<PAGE>
Manager Profile
Throughout its history, your Fund has been managed by investment affiliates of
Lincoln National Corporation. The Fund's investment advisor is Lincoln
Investment Management Inc. (LIM), a wholly owned subsidiary of Lincoln National
Investment Companies, Inc. (LNIC). LNIC was formed in 1995 and is wholly owned
by Lincoln National Corporation. In February of 1988, shareholders approved a
subadvisory contract between LIM and Lynch & Mayer, Inc. Under the contract,
Lynch & Mayer may perform some or substantially all of the investment advisory
services subject to the direction and supervision of LIM.
Lynch & Mayer is a New York-based investment manager of equities and convertible
securities. Founded in 1976 by Eldon Mayer and Dennis Lynch, the firm currently
has over $6 billion under management. Lynch & Mayer manages both large - and
mid-capitalization equity portfolios in addition to convertible portfolios.
Since 1985, the firm has been a wholly owned subsidiary of Lincoln National
Corporation.
Robert Schwartz is the current portfolio manager for the Fund at Lynch & Mayer.
Mr. Schwartz took over the helm of the Fund from Brad Roberts in early 1993.
Mr. Roberts and the previous manager, Ed Petner, are still with the firm. Mr.
Schwartz previously managed convertible security portfolios for Salomon Brothers
Asset Management and First Boston Asset Management. Mr. Schwartz also spent
four years as a Senior Research Associate at Morgan Stanley, specializing in
quantitative analysis. Mr. Schwartz received an MBA from New York University in
1987, and was awarded the Chartered Financial Analyst designation in 1991.
Investment Policies & Objectives
The Fund's primary investment objective is to provide a high level of total
return through a combination of capital appreciation and current income. Nearly
all of the Fund's net investment income will be distributed through regular
dividends to shareholders. Net short-term capital gains, if any, will be
distributed annually in cash, provided the Fund does not have a capital loss
carry forward. Net realized long-term gains will be retained to increase the
size of the Fund's asset base.
The investment portfolio will contain primarily convertible securities,
including direct placement convertible securities. The fund also will invest in
publicly traded fixed-income securities and preferred and common stocks.
The Fund may borrow to purchase securities in an amount not exceeding 33 1/3
percent of net assets. The Fund also may invest in non-dollar denominated
securities, however, as of December 31, 1995, has chosen not to do so.
1
<PAGE>
President's Letter
January 26, 1996
Dear Shareholder:
This past year was exceptional for the U.S. financial markets. All of the major
equity and fixed-income indices showed considerable appreciation, and the
Lincoln National Convertible Securities Fund, Inc. (the Fund) benefited from
this positive environment. The Fund's net asset value increased 19.6 percent in
1995 including dividends and before long-term capital gains taxes. Dividends
totaled $1.64 for the year, including a regular dividend of $0.96 and a dividend
of $0.68 attributed to short-term capital gains. The Fund's share price closed
the year at $16.75, up from $15.38. The share price closed the year at a 10.5
percent discount to net asset value, similar to the discount at year-end 1994.
A steady rally in bonds set a positive backdrop for the equity and convertible
markets. Yields on the five- and thirty-year treasuries dropped 2.45 percent
and 1.93 percent, respectively, in a complete reversal of the 1994 record sell
off in bonds. While we don't expect this type of bond rally to continue, we do
expect relatively stable and somewhat lower interest rates in 1996.
The equity market had several noteworthy trends in 1995, including the
tremendous first half rally and subsequent sell off of the technology sector.
The convertible market benefited only slightly from the rally because of the
limited number of attractive technology convertibles available early in the
year. Several new technology issues came to the market mid-year, too late for
the Fund to profit from the rally. However, we welcome the added new investment
opportunities.
The Dow Industrials and S&P 500 actually turned in their best performances since
1975 and 1958, respectively. Continuing a trend that began in 1994, large
capitalization equities out-performed smaller capitalization equities. This
trend is best illustrated by the Dow Industrials, which returned 36.9 percent
and the S&P 500 which had a return of 37.6 percent. Both out-performed the
Russell 2000 Index of smaller companies which had a return of 28.3 percent. The
reverse was true from 1991 through 1993 when small company equities out-
performed large company equities. The convertible universe, which consists
primarily of small- to medium- size companies, also under-performed the large-
cap indices in 1995. For example, the underlying equities of the First Boston
Convertible Securities Index returned only 23.7 percent.
Statistics began to indicate an economic slow down in the fourth quarter, which
boosted growth stocks. We expect this trend to continue in 1996 as weak
economic conditions in the U.S., Europe and Japan shift investment emphasis to
mid-sized growth companies. We continue to take positions in mid-size growth
companies that should perform well in this environment. We are encouraged to
see an increase in these types of issuers, thus providing us with a larger
choice of investments.
We have a positive outlook for the Fund in 1996. The convertible market is
reasonably valued, and there are many attractive investment opportunities. As
the investment manager, we will continue to use the same approach that has
served the Fund well over the years. We will balance sound convertible security
analysis with our underlying equity philosophy focusing on companies undergoing
positive fundamental change. This consistent philosophy should help the Lincoln
National Convertible Securities Fund to perform well through changing economic
and market cycles.
Sincerely,
H. Thomas McMeekin
President
2
<PAGE>
Portfolio Manager's Discussion
WHAT WERE THE FACTORS BEHIND THE CONVERTIBLE MARKET'S REBOUND IN 1995?
This past year was a good year for most U.S. financial markets. The record
negative bond market returns in 1994 removed the excess leverage that had
entered bond markets in prior years. Therefore, the bond market began 1995 in
good shape and continued to rally as inflation remained under control. In
addition, companies continued to beat earnings expectations for most of the
year, supporting higher stock prices. This combination was a much different
backdrop for convertibles than in 1994 when inflation appeared to be rising and
excess leverage and speculation forced portfolio liquidations.
WHY DID POPULAR INDICES SUCH AS THE S&P 500 AND DOW INDUSTRIALS OUTPERFORM THE
CONVERTIBLE MARKET IN 1995?
Although the convertible market enjoyed returns of more than 20 percent, the S&P
500 and Dow Industrials, which consist of large-capitalization stocks,
outperformed smaller capitalization indices in 1995. Convertibles traditionally
track the performance of smaller capitalization equity indices such as the
Russell 2000. This small-cap bias exists because most issuers of convertibles
are mid-size growing companies that require equity-like financing to support
growth.
Additionally, at different times there are major variations in industry
weightings between the convertible universe and the S&P 500. For example, the
convertible universe lacks large- capitalization consumer staple companies, such
as McDonald's and Procter & Gamble, which were strong performers during 1995.
The consumer staple group always has been under weighted in the convertible
universe because these companies don't require convertible financing.
Convertible performance also was penalized in 1995 due to the absence of large
pharmaceutical companies in the convertible universe, which also were market
leaders.
WHEN SELECTING CONVERTIBLE SECURITIES, SOME MANAGERS FOCUS ON THE BOND PORTION
OF THE CONVERTIBLE WHILE OTHERS FOCUS ON THE UNDERLYING EQUITY. DESCRIBE LYNCH
& MAYER'S APPROACH.
Lynch & Mayer emphasizes the underlying equity when investing in a convertible.
The convertible must be attractively priced, but we primarily look for positive
equity fundamentals. A fixed-income approach can provide good returns but is
more dependent on decreasing interest rates to provide high returns. With
interest rates at historically low levels, an equity approach should yield
superior returns over the intermediate term. Regardless of the interest rate
environment, equities of superior companies should appreciate. Therefore, we
look for attractive convertibles with superior underlying equity fundamentals,
to provide the returns our shareholders have come to expect.
WHAT WILL BE THE KEY FACTORS AFFECTING THE PERFORMANCE OF THE FUND IN 1996?
The primary factors that will determine convertible performance for 1996 will be
interest rates, small-cap equity performance and industry performance. Interest
rates are always an important determinant of convertible performance. As long
as interest rates do not rise dramatically, convertibles should perform
reasonably well. Our equity-oriented strategy also is less dependent on
interest rates than the market. Additionally, a rotation in the equity markets
toward small-capitalization stocks should help the Fund. Investors should shift
their focus away from the large-capitalization stocks, especially the consumer
staples and pharmaceuticals that are overvalued relative to the small-cap growth
stocks. We may see improvement in the health care sector of the convertible
market if Congress passes a resolution on Medicare reform. Year-end uncertainty
has, to date, depressed small-cap companies in this sector. Of course, the most
important factor will be our selection of individual companies.
3
<PAGE>
Portfolio Manager's Discussion
WHAT IS YOUR VIEW ON THE TECHNOLOGY INDUSTRY, AND WHAT DOES THAT IMPLY FOR THE
FUND IN 1996?
The technology sector has been discussed in the press and by market participants
more than any other sector. The volatility of the group can be extremely high
due to the rapid growth of these companies. The reason for this growth is that
many of the companies have products that can drastically change the way people
work and live. Many products that people take for granted today have been
introduced in the past decade. Cordless and cellular phones, pagers, compact
disk players and multimedia computers are relatively new innovations. The
phenomenal growth of these new products can result in tremendous stock
performance for the companies that create and build these products. This rapid
sales growth usually attracts competitors however, causing supply and demand
imbalances to occur. While imbalances may exist today in some product lines, we
still believe that selected convertibles in the technology sector can produce
excellent growth in the future. Selection and timing of purchases will be more
important in 1996 than in 1995, however. We will concentrate our investments in
attractive convertibles of companies with proprietary and growing product lines.
DESCRIBE THE CONDITION OF THE CONVERTIBLE MARKET AT THE END OF 1995.
The convertible market is attractive for a number of reasons. The primary
reason is the increased issuance from attractive medium-sized growth companies.
These are the type of issues that best fit our convertible strategy. Second,
the short maturities that most new issues featured during 1995 continue to
provide excellent downside protection. Another positive feature of the market
is the small difference in yield of convertible bonds versus corporate bonds.
This yield give-up is near historical lows, making convertibles an attractive
yield alternative. Examining convertibles from a statistical viewpoint, the
comparison of conversion premium, yield, and break-even paints a mixed picture.
Convertibles appear more expensive than at year-end 1994, but less expensive
than at year-end 1993. The theoretical valuations models also are in the
middle of historic ranges.
(continued)
4
<PAGE>
THE LINCOLN NATIONAL CONVERTIBLE SECURITIES FUND HAS HAD CONSISTENT LONG-TERM
PERFORMANCE SINCE 1988. HOW HAVE YOU ACHIEVED THIS RECORD?
Lynch & Mayer, the Fund's subadvisors, approaches convertibles from an equity
viewpoint which differs from many other convertible managers. We combine our
basic equity philosophy (investing in companies undergoing positive fundamental
change) with sound convertible security analysis. We realize that companies
undergoing change have inherent risks, and convertibles are an ideal way to
invest in these companies. The convertible securities' priority claim, higher
yield and fixed maturity give the Fund protection if we are wrong, and allow us
unlimited upside performance if we are right.
5
<PAGE>
Portfolio Performance
As of December 31, 1995
The following graph presents the cumulative net asset value total return for the
Fund compared to the First Boston Convertible Securities Index.
The graph below shows the results for each category of what $1,000 invested in
1986 would have grown to by the end of 1995 assuming reinvestment of dividends.
6
<PAGE>
Annual Performance of
Lincoln National Convertible Securities Fund, Inc. vs. Indices
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 Cumulative 5 Yr. Return Annualized
<S> <C> <C> <C> <C> <C> <C>
Lincoln National Convertible Securities 41.90% 11.27% 28.05% (1.96%) 19.59% 18.84%
First Boston Convertible Securities 29.12% 17.60% 18.57% (4.70%) 23.70% 16.24%
Index
Merrill Lynch Convertible Index 32.06% 20.92% 18.88% (7.07%) 24.69% 17.08%
Lipper Convertible Mutual Fund Index 29.90% 18.14% 18.39% (3.76%) 20.81% 16.13%
S&P 500 Index (with dividends 30.40% 7.61% 10.06% 1.31% 37.53% 16.56%
reinvested)
Russell 2000 46.04% 18.42% 18.89% (1.82%) 28.33% 20.97%
Lehman Gov't/ Corporate Bond Index 16.13% 7.58% 11.03% (3.51%) 19.24% 9.80%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Total Fund Investments
At Market or Fair Values as of December 31
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
$ (000) % of Total $ (000) % of Total $ (000) % of Total
-------- ---------- -------- ---------- -------- ----------
Public Debt Securities 85,808 72% 60,553 56% 82,614 70%
Direct Placement Securities 2,832 2 2,758 3 4,595 4
Convertible Preferred Stock 29,671 25 41,938 38 38,881 33
Common Stock 2,513 2 1,167 1 --- ---
Short-term Investments 2,196 2 4,601 4 7,587 6
Liabilities over Other Assets (3,933) (3) (2,207) (2) (15,102) (13)
-------- --- -------- ---- -------- ---
NET ASSETS $119,087 100 % $108,810 100 % $118,575 100%
======== === ======== ==== ======== ===
- ------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
Common Stock Market Prices & Net Asset Value History*
<TABLE>
<CAPTION>
Market Price Market Price Market Price Net Asset Net Asset Net Asset
High Low Close Value High Value Low Value Close
Volume
-------
1995
<S> <C> <C> <C> <C> <C> <C> <C>
1st Quarter $17.00 $15.00 $16.00 330,000 $17.98 $17.06 $17.98
2nd Quarter 17.63 15.88 16.63 303,900 18.92 18.03 18.72
3rd Quarter 18.25 16.50 18.00 385,400 19.90 18.72 19.75
4th Quarter 18.38 16.75 16.75 304,300 19.75 18.68 18.71
1994
1st Quarter 20.75 17.75 17.88 502,200 19.70 18.27 18.27
2nd Quarter 18.50 16.50 16.88 309,300 18.45 17.15 17.15
3rd Quarter 18.00 16.00 16.13 277,100 18.51 17.27 18.46
4th Quarter 17.25 15.13 15.38 406,900 18.45 17.10 17.10
1993
1st Quarter 18.25 16.38 18.00 445,600 18.74 17.55 18.74
2nd Quarter 19.38 17.88 18.75 329,100 19.92 18.61 19.92
3rd Quarter 20.13 18.63 19.50 306,700 21.01 19.80 21.01
4th Quarter 21.13 18.25 19.25 469,800 21.75 18.84 18.84
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Shares are listed on the New York Stock Exchange under the trading symbol LNV.
* Unaudited
8
<PAGE>
Shareholder Meeting Results
The Fund had their annual Shareholder meeting on May 19, 1995. Two proposals
were presented to shareholders for vote. PROPOSAL I - "ELECTION OF DIRECTORS"
and PROPOSAL II - "RATIFICATION OF THE SELECTION OF AUDITORS." A total of
5,571,736 of Common Stock shares (87.55% of the total outstanding shares) were
voted. The following table highlights the results of the vote.
<TABLE>
<CAPTION>
Number of Shares Voted Number of Shares Voted Number of Shares
FOR AGAINST ABSTAINED
---------------------- ---------------------- ----------------
PROPOSAL I
<S> <C> <C> <C> <C>
Election of Directors R. Burridge 5,520,902 50,834 ---
A. Cepeda 5,509,630 62,106 ---
R. Deshaies 5,514,527 57,209 ---
C. Freund 5,517,091 54,645 ---
T. Mathers 5,504,183 67,553 ---
T. McMeekin 5,503,812 67,924 ---
D. Toll 5,518,445 53,291 ---
A. Warner 5,496,203 75,533 ---
F. Young 5,502,673 69,063 ---
PROPOSAL II
Ratification of the Selection of
Auditor
(Coopers & Lybrand L.L.P.) 5,507,311 19,742 44,683
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Dividend History
The table below shows the nine-year common dividend per share history.
<TABLE>
<CAPTION>
YEAR ANNUAL DIVIDEND YEAR ANNUAL DIVIDEND
- ------- --------------- ---- ---------------
<S> <C> <C> <C>
1987 $1.13 1992 $2.14
1988 0.95 1993 2.92
1989 1.57 1994 1.08
1990 1.02 1995 1.64
1991 1.02
- -----------------------------------------------
</TABLE>
9
<PAGE>
Financial Highlights
Year Ended December 31
(For each share of common stock outstanding throughout the year)
<TABLE>
<CAPTION>
1995 1994 1993 1992
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 17.10 $ 18.84 $ 17.62 $ 18.04
($)
Net Investment Income 0.91 0.94 0.90 1.01
Net Realized and Unrealized Gain
(Loss)
on Investments 2.34 -1.60 3.24 0.71
-------- -------- -------- --------
Total from Investment Operations 3.25 -0.66 4.14 1.72
Less Distributions
Dividends from Net Investment -0.96 -0.95 -1.05 -0.97
Income
Distributions from Net -0.68 -0.13 -1.87 -1.17
Realized Gains -------- -------- -------- --------
Total Distributions -1.64 -1.08 -2.92 -2.14
-------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD ($) $ 18.71 $ 17.10 $ 18.84 $ 17.62
======== ======== ======== ========
Per Share Market Value, End of Period $ 16.75 $ 15.38 $ 19.25 $ 16.50
($)
Total Investment Return (based on 19.57% (14.49%) 34.36% 20.26%
Market Value)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $119,087 $108,810 $118,575 $110,743
Ratio of Operating Expenses to Average 1.09% 1.09% 1.02% 0.83%
Net Assets
Ratio of Net Investment Income to 4.91% 5.18% 4.58% 5.49%
Average Net Assets
Portfolio Turnover Rate 127.24% 127.32% 222.00% 166.26%
Average Commission Rate Paid Per Share .0579
- ------------------------------------------------------------------------------------
</TABLE>
( ) Denotes deduction.
10
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
1991 1990 1989 1988 1987 1986 *
-------- ------- ------- ------- ------- -------
$13.59 $ 15.21 $ 13.41 $ 12.62 $ 14.38 $ 13.95
0.97 1.03 1.53 0.95 0.92 0.43
4.50 -1.63 1.84 0.79 -1.55 0.20
-------- ------- ------- ------- ------- -------
5.47 -0.60 3.37 1.74 -0.63 0.63
- -1.02 -1.02 -1.07 -0.95 -1.13 -0.20
0.00 0.00 -0.50 0.00 0.00 0.00
-------- ------- ------- ------- ------- -------
-1.02 -1.02 -1.57 -0.95 -1.13 -0.20
-------- ------- ------- ------- ------- -------
$18.04 $ 13.59 $ 15.21 $ 13.41 $ 12.62 $ 14.38
======== ======= ======= ======= ======= =======
$15.50 $ 11.50 $ 13.38 $ 11.75 $ 11.75 $ 15.75
43.65% (6.43%) 27.23% 8.09% (18.22%) 6.33%
$ 113,398 $85,434 $95,655 $91,607 $87,304 $99,460
0.89% 0.97% 0.94% 0.96% 0.88% 0.38%
5.96% 7.21% 6.64% 6.90% 6.43% 3.08%
132.99% 134.64% 147.31% 110.70% 73.41% 34.00%
- --------------------------------------------------------------------
</TABLE>
* Covers the period of June 26, 1986 (commencement of investment activity) to
December 31, 1986. Accordingly, the ratios and portfolio turnover have not been
calculated on an annualized basis.
11
<PAGE>
The accompanying notes are an integral part of the financial statements.
Tax Information
Income dividends received by a shareholder must be reported for federal income
tax purposes as ordinary income. THE FUND DISTRIBUTED $1.64 PER SHARE OF
ORDINARY INCOME FOR THE TAX YEAR 1995. Dividend payments made in June,
September and December 1995 and mid-January 1996 are taxable in the 1995 tax
year.
In accordance with the Tax Reform Act of 1986, regulated investment companies
are required to distribute at least 98 percent of their net investment income
earned in the calendar year to avoid a four percent federal excise tax on
undistributed net investment income. Under the act, dividends declared in
December, payable to shareholders of record on a date in December and paid
before the following February 1, are treated as paid by the Fund and received by
the shareholders in December.
The extent to which the following dividend payments qualify (as provided by the
Internal Revenue Code and subject to certain limitations set forth therein) for
the dividend received deduction for corporations, is shown in the table below.
<TABLE>
<S> <C>
@mini table@Corporation's Dividend
Received Deduction - Percent
21.0578%
Corporation's Dividend Received
Deduction - Amount Per Share
$ 0.3453
- --------------------------------------------------
</TABLE>
For the year ended December 31, 1995, the Fund realized long-term capital gains.
As set forth in the prospectus of the Fund, it is the intention to retain these
gains as a means of increasing the asset base of the Fund. These gains, even
though not distributed to the shareholder, are taxable; however, the tax has
been paid by the Fund. In February 1995, the Fund will distribute IRS Form 2439
to shareholders of record as of December 31, 1995. IRS Form 2439 indicates each
shareholder's pro-rata portion of the undistributed long-term capital gains on
Line 1 of the form ($0.16441133 per share). YOUR LONG-TERM CAPITAL GAINS
PORTION MUST BE REPORTED ON SCHEDULE D OF YOUR INCOME TAX RETURN AS LONG-TERM
CAPITAL GAINS. Your share of the tax paid by the Fund is shown on Line 2
($0.05754397 per share) of IRS Form 2439.
YOUR SHARE OF THE TAX PAID BY THE FUND SHOULD BE REFLECTED ON YOUR TAX RETURN AS
A TAX CREDIT (WHICH
WILL REDUCE YOUR FEDERAL INCOME TAX LIABILITY AND MAY RESULT IN A TAX REFUND).
Organizations exempt from tax under section 501(a) (and to which section 511
does not apply) and trustees for Individual Retirement Accounts described in
section 408 (including a custodian described in section 408(h)) can claim a
refund by filing Form 990-T Exempt Organization Business Income Tax Return, as
follows: (1) complete the heading and signature area, (2) enter the refund or
credit on the appropriate lines, and (3) indicate at the top of the return
"Claim for Refund Shown of Form 2439."
In addition, shareholders of record as of December 31, 1995, are entitled to
increase, for federal income tax purposes, the basis of their shares by the
excess of Line 1 over Line 2. This amounts to $0.10686736 per share.
12
<PAGE>
Statement of Net Assets
As of December 31, 1995
INVESTMENTS - NOTES A & B
<TABLE>
<CAPTION>
* Non-Income producing. Year Ended December 31, 1995 Year Ended December 31, 1994
+ Securities that are eligible for sale
under SEC Rule 144A.
The accompanying notes are an integral
part of the financial statements.
Statements of Operations
- ----------------------------------------------------------------------
<S> <C> <C>
Investment Income:
Income:
Interest $ 4,949,990 $ 4,432,705
Dividends 2,133,269 2,820,879
-------------------------------------------------------------
TOTAL INCOME 7,083,259 7,253,584
Expenses:
Management Fees - Note C 1,048,548 989,876
Director Fees 69,000 73,500
Professional Fees 27,631 41,225
Printing, Stationery, and 45,564 27,348
Supplies
Stock Transfer and Dividend 25,402 29,454
Disbursing Fees
Postage and Mailing Fees 26,304 45,790
New York Stock Exchange Fees 16,170 16,170
Custodian and Registrar Fees 13,133 9,305
Other 13,428 28,047
-------------------------------------------------------------
TOTAL OPERATING EXPENSES 1,285,180 1,260,715
-------------------------------------------------------------
NET INVESTMENT INCOME 5,798,079 5,992,869
Net Realized and Unrealized Gain(Loss)
on Investments:
Net Realized Gain on Investments 5,579,661 6,100,801
Increase (Decrease) in Net 9,702,780 (14,498,099)
Unrealized Appreciation of
Investments
Income Taxes - Note F (366,192) (1,837,694)
-------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN(LOSS) 14,916,249 (10,234,992)
ON INVESTMENTS
-------------------------------------------------------------
NET INCREASE(DECREASE) IN NET ASSETS $20,714,328 ($4,242,123)
RESULTING FROM OPERATIONS
-------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
( ) Denotes deduction.
The accompanying notes are an integral part of the financial statements.
Statements of Changes in Net Assets
13
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1995 Year Ended December 31, 1994
<S> <C> <C>
Changes from Operations:
Net Investment Income $ 5,798,079 $ 5,992,869
Net Realized Gain on Investments
(net of taxes: 1995 - 5,213,469 4,263,107
$366,192; 1994 - $1,837,694)
Increase(Decrease) in Net
Unrealized Appreciation
of Investments 9,702,780 (14,498,099)
-------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS 20,714,328 (4,242,123)
RESULTING FROM OPERATIONS
Distributions to Shareholders from Net (6,123,660) (6,020,427)
Investment Income
Distributions to Shareholders from Net (4,312,799) (850,246)
Realized Gain on Investments
CHANGES FROM CAPITAL SHARES
TRANSACTIONS:
Net Proceeds from Shares Issued
Under Dividend
Reinvestment Program --- 1,347,355
-------------------------------------------------------------
TOTAL INCREASE(DECREASE) IN NET ASSETS 10,277,869 (9,765,441)
Net Assets at Beginning of Year 108,809,519 118,574,960
-------------------------------------------------------------
NET ASSETS AT END OF YEAR * 119,087,388 108,809,519
-------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
* Includes distributions in excess of net investment income: 1995 - ($81,828);
undistributed net investment income:
1994 - $115,157.
The accompanying notes are an
integral part of the financial
statements.
14
<PAGE>
Portfolio of Investments by Industry
Classification
(Unaudited)
<TABLE>
<CAPTION>
@mini table@ Market or Fair Value T ECHNOLOGY
A llstate Corporation $2,035,650 A ltera Corporation $ 2,111,369
P enncorp Financial Group 1,320,438 B ay Networks Inc. 1,496,250
----------------------
<S> <C> <C> <C> <C> <C> <C>
3,356,088 2.8% Integrated Device Technology 1,107,713
L am Research 1,757,500
M ACHINERY & EQUIPMENT O rbital Sciences Corp. 1,127,500
A GCO Corporation 2,497,095 T elxon Corporation 1,312,500
--------------
A lfa S.A. de C.V. 2,450,000 8,912,832 7.5%
Thermo Electron Corporation 1,166,400
----------------------
6,113,495 5.1% TELECOMMUNICATION
M INING W orldCom Inc. 2,268,000
F REEPORT-McMoran C & G 2,500,188 2.1% Intelcom Group 1,323,506
U nited States Cellular Corp. 2,499,000
--------------
O FFICE AND OFFICE EQUIPMENT 6,090,506 5.1%
Danka Business Systems PLC 2,319,850
C areer Horizons Inc. 1,231,200 T RANSPORTATION
----------------------
3,551,050 3.0% Reno Air Inc. 1,552,000
A MR Corporation 1,521,450
P APER AND PAPER PRODUCTS A ir Express International 942,812
--------------
A lco Standard Corporation 2,484,630 4,016,262 3.4%
Riverwood International Corp. 2,566,875
----------------------
5,051,505 4.2% WASTE MGMT & EQUIPMENT
U S Filter Corp. 2,095,300
P HARMACEUTICALS I nternational Technology 1,475,212
--------------
G enzyme Corporation 1,955,250 3,570,512 3.0%
Liposome Company Inc. 1,441,750
----------------------
3,397,000 2.9%
--------------
T otal Long-Term Investments $120,824,244 101.5%
--------------
RESTAURANTS
H ometown Buffet Inc. 1,633,850 1.4%
R ETAIL
L owe's Companies 2,015,000 1.7%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
Notes to Financial Statements
NOTE A - SUMMARY OF ACCOUNTING POLICIES
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. One of the policies of the Fund is that the investment portfolio will
have a significant component of convertible securities, which may include direct
placement convertible securities. The following is a summary of significant
accounting policies followed by the Fund in the preparation of its financial
statements.
INVESTMENTS
Cost represents original cost except in those cases where there is "original-
issue discount" as defined by the Internal Revenue Service. In those cases, the
cost figure shown is amortized cost. "Original-issue discount" is being
amortized over the period to the next expected call date.
Investments in equity securities traded on a national exchange are valued at
their last reported sale price on the date of valuation; equity securities
traded in the over-the-counter market and listed securities for which no sale
was reported on that date are valued at the last reported bid price. Public
debt securities and certain direct placement securities, which are traded in a
secondary market system for trading restricted securities (in reliance upon SEC
Rule 144A), are valued at the composite price as determined by a pricing service
which uses market transactions as inputs. Short-term investments are stated at
cost which approximates market.
Direct placement securities are restricted as to resale. Except for certain
direct placement securities traded in a secondary market system for trading
restricted securities, direct placement securities have no quoted market values.
The amounts shown as fair values for direct placement securities with no
available quoted market values represent values approved by the Board of
Directors. Many factors are considered in arriving at fair value, including,
where applicable, yields available on comparable securities of other issuers;
changes in financial condition of the issuer; price at which the security was
initially acquired; extent of a private market for the security; period of time
before the security becomes freely marketable or becomes convertible;
anticipated expense to the Fund for
16
<PAGE>
registration or qualification of the security for public sale; potential
underwriting commissions if underwriting would be required for sale; size of the
issue and the proportion held by the Fund; if a convertible security, whether or
not it would trade on the basis of its stock equivalent; and existence of merger
proposals or tender offers involving the issuer.
The Board of Directors of the Fund is composed, in part, of individuals who are
interested persons (as defined in the Investment Company Act of 1940) of the
Advisor or affiliated companies. Since the fee paid to the Advisor is affected
by the valuation placed on securities held in the Fund's portfolio, valuations
are approved by a majority of the Directors who are not interested persons. For
1995, all direct placement securities, which totaled $2,832,053 and represent
2.4% of the total net assets, were valued by the directors who are not
interested persons.
INCOME TAXES
It is the intention of the Fund to distribute substantially all net investment
income and net short-term realized gains. The Fund therefore qualifies for tax
treatment accorded to "regulated investment companies" as defined by 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 short-term realized gains distributed to shareholders.
The Fund does not intend to distribute net realized long-term capital gains.
The Fund intends to retain and reinvest such gains and, accordingly, to pay
applicable income taxes on the excess of such gains over net realized short-term
capital losses, if any.
17
<PAGE>
Notes to Financial Statements
NOTE A (CONTINUED)
OTHER
Security transactions are accounted for on the day after the trade date for
equity and debt securities. 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 except for interest in default,
or interest deferred by a change in the terms of the loan agreement, which is
recorded when received. In addition, in the preparation of financial statements
management relies on the use of estimates where necessary.
For the year ending December 31, 1995, only one security, Physicians Clinical
Laboratories, Inc. is in default. The company has missed its last two interest
payments. No reorganization plan has been announced as of yet.
Distributions to common shareholders are recorded on the ex-dividend date.
NOTE B - INVESTMENTS
Direct placement securities are restricted as to resale because these securities
have not been registered with the Securities and Exchange Commission (SEC). The
terms under which direct placement securities are acquired, however, sometimes
provide for limited registration rights if requested by the security owner.
These registration rights usually relate to common stock issued or issuable upon
conversion of convertible securities or the exercise of warrants.
The following is a summary of registration rights pertaining to direct placement
securities held by the Fund:
1) Common shares issuable upon conversion of convertible securities or exercise
of warrants are entitled to at least one free registration and to certain free
"piggyback" registration rights.
2) Warrants owned by the Fund do not carry registration rights.
3) All debt and preferred securities have no registration rights, but can be
sold to other institutional investors after a minimum holding period, subject
to certain requirements.
(continued)
18
<PAGE>
The SEC requires that, as of the date a direct placement security is acquired,
the market value of an equivalent unrestricted security of the same company be
provided. Since there are no comparable publicly traded securities for any of
these companies outstanding, no such comparative values have been provided.
The aggregate cost of investments purchased and the aggregate proceeds from
investments sold (exclusive of short-term investments) amounted to $150,347,139
and $151,424,268, respectively, in 1995; and $147,195,897 and $158,585,330,
respectively in 1994.
NOTE C - MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Under an agreement between the Fund and Lincoln Investment Management, Inc. (the
Advisor), the Advisor manages the Fund's investment portfolio, maintains its
accounts and records, and furnishes the services of individuals to perform
executive and administrative functions of the Fund. In return for these
services, the Advisor receives a management fee of .21875% of the net assets of
the Fund as of the close of business on the last business day of the quarter
(.875% on an annual basis). Prior to May 21, 1993, the Fund paid a management
fee of .15% (.6% on an annual basis) of net asset value of the Fund as of the
close of business on the last business day of the quarter.
Securities regulations of various states in which the Fund has shareholders
provide that, if expenses borne by the Fund in any year (including the advisory
fee but excluding interest, taxes, brokerage fees and where permitted,
extraordinary expenses) exceed certain limitations, the Advisor must reimburse
the Fund for any such excess at least annually and prior to the publication of
the Fund's annual report. These expense limitations may be raised or lowered
from time to time. The Fund believes the most restrictive expense limitation of
state securities commissioners is 2.5% of the Fund's average daily net assets up
to $30,000,000; 2% of the next $70,000,000
19
<PAGE>
Notes to Financial Statements
NOTE C (CONTINUED)
and 1.5 percent of average daily net assets in excess of $100,000,000 during the
applicable year. During any year, the Advisor will be bound by the most
stringent applicable requirements of any state in which the Fund has
shareholders. No reimbursement was due for 1995 and 1994.
Certain officers and directors of the Fund are also officers or directors of the
Advisor. The compensation of unaffiliated directors of the Fund is borne by the
Fund.
NOTE D - EXCESS OF LIABILITIES OVER OTHER ASSETS
The net asset caption "excess of liabilities over other assets" consisted of the
following:
<TABLE>
<CAPTION>
<S> <C>
Accrued investment income receivable
$ 1,174,515
Receivable - investment securities sold
1,128,006
Accrued dividends receivable 283,929
Accrued dividends payable (5,854,599)
Payable - investment securities
purchased
(1,080,000)
Accrued federal income taxes payable (366,192)
Management fees payable (261,075)
Other - Net 1,218
Cash 1,041,163
--------------
($3,933,035)
- ------------------------------------------------------
</TABLE>
(continued)
20
<PAGE>
NOTE E - NET ASSETS
Net assets at December 31, 1995, consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
Common Stock, par value $.001 per share
(authorized 20,000,000 shares), Issued
and outstanding 6,363,695 shares
$ 6,364
Proceeds in excess of par value of
shares issued
89,730,569
Undistributed realized gain on
investments, net of taxes
18,771,956
Distributions in excess of net
investment income
(81,828)
Net unrealized appreciation of
investments
10,660,327
--------------
Total Net Assets $119,087,388
- ------------------------------------------------------
</TABLE>
NOTE F - INCOME TAXES
The cost of investments for federal income tax purposes is the same as for book
purposes. At December 31, 1995, the aggregate gross unrealized appreciation of
investments was $17,117,298 and the aggregate gross unrealized depreciation was
$6,456,971.
21
<PAGE>
Notes to Financial Statements (continued)
NOTE G - UNAUDITED QUARTERLY RESULTS OF OPERATIONS
The following is a tabulation of the unaudited quarterly results of operations.
Per share data is based on shares outstanding at the end of each quarter:
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
------------ ---------- ---------- ----------
1995 (Thousands of dollars, except per share data)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment Income $ 1,849 $ 1,840 $1,600 $ 1,794
Net Investment Income 1,545 1,487 1,284 1,482
Net Realized and Unrealized Gain (Loss) 4,057 4,744 6,801 (686)
on Investments
Per Share Amounts:
Net Investment Income $ 0.24 $ 0.23 $ 0.20 $ 0.23
Net Realized and Unrealized $ 0.64 $ 0.75 $ 1.07 $ (0.11)
Gain (Loss) on Investments
1994
- -----------------------------------------------------------------------------------------
Investment Income $ 1,611 $ 1,767 $1,934 $ 1,942
Net Investment Income 1,290 1,433 1,618 1,652
Net Realized and Unrealized Gain(Loss) (4,951) (7,026) 8,229 (6,487)
on Investments
Per Share Amounts:
Net Investment Income $ 0.20 $ 0.23 $ 0.25 $ 0.26
Net Realized and Unrealized $ (0.77) $ (1.10) $ 1.29 $ (1.02)
Gain (Loss) on Investments
- -----------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
Report of Independent Accountants
To the Shareholders and Board of Directors of Lincoln National Convertible
Securities Fund, Inc.:
We have audited the accompanying statement of net assets of Lincoln National
Convertible Securities Fund, Inc., including the portfolio of investments in
securities as of December 31, 1995, and the related statements of operations,
and changes in net assets for each of the two years in the period then ended,
and the financial highlights for each of the ten 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 generally accepted auditing
standards. Those standards require that we plan and perform the audits 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. Our procedures included confirmation of securities owned as of
December 31, 1995, 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 Convertible Securities Fund, Inc. as of December 31, 1995, the
results of its operations, changes in its net assets for each of the two years
in the period then ended, and the financial highlights for eachof the ten years
in the period then ended, in conformity with generally accepted accounting
principles.
Fort Wayne, Indiana
January 26, 1996
23
