Lincoln National Convertible Securities Fund, Inc.
1997 Annual Report
<TABLE>
<CAPTION>
Table of Contents Page
<S> <C>
Manager Profile ............ 1
Investment Policies & Objectives .... 1
President's Letter ................ 2
Portfolio Manager's Discussion ...... 3
Portfolio Performance ............. 4
Annual Performance of the Fund vs.
Indices 4
Total Fund Investments ........... 5
Common Stock Market Prices & Net
Asset Value History ........... 5
Dividend History ................. 5
Tax Information ................. 6
Shareholder Meeting Results ....... 6
FINANCIAL STATEMENTS:
Financial Highlights ........ 7
Statement of Net Assets ...... 9
Statements of Operations ..... 13
Statements of Changes in Net
Assets 14
Portfolio of Investments by
Industry Classification....... 15
Notes to Financial Statements 16
Report of Independent Accountants .. 19
Directors & Officers of the Fund .. 20
Corporate Information ............ 21
</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 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 Lincoln National Investment Companies, Inc. (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 December 31, 1997, has chosen not to do so.
<PAGE>
President's Letter
Dear Shareholder:
This past year was another positive year for the domestic financial markets.
Despite increased market volatility in the final quarter, both the equity and
fixed income markets showed significant appreciation. The Fund had its third
consecutive year of double-digit performance, and the return was above most
fixed income benchmarks. However, the return was less than many equity indices.
Our strategy of investing in small and medium sized growth companies kept
performance at a moderate level, as this segment of the market lagged the
performance of the overall equity market.
Your Fund's net asset value finished the year at $18.24/share, a 13.2% gain
(after tax credits) including regular dividends of $1.00, and a dividend of
$1.76 attributable to short term capital gains. The Fund's share price ended
the year at $17.8125 up from $17.50 at year-end 1996. The share price closed
at a modest 2.3% discount to net asset value.
The Fund's performance fluctuated by quarter, with positive returns building
through the first three quarters and then a negative fourth quarter erasing a
good portion of the Fund's earlier gains. The dramatic worsening of financial
problems in Southeast Asia during the fourth quarter brought an increase in
volatility and caused a flight to quality throughout the equity and fixed
income markets. Small capitalization equities were sold in favor of larger
companies, value was favored over growth, and spread widened on corporate debt.
All of these trends penalized our strategy of purchasing convertible securities
issued by faster growing mid-sized companies.
Many of the best performing sectors through the third quarter were the
poorest performing sectors in the final quarter. As investors worried about
global problems, securities of companies in industries such as technology and
energy were broadly sold without regard to individual company fundamentals.
The Fund's performance was hurt in the fourth quarter by holdings in these
two sectors. Although growth for many companies could be less than once
expected, we feel that many companies in these industries still offer strong
growth potential, and their convertible securities are excellent investments.
We are limiting our exposure to sectors that are highly dependent on Asian
economies, but are not abandoning companies whose positive fundamentals and
depressed security prices should provide significant returns as the year
progresses.
As we head into 1998, we are optimistic about he outlook for the convertible
market. Although our overall view for the equity market is tempered by the
effects of slowing Asian economies, convertibles, and our strategy in
particular, should be well positioned to outperform in coming year.
The negative trends seen in the fourth quarter of 1997 for our segment of the
market should be short term in nature. Relative valuations for small and
medium sized growth companies are very attractive, and these companies should
show good relative earnings growth due to their domestic focus. Additionally,
convertibles issued by these companies cheapened considerably in the last
quarter of 1997. Furthermore, convertibles in general should get more
attention in 1998 due to their lower volatility, higher yields, and defensive
characteristic. Interest rate trends are providing a positive backdrop for
our market, and support from the fixed income portion of convertible
securities has improved significantly in the past six months.
We do not plan to change our strategy of purchasing attractive convertibles
issued by small and medium sized companies that fit our investment
philosophy. Although we will strive to keep our convertible holdings somewhat
more defensive in nature due to our market outlook, we will continue to
purchase securities of companies undergoing positive fundamentals that have
significant upside potential. This consistent investment philosophy should
help the Lincoln National Convertible Securities Fund continue to perform very
well through changing market and economic cycles. We thank you for your
continual interest in your fund.
We would also like to acknowledge the contributions of Fred Young as a
Director who has served throughout the Fund's history and contributed
significantly to the Fund's success. Fred has decided to retire from the
Board in April of this year. His insight and guidance have helped the Fund to
achieve its fine dividend history and his contribution will be missed. We
wish him continued success.
Sincerely,
/s/ H. Thomas McMeekin
H. Thomas McMeekin
January 28, 1998
<PAGE>
Portfolio Manager's Discussion
What is a convertible security and why are they attractive investment
vehicles?
Eighty five percent of the convertible securities that we invest in are
either convertible bonds or convertible preferred. These securities are the
same as regular fixed income securities with preset coupon or dividend rates,
and in most cases have a fixed maturity or redemption date. What makes
convertibles different is that convertible securities also give the holder
an option to convert into a fixed number of shares of an underlying common
stocks. This conversion option makes the value of the convertible increase as
the underlying equity increases. Importantly however, if the value of the
equity decreases, the convertible sitll has its fixed income value to support
its price. Therefore, convertibles have the upside potential of common stocks
but have extra protection if the underlying equity falls.
Can you explain your approach to investing in convertible securities?
We first look for a company undergoing a positive fundamental change that
will increase earnings or cash flow, and result in a higher stock price. We
typically find positive change in companies that have new products, have made
a recent acquisition, undergone a restructuring, or whose industry is facing
improved fundamentals. We recognize however, that companies that are
undergoing change may encounter problems. They have tremendous potential, but
all change entails risk. These companies are perfect candidates for investment
through convertible securities. We prefer to invest in these companies with
a convertible security that will act as a "hybrid" security, ie. increase with
the stock price but defensive enough to provide us with downside protection.
The extra protection and increased yield are valuable in cases where the
underlying equity fundamentals don't meet expectations, The combination of
investing in high potential return companies through the use of convertible
securities has worked well over the years.
Can you describe one of your current holdings and how it fits your investment
philosophy and outlook?
One of our current holdings is Tecnomatix 5.25% due in 2004. Tecnomatix is
the leader in the "CAPE" software market. CAPE stands for Computer Aided
Production Engineering. While there is an abundance of software for designing
products, there is little in the way of software to assist in designing the
manufacturing process to produce these products. Tecnomatix products create
simulations of production lines for industries such as autos, airlines, and
machinery. These products allow bottlenecks and production problems to be
worked out in advance,thus saving time and money with expensive robots and
manufacturing space. Recent acquisitions will allow the company to offer
integrated systems including design, operation, and materials management
for a production process. The convertible is an excellent means of investing
in the company as we expect 75% or more of any upside in the common, yet the
relatively short maturity and attractive yield will cushion our return in the
event of specific company or market problems.
Describe the condition of the convertible securities market at year-end 1997?
Overall the convertible market is in good shape at year-end 1997. The market
grew again in 1997, totaling approximately $150 billion in securities at
year-end. The total size of new issues in 1997 set a record, slightly above
1996 levels. Issuance continues to be dominated by small and mid-sized growth
companies, providing us with many candidates for investment. Approximately 60%
of the market place is traditional convertible bonds, 30% is convertible
preferred, with the remainder consisting of mandatory convertible securities.
With the relatively low yields available on other fixed income securities,
and less than a 1% yield offered on the underlying stocks, the 5.4% yield of
the typical convertible is an attractive alternative investment. The average
conversion premium is currently 25% in line with historical averages. Although
the average is made up of the combination of may high premium and low premium
issues, there are plenty of the hybrid securities that we prefer. Additionally
on a theoretical basis, we find that many of the securities we follow cheapen
during the latter part of 1997 and are currently quite attractive.
What are the key factors that you expect to affect the Fund's performance in
1998?
The overall trends in the equity market will be an important determinant of
the relative and absolute performance of convertibles in 1998. If our
expectations of moderate overall equity performance in 1998 are correct,
convertibles should have excellent relative performance due to their higher
yields. The relative performance of large capitalization equities versus
smaller company equities will also be a key factor. Small stocks have lagged
larger stocks for the past four years after outperforming from 1991 through 1993
As the typical convertible issuer is a smaller company, this trend is always
important. A lower dependence on Asian and other emerging markets, and being
more insulated from a strong U.S. dollar, smaller companies should begin to
outperform in 1998. Interest rates are also an important factor, and our
expectations for continued low inflation and moderate global growth are a
positive for interest rate trends. This should provide a positive backdrop
for the Fund.
Can you describe how convertibles and the Fund performed in 1997?
Although the Fund and the convertible indices had double digit returns in
1997, this performance is disappointing when compared to many equity indices.
The primary reason for this relative under-performance is the smaller size of
the typical issuer in the convertible market. Smaller companies, and small
growth companies in particular, were nor rewarded for earnings growth in
1997. This lag in returns is shown by examining the Russell 2000 Index of
smaller companies. Those companies categorized as value in the index increased
31.8%, while those categorized as growth increased only 13%. This type of
disparity is unusual and we don't expect a continuation of this trend.
Convertibles actually did quite well when compared to their underlying
equities. Using data from the First Boston Convertible Securities Index, the
convertibles achieved 92% of their underlying equity return. This is quite
good, since we expect the participation in a down market to be considerably
less.
/s/ Robert D. Schwartz
Robert D. Schwartz
Portfolio Manager
Portfolio Performance
As of December 31, 1997
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 1997 assuming reinvestment of dividends.
[MOUNTAIN GRAPH]
Data Points
1986 1989 1994 1997
LN Convertible
Securities Fund $1,000 $2,138 $2,686 $4,379
First Boston 1,000 1,301 2,079 3,421
Annual Performance of Lincoln National Convertible Securities Fund, Inc. vs.
Indices
<TABLE>
<CAPTION>
1993 1994 1995 1996
<S> <C> <C> <C> <C>
1997 Cumulative 5Yr. Return
<C> <C>
LN Convertible
Securities Fund 28.05% (1.96%) 19.59% 20.42% 13.17% 15.41%
1st Boston
Convertible Sec.
Index 18.57% (4.70%) 23.70% 13.80% 16.90% 13.21%
Merrill Lynch
Convertible
Index 18.88% (7.07%) 24.69% 15.90% 19.57% 13.80%
Lipper Convertible
Mutual Fund
Index 15.70% (3.90%) 20.60% 14.40% 17.80% 12.56%
S&P 500* 10.06% 1.31% 37.53% 22.94% 33.36% 20.25%
Russell 2000 18.89% (1.82%) 28.33% 16.50% 22.40% 16.39%
Lehman Gov't/
Corporate Bond
Index 11.06% (3.50%) 19.24% 2.90% 9.80% 7.62%
</TABLE>
* Dividends Reinvested
<PAGE>
Total Fund Investments
At Market or Fair Values As of December 31
<TABLE>
<CAPTION>
1997 1996
(000) % of Total (000) % of Total
<S> <C> <C> <C> <C>
Convertible &
Public Debt
Securities $85,651 74% $89,494 74%
Private Placement
Securities - - 3,349 3%
Convertible Preferred
Stocks 35,952 31% 35,878 30%
Common Stocks 1,610 1% 7,519 6%
Short-Term
Investments 5,189 5% - -
Other Assets Over
Liabilities (12,345) (11%) (15,809) (13%)
Total Net
Assets $116,057 100% $120,431 100%
</TABLE>
Common Stock Market Prices and Net Asset Value History*
<TABLE>
<CAPTION>
1997
Market Prices and VolumesNet Asset Value
High Low Close Volume High Low Close
<S> <C> <C> <C> <C> <C> <C> <C>
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>
* Unaudited
Shares are listed on the New York Stock Exchange under the trading symbol
LNV.
Dividend History
The table below shows the common dividend per share history.
<TABLE>
<CAPTION>
Year Annual Year Annual
Dividend 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
<PAGE>
Tax Information
Income dividends received by a shareholder must be reported for federal
income tax purposes as ordinary income. The Fund distributed $ 2.76 per share
of ordinary income for the tax year 1997. Dividend payments made in April,
July, October and mid-January 1998 are taxable in the 1997 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:
Corporation's Dividend Received Deduction - Percent 9.8420%
Corporation's Dividend Received Deduction - $ Per Share $0.2716
Percentage of long-term gains eligible for 28% taxation 64.68%
For the year-ended December 31, 1997, the Fund realized long-term capital
gains. As set forth in the prospectus of the Fund, it is the intention to
retain these gainsas 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 1998, the Fund will distribute
IRS Form 2439 to shareholders of record as of December 31, 1997. IRS Form
2439 indicates each shareholder's pro-rata portion of the undistributed long
- -term capital gains on Line 1 of the form ($1.0082 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 ($0.3529 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, 1997, 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 $0.6553 per share.
SHAREHOLDER MEETING RESULTS
The Fund had its annual Shareholder meeting on April 22, 1997. 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
5,829,216 ofCommon Stock shares (91.60% of the total outstanding shares) were
voted. The following table highlights the results of the vote.
</TABLE>
<TABLE>
<CAPTION>
Numberof Number of Number of
Shares Shares Shares
Voted Voted Voted
FOR AGAINST ABSTAINED
<S> <C> <C> <C>
Proposal I
Election of Directors
R. Burridge 5,595,930 233,286 ----
A. Cepeda 5,591,817 237,399 ----
R. Deshaies 5,595,932 233,284 ----
C. Freund 5,592,898 236,318 ----
T. Mathers 5,577,592 251,624 ----
T. McMeekin 5,586,364 242,852 ----
D. Toll 5,591,808 237,408 ----
A. Warner 5,581,059 248,157 ----
F. Young 5,584,490 244,726 ----
Proposal II
Ratification of the Selection
Of Auditor (Coopers & Lybrand
L.L.P.) 5,760,742 21,714 46,760
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS Years Ended December 31
(Selected data for each share of common stock
outstanding throughout the year)
<TABLE>
<CAPTION>
1997 1996 1995 1994
<S> <C> <C> <C> <C>
NAV, Beginning of
Period $18.92 $18.71 $17.10 $18.84
Net Investment Income 0.93 0.92 0.91 0.94
Net Realized & Unrealized
Gain\(Loss) 1.15 2.62 2.34 (1.60)
Total From Investment
Operations 2.08 3.54 3.25 (0.66)
Less Distributions:
Dividends from Net
Investment Income: (1.00) (0.98) (0.96) (0.95)
Dividends from Net Realized
Gains: (1.76) (2.35) (0.68) (0.13)
Total Distributions (2.76) (3.33) (1.64) (1.08)
NAV, End of Period $18.24 $18.92 $18.71 $17.10
Per Share Market Value,
End of Period $17.81 $17.50 $16.75 $15.38
Total Investment Return
(based on Market Value) 17.54% 24.36% 19.57% (14.49%)
Ratios/Supplemental Data
Net Assets,End of
Period(000) $116,057 $120,431 $119,087 $108,810
Ratio-Expenses to
Average Net Assets 1.05% 1.05% 1.09% 1.09%
Ratio--Net Investment
Income to Average
Net Assets 4.64% 4.50% 4.91% 5.18%
Portfolio Turnover
Rate 141.85% 134.85% 127.24% 127.32%
Average Commission Rate
Paid Per Share $0.0663 $0.0602 $0.0579
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS Years Ended December 31
(Selected data for each share of common stock
outstanding throughout the year)
<TABLE>
<CAPTION>
1993 1992 1991 1990
<S> <C> <C> <C> <C>
NAV, Beginning of Period $17.62 $18.04 $13.59 $15.21
Net Investment Income 0.90 1.01 0.97 1.03
Net Realized & Unrealized
Gain\(Loss) 3.24 0.71 4.50 (1.63)
Total From Investment
Operations 4.14 1.72 5.47 (0.60)
Less Distributions:
Dividends from Net Investment
Income: (1.05) (0.97) (1.02) (1.02)
Dividends from Net
Realized Gains: (1.87) (1.17) ---- ----
Total Distributions (2.92) (2.14) (1.02) (1.02)
Net Asset Value,
End of Period $18.84 $17.62 $18.04 $13.59
Per Share Market Value,
End of Period $19.25 $16.50 $15.50 $11.50
Total Investment Return
(based on Market Value) 34.36% 20.26% 43.65% (6.43%)
Ratios/Supplemental Data
Net Assets, End of
Period (000) $118,575 $110,743 $113,398 $85,434
Ratio-Expenses
to Average Net
Assets 1.02% 0.83% 0.89% 0.97%
Ratio--Net Investment
Income to Average
Net Assets 4.58% 5.49% 5.96% 7.21%
Portfolio Turnover
Rate 222.00% 166.26% 132.99% 134.64%
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS Years Ended December 31
(Selected data for each share of common stock
outstanding throughout the year)
<TABLE>
<CAPTION>
1989 1988
<S> <C> <C>
Net Asset Value, Beginning of Period $13.41 $12.62
Net Investment Income 1.53 0.95
Net Realized & Unrealized Gain\(Loss) 1.84 0.79
Total From Investment Operations 3.37 1.74
Less Distributions:
Dividends from Net Investment Income: (1.07) (0.95)
Dividends from Net Realized Gains: (0.50) ----
Total Distributions (1.57) (0.95)
Net Asset Value, End of Period $15.21 $13.41
Per Share Market Value, End of Period $13.38 $11.75
Total Investment Return (based on
Market Value) 27.23% 8.09%
Ratios/Supplemental Data
Net Assets, End of Period (000) $95,655 $91,607
Ratio--Expenses to Average Net Assets 0.94% 0.96%
Ratio--Net Inv. Inc. to Average Net Assets 6.64% 6.90%
Portfolio Turnover Rate 147.31% 110.70%
</TABLE>
<PAGE>
Statement of Net Assets As of December 31, 1997
Investments - Notes A & B
<TABLE>
<CAPTION>
Par Market or
Amount Cost FairValue
<S> <C> <C> <C>
Convertible & Public Debt Securities (73.8%)
Applied Magnetics Corporation
7.00% Convertible Subordinated
Debenture, 3/15/06 $760,000 $882,690 $608,000
Capstar Hotel Corporation
4.75% Convertible Subordinated
Note, 10/15/04 2,270,000 2,270,000 2,261,488
Comverse Technology, Inc.
5.75% Convertible Subordinated
Debenture,10/01/06 1,885,000 1,892,481 2,019,306
5.75% Convertible Subordinated
Debenture, 10/01/06 410,000 435,625 439,212
Credence Systems Corporation
5.25% Convertible Subordinated
Note, 9/15/02 2,865,000 2,865,000 2,331,394
DIIG Group
6.00% Convertible Subordinated
Note, 10/15/02 1,549,000 1,452,964 2,358,353
Eagle Hardware & Garden
6.25% Convertible Subordinated
Debenture, 3/15/01 1,415,000 1,805,500 1,735,144
EMC Corporation
3.25% Convertible Subordinated
Note, 3/15/02 1,040,000 1,040,000 1,396,200
ESC Medical Systems, Ltd.
6.00% Convertible Subordinated
Note, 9/01/02 2,255,000 2,306,444 2,463,587
Family Golf Centers, Inc.
5.75% Convertible Subordinated
Note, 10/15/04 1,890,000 1,890,000 2,003,400
Fine Host Corporation
5.00% Convertible Subordinated
Note, 11/01/04 3,080,000 3,048,719 1,694,000
FPA Medical Management Inc.
6.50% Convertible Subordinated
Debenture,12/15/01 1,210,000 1,210,000 1,240,250
Fuisz Technologies, Ltd.
7.00% Convertible Subordinated
Note, 10/15/04 2,270,000 2,270,000 2,025,975
Gilat Satellite Networks, Ltd.
6.50% Convertible Subordinated
Note, 6/03/04 2,215,000 2,202,605 2,059,950
Halter Marine Group, Inc.
4.50% Convertible Subordinated
Note, 9/15/04 1,445,000 1,437,294 1,618,400
Heartport, Inc.
7.25% Convertible Subordinated
Note, 5/01/04 585,000 608,400 560,138
Hybridon, Inc.
9.00% Convertible Subordinated
Note, 4/01/04 1,490,000 1,490,000 745,000
IMAX Corporation
5.75% Convertible
Debenture,4/01/03 1,530,000 1,384,500 1,814,962
Integrated Process Equipment Corporation
6.25% Convertible Senior Subordinated
Note, 9/15/04 1,425,000 1,425,000 1,177,406
Intevac, Inc.
6.50% Convertible Senior Subordinated
Note, 3/01/04 1,270,000 1,262,187 974,725
Kent Electronics Corporation
4.50% Convertible Sr.Subordinated
Note, 9/01/04 2,995,000 2,956,788 2,433,438
Key Energy Group Inc.
5.00% Convertible Subordinated
Note, 9/15/04 3,175,000 3,146,950 2,663,031
Lernout and Hauspie Speech
8.00% Convertible Subordinated
Note, 11/15/01 575,000 575,000 1,348,375
</TABLE>
<PAGE>
Statement of Net Assets (Continued)
<TABLE>
<CAPTION>
Par Market or
Amount Cost Fair Value
<S> <C> <C> <C>
Convertible & Public Debt Securities (continued)
Level One Communications, Inc.
4.00% Convertible Subordinated
Note, 9/01/04 $1,170,000 $1,214,141$1,145,138
Lomak Petroleum Inc.
6.00% Convertible Subordinated
Debenture, 2/01/07 815,000 815,000 874,087
North American Vaccine, Inc.
6.50% Convertible Subordinated
Note, 5/01/03 2,460,000 2,433,235 2,570,700
Occusystems Inc.
6.00% Convertible Subordinated
Note, 12/15/01 1,720,000 1,702,956 2,244,600
Offshore Logistics, Inc.
6.00% Convertible Subordinated
Note, 12/15/03 1,375,000 1,372,100 1,567,500
P-Com, Inc.
4.25% Convertible Subordinated
Debenture,11/01/02 2,055,000 2,055,000 1,885,463
Parker Drilling Company
5.50% Convertible Subordinated
Note, 8/01/04 975,000 1,012,717 1,043,250
Personnel Group of America, Inc.
5.75% Convertible Subordinated
Note, 7/01/04 1,735,000 1,834,450 1,938,863
Platinum Technology, Inc.
6.75% Convertible Subordinated
Note, 11/15/01 153,000 153,000 319,579
Premiere Technologies, Inc.
5.75% Convertible Subordinated
Note, 7/01/04 1,345,000 1,345,000 1,420,656
Prime Hospitality Corporation
7.00% Convertible Subordinated
Note, 4/15/02 525,000 525,000 956,813
RES-Care, Inc.
6.00% Convertible Subordinated
Note, 12/01/04 1,715,000 1,715,000 1,946,525
Seacor Holdings, Inc.
5.375% Convertible Subordinated
Note, 11/15/06 435,000 407,486 490,463
Sholodge, Inc.
7.50% Convertible Subordinated
Debenture, 5/01/04 2,200,000 2,200,000 2,158,750
Signature Resorts, Inc.
5.75% Convertible Subordinated
Note, 1/15/07 2,850,000 2,661,713 2,889,187
Smartalk Teleservices, Inc.
5.75% Convertible Subordinated
Note, 9/15/04 1,320,000 1,320,000 1,379,400
Stillwater Mining Company
7.00% Convertible Subordinated
Note, 5/01/03 2,325,000 2,316,750 2,092,500
Tecnomatix Technologies, Ltd.
5.25% Convertible Subordinated
Note, 8/15/04 3,615,000 3,686,875 3,624,037
Thermo Electron Corporation
4.25% Convertible
Eurobond, 1/01/03 1,720,000 1,981,500 2,158,600
Thermo Fibertek, Inc.
4.50% Convertible Subordinated
Debenture, 7/15/04 615,000 615,000 651,900
Thermotrex Corporation
3.25% Convertible Subordinated
Debenture,11/01/07 1,195,000 1,195,000 1,151,681
Tower Automotive, Inc.
5.00% Convertible Subordinated
Note, 8/01/04 2,090,000 2,137,519 2,163,150
Uromed Corporation
6.00% Convertible Subordinated
Note, 10/15/03 1,380,000 1,390,762 746,925
</TABLE>
<PAGE>
Statement of Net Assets (Continued)
<TABLE>
<CAPTION>
Par Market or Amount Cost Fair Value
<S> <C> <C> <C>
Convertible & Public Debt Securities (continued)
United States Filter Corporation
4.50% Convertible Subordinated
Note, 12/15/01 1,685,000 1,699,310 1,722,912
US Diagnostic Labs, Inc.
9.00% Convertible Senior
Subordinated Debenture,
3/31/03 1,730,000 1,906,862 1,271,550
U.S. Office Products Company
5.50% Convertible Subordinated
Note, 2/01/01 2,605,000 3,073,889 3,057,619
USA Waste Services, Inc.
4.00% Convertible Subordinated
Note, 2/01/02 2,255,000 2,246,750 2,457,950
Vantive Corporation
4.75% Convertible Subordinated
Note, 9/01/02 1,010,000 995,900 932,987
World Access, Inc.
4.50% Convertible Subordinated
Note, 10/01/02 925,000 925,000 816,312
Total Convertible and Public
Debt Securities 86,796,062 85,650,831
Number of Market or
Shares Cost Fair Value
Common Stocks (1.4%)
Qualcomm Financial
Trust 34,450 1,725,858 1,610,538
Total Common Stocks 1,725,858 1,610,538
Convertible Preferred Stocks (31.0%)
AES Trust II 5.50% *
Term Convertible
Shares 51,280 2,564,000 2,640,920
Automatic Common Exchange Sec.
Trust II 6.50% Convertible
Preferred Stock(Republic
Industries) 66,165 1,561,852 1,554,878
CNF Trust I Series A 5.00%
Convertible Preferred
Stock 40,425 2,233,226 2,364,863
Evergreen Media Group $3.00
Convertible Preferred
Stock 40,225 2,089,650 3,112,409
EVI, Inc. 5.00% *
Convertible Preferred
Stock 47,875 2,393,750 2,193,273
Globalstar Telecomm 6.50%
Convertible Preferred
Stock 13,070 698,190 1,104,415
Hvide Capital Trust 6.50%
Convertible Preferred
Stock 11,015 559,019 627,855
ICG Communications, Inc. 6.75%
Convertible Preferred
Stock 26,665 1,333,250 1,683,228
Insignia Financial 6.50%
Convertible Preferred
Stock 34,050 1,702,500 1,791,881
Intermedia Communications, Inc.7.00%*
Convertible Trust Preferred
Securities 21,235 530,875 597,234
Loral Space and Communications 6.00% *
Convertible Preferred
Stock 28,500 1,425,000 1,756,313
Loral Space and Communications 6.00%
Convertible Preferred
Stock 15,150 750,652 933,619
</TABLE>
<PAGE>
Statement of Net Assets (Continued)
<TABLE>
<CAPTION>
Number of Marketor
Shares Cost Fair Value
<S> <C> <C> <C>
Convertible Preferred Stocks (continued)
Medpartners, Inc. 6.50% *
Convertible Preferred
Stock $34,925 $816,285 $768,350
Qualcomm Financial Trust 5.75% *
Convertible Preferred
Stock 14,855 766,889 694,471
Royal Group Technology, Ltd. 6.875% *
Debt Exchangeable for Common
Stock 99,682 2,629,113 2,354,987
Salomon, Inc. Series CSN 6.25%
Debt Exchangeable for
Common Stock (Cincinnati
Bell) 33,645 1,879,082 1,993,466
Sinclair Broadcast Group, Inc. 6.00%
Convertible Preferred
Stock 54,935 2,794,388 3,131,295
Timet Capital Trust I 6.625%
Convertible Preferred
Stock 35,180 1,747,713 1,741,410
USX Corporation 6.75%
Debt Exchangeable for Common
Stock 108,760 2,322,995 2,202,390
Wang Laboratories, Inc.
Series B 6.50% Depository
Shares, Representing 1/20
Convertible Preferred
B Shares 41,480 2,143,185 2,089,555
Worthington Industries, Inc. 7.25%
Convertible Preferred
Stock (Rouge Steel) 46,845 726,097 614,841
Total Convertible
Preferred Stock 33,667,711 35,951,653
Total Long-Term
Investments (106.2%) 122,189,631 123,213,022
Par
Amount
Short-Term Investments (4.5%)
Merrill Lynch & Co., Inc.
5.87%, 1/13/98 $2,600,000 2,594,489 2,594,489
Monsanto Co.
6.30%, 1/5/98 2,600,000 2,594,085 2,594,085
Total Short-Term
Investments 5,188,574 5,188,574
Total
Investments(110.7%) $127,378,205 $128,401,596
Excess of Liabilities Over Other
Assets (10.7%)-Note D (12,344,994)
Net Assets (100%) - Note E $116,056,602
</TABLE>
(Equivalent to $18.24 Per Share Based on 6,363,695 Shares Outstanding)
* 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, December 31,
1997 1996
<S> <C> <C>
Investment Income:
Income:
Interest $5,269,254 $5,480,127
Dividends 1,962,319 1,770,362
Total Income 7,231,573 7,250,489
Expenses:
Management fees 1,110,641 1,144,848
Director fees 65,500 66,000
Professional fees 32,630 35,627
Printing, stationery,
and supplies 22,536 23,674
Stock transfer fees 36,535 16,238
Postage and mailing fees31,140 36,663
New York Stock Exchange
Fee 16,170 16,170
Custodian and registrar
Fees 6,289 7,509
Other 18,714 21,452
Total Operating Expenses 1,340,155 1,368,181
Net Investment Income 5,891,418 5,882,308
Net realized and unrealized gain(loss)
on investments:
Net realized gain on
Investments 18,226,897 18,918,136
Increase(decrease) in
net unrealized appreciation
of investments (8,683,838) (953,098)
Income Taxes - Note F (2,245,498) (1,312,209)
Net Realized & Unrealized
Gain on Investments 7,297,561 16,652,829
Net Increase in Net
Assets Resulting from
Operations $13,188,979 $22,535,137
</TABLE>
The accompanying notes are an integral part of the financial statements
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended Year Ended December 31, December 31,
1997 1996
<S> <C> <C>
Changes from operations:
Net Investment Income $5,891,418 $5,882,308
Net realized gain
on investments(net of
taxes: 1997 - $2,245,498;
1996 - $1,312,208) 15,981,399 17,605,927
Decrease in Net
Unrealized appreciation
of investments (8,683,838) (953,098)
Net Increase in
Net Assets Resulting
from Operations 13,188,979 22,535,137
Distributions to
Shareholders from
net investment income(6,363,695) (6,236,421)
Distributions to
Shareholders from net
realized gain on
investments: (11,200,103) (14,954,683)
Total Increase(Decrease)
in Net Assets (4,374,819) 1,344,033
Net assets at beginning
of period 120,431,421 119,087,388
Net Assets at End
of Period * $116,056,602 $120,431,421
</TABLE>
* Includes distributions in excess of net investment income
as of: 1997 - $0 1996 - $37,302
Includes undistributed net investment income as of:
1997 - $101,508 1996 - $0
The accompanying notes are an integral part of the financial statements
<PAGE>
PORTFOLIO of INVESTMENTS BY INDUSTRY CLASSIFICATION* As of December 31, 1997
<TABLE>
<CAPTION>
Market or Percent of
Fair Value Net Assets
<S> <C> <C>
AUTOMOTIVE
Automatic Common Exchange
Security Trust II
(Republic Industries) $1,554,878 1.3%
BROADCASTING
Evergreen Media Group 3,112,409
Sinclair Broadcast Group 3,131,295
6,243,704 5.4%
BUILDING CONSTRUCTION
Royal Group Technology 2,354,987 2.0%
COMMUNICATION EQUIPMENT
Comverse Technology 2,458,518
P-Com, Inc. 1,885,463
Qualcomm Financial Trust 2,305,009
World Access, Inc. 816,312
7,465,302 6.4%
COMPUTER SOFTWARE/SYSTEMS
Platinum Technology, Inc. 319,579
Tecnomatix Technologies 3,624,037
Vantive Corporation 932,987
Wang Laboratories, Inc. 2,089,555
6,966,158 6.0%
ELECTRONICS
DIIG Group 2,358,353
Kent Electronics Corp. 2,433,438
4,791,791 4.1%
EMPLOYMENT SERVICES
Personnel Group of
America, Inc. 1,938,863 1.7%
ENERGY
AES Trust II 2,640,920
Lomak Petroleum, Inc. 874,087
3,515,007 3.0%
ENTERTAINMENT
Family Golf Centers 2,003,400
IMAX Corporation 1,814,962
3,818,362 3.3%
FINANCE
Insignia Financial 1,791,881 1.5%
FOOD SERVICES
Fine Host Corporation 1,694,000 1.5%
HEALTH SERVICES
ESC Medical Systems 2,463,587
FPA Medical Management 1,240,250
Fuisz Technologies, Ltd 2,025,975
Heartport, Inc. 560,138
Hybridon, Inc. 745,000
Medpartners, Inc. 768,350
North American Vaccine 2,570,700
Occusystems, Inc. 2,244,600
RES-Care, Inc. 1,946,525
Thermotrex Corporation 1,151,681
Uromed Corporation 746,925
US Diagnostic Labs, Inc. 1,271,550
17,735,281 15.3%
HOTEL/LODGING
Capstar Hotel Corp. 2,261,488
Prime Hospitality Corp. 956,813
Sholodge, Inc. 2,158,750
Signature Resorts, Inc. 2,889,187
8,266,238 7.1%
MACHINERY & EQUIPMENT
Thermo Electron Corp. 2,158,600
Tower Automotive, Inc. 2,163,150
4,321,750 3.7%
METALS and MINING
Stillwater Mining Co. 2,092,500
Timet Capital Trust 1,741,410
USX Corporation 2,202,390
Worthington Industries 614,841
6,651,141 5.7%
OFFICE and OFFICE EQUIPMENT
U.S. Office Products 3,057,619 2.6%
OIL EQUIPMENT/SERVICES
EVI, Inc. 2,193,273
Halter Marine Group 1,618,400
Hvide Capital Trust 627,855
Key Energy Group, Inc. 2,663,031
Parker Drilling Company 1,043,250
Offshore Logistics, Inc 1,567,500
Seacor Holdings 490,463
10,203,772 8.8%
PAPER and PAPER PRODUCTS
Thermo Fibertek, Inc. 651,900 0.6%
RETAIL
Eagle Hardware & Garden 1,735,144 1.5%
SHIPPING
CNF Trust Series A 2,364,863 2.0%
</TABLE>
<PAGE>
PORTFOLIO of INVESTMENTS BY INDUSTRY CLASSIFICATION* (Continued)
<TABLE>
<CAPTION>
Market or Percent of
Fair Value Net Assets
<S> <C> <C>
TECHNOLOGY
Applied Magnetics Corp $608,000
Credence Systems Corp 2,331,394
EMC Corporation 1,396,200
Integrated Processt 1,177,406
Intevac, Inc. 974,725
Lernout and Hauspie
Speech 1,348,375
Level One Communications 1,145,138
Loral Space and
Communications 2,689,932
11,671,170 10.1%
TELECOMMUNICATION
Gilat Satellite Networks 2,059,950
Globalstar Telecomm 1,104,415
ICG Communications, Inc. 1,683,228
Intermedia Communications 597,234
Premiere Technologies, 1,420,656
Salomon Inc. 1,993,466
Smartalk Teleservices 1,379,400
10,238,349 8.8%
WASTE MANAGEMENT
United States Filter 1,722,912
USA Waste Services, Inc. 2,457,950
4,180,862 3.6%
Total Long-Term
Investments $123,213,022 106.2%
</TABLE>
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 or
independent broker.
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 or 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
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
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 security existed. As of December 31, 1997, there were
no private placement securities held by the Fund.
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 $178,040,062
and $200,612,633, respectively, as of December 31, 1997;and $176,323,648 and
$179,020,553, respectively as of December 31, 1996.
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.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
Note D - Excess of Liabilities over Other Assets
The net asset caption excess of liabilities over other assets at December 31,
1997 consisted of the following:
Cash $102,298
Accrued investment income receivable 1,227,558
Accrued dividend income receivable 94,721
Receivable for securities sold 1,720,803
Management fee payable (254,430)
Accrued dividends payable (12,981,938)
Accrued federal income tax payable (2,245,498)
Other - net (8,508)
($12,344,994)
Note E - Net Assets
Net assets at December 31, 1997, 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 25,194,770
Undistributed net investment
Income 101,508
Net unrealized appreciation of
Investments 1,023,391
Total Net Assets $116,056,602
Note F - Income Taxes
The cost of investments for federal income tax purposes is the same as for book
purposes. At December 31, 1997, the aggregate gross unrealized appreciation on
investments was $9,073,804 and the aggregate gross unrealized depreciation was
$8,050,413.
Note G - Unaudited Quarterly Results of Operations
The following is a tabulation of the unaudited quarterly results of operations.
Per share data is based on shares outstanding at the end of each quarter:
<TABLE>
<CAPTION>
1997 March 31 June 30 Sept 30 Dec.31
<S> <C> <C> <C> <C>
Investment Income
($ 000) $1,922 $1,824 $1,805 $1,681
Net Investment
Income($ 000) 1,587 1,445 1,479 1,380
Net Realized
And Unrealized
Gain(Loss)on
Investments (2,668) 9,023 14,912 (13,969)
Per Share Amounts:
Net Investment
Income $0.25 $0.23 $0.23 $0.22
Net Realized and
Unrealized Gain
on Investments ($0.42) $1.42 $2.34 ($2.19)
1996
Investment Income
($ 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(Loss) on
Investments 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
(Loss) on
Investments $1.50 $0.93 $0.07 $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, 1997, 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,
1997, 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, 1997,
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 27, 1998
<PAGE>
Directors & Officers of the Fund
<TABLE>
<CAPTION>
Directors Descriptions of
Occupations and
Responsibilities
<S> <C>
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. Member School of Business
Advisory Board, Indiana-Purdue University of Fort Wayne.
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., 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.
Fred J. Young Director, Lincoln National Income Fund, Inc.
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 07303-2500
1-800-317-4445
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 First Chicago, the Plan agent. You will receive a
statement each time shares are distributed by the Fund or purchased for you.
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.
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