Lincoln National Convertible Securities Fund, Inc.
1998 Semi - Annual Report
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<CAPTION>
Table of Contents Page
<S> <C>
Manager Profile ................................................... 1
Investment Policies & Objectives .................................. 1
President's Letter ................................................ 2
Portfolio Performance ............................................. 3
Total Fund Investments ............................................ 3
Dividend History .................................................. 4
Shareholder Meeting Results ....................................... 4
FINANCIAL STATEMENTS:
Financial Highlights ......................................... 5
Statement of Net Assets ...................................... 7
Statements of Operations ..................................... 11
Statements of Changes in Net Assets .......................... 12
Portfolio of Investments by Industry Classification .......... 13
Notes to Financial Statements ................................ 14
Common Stock Market Prices & Net Asset Value History .............. 17
Directors & Officers of the Fund .................................. 18
Corporate Information ............................................. 19
</TABLE>
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
Investments Inc. (LNI). LNI was formed in 1997 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 approximately $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 private 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 June 30, 1998, has chosen not to do so.
<PAGE>
President's Letter
July 27, 1998
Dear Shareholders:
The first half of 1998 provided mixed performance across the U.S. capital
markets. Investors favored safe investments as the Asian crisis widened, and
concerns over U.S. corporate earnings grew. In the equity markets, large
capitalization equities significantly outperformed smaller company equities as
evidenced by June 30, 1998 performance of the S&P 500 of 17.3% versus 4.7% for
the Russell 2000 index. The return for the Lehman Government/Corporate Index was
4.2% for the quarter. The Fund's return of 6.5% was in line with the Merrill
Lynch, First Boston and Lipper convertible indices with returns of 7.7%, 6.6%,
and 5.8% respectively.
The Fund's sector weightings were changed moderately during the quarter.
Technology, energy and communications sectors were increased while the consumer
cyclical weightings were decreased. Tech- Technology issues were added in those
companies with little or no Asian exposure.
Given the current environment where large capitalization equities continue to
outperform smaller company stocks, it will be difficult for the convertible
market to outperform the S & P 500. However, the favorable interest rate
environment is providing a backdrop that allows convertibles to outperform their
underlying equities.
As long as interest rates remain stable, convertibles should provide reasonable
performance. As investors look for ways to hedge their equity exposure, the
convertible market should benefit by stronger demand. The convertible market is
still an attractive investment option for many investors and the Fund is
positioned to benefit from positive trends in the financial market. We
appreciate your continued interest in the Fund.
Sincerely,
\s\ H. Thomas McMeekin
H. Thomas McMeekin
President
<PAGE>
Portfolio Performance
As of June 30, 1998
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 the period assuming reinvestment of dividends.
<TABLE>
<CAPTION>
Cumulative
YTD 5yr. Return
1993 1994 1995 1996 1997 1998 Annualized
<S> <C> <C> <C> <C> <C> <C> <C>
LN Convertible
Securities Fund 28.05% 18.52% 19.59% 20.42% 13.17% 6.50% 13.80%
1st Boston
Convertible
Sec. Index 18.57% 200.10% 23.70% 13.80% 16.90% 6.60% 12.50%
Merrill Lynch
Convertible Index 18.88% 13.41% 24.69% 15.90% 19.57% 7.70% 13.00%
Lipper Convertible
Mutual Fund Index 18.39% 16.72% 20.81% 14.80% 17.80% 5.80% 12.10%
Standard and
Poor's 500* 10.06% 1.31% 37.53% 22.94% 33.36% 17.30% 23.00%
Russell 2000 18.89% 18.66% 28.33% 16.50% 22.40% 4.70% 16.00%
Lehman Gov't/
Corporate Index 11.06% 2044.50% 2.90% 9.80% 4.20% 6.90% 0.00%
</TABLE>
* Dividends Reinvested
Total Fund Investments
At Market or Fair Values As of June 30,
<TABLE>
<CAPTION>
1998 1997
(000) % of Total (000) % of Total
<S> <C> <C> <C> <C>
Convertible & Public Debt Securities $ 77,167 63% $ 85,583 67%
private Placement Securities . 0 0% 2,892 2%
Convertible Preferred Stocks . 38,662 32% 32,065 25%
Common Stocks ................ 0 0% 3,834 3%
Short-Term Investments ....... 2,998 2% 1,298 1%
Other Assets Over Liabilities 3,255 3% 2,619 2%
Total Net Assets ............. $122,082 100% $128,291 100%
</TABLE>
<PAGE>
Dividend History
The table below shows the common dividend per share history.
<TABLE>
<CAPTION>
Annual Annual
Year Dividend Year Dividend
<S> <C> <C> <C>
1987 and prior $1.33 1993 $2.92
1988 0.95 1994 1.08
1989 1.57 1995 1.64
1990 1.02 1996 3.33
1991 1.02 1997 2.76
1992 2.14 1998 0.24
</TABLE>
SHAREHOLDER MEETING RESULTS
The Fund had their annual Shareholder meeting on April 24, 1998. 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 5,086,843 of
Common Stock shares (79.94% 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 Voted Shares Voted Shares
FOR AGAINST ABSTAINED
<S> <C> <C> <C>
Proposal I
Election of Directors
T. Bindley 5,002,779 84,064
R. Burridge 5,032,395 54,448 ----
A. Cepeda 5,028,210 58,633 ----
R. Deshaies 5,035,265 51,578 ----
C. Freund 5,023,628 63,215 ----
T. Mathers 5,014,308 72,535 ----
T. McMeekin 5,026,927 59,916 ----
D. Toll 5,025,737 61,106 ----
A. Warner 5,016,359 70,484 ----
Proposal II
Ratification of the Selection of
Auditor (Coopers & Lybrand LLP) 5,039,407 15,416 32,020
</TABLE>
FINANCIAL HIGHLIGHTS
(Selected data for each share of common stock
outstanding throughout the year)
<TABLE>
<CAPTION>
Six Months Years Ended
Ended June 30, December 31,
<S> <C> <C> <C> <C>
1998 1997 1997 1996
Net Asset Value, Beginning of Period $18.24 $18.92 $18.92 $18.71
Net Investment Income ............. 0.41 0.48 0.93 0.92
Net Realized & Unrealized Gain\(Loss) 0.77 1.00 1.15 2.62
Total From Investment Operations .. 1.18 1.48 2.08 3.54
Less Distributions:
Dividends from Net Investment Income: (0.24) (0.24) (1.00) (0.98)
Dividends from Net Realized Gains: 0.00 0.00 (1.76) (2.35)
Total Distributions ............... (0.24) (0.24) (2.76) (3.33)
Net Asset Value, End of Period .... 19.18 20.16 18.24 18.92
Per Share Market Value, End of Period 16.81 18.88 17.81 17.50
Total Investment Return (based on
Market Value) ..................... 6.45% 9.34% 17.54% 24.36%
Ratios/Supplemental Data
Net Assets, End of Period (000) ... 122,082 128,291 116,057 120,431
Ratio - Expenses to Average Net Asset 0.55% 0.58% 1.05% 1.05%
Ratio - Net Income to Average Net Assets 2.16% 2.46% 4.64% 4.50%
Portfolio Turnover Rate ........... 83.08% 55.16% 141.85% 134.85%
Average Commission Rate Paid Per Share $0.0688 $0.0912 $0.0663 $0.0602
</TABLE>
( ) Denotes deduction
The accompanying notes are an integral part of the financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS
(Selected data for each share of common stock
outstanding throughout the year)
<TABLE>
<CAPTION>
Years Ended December 31
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 & Unrealized Gain\(Loss) .. 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 Income: .. (0.96) (0.95) (1.05) (0.97)
Dividends from Net Realized Gains: ..... (0.68) (0.13) (1.87) (1.17)
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
Market Value) .......................... 19.57% (14.49)% 34.36% 20.26%
Ratios/Supplemental Data
Net Assets, End of Period (000) ........ $119,087 $108,810 $118,575 $110,743
Ratio - Expenses to Average Net Assets . 1.09% 1.09% 1.02% 0.83%
Ratio - Net Income to Average Net Assets 4.91% 5.18% 4.58% 5.49%
Portfolio Turnover Rate ................ 127.24% 127.32% 222.00% 166.26%
Average Commission Rate Paid Per Share . $0.0579
</TABLE>
( ) Denotes deduction
The accompanying notes are an integral part of the financial statements.
FINANCIAL HIGHLIGHTS
(Selected data for each share of common stock
outstanding throughout the year)
<TABLE>
<CAPTION>
Years Ended December 31
1991 1990 1989 1988
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $13.59 $15.21 $13.41 $12.62
Net Investment Income .................. 0.97 1.03 1.53 0.95
Net Realized & Unrealized Gain\(Loss) ... 4.50 (1.63) 1.84 0.79
Total From Investment Operations ........ 5.47 0.60 3.37 1.74
Less Distributions:
Dividends from Net Investment Income: ... (1.02) (1.02) (1.07) (0.95)
Dividends from Net Realized Gains: ...... -- -- (0.50) --
Total Distributions ..................... (1.02) (1.02) (1.57) (0.95)
Net Asset Value, End of Period .......... $18.04 $13.59 $15.21 $13.41
Per Share Market Value, End of Period $15.50 $11.50 $13.38 $11.75
Total Investment Return (based on
Market Value) ........................... 43.65% (6.43%) 27.23% 8.09%
Ratios/Supplemental Data
Net Assets, End of Period (000) ......... $113,398 $85,434 $95,655 $91,607
Ratio - Expenses to Average Net Assets ... 0.89% 0.97% 0.94% 0.96%
Ratio - Net Income to Average Net Assets . 5.96% 7.21% 6.64% 6.90%
Portfolio Turnover Rate .................. 132.99% 134.64% 147.31% 110.70%
</TABLE>
( ) Denotes deduction
The accompanying notes are an integral part of the financial statements.
<PAGE>
Statement of Net Assets +
As of June 30, 1998
<TABLE>
<CAPTION>
Investments - Notes A & B Par Market or
Amount Cost Fair Value
<S> <C> <C> <C>
Convertible & Public Debt Securities (74.3%)
Action Performance Companies, Inc
4.75% Convertible Debenture, 4/1/05 .. $2,040,000 $2,040,000 $1,935,450
Alpharma Inc. ...............................
5.75% Convertible Subordinated
Debenture, 4/1/05 2,725,000 2,725,000 2,690,938
Antec Corporation
4.50% Convertible Subordinated
Note, 5/15/03 2,035,000 2,035,000 2,350,425
Aviron Corp. ................................
5.75% Convertible Subordinated
Note, 4/1/05 1,145,000 1,145,000 1,296,713
BEA Systems Inc. ............................
4.00% Convertible Subordinated
Note, 6/15/05 2,035,000 2,045,125 2,068,171
Capstar Hotel Corporation
4.75% Convertible Subordinated
Note, 10/15/04 2,270,000 2,270,000 1,855,725
Comverse Technology, Inc. ...................
5.75% Convertible Subordinated
Debenture, 10/01/06 1,135,000 1,135,000 1,449,963
5.75% Convertible Subordinated
Debenture, 10/01/06 860,000 977,875 1,098,650
4.50% Convertible Subordinated
Debenture, 7/1/05 750,000 750,000 763,125
Concentra Managed Care Inc. .................
4.5% Convertible Subordinated
Note, 3/15/03 . 1,700,000 1,700,000 1,525,750
Corestaff, Inc. .............................
5.88% Convertible Subordinated
Note, 8/15/04 1,680,000 1,421,500 1,617,000
Data Processing Resource Corp. ..............
5.25% Convertible Note, 4/1/05 ... 1,700,000 1,700,000 1,844,500
Dovatron International Inc. .................
6.00% Convertible Subordinated
Note, 10/15/02 1,694,000 1,680,058 1,797,758
Emcor Group Inc. ............................
5.75% Convertible Subordinate
Note, 4/1/05 .. 2,340,000 2,340,000 2,258,100
ESC Medical Systems, Ltd. ...................
6.00% Convertible Subordinated
Note, 9/01/02 2,255,000 2,306,444 2,142,250
Family Golf Centers, Inc. ...................
5.75% Convertible Subordinated
Note, 10/15/04 1,390,000 1,390,000 1,687,112
Fuisz Technologies, Ltd. ....................
7.00% Convertible Subordinated
Note, 10/15/04 2,270,000 2,270,000 2,278,512
Getty Images, Inc. ..........................
4.75% Convertible Subordinated
Note, 6/01/03 3,395,000 3,395,000 3,318,612
Gilat Satellite Networks, Ltd. ..............
6.50% Convertible Subordinated
Note, 6/03/04 2,775,000 2,689,455 2,865,187
Healhsouth Corp. ............................
3.25% Convertible Subordinated
Note, 4/1/03 . 1,360,000 1,414,128 1,351,500
HNC Software, Inc. ..........................
4.75% Convertible Subordinate
Note, 3/1/03 .. 1,000,000 1,060,000 1,103,750
Hybridon, Inc. ...............
9.00% Convertible Subordinated
Note, 4/01/04 $1,490,000 $1,490,000 $ 812,050
IMAX Corporation
5.75% Convertible Debenture, 4/01/03 .. 830,000 747,000 1,022,975
Interim Services, Inc. ......................
4.50% Convertible Subordinated
Note, 6/01/05 635,000 635,000 659,606
</TABLE>
<PAGE>
Statement of Net Assets + (Continued)
<TABLE>
<CAPTION>
Par Market or
Amount Cost Fair Value
Convertible & Public Debt Securities (cont'd)
<S> <C> <C> <C>
Jacor Communications, Inc. ..................
0.00% Convertible Note, 2/09/18 ...... $2,832,235 $2,832,235 $2,804,194
Key Energy Group Inc. .......................
4.50% Convertible Sr. Subordinated
Note, 9/15/04 1,475,000 1,446,950 1,130,219
May & Speh Inc. .............................
5.25% Convertible Subordinated
Note, 4/01/03 1,745,000 1,745,000 2,401,556
North American Vaccine, Inc. ................
6.50% Convertible Subordinate
Note, 5/01/03 . 2,460,000 2,433,234 1,909,575
Oak Industries, Inc. ........................
4.875% Convertible Subordinated
Note, 3/01/08 2,040,000 2,040,000 2,175,150
4.875% Convertible Subordinated
Note, 3/01/08 510,000 515,100 384,958
Offshore Logistics, Inc. ....................
6.00% Convertible Subordinated
Note, 12/15/03 862,000 859,100 900,790
6.00% Convertible Subordinated
Note, 12/15/03 750,000 768,750 783,750
P-Com, Inc. .................................
4.25% Convertible Subordinated
Debenture, 11/01/0 2,345,000 2,326,150 1,679,606
Personnel Group of America, Inc. ............
5.75% Convertible Subordinated
Note, 7/01/04 885,000 885,000 1,067,531
Premiere Technologies, Inc. .................
5.75% Convertible Subordinated
Note, 7/01/04 2,670,000 2,477,750 1,688,775
Pride International, Inc. ...................
0.00% Convertible Subordinated
Zero Coupon, 4/24/ 2,985,000 1,177,404 1,096,987
Quadramed Corporation
5.25% Convertible Subordinated
Debentures, 5/01/0 2,460,000 2,460,000 2,533,800
RES-Care, Inc. ..............................
6.00% Convertible Subordinated
Note, 12/01/04 850,000 850,000 973,250
Signature Resorts, Inc. .....................
5.75% Convertible Subordinated
Note, 1/15/07 3,190,000 2,941,362 2,723,462
Smartalk Teleservices, Inc. .................
5.75% Convertible Subordinated
Note, 9/15/04 1,840,000 1,862,024 1,534,100
Stillwater Mining Company
7.00% Convertible Subordinated
Note, 5/01/03 1,625,000 1,616,397 1,860,625
Tecnomatix Technologies, Ltd. ...............
5.25% Convertible Subordinated
Note, 8/15/04 3,615,000 3,686,875 2,910,075
Tower Automotive, Inc. ......................
5.00%, Convertible Subordinated
Note, 8/01/04 1,350,000 1,344,169 1,398,937
Uromed Corporation
6.00% Convertible Subordinated
Note, 10/15/03 900,000 900,675 373,500
US Diagnostic Labs, Inc. ....................
9.00% Convertible Sr. Subordinated
Debenture 1,730,000 1,906,862 1,291,012
USA Waste Services, Inc. ....................
4.00% Convertible Subordinated
Note, 2/01/02 1,415,000 1,405,475 1,751,062
Total Convertible and Public Debt Securities 79,842,097 77,166,736
</TABLE>
<PAGE>
Statement of Net Assets + (Continued)
<TABLE>
<CAPTION>
Number of Market or
Convertible Preferred Stocks (29.8%) Shares Cost Fair Value
<S> <C> <C> <C>
AES Trust II 5.50%
Convertible Preferred Stock ......... 36,105 $1,805,250 $2,057,985
Automatic Common Exchange Sec. Trust 6.50%
Convertible Preferred Stock
(Republic Industries) 66,165 1,561,852 1,587,960
Budget Group Capital Trust
Convertible Preferred Stock ......... 33,910 1,695,500 1,971,019
Cellnet Funding LLC 7.00%
Convertible Preferred Stock ......... 65,975 1,658,800 1,533,919
CNF Trust I Series A 5.00%
Convertible Preferred Stock ......... 15,950 829,677 1,012,825
Herbalife Decs Trust III 8.75%
Cumulative Preferred Stock .......... 106,405 2,459,759 2,194,603
ICG Communications, Inc. 6.75%
Convertible Preferred Stock ......... 26,630 1,672,623 2,226,934
Lernout & Hauspie Speech 4.75%
Convertible Preferred Stock ......... 40,505 2,025,250 2,582,194
Life Re Capital Trust II 6.00%
Convertible Preferred Stock ......... 23,915 1,674,915 1,823,519
Loral Space and Communications 6.00% *
Convertible Preferred Stock ......... 20,065 994,854 1,522,432
Omnipoint Corporation 7.00%
Convertible Preferred Stock ......... 40,705 2,035,250 1,943,664
Owens Illinois Inc. 4.75%
Convertible Preferred Stock ......... 33,480 1,674,000 1,745,145
Peak Technologies
Convertible Preferred Stock ......... 53,685 845,539 758,301
Royal Group Technology, Ltd. 6.875%
Convertible Preferred Stock ......... 99,682 2,629,113 2,816,017
Sinclair Broadcast Group, Inc. 6.00%
Convertible Preferred Stock ......... 18,155 907,750 1,284,466
</TABLE>
<PAGE>
Statement of Net Assets + (Continued)
<TABLE>
<CAPTION>
Number of Market or
Convertible Preferred Stocks (continued) Shares Cost Fair Value
<S> <C> <C> <C>
Suiza Capital Trust II Series 5.50%
Convertible Preferred Stock ......... 30,675 $1,533,750 $1,533,750
Tesoro Petroleum Corporation 7.25%
Convertible Preferred Stock ......... 113,350 1,805,798 1,869,533
Timet Capital Trust I 6.625%
Convertible Preferred Stock ......... 35,180 1,747,713 1,547,920
Tower Automotive Capital Trust 6.75%
Convertible Preferred Stock ......... 27,125 1,356,250 1,291,828
USX Corporation 6.75% *
Debt Exchangeable for Common Stock .. 54,710 1,167,676 1,176,265
Wang Laboratories, Inc. Series B 6.50%
Depository Shares, Representing 1/20 Convertible
Preferred B Shares .................. 41,480 2,143,185 2,338,435
Winstar Communication, Inc. 7.00%
Convertible Preferred Stock ......... 33,900 1,813,650 1,843,313
Total Convertible Preferred Stock ...... 36,038,154 38,662,027
Total Long-Term Investments (94.4%) .... $115,880,251 115,828,763
Par Market or
Amount Cost Fair Value
Short-Term Investments (2.4%)
Associates Corp. of North America
6.251%, 7/11/98 $1,500,000 1,500,000 1,500,000
Salomon Smith Barney Holdings
5.78%, 7/06/98 1,497,625 1,497,625 1,497,625
Total Short-Term Investments ........... 2,997,625 2,997,625
Total Investments (97.3%) ............. 118,877,876 118,826,388
Excess of Other Assets
Over Liabilities (2.7%)- Note D 3,255,356
Net Assets (100%) - Note E ............. $122,081,744
(Equivalent to $19.18 Per Share Based on 6,363,695 Shares Outstanding)
</TABLE>
+ Unaudited
* Non-Income Producing
The accompanying notes are an integral part of the financial statements.
<PAGE>
STATEMENTS OF OPERATIONS~
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
Investment Income:
<S> <C> <C> <C> <C>
Income:
Interest ..................... $1,136,207 $1,353,314 $2,320,710 $2,657,578
Dividends ................. 435,841 470,796 977,231 1,087,942
Total Income .............. 1,572,048 1,824,110 3,297,941 3,745,520
Expenses:
Management Fees - Note C .. 270,471 281,253 546,622 542,373
Director Fees ............. 13,500 15,750 34,500 31,500
Professional fees ......... 2,817 5,633 16,768 19,001
Printing, stationery, and
supplies 10,658 31,218 12,595 32,192
Stock Transfer & dividend
disbursing 3,740 12,895 9,549 27,741
Postage and mailing fees .. 22,204 22,505 25,491 23,317
New York Stock Exchange fee 0 0 16,170 16,170
Custodian and registrar fees . 2,515 1,551 4,066 3,119
Other ........................ 5,500 8,576 14,191 17,737
Total Operating Expenses ..... 331,405 379,381 679,952 713,150
Net Investment Income ........ 1,240,643 1,444,729 2,617,989 3,032,370
Net realized and unrealized gain(loss)
on investments:
Net realized gain on
investments .. 4,008,162 1,207,119 6,009,319 10,198,826
Increase(decrease) in net
unrealized appreciation
of investments ....... (7,524,317) 7,816,304 (1,074,879) (3,843,915)
Net Realized & Unrealized Gain
on Investments ........... (3,516,155) 9,023,423 4,934,440 6,354,911
Net Increase in Net Assets Resulting
from Operations .......... ($ 2,275,512) $10,468,152 $7,552,428 $9,387,281
</TABLE>
~Unaudited
The accompanying notes are an integral part of the financial statements
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS~
<TABLE>
<CAPTION>
Three Months Six Months Ended
Ended June 30, June 30,
1998 1997 1998 1997
Changes from operations:
<S> <C> <C> <C> <C>
Net Investment Income ....... $1,240,643 $1,444,729 $2,617,989 $3,032,370
Net realized gain on
investments 4,008,162 1,207,119 6,009,319 10,198,826
Increase(Decrease) in Net Unrealized
appreciation of investments . (7,524,317) 7,816,304 (1,074,879) (3,843,915)
Net Increase(Decrease) in Net Assets
Resulting from operations (2,275,512) 10,468,152 7,552,429 9,387,281
Distributions to shareholders
from net investment income (1,527,287) (1,527,287) (1,527,287) (1,527,287)
Distributions to shareholders from
net realized gain on investments: 0 0 0 0
Total Increase(Decrease)
in Net Assets (3,802,799) 8,940,865 6,025,142 7,859,994
Net assets at beginning
of period . 125,884,543 119,350,550 116,056,602 120,431,421
Net Assets at End
of Period * $122,081,744 $128,291,415 $122,081,744 $128,291,415
</TABLE>
~Unaudited
* Includes distributions in excess of net investment income as of
June 30: 1998 - $ 1,143,058; 1997 - $1,467,781
The accompanying notes are an integral part of the financial statements.
<PAGE>
PORTFOLIO of INVESTMENTS BY INDUSTRY CLASSIFICATION
As of June 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Market or Percent of
Fair Value Net Assets
<S> <C> <C>
Automotive
Automatic Common Exchange (Republic Industries) $ 1,587,960
Budget Group Capital Trust .................. 1,971,019
3,558,979 2.9%
Broadcasting
Jacor Communications, Inc. .................. 2,804,194
Sinclair Broadcast Group, Inc. .............. 1,284,466
4,088,660 3.3%
Building Construction
Emcor Group, Inc. ........................... 2,258,100
Royal Group Technology, Ltd. ................ 2,816,017
5,074,117 4.2%
Communication Equipment
Antec Corporation ........................... 2,350,425
Comverse Technology Inc. .................... 3,311,738
Oak Industries, Inc. ........................ 2,560,108
P-Com, Inc. ................................. 1,679,606
9,901,877 8.1%
Computer Software/Systems
BEA Systems Inc. ............................ 2,068,171
HNC Software, Inc. .......................... 1,103,750
Lernout & Hauspie Speech .................... 2,582,194
Tecnomatix Tecnologies, Ltd. ................ 2,910,075
Wang Laboratories, Inc. ..................... 2,338,435
11,002,625 9.0%
Electronics
Dovatron International, Inc. ................ 1,797,758
Getty Images, Inc. .......................... 3,318,612
5,116,370 4.2%
Employment Services
Corestaff, Inc. ............................. 1,617,000
Data Processing Resource Corp. .............. 1,844,500
Interim Services, Inc. ...................... 659,606
Personnel Group of America, Inc. ............ 1,067,531
5,188,637 4.3%
Energy
AES Trust II ................................ 2,057,985
Tesoro Petroleum Corporation ................ 1,869,533
3,927,518 3.2%
Entertainment
Family Golf Centers, Inc. ................... 1,687,112
IMAX Corporation ............................ 1,022,975
2,710,087 2.2%
Food Products
Suiza Capital Trust II ...................... 1,533,750 1.3%
Health Services
Alpharma Inc. ............................... 2,690,938
Aviron Corp ................................. 1,296,713
Concentra Managed Care Inc. ................. 1,525,750
ESC Medical Systems, Inc. ................... 2,142,250
Fuisz Technologies, Ltd. .................... 2,278,512
Healthsouth Corp. ........................... 1,351,500
Hybridon, Inc. .............................. 812,050
North American Vaccine, Inc. ................ 1,909,575
Quadramed Corporation ....................... 2,533,800
RES-Care, Inc. .............................. 973,250
Uromed Corporation .......................... 373,500
US Diagnostic Labs Inc. ..................... 1,291,012
19,178,850 15.7%
Hotels/Lodging
Capstar Hotel Corporation ................... 1,855,725
Signature Resorts, Inc. ..................... 2,723,462
4,579,187 3.8%
Insurance
Life Re Capital Trust II .................... 1,823,519 1.5%
Machinery & Equipment
Action Performance Companies, Inc. .......... 1,935,450
Tower Automotive, Inc. ...................... 2,690,765
4,626,215 3.8%
Metals and Minings
Stillwater Mining Company ................... 1,860,625
Timet Capital Trust ......................... 1,547,920
USX Corporation (RMI Titanium) .............. 1,176,265
4,584,810 3.8%
Oil Equipment/Services
Key Energy Group, Inc. ...................... 1,130,219
Offshore Logistics Inc. ..................... 1,684,540
Pride International, Inc. ................... 1,096,987
3,911,746 3.2%
Paper and Paper Products
Owens Illinois Inc. ......................... 1,745,145 1.4%
Retail
Herbalife Decs Trust III .................... 2,194,603 1.8%
Shipping
CNF Trust I Series A ........................ 1,012,825 0.8%
Technology
Cellnet Funding LLC ......................... 1,533,919
Loral Space and Communications .............. 1,522,432
May & Speh Inc. ............................. 2,401,556
Peak Technologies ........................... 758,301
6,216,208 5.1%
</TABLE>
<PAGE>
PORTFOLIO of INVESTMENTS BY INDUSTRY CLASSIFICATION
Continued (Unaudited)
<TABLE>
<CAPTION>
Market or Percent of
Fair Value Net Assets
<S> <C> <C>
Telecommunication
Gilat Sattellite Networks, Ltd .............. $2,865,187
ICG Communications Inc. ..................... 2,226,934
Omnipoint Corporation ....................... 1,943,664
Premiere Technologies, Inc. ................. 1,688,775
Smartalk Teleservices, Inc. ................. 1,534,100
Winstar Communication,Inc ................... 1,843,313
12,101,973 9.9%
Waste Management
USA Waste Services, Inc. .................... 1,751,062 1.4%
Total Investments ........................... $115,828,763 94.9%
</TABLE>
Notes to Financial Statements (Unaudited)
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.
Private placement securities are restricted as to resale. Except for
certain private placement securities traded in a secondary market system
for trading restricted securities, private placement securities have no
quoted market values. The amounts shown as fair values for private
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
<PAGE>
Notes to Financial Statements (continued)
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.
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 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 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.
Distributions to common shareholders are recorded on the ex-dividend date.
Note B - Investments
Private 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 private 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 private
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 private 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 $100,684,109
and $105,327,950 respectively, as of June 30, 1998; and $55,729,634 and
$81,732,779, respectively as of June 30, 1997.
<PAGE>
Notes to Financial Statements (continued)
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 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).
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 Other Assets over Liabilities
The net asset caption "excess of other assets over liabilities" consisted
of the following:
Cash $19,823
Accrued investment income receivable 1,104,451
Accrued dividend income receivable 24,822
Receivable for securities sold 4,190,707
Management fee payable (267,639)
Payable for securities purchased (1,805,798)
Other - net (11,010)
$3,255,356
Note E - Net Assets
Net assets at June 30, 1998, 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 89,779,720
Undistributed realized gain on investments,
net of taxes paid 31,204,090
Undistributed net investment income 1,143,058
Net unrealized depreciation of investments (51,488)
Total Net Assets $122,081,744
Note F - Income Taxes
The cost of investments for federal income tax purposes is the same as for
book purposes. At June 30, 1998, the aggregate gross unrealized
appreciation on investments was $7,470,045 and the aggregate gross
unrealized depreciation was $7,521,533.
Note G - Subsequent Event
On July 7, 1998, the Board of Directors declared a $0.24 per share
distribution. The dividend is payable July 31, 1998 to shareholders of
record as of July 20, 1998.
<PAGE>
Common Stock Market Prices and Net Asset Value History
(Unaudited)
<TABLE>
<CAPTION>
1998
Net Asset Value
High Low Close Volume High Low Close
<S> <C> <C> <C> <C> <C> <C> <C>
1st Quarter $18.750 $16.625 $18.500 756,100 $19.78 $17.76 $19.78
2nd Quarter 19.125 16.063 16.813 420,300 19.88 18.64 19.18
1997
Market Prices and Volumes Net Asset Value
High Low Close Volume High Low Close
1st Quarter $19.750 $17.250 $17.375 598,200 $20.20 $18.76 $18.76
2nd Quarter 19.000 16.750 18.875 377,400 20.16 18.15 20.16
3rd Quarter 20.000 18.250 19.500 358,000 22.50 20.16 22.50
4th Quarter 20.438 17.625 17.813 333,200 23.13 18.24 18.24
1996
Market Prices and Volumes Net Asset Value
High Low Close Volume High Low Close
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
</TABLE>
Shares are listed on the New York Stock Exchange under the trading symbol LNV.
<PAGE>
Directors & Officers of the Fund
<TABLE>
<CAPTION>
Directors Descriptions of Occupations and Responsibilities
<S> <C>
Thomas L. Bindley Director, Lincoln National Income Fund, Inc.
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., 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., Mallinckrodt Group, Inc.,
and NICOR, Inc.
Ann L. Warner Senior Vice President and Director Risk Management,
Lincoln Investment Management, Inc; Director,
Lincoln National Income Fund, Inc.
</TABLE>
Officers
H. Thomas McMeekin President
David A. Berry Vice President
David G. Humes Vice President, Treasurer & Controller
Edward J. Petner Vice President
Robert D. Schwartz Vice President
Ann L. Warner Vice President
Cynthia A. Rose Secretary
<PAGE>
Corporate Information
Dividend Disbursing Agent, Transfer Agent
and Reinvestment Plan Agent
First Chicago Trust Company of New York
P.O. Box 2500
Jersey City, NJ 07303-5561
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
Pricewaterhouse Coopers LLP
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 First Chicago, 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 First Chicago, P.O.
Box 2500 Jersey City NJ,07303-2500 or call 1-800-317-4445.
