<PAGE>
LINCOLN NATIONAL CONVERTIBLE SECURITIES FUND, INC.
1999 Semi-Annual Report
LINCOLN INVESTMENT MANAGEMENT, INC.
TABLE OF CONTENTS
Page
- -------------------------------------------------------------------
Manager Profile
Investment Policies & Objectives
President's Letter 1
Portfolio Performance 2
Total Fund Investments 2
Common Stock Market Prices
& Net Asset Value History 3
Dividend History 3
Shareholder Meeting Results 4
FINANCIAL STATEMENTS:
Statement of Net Assets 5
Statements of Assets and Liabilities 9
Statements of Operations 10
Statements of Changes in Net Assets 11
Financial Highlights 12
Notes to Financial Statements 14
Directors & Officers of the Fund 16
Corporate Information 17
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 $1.5 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 June 30, 1999, has chosen not to do so.
<PAGE>
PRESIDENT'S LETTER
Dear Shareholder:
Equity markets around the globe were strong in the first half of 1999. Many
markets were recovering from their 1998 difficulties, including the U.S.
domestic small and mid-capitalization equity markets. The most important trend
in the U.S. market was the continued rebound in smaller company stocks that
began in the fourth quarter of 1998. Although smaller stocks sold off one more
time in the first quarter of 1999, smaller company equities outperformed by 8.1%
in the second quarter.
The Fund's performance showed a significant improvement in performance as the
first half of its fiscal year was completed. In fact, the Fund had the highest
return of all the closed-end convertible funds in the second quarter. (Source:
Morningstar) The improvement in performance is due to the recovery in smaller
company equities in addition to internal changes. We have reduced our focus on
earning an above market dividend yield, and increased our emphasis on improving
the total return of the Fund. Our $.24 dividend had been put in place in the mid
1980's when interest rates were much higher than they are today. Sticking to
this yield has required the Fund to hold a number of securities whose total
return prospects were not satisfactory. This is the reason we reduced the
dividend from $.24 to $.22 in the first quarter. We expect that our renewed
focus on finding underlying equities with outstanding fundamentals will continue
to improve the relative and absolute performance of the Fund.
The broadening of the market that took place in the second quarter should
continue as the year progresses. Market participants are finally paying
attention to the factors that make mid-cap stocks attractive: strong growth
rates, lower valuations, and the prospect for acquisitions by larger companies.
This broadening trend, which would be a reversal of five years of
under-performance, will help the convertible market and the Fund. Although we
have raised the typical company market capitalization of the Fund's holdings to
over $1.2 billion from $600 million during 1998, we are still heavily dependent
on mid-sized company performance. We have, however, lowered the portion of the
Fund in very small companies to improve the overall liquidity of the Fund.
We see many areas of growth in the market today. The leading sectors driving
growth are telecommunications and technology. Although volatile, we have
significant weightings in these groups and continue to believe that there are
many opportunities for profitable investment in these sectors. We also see
opportunity in traditional consumer growth areas as economies around the world
begin to rebound from weakness suffered in 1998. A third area of increased focus
for the Fund has been the energy industry. A reduction in available supply
combined with an increasing demand should keep energy prices firmer than many
investors believe.
Our outlook for the Fund remains positive. Although the market may have some
choppy trading periods between now and year-end, the strong economy and moderate
inflation environment should provide a positive backdrop for the equity and
convertible markets. The Fund's recent changes should allow the Fund to
participate more fully in the market's upside. We look forward to the challenges
ahead, and expect the Fund's future results will be rewarding to our
shareholders.
Sincerely,
/s/ H. Thomas McMeekin
- ----------------------
H. Thomas McMeekin
President
July 26, 1999
1
<PAGE>
PORTFOLIO PERFORMANCE
As of June 30, 1999
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 June 30, 1999 assuming reinvestment of dividends.
<TABLE>
<CAPTION>
1986 1989 1992 1994 1997 1998 1999
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Convertible Securities Fund $1,000 $1,419 $2,138 $2,686 $4,379 $4,164 $4,403.85
First Boston Convertible Securities Index $1,000 $1,301 $1,840 $2,079 $3,421 $3,646 $4,073.31
</TABLE>
PERFORMANCE OF LINCOLN NATIONAL CONVERTIBLE SECURITIES FUND, INC. VS. INDICES
<TABLE>
<CAPTION>
YTD
THROUGH CUMULATIVE 5 YR.
6/30/99 1998 1997 1996 1995 1994 RETURN ANNUALIZED
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
LN Convertible Securities Fund 5.76% (5.09%) 13.17% 20.42% 19.59% (1.96%) 11.75%
1st Boston Convertible Sec. Index 11.72% 6.57% 16.90% 13.80% 23.70% (4.70%) 14.60%
Merrill Lynch Convertible Index 13.20% 8.93% 19.57% 15.90% 24.69% (7.07%) 16.30%
Lipper Convertible Mutual Fund Index 11.00% 4.40% 17.80% 14.40% 20.60% (3.90%) 13.47%
Standard & Poor's 500* 11.67% 26.67% 33.36% 22.94% 37.53% 1.31% 25.30%
Russell 2000 8.47% (3.45%) 22.40% 16.50% 28.33% (1.82%) 13.75%
Lehman Gov't/Corporate Bond Index (2.28%) 8.29% 9.80% 2.90% 19.24% (3.50%) 7.76%
</TABLE>
- -------------------
* Dividends Reinvested
TOTAL FUND INVESTMENTS
At Market or Fair Values As of June 30
<TABLE>
<CAPTION>
1999 1998
(000) % of Total (000) % of Total
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Convertible Debt Securities $60,812 56% $67,054 64%
Convertible Preferred Stocks 31,793 29% 27,490 26%
Preferred Stocks 2,487 2% -- --
Common Stocks and Warrants 6,791 6% 4,206 4%
Short-Term Investments 1,900 2% 5,799 6%
Other Assets Net of Liabilities 4,960 5% (322) 0%
- --------------------------------------------------------------------------------------------------------
Total Net Assets $108,743 100% $104,227 100%
</TABLE>
2
<PAGE>
COMMON STOCK MARKET PRICES AND NET ASSET VALUE HISTORY (Unaudited)
<TABLE>
<CAPTION>
1999
MARKET PRICES AND VOLUMES NET ASSET VALUE
HIGH LOW CLOSE VOLUME HIGH LOW CLOSE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1st Quarter $15.438 $12.813 $12.813 739,200 $16.96 $15.52 $15.63
2nd Quarter 14.250 13.875 14.000 870,500 17.07 15.65 17.07
1998
MARKET PRICES AND VOLUMES NET ASSET VALUE
HIGH LOW CLOSE VOLUME HIGH LOW CLOSE
- ------------------------------------------------------------------------------------------------------------------------------------
1st Quarter $18.625 $16.625 $18.500 866,100 $19.78 $17.76 $19.78
2nd Quarter 19.063 16.750 16.813 536,700 19.88 18.64 19.18
3rd Quarter 17.375 13.500 14.625 529,300 19.39 15.04 15.04
4th Quarter 16.125 13.125 14.000 645,300 16.36 13.70 16.36
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
</TABLE>
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.
ANNUAL ANNUAL
YEAR DIVIDEND YEAR DIVIDEND
- ----------------------------------------------------------------------
1988 and Prior $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 0.96
1993 2.92 1999 0.22*
- -------------------
* Dividends paid as of June 30
3
<PAGE>
SHAREHOLDER MEETING RESULTS (Unaudited)
The Fund had its annual Shareholder meeting on April 23, 1999. 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 5,392,090 of
Common Stock shares (83.78% of the total outstanding shares) were voted. The
following table highlights the results of the vote.
NUMBER OF NUMBER OF NUMBER OF
SHARES VOTED SHARES VOTED SHARES
FOR AGAINST ABSTAINED
- --------------------------------------------------------------------------------
PROPOSAL I
ELECTION OF DIRECTORS
T. BINDLEY 5,161,177 230,913 -
R. BURRIDGE 5,163,146 228,944 -
A. CEPEDA 5,162,172 229,918 -
R. DESHAIES 5,160,711 231,379 -
C. FREUND 5,149,763 242,327 -
T. MATHERS 5,136,699 255,391 -
T. MCMEEKIN 5,139,041 253,049 -
J. NICK* 5,136,507 255,583 -
D. TOLL 5,141,929 250,161 -
PROPOSAL II
Ratification of the
Selection of Auditor
(PricewaterhouseCoopers LLP) 5,338,578 22,823 30,689
- -------------------
* resigned as of June 4, 1999
YEAR 2000
Like other investment companies, financial and business organizations and
individuals around the world, the Funds could be adversely affected if computer
systems used by the Investment Manager and other service providers do not
properly process and calculate date-related information and data on and after
January 1, 2000. The Fund is taking steps to obtain satisfactory assurances that
the Investment Manager and other major service providers are taking steps
reasonably designed to address the Year 2000 issue with respect to the computer
systems that such service providers use. At this time, however, there can be no
assurance that these steps will be sufficient to avoid any adverse impact to the
Fund.
4
<PAGE>
LINCOLN NATIONAL CONVERTIBLE SECURITIES FUND, INC.
STATEMENT OF NET ASSETS
As of June 30, 1999
(Unaudited) PAR MARKET OR
CONVERTIBLE BONDS (55%) AMOUNT FAIR VALUE
- --------------------------------------------------------------------------------
BANKING, FINANCE & INSURANCE (1.7%)
Elan Finance
3.25%, 12/14/18 $3,585,000 $1,846,275
----------
BUILDING & MATERIALS (2.0%)
Emcor Group
5.75%, 4/1/05 2,175,000 2,229,375
----------
CABLE, MEDIA & PUBLISHING (2.4%)
Getty Images
4.75%, 6/1/03 2,095,000 1,898,594
Sportsline USA
5.00%, 4/1/06 1,000,000 716,250
----------
2,614,844
----------
COMPUTERS & TECHNOLOGY (9.1%)
Activision
6.75%, 1/1/05 2,170,000 2,026,231
Doubleclick
4.75%, 3/15/06 1,200,000 1,491,000
HNC Software
4.75%, 3/1/03 1,000,000 965,000
May & Speh
5.25%, 4/1/03 1,495,000 2,173,356
Technomatix Technologies
5.25%, 8/15/04 975,000 684,938
Tecnomatix Technologies 144A
5.25%, 8/15/04 3,615,000 2,539,538
----------
9,880,063
----------
ELECTRONICS & ELECTRICAL EQUIPMENT (2.9%)
Amkor Technologies
5.75%, 5/1/03 1,615,000 1,558,475
LSI Logic
4.25%, 3/15/04 1,000,000 1,643,750
----------
3,202,225
----------
ENVIRONMENTAL SERVICES (2.1%)
Waste Management
4.00%, 2/1/02 1,670,000 2,231,538
----------
HEALTHCARE & PHARMACEUTICALS (12.7%)
Alpharma
3.00%, 6/1/06 1,000,000 1,253,750
Alpharma 144A
5.75%, 4/1/05 1,335,000 1,652,063
Aviron
5.75%, 4/1/05 1,145,000 1,176,488
ESC Medical Systems
6.00%, 9/1/02 500,000 331,875
ESC Medical Systems 144A
6.00%, 9/1/02 675,000 448,031
Fuisz Technologies
7.00%, 10/15/04 410,000 217,813
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
STATEMENT OF NET ASSETS (continued)
PAR MARKET OR
CONVERTIBLE BONDS (CONTINUED) AMOUNT FAIR VALUE
- --------------------------------------------------------------------------------
HEALTHCARE & PHARMACEUTICALS (CONTINUED)
Fuisz Technologies 144A
7.00%, 10/15/04 $2,270,000 $1,205,938
IDEC Pharmaceuticals 144A
0.00%, 2/16/19 3,000,000 1,590,000
North American Vaccine
6.50%, 5/1/03 2,460,000 713,400
Quadramed
5.25%, 5/1/05 385,000 220,894
Quadramed 144A
5.25%, 5/1/05 2,460,000 1,402,200
Res-Care
6.00%, 12/1/04 510,000 655,350
Res-Care 144A
6.00%, 12/1/04 120,000 154,200
Sabratek
6.00%, 4/15/05 1,325,000 879,469
Sabratek 144A
6.00%, 4/15/05 1,355,000 899,381
Sepacor, Inc. 144A
7.00%, 12/15/05 1,000,000 986,250
----------
13,787,102
----------
INDUSTRIAL MACHINERY (1.3%)
Action Performance
4.75%, 4/1/05 1,540,000 1,430,275
----------
LEISURE, LODGING & ENTERTAINMENT (3.6%)
Family Golf Centers
5.75%, 10/15/04 1,390,000 854,850
Imax
5.75%, 4/1/03 840,000 995,400
Signature Resorts
5.75%, 1/15/07 3,190,000 2,117,363
----------
3,967,613
----------
MISCELLANEOUS (4.2%)
Cirrus Logic
6.00%, 12/15/03 2,450,000 1,589,438
Personnel Group of America
5.75%, 7/1/04 2,480,000 2,067,700
Personnel Group of America 144A
5.75%, 7/1/04 405,000 337,669
Sanmina Corp 144A
4.25%, 5/1/04 500,000 560,625
----------
4,555,432
----------
TELECOMMUNICATIONS (13.9%)
Antec
4.50%, 5/15/03 490,000 713,563
Antec 144A
4.50%, 5/15/03 1,925,000 2,803,281
CellStar
5.00%, 10/15/02 1,695,000 1,175,906
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
STATEMENT OF NET ASSETS (continued)
PAR MARKET OR
CONVERTIBLE BONDS (CONTINUED) AMOUNT FAIR VALUE
- --------------------------------------------------------------------------------
TELECOMMUNICATIONS (CONTINUED)
Comverse Technology
4.50%, 7/1/05 $ 500,000 $ 959,375
Comverse Technology 144A
4.50%, 7/1/05 1,345,000 2,580,719
Gilat Satellite Networks
6.50%, 6/3/04 500,000 646,875
Gilat Satellite Networks 144A
6.50%, 6/3/04 1,935,000 2,503,406
Oak Industries
4.88%, 3/1/08 10,000 12,975
Oak Industries 144A
4.88%, 3/1/08 1,640,000 2,127,900
Telefonos De Mexico
4.25%, 6/15/04 1,500,000 1,543,125
-----------
15,067,125
-----------
TOTAL CONVERTIBLE BONDS (cost of $62,955,196) 60,811,867
-----------
NUMBER OF
COMMON STOCK (6.3%) SHARES
- --------------------------------------------------------------------------------
AUTOMOBILES & AUTO PARTS (1.6%)
Tower Auto Capital Trust 32,650 1,693,719
----------
ELECTRONICS & ELECTRICAL EQUIPMENT (2.2%)
DII Group* 64,480 2,397,850
----------
RETAIL (2.1%)
Lowe's Companies 40,000 2,267,500
----------
TELECOMMUNICATIONS (0.4%)
Winstar Communications 8,489 414,104
----------
TOTAL COMMON STOCK (cost of $4,955,815) 6,773,173
----------
CONVERTIBLE PREFERRED STOCKS (29.2%)
- --------------------------------------------------------------------------------
AUTOMOBILES & AUTO PARTS (0.6%)
Tower Auto Capital Trust 12,125 628,984
----------
BUILDING & MATERIALS (2.4%)
Royal Group Technology, Ltd. 99,682 2,654,033
----------
COMPUTERS & TECHNOLOGY (5.7%)
Cellnet Funding 125,360 2,436,685
Hybridon 16,115 362,588
L&H Capital Trust 40,505 1,341,728
PSInet 45,000 2,061,563
----------
6,202,564
----------
ENERGY (5.2%)
AES Trust II 36,105 2,057,985
Tesoro Petroleum Corporation 120,405 1,896,379
El Paso Energy Cap Trust 34,600 1,712,700
----------
5,667,064
----------
FOOD, BEVERAGE & TOBACCO (1.1%)
Suiza Capital Trust 30,675 1,146,478
----------
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
STATEMENT OF NET ASSETS (continued)
NUMBER OF MARKET OR
CONVERTIBLE PREFERRED STOCKS (CONTINUED) SHARES FAIR VALUE
- --------------------------------------------------------------------------------
MISCELLANEOUS (1.5%)
Unocal Capital Trust 29,200 $ 1,635,200
----------
1,635,200
----------
PAPER & FOREST PRODUCTS (1.2%)
International Paper 24,250 1,279,188
----------
TELECOMMUNICATIONS (7.8%)
Adelphia Communications 7,800 1,567,800
ICG Communications 26,965 1,408,921
ICG Communications 144A 12,965 677,421
Omnipoint 35,705 1,954,849
Skytel 40,000 1,500,000
Winstar Communications* 15,585 896,138
Winstar Communications 144A* 8,900 511,750
----------
8,516,879
----------
TRANSPORTATION (2.1%)
CNF Trust I Series A 15,000 856,875
Union Pacific Capital Trust 28,000 1,456,000
----------
2,312,875
----------
UTILITIES (1.6%)
Houston Industries 14,675 1,749,994
----------
TOTAL CONVERTIBLE PREFERRED STOCKS (cost of $32,450,846) 31,793,259
----------
PREFERRED STOCKS (2.3%)
- --------------------------------------------------------------------------------
BANKING, FINANCE & INSURANCE (2.3%)
Aetna 33,500 2,487,375
----------
TOTAL PREFERRED STOCKS (cost of $2,632,675) 2,487,375
----------
WARRANTS (0.0%)
- --------------------------------------------------------------------------------
Hybridon Warrants* 92,359 17,317
----------
TOTAL WARRANTS (cost of $0) 17,317
----------
PAR
SHORT TERM INSTRUMENTS (1.7%) AMOUNT
- --------------------------------------------------------------------------------
Caterpillar
5.85%, 7/1/99 $1,900,000 1,900,000
------------
TOTAL SHORT TERM INSTRUMENTS (cost of $1,900,000) 1,900,000
------------
TOTAL MARKET VALUE OF SECURITIES (95.4%) (cost $104,894,532) 103,782,991
RECEIVABLES AND OTHER ASSETS NET OF LIABILITIES (4.6%) 4,960,364
------------
NET ASSETS APPLICABLE TO 6,372,225 SHARES
($0.001 Par Value) OUTSTANDING - 100.0% $108,743,355
------------
NET ASSET VALUE PER SHARE OF COMMON STOCK OUTSTANDING $ 17.07
------------
Common Stock, par value $.001 per share (authorized
20,000,000 shares), issued and 6,372,225 shares
outstanding 6,372
Proceeds in excess of par value of shares issued 115,499,834
Undistributed net investment income 1,435,290
Net realized loss on investments, net of taxes (7,086,600)
Net unrealized depreciation of investments (1,111,541)
------------
TOTAL NET ASSETS $108,743,355
============
- -------------------
* Non-Income producing securities.
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
LINCOLN NATIONAL CONVERTIBLE SECURITIES FUND, INC.
STATEMENTS OF ASSETS AND LIABILITIES
JUNE 30, 1999
(UNAUDITED)
ASSETS:
Investment at Market $103,782,991
Cash 136,784
Dividends and interest receivable 989,657
Receivable for securities sold 5,020,461
------------
Total Assets 109,929,893
------------
LIABILITIES:
Payable for securities purchased 905,000
Accrued expenses 281,538
------------
Total liabilities 1,186,538
------------
TOTAL NET ASSETS $108,743,355
============
Investments at cost $104,894,532
============
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
LINCOLN NATIONAL CONVERTIBLE SECURITIES FUND, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-------------------------
1999 1998
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $1,898,199 $2,320,710
Dividends 1,452,967 977,231
- --------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 3,351,166 3,297,941
EXPENSES:
Management fees 449,464 546,622
Directors fees 29,354 34,500
Professional fees 20,899 16,768
Printing and Postage 14,901 12,595
Stock transfer & dividend disbursing fees 14,588 9,549
Postage and mailing fees 10,745 25,491
New York Stock Exchange fee 10,181 16,170
Custodian and registrar fees 2,436 4,066
Other 8,538 14,191
- --------------------------------------------------------------------------------
TOTAL EXPENSES 561,106 679,952
NET INVESTMENT INCOME 2,790,060 2,617,989
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on:
Investment transactions (6,621,121) 6,009,319
Net change in unrealized appreciation (depreciation) on:
Investments 9,749,755 (1,074,879)
- --------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 3,128,634 4,934,440
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $5,918,694 $7,552,429
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
LINCOLN NATIONAL CONVERTIBLE SECURITIES FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-------------------------
1999 1998
- --------------------------------------------------------------------------------
CHANGES FROM OPERATIONS:
Net investment income $2,790,060 $2,617,989
Net realized gain (loss) on investments (6,621,121) 6,009,319
Net change in unrealized appreciation
(depreciation) on investments 9,749,755 (1,074,879)
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 5,918,694 7,552,429
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions to shareholders from net
investment income (1,401,890) (1,527,287)
- --------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS TO SHAREHOLDERS (1,401,890) (1,527,287)
- --------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 4,516,804 6,025,142
- --------------------------------------------------------------------------------
Net Assets at beginning of period $104,226,551 $116,056,602
- --------------------------------------------------------------------------------
NET ASSETS AT END OF PERIOD $108,743,355 $122,081,744
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
LINCOLN NATIONAL CONVERTIBLE SECURITIES FUND, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
(SELECTED DATA FOR EACH COMMON STOCK (UNAUDITED)
OUTSTANDING THROUGHOUT THE PERIOD) 1999 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $16.36 $18.24 $18.92 $18.71 $17.10 $18.84
Net investment income 0.41 0.97 0.93 0.92 0.91 0.94
Net realized and unrealized gain/(loss) 0.52 (1.89) 1.15 2.62 2.34 (1.60)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.93 (0.92) 2.08 3.54 3.25 (0.66)
Less distributions:
Dividends from net investment income (0.22) (0.96) (1.00) (0.98) (0.96) (0.95)
Dividends from net realized gains -- -- (1.76) (2.35) (0.68) (0.13)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS (0.22) (0.96) (2.76) (3.33) (1.64) (1.08)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $17.07 $16.36 $18.24 $18.92 $18.71 $17.10
- ------------------------------------------------------------------------------------------------------------------------------------
Per Share Market Value, End of Period $14.00 $14.00 $17.81 $17.50 $16.75 $15.38
Total Investment Return
(based on Market Value) 1.70% (16.43%) 17.54% 24.36% 19.57% (14.49%)
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $108,743 $104,227 $116,057 $120,431 $119,087 $108,810
Ratio - Expenses to Average Net Assets 1.08%* 1.15% 1.05% 1.05% 1.09% 1.09%
Ratio - Net Inv. Inc. to Average Net Assets 6.44%* 5.52% 4.64% 4.50% 4.91% 5.18%
Portfolio Turnover 75.48% 151.68% 141.85% 134.85% 127.24% 127.32%
</TABLE>
- -------------------
* Annualized
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
LINCOLN NATIONAL CONVERTIBLE SECURITIES FUND, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(SELECTED DATA FOR EACH COMMON STOCK ------------------------------------------------------------
OUTSTANDING THROUGHOUT THE PERIOD) 1993 1992 1991 1990 1989
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $17.62 $18.04 $13.59 $15.21 $13.41
Net investment income 0.90 1.01 0.97 1.03 1.53
Net realized and unrealized gain/(loss) 3.24 0.71 4.50 (1.63) 1.84
- -----------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 4.14 1.72 5.47 (0.60) 3.37
Less distributions:
Dividends from net investment income (1.05) (0.97) (1.02) (1.02) (1.07)
Dividends from net realized gains (1.87) (1.17) -- -- (0.50)
- -----------------------------------------------------------------------------------------------------------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS (2.92) (2.14) (1.02) (1.02) (1.57)
- -----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $18.84 $17.62 $18.04 $13.59 $15.21
- -----------------------------------------------------------------------------------------------------------------------
Per Share Market Value, End of Period $19.25 $16.50 $15.50 $11.50 $13.38
Total Investment Return
(based on Market Value) 34.36% 20.26% 43.65% (6.43%) 27.23%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $118,575 $110,743 $113,398 $85,434 $95,655
Ratio - Expenses to Average Net Assets 1.02% 0.83% 0.89% 0.97% 0.94%
Ratio - Net Inv. Inc. to Average Net Assets 4.58% 5.49% 5.96% 7.21% 6.64%
Portfolio Turnover 222.00% 166.26% 132.99% 134.64% 147.31%
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
LINCOLN NATIONAL CONVERTIBLE SECURITIES FUND, INC.
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 mean price on the
date of valuation from the issuance's underwriter or independent broker. Money
market instruments having less than 60 days to maturity are valued at amortized
cost, which approximates market value.
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 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
might differ significantly from the values that would have been used had a ready
market for the securities existed. As of June 30, 1999, 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.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of increases and decreases in net assets from operations
during the reporting period. Actual results could differ from those estimates.
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(UNAUDITED) (continued)
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.
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 aggregate cost of investments purchased and the aggregate proceeds from
investments sold (exclusive of short-term investments) amounted to $75,656,463
and $74,118,601, respectively, as of June 30, 1999.
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). Lynch & Mayer, which is an affiliate of the Advisor,
provides sub-advisory services for the Fund. In addition, Delaware Service
Company, which is an affiliate of the Advisor, provides accounting and
administrative services for the Fund. Both parties are paid directly by the
Advisor.
Certain officers and directors of the Fund are also officers or directors of
the Advisor and receive no compensation from the Funds. The compensation of
unaffiliated directors of the Fund is borne by the Fund.
NOTE D--INCOME TAXES
The cost of investments for federal income tax purposes is the same as for book
purposes. At June 30, 1999, the aggregate gross unrealized appreciation on
investments was $10,508,102 and the aggregate gross unrealized depreciation was
$11,619,643.
15
<PAGE>
DIRECTORS & OFFICERS OF THE FUND
DIRECTORS DESCRIPTIONS OF OCCUPATIONS AND RESPONSIBILITIES
Thomas L. Bindley President, Bindley Capital Corporation; Director,
Midas, Inc.; Director, Lincoln National Income Fund,
Inc., and Junior Achievement of Chicago
Richard M. Burridge Chairman, The Burridge Group, Inc.; Director,
Cincinnati Financial Corporation; Lincoln National
Income Fund, Inc., 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, Bringham and Women's
Hospital (Harvard Medical School teaching affiliate);
Corporate Director of Partners Health System;
Director, Lincoln National Income Fund, Inc.
Charles G. Freund Chairman Emeritus of the Board of Directors, Success
National Bank; Director, Success Bancshares, Inc.;
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.; Executive Vice President
and Chief Investment Officer - Fixed Income, Delaware
Investments; Director, The Lincoln National Life
Insurance Company, Lincoln National Investment
Companies, Inc., Delaware Management Holdings, Inc.
and Vantage Investment Advisors, Inc.
Daniel R. Toll Director, Kemper National Insurance Companies, Lincoln
National Income Fund, Inc., & Mallinckrodt, Inc.,
Nicor, Inc.; Corporate and Civic Director, Brown
Group, Inc.
OFFICERS
H. Thomas McMeekin President
David A. Berry Vice President
David G. Humes Vice President, Treasurer & Controller
Robert D. Schwartz Vice President
Eric E. Miller Secretary
16
<PAGE>
CORPORATE INFORMATION
DIVIDEND DISBURSING AGENT, TRANSFER AGENT
AND REINVESTMENT PLAN AGENT
Equiserve - First Chicago Division
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
ADMINISTRATOR
Delaware Service Company
1818 Market Street
Philadelphia, PA 19103
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
2400 Eleven Penn Center
Philadelphia, PA 19103
STOCK EXCHANGE
The Fund's stock is traded on the New York Stock
Exchange (NYSE) under the symbol of LNV.
<PAGE>
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 not be 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 Equiserve, the Plan agent. You will receive a
statement each time shares are distributed by the Fund or purchased for you.
There is no direct charge for Plan participation. The administrative costs of
the Plan are borne by the Fund.
If your dividends and other distributions are reinvested, they will be
subject to capital gains and income taxes as if they were paid to you in cash.
You may terminate your participation in the Plan at any time by giving
written notice to the Plan agent.
For additional information on the Plan, please write Equiserve, P.O. Box
2500, Jersey City, NJ 07303-2500, or call 1-800-317-4445.
17
<PAGE>
LINCOLN INVESTMENT MANAGEMENT, INC.
200 EAST BERRY STREET
FORT WAYNE, INDIANA 46802
Lincoln Investment Management, Inc. is the investment manager for the Lincoln
National Convertible Securitites Fund, Inc.
LINCOLN NATIONAL CONVERTIBLE SECURITIES FUND, INC.
1999 Semi-Annual Report
Form 23296-1 8/99
