FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number: 811-03291
LINCOLN NATIONAL SPECIAL OPPORTUNITIES FUND, INC.
(Exact name of registrant as specified in charter)
1300 South Clinton Street
Fort Wayne, Indiana 46802
(Address of principal executive offices) (Zip code)
Elizabeth Frederick, Esq.
Lincoln National Life Insurance Company
1300 South Clinton Street
Fort Wayne, Indiana 46802
(Name and address of agent for service)
Copies of all communications to:
Jeffrey S. Puretz, Esq.
Dechert LLP
1775 Eye Street, N.W.
Washington, D.C. 2006
Registrant's telephone number, including area code: (260) 455-2000
Date of fiscal year end: December 31, 2002
Date of reporting period: January 1, 2002 through December 31, 2002
SPECIAL OPPORTUNITIES FUND
[DELAWARE INVESTMENTS LOGO]
Lincoln National
Special Opportunities Fund, Inc.
Annual Report
December 31, 2002
LINCOLN NATIONAL SPECIAL OPPORTUNITIES FUND, INC.
INDEX
COMMENTARY
STATEMENT OF NET ASSETS
STATEMENT OF OPERATIONS
STATEMENTS OF CHANGES IN NET ASSETS
FINANCIAL HIGHLIGHTS
NOTES TO FINANCIAL STATEMENTS
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
OFFICER/DIRECTOR INFORMATION
LINCOLN NATIONAL
SPECIAL OPPORTUNITIES FUND, INC.
ANNUAL PORTFOLIO COMMENTARY
For the year ended December 31, 2002
Managed by:
[DELAWARE INVESTMENTS LOGO]
The Lincoln National Special Opportunities Fund had a return of -11.8% for the
year ended December 31, 2002, while its style specific benchmark, the Russell
MidCap Value Index*, returned -9.7% and the broader market index, the S&P MidCap
400 Index**, returned -14.5%.
For 2002, the markets declined for the third year in a row -- the first series
of three consecutive years of decline in over 50 years. The Fund's performance
lagged the performance of the Russell Mid-Cap Value Index* for the year. The
underperformance can be attributed in part to stock selection in media and
healthcare stocks. This underperformance was partially offset by stock selection
in the utility and finance sectors.
Although U.S. equity markets performed strongly in the fourth quarter of 2002,
much of the strength was in lower quality stocks that had, with hindsight, been
oversold. We expect the current high level of volatility in stock prices to
continue until investors are convinced that a sustained economic recovery has
begun and corporate earnings concerns ease. However, the Federal Reserve's
recent 50 basis point reduction in short-term interest rates, to levels not seen
in 40 years, and improved prospects for further tax cuts, due to the Republican
Party's victory in the mid-term Congressional elections, should both be
interpreted positively by the equity markets. The hope is that this combination
of fiscal and monetary easing will help stimulate increased economic activity in
the U.S. in 2003. So, looking forward, we maintain a positive long-term view on
both the economy and equity markets and thus remain committed to our
process -- blending quantitative screening, fundamental research and portfolio
risk control. At year end, the Fund held moderately overweight positions in the
finance, healthcare and defense sectors relative to its benchmark, the Russell
MidCap Value Index*.
J. Paul Dokas
Growth of $10,000 invested 1/1/93 through 12/31/02
(CHART)
This chart illustrates, hypothetically, that $10,000 was invested in the Special
Opportunities Fund on 1/1/93. As the chart shows, by December 31, 2002, the
value of the investment at net asset value, with any dividends and distributions
reinvested, would have grown to $24,631. For comparison, look at how the S&P
MidCap 400 Index and the Russell MidCap Value Index did over the same period.
The same $10,000 investment would have grown to $30,945 and $28,537,
respectively. Past performance is not indicative of future performance.
Remember, an investor cannot invest directly in an index.
Average annual return Ended
on investment 12/31/02
------------------------------------------
One Year -11.75%
------------------------------------------
Five Years + 1.31%
------------------------------------------
Ten Years + 9.43%
------------------------------------------
* Russell MidCap Value Index - Measures the performance of those Russell MidCap
companies with lower price-to-book ratios and lower forecasted growth values.
** The S&P MidCap 400 Index is the Standard & Poor's Composite Index of 400
stocks, a widely recognized unmanaged index of common stock prices of
mid-sized companies.
Special Opportunities Fund 1
LINCOLN NATIONAL
SPECIAL OPPORTUNITIES FUND, INC.
STATEMENT OF NET ASSETS
December 31, 2002
Number Market
COMMON STOCK - 99.56% of Shares Value
-------------------------------------------------------------------
AEROSPACE & DEFENSE - 0.83%
-------------------------------------------------------------------
Goodrich 104,000 $ 1,905,280
Northrop Grumman 18,001 1,746,069
-------------------------------------------------------------------
3,651,349
AUTOMOBILES & AUTOMOTIVE PARTS - 3.08%
-------------------------------------------------------------------
Autoliv 51,000 1,067,430
+ Autonation 180,000 2,260,800
BorgWarner 35,000 1,764,700
Dana 147,800 1,738,128
Delphi 343,200 2,762,760
Genuine Parts 29,500 908,600
+ Lear 54,500 1,813,760
Magna International Class A 22,000 1,235,300
-------------------------------------------------------------------
13,551,478
BANKING & FINANCE - 15.24%
-------------------------------------------------------------------
A.G. Edwards 58,400 1,924,864
+ Affiliated Managers Group 18,500 930,550
AmSouth Bancorporation 183,000 3,513,600
Associated Banc-Corp 79,000 2,681,260
Astoria Financial 60,000 1,629,000
Bancorpsouth 57,500 1,116,650
Banknorth 124,000 2,802,400
Bear Stearns 62,400 3,706,560
Brascan 59,000 1,209,500
Capital One Financial 34,000 1,010,480
Charter One Financial 113,400 3,257,982
Colonial BancGroup 146,000 1,741,780
Compass Bancshares 83,000 2,595,410
Countrywide Financial 60,000 3,099,000
Cullen Frost Bankers 52,500 1,716,750
First Merit 49,500 1,072,170
First Tennessee National 70,000 2,515,800
Golden West Financial 6,500 466,765
Greenpoint Financial 60,000 2,710,800
Hibernia Class A 117,800 2,266,472
Hudson United Bancorp 49,000 1,523,900
M & T Bank 16,300 1,293,405
Marshall & Ilsley 123,000 3,367,740
National Commerce Financial 117,500 2,802,375
Popular 56,500 1,909,700
Regions Financial 62,000 2,068,320
SouthTrust 89,000 2,211,650
Sovereign Bancorp 118,000 1,657,900
TCF Financial 36,000 1,572,840
Union BanCal 47,500 1,865,325
Union Planters 116,000 3,264,240
Washington Federal 28,000 695,800
Zions Bancorporation 22,000 865,678
-------------------------------------------------------------------
67,066,666
BUILDINGS & MATERIALS - 2.22%
-------------------------------------------------------------------
Centex 43,500 2,183,700
D.R. Horton 104,000 1,804,400
KB Home 26,000 1,114,100
Martin Marietta Materials 65,000 1,992,900
+ Toll Brothers 76,000 1,535,200
York International 44,500 1,137,865
-------------------------------------------------------------------
9,768,165
Number Market
BUSINESS SERVICES - 1.04% of Shares Value
-------------------------------------------------------------------
Fluor 57,000 $ 1,596,000
+ Republic Services 141,000 2,958,180
-------------------------------------------------------------------
4,554,180
CABLE, MEDIA & PUBLISHING - 2.67%
-------------------------------------------------------------------
Belo 74,500 1,588,340
+ Borders Group 54,000 869,400
+ COX Radio Class A 28,500 650,085
+ Hearst-Argyle Television 50,500 1,217,555
Knight-Ridder 52,000 3,289,000
New York Times 35,000 1,600,550
RR Donnelley & Sons 73,500 1,600,095
+ Scholastic 26,000 934,700
-------------------------------------------------------------------
11,749,725
CHEMICALS - 3.73%
-------------------------------------------------------------------
Eastman Chemical 19,000 698,630
Englehard 113,000 2,525,550
Lubrizol 69,000 2,104,500
PPG Industries 36,000 1,805,400
Praxair 68,500 3,957,245
Rohm & Haas 30,000 974,400
RPM International 119,300 1,822,904
Sigma-Aldrich 51,500 2,508,050
-------------------------------------------------------------------
16,396,679
COMPUTERS & TECHNOLOGY - 4.12%
-------------------------------------------------------------------
+ Apple Computer 77,000 1,103,410
Autodesk 104,000 1,487,200
+ Cadence Design Systems 80,000 943,200
+ Ceridian 48,000 692,160
+ Citrix Systems 40,000 492,800
Computer Associates International 84,400 1,139,400
+ Computer Sciences 88,000 3,031,600
+ Dun & Bradstreet 39,500 1,362,355
+ Emulex 52,000 964,600
+ Ingram Micro Class A 92,000 1,136,200
ITT Industries 16,000 971,040
+ Lexmark International 23,200 1,403,600
Pitney Bowes 28,000 914,480
+ Storage Technology 77,500 1,660,050
+ Xerox 101,000 813,050
-------------------------------------------------------------------
18,115,145
CONSUMER PRODUCTS - 2.50%
-------------------------------------------------------------------
Black & Decker 22,000 943,580
Fortune Brands 72,000 3,348,720
Newell Rubbermaid 129,500 3,927,735
Whirlpool 53,000 2,767,660
-------------------------------------------------------------------
10,987,695
ELECTRONICS & ELECTRICAL EQUIPMENT - 5.52%
-------------------------------------------------------------------
+ Broadcom Class A 60,000 903,600
+ Energizer Holdings 68,000 1,897,200
+ Fairchild Semiconductor Class A 53,500 572,985
+ General Motors Class H 42,000 449,400
+ International Rectifier 42,000 775,320
+ Jabil Circuit 50,200 899,584
Johnson Controls 43,500 3,487,395
+ National Semiconductor 61,000 915,610
+ Novellus Systems 38,000 1,067,040
Pittston Brink's Group 77,000 1,422,960
+ SPX 47,000 1,760,150
Symbol Technologies 94,000 772,680
Teleflex 32,000 1,372,480
Textron 85,000 3,654,150
+ Thermo Electron 121,500 2,444,580
Special Opportunities Fund 2
ELECTRONICS & ELECTRICAL Number Market
EQUIPMENT (CONT'D) of Shares Value
-------------------------------------------------------------------
+ Varco International 78,500 $ 1,365,900
+ Vishay Intertechnology 47,000 525,460
-------------------------------------------------------------------
24,286,494
ENERGY - 6.94%
-------------------------------------------------------------------
Amerada Hess 27,200 1,497,360
Apache 69,500 3,960,805
Burlington Resources 44,100 1,880,865
Devon Energy 78,500 3,603,150
ENSCO International 50,400 1,484,280
EOG Resources 46,000 1,836,320
Equitable Resources 64,500 2,260,080
Kerr-McGee 71,000 3,145,300
Marathon Oil 127,500 2,714,475
Questar 49,000 1,363,180
Tidewater 48,000 1,492,800
Unocal 108,000 3,302,640
Valero Energy 54,500 2,013,230
-------------------------------------------------------------------
30,554,485
FOOD, BEVERAGE & TOBACCO - 3.51%
-------------------------------------------------------------------
Adolph Coors Class B 28,500 1,745,625
Archer-Daniels-Midland 298,000 3,695,200
Hershey Foods 34,500 2,326,680
Interstate Bakeries 60,000 915,000
RJ Reynolds Tobacco Holdings 60,000 2,526,600
Sensient Technologies 53,000 1,190,910
Supervalu 83,500 1,378,585
+ Yum! Brands 68,000 1,646,960
-------------------------------------------------------------------
15,425,560
HEALTHCARE & PHARMACEUTICALS - 4.45%
-------------------------------------------------------------------
Aetna 28,000 1,151,360
AmerisourceBergen Class A 21,000 1,140,510
Becton Dickinson 110,000 3,375,900
+ Health Net 87,500 2,310,000
+ Henry Schein 29,500 1,327,500
Hillenbrand Industries 44,000 2,125,640
+ Humana 107,000 1,070,000
McKesson 50,100 1,354,203
Omnicare 56,500 1,346,395
+ Priority Healthcare 42,500 986,000
+ Quintiles Transnational 91,000 1,101,100
+ Steris 41,000 994,250
+ Triad Hospitals 43,500 1,297,605
-------------------------------------------------------------------
19,580,463
INDUSTRIAL MACHINERY - 1.72%
-------------------------------------------------------------------
Dover 40,000 1,166,400
Ingersoll-Rand Class A 38,000 1,636,280
Pentair 47,000 1,623,850
Rockwell Automation 122,000 2,526,620
+ Zebra Technologies Class A 10,500 601,650
-------------------------------------------------------------------
7,554,800
INSURANCE - 8.38%
-------------------------------------------------------------------
American Financial 70,500 1,626,435
AON 45,000 850,050
Berkley 21,000 831,810
Cincinnati Financial 36,000 1,351,800
Everest Re 18,500 1,023,050
Fidelity National Financial 73,500 2,413,005
Jefferson-Pilot 33,500 1,276,685
John Hancock Financial Services 35,000 976,500
Loews 38,000 1,689,480
MBIA 88,000 3,859,680
MGIC Investment 43,500 1,796,550
Old Republic International 99,000 2,772,000
Phoenix 95,000 722,000
+ Platinum Underwriters Holdings 37,500 988,125
PMI 66,000 1,982,640
Progressive 24,000 1,191,120
Number Market
INSURANCE (CONT'D) of Shares Value
-------------------------------------------------------------------
Protective Life 71,500 $ 1,967,680
Reinsurance Group of America 16,500 446,820
Saint Paul 55,500 1,889,775
Stancorp Financial Group 22,500 1,099,125
Torchmark 76,500 2,794,545
Transatlantic Holdings 8,200 546,940
UnumProvident 158,500 2,780,090
-------------------------------------------------------------------
36,875,905
LEISURE, LODGING &
ENTERTAINMENT - 2.86%
-------------------------------------------------------------------
Eastman Kodak 92,000 3,223,680
Marriott International Class A 81,300 2,672,331
Mattel 64,000 1,225,600
+ MGM MIRAGE 55,000 1,813,350
+ Park Place Entertainment 73,000 613,200
Starwood Hotels & Resorts Worldwide 58,000 1,376,920
Viad 75,000 1,676,250
-------------------------------------------------------------------
12,601,331
METALS & MINING - 1.03%
-------------------------------------------------------------------
Precision Castparts 68,500 1,661,125
United States Steel 128,000 1,679,360
Vulcan Materials 31,600 1,185,000
-------------------------------------------------------------------
4,525,485
PACKAGING & CONTAINERS - 1.60%
-------------------------------------------------------------------
Ball 8,500 435,115
Bemis 35,000 1,737,050
+ Pactiv 110,500 2,415,530
Sonoco Products 107,000 2,453,510
-------------------------------------------------------------------
7,041,205
PAPER & FOREST PRODUCTS - 1.07%
-------------------------------------------------------------------
Boise Cascade 62,000 1,563,640
Georgia-Pacific 55,000 888,800
MeadWestvaco 39,000 963,690
Temple-Inland 29,000 1,299,490
-------------------------------------------------------------------
4,715,620
REAL ESTATE - 6.32%
-------------------------------------------------------------------
AMB Property 84,000 2,298,240
Archstone-Smith Trust 103,500 2,436,390
Boston Properties 30,000 1,105,800
Duke Realty 105,000 2,672,250
Equity Office Properties Trust 46,000 1,149,080
Equity Residential Properties 161,000 3,957,380
Highwoods Properties 83,500 1,845,350
+ Host Marriott 122,000 1,079,700
Kimco Realty 53,000 1,623,920
Mack-Cali Realty 63,200 1,914,960
New Plan Excel Realty Trust 75,000 1,431,750
Prologis 100,000 2,515,000
Public Storage 60,500 1,954,755
Simon Property 55,000 1,873,850
-------------------------------------------------------------------
27,858,425
RETAIL - 4.16%
-------------------------------------------------------------------
Blockbuster Class A 32,000 392,000
+ Brinker International 48,000 1,548,000
Circuit City Stores 90,000 667,800
+ Federated Department Stores 117,000 3,364,920
Ikon Office Solutions 213,000 1,522,950
J.C. Penney 102,000 2,347,020
May Department Stores 58,000 1,332,840
Nordstrom 68,000 1,289,960
+ Office Depot 91,000 1,343,160
Pier 1 Imports 49,000 927,570
+ Saks 165,000 1,937,100
Winn-Dixie Stores 105,500 1,612,040
-------------------------------------------------------------------
18,285,360
Special Opportunities Fund 3
Number Market
TELECOMMUNICATIONS - 2.12% of Shares Value
-------------------------------------------------------------------
+ Andrew 158,000 $ 1,624,240
CenturyTel 96,500 2,835,170
Harris 59,000 1,551,700
+ JDS Uniphase 480,000 1,185,600
Scientific-Atlanta 143,000 1,695,980
+ Tellabs 61,000 443,470
-------------------------------------------------------------------
9,336,160
TEXTILES, APPAREL & FURNITURE - 0.99%
-------------------------------------------------------------------
+ Jones Apparel 27,500 974,600
+ Skechers USA Class A 95,000 806,550
VF 72,000 2,595,600
-------------------------------------------------------------------
4,376,750
TRANSPORTATION & SHIPPING - 1.49%
-------------------------------------------------------------------
Alexander & Baldwin 20,500 528,695
CSX 135,500 3,836,005
Norfolk Southern 108,800 2,174,912
-------------------------------------------------------------------
6,539,612
UTILITIES - 11.97%
-------------------------------------------------------------------
Ameren 45,500 1,891,435
Cinergy 70,500 2,377,260
Consolidated Edison 75,500 3,232,910
DTE Energy 96,800 4,491,520
+ Edison International 217,000 2,571,450
Energy East 116,000 2,562,440
Entergy 119,500 5,448,005
FirstEnergy 150,000 4,945,500
Great Plains Energy 69,500 1,590,160
KeySpan 99,500 3,506,380
NiSource 61,400 1,228,000
Pepco Holdings 57,000 1,105,230
+ PG&E 191,500 2,661,850
PPL 77,000 2,670,360
Public Service Enterprise 135,000 4,333,500
Sempra Energy 125,000 2,956,250
TECO Energy 85,500 1,322,685
Wisconsin Energy 101,000 2,545,200
Xcel Energy 113,000 1,243,000
-------------------------------------------------------------------
52,683,135
-------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost $442,777,304) 438,081,872
-------------------------------------------------------------------
Principal Market
COMMERCIAL PAPER - 0.26% Amount Value
-------------------------------------------------------------------
UBS Finance 1.20% 1/2/03 $1,130,000 $ 1,129,962
-------------------------------------------------------------------
TOTAL COMMERCIAL PAPER
(Cost $1,129,962) 1,129,962
-------------------------------------------------------------------
TOTAL MARKET VALUE OF SECURITIES - 99.82%
(Cost $443,907,266) 439,211,834
-------------------------------------------------------------------
Receivables and Other Assets Net of
Liabilities - 0.18% 772,581
-------------------------------------------------------------------
NET ASSETS - 100.00%
(Equivalent to $22.471 per share based on
19,579,863 shares issued and
outstanding) $439,984,415
-------------------------------------------------------------------
COMPONENTS OF NET ASSETS AT DECEMBER 31, 2002:
Common stock, par value $0.01 per share,
50,000,000 authorized shares $466,420,024
Undistributed net investment income 1,711,951
Accumulated net realized loss on
investments (23,452,128)
Net unrealized depreciation of
investments (4,695,432)
-------------------------------------------------------------------
TOTAL NET ASSETS $439,984,415
-------------------------------------------------------------------
+ Non-income producing security for the year ended December 31, 2002.
See accompanying notes to financial statements.
Special Opportunities Fund 4
LINCOLN NATIONAL SPECIAL OPPORTUNITIES FUND, INC.
STATEMENT OF OPERATIONS
Year ended December 31, 2002
INVESTMENT INCOME:
Dividends $ 10,888,773
--------------------------------------------------------------------------
Interest 34,821
--------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 10,923,594
--------------------------------------------------------------------------
EXPENSES:
Management fees 2,090,889
--------------------------------------------------------------------------
Accounting and administration fees 218,878
--------------------------------------------------------------------------
Printing and postage 128,408
--------------------------------------------------------------------------
Professional fees 42,695
--------------------------------------------------------------------------
Custody fees 24,203
--------------------------------------------------------------------------
Directors' fees 4,200
--------------------------------------------------------------------------
Other 13,233
--------------------------------------------------------------------------
2,522,506
--------------------------------------------------------------------------
Less fees waived (92,455)
--------------------------------------------------------------------------
Less expenses paid indirectly (2,346)
--------------------------------------------------------------------------
TOTAL EXPENSES 2,427,705
--------------------------------------------------------------------------
NET INVESTMENT INCOME 8,495,889
--------------------------------------------------------------------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
--------------------------------------------------------------------------
Net realized loss on investments (22,338,083)
--------------------------------------------------------------------------
Net change in unrealized appreciation/depreciation of
investments (50,415,703)
--------------------------------------------------------------------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS (72,753,786)
--------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(64,257,897)
--------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
Year ended Year ended
12/31/2002 12/31/2001
------------------------------
Changes from operations:
Net investment income $ 8,495,889 $ 8,942,534
--------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (22,338,083) 20,001,395
--------------------------------------------------------------------------------------------
Net change in unrealized appreciation/depreciation of
investments (50,415,703) (18,926,319)
--------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS (64,257,897) 10,017,610
--------------------------------------------------------------------------------------------
Dividends and distributions to shareholders from:
Net investment income (7,102,162) (7,567,654)
--------------------------------------------------------------------------------------------
Net realized gain on investments (2,512,598) --
--------------------------------------------------------------------------------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS (9,614,760) (7,567,654)
--------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CAPITAL
SHARE TRANSACTIONS (26,013,097) 1,133,219
--------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (99,885,754) 3,583,175
--------------------------------------------------------------------------------------------
Net assets, at beginning of period 539,870,169 536,286,994
--------------------------------------------------------------------------------------------
NET ASSETS, AT END OF PERIOD $439,984,415 $539,870,169
--------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
Special Opportunities Fund 5
LINCOLN NATIONAL SPECIAL OPPORTUNITIES FUND, INC.
FINANCIAL HIGHLIGHTS
(Selected data for each capital share outstanding throughout the year)
Year ended December 31,
2002 2001 2000 1999 1998
----------------------------------------------------
Net asset value, beginning of year $ 26.006 $ 25.846 $ 28.225 $ 33.416 $ 35.056
Income from investment operations:
Net investment income(1) 0.418 0.431 0.536 0.482 0.470
Net realized and unrealized gain (loss)
on investments (3.467) 0.098 3.153 (1.779) 1.795
-----------------------------------------------------------------------------------------------
Total from investment operations (3.049) 0.529 3.689 (1.297) 2.265
-----------------------------------------------------------------------------------------------
Less dividends and distributions from:
Net investment income (0.365) (0.369) (0.494) (0.373) (0.862)
Net realized gain on investments (0.121) -- (5.574) (3.521) (3.043)
-----------------------------------------------------------------------------------------------
Total dividends and distributions (0.486) (0.369) (6.068) (3.894) (3.905)
-----------------------------------------------------------------------------------------------
Net asset value, end of period $ 22.471 $ 26.006 $ 25.846 $ 28.225 $ 33.416
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
Total return(2) (11.75%) 2.16% 16.04% (4.48%) 6.79%
Ratios and supplemental data:
Net assets, end of period (000 omitted) $439,984 $539,870 $536,287 $665,642 $917,796
Ratio of expenses to average net assets 0.47% 0.48% 0.49% 0.44% 0.42%
Ratio of expenses to average net assets
prior to fees waived and expenses paid
indirectly 0.49% 0.48% 0.49% 0.44% 0.42%
Ratio of net investment income to
average net assets 1.67% 1.65% 2.15% 1.46% 1.44%
Ratio of net investment income to
average net assets prior to fees
waived and expenses paid indirectly 1.65% 1.65% 2.15% 1.46% 1.44%
Portfolio turnover 55% 73% 75% 96% 76%
(1) The average shares outstanding method has been applied for per share
information for the years ended December 31, 2002, 2001 and 2000.
(2) Total return percentages in this table are calculated on the basis
prescribed by the Securities and Exchange Commission.
See accompanying notes to financial statements.
Special Opportunities Fund 6
LINCOLN NATIONAL SPECIAL OPPORTUNITIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
THE FUND: Lincoln National Special Opportunities Fund, Inc. (the "Fund") is
registered as an open-end, diversified management investment company under the
Investment Company Act of 1940, as amended. The Fund's shares are sold only to
The Lincoln National Life Insurance Company and Lincoln Life & Annuity Company
of New York (the "Companies") for allocation to their variable annuity products
and variable universal life products.
The Fund's investment objective is to maximize long-term capital appreciation.
1. SIGNIFICANT ACCOUNTING POLICIES
The following accounting policies are in accordance with accounting principles
generally accepted in the United States and are consistently followed by the
Fund.
SECURITY VALUATION: All equity securities 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. If on a particular day an equity security does not trade,
then the mean between the bid and asked prices will normally be used. 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 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).
FEDERAL INCOME TAXES: The Fund intends to continue to qualify for federal income
tax purposes as a regulated investment company and make the requisite
distributions to shareholders. Accordingly, no provision for federal income
taxes has been made in the financial statements.
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 year. Actual results could
differ from those estimates.
OTHER: Security transactions are accounted for on the date the securities are
purchased or sold (trade date). Costs used in calculating realized gains and
losses on the sale of investment securities are those of the specific securities
sold. Dividend income is recorded on the ex-dividend date and interest income is
recorded on the accrual basis. The Fund declares and distributes dividends from
net investment income, if any, semi-annually. Distributions from net realized
gains, if any, are declared and distributed annually.
The Fund receives earnings credits from its custodian when positive cash
balances are maintained, which are used to offset custody fees. The earnings
credits for the year ended December 31, 2002, were approximately $2,346. The
expense paid under the above arrangement is included under custodial fees on the
Statement of Operations with the expense offset shown as "expenses paid
indirectly".
2. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Effective May 1, 2002, Delaware Management Company (DMC) is responsible for
overall management of the Fund's investment portfolio and provides certain
administrative services to the Fund. DMC is a series of Delaware Management
Business Trust (DMBT), a multi-series business trust registered with the
Securities and Exchange Commission as an investment adviser. DMBT is an indirect
wholly-owned subsidiary of Lincoln National Corporation (LNC). For its services,
DMC receives a management fee at an annual rate of 0.48% of the first $200
million of the average daily net assets of the Fund, 0.40% of the next $200
million, and 0.30% of the average daily net assets of the Fund in excess of $400
million.
Prior to May 1, 2002, Vantage Investment Advisers (VIA), an affiliate of DMC,
served as the investment manager to the Fund under identical terms.
Special Opportunities Fund 7
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
During the year ended December 31, 2002, DMC and VIA contractually waived a
portion of their management fees in the amount of $92,455. Effective January 1,
2003, this waiver was discontinued in connection with stockholder approval of
the amended Management Agreement as discussed below on December 9, 2002.
If the aggregate annual expenses of the Fund, including the management fee, but
excluding taxes, interest, brokerage commissions relating to the purchase or
sale of portfolio securities and extraordinary non-recurring expenses, exceed
1.50% of the average daily net assets of the Fund, DMC has agreed to reimburse
the Fund in the amount of such excess. No reimbursement was due for the year
ended December 31, 2002.
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides accounting
services and other administration support to the Fund. For these services, the
Fund pays DSC a monthly fee based on average net assets, subject to certain
minimums.
At December 31, 2002, the Fund had payables to affiliates as follows:
Management Fees Payable to DMC $153,844
Accounting and Administration Fees
Payable to DSC 32,186
On December 9, 2002, stockholders of the Fund approved an amended Management
Agreement between the Fund and DMC that is effective January 1, 2003. The Fund
will incur additional fees and expenses under the new agreement because certain
expenses relating to the administration of the Fund's affairs and the
maintenance of the Fund's books and records will be paid by the Fund rather than
the investment adviser.
In connection with the amended Management Agreement, the Board of Directors of
the Fund approved an Administration Agreement with Lincoln National Life
Insurance Company (Lincoln Life), an affiliate of DMC, dated January 1, 2003.
Pursuant to the Administration Agreement, Lincoln Life will provide various
administrative services necessary for the operation of the Fund. For these
services, the Fund will pay Lincoln Life an annual fee of $15,000 plus the cost
of certain support services, such as legal and corporate secretary services.
Certain officers and directors of the Fund are also officers or directors of the
Companies and receive no compensation from the Fund. The compensation of
unaffiliated directors of the Fund is borne by the Fund.
3. INVESTMENTS
For the year ended December 31, 2002, the Fund made purchases of $282,312,202
and sales of $310,468,114 of investment securities other than short-term
investments. At December 31, 2002, the cost of investments for federal income
tax purposes was $444,316,490. At December 31, 2002, net unrealized depreciation
was $5,104,656, of which $37,299,379 related to unrealized appreciation of
investments and $42,404,035 related to unrealized depreciation of investments.
4. 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. Ordinary income includes dividends from
net investment income and distributions from short-term capital gains. The tax
character of dividends and distributions paid during the years ended December
31, 2002 and 2001 were as follows:
Year ended Year ended
12/31/02 12/31/01
--------------------------
Ordinary income $7,102,162 $7,567,654
Long-term capital gain 2,512,598 --
---------- ----------
Total $9,614,760 $7,567,654
========== ==========
In addition, the Fund declared an ordinary income consent dividend of $1,056,656
for the year ended December 31, 2001. Such amount has been deemed paid and
contributed to the Fund as additional paid-in capital.
Special Opportunities Fund 8
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
As of December 31, 2002, the components of net assets on a tax basis were as
follows:
Shares of beneficial interest $466,420,024
Undistributed ordinary income 1,711,951
Capital loss carryforwards (22,074,286)
Post-October losses (968,618)
Unrealized depreciation of
investments (5,104,656)
------------
Net assets $439,984,415
============
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: $22,074,286 expires in 2010.
Post-October losses represent losses realized on investment transactions from
November 1, 2002 through December 31, 2002, that, in accordance with federal
income tax regulations, the Fund has elected to defer and treat as having arisen
in the following fiscal year.
5. CAPITAL SHARES
Transactions in capital shares were as follows:
Shares Issued Upon
Reinvestment of
Capital Shares Dividends and Capital Shares
Sold Distributions Redeemed
--------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
--------------------------------------------------------------------------
Year ended December 31, 2002: 1,204,035 $32,376,305 420,406 $9,614,760 (2,804,338) $(68,004,162)
Year ended December 31, 2001: 1,340,283 $34,495,032 314,284 $7,567,654 (1,644,323) $(40,929,467)
Net Increase (Decrease)
Resulting From Capital
Share Transactions
-------------------------
Shares Amount
-------------------------
Year ended December 31, 2002: (1,179,897) $(26,013,097)
Year ended December 31, 2001: 10,244 $ 1,133,219
6. LINE OF CREDIT
The Fund, along with certain other Lincoln National Mutual Funds (the
"Participants"), participates in a $50,000,000 Credit Agreement to be used for
temporary or emergency purposes as an additional source of liquidity to fund
redemptions of investor shares. The Participants are charged an annual
commitment fee, which is allocated among the Participants in accordance with the
agreement. Effective January 1, 2003, the Fund may borrow up to 33 1/3% of its
total assets (including the amount borrowed). The Fund had no amount outstanding
at December 31, 2002, or at any time during the year.
7. TAX INFORMATION (UNAUDITED)
For the fiscal year ended December 31, 2002, the Fund designates distributions
paid during the year as follows:
(A) (B)
Long-Term Ordinary Total (C)
Capital Gains Income Distributions Qualifying(1)
Distributions Distributions (Tax Basis) Dividends
-------------------------------------------------------------
26% 74% 100% 100%
Items (A) and (B) are based on a percentage of the Fund's total distributions.
Item (C) is based on a percentage of ordinary income of the Fund.
(1) Qualifying dividends represent dividends which qualify for the corporate
dividends received deduction.
Special Opportunities Fund 9
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. PROXY RESULTS (UNAUDITED)
Lincoln National Special Opportunities Fund, Inc., shareholders voted on the
following proposals at the special meeting of shareholders on December 9, 2002,
or as adjourned. The resulting votes are presented below.
Outstanding Total Percent Percent Percent
Shares Voted For Withheld Abstained
---------------------------------------------------------
1. To elect five Directors of the Fund to hold office until their
respective successors have been duly elected and qualified or
until their earlier resignation or removal.
John B. Borsch, Jr. 20,082,672 20,082,672 93.81% 6.19% 0.00%
Kelly D Clevenger 20,082,672 20,082,672 93.82% 6.18% 0.00%
Nancy L. Frisby 20,082,672 20,082,672 94.03% 5.97% 0.00%
Barbara S. Kowalczyk 20,082,672 20,082,672 93.71% 6.29% 0.00%
Kenneth G. Stella 20,082,672 20,082,672 93.67% 6.33% 0.00%
Outstanding Total Percent Percent Percent
Shares Voted For Against Abstained
---------------------------------------------------------
2. To approve a reorganization to change Fund from a Maryland
corporation to a series of a Delaware business trust. 20,082,672 20,082,672 87.61% 8.82% 3.57%
3. To approve a proposal that would permit the Fund to enter into or
materially change sub-advisory agreements with sub-advisers 20,082,672 20,082,672 82.38% 14.00% 3.62%
without obtaining stockholder approval.
4. To approve a new investment management agreement between the Fund
and their current investment adviser, Delaware Management
Company, a series of Delaware Management Business Trust. 20,082,672 20,082,672 86.64% 9.25% 4.11%
5. To approve the amendment of certain Fundamental Investment
Restrictions.
5A) Amendment to Fundamental Restrictions on Concentration of
Investments in the Same Industry. 20,082,672 20,082,672 86.04% 9.24% 4.72%
5B) Amendment to Fundamental Restrictions on Borrowing Money and
Issuing Senior Securities. 20,082,672 20,082,672 85.78% 9.48% 4.74%
5C) Amendment to Fundamental Restrictions on Underwriting. 20,082,672 20,082,672 85.93% 9.29% 4.78%
5D) Amendment to Fundamental Restrictions on Investments in Real
Estate. 20,082,672 20,082,672 86.46% 8.92% 4.62%
5E) Amendment to Fundamental Restrictions on Investments in
Commodities or Commodity Issues. 20,082,672 20,082,672 85.95% 9.38% 4.67%
5F) Amendment to Fundamental Restrictions on Lending. 20,082,672 20,082,672 85.72% 9.54% 4.74%
5G) Amendment to Fundamental Restrictions on Diversification. 20,082,672 20,082,672 86.17% 9.19% 4.64%
6. To approve the elimination of certain Fundamental Investment
Restrictions.
6A) Elimination of Fundamental Restrictions on Investments in
Other
Investment Companies. 20,082,672 20,082,672 83.13% 12.29% 4.58%
6B) Elimination of Fundamental Restrictions on Selling
Securities Short. 20,082,672 20,082,672 82.86% 12.44% 4.70%
6C) Elimination of Fundamental Restrictions on Margin
Transactions. 20,082,672 20,082,672 82.75% 12.65% 4.60%
6D) Elimination of Fundamental Restrictions on Pledging Fund
Assets. 20,082,672 20,082,672 82.83% 12.51% 4.66%
6E) Elimination of Fundamental Restrictions on Illiquid and
Restricted Securities. 20,082,672 20,082,672 82.72% 12.60% 4.68%
6F) Elimination of Fundamental Restrictions on Purchase of Put
and Call Options. 20,082,672 20,082,672 82.86% 12.40% 4.74%
6G) Elimination of Fundamental Restrictions on Investments in
Companies for the Purpose of Acquiring Control. 20,082,672 20,082,672 83.13% 12.22% 4.65%
Special Opportunities Fund 10
LINCOLN NATIONAL SPECIAL OPPORTUNITIES FUND, INC.
REPORT OF INDEPENDENT AUDITORS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
LINCOLN NATIONAL SPECIAL OPPORTUNITIES FUND, INC.
We have audited the accompanying statement of net assets of Lincoln National
Special Opportunities Fund, Inc. (the "Fund") as of December 31, 2002, and the
related statement of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the five years in the period then ended.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights. Our procedures included
confirmation of securities owned as of December 31, 2002, 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
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Lincoln National Special Opportunities Fund, Inc. at December 31, 2002, the
results of its operations for the year then ended, the changes in its net assets
for each of the two years in the period then ended, and its financial highlights
for each of the five years in the period then ended, in conformity with
accounting principles generally accepted in the United States.
[ERNST & YOUNG LLP]
Philadelphia, Pennsylvania
February 7, 2003
Special Opportunities Fund 11
OFFICER/DIRECTOR INFORMATION
Name, address and Position(s) held Term of office Number of
date of birth with the funds and length of Principal funds in
time served occupation(s) fund complex
during the past overseen by
five years Director
------------------------------------------------------------------------------------------------------------
Kelly D. Clevenger(1) Chairman, President Chairman since Vice President, The 12
1300 S. Clinton Street and Director August 1995; Lincoln National Life
Fort Wayne, IN 46802 President and Insurance Company. Vice
DOB: 07/25/52 Director since President, Lincoln
November 1994 Retirement Services
Company, LLC; Second Vice
President, Lincoln Life &
Annuity Company of New
York
Barbara S. Kowalczyk Director Director since Senior Vice President, 12
Centre Square, West Tower November 1993 Corporate Planning and
1500 Market St., Suite 3900 Development, Lincoln
Philadelphia, PA 19102 National Corporation
DOB: 04/07/51 (insurance holding
company); Senior Vice
President, Lincoln
National Management
Corporation
John B. Borsch, Jr. Director Director since Retired; formerly 12
1300 S. Clinton Street December 1981 Associate Vice President,
Fort Wayne, IN 46802 Investments, Northwestern
DOB: 06/09/33 University
Nancy L. Frisby Director Director since Vice President and Chief 12
1300 S. Clinton Street April 1992 Financial Officer, DeSoto
Fort Wayne, IN 46802 Memorial Hospital;
DOB: 11/10/41 formerly Chief Financial
Officer, Bascom Palmer
Eye Institute, University
of Miami School of
Medicine; formerly Vice
President and Chief
Financial Officer, St.
Joseph Medical Center,
Inc.
Kenneth G. Stella Director Director since President, Indiana 12
1300 S. Clinton Street February 1998 Hospital & Health
Fort Wayne, IN 46802 Association
DOB: 08/20/43
Frederick J. Crawford(1) Vice President and Vice President Vice President and N/A
Centre Square, West Tower, Treasurer and Treasurer Treasurer, Lincoln
1500 Market Street, Suite since January National Corporation;
3900 2001 formerly President and
Philadelphia, PA 19102 Market Manager, Greater
DOB: 08/03/63 Cincinnati Region, Bank
One, N.A.
Cynthia A. Rose(1) Secretary Secretary since Secretary and Assistant N/A
1300 S. Clinton Street February 1995 Vice President, The
Fort Wayne, IN 46802 Lincoln National Life
DOB: 04/24/54 Insurance Company;
formerly Assistant
Secretary, Lincoln
National Corporation
William P. Flory, Jr.(1) Assistant Vice Chief Accounting Assistant Vice President, N/A
1300 S. Clinton Street President and Chief Officer since May The Lincoln National Life
Fort Wayne, IN 46802 Accounting Officer 2002 Insurance Company;
DOB: 09/02/61 formerly Vice President,
MetLife Investors;
formerly Assistant Vice
President, MetLife
Investors; formerly
Accounting Manager,
Transamerica Life
Companies
Steven M. Kluever(1) Second Vice Second Vice Second Vice President, N/A
1300 S. Clinton Street President President since The Lincoln National Life
Fort Wayne, IN 46802 August 1999; Insurance Company; Second
DOB: 08/04/62 Assistant Vice Vice President, Lincoln
President since Life & Annuity Company of
August 1997 New York
Name, address and Other directorships
date of birth held by Director
--------------------------- -------------------------
Kelly D. Clevenger(1) Lincoln Retirement
1300 S. Clinton Street Services Company, LLC
Fort Wayne, IN 46802
DOB: 07/25/52
Barbara S. Kowalczyk Lincoln National
Centre Square, West Tower Management Corporation;
1500 Market St., Suite 3900 The Lincoln National Life
Philadelphia, PA 19102 Insurance Company;
DOB: 04/07/51 Lincoln Financial Group
Foundation, Inc.; Lincoln
Life & Annuity Company of
New York; Lincoln
National (UK) PLC
(financial services
company)
John B. Borsch, Jr. N/A
1300 S. Clinton Street
Fort Wayne, IN 46802
DOB: 06/09/33
Nancy L. Frisby N/A
1300 S. Clinton Street
Fort Wayne, IN 46802
DOB: 11/10/41
Kenneth G. Stella First National Bank &
1300 S. Clinton Street Trust
Fort Wayne, IN 46802
DOB: 08/20/43
Frederick J. Crawford(1) N/A
Centre Square, West Tower,
1500 Market Street, Suite
3900
Philadelphia, PA 19102
DOB: 08/03/63
Cynthia A. Rose(1) N/A
1300 S. Clinton Street
Fort Wayne, IN 46802
DOB: 04/24/54
William P. Flory, Jr.(1) N/A
1300 S. Clinton Street
Fort Wayne, IN 46802
DOB: 09/02/61
Steven M. Kluever(1) N/A
1300 S. Clinton Street
Fort Wayne, IN 46802
DOB: 08/04/62
------------------------
Additional information on the officers and directors can be found in the
Statement of Additional Information ("SAI") to the Fund's prospectus. To obtain
a free copy of the SAI, write: Lincoln National Life Insurance Company, P.O. Box
2340, Fort Wayne, Indiana 46801, or call 1-800-4LINCOLN (454-6265). The SAI is
also available on the SEC's web site (http://www.sec.gov).
(1) All of the executive officers are "interested persons" of the Fund, as that
term is defined by Section 2(a)(19) of the 1940 Act, by reason of their
being officers of the Fund.
(2) The officers and directors are re-elected annually. The officers and
directors hold their position with the Fund until retirement or resignation.
The Bylaws of the Funds do not specify a term of office.
Special Opportunities Fund 12
'
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.
LINCOLN NATIONAL SPECIAL OPPORTUNITIES FUND, INC. (Registrant)
By /s/ Kelly D. Clevenger
--------------------------------------------------------------
Kelly D. Clevenger
President
(Signature and Title)
Date March 7, 2003
----------------------
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.
By /s/ Kelly D. Clevenger
--------------------------------
Kelly D. Clevenger
Chairman, President and Director
(Signature and Title)
Date March 7, 2003
----------------------
By /s/ William P. Flory, Jr.
---------------------------------
William P. Flory, Jr.
Assistant Vice President and Chief Accounting Officer
(Signature and Title)
Date March 7, 2003
-------------------------------