 $15,808.40 $15,570.80
31-Dec-99 $26,494.44 0.4432 $21,907.28 $18,929.43
31-Dec-00 $23,394.59 -0.117 $19,079.05 $19,453.77
31-Dec-01 $22,470.50 -0.0395 $19,464.44 $19,953.73
31-Dec-02 $21,358.21 -0.0495 $15,659.14 $18,088.06
31-Dec-03 $26,868.63 0.258 $19,763.41 $21,501.28
31-Dec-04 $29,149.78 0.0849 $20,373.00 $22,602.14
Chart assumes $10,000 invested on December 31, 1994 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.
An expense waiver was in effect for the period shown. Performance would have
been lower had the expense waiver not been in effect.
The performance graph does not reflect the deduction of taxes the shareholder
would pay on Fund distributions or on the sale of Fund shares.
MARKET PRICE VS. NET ASSET VALUE
December 31, 2003 to December 31, 2004
LC-LINCOLN CLOSED END CONVERTIBLE SECURITIES
JAN
Date NAV Market
- ---- --- ------
12/31/03 14.93 13.50
01/30/04 15.17 14.04
02/27/04 15.19 14.07
03/26/04 15.18 13.65
04/30/04 14.72 12.60
05/28/04 14.65 12.75
06/30/04 14.78 12.69
07/30/04 14.4 12.75
08/31/04 14.37 12.39
09/30/04 14.46 12.70
10/29/04 14.37 12.87
11/30/04 14.91 13.13
12/31/04 15.02 13.47
Past performance is not a guarantee of future results.
4
SECTOR ALLOCATION As of December 31, 2004
LINCOLN NATIONAL CONVERTIBLE SECURITIES FUND, INC.
The SEC adopted a requirement that all funds present their categories of
portfolio holdings in a table, chart, or graph format in their annual and
semiannual shareholder reports, whether or not a schedule of investments is
utilized. The following chart lists the Fund's categories of portfolio holdings
as a percentage of total net assets and is provided in compliance with such
requirement.
PERCENTAGE
SECTOR OF NET ASSETS
- ---------------------------------------------------------------------
CONVERTIBLE BONDS 53.07%
- ---------------------------------------------------------------------
Automobiles & Automotive Parts 1.14%
Banking, Finance & Insurance 2.21%
Cable, Media & Publishing 6.21%
Computers & Technology 4.97%
Diversified Manufacturing 2.00%
Electronics & Electrical Equipment 0.83%
Energy 4.38%
Engineering & Construction 1.96%
Food, Beverage & Tobacco 4.56%
Healthcare & Pharmaceuticals 12.50%
Leisure, Lodging & Entertainment 2.00%
Retail 4.97%
Transportation & Shipping 2.02%
Utilities 3.32%
- ---------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK 29.51%
- ---------------------------------------------------------------------
Automobiles & Automotive Parts 3.82%
Banking, Finance & Insurance 6.94%
Cable, Media & Publishing 1.86%
Consumer Products 0.81%
Energy 4.95%
Environmental Services 0.79%
Food, Beverage & Tobacco 1.54%
Paper & Forest Products 6.13%
Utilities 2.67%
- ---------------------------------------------------------------------
COMMON STOCK 12.20%
- ---------------------------------------------------------------------
Aerospace & Defense 1.48%
Cable, Media & Publishing 1.14%
Electronics & Electrical Equipment 2.33%
Leisure, Lodging & Entertainment 2.21%
Real Estate 5.04%
- ---------------------------------------------------------------------
PREFERRED STOCK 3.75%
- ---------------------------------------------------------------------
Energy 1.39%
Real Estate 2.36%
- ---------------------------------------------------------------------
COMMERCIAL PAPER 2.51%
- ---------------------------------------------------------------------
TOTAL MARKET VALUE OF SECURITIES 101.04%
- ---------------------------------------------------------------------
LIABILITIES NET OF RECEIVABLES AND OTHER ASSETS (1.04%)
- ---------------------------------------------------------------------
TOTAL NET ASSETS 100.00%
- ---------------------------------------------------------------------
5
LINCOLN NATIONAL CONVERTIBLE SECURITIES FUND, INC.
STATEMENT December 31, 2004
OF NET ASSETS
Principal Market
Amount Value
- --------------------------------------------------------------------------------
CONVERTIBLE BONDS - 53.07%
Automobiles & Automotive Parts - 1.14%
Sonic Automotive 5.25% 5/7/09 $1,000,000 $ 1,000,000
-----------
1,000,000
-----------
Banking, Finance & Insurance - 2.21%
PMI Group 2.50% 7/15/21 1,750,000 1,940,313
-----------
1,940,313
-----------
Cable, Media & Publishing - 6.21%
EchoStar Communications 5.75% 5/15/08 500,000 514,375
+EchoStar Communications 144A
5.75% 5/15/08 500,000 514,375
Liberty Media (Convertible to Motorola)
3.50% 1/15/31 1,000,000 948,750
Liberty Media (Convertible to Viacom)
3.25% 3/15/31 1,000,000 986,250
Mediacom Communications 5.25% 7/1/06 2,500,000 2,474,999
-----------
5,438,749
-----------
Computers & Technology - 4.97%
+EMC 144A 4.50% 4/1/07 1,000,000 1,130,000
Fairchild Semiconductor International
5.00% 11/1/08 1,650,000 1,672,687
*+ON Semiconductor 144A
0.421% 4/15/24 2,000,000 1,552,500
-----------
4,355,187
-----------
Diversified Manufacturing - 2.00%
+Tyco International Group 144A
2.75% 1/15/18 1,100,000 1,749,000
-----------
1,749,000
-----------
Electronics & Electrical Equipment - 0.83%
+Solectron 144A 0.50% 2/15/34 825,000 728,063
-----------
728,063
-----------
Energy - 4.38%
Halliburton 3.125% 7/15/23 1,400,000 1,729,000
Pride International 3.25% 5/1/33 1,140,000 1,241,175
Schlumberger 2.125% 6/1/23 800,000 868,000
-----------
3,838,175
-----------
Engineering & Construction - 1.96%
Fluor 1.50% 2/15/24 1,500,000 1,717,500
-----------
1,717,500
-----------
Food, Beverage & Tobacco - 4.56%
*Brinker International 2.273% 10/10/21 2,000,000 1,295,000
+Bunge Limited 144A 3.75% 11/15/22 1,500,000 2,705,625
-----------
4,000,625
-----------
Healthcare & Pharmaceuticals - 12.50%
+AmerisourceBergen 144A 5.00% 12/1/07 900,000 1,001,250
+Cephalon 144A 2.50% 12/15/06 1,000,000 985,000
+CV Therapeutics 144A 4.75% 3/7/07 2,000,000 2,069,999
Fisher Scientific 3.25% 3/1/24 1,500,000 1,689,375
*Laboratory Corporation of America
1.591% 9/11/21 1,000,000 776,250
*+Laboratory Corporation of America 144A
2.00% 9/11/21 1,550,000 1,203,188
Province Healthcare 4.25% 10/10/08 1,400,000 1,422,750
++Wyeth 1.36% 1/15/24 1,750,000 1,802,517
-----------
10,950,329
-----------
Principal Market
Amount Value
- --------------------------------------------------------------------------------
CONVERTIBLE BONDS (continued)
Leisure, Lodging & Entertainment - 2.00%
+Regal Entertainment Group 144A
3.75% 5/15/08 $1,270,000 $ 1,757,363
-----------
1,757,363
-----------
Retail - 4.97%
++Lowes Companies 0.861% 10/19/21 1,250,000 1,321,875
+Saks 144A 2.00% 3/15/24 1,275,000 1,265,438
*TJX 1.75% 2/13/21 2,000,000 1,765,000
-----------
4,352,313
-----------
Transportation & Shipping - 2.02%
+ExpressJet Holdings 144A 4.25% 8/1/23 750,000 769,688
+Northwest Airlines 144A 7.625% 11/15/23 1,250,000 1,004,687
-----------
1,774,375
-----------
Utilities - 3.32%
CenterPoint Energy 3.75% 5/15/23 600,000 689,250
+CenterPoint Energy 144A 3.75% 5/15/23 1,930,000 2,217,088
-----------
2,906,338
-----------
TOTAL CONVERTIBLE BONDS
(cost $41,414,889) 46,508,330
==========
Number of
Shares
- --------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK - 29.51%
- --------------------------------------------------------------------------------
Automobiles & Automotive Parts - 3.82%
Ford Capital Trust II 6.50% 20,000 1,055,800
General Motors 5.25% 70,000 1,614,900
Tower Automotive Capital Trust 6.75% 60,650 561,013
+Tower Automotive Capital Trust 144A 6.75% 12,125 112,156
-----------
3,343,869
-----------
Banking, Finance & Insurance - 6.94%
Chubb 7.00% 85,000 2,549,999
Lehman Brothers Holdings 6.25% 47,000 1,280,750
+Washington Mutual 144A 5.375% 40,000 2,255,840
-----------
6,086,589
-----------
Cable, Media & Publishing - 1.86%
Interpublic Group 5.375% 33,200 1,626,800
-----------
1,626,800
-----------
Consumer Products - 0.81%
Newell Financial Trust I 5.25% 15,000 706,875
-----------
706,875
-----------
Energy - 4.95%
Chesapeake Energy 6.00% 53,260 878,790
El Paso Energy Capital Trust I 4.75% 34,600 1,269,820
Unocal Capital Trust 6.25% 9,900 511,088
+Williams 144A 5.50% 20,000 1,680,000
-----------
4,339,698
-----------
Environmental Services - 0.79%
Allied Waste Industries 6.25% 13,100 690,501
-----------
690,501
-----------
Food, Beverage & Tobacco - 1.54%
Constellation Brands 5.75% 36,000 1,354,320
-----------
1,354,320
-----------
6
LINCOLN NATIONAL CONVERTIBLE SECURITIES FUND, INC.
STATEMENT
OF NET ASSETS (CONTINUED)
Number of Market
Shares Value
- --------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK (continued)
Paper & Forest Products - 6.13%
International Paper Capital 5.25% 65,000 $ 3,290,625
Temple-Inland 7.50% 37,000 2,083,100
-----------
5,373,725
-----------
Utilities - 2.67%
Aquila 6.75% 16,000 550,000
CenterPoint Energy 2.00% 26,000 961,818
+NRG Energy 144A 4.00% 750 826,875
-----------
2,338,693
-----------
TOTAL CONVERTIBLE PREFERRED STOCK
(cost $25,939,983) 25,861,070
-----------
COMMON STOCK - 12.20%
Aerospace & Defense - 1.48%
Northrop Grumman 23,963 1,302,629
-----------
1,302,629
-----------
Cable, Media & Publishing - 1.14%
**Cablevision Systems Class A 40,000 996,000
-----------
996,000
-----------
Electronics & Electrical Equipment - 2.33%
**Benchmark Electronics 47,878 1,632,640
**Solectron 76,452 407,489
-----------
2,040,129
-----------
Leisure, Lodging & Entertainment - 2.21%
**Jameson Inns 985,000 1,940,450
-----------
1,940,450
-----------
Real Estate - 5.04%
American Home Mortgage Holdings 94,500 3,236,625
Sunset Financial Resources 113,100 1,177,371
-----------
4,413,996
-----------
TOTAL COMMON STOCK (cost $9,635,883) 10,693,204
===========
PREFERRED STOCK - 3.75%
Energy - 1.39%
Chesapeake Energy 5.00% 10,000 1,211,250
-----------
1,211,250
-----------
Real Estate - 2.36%
SL Green Realty 7.625% 80,000 2,070,000
-----------
2,070,000
-----------
TOTAL PREFERRED STOCK (cost $3,000,000) 3,281,250
===========
Principal
Amount
- --------------------------------------------------------------------------------
COMMERCIAL PAPER - 2.51%
*Starbird Funding 2.21% 1/3/05 $1,200,000 1,199,851
*Steamboat Funding 2.34% 1/6/05 1,000,000 999,675
-----------
TOTAL COMMERCIAL PAPER (cost $2,199,526) 2,199,526
-----------
Market
Value
- --------------------------------------------------------------------------------
TOTAL MARKET VALUE OF SECURITIES - 101.04%
(cost $82,190,281) $ 88,543,380
LIABILITIES NET OF RECEIVABLES AND
OTHER ASSETS - (1.04%) (909,446)
------------
NET ASSETS APPLICABLE TO 5,832,823 COMMON SHARES
($0.001 PAR VALUE) OUTSTANDING; EQUIVALENT TO
$15.02 PER SHARE - 100.00% $ 87,633,934
============
COMPONENTS OF NET ASSET AT DECEMBER 31, 2004:
Paid in capital $110,735,924
Accumulated net realized loss on investments (29,455,089)
Net unrealized appreciation of investments 6,353,099
------------
Total net assets $ 87,633,934
============
*The interest rate shown is the yield at the time of purchase.
**Non-income producing security for the year ended December 31, 2004.
+Security exempt from registration under Rule 144A of the Securities Act of
1933. See Note G in "Notes to Financial Statements."
++Variable rate notes. The interest rate shown is the rate as of December 31,
2004.
See accompanying notes
7
LINCOLN NATIONAL CONVERTIBLE SECURITIES FUND, INC.
STATEMENT Year Ended December 31, 2004
OF OPERATIONS
INVESTMENT INCOME:
Dividends $2,201,909
Interest 2,002,759 $4,204,668
---------- ----------
EXPENSES:
Management fees 760,058
Directors fees 123,063
Legal fees 76,320
Stock transfer & dividend disbursing fees 47,500
Reports to shareholders 45,750
Audit and related fees 27,904
NYSE fees 25,000
Proxy fees 12,500
Custodian fees 11,108
Pricing fees 1,154
Other 9,022 1,139,379
----------
Less expenses waived (12,539)
Less expense paid indirectly (1,446)
----------
Total expenses 1,125,394
----------
NET INVESTMENT INCOME 3,079,274
----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 2,624,954
Net change in unrealized appreciation/
depreciation of investments (1,166,613)
----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 1,458,341
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $4,537,615
==========
See accompanying notes
8
LINCOLN NATIONAL CONVERTIBLE SECURITIES FUND, INC.
STATEMENTS
OF CHANGES IN NET ASSETS
Year Ended
12/31/04 12/31/03
----------- -----------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS:
Net investment income $ 3,079,274 $ 2,558,728
Net realized gain (loss) on investments 2,624,954 (6,370,418)
Net change in unrealized appreciation/depreciation of investments (1,166,613) 22,513,794
----------- -----------
Net increase in net assets resulting from operations 4,537,615 18,702,104
----------- -----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (2,087,694) (2,093,627)
Net realized gain on investments (1,878,626) --
Return of capital -- (2,802,895)
----------- -----------
(3,966,320) (4,896,522)
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds for shares issued under dividend reinvestment plan -- 85,494
----------- -----------
Increase in net assets derived from capital share transactions -- 85,494
----------- -----------
Net Increase in Net Assets 571,295 13,891,076
----------- -----------
NET ASSETS:
Beginning of year 87,062,639 73,171,563
----------- -----------
End of year (including distributions in excess of net
investment income for book purposes of
$-- and $991,580, respectively) $87,633,934 $87,062,639
=========== ===========
See accompanying notes
9
FINANCIAL
HIGHLIGHTS
Selected data for each share of the Fund outstanding
throughout each period were as follows:
LINCOLN NATIONAL CONVERTIBLE SECURITIES FUND, INC.
Year Ended
12/31/04 12/31/03 12/31/02 12/31/01 12/31/00(2)
NET ASSET VALUE, BEGINNING OF PERIOD $14.930 $12.560 $16.760 $17.190 $21.590
INCOME (LOSS) FROM INVESTMENT OPERATIONS:(1)
Net investment income 0.528 0.439 0.560 0.830 0.910
Anti-dilutive impact of capital shares repurchase -- -- 0.010 0.110 0.120
Net realized and unrealized gain (loss)
on investments (net of taxes) 0.242 2.771 (3.840) (0.610) (4.550)
------- ------- ------- ------- -------
Total from investment operations 0.770 3.210 (3.270) 0.330 (3.520)
------- ------- ------- ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS TO
COMMON SHAREHOLDERS:
From net investment income (0.358) (0.359) (0.820) (0.760) (0.880)
From net realized gain on investments (0.322) -- -- -- --
From return of capital -- (0.481) (0.110) -- --
------- ------- ------- ------- -------
Total dividends and distributions (0.680) (0.840) (0.930) (0.760) (0.880)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $15.020 $14.930 $12.560 $16.760 $17.190
======= ======= ======= ======= =======
Per Share Market Value, End of Period $13.470 $13.500 $12.090 $14.360 $14.750
Total Investment Return Based on Market Value 5.12% 18.87% (9.35%) 2.57% (2.62%)
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $87,634 $87,063 $73,172 $98,338 $106,227
Ratio of expenses to average net assets 1.31% 1.46% 1.46% 1.54% 1.23%
Ratio of expenses to average net assets prior to
expense waiver and expenses paid indirectly 1.32% 1.53% 1.76% 1.74% 1.28%
Ratio of net investment income to average net assets 3.58% 3.18% 3.89% 4.88% 4.10%
Ratio of net investment income to average net assets
prior to expense waiver and expenses paid indirectly 3.57% 3.11% 3.59% 4.68% 4.05%
Portfolio turnover 42% 56% 77% 124% 121%
(1) The average shares outstanding method has been applied for per share
information.
(2) Total investment return is based on market value and does not include the
impact of the capital gains tax credit of $0.816 per share.
See accompanying notes
10
LINCOLN NATIONAL CONVERTIBLE SECURITIES FUND, INC.
NOTES December 31, 2004
TO FINANCIAL STATEMENTS
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 accounting policies are in accordance with U.S. generally accepted
accounting principles and are consistently followed by the Fund.
Investments -- Equity securities, except those traded on the Nasdaq Stock
Market, Inc. (NASDAQ), are valued at the last quoted sales price as of the 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 closure, 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.
The current annualized rate is $0.68 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 U.S.
generally accepted accounting principles 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 and premiums
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, 2004 were approximately $1,446. The expense paid under
this agreement is included in custodian fees on the Statement of Operations with
the corresponding expense offset shown as "expense paid indirectly".
NOTE B -- INVESTMENTS
For the year ended December 31, 2004, the Fund made purchases of $34,845,114 and
sales of $36,306,942 of investment securities other than short-term investments.
At December 31 2004, the cost of investments for federal income tax purposes was
$82,190,281. At December 31, 2004, net unrealized appreciation was $6,353,099,
of which $10,993,394 related to unrealized appreciation of investments and
$4,640,295 related to unrealized depreciation of investments.
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 U.S. generally
accepted accounting principles. Additionally net short-term gains on sales of
investment securities are treated as ordinary income for federal income tax
purposes. The distributions made by the Fund during the fiscal year ended
December 31, 2004 were in excess of the net investment income earned by the Fund
for financial reporting purposes. This was offset by realized gains and
therefore there was no return of capital for federal income tax purposes. The
tax character of dividends and distributions paid during the years ended
December 31, 2004 and 2003 was as follows:
2004 2003
Ordinary income $3,966,320 $2,093,627
Return of capital -- 2,802,895
---------- ----------
Total $3,966,320 $4,896,522
========== ==========
For financial reporting purposes, capital accounts are adjusted to reflect
the tax character of permanent book/tax differences. For the year ended December
31, 2004, the Funds recorded the following reclassifications. Reclassifications
are primarily due to tax treatment of distributions from net realized gains.
Results of operations and net assets were not affected by these
reclassifications.
Accumulated net realized gain (loss) $1,878,626
Paid in capital (1,878,626)
As of December 31, 2004, the components of net assets on a tax basis were as
follows:
Shares of beneficial interest $110,735,924
Capital loss carryforwards (29,455,089)
Unrealized appreciation on investments 6,353,099
------------
Net assets $ 87,633,934
============
For federal income tax purposes, capital loss carryforwards may be carried
forward and applied against future capital gains. $2,624,954 was utilized in
2004. Capital loss carryforwards remaining at December 31, 2004 will expire as
follows: $4,419,824 expires in 2009, $11,847,326 expires in 2010, and
$13,187,939 expires in 2011.
11
LINCOLN NATIONAL CONVERTIBLE SECURITIES FUND, INC.
NOTES
TO FINANCIAL STATEMENTS (CONTINUED)
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). Effective June 1, 2004, DMC has elected to waive
0.025% of its annual management fees through May 31, 2005.
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, 2004, the Fund had liabilities payable to affiliates as follows:
Investment management fee payable to DMC $188,472
Other expenses payable to DMC* 140,865
*DMC, as part of its administrative services, pays operating expenses on behalf
of the Fund and is reimbursed on a periodic basis. Such expenses include items
such as printing of shareholder reports, fees for audit, legal and tax
services, stock exchange fees, custodian fees and directors' fees.
As provided in the investment management agreement, the Fund bears the cost of
certain legal services expenses, including internal legal services provided to
the Fund by DMC employees. Through May 31, 2004, the Fund was charged $31,250
for internal legal services provided by DMC. Management agreed to discontinue
charging the Fund for internal legal fees effective June 1, 2004.
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 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.
There were no shares repurchased during the years ended December 31, 2003 or
December 31, 2004.
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 adviser. 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. This action
purports to have been brought on behalf of a class consisting of all the Fund's
shareholders. The allegations in this action were functionally identical to
those in the action described above. On February 8, 2005, the Circuit Court
dismissed this action with prejudice as moot.
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.
Illiquid securities, if any, have been denoted on the Statement of Net Assets.
NOTE H - TAX INFORMATION (UNAUDITED)
For the fiscal year ended December 31, 2004, the Fund designates distributions
paid during the year as follows:
(A) (B)
Long-Term Ordinary
Capital Gains Income Total
Distributions Distributions Distribution
(Tax Basis) (Tax Basis) (Tax Basis)
------------- ------------- -------------
-- 100% 100%
(A) and (B) are based on a percentage of the Fund's total distributions.
12
LINCOLN NATIONAL CONVERTIBLE SECURITIES FUND, INC.
NOTES
TO FINANCIAL STATEMENTS (CONTINUED)
NOTE I - SUBSEQUENT EVENT
On February 16, 2005, the Board of Directors of the Fund approved an Agreement
and Plan of Acquisition among the Fund, Delaware Group Equity Funds V, on behalf
of its Delaware Dividend Income Fund series ("Dividend Income Fund"), and DMC
providing for: (i) the acquisition by the Dividend Income Fund of substantially
all of the assets of the Fund in exchange for Class A shares of the Dividend
Income Fund; (ii) the pro rata distribution of those Dividend Income Fund shares
to the shareholders of the Fund; and (iii) the subsequent dissolution of the
Fund (the "Reorganization"). The Dividend Income Fund is an open-end mutual fund
managed by DMC. The investment objective of the Dividend Income Fund is to
provide high current income and an investment that has the potential for capital
appreciation. The Board of Trustees of Delaware Group Equity Funds V also
approved the Reorganization on February 16, 2005, as well as a temporary 2%
redemption fee that would be imposed on Dividend Income Fund shares issued in
the Reorganization if they are redeemed within three months of the closing of
the Reorganization. If approved by shareholders of the Fund, it is expected that
the Reorganization would close by the end of the second quarter of 2005.
NOTE J - 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.
13
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
Lincoln National Convertible Securities Fund, Inc.
We have audited the accompanying statement of net assets of the Lincoln National
Convertible Securities Fund, Inc. (the "Fund") as of December 31, 2004, and the
related statement of operations for the year then ended and statements of
changes in net assets and financial highlights for each of the two years in the
period then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The financial highlights for each of the three 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 highlights.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (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 consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Fund's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements and financial
highlights, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
Our procedures included confirmation of securities owned as of December 31,
2004, by correspondence with the custodian. 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 the
Lincoln National Convertible Securities Fund, Inc. at December 31, 2004, the
results of its operations for the year then ended, and the changes in its net
assets and its financial highlights for each of the two years in the period then
ended, in conformity with U.S. generally accepted accounting principles.
Ernst & Young LLP
Philadelphia, Pennsylvania
February 16, 2005
14
LINCOLN NATIONAL CONVERTIBLE SECURITIES FUND, INC.
OTHER
FUND INFORMATION
CORPORATE GOVERNANCE
The Fund's Audit Committee charter is available in print to any shareholder who
requests it. The Fund submitted its Annual CEO certification for 2004 to the
NYSE on June 8, 2004, stating that the CEO was not aware of any violation by the
Fund of the NYSE's corporate governance listing standards. In addition, the Fund
has filed the required CEO/CFO certifications regarding the quality of the
Fund's public disclosure as exhibits to the Form N-CSRs and Form N-Qs filed by
the Fund over the past fiscal year. The Fund's Form N-CSR and Form N-Q filings
are available on the Commission's web site at http://www.sec.gov.
15
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 2 Years Executive Vice President/ 2 President and Director,
2005 Market Street Managing Director/ Lincoln National
Philadelphia, PA 19103 Chief Investment Officer- Income Fund, Inc.
Equity Investments (since 2004);
April 14, 1963 Mr. Coyne has served in
various executive capacities
at different times
at Delaware Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
RICHARD M. BURRIDGE, SR.(2) Director 19 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 15 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 7 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 13 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.
- ------------------------------------------------------------------------------------------------------------------------------------
16
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 13 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 19 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 6 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 5 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.
17
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 figures in this report represent past
results, which are not a guarantee of future results. The return and principal
value of an investment in the Fund will fluctuate so that shares, when sold, 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
Common Stock on the open market at market prices.
Corporate Information AUTOMATIC DIVIDEND REINVESTMENT PLAN
INVESTMENT ADVISOR Any registered shareholder of Lincoln National Convertible Securities
Delaware Management Company Fund, Inc. may participate in the Automatic Dividend Reinvestment Plan
2005 Market Street (the "Plan"). If you are a beneficial owner whose shares are registered
Philadelphia, PA 19103-7094 in the name of another (e.g., in a broker's "street name") and desire to
participate in the Plan, you must become a registered holder by
ADMINISTRATOR transferring the shares to your name.
Delaware Service Company, Inc.
2005 Market Street To participate in the Plan, you must complete and forward an
Philadelphia, PA 19103-7042 authorization card to Mellon Investor Services LLC, the Plan agent. This
card authorizes the Plan agent to receive your dividends and other
INDEPENDENT AUDITORS distributions from the Fund in additional shares of common stock. The
Ernst & Young LLP additional shares will be issued by the Fund, if the net asset value per
2001 Market Street share is equal to or lower than the market price of the Fund's common
Philadelphia, PA 19103-7042 stock plus brokerage commissions. If the net asset value per share is
higher than the market price of the Fund's common stock plus brokerage
DIVIDEND DISBURSING AGENT, TRANSFER commissions, the additional shares will be purchased in the open market
AGENT AND REINVESTMENT PLAN AGENT and the cost of the brokerage commissions will be charged to each
Mellon Investor Services LLC participant on a pro-rata basis. The Plan also allows the Plan agent to
Overpeck Centre accept optional cash contributions. Each optional cash contribution by a
85 Challenger Road participant must be not less than $100 and not more than $3,000 per
Ridgefield Park, NJ 07666 dividend period and must be received by the Plan agent not less than
800 851-9677 five business days and no more than 30 days prior to the dividend
payment date.
STOCK EXCHANGE
The Fund's stock is traded on the New York Shares will be held by the Plan agent. You will receive a statement each
Stock Exchange (NYSE) under the symbol LNV. time shares are distributed by the Fund or purchased for you.
FOR SECURITIES DEALERS AND FINANCIAL There is no direct charge for Plan participation. The administrative
INSTITUTIONS REPRESENTATIVES costs of the Plan are borne by the Fund.
800 362-7500
If your dividends and other distributions are reinvested, they will be
subject to capital gains and income taxes as if they were paid to you in
cash.
You may terminate your participation in the Plan at any time by giving
written notice to the Plan agent.
For additional information on the Plan, please write to:
Mellon Investor Services LLC
Overpeck Centre
85 Challenger Road
Ridgefield Park, NJ 07666
or call 800 851-9677.
------------------------------------------------------------------------
The Fund files its complete schedule of portfolio holdings with the
Securities and Exchange Commission for the first and third quarters of
each fiscal year on Form N-Q. The Fund's Forms N-Q, as well as 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 Web site at http://www.delawareinvestments.com; and
(iii) on the Commission's Web site at http://www.sec.gov. The Fund's
Forms N-Q may be reviewed and copied at the Commission's Public
Reference Room in Washington, DC; information on the operation of the
Public Reference Room may be obtained by calling 1-800-SEC-0330.
Information (if any) regarding how the Fund voted proxies relating to
portfolio securities during the most recently disclosed 12-month period
ended June 30 is available without charge (i) through the Fund's Web
site at http://www.delawareinvestments.com; and (ii) on the Commission's
Web site at http://www.sec.gov.
------------------------------------------------------------------------
(9155) Printed in the USA
AR-LNCS [12/04] IVES 2/05 J9974
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 Trustees/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 Trustees/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 Trustees/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, 2004.
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.
(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, 2004.
The aggregate fees billed by the Registrant's 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, 2004.
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 by the Registrant's 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, 2003.
(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, 2004. 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 returns and annual excise distribution calculations.
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, 2004.
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 returns and annual excise distribution calculations.
The aggregate fees billed by the Registrant's 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, 2003.
(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, 2004.
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, 2004.
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.
(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 independent
auditors for services rendered to the Registrant and to its investment
adviser and other service providers under common control with the
adviser were $228,134 and $155,400 for the Registrant's fiscal years
ended December 31, 2004 and December 31, 2003, 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.
Deshaises, Thomas L. Bindley, Adela Cepeda and Daniel R. Toll.
Item 6. Schedule of Investments
Included as part of report to shareholders filed under Item 1 of this
Form N-CSR.
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 generally determined on a
case-by-case basis; (vii) generally vote for reports on the level of greenhouse
gas emissions from a company's operations and products; and (viii) generally
vote for proposals requesting the company to report on its policies and
practices related to social, environmental and economic sustainability.
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. Portfolio Managers of Closed-End Management Investment Companies
Applicable to Form N-CSRs filed for fiscal years ending on or after
December 31, 2005.
Item 9. Purchases of Equity Securities by Closed-End Management Investment
Companies and Affiliated Purchasers
Not applicable.
Item 10. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 11. 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 second fiscal quarter of the
period covered by the report to stockholders included herein (i.e., the
registrant's fourth fiscal quarter) that have materially affected, or are
reasonably likely to materially affect, the registrant's internal control over
financial reporting.
Item 12. 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
- -------------------------------
By: Patrick P. Coyne
Title: President
Date: February 28, 2005
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
- -------------------------------
By: Patrick P. Coyne
Title: President
Date: February 28, 2005
MICHAEL P. BISHOF
- -------------------------------
By: Michael P. Bishof
Title: Chief Financial Officer
Date: February 28, 2005