<PAGE>
Lincoln National Convertible Securities Fund, Inc.
1996 Annual Report
<TABLE>
<CAPTION>
Table of Contents Page
<S> <C>
Manager Profile ..................................... 2
Investment Policies & Objectives ....................... 2
President's Letter .................................... 3
Portfolio Manager's Discussion ....................... 4
Portfolio Performance .............................. 6
Annual Performance of the Fund vs. Indices ............ 6
Total Fund Investments ............................... 7
Common Stock Market Prices & Net Asset Value History 7
Dividend History ...................................... 8
Tax Information ...................................... 8
Shareholder Meeting Results ......................... 9
FINANCIAL STATEMENTS:
Financial Highlights ............................. 10
Statement of Net Assets ......................... 12
Statements of Operations ......................... 19
Statements of Changes in Net Assets ............ 20
Portfolio of Investments by Industry Classification 21
Notes to Financial Statements .................... 23
Report of Independent Accountants .................... 26
Directors & Officers of the Fund ...................... 27
Corporate Information ................................. 28
</TABLE>
<PAGE>
Manager Profile
Throughout it's 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. In 1995, it became a wholly owned subsidiary
of LNIC.
In 1993, Robert Schwartz became the portfolio manager for the Fund
at Lynch & Mayer. 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
(CFA) 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,
1996, has chosen not to do so.
<PAGE>
President's Letter
January 29, 1997
Dear Shareholders:
This past year was a positive year for the domestic financial markets.
The equity markets showed above average appreciation, while most bond
indices realized moderate gains. The convertible securities market
benefited from this positive environment and the convertible benchmarks
turned in double-digit performance. Your Fund's performance exceeded the
returns of the convertible benchmarks, and ranked first in its Lipper
Analytical Service, Inc., category for 1996.
Fund's net asset value increased to $18.92, a 20.4 percent gain including
dividends and before long-term capital gain taxes. Dividends totaled
$3.33 for the year, including regular dividends of $ 0.96, and a dividend
of $2.35, attributable to short term capital gains. The Fund's share
price ended the year at $17.50, up slightly from $16.75. The share price
closed the year at a 7.5 percent discount to net asset value, slightly
less than the 10.5 percent discount at year-end 1995.
The performance of your Fund is notable this year in light of the
underperformance for the year of smaller capitalization equities as
compared to large capitalization equities. The Russell Index of 2000
smaller stocks return of 16.5 percent lagged the S&P 500 index of larger
stocks by 6.4 percent. The Fund's holdings consist primarily of
convertibles that convert into small and mid-sized companies. The
performance of the equity and convertible markets is also notable in that
interest rates actually increased during the year. The 30 year treasury
yield increased 0.69 percent during 1996. Although increasing interest
rates are not typically a positive for the convertible and equity
markets, a moderate increase is not necessarily a significant negative.
Offsetting some of the increase in interest rates this year was a
tightening of credit spreads in the corporate bond market. Convertibles
also performed well when compared to their underlying equities. For
example, the First Boston Convertible Securities Index achieved 92
percent of the total return of the underlying equities -- a high
percentage in the market.
Two distinct periods for the Fund were evident in 1996. The Fund
experienced excellent first half performance led by strong performance in
small and medium size growth companies. However a June correction in
smaller growth stocks began a period of outperformance by larger company
equities that lasted until December. In the second half of the year,
small stocks, as measured by the Russell 2000, lagged larger stocks as
measured by the S&P 500 by over 6 percent. Semiconductor and energy
equities were the leading industries for the year, although much of the
return for these sectors came in the fourth quarter of 1996. Due to
greater perceived risk in many of the technology convertibles at
mid-year, the Fund was underweighted in this sector through most of the
second half of 1996. This was a primary reason for a lackluster fourth
quarter performance for the Fund. For 1997, we are optimistic. We view
the prospects for small and medium sized growth companies to be quite
attractive. Relative valuations and expected growth rates point to a
potential for this sector to reverse the annual underperformance that
began in 1994. Interest rates should continue to be stable in 1997. The
Federal Reserve continues to do an excellent job of balancing the risk of
inflation with a continuation of stable economic growth. We expect
interest rates will continue to move in a moderate range, and earnings
will be the most important factor determining performance for 1997.
The convertible market is reasonably valued, and we continue to find
attractive issues of medium sized growth companies that fit our
investment philosophy. As the Fund's investment manager,
we will continue to use the same approach that has served our
shareholders well in the past. We 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
continue to perform well through changing market and economic cycles.
Sincerely,
/s/ H. Thomas McMeekin
H. Thomas McMeekin
President
<PAGE>
Portfolio Manager's Discussion
What is an appropriate benchmark to compare the performance of the
Fund with the convertible securities market?
There are many comparisons that an investor can make to examine the
performance of a convertible fund. The first comparison should be
with a convertible securities index. Many major wall street
brokerages publish convertible indices. Two popular indices are
from First Boston and Merrill Lynch. There are also averages of
open and closed-end funds published by both Lipper and Morningstar.
These averages show how different funds compare to each other over
different periods. Knowledge of a fund's strategy can
also help an investor compare a fund to an appropriate benchmark.
For example, a typical convertible fund's performance should fall
between bonds and stocks due to the hybrid nature of convertibles.
Additionally, as the convertible market, as a whole, consists
primarily of mid-size companies, convertible market performance can
often be explained by examining a combination of a bond index and
an index of mid-sized companies An example of a bond index is the
Lehman Government/Corporate index. Examples of smaller company
indices would be the Russell 2000 or the S&P Mid-Cap 400. Finally,
the Lincoln National Convertible Securities Fund follows an equity
oriented strategy, so our performance may have a slightly higher
correlation to the equity indices than a fixed income-oriented
convertible manager.
How well did the convertible securities market perform in 1996?
The major convertible indices had annualized returns ranging from
13.8 percent for the First Boston Convertible Securities index to
15.9 percent for the Merrill Lynch Convertible Securities index.
This is slightly above their respective five year returns
of 13.3 and 14.1. The Fund's return of 20.4 percent, after
expenses, is also slightly above its 15 percent annualized five
year return.
On a relative basis, the convertible indices were slightly below
that of the Russell 2000 index of smaller stocks, and lagged
indices of larger capitalization companies by a greater margin.
However, convertibles achieved 92 percent of the return of their
underlying equities (using the First Boston Convertible Securities
Index), which is a high participation rate. Compared with
non-convertible bonds, the performance was very positive. The
Lehman Government/Corporate Index returned only 2.9 percent for
1996. One factor that helped the convertible market in 1996
included a balanced supply and demand environment. Twenty-five
percent of the market was redeemed during the year, creating cash
that needed to be reinvested in other issues.
Has the convertible market changed much in the past five years?
Many changes have occurred in the convertible marketplace over the
past five years.
The type of issuer:
In the three years ending 1992, there were a large number of
issues from large capitalization domestic companies. Many of
these issuers were companies that were trying to improve
their balance sheets, such as banks, auto, manufactures, and
airlines. In the past three years the typical issuer has
changed back to the traditional convertible issuer, small and
medium sized growth companies that need financing to expand
their companies.
The type of convertible securities issued:
Lyons, or zero coupon convertibles, were popular in the early
1990's. This year, however, Lyons only accounted for 2
percent of all new issues. Mandatory convertible securities,
initially issued in 1991, now make up more than 15 percent of
the market. Mandatory convertibles are more similar to common
stocks than they are to traditional convertible bonds.
<PAGE>
Portfolio Manager's Discussion
The prevalence of 144A securities and trust securities:
More than 50 percent of the new issues during 1996 were 144A
securities. Trading of these securities is restricted to
institutional trading when first issued, and makes it
difficult for the individual investor to invest in
convertibles on their own. This past year was also a big year
for trust securities. Trust issues look like convertible
preferreds to the buyer, but are treated as bonds by the
issuer. Because of the positive tax treatment received by the
issuer of these securities, the use of these securities
should continue to grow.
Many investors are nervous about the level of the equity markets.
How do convertible securities, and this fund in particular, reduce
the risk of investing in the equity market?
Two aspects of convertible securities reduce the risk compared to
investing in the common stocks. The first is a much higher yield
than the underlying equity. Many types of mid-size growth companies
the fund invests in have little or no dividend yield. However, the
typical convertible bond issued by these companies has a 6 percent
or greater yield. Convertible bonds and some convertible
preferreds also have stated maturity dates and values. The
combination of a fixed maturity and a much higher yield provides
considerable downside protection to the fund's holdings. We also
continuously monitor the fund's positions to control risk. As
convertibles increase in price and the convertible price moves
farther away from its straight bond floor and has less downside
protection, we typically swap part or all of the position into a
more defensive security. We also favor bonds with fixed maturities
over less defensive securities. Today, 65 percent of our holdings
are in traditional convertible bonds. The overall portfolio yield
and premium are also monitored to control risk, while maximizing
the fund's overall return potential. We also monitor the
underlying equities to insure that the equity valuation is
warranted by each company's prospects. We sell a security when the
underlying equity valuation is not justified.
Can you explain your investment philosophy and give an example of a
current holding?
Our investment philosophy begins with our underlying equity
approach. We look for companies that are undergoing significant
positive fundamental change that can lead to dramatically higher
earnings. We realize however, that fast growing and dynamic
companies may encounter disappointments. To minimize any negative
surprises we combine our equity analysis with convertible analysis.
The yield and maturity values of the convertibles will reduce the
risk of our investment, while allowing for substantial upside. An
example is the Applied Magnetics 7 percent convertible debenture.
This security was issued in March 1996 with a 7 percent yield and a
20 percent conversion premium. Applied is a manufacturer of
components used in disk drives for computers. Before 1995, the
company had been un-focused and had not performed well. New
management focused the company on its core technologies and the
company earned a clear technological lead over its primary
competitors. New design wins with major customers validated the
company's products and the company needed financing to ramp
up its production. This was an example of significant positive
change. The defensive 7 percent yield compensated us for the risk
of a delay in production that would slow the earnings turn around.
But the moderate conversion premium allowed for us to share in
the upside if the earnings growth unfolded as we forecast. From
our purchase in March through the end of 1996, our convertible
holding doubled in price, and achieved 88 percent of the total
return of the underlying stock.
<PAGE>
Portfolio Manager's Discussion
The Fund continues to have consistent performance, typically in the
top of its peer group. How have you achieved this performance?
Lynch & Mayer, the Fund's subadvisors, approach convertibles from
an equity viewpoint that differs from many other convertible
managers. Our basic equity philosophy (investing in companies
undergoing positive fundamental change) has worked in different
economic and market cycles. This equity philosophy, focusing on
the upside potential of an equity, is complemented by our
convertible selection process. The convertible protects us from
the inherent risk of the dynamic companies in which we are
investing.
What is your outlook for the performance of the Fund in 1997?
We are optimistic about 1997. The first factor we look at is our
outlook for small and medium size stocks. Convertible issuers are
predominantly from mid-sized growth companies. An analysis of
valuation levels of these companies versus larger companies
is quite favorable. The expected growth rate of these companies is
also much higher than the larger capitalization companies. The
next most important factor is interest rates. We expect that
inflation will stay under control in 1997. There may be short term
changes in economic growth but the economy should continue its
moderate growth. We also expect that demand of convertibles should
continue to grow. New investors have increasingly embrace
convertibles every year for the past five years. Redemptions are
expected to continue at high levels, which should keep demand high.
Our equity-oriented approach should also help in 1997. Regardless
of what happens to interest rates, if we find attractive
convertibles with superior underlying equity fundamentals, then our
strategy should provide positive returns for our shareholders.
Portfolio Performance
As of December 31, 1996
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 1996 assuming
reinvestment of dividends.
[MOUNTAIN GRAPH]
Data Points 1986 1989 1992 1994 1996
Convertible Securities $1,000 $1,419 $2,138 $2,686 $3,869
First Boston $1,000 $1,301 $1,840 $2,079 $2,927
Annual Performance of Lincoln National Convertible Securities
Fund, Inc. vs. Indices
<TABLE>
<CAPTION>
Cumulative 5 Yr.
1992 1993 1994 1995 1996 Return Annualized
<S> <C> <C> <C> <C> <C> <C>
LN Convertible Securities Fund 11.27% 28.05% -1.96% 19.59% 20.42% 15.00%
1st Boston Convertible Sec. Index 17.60% 18.57% -4.70% 23.70% 13.80% 13.34%
Merrill Lynch Convertible Index 20.92% 18.88% -7.07% 24.69% 15.90% 14.06%
Lipper Convertible Mutual Fund Ind 18.14% 18.39% -3.76% 20.81% 14.80% 13.30%
Standard & Poor's 500* 7.61% 10.06% 1.31% 37.53% 22.94% 15.20%
Russell 2000 18.42% 18.89% -1.82% 28.33% 16.50% 15.62%
Lehman Gov't/Corporate Bond Index 7.58% 11.06% -3.50% 19.24% 2.90% 7.18%
</TABLE>
* Dividends Reinvested
<PAGE>
Total Fund Investments
At Market or Fair Values As of December 31
<TABLE>
<CAPTION>
1996 1995
(000) % of Total (000) % of Total
<S> <C> <C> <C> <C>
Convertible & Public Debt Securiti $89,494 74% $85,808 72%
Direct Placement Securities 3,349 3% 2,832 2%
Convertible Preferred Stocks 35,878 30% 29,671 25%
Common Stocks 7,519 6% 2,513 2%
Short-Term Investments -- -- 2,196 2%
Other Assets Over Liabilities (15,809) -13% (3,933) -3%
Total Net Assets $120,431 100% $119,087 100%
</TABLE>
Common Stock Market Prices and Net Asset Value History
(Unaudited)
<TABLE>
<CAPTION>
1996
Market Prices and Volumes Net Asset Value
High Low Close Volume High Low Close
<S> <C> <C> <C> <C> <C> <C> <C>
1st Quarter $17.875 $16.125 $17.125 412,400 $20.42 $18.48 $20.42
2nd Quarter 19.000 16.750 18.250 601,200 22.07 20.24 21.34
3rd Quarter 19.125 16.625 18.750 404,000 21.42 19.60 21.42
4th Quarter 20.375 17.375 17.500 416,300 22.09 18.92 18.92
1995
Market Prices and Volumes Net Asset Value
High Low Close Volume High Low Close
1st Quarter $17.000 $15.000 $16.000 330,000 $17.98 $17.06 $17.98
2nd Quarter 17.625 15.875 16.625 303,900 18.92 18.03 18.72
3rd Quarter 18.250 16.500 18.000 385,400 19.90 18.72 19.75
4th Quarter 18.375 16.750 16.750 304,300 19.75 18.68 18.71
1994
Market Prices and Volumes Net Asset Value
High Low Close Volume High Low Close
1st Quarter $20.750 $17.750 $17.875 502,200 $19.70 $18.27 $18.27
2nd Quarter 18.500 16.500 16.875 309,300 18.45 17.15 17.15
3rd Quarter 18.000 16.000 16.125 277,100 18.51 17.27 18.46
4th Quarter 17.250 15.125 15.375 406,900 18.45 17.10 17.10
</TABLE>
Shares are listed on the New York Stock Exchange under the trading
symbol LNV.
Dividend History
The table below shows the 10 year common dividend per share
history.
<TABLE>
<CAPTION>
Annual Annual
Year Dividend Year 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 1996 3.33
</TABLE>
<PAGE>
Tax Information
Income dividends received by a shareholder must be reported for
federal income tax purposes as ordinary income. The Fund
distributed $ 3.33 per share of ordinary income for the tax year
1996. Dividend payments made in April, July, October and
mid-January 1997 are taxable in the 1996 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 4
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:
Corp. Dividend Received Deduction - Percent 7.7753%
Corp. Dividend Received Deduction - $ Per Share $0.2589
For the year-ended December 31, 1996, 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 1997, the Fund will distribute IRS Form 2439 to
shareholders of record as of December 31, 1996. IRS Form 2439
indicates each shareholder's pro-rata portion of the undistributed
long-term capital gains on Line 1 of the form ($0.58914934
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
($0.20620227 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 on Form 2439."
In addition, shareholders of record as of December 31, 1996, 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
$0.38294707 per share.
<PAGE>
SHAREHOLDER MEETING RESULTS
The Fund had their annual Shareholder meeting on April 19, 1996.
Two proposals were presented to shareholders for vote. Proposal I
"Election of Directors" and Proposal II "Ratification of the
Selection of Auditor". A total of 5,228,274 of Common Stock shares
(82.16% of the total outstanding shares) were voted. The following
table highlights the results of the vote.
<TABLE>
<CAPTION>
Number of Number of Number of
Shares Vote Shares Vote Shares
FOR AGAINST ABSTAINED
<S> <C> <C> <C>
Proposal I
Election of Directors
R. Burridge 5,162,231 66,043 ----
A. Cepeda 5,155,590 72,684 ----
R. Deshaies 5,164,390 63,884 ----
C. Freund 5,152,857 75,417 ----
T. Mathers 5,153,289 74,985 ----
T. McMeekin 5,152,207 76,067 ----
D. Toll 5,160,801 67,473 ----
A. Warner 5,153,046 75,228 ----
F. Young 5,155,908 72,366 ----
Proposal II
Ratification of the Selection of
Auditor (Coopers & Lybrand LL 5,154,798 22,560 50,916
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
Years Ended December 31
(Selected data for each share of common stock
outstanding throughout the year)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $18.71 $17.10 $18.84 $17.62 $18.04
Net Investment Income 0.92 0.91 0.94 0.90 1.01
Net Realized & Unrealized Gain\(Loss) 2.62 2.34 (1.60) 3.24 0.71
Total From Investment Operations 3.54 3.25 (0.66) 4.14 1.72
Less Distributions:
Dividends from Net Investment Income: (0.98) (0.96) (0.95) (1.05) (0.97)
Dividends from Net Realized Gains: (2.35) (0.68) (0.13) (1.87) (1.17)
Total Distributions (3.33) (1.64) (1.08) (2.92) (2.14)
Net Asset Value, End of Period $18.92 $18.71 $17.10 $18.84 $17.62
Per Share Market Value, End of Period $17.50 $16.75 $15.38 $19.25 $16.50
Total Investment Return (based on
Market Value) 24.36% 19.57% (14.49%) 34.36% 20.26%
Ratios/Supplemental Data
Net Assets, End of Period (000) $120,431 $119,087 $108,810 $118,575 $110,743
Ratio - Expenses to Average Net Asset 1.05% 1.09% 1.09% 1.02% 0.83%
Ratio - Net Income to Average Net Assets 4.50% 4.91% 5.18% 4.58% 5.49%
Portfolio Turnover Rate 134.85% 127.24% 127.32% 222.00% 166.26%
Average Commission Rate Paid Per Shar $0.0602 $0.0579
</TABLE>
( ) Denotes deduction
The accompanying notes are an integral part of the financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS
Years Ended December 31
(Selected data for each share of common stock
outstanding throughout the year)
<TABLE>
<CAPTION>
1991 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $13.59 $15.21 $13.41 $12.62 $14.38
Net Investment Income 0.97 1.03 1.53 0.95 0.92
Net Realized & Unrealized Gain\(Loss) 4.50 (1.63) 1.84 0.79 (1.55)
Total From Investment Operations 5.47 (0.60) 3.37 1.74 (0.63)
Less Distributions:
Dividends from Net Investment Income: (1.02) (1.02) (1.07) (0.95) (1.13)
Dividends from Net Realized Gains: ---- ---- (0.50) ---- ----
Total Distributions (1.02) (1.02) (1.57) (0.95) (1.13)
Net Asset Value, End of Period $18.04 $13.59 $15.21 $13.41 $12.62
Per Share Market Value, End of Period $15.50 $11.50 $13.38 $11.75 $11.75
Total Investment Return (based on
Market Value) 43.65% (6.43%) 27.23% 8.09% (18.22%)
Ratios/Supplemental Data
Net Assets, End of Period (000) $113,398 $85,434 $95,655 $91,607 $87,304
Ratio - Expenses to Average Net Asset 0.89% 0.97% 0.94% 0.96% 0.88%
Ratio - Net Income to Average Net Ass 5.96% 7.21% 6.64% 6.90% 6.43%
Portfolio Turnover Rate 132.99% 134.64% 147.31% 110.70% 73.41%
Average Commission Rate Paid Per Shar
</TABLE>
( ) Denotes deduction
The accompanying notes are an integral part of the financial statements.
<PAGE>
Statement of Net Assets
As of December 31, 1996
<TABLE>
<CAPTION>
Investments - Notes A & B Par Market or
Amount Cost Fair Value
<S> <C> <C> <C>
Convertible & Public Debt Securities (74.3%)
Advance Agro Public Company
Convertible Preferred Stock~
3.50% Convertible Unsubordinated Debenture, 6/17/01 $2,050,000 $2,050,000 $2,101,250
(convertible into 713,281 common shares)
American Medical Response Inc.
5.25% Convertible Subordinated Note, 2/01/01 2,425,000 2,460,706 2,606,875
(convertible into 64,238 common shares)
Applied Magnetics Corporation
7.00% Convertible Subordinated Debenture, 3/15/06 2,255,000 2,256,688 3,991,350
(convertible into 121,236 common shares)
Argosy Gaming Company
12.00% Convertible Subordinated Note, 6/01/01 1,500,000 1,457,500 1,220,625
(convertible into 84,746 common shares)
ARV Assisted Living Inc.
6.75% Convertible Subordinated Note, 4/01/01 1,225,000 1,225,000 1,029,000
(convertible into 65,966 common shares)
BEC Group Inc.
8.00% Convertible Subordinated Note, 5/03/02 936,000 1,032,000 917,280
(convertible into 51,678 common shares)
Central Garden and Pet Company
6.00% Convertible Subordinated Note, 11/15/03 850,000 850,000 842,563
(convertible into 30,357 common shares)
Cityscape Financial Corporation
6.00% Convertible Subordinated Debenture, 5/01/06 1,810,000 1,846,975 1,882,400
(convertible into 68,952 common shares)
Comverse Technology Inc.
5.75% Convertible Subordinated Debenture, 10/01/06 2,505,000 2,530,088 2,567,625
(convertible into 54,754 common shares)
Continental Homes Holding Corp.
6.875% Convertible Subordinated Note, 11/01/02 465,000 465,000 489,994
(convertible into 19,579 common shares)
Cross Timbers Oil Company
5.25% Convertible Subordinated Note, 11/01/03 625,000 584,375 692,967
(convertible into 27,027 common shares)
DIIG Group (formally Dovatron International)
6.00% Convertible Subordinated Note, 10/15/02 3,049,000 2,968,558 2,850,815
(convertible into 81,307 common shares)
FPA Medical Management Inc.
6.50% Convertible Subordinated Debenture, 12/15/01 2,400,000 2,400,000 2,382,000
(convertible into 92,486 common shares)
Healthsouth Rehabilitation Corporation
5.00% Convertible Subordinated Debenture, 4/01/01 935,000 993,438 1,874,675
(convertible into 49,701 common shares)
Hometown Buffet Inc.
7.00% Convertible Subordinated Note, 12/01/02 2,040,000 2,066,000 2,096,100
(convertible into 174,957 common shares)
IMAX Corporation
5.75% Convertible Debenture, 4/01/03 2,030,000 1,882,500 1,844,763
(convertible into 47,417 common shares)
Integrated Health Services
5.75% Convertible Sr.Subordinated Debenture, 1/01/01 2,150,000 2,181,625 2,064,000
(convertible into 65,951 common shares)
Key Energy Group Inc.
7.00% Convertible Debenture, 7/01/03 1,350,000 1,350,000 1,687,500
(convertible into 138,462 common shares)
Lernout and Hauspie Speech
8.00% Convertible Subordinated Note, 11/15/01 1,275,000 1,275,000 1,275,000
(convertible into 62,187 common shares)
Lomak Petroleum Inc.
6.00% Convertible Subordinated Debenture, 2/01/07 1,410,000 1,410,000 1,508,700
(convertible into 73,247 common shares)
Midcom Communications Inc.
8.25% Convertible Subordinated Debenture, 8/15/03 525,000 525,000 420,000
(convertible into 37,267 common shares)
NABI Inc.
6.50% Convertible Subordinated Note, 2/01/03 1,900,000 1,846,100 1,771,750
(convertible into 135,714 common shares)
Nine West Group Inc.
5.50% Convertible Subordinated Note, 7/15/03 3,000,000 2,985,750 2,977,500
(convertible into 49,375 common shares)
North American Vaccine Inc.
6.50% Convertible Subordinated Note, 5/01/03 2,460,000 2,433,235 2,539,950
(convertible into 98,964 common shares)
Occusystems Inc.
6.00% Convertible Subordinated Note, 12/15/01 2,125,000 2,125,000 2,316,250
(convertible into 71,549 common shares)
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
Statement of Net Assets (Continued)
<TABLE>
<CAPTION>
Par Market or
Amount Cost Fair Value
<S> <C> <C> <C>
Convertible & Public Debt Securities (continued)
Offshore Logistics Inc.
6.00% Convertible Subordinated Note, 12/15/03 1,695,000 1,695,000 1,773,394
(convertible into 74,139 common shares)
Penn Treaty American Corporation
6.25% Convertible Subordinated Note, 12/01/03 850,000 850,000 702,168
(convertible into 29,887 common shares)
PHP Healthcare Inc.
6.50% Convertible Subordinated Debenture, 12/13/02 490,000 490,000 536,550
(convertible into 17,982 common shares)
Phymatrix Corporation
6.75% Convertible Subordinated Debenture, 6/15/03 2,050,000 2,050,000 1,691,250
(convertible into 72,695 common shares)
Pier 1 Imports Inc.
5.75% Convertible Subordinated Note, 10/01/03 550,000 550,000 627,000
(convertible into 29,730 common shares)
Plasma and Materials Technology Inc.
7.125% Convertible Subordinated Note, 10/15/01 2,245,000 2,256,237 2,200,100
(convertible into 143,588 common shares)
Platinum Technology Inc.
6.75% Convertible Subordinated Note, 11/15/01 1,200,000 1,200,000 1,462,500
(convertible into 86,021 common shares)
Prime Hospitality Corp.
7.00% Convertible Subordinated Note, 4/15/02 1,890,000 1,991,504 2,721,600
(convertible into 157,500 common shares)
Quantum Corporation
5.00% Convertible Subordinated Note, 3/01/03 1,100,000 1,211,250 1,537,250
(convertible into 49,283 common shares)
RAC Financial Group Inc.
7.25% Convertible Subordinated Note, 8/15/03 2,035,000 2,035,000 2,718,760
(convertible into 124,847 common shares)
Reno Air Inc.
9.00% Senior Note, 9/30/02 1,700,000 1,706,750 1,778,353
(convertible into 170,000 common shares)
Richey Electronics Inc.
7.00% Convertible Subordinated Note, 3/01/06 1,235,000 1,235,000 1,230,369
(convertible into 87,434 common shares)
Rotech Medical Corporation
5.25% Convertible Subordinated Debenture, 6/01/03 2,520,000 2,478,075 2,545,200
(convertible into 95,999 common shares)
Seacor Holdings Inc.
5.375% Convertible Subordinated Note, 11/15/06 1,005,000 1,005,000 1,160,775
(convertible into 15,227 common shares)
Sholodge Inc.
7.50% Convertible Subordinated Debenture, 5/01/04 2,400,000 2,406,000 2,136,000
(convertible into 102,960 common shares)
Southern Pacific Funding Corporation
6.75% Convertible Subordinated Note, 10/15/06 1,020,000 1,020,000 1,085,025
(convertible into 28,571 common shares)
Stillwater Mining Company
7.00% Convertible Subordinated Note, 5/01/03 2,125,000 2,113,750 2,061,250
(convertible into 79,291 common shares)
Sun Healthcare Group Inc.
6.00% Convertible Subordinated Debenture, 3/01/04 1,000,000 850,000 855,000
(convertible into 45,788 common shares)
Tele-Communications International Inc.
4.50% Convertible Subordinated Debenture, 2/15/06 2,075,000 1,981,437 1,558,844
(convertible into 76,007 common shares)
Thermo Electron Corporation
4.25% Convertible Subordinated Debenture, 1/01/03 700,000 795,375 859,250
(convertible into 18,519 common shares)
4.25% Convertible Eurobond, 1/01/03 1,020,000 1,173,000 1,252,050
(convertible into 26,984 common shares)
Titan Wheel International Inc.
4.75% Convertible Subordinated Debenture, 12/01/00 1,150,000 1,421,000 1,181,199
(convertible into 92,000 common shares)
Uromed Corporation
6.00% Convertible Subordinated Note, 10/15/03 1,380,000 1,390,762 1,292,025
(convertible into 103,906 common shares)
US Diagnostic Labs Inc.
9.00% Convertible Sr. Subordinated Debenture, 3/31/03 1,730,000 1,906,862 2,127,900
(convertible into 192,222 common shares)
United States Filter Corporation
6.00% Convertible Subordinated Note, 9/15/05 785,000 785,000 1,397,300
(convertible into 42,597 common shares)
4.50% Convertible Subordinated Note, 12/15/01 1,210,000 1,210,000 1,225,125
(convertible into 30,633 common shares)
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
Statement of Net Assets (Continued)
<TABLE>
<CAPTION>
Par Market or
Amount Cost Fair Value
<S> <C> <C> <C>
Convertible & Public Debt Securities (continued)
U.S. Office Products Company
5.50% Convertible Subordinated Note, 2/01/01 1,950,000 2,321,120 2,505,750
(convertible into 68,421 common shares)
5.50% Convertible Subordinated Note, 5/15/03 1,435,000 1,441,163 1,321,994
(convertible into 30,274 common shares)
Total Convertible and Public Debt Securities 84,769,823 89,494,913
Date of
Initial
Purchase
Direct Placement Securities (2.8%) - Note A & B
Desert Eagle Distributing of El Paso, Inc. *
13.00% Senior Subordinated Note, 11/01/99 5/7/92 1,750,000 1,529,500 1,750,000
Desert Eagle Distributing of El Paso, Inc. *
Equity Appreciation Rights Certificate 5/7/92 3 219,426 1,598,647
(entitled to receive the equivalent of the
purchase price of 87,895 shares of common stock
on or after 5/1/97)
Desert Eagle Distributing of New Mexico, Inc. *
Equity Appreciation Rights Certificate 5/7/92 1 1,074 1
(entitled to receive the equivalent of the
purchase price of 430 shares of common stock
on or after 5/1/97)
Total Direct Placement Securities 1,750,000 3,348,648
Number of
Shares
Common Stocks (6.2%)
BEC Group Inc. * 31,645 182,285 166,136
Comverse Technology * 29,935 439,722 840,590
Cross Timbers Oil Company 27,027 590,374 679,053
ICG Communications Inc. * 89,166 1,414,145 1,571,551
Liposome Company Inc. * 17,888 276,021 342,108
MFS Communications Company Inc. * 915 29,334 49,868
Spectrum Holybyte Inc. * 244,500 1,344,750 1,833,750
Worldcom Inc. * 78,106 1,197,519 2,035,599
Total Common Stocks 5,474,150 7,518,655 6.2%
Convertible Preferred Stocks (29.8%)
Allstate Corporation
Convertible Preferred Stock 49,150 1,758,050 2,322,337
(convertible into PMI Group 40,269 common shares)
AMC Entertainment Inc.
Convertible Preferred Stock 77,500 2,001,575 2,092,500
(convertible into 133,610 common shares)
Amway Japan LTD $1.44
Premium Exchangeable Participating Shares 108,800 2,112,558 1,781,600
(convertible into 92,208 common shares)
Designer Finance Trust
Convertible Preferred Stock 32,855 1,646,795 1,519,544
(convertible into 69,846 common shares)
Enron Corporation *
Convertible Preferred Stock 28,320 735,598 679,680
(convertible into Enron Oil & Gas 23,404 common shares)
Freeport-McMoran Copper & Gold, Inc., $1.25
Depository Shares, Representing 1/20 of a share
of Cumulative Preferred Stock 91,750 2,220,245 2,546,063
(convertible into 76,611 common shares)
Globalstar Telecomm *
Convertible Preferred Stock 7,065 392,108 390,341
(convertible into 5,434 common shares)
Insignia Financial *
Convertible Preferred Stock 43,050 2,152,500 2,249,363
(convertible into 81,227 common shares)
Kmart Financing I
Convertible Trust Preferred Securities 9,715 485,750 473,606
(convertible into 32,383 common shares)
</TABLE>
The accompanying notes are an integral part of the financial statments.
<PAGE>
Statement of Net Assets (Continued)
<TABLE>
<CAPTION>
Par Market or
Amount Cost Fair Value
<S> <C> <C> <C>
Convertible Preferred Stocks (continued)
Loral Space and Communications *
Convertible Preferred Stock 28,500 1,425,000 1,596,000
(convertible into 71,250 common shares)
Nortel Inversora SA CV *
Mandatory Exchangeable Debt Securities 9,950 417,900 407,950
(convertible into Telecom Argentina 8,653 common shares)
Occidental Petroleum Corporation, $3.00
Convertible Preferred Stock 42,830 $2,033,510 $2,526,970
(convertible into 151,276 Canadian Occidental
common shares)
Parker & Parsley Petroleum Company
Monthly Income Preferred Securities 26,250 1,360,161 1,778,437
(convertible into 46,667 common shares)
Penncorp Financial Group Inc.
Convertible Preferred Stock 20,020 1,001,000 1,161,160
(convertible into 28,681 common shares)
Salomon Inc.
Debt Exchangeable for Common Stock 43,745 1,164,711 1,339,691
(convertible into 35,871 of FSA Holdings
common shares)
Debt Exchangeable for Common Stock * 21,205 1,182,179 1,277,601
(convertible into 17,670 of Cincinnati Bell
common shares)
SFX Broadcasting Inc. *
Convertible Preferred Stock 22,160 1,169,170 966,730
(convertible into 24,347 common shares)
Timet Capital Trust *
Convertible Preferred Stock 42,490 2,124,500 2,326,327
(convertible into 56,894 common shares)
Trans World Air Inc.
Convertible Preferred Stock 41,800 2,132,000 1,003,200
(convertible into 103,112 common shares)
Convertible Preferred Stock * 20,000 662,500 480,000
(convertible into 49,336 common shares)
Tyco Toys Inc.
Depository Shares, Representing 1/20 Share
Preferred Stock 64,400 322,000 652,050
(convertible into 52,789 common shares)
USX Corporation *
Debt Exchangeable for Common Stock 95,760 2,046,870 2,405,970
(convertible into 81,128 of RMI Titanium
common shares)
Vanstar Financing Trust *
Convertible Preferred Stock 29,935 1,496,750 1,534,169
(convertible into 52,060 common shares)
Wang Laboratories Inc.
Depository Shares, Representing 1/20 Convertible
Preferred B Shares 48,305 2,495,818 2,366,945
(convertible into 90,929 common shares)
Total Convertible Preferred Stock 34,539,248 35,878,234
Total Investments (113.1%) 126,533,221 136,240,450
Excess of Liabilities Over Other Assets (13.1%) - Note D (15,809,029)
Net Assets (100%) - Note E $120,431,421
(Equivalent to $18.92 Per Share Based on 6,363,695
Shares Outstanding)
</TABLE>
* Non-Income Producing
The accompanying notes are an integral part of the financial statements.
<PAGE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31,1996 December 31,1995
<S> <C> <C>
Investment Income:
Income:
Interest $5,480,127 $4,949,990
Dividends 1,770,362 2,133,269
Total Income 7,250,489 7,083,259
Expenses:
Management Fees - Note C 1,144,848 1,048,548
Director Fees 66,000 69,000
Professional fees 35,627 27,631
Printing, stationery, and supplies 23,674 45,564
Stock Transfer & dividend disbursing 16,238 25,402
Postage and mailing fees 36,663 26,304
New York Stock Exchange fee 16,170 16,170
Custodian and registrar fees 7,509 13,133
Other 21,452 13,428
Total Operating Expenses 1,368,181 1,285,180
Net Investment Income 5,882,308 5,798,079
Net realized and unrealized gain(loss)
on investments:
Net realized gain on investments 18,918,136 5,579,661
Increase(decrease) in net unrealized
appreciation of investments (953,098) 9,702,780
Income Taxes - Note F (1,312,209) (366,192)
Net Realized & Unrealized Gain
on Investments 16,652,829 14,916,249
Net Increase in Net Assets Resulting
from Operations $22,535,137 $20,714,328
</TABLE>
The accompanying notes are an integral part of the financial statements
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31,1996 December 31,1995
<S> <C> <C>
Changes from operations:
Net Investment Income $5,882,308 $5,798,079
Net realized gain on investments
(net of taxes: 1996 - $1,312,208; 1995 - $366,192) 17,605,927 5,213,469
Increase(Decrease) in Net Unrealized
appreciation of investments (953,098) 9,702,780
Net Increase in Net Assets Resulting from Operation 22,535,137 20,714,328
Distributions to shareholders from net investment i (6,236,421) (6,123,660)
Distributions to shareholders from net realized gain on
investments: (14,954,683) (4,312,799)
Total Increase in Net Assets 1,344,033 10,277,869
Net assets at beginning of period 119,087,388 108,809,519
Net Assets at End of Period * $120,431,421 $119,087,388
</TABLE>
* Includes distributions in excess of net investment income as of:
1996 - $ (37,302); 1995 - $(81,828).
The accompanying notes are an integral part of the
financial statements
<PAGE>
PORTFOLIO of INVESTMENTS BY INDUSTRY CLASSIFICATION
As of December 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Market or Percent of
Fair Value Net Assets
<S> <C> <C>
Airline
Reno Air Inc. $1,778,353
Trans World Air Inc. 1,483,200
3,261,553 2.7%
Broadcasting
SFX Broadcasting 966,730 0.8%
Building Construction
Continental Homes Holding Corp. 489,994 0.4%
Communication Equipment
Comverse Technology Inc. 3,408,215 2.8%
Computer Software/Systems
Platinum Technology Inc. 1,462,500
Spectrum Holybyte Inc. 1,833,750
Wang Laboratories Inc. 2,366,945
Vanstar Financing Trust 1,534,169
7,197,364 6.0%
Consumer Goods/Services
Amway Japan LTD 1,781,600
BEC Group Inc. 1,083,416
Designer Finance Trust 1,519,544
Tyco Toys Inc. 652,050
5,036,610 4.2%
Electronics
DIIG Group 2,850,815
Richey Electronics Inc 1,230,369
4,081,184 3.4%
Energy
Cross Timbers Oil Company 1,372,020
Enron Corporation 679,680
Key Energy Group Inc. 1,687,500
Lomak Petroleum Inc. 1,508,700
Occidental Petroleum Corporation 2,526,970
7,774,870 6.5%
Entertainment
AMC Entertainment Inc. 2,092,500
Argosy Gaming Company 1,220,625
IMAX Corporation 1,844,763
5,157,888 4.3%
Finance
Cityscape Financial Corporation 1,882,400
Insignia Financial 2,249,363
Penncorp Financial Group Inc. 1,161,160
RAC Financial Group 2,718,760
Southern Pacific Funding 1,085,025
9,096,708 7.6%
Food Products
Desert Eagle Distributing 3,348,648 2.8%
Health Services
American Medical Response Inc. $2,606,875
ARV Assisted Living 1,029,000
FPA Medical Management 2,382,000
Healthsouth Rehabilitation Corp. 1,874,675
Integrated Health Services 2,064,000
NABI Inc. 1,771,750
North American Vaccine Inc. 2,539,950
Occusystems Inc. 2,316,250
PHP Healthcare Inc. 536,550
Phymatrix Corporation 1,691,250
Plasma and Materials Technology Inc. 2,200,100
Rotech Medical Corporation 2,545,200
Sun Healthcare Group 855,000
US Diagnostic Labs Inc. 2,127,900
Uromed Corporation 1,292,025
27,832,525 23.1%
</TABLE>
<PAGE>
PORTFOLIO of INVESTMENTS BY INDUSTRY CLASSIFICATION (Continued)
(Unaudited)
<TABLE>
<CAPTION>
Market or Percent of
Fair Value Net Assets
<S> <C> <C>
Hotels/Lodging
Prime Hospitality Corp. 2,721,600
Sholodge Inc. 2,136,000
4,857,600 4.0%
Insurance
Allstate Corporation (PMI Group) 2,322,337
Penn Treaty American Corporation 702,168
3,024,505 2.5%
Machinery & Equipment
Titan Wheel International Inc. 1,181,199 1.0%
Metals and Minings
Freeport-McMoran Copper & Gold Inc. 2,546,063
Stillwater Mining Company 2,061,250
Timet Capital Trust 2,326,327
USX Corporation (RMI Titanium) 2,405,970
9,339,610 7.8%
Office and Office Equipment
U.S. Office Products Company 3,827,744 3.2%
Oil Equipment/Services
Parker & Parsley Petroleum Co. 1,778,437
Offshore Logistics Inc. 1,773,394
Seacor Holdings 1,160,775
4,712,606 3.9%
Paper and Paper Products
Advance Agro Public Company 2,101,250 1.7%
Pharmaceuticals
The Liposome Company, Inc. 342,108 0.3%
Retail
Central Garden and Pet Company 842,563
Kmart Financing 473,606
Nine West Group Inc. 2,977,500
Pier 1 Imports Inc. 627,000
4,920,669 4.1%
Restaurants
Hometown Buffet Inc. 2,096,100 1.7%
Technology
Applied Magnetics Corporation $3,991,350
Salomon Inc. (FSA Holdings) 1,339,691
Lernout and Hauspie Speech 1,275,000
Loral Space and Communications 1,596,000
Thermo Electron Corporation 2,111,300
Quantum Corporation 1,537,250
11,850,591 9.8%
Telecommunication
Globalstar Telecomm 390,341
ICG Communications Inc. 1,571,551
MFS Communications Inc. 49,868
Midcom Communications Inc. 420,000
Nortel Inversora SA 407,950
Salomon Inc. (Cincinnati Bell) 1,277,601
Tele-Communications International 1,558,844
Worldcom 2,035,599
7,711,754 6.4%
Waste Management
United States Filter Corporation 2,622,425 2.2%
Total Investments $136,240,450 113.1%
</TABLE>
<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. Fund shares are listed on
the New York Stock Exchange under the symbol LNV.
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, and 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. Securities which are restricted
in reliance with SEC Rule 144A, are valued at a composite price as
determined by a pricing source. If a composite price from a
pricing source is not available, values are based on the last
reported bid price on the date of valuation from the issuance's
underwriter.
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 of registration or otherwise qualifying the security for
public sale; potential underwriting commissions if an 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. As of December 31, 1996, the value of all
direct placement securities, which totaled $3,348,648 and
represents 2.8% of total net assets were approved by directors who
are not interested persons. Because of the inherent uncertainty of
valuation, those estimated values may differ significantly from
the values that would have been used had a ready market for the
securities existed.
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 the applicable provisions
<PAGE>
Notes to Financial Statements (continued)
Income Taxes (continued)
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.
As set forth in the prospectus, the Fund does not intend to
distribute net realized long-term capital gains. The Fund intends
to retain and reinvest such gains and accordingly, pay applicable
income taxes on the excess of such gains over net realized
short-term capital losses, if any.
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 changein the terms of the loan agreement, which is
recorded when received. In addition, inthe preparation of financial
statements, management relies on the use of estimates where
necessary. 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.
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 of 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 $176,323,648 and $179,020,553,
respectively, as of December 31, 1996; and $150,347,139 and
$151,424,268, respectively as of December 31, 1995.
Note C - Management Fees and Other Transactions with Affiliates
Under an agreement between the Fund and Lincoln Investment
Management, Inc. (Advisor), the Advisor manages the Fund's
investment portfolio, maintains its accounts and records, and
<PAGE>
Notes to Financial Statements (continued)
Note C (continued)
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 net assets of
the Fund as of the close of business on the last business day of
the quarter (.875% on an annual basis).
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 and 1.5% 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 as December 31, 1996.
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:
Cash $940,942
Accrued investment income receivable 1,305,464
Accrued dividend income receivable 90,815
Management fee payable (263,398)
Accrued dividends payable (16,609,244)
Accrued federal income tax payable (1,312,208)
Other - net 38,600
($15,809,029)
Note E - Net Assets
Net assets at December 31, 1996, consisted of the following:
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 paid 21,024,561
Distribution in excess net investment income (37,302)
Net unrealized appreciation of investments 9,707,229
Total Net Assets $120,431,421
Note F - Income Taxes
The cost of investments for federal income tax purposes is the same
as for book purposes. At December 31, 1996, the aggregate gross
unrealized appreciation on investments was $14,723,629 and the
aggregate gross unrealized depreciation was $5,016,400.
<PAGE>
Notes to Financial Statements (continued)
Note G - Unaudited Quarterly Results of Operations
The following is a tabulation of the unaudited quarterly results of
operations. Per share data is based on shares outstanding at the
end of each quarter:
<TABLE>
<CAPTION>
March 31 June 30 Sept. 30 Dec. 31
<S> <C> <C> <C> <C>
1996
Investment Income ($ 000) $1,649 $1,760 $1,920 $1,921
Net Investment Income ($ 000) 1,309 1,412 1,579 1,582
Net Realized and Unrealized Gain on
Investments ($ 000) 9,572 5,932 476 673
Per Share Amounts:
Net Investment Income $0.21 $0.22 $0.25 $0.25
Net Realized and Unrealized Gain on
Investments $1.50 $0.93 $0.07 $0.11
1995
Investment Income ($ 000) $1,849 $1,840 $1,600 $1,794
Net Investment Income ($ 000) 1,545 1,487 1,284 1,482
Net Realized and Unrealized Gain(Loss) on
Investments ($ 000) 4,057 4,744 6,801 (686)
Per Share Amounts:
Net Investment Income $0.24 $0.23 $0.20 $0.23
Net Realized and Unrealized Gain(Loss)
on Investments $0.64 $0.75 $1.07 ($0.11)
</TABLE>
<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, 1996, 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, 1996, by correspondence with the
custodian. 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, 1996, 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 each of the ten years
in the period then ended, in conformity with generally accepted
accounting principles.
/s/ Coopers & Lybrand L.L.P.
Fort Wayne, Indiana
January 29, 1997
<PAGE>
Directors & Officers of the Fund
Directors Descriptions of Occupations and Responsibilities
Richard M. Burridge Chairman, The Burridge Group, Inc.; Director,
Cincinnati Financial Corporation, Lincoln National
Income Fund Inc. and St. Joseph Light and Power
Company; Chairman of the Board Fort Dearborn Income
Securities, Inc.
Adela Cepeda President, A.C. Advisory, Inc.; Commissioner, Chicago
Public Building Commission; Director, Lincoln
National Income Fund, Inc.; Director and Vice
President, Harvard Club of Chicago.
Roger J. Deshaies Senior Vice President, Finance, Parkview Health
System; Director Lincoln National Income Fund, Inc.,
Hospital Laundry Services, Inc., and Signature Care,
Inc. Director and Treasurer, Pine Valley Country
Club; Member, Chamber of Commerce Finance Committee.
Charles G. Freund Chairman Emeritus of the Board of Directors, Success
National Bank at Lincolnshire; Director, Mathers
Fund, Inc., Lincoln National Income Fund, Inc.
Thomas N. Mathers Director, Lincoln National Income Fund, Inc.; Vice
President and Director, OFC Meadowood Retirement
Community.
H. Thomas McMeekin Executive Vice President and Chief Investment
Officer, Lincoln National Corporation; President and
Director, Lincoln Investment Management Inc. and
Lincoln National Income Fund, Inc.; Director, The
Lincoln National Life Insurance Company, Lincoln
National Investment Companies, Inc., Delaware
Management Holdings, Inc., Lynch & Mayer, Inc. and
Vantage Global Advisors, Inc.
Daniel R. Toll Director, Brown Group, Inc.; A.P. Green Industries,
Inc., Kemper National Insurance Company, Lincoln
National Income Fund, Inc., NICOR, Inc., and
Mallinckrodt Group, Inc.
Ann L. Warner Senior Vice President and Director Portfolio
Management, Lincoln Investment Management, Inc;
Director, Lincoln National Income Fund, Inc.
Fred J. Young President, United Wealth Watchers of America;
Director, Lincoln National Income Fund, Inc.
Officers
H. Thomas McMeekin President
David A. Berry Vice President
David G. Humes Vice President, Controller
Harold McElraft Vice President, Treasurer
Edward J. Petner Vice President
Bradley A. Roberts Vice President
Robert D. Schwartz Vice President
Ann L. Warner Vice President
C. Suzanne Womack Secretary
<PAGE>
Corporate Information
Dividend Disbursing Agent, Transfer Agent
and Reinvestment Plan Agent
Boston EquiServe L.P.
Investor Relations
P.O. Box 8200
Boston, MA 02266-8200
1-800-730-6001
Investment Advisor
Lincoln Investment Management, Inc.
200 East Berry Street
Fort Wayne, IN 46802
(219) 455-2210
Investment Subadvisor
Lynch & Mayer, Inc.
520 Madison Avenue
New York, NY 10022
(212) 758-1717
Independent Accountants
Coopers & Lybrand L.L.P.
490 Lincoln Tower
Fort Wayne, IN 46802
Stock Exchange
The Fund's stock is traded on the New York Stock Exchange (NYSE)
under the symbol of LNV.
Automatic Dividend Reinvestment Plan
Any registered shareholder of Lincoln National Convertible Securities
Fund, Inc. may participate in the Automatic Dividend Reinvestment Plan
(the Plan). If you are a beneficial owner whose shares are registered in
the name of another (e.g., in a broker's "street name") and desires to
participate in the Plan, you must become a registered holder by
transferring the shares to your name.
To participate in the Plan, you must complete and forward an
authorization card to the Plan agent. This card authorizes the Plan agent
to receive your dividends and other distributions from the Fund in
additional shares of common stock. The additional shares will be issued
by the Fund, if the net asset value per share is equal to or lower than
the market price of the Fund's Common 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 commissions, the additional shares
will be purchased in the open market and the cost of the brokerage
commissions will be charged to each participant on a pro-rata basis. The
Plan also allows the Plan agent to accept optional cash contributions.
Each optional cash contribution by a participant must be not less than
$100 and not more than $3,000 per dividend period and must be received by
the Plan agent not less than five business days and no more than thirty
days prior to the dividend payment date.
Shares will be held by Boston EquiServe, the Plan agent. You will receive
a statement each time shares are distributed by the Fund or purchased for
you.
There is no direct charge for Plan participation. The administrative
costs of the Plan are borne by the Fund.
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 Boston EquiServe,
P.O. Box 8200 Boston, MA 02266-8200 or call 1-800-730-6001.
