<PAGE>
As filed with the Securities and Exchange Commission on January 28, 1999
File No. 2-80731
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Post-Effective Amendment No. 19 [ X ]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 20 [ X ]
LINCOLN NATIONAL SPECIAL OPPORTUNITIES FUND, INC.
(Exact Name of Registrant as Specified in Charter)
1300 South Clinton Street
Fort Wayne, Indiana 46802
(Address of Principal Executive Offices)(Zip Code)
Registrant's Telephone Number, including Area Code (219)455-2000
JACK D. HUNTER, ESQ.
1300 South Clinton Street
Fort Wayne, Indiana 46802
(Name and Address of Agent for Service)
--------------------
Copies of all communications to
Freedman, Levy, Kroll & Simonds
1050 Connecticut Avenue, N.W.,
Suite 825
Washington, D.C. 20036
Attention: Gary O. Cohen, Esq.
Bruce Rosenblum, Esq.
Fiscal year-end: December 31
--------------------
It is proposed that this filing will become effective:
____ immediately upon filing pursuant to paragraph (b)
____ on May 1, 1998, pursuant to paragraph (b)
____ 60 days after filing pursuant to paragraph (a)(1)
X on April 19, 1999 pursuant to paragraph (a)(1)
----
____ 75 days after filing pursuant to paragraph (a)(2)
____ on ___________ pursuant to paragraph (a)(2) of rule 485.
--------------------
If appropriate, check the following box:
[ ] This post effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
PREFACE TO THE MULTI FUND-REGISTERED TRADEMARK- PROSPECTUSES
THE PREFACE AND DIRECTORY ARE PART OF THE PROSPECTUS FOR EACH OF THE FOLLOWING
FUNDS:
Lincoln National Aggressive Growth Fund, Inc. (Aggressive Growth)
Lincoln National Bond Fund, Inc. (Bond)
Lincoln National Capital Appreciation Fund, Inc. (Capital Appreciation)
Lincoln National Equity-Income Fund, Inc. (Equity Income)
Lincoln National Global Asset Allocation Fund, Inc. (Global Asset Allocation)
Lincoln National Growth and Income Fund, Inc. (Growth and Income)
Lincoln National International Fund, Inc. (International)
Lincoln National Managed Fund, Inc. (Managed)
Lincoln National Money Market Fund, Inc. (Money Market)
Lincoln National Social Awareness Fund, Inc. (Social Awareness)
Lincoln National Special Opportunities Fund, Inc. (Special Opportunities)
Each FUND has its own Prospectus that describes the FUND and its investment
objective. We refer to each of the FUNDS as a FUND and to all of the FUNDS
together as the FUNDS.
Each FUND sells its shares only to Lincoln National Life Insurance Co. and its
affiliates (LINCOLN LIFE). LINCOLN LIFE holds the shares in its separate
accounts to support variable annuity contracts and variable life insurance
contracts (CONTRACTS). We refer to a separate account as a VARIABLE ACCOUNT.
Each VARIABLE ACCOUNT has its own prospectus that describes the ACCOUNT and the
CONTRACTS it supports. You choose the FUND or FUNDS in which a VARIABLE ACCOUNT
invests your CONTRACT assets. In effect, you invest indirectly in the FUND(S)
that you choose under your CONTRACT.
Each FUND Prospectus discusses the information about the FUND that you ought to
know before choosing to invest your CONTRACT assets in one or more of the FUNDS.
You can find information unique to each FUND in that FUND'S Prospectus. You can
find information common to all FUNDS in the APPENDIX following the individual
FUND Prospectuses.
The Securities and Exchange Commission (SEC) has not approved or disapproved
these securities or determined if these prospectuses are truthful or complete.
Any representation to the contrary is a criminal offense.
We have not authorized any dealer, salesperson, or any other person to give any
information, or to make any representation, other than what these Prospectuses
state. These Prospectuses do not offer to sell FUND shares, or seek offers to
buy FUND shares, where it would be unlawful.
Prospectuses dated May 1, 1999
<PAGE>
DIRECTORY FOR THE FUND PROSPECTUS
<TABLE>
<CAPTION>
SUBJECT PAGE
<S> <C>
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PREFACE
SUMMARY DESCRIPTION OF THE FUND
Aggressive Growth
Bond
Capital Appreciation
Equity-Income
Global Asset Allocation
Growth and Income
International
Managed
Money Market
Social Awareness
Special Opportunities
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FEE TABLE
Aggressive Growth
Bond
Capital Appreciation
Equity-Income
Global Asset Allocation
Growth and Income
International
Managed
Money Market
Social Awareness
Special Opportunities
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INVESTMENT STRATEGIES
Aggressive Growth
Bond
Capital Appreciation
Equity-Income
Global Asset Allocation
Growth and Income
International
Managed
Money Market
Social Awareness
Special Opportunities
<CAPTION>
SUBJECT PAGE
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<S> <C>
RISKS OF INVESTMENT STRATEGIES
Aggressive Growth
Bond
Capital Appreciation
Equity-Income
Global Asset Allocation
Growth and Income
International
Managed
Money Market
Social Awareness
Special Opportunities
- --------------------------------------------------------
INVESTMENT ADVISER AND PORTFOLIO MANAGER
Aggressive Growth
Bond
Capital Appreciation
Equity-Income
Global Asset Allocation
Growth and Income
International
Managed
Money Market
Social Awareness
Special Opportunities
- --------------------------------------------------------
APPENDIX -- CONTAINS IMPORTANT INFORMATION
FOR ALL FUNDS
Net asset value
Management of the funds
Purchase and redemption of fund shares
Distribution and federal income tax
considerations
Management discussion of fund performance
General Information
Financial highlights
Preparing for the year 2000
</TABLE>
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LINCOLN NATIONAL
SPECIAL OPPORTUNITIES FUND, INC.
SUMMARY DESCRIPTION OF THE FUND
The investment objective of the Special Opportunities Fund (FUND) is to maximum
long-term capital appreciation (as measured by the change in the value of FUND
shares over a period of three years or longer). The FUND pursues this objective
primarily by buying and holding (investing in) a diverse group of equity
securities (stocks) of medium-sized U.S. companies: companies with market
capitalizations of more than $1 billion but less than $5 billion. The FUND also
holds some investments in larger-sized U.S. companies, which have market
capitalizations greater than $5 billion but less than $24 billion.
The FUND'S investment strategy is to invest in stocks of established companies
believed to:
- - be undervalued in the market relative to other companies in an industry, and
- - show growth potential significantly greater than the average expected growth
rate of companies in the same industry.
The FUND'S secondary investment strategy places some emphasis on providing
income (dividends and interest).
The main investment risks of choosing to invest your CONTRACT assets in the FUND
are as follows:
- - the value of the FUND'S shares will fluctuate, and you could lose money;
- - investing in medium-sized, less-mature and lesser-known companies involves
greater risks than those normally associated with investing in large-sized,
more-mature, well-known companies; and
- - the value of the FUND'S stock investments -- and, therefore, the value of the
FUND'S shares -- will fluctuate independently of large-company stock prices
and broad stock market indices, such as the Standard & Poor's 500 Composite
Stock Index (S&P 500).
The following information provides some indication of the risks of choosing to
invest your CONTRACT assets in the FUND. The information shows:
- - changes in the FUND'S performance from year to year and
- - how the FUND'S average annual returns for one year and the FUND'S lifetime
compare with those of a broad measure of market performance.
Please note that the past performance of the FUND is not necessarily an
indication of how the FUND will perform in the future.
[CHART]
The FUND'S highest return for a quarter occurred in the quarter of 199
at: %.
The FUND'S lowest return for a quarter occurred in the quarter of 199
at: %.
AVERAGE ANNUAL TOTAL RETURN
(FOR PERIODS ENDED 12/31/98)
<TABLE>
<CAPTION>
PERIOD BACK SPECIAL OPPORTUNITIES S&P 400*
<S> <C> <C>
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1 year
5 year
10 year
Lifetime**
</TABLE>
* The S&P 400 is the Standard & Poor's Composite Index of 400 stocks, a widely
recognized unmanaged index of common stock prices.
** The FUND'S lifetime began on .
INVESTMENT STRATEGIES
The investment objective of the FUND is long-term capital appreciation.
The FUND pursues this objective by investing in a diversified portfolio of
stocks primarily of medium-sized companies (market capitalizations between $1
billion and $5 billion) with some emphasis on larger-sized U.S. companies
(market capitalizations greater than $5 billion but less than $24 billion). (A
company market capitalization is calculated by multiplying the total number
1
<PAGE>
of shares of its common stock outstanding by the market price of the stock. As a
point of reference, as of the date of this prospectus, the average market
capitalization of the S&P 500, a broad based market index representative of
larger, typically more financially stable companies, was [$50 billion].) As of
the date of this prospectus, the average market capitalization of the FUND'S
holdings is [ ].
The FUND'S management style focuses on seeking growth companies at a reasonable
price by blending:
- - a "growth" oriented management style, which seeks companies with earnings
and/or revenues that are growing faster than the industry average, and
- - a "value" oriented management style, which seeks companies within an industry
with current stock prices that do not reflect the stocks' perceived true
worth.
More specifically, the FUND seeks to invest in companies believed to:
- - show growth potential that significantly exceeds the average expected growth
rate of companies in the same industry; and
- - be undervalued in the market relative to the companies' industry peers.
The companies sought typically have:
- - a long history of profit growth and dividend payment, and
- - a reputation for quality management, products and service.
The FUND seeks stocks of companies representing a wide selection of industries.
The FUND normally holds 100 stocks that each represents approximately 1% of the
FUND'S total investments. The FUND uses the following fundamental criteria for
measuring individual stock selection: price to earnings ratio, growth of
historical and forecasted earnings, and current yield. The FUND seeks to own the
most attractive stocks in each industry. The FUND compares its current
investments to possible new investments on an ongoing basis. The FUND replaces a
current investment, if a possible new investment appears significantly more
attractive under the FUND'S investment criteria.
OTHER STRATEGIES
The FUND may invest in money market instruments and hold a portion of its assets
in cash for liquidity purposes, as a temporary defensive strategy. The FUND may
use this temporary defensive strategy when market conditions limit the FUND'S
ability to use its other investment strategies to identify and obtain suitable
investments. The FUND, in doing so, would not be pursuing its investment
objective. The FUND also may hold cash or money market instruments while seeking
appropriate investments.
The FUND also uses other investment strategies, to a lesser degree, to pursue
its investment objective. The FUND'S SAI describes these other investment
strategies and the risks they involve.
RISKS OF INVESTMENT STRATEGIES
Investing in stocks involves the risk that the value of the stocks purchased
will fluctuate. These fluctuations could occur for a single company, an
industry, a sector of the economy, or the stock market as a whole. These
fluctuations could cause the value of the FUND'S stock investments -- and,
therefore, the value of the FUND'S shares held under your CONTRACT -- to
fluctuate, and you could lose money.
Investing in stocks of medium-sized, less mature, lesser-known companies
involves greater risks than those normally associated with large-sized, more
mature, well-known companies. Stocks of medium-sized companies, which are not as
well-established as large-sized companies, may (1) react more severely to market
conditions and (2) suffer more from economic, political and regulatory
developments. For these reasons, the FUND runs a risk of increased and more
rapid fluctuations in the value of its stock investments.
Additionally, the prices of medium-sized company stocks may fluctuate
independently of larger company stock prices. Medium-sized company stocks may
decline in price as large company stock prices rise, or rise in price as large
company stock prices decline.
Therefore, you should expect that the value of the FUND'S shares may fluctuate
more than broad stock market indices such as the S&P 500, and may fluctuate
independently from those indices.
Finally, the FUND invests in large-sized as well as medium-sized companies, and
the FUND'S performance may be affected if stocks in one of these two groups of
companies do not perform as well as stocks in the other group.
You may consider choosing the FUND for investing some portion of your CONTRACT
assets (1) if you are seeking the possibility of maximum long-term capital
appreciation, with some emphasis on providing income, and (2) as long as you are
comfortable with the additional risks associated with investing in securities of
medium-sized, less mature, lesser-known companies.
2
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INVESTMENT ADVISOR AND PORTFOLIO MANAGER
The FUND'S INVESTMENT ADVISOR is LINCOLN INVESTMENT MANAGEMENT, INC. (LINCOLN
INVESTMENT). You can find information about LINCOLN INVESTMENT in the Appendix
under "Management of the funds -- Investment advisor." LINCOLN INVESTMENT is
responsible for overall management of the FUND'S securities investments. This
includes monitoring the FUND'S sub-advisor, Vantage Investment Advisors, Inc.
(Vantage). Vantage's address is 630 5(th) Avenue, New York, New York 10111.
Vantage is responsible for the day-to-day management of the FUND'S securities
investments. Vantage, founded in 1979, is an affiliate of Lincoln Investment.
Vantage began managing the FUND in 1985. Enrique Chang, Vantage's Chief
Investment Officer, and Yifeng Yang, a Vice-President of Vantage, manage the
FUND.
Mr. Chang oversees the management of all of Vantage's equity portfolios and
directs Vantage's quantitative research efforts. Prior to joining Vantage, Mr.
Chang was an actuary with Prudential, Director of Quantitative Analysis and
Strategy with General Reinsurance Corporation, and Senior Vice President and
Director of Quantitative Analysis with J&W Seligman. He graduated from Fairleigh
Dickinson University, and received an MBA in finance and quantitative analysis
and an MS in statistics and operations research from New York University.
Mr. Yang conducts portfolio management and research for Vantage. Prior to
joining Vantage, Mr. Yifeng served as Director of Quantitative Research for J. &
W. Seligman and for General Reinsurance Corporation. He graduated Tsinghua
University, Beijing, and received a Ph. D. in electronic materials and device
and an M.S. in finance, investment, and banking from the University of
Wisconsin.
3
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THIS PAGE WAS INTENTIONALLY LEFT BLANK.
4
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APPENDIX -- CONTAINS IMPORTANT INFORMATION FOR ALL FUNDS
This Appendix is part of the Prospectus of:
Lincoln National Aggressive Growth Fund, Inc.
(Aggressive Growth)
Lincoln National Bond Fund, Inc. (Bond)
Lincoln National Capital Appreciation Fund, Inc.
(Capital Appreciation)
Lincoln National Equity-Income Fund, Inc.
(Equity-Income)
Lincoln National Global Asset Allocation Fund, Inc. (Global Asset Allocation)
Lincoln National Growth and Income Fund, Inc. (Growth and Income)
Lincoln National International Fund, Inc. (International)
Lincoln National Managed Fund, Inc. (Managed)
Lincoln National Money Market Fund, Inc.
(Money Market)
Lincoln National Social Awareness Fund, Inc.
(Social Awareness)
Lincoln National Special Opportunities Fund, Inc.
(Special Opportunities)
The following information applies to each FUND, unless otherwise indicated.
NET ASSET VALUE
Each FUND determines its net asset value per share (NAV) as of close of business
(currently 4:00 p.m., New York time) on the New York Stock Exchange (NYSE) on
each day the NYSE is open for trading. Each FUND, except the Money Market Fund,
determines its NAV by:
- - adding the values of all securities investments and other assets,
- - subtracting liabilities (including dividends payable), and
- - dividing by the number of shares outstanding.
NYSE's most recent announcement states that, as of the date of this prospectus,
the NYSE will be closed on New Year's Day, Martin Luther King Day, President's
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day,
and Christmas Day. NYSE may also be closed on other days. The NYSE may modify
its holiday schedule at any time.
A FUND'S securities investments may be traded in other markets on days when the
NYSE is closed. Therefore, the FUND'S NAV may fluctuate on days when you do not
have access to the FUND to purchase or redeem shares.
See the SAI Appendix for the methodology that a FUND (other than for the Money
Market Fund) uses to value short-term investments, options, futures and options
on futures, and foreign securities.
Each FUND values its securities investments as follows:
- - equity securities, at their last sale prices on national securities exchanges
or over-the-counter, or, in the absence of recorded sales, at the average of
readily available closing bid and asked prices on exchanges or
over-the-counter;
- - debt securities and other assets of a FUND, at their bid quotations; and
- - equity securities, debt securities and other assets for which market
quotations are not readily available, fair value as determined in good faith.
MONEY MARKET FUND. The Money Market Fund determines its NAV by the amortized
cost method of valuation provided by SEC Rule 2a-7 under the Investment Company
Act of 1940. Under the Rule, the FUND'S NAV must fairly reflect market value.
MANAGEMENT OF THE FUNDS
Each FUND'S business and affairs are managed under the direction of its Board of
Directors. The Board has the power to amend the bylaws of each FUND, to declare
and pay dividends, and to exercise all the powers of the FUND except those
granted to the shareholders.
INVESTMENT ADVISOR. LINCOLN INVESTMENT MANAGEMENT, INC. (LINCOLN INVESTMENT OR
ADVISOR) is the INVESTMENT ADVISOR to each FUND. Its headquarters are at 200
East Berry Street, Fort Wayne, Indiana 46802.
The ADVISOR has registered with the SEC as an INVESTMENT ADVISOR and acted as an
INVESTMENT ADVISOR to mutual FUNDS for over 40 years. The ADVISOR also acts as
(1) INVESTMENT ADVISOR to Lincoln National Convertible Securities Fund, Inc. and
Lincoln National Income Fund, Inc., closed-end investment companies, and (2)
SUB-ADVISER to two of the series of Delaware Group Adviser Funds, Inc., an
open-end series investment company.
The ADVISOR is a wholly-owned subsidiary of Lincoln National Corp. (LNC), a
publicly-held insurance holding company organized under Indiana law. LNC,
through its subsidiaries, provides life insurance and annuities,
property-casualty insurance, reinsurance and financial services.
Directors, officers and employees of the ADVISOR and each FUND may engage in
personal securities transactions, subject to restrictions and procedures of the
Code of
<PAGE>
Ethics adopted by the ADVISOR and each FUND. The restrictions and procedures
include substantially all of the recommendations of the Advisory Group of the
Investment Company Institute and comply with SEC rules and regulations.
The ADVISOR, either directly or through a SUB-ADVISER, provides portfolio
management and investment advice to each FUND and administers each FUND'S other
affairs, subject to the supervision of each FUND'S Board of Directors.
Each FUND pays the ADVISOR a monthly fee for the ADVISOR'S services. The annual
rate of the fee is based on the average daily net asset value of each FUND, as
shown in the following chart:
<TABLE>
<CAPTION>
FUND ...OF AVERAGE DAILY NET ASSET VALUE
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<S> <C>
Aggressive Growth .75 of 1% of the first $200 million; .70 of 1% of the next $200
million; .65 of 1% of the excess over $400 million
Capital Appreciation .75 of 1% of the first $500 million; .70 of 1% of the excess over
$500 million
Equity-Income .75 of 1% of the first $500 million; .70 of 1% of the excess over
$500 million
Global Asset Allocation .75 of 1% of the first $200 million; .70 of 1% of the next $200
million; and .68 of 1% of the excess over $400 million
International .90 of 1% of the first $200 million; .75 of 1% of the next $200
million; and .60 of 1% in excess over $400 million
All other FUNDS .48 of 1% of the first $200 million; .40 of 1% of the next $200
million; and .30 of 1% in excess over $400 million
</TABLE>
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PURCHASE AND REDEMPTION OF FUND SHARES
Each FUND sells its shares of common stock only to LINCOLN LIFE. LINCOLN LIFE
holds the FUND shares in separate accounts (VARIABLE ACCOUNTS) that support
various LINCOLN LIFE variable annuity contracts and variable life insurance
contracts.
Each FUND sells and redeems its shares, without charge, at their NAV next
determined after LINCOLN LIFE receives a purchase or redemption request.
However, each FUND redeems its shares held by LINCOLN LIFE for its own account
at the NAV next determined after the FUND receives the redemption request. The
value of shares redeemed may be more or less than original cost, depending on
the market value of a FUND'S securities investments at the time of redemption.
The FUND normally pays for shares redeemed within seven days after LINCOLN LIFE
receives the redemption request. However, a FUND may suspend redemption or
postpone payment for any period when:
- - the NYSE closes for other than weekends and holidays;
- - the SEC restricts trading on the NYSE;
- - the SEC determines that an emergency exists, so that a FUND'S (1) disposal of
investment securities, or (2) determination of net asset value, is not
reasonably practicable; or
- - The SEC permits, by order, for the protection of FUND shareholders.
DISTRIBUTIONS AND FEDERAL INCOME TAX CONSIDERATIONS
Each FUND'S policy is to distribute substantially all of its net investment
income and net realized capital gains each year. A FUND may distribute net
realized capital gains only once a year. Each FUND pays these distributions to
LINCOLN LIFE for the VARIABLE ACCOUNTS. The VARIABLE ACCOUNTS automatically
reinvest the distributions in additional FUND shares at no charge.
Each FUND has elected to be taxed as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the Code). The
Code relieves a regulated investment company from certain Federal income tax and
excise tax, if the company distributes substantially all of its net investment
income and net realized capital gains. See the SAI for a more complete
discussion.
Each FUND must meet asset diversification requirements under Section 817(h) of
the Code and the related regulation of the United States Treasury Department.
Each FUND intends to comply with these diversification requirements.
The sole shareholder of the FUNDS is LINCOLN LIFE. Consequently, this Appendix
does not discuss the federal income tax consequences at the shareholder level.
For information concerning the federal income tax consequences to owners of
variable annuity contracts or variable life insurance contracts (CONTRACT
OWNERS), including the failure of a FUND to meet the diversification
requirements discussed above, see the Prospectus for the VARIABLE ACCOUNT.
MANAGEMENT DISCUSSION OF FUND PERFORMANCE
Each FUND'S Annual Report includes the portfolio manager's discussion of the
FUND'S performance for the previous fiscal year and the factors affecting the
performance. Each FUND will send you a free copy of its Annual Report on
request.
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the financial
performance of the FUNDS for the past 5 years [or, if shorter, the period of the
FUND'S operations]. Certain information reflects financial results for a single
FUND share. The total returns in the table represent the rate that an investor
would have earned or lost on an investment in the FUND (assuming reinvestment of
all dividends and distributions). This information has been audited by Ernst &
Young LLP, independent auditors, whose report, along with each FUND'S financial
statements, are included in the annual report, which is available upon request.
<TABLE>
<CAPTION>
INCOME FROM INVESTMENT OPERATIONS LESS DIVIDENDS FROM:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET REALIZED
AND
NET ASSET UNREALIZED
VALUE NET GAIN (LOSS) TOTAL FROM NET NET REALIZED NET ASSET
BEGINNING OF INVESTMENT ON INVESTMENT INVESTMENT GAIN ON TOTAL VALUE END OF
PERIOD ENDED PERIOD INCOME (LOSS) INVESTMENTS OPERATIONS INCOME INVESTMENTS DIVIDENDS PERIOD
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
<CAPTION>
<S> <C> <C> <C> <C> <C>
RATIO OF NET
RATIO OF INVESTMENT NET ASSETS
EXPENSES TO INCOME TO PORTFOLIO AT END OF
TOTAL AVERAGE NET AVERAGE NET TURNOVER PERIOD
PERIOD ENDED RETURN** ASSETS ASSETS RATE (0000'S)
- -------------
<S> <C> <C> <C> <C> <C>
</TABLE>
* The per share data, total return, ratios and portfolio turnover are
calculated for the period from commencement of investment activity on May 2,
1988 through December 31, 1988 for the Social Awareness Fund, May 1, 1991
through December 31, 1991 for the International Fund, May 1, 1994 through
December 31, 1994 for the Equity Income, Capital Appreciation and Aggressive
Growth Fund. Accordingly, the total return, ratios, and portfolio turnover
have NOT been calculated on an annualized basis.
** Total return percentages in this table are calculated on the basis
prescribed by the Securities and Exchange Commission. These percentages are
based on the underlying mutual FUND shares in which the VARIABLE ACCOUNTS
may invest.
GENERAL INFORMATION
You should direct any inquiry to Lincoln National Life Insurance Co., at P.O.
Box 2340, Fort Wayne, Indiana 46801, or, call 1-800-4LINCOLN (454-6265).
Each FUND will issue:
- - unaudited semiannual reports showing current investments and other
information; and
- - annual financial statements audited by the FUND'S independent auditors.
These Prospectuses do not contain all the information included in the
Registration Statements that the FUNDS have filed with the SEC. You may examine
the Registration Statements, including exhibits, at the SEC in Washington, D.C.
Statements made in the Prospectuses about any variable annuity contract,
variable life insurance contract, or other document referred to in a CONTRACT,
are not necessarily complete. In each instance, we refer you to the copy of that
CONTRACT or other document filed as an exhibit to the related Registration
Statement. We qualify each statement in all respects by that reference.
The use of a FUND by both annuity and life insurance VARIABLE ACCOUNTS is called
mixed funding. Due to differences in redemption rates, tax treatment, or other
considerations, the interests of CONTRACT OWNERS under the VARIABLE LIFE
ACCOUNTS may conflict with those of CONTRACT OWNERS under the VARIABLE ANNUITY
ACCOUNTS. Violation of the federal tax laws by one VARIABLE ACCOUNT investing in
a FUND could cause the CONTRACTS funded through another VARIABLE ACCOUNT to lose
their tax-deferred status, unless remedial action were taken. The Board of
Directors of each FUND will monitor for any material conflicts and determine
what action, if any, the FUND or a VARIABLE ACCOUNT should take.
A conflict could arise that requires a VARIABLE ACCOUNT to redeem a substantial
amount of assets from any of the FUNDS. The redemption could disrupt orderly
portfolio management to the detriment of those CONTRACT OWNERS still investing
in that FUND. Also, that FUND could determine that it has become so large that
its size materially impairs investment performance. The FUND would then examine
its options.
LINCOLN LIFE performs the dividend and transfer functions for each FUND.
PREPARING FOR YEAR 2000
[Revised disclosure to be provided at the time of annual update filing.]
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You can find additional information in each FUND'S STATEMENT OF ADDITIONAL
INFORMATION (SAI), which is on file with the SEC. Each FUND incorporates its
SAI, dated May 1, 1999, into its Prospectus. Each FUND will provide a free copy
of its SAI on request.
You can find still further information about each FUND'S investments in the
FUND'S annual and semi-annual reports to shareholders. The Annual Report
discusses the market conditions and investment strategies that significantly
affected that FUND'S performance (except the Money Market Fund) during its last
fiscal year. Each FUND will provide a free copy of its Annual and Semi-Annual
Report on request.
For an SAI or Report, either write Lincoln National Life Insurance Co., P.O. Box
2340, Fort Wayne, Indiana 46801, or call 1-800-4LINCOLN (454-6265). Also call
this number to request other information about a FUND, or to make inquiries.
You can review and copy information about the FUNDS (including the SAIS) at the
SEC's Public Reference Room in Washington, D.C. You can get information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. You
can also get reports and other information about the FUNDS on the SEC's Internet
site at http:// www.sec.gov. You can get copies of this information by writing
the SEC Public Reference Section, Washington, D.C. 20549-6009, and paying a
duplicating fee.
Fund Investment Company Act File Numbers:
<TABLE>
<S> <C> <C>
Lincoln National Aggressive Growth Fund, Inc.: 33-70742; 811-8090
Lincoln National Bond Fund, Inc.: 2-80746; 811-3010
Lincoln National Capital Appreciation Fund,
Inc.: 33-70272; 811-8074
Lincoln National Equity-Income Fund, Inc.: 33-71158; 811-8126
Lincoln National Global Asset Allocation Fund,
Inc.: 33-13530; 811-5115
Lincoln National Growth and Income Fund, Inc.: 2-80741; 811-3211
Lincoln National International Fund, Inc.: 33-38335; 811-6233
Lincoln National Managed Fund, Inc.: 2-82276; 811-3683
Lincoln National Money Market Fund, Inc.: 2-80743; 811-3121
Lincoln National Social Awareness Fund, Inc.: 33-19896; 811-5464
Lincoln National Special Opportunities Fund,
Inc.: 2-80731; 811-3291
</TABLE>
<PAGE>
THIS PAGE WAS INTENTIONALLY LEFT BLANK.
<PAGE>
PREFACE TO THE MULTI FUND-REGISTERED TRADEMARK- STATEMENTS OF ADDITIONAL
INFORMATION
THE PREFACE AND TABLE OF CONTENTS ARE PART OF THE STATEMENT OF ADDITIONAL
INFORMATION (SAI) FOR EACH OF THE FOLLOWING FUNDS:
Lincoln National Aggressive Growth Fund, Inc. (Aggressive Growth)
Lincoln National Bond Fund, Inc. (Bond)
Lincoln National Capital Appreciation Fund, Inc. (Capital Appreciation)
Lincoln National Equity-Income Fund, Inc. (Equity Income)
Lincoln National Global Asset Allocation Fund, Inc. (Global Asset Allocation)
Lincoln National Growth and Income Fund, Inc. (Growth and Income)
Lincoln National International Fund, Inc. (International)
Lincoln National Managed Fund, Inc. (Managed)
Lincoln National Money Market Fund, Inc. (Money Market)
Lincoln National Social Awareness Fund, Inc. (Social Awareness)
Lincoln National Special Opportunities Fund, Inc. (Special Opportunities)
Each FUND has its own SAI that provides more information about that FUND. For
each FUND'S SAI, the FUND'S audited financial statements and the report of Ernst
& Young LLP, Independent Auditors, are incorporated by reference to the FUNDS'
1998 Annual Report. A FUND'S SAI should be read in conjunction with the
Prospectus of that FUND dated May 1, 1999. You may obtain a copy of any FUNDS'
Annual Report or Prospectus on request and without charge. Please write Lincoln
National Life Insurance Co., P.O. Box 2340, Fort Wayne, Indiana 46801 or call
1-800-4LINCOLN (454-6265).
A FUND'S SAI is not a Prospectus.
The date of each FUND'S SAI is May 1, 1999.
<PAGE>
TABLE OF CONTENTS FOR THE FUND SAIS
<TABLE>
<CAPTION>
SUBJECT PAGE
<S> <C>
- --------------------------------------------------------
PREFACE
DESCRIPTION OF THE FUND
Aggressive Growth
Bond
Capital Appreciation
Equity-Income
Global Asset Allocation
Growth and Income
International
Managed
Money Market
Social Awareness
Special Opportunities
- --------------------------------------------------------
ADDITIONAL INVESTMENT STRATEGIES AND RISKS
Aggressive Growth
Bond
Capital Appreciation
Equity-Income
Global Asset Allocation
Growth and Income
International
Managed
Money Market
Social Awareness
Special Opportunities
- --------------------------------------------------------
STRATEGIC PORTFOLIO TRANSACTIONS
Aggressive Growth
Bond
Capital Appreciation
Equity-Income
Global Asset Allocation
Growth and Income
International
Managed
Money Market
Social Awareness
Special Opportunities
<CAPTION>
SUBJECT PAGE
- --------------------------------------------------------
<S> <C>
INVESTMENT RESTRICTIONS
Aggressive Growth
Bond
Capital Appreciation
Equity-Income
Global Asset Allocation
Growth and Income
International
Managed
Money Market
Social Awareness
Special Opportunities
- --------------------------------------------------------
PORTFOLIO TRANSACTIONS AND BROKERAGE
Aggressive Growth
Bond
Capital Appreciation
Equity-Income
Global Asset Allocation
Growth and Income
International
Managed
Money Market
Social Awareness
Special Opportunities
- --------------------------------------------------------
SAI APPENDIX -- CONTAINS IMPORTANT
INFORMATION FOR ALL FUNDS
Investment advisor and sub-advisor
Directors and officers
Fund expenses
Description of shares
Strategic portfolio transactions --
additional information
Foreign investments
Valuation of portfolio securities
Custodian
Independent auditors
Financial statements
Bond and commercial paper ratings
Taxes
Derivative transactions -- definitions
</TABLE>
<PAGE>
LINCOLN NATIONAL
SPECIAL OPPORTUNITIES FUND, INC.
DESCRIPTION OF THE FUND
The Special Opportunities Fund (FUND) was incorporated in Maryland in 1981. It
is an open-end non-diversified management investment company whose investment
objective is maximum long-term capital appreciation. The FUND'S investment
objective and certain of its policies are fundamental and cannot be changed
without the affirmative vote of a majority of the outstanding voting securities
of the FUND. See "Investment restrictions." There can be no assurance that the
objective of the FUND will be achieved. References to ADVISOR in this SAI
include both LINCOLN INVESTMENT MANAGEMENT, INC. (LINCOLN INVESTMENT) and
Vantage Investment Advisors, Inc.
ADDITIONAL INVESTMENT STRATEGIES AND RISKS
The Prospectus discusses the FUND'S principal investment strategies used to
pursue the FUND'S investment objective and the risks of those strategies. The
following discussion describes other investment strategies that the FUND may use
as market conditions warrant, and notes the risks associated with these other
investment strategies. (Italicized terms that are not defined herein are defined
in the FUND'S Prospectus.)
FOREIGN INVESTMENTS
The FUND may invest up to 10% of its total assets in U.S. dollar-denominated
foreign securities listed on recognized U.S. exchanges or traded in the U.S.
over-the-counter market. Investments in securities issued by foreign issuers
involve certain risks which are not associated with investment in U.S.
securities. Eurodollar deposits in foreign branches of U.S. banks are similar to
domestic deposits, but are not covered by Federal Deposit Insurance Corp. (FDIC)
insurance and may be influenced by future political and economic developments
and governmental restrictions (for example, restrictions on the flow of capital
between Europe and the United States). Refer to "Foreign investments" in the SAI
APPENDIX for the 11 FUNDS for a discussion of the various risks inherent in
foreign investing.
STRATEGIC PORTFOLIO TRANSACTIONS
The portfolio manager for the FUND may, at any given time, invest a portion of
the FUND'S assets in one or more strategic portfolio transactions which we
define as derivative transactions and cash enhancement transactions.
For your convenience, in the SAI APPENDIX for the 11 FUNDS, we have included a
basic discussion of these special financial arrangement transactions and some of
the risks associated with them. Note also that the SAI APPENDIX for the 11 FUNDS
contains definitions of the more commonly used derivative transactions,
technical explanations of how these transactions will be used and the limits on
their use. You should consult your financial counselor if you have specific
questions.
THE SPECIAL OPPORTUNITIES FUND IS AUTHORIZED:
a) for derivative transactions, to: sell put and covered call options and buy
put options for stock and stock indices and buy and sell options to close out
positions previously entered into (The aggregate cost of premiums for all
outstanding options shall not exceed 30% of the FUND'S total assets, although
the ultimate loss to the FUND from options could be substantially greater than
30%.); and buy and sell financial futures contracts and put and call options on
those contracts. (For certain limited purposes, the FUND may also buy financial
futures contracts on an unleveraged basis and not as an anticipatory hedge.)
Amounts committed to margin and paid for option premiums on futures contracts
may not exceed 5% of total assets.
b) for cash enhancement transactions, to: lend portfolio securities, if such
loans of securities do not exceed one-third of the FUND'S total assets, and
engage in repurchase transactions. Collateral will be continually maintained at
no less than 102% of the value of the loaned securities or of the repurchase
price, as applicable.
OPTIONS TRADING
The FUND will only write and purchase options in standard contracts which may be
quoted on NASDAQ or traded on the national securities exchanges. The INVESTMENT
ADVISOR will generally write covered call options when it anticipates declines
in the market value of the portfolio securities and the premiums received may
offset to some extent the anticipated decline in the FUND'S
SO-1
<PAGE>
net asset value. On the other hand, writing put options may be a useful
portfolio investment strategy when the FUND has cash or other reserves and it
intends to purchase securities but expects prices to increase.
Generally, the risk to the FUND in writing options is that the INVESTMENT
ADVISOR'S assumption about the price trend of the underlying security may prove
inaccurate. If the FUND wrote a put, expecting the price of a security to
increase, and it decreased; or if the FUND wrote a call, expecting the price to
decrease but it increased, the FUND could suffer a loss if the premium received
in each case did not equal the difference between the exercise price and the
market price. See the SAI APPENDIX for the 11 FUNDS for a more complete
description of put and call options and the risks involved.
FUTURES CONTRACTS AND OPTIONS THEREON
Generally, the FUND may buy and sell financial futures contracts (futures
contracts) and related options thereon solely for hedging purposes. The FUND may
sell a futures contract or purchase a put option on that futures contract to
protect the value of the FUND'S portfolio in the event the INVESTMENT ADVISOR
anticipates declining security prices. Similarly, if security prices are
expected to rise, the FUND may purchase a futures contract or a call option
thereon. (For certain limited purposes, the FUND is also authorized to buy
futures contracts on an unleveraged basis and not as an anticipatory hedge.)
See the SAI APPENDIX for the 11 FUNDS for a more complete description of the use
of futures contracts and options thereon as well as the risks related thereto.
LENDING OF PORTFOLIO SECURITIES
The FUND may from time to time lend securities from its portfolio to brokers,
dealers and financial institutions and receive collateral from the borrower, in
the form of cash (which may be invested in short-term securities), U.S.
Government obligations or certificates of deposit. Such collateral will be
maintained at all times in an amount equal to at least 102% of the current
market value of the loaned securities, and will be in the actual or constructive
possession of the FUND during the term of the loan. The FUND will retain the
incidents of ownership of the loaned securities and will be entitled to the
interest or dividends payable on the loaned securities. In addition, the FUND
will receive interest on the amount of the loan. The loans will be terminable by
the FUND at any time and will not be made to any affiliates of the FUND or the
ADVISOR. The FUND may pay reasonable finder's fees to persons unaffiliated with
it in connection with the arrangement of the loans.
REPURCHASE AGREEMENTS
The FUND may make short-term investments in repurchase agreements. See the SAI
APPENDIX for the 11 FUNDS for a description of repurchase agreements and the
risks they involve.
INVESTMENT RESTRICTIONS
The FUND has adopted policies and investment restrictions. The investment
restrictions may not be changed without a majority vote of its outstanding
shares, and are considered fundamental. Such majority is defined in the 1940 Act
as the vote of the lesser of (1) 67% or more of the outstanding voting
securities present at a meeting, if the holders of more than 50% of the
outstanding voting securities are present in person or by proxy, or (2) more
than 50% of the outstanding voting securities. For purposes of the following
restrictions: (1) all percentage limitations apply immediately after the making
of an investment; and (2) any subsequent change in any applicable percentage
resulting from market fluctuations does not require elimination of any security
from the portfolio.
The FUND may not:
1. Invest more than 25% of its total assets in the securities of issuers in any
one industry. For purposes of this restriction, gas, electric, water and
telephone utilities are treated as separate industries. As of the end of
each quarter, at least 50% of the value of the FUND'S total assets must be
represented by: (a) U.S. Government obligations, cash and cash items, (b)
securities of other investment companies (subject to Restriction 10), and
(c) securities of issuers as to each of which, either at the time the
investment was made or at the end of such quarter, the FUND'S investment in
the issuer did not exceed 5% of the value of the FUND'S total assets or 10%
of the outstanding voting securities of the issuer.
2. The FUND may not borrow money, except for temporary or emergency purposes
and not exceeding 5% (taken at the lower of cost or current value) of its
total assets (not including the amounts borrowed).
3. Purchase or sell real estate or interests therein, although it may purchase
securities of issuers which engage in real estate operations or securities
which are secured by interests in real estate.
4. Make loans except that it may lend its portfolio securities if such loans
are fully collateralized and such loans of securities do not exceed
one-third of its total assets at any one time. See "Lending of portfolio
securities." The purchase of debt securities (including loan participation
certificates) and the entry into repurchase agreements are not considered
the making of loans.
5. Purchase puts, calls or combinations thereof, except the FUND may write and
purchase put and call options and effect closing transactions as described
under "Options trading."
6. Underwrite the securities of other issuers, except insofar as the FUND may
be deemed an underwriter
SO-2
<PAGE>
under the Securities Act of 1933 in disposing of portfolio securities.
7. Invest more than 10% of its total assets in securities (including repurchase
agreements maturing in more than seven days) which are subject to legal or
contractual restrictions upon resale or are otherwise not readily
marketable.
8. Purchase securities on margin, except for such short term loans as are
necessary for the clearance of purchases of portfolio securities.
9. Make short sales of securities.
10. Purchase or sell commodities or commodity futures contracts, except
financial futures contracts and options thereon.
11. Purchase securities of investment companies except in connection with an
acquisition, merger, consolidation or reorganization.
12. Invest in companies for the purpose of exercising control.
13. Pledge its assets or assign or otherwise encumber them except to secure
borrowings effected within the limitations set forth in Restriction 2. (For
purposes of this restriction, collateral arrangements with respect to the
writing of options and collateral arrangements with respect to initial
margin for futures contracts are not deemed to be pledges of assets.)
14. Issue senior securities as defined in the 1940 Act except insofar as the
FUND may be deemed to have issued a senior security by borrowing money in
accordance with the restrictions described above. (For the purpose of this
restriction, collateral arrangements with respect to the writing of options
and initial margin deposits for futures contracts and the purchase or sale
of futures contracts are not deemed to be the issuance of a senior
security.)
PORTFOLIO TRANSACTIONS AND BROKERAGE
The FUND'S INVESTMENT ADVISOR (the ADVISOR) is responsible for decisions to buy
and sell securities for the FUND, the selection of brokers and dealers to effect
the transactions, and the negotiation of brokerage commissions, if any.
Purchases and sales of securities on a stock exchange are effected through
brokers who charge a commission for their services. In the over-the-counter
market, securities are generally traded on a net basis with dealers acting as
principal for their own accounts without a stated commission, although the price
of the security usually includes a profit to the dealer. (Increasingly, however,
over-the-counter securities trade electronically, thereby avoiding the cost of
trading through dealers. These electronic trades do require payment of
commissions to the "electronic" broker.) In underwritten offerings, securities
are purchased at a fixed price which includes an amount of compensation to the
underwriter, generally referred to as the underwriter's concession or discount.
On occasion, certain money market instruments may be purchased directly from an
issuer, in which case no commissions or discounts are paid.
The ADVISOR currently provides investment advice to a number of other clients.
See "Investment advisor" in the Appendix and "Sub-advisors" in the SAI APPENDIX.
It will be the practice of the ADVISOR to allocate purchase and sale
transactions among the FUND and others whose assets it manages in such manner as
it deems equitable. In making such allocations, major factors to be considered
are investment objectives, the relative size of portfolio holdings of the same
or comparable securities, the availability of cash for investment, the size of
investment commitments generally held and the opinions of the persons
responsible for managing the portfolios of the FUND and other client accounts.
Securities of the same issuer may be purchased, held, or sold at the same time
by the FUND or other accounts or companies for which the ADVISOR provides
investment advice (including affiliates of the ADVISOR). On occasions when the
ADVISOR deems the purchase or sale of a security to be in the best interest of
the FUND, as well as the other clients of the ADVISOR, the ADVISOR, to the
extent permitted by applicable laws and regulations, may aggregate such
securities to be sold or purchased for the FUND with those to be sold or
purchased for other clients in order to obtain best execution and lower
brokerage commissions, if any. In such event, allocation of the securities so
purchased or sold, as well as the expenses incurred in the transaction, will be
made by the ADVISOR in the manner it considers to be equitable and consistent
with its fiduciary obligations to all such clients, including the FUND. In some
instances, the procedures may impact the price and size of the position
obtainable for the FUND. Portfolio securities are not purchased from or sold to
the ADVISOR or any affiliated person (as defined in the 1940 Act) of the
ADVISOR.
In connection with effecting portfolio transactions, primary consideration will
be given to securing most favorable price and efficient execution. Within the
framework of this policy, the reasonableness of commission or other transaction
costs is a major factor in the selection of brokers and is considered together
with other relevant factors, including financial responsibility, research and
investment information and other services provided by such brokers. It is
expected that, as a result of such factors, transaction costs charged by some
brokers may be greater than the amounts other brokers
SO-3
<PAGE>
might charge. The ADVISOR may determine in good faith that the amount of such
higher transaction costs is reasonable in relation to the value of the brokerage
and research services provided. The Board of Directors of the FUND will review
regularly the reasonableness of commission and other transaction costs incurred
by the FUND in the light of facts and circumstances deemed relevant from time to
time, and, in that connection, will receive reports from the ADVISOR and
published data concerning transaction costs incurred by institutional investors
generally. The nature of the research services provided to the ADVISOR by
brokerage firms varies from time to time but generally includes current and
historical financial data concerning particular companies and their securities;
information and analysis concerning securities markets and economic and industry
matters; and technical and statistical studies and data dealing with various
investment opportunities, risks and trends, all of which the ADVISOR regards as
a useful supplement to its own internal research capabilities. The ADVISOR may
from time to time direct trades to brokers which have provided specific
brokerage or research services for the benefit of the ADVISOR'S clients; in
addition the ADVISOR may allocate trades among brokers that generally provide
superior brokerage and research services. During 1998, the ADVISOR directed
transactions totaling approximately $ million to these brokers and paid
commissions of approximately $ in connection with these transactions.
Research services furnished by brokers are used for the benefit of all of the
advisor's clients and not solely or necessarily for the benefit of the FUND. The
ADVISOR believes that the value of research services received is not
determinable and does not significantly reduce its expenses. The FUND does not
reduce its fee to the ADVISOR by any amount that might be attributable to the
value of such services.
The aggregate amount of brokerage commissions paid by the FUND was $ ,
$1,278,854, and $1,264,448, during 1998, 1997, and 1996, respectively.
If the FUND effects a closing purchase transaction with respect to an option
written by it, normally such transaction will be executed by the same
broker-dealer who executed the sale of the option. If a call written by the FUND
is exercised, normally the sale of the underlying securities will be executed by
the same broker-dealer who executed the sale of the call.
The writing of options by the FUND will be subject to limitations established by
each of the exchanges governing the maximum number of options in each class
which may be written by a single investor or group of investors acting in
concert, regardless of whether the options are written on the same or different
exchanges or are held or written in one or more accounts or through one or more
brokers. Thus, the number of options which the FUND may write may be affected by
options written by other investment advisory clients of its advisor. An exchange
may order the liquidations of positions found to be in excess of these limits,
and it may impose certain other sanctions. As of the date of this Prospectus,
these limits (which are subject to change) are 2,000 options (200,000 shares) in
each class of puts or calls.
Under the sub-advisory agreement (see "Investment advisor and sub-advisor" in
the SAI APPENDIX) between the ADVISOR (LINCOLN INVESTMENT) and the SUB-ADVISOR
(Vantage), the SUB-ADVISOR may perform some, or substantially all, of the
investment advisory services required by the FUND, even though the ADVISOR
remains primarily responsible for investment decisions affecting the FUND. The
SUB-ADVISOR will follow the same procedures and policies which are followed by
the ADVISOR as described previously. The SUB-ADVISOR currently provides
investment advice to a number of other clients.
SO-4
<PAGE>
APPENDIX
(NOTE: THIS IS UNIFORM INFORMATION FOR THE 11 FUNDS. SEE EACH FUND'S SAI FOR
INFORMATION SPECIFIC TO THAT FUND.)
THIS APPENDIX CONSTITUTES PART OF THE SAIS OF LINCOLN NATIONAL AGGRESSIVE GROWTH
FUND, INC. (AGGRESSIVE GROWTH), LINCOLN NATIONAL BOND FUND, INC. (BOND), LINCOLN
NATIONAL CAPITAL APPRECIATION FUND, INC. (CAPITAL APPRECIATION), LINCOLN
NATIONAL EQUITY-INCOME FUND, INC. (EQUITY-INCOME), LINCOLN NATIONAL GLOBAL ASSET
ALLOCATION FUND, INC. (GLOBAL ASSET ALLOCATION), LINCOLN NATIONAL GROWTH AND
INCOME FUND, INC. (GROWTH AND INCOME), LINCOLN NATIONAL INTERNATIONAL FUND, INC.
(INTERNATIONAL), LINCOLN NATIONAL MANAGED FUND, INC. (MANAGED), LINCOLN NATIONAL
MONEY MARKET FUND, INC. (MONEY MARKET), LINCOLN NATIONAL SOCIAL AWARENESS FUND,
INC. (SOCIAL AWARENESS), AND LINCOLN NATIONAL SPECIAL OPPORTUNITIES FUND, INC.
(SPECIAL OPPORTUNITIES). UNLESS OTHERWISE INDICATED, THE FOLLOWING INFORMATION
APPLIES TO EACH FUND.
INVESTMENT ADVISOR AND SUB-ADVISOR
LINCOLN INVESTMENT MANAGEMENT, INC. (LINCOLN INVESTMENT) is the INVESTMENT
ADVISOR to the FUNDS and is headquartered at 200 E. Berry Street, Fort Wayne,
Indiana 46802. LINCOLN INVESTMENT (the ADVISOR) is a subsidiary of Lincoln
National Corp. (LNC), a publicly-held insurance holding company organized under
Indiana law. Through its subsidiaries, LNC provides, on a national basis,
insurance and financial services. LINCOLN INVESTMENT is registered with the
Securities and Exchange Commission (SEC) as an INVESTMENT ADVISOR and has acted
as an INVESTMENT ADVISOR to mutual funds for over 40 years. The ADVISOR also
acts as INVESTMENT ADVISOR to Lincoln National Income Fund, Inc. (a closed-end
investment company whose investment objective is to provide a high level of
current income from interest on fixed-income securities) and Lincoln National
Convertible Securities Fund, Inc. (a closed-end investment company whose
investment objective is a high level of total return on its assets through a
combination of capital appreciation and current income) and to other clients,
and also acts as SUB-ADVISER to two of the series of Delaware Group Adviser
Funds, Inc. (the Corporate Income Fund and the Federal Bond Fund of that retail
mutual fund complex).
Under Advisory Agreements with the FUNDS, the ADVISOR provides portfolio
management and investment advice to the FUNDS and administers its other affairs,
subject to the supervision of the FUNDS' Board of Directors. The ADVISOR, at its
expense, will provide office space to the FUNDS and all necessary office
facilities, equipment and personnel and will make its officers and employees
available to the FUNDS as appropriate. In addition, the ADVISOR will pay all
expenses incurred by it or by the FUNDS in connection with the management of
each FUND'S assets or the administration of its affairs, other than those
assumed by the FUNDS, as described in the APPENDIX to the Prospectus. LINCOLN
LIFE has paid the organizational expenses of all the FUNDS. The rates of
compensation to the ADVISOR and the SUB-ADVISORS are set forth in the APPENDIX
to the Prospectus.
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth Fund $2,109,952 $1,428,803
Bond Fund 1,221,295 1,188,030
Capital Appreciation Fund 2,940,632 1,549,656
Equity-Income Fund 6,053,404 3,303,336
Global Asset Allocation Fund 2,808,358 2,072,722
Growth and Income Fund 9,714,765 7,063,276
International Fund 3,741,563 3,319,701
Managed Fund 2,873,786 2,480,524
Money Market Fund 451,243 417,468
Social Awareness Fund 3,355,544 1,877,030
Special Opportunities Fund 2,824,015 2,274,229
</TABLE>
A-1
<PAGE>
During the last three years, the ADVISOR received the amounts, as mentioned
above, for investment ADVISORY services. If total expenses of the
FUNDS(excluding taxes, interest, portfolio brokerage commissions and fees, and
expenses of an extraordinary and non-recurring nature, but including the
investment advisory fee) exceed 1 1/2% per annum of the average daily net assets
of each FUND (2% for the International Fund), the ADVISOR will pay such excess
by offsetting it against the ADVISORY fee. If such offset is insufficient to
cover the excess, any balance remaining will be paid directly by the ADVISOR to
each FUND.
SUB-ADVISORS. As ADVISOR, LINCOLN INVESTMENT is primarily responsible for
investment decisions affecting each of the FUNDS. However, LINCOLN INVESTMENT
has entered into SUB-ADVISORY agreements with several professional investment
management firms. These firms provide some or substantially all of the
investment ADVISORY services required by a number of the FUNDS, including
day-to-day investment management of those FUNDS' portfolios. Each SUB-ADVISOR
makes investment decisions for its respective FUND in accordance with that
FUND'S investment objectives and places orders on behalf of that FUND to effect
those decisions. See the following tables for more information about the
SUB-ADVISORS and their fees:
<TABLE>
<CAPTION>
ANNUAL FEE RATE BASED ON
FUND SUB-ADVISOR AVERAGE DAILY NET ASSET VALUE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Aggressive Growth Lynch & Mayer .50 of 1% of the first $150 million .35 of 1% of
520 Madison Avenue the excess over $150 million
New York, NY 10022
Capital Appreciation Janus .55 of 1% of the first $100 million .50 of 1% of
100 Fillmore Street the next $400 million; and .45 of 1% of the
Denver, CO 80206 excess over $500 million
Equity Income Fidelity .48 of 1%
82 Devonshire Street
Boston, MA 02108
Global Asset Allocation Putnam The greater of (a) $40,000; or (b) .47 of 1% of
One Post Office Square the first $200 million; .42 of 1% of the next
Boston, MA 02109 $200 million; and .40 of 1% of any excess over
$400 million
International Delaware International .50 of 1% of the first $200 million; .40 of 1%
Advisers Ltd. of the next $200 million; and .35 of 1% of any
80 Cheapside, excess over $400 million
London, England
EC2V 6EE
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FEE RATE BASED ON MARKET
VALUE OF SECURITIES HELD IN THE
PORTFOLIO OF EACH RESPECTIVE CLIENT
FUND AT THE CLOSE OF BUSINESS ON THE
FUND SUB-ADVISOR LAST TRADING DAY OF EACH CALENDAR QUARTER
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Growth and Income Vantage .20 of 1%
630 5th Avenue
New York, NY 10111
Managed Vantage .20 of 1%
(STOCK PORTFOLIO ONLY)
Social Awareness Vantage .20 of 1%
Special Opportunities Vantage .20 of 1%
</TABLE>
A-2
<PAGE>
During the last three years each SUB-ADVISOR received the following amounts for
investment SUB-ADVISORY services. LINCOLN INVESTMENT, not the FUND, pays all
sub-advisory fees owed.
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth Fund $1,229,800 $ 893,059
Bond Fund N/A N/A
Capital Appreciation Fund 2,072,388 1,117,383
Equity-Income Fund 4,781,931 2,612,405
Global Asset Allocation Fund 1,724,369 1,284,185
Growth and Income Fund 6,155,225 4,440,325
International Fund 1,503,294 1,326,484
Managed Fund 974,080 820,633
Money Market Fund N/A N/A
Social Awareness Fund 1,901,560 923,516
Special Opportunities Fund 1,519,961 1,168,134
</TABLE>
SERVICE MARKS. The service mark for the FUNDS and the name Lincoln National have
been adopted by the FUNDS with the permission of LNC, and their continued use is
subject to the right of LNC to withdraw this permission in the event the ADVISOR
should not be the INVESTMENT ADVISOR of the FUNDS.
In the Prospectus and sales literature, the name Fidelity Investments will be
used with the Equity-Income Fund, Janus with the Capital Appreciation Fund and
Putnam with the Global Asset Allocation Fund. The continued use of these names
is subject to the right of the respective SUB-ADVISOR to withdraw its permission
in the event it ceases to be the SUB-ADVISOR to the particular FUND it advises.
A-3
<PAGE>
DIRECTORS AND OFFICERS
The directors and executive officers of each FUND, their business addresses,
positions with FUND, age and their principal occupations during the past five
years are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
* KELLY D. CLEVENGER Vice President, Lincoln National Life Insurance Co.
CHAIRMAN OF THE BOARD,
PRESIDENT AND DIRECTOR, age
46
1300 S. Clinton Street
Fort Wayne, IN 46802
- ------------------------------------------------------------------------------------------------------------------
JOHN B. BORSCH, JR. Retired, formerly Associate Vice President--Investments, Northwestern
DIRECTOR, age 65 University
1776 Sherwood Road
Des Plaines, IL 60016
- ------------------------------------------------------------------------------------------------------------------
NANCY L. FRISBY, CPA Regional Vice President/Chief Financial Officer (formerly Vice
DIRECTOR, age 57 President--Finance; Regional Controller of Finance), St. Joseph Medical
700 Broadway Center, Fort Wayne, Indiana
Fort Wayne, Indiana
Fort Wayne, IN 46802
- ------------------------------------------------------------------------------------------------------------------
* BARBARA S. KOWALCZYK Senior Vice President and Director, Corporate Planning and Development,
DIRECTOR, age 47 Lincoln National Corporation; Director, Lincoln Life and Annuity Company
1300 S. Clinton St. of New York (formerly Executive Vice President, LINCOLN INVESTMENT
Fort Wayne, IN 46802 MANAGEMENT, INC.)
- ------------------------------------------------------------------------------------------------------------------
KENNETH G. STELLA President, Indiana Hospital and Health Association
DIRECTOR, age 55
One America Square
Indianapolis, IN 46282
- ------------------------------------------------------------------------------------------------------------------
* JANET C. CHRZAN Vice President and Treasurer, Lincoln National Corp. (formerly Vice
TREASURER, age 50 President and General Auditor)
200 East Berry Street
Fort Wayne, IN 46802
- ------------------------------------------------------------------------------------------------------------------
* CYNTHIA A. ROSE Assistant Secretary, Lincoln National Life Insurance Co.
SECRETARY, age 44
200 East Berry Street
Fort Wayne, IN 46802
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
* Interested persons of the FUNDS, as defined in the 1940 Act.
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<TABLE>
<S> <C> <C>
COMPENSATION TABLE
- ----------------------------------------------------------------------------------------------------
AGGREGATE COMPENSATION TOTAL COMPENSATION FROM FUND
NAME OF PERSON, POSITION FROM EACH FUND* AND FUND COMPLEX
- ----------------------------------------------------------------------------------------------------
JOHN B. BORSCH, JR.
DIRECTOR
- ----------------------------------------------------------------------------------------------------
NANCY L. FRISBY
DIRECTOR
- ----------------------------------------------------------------------------------------------------
KENNETH G. STELLA
DIRECTOR
- ----------------------------------------------------------------------------------------------------
</TABLE>
* Directors fees of $250 per meeting, plus expenses to attend the meetings, are
paid by each FUND to each director who is not an interested person of the FUNDS.
FUND EXPENSES
Expenses other than investment ADVISORY fees specifically assumed by each FUND
include: compensation and expenses of Directors of the FUND who are not
interested persons of the FUND as defined in the 1940 Act; registration, filing,
printing, and other fees in connection with filings with regulatory authorities,
including the costs of printing and mailing updated Prospectuses and SAIs
provided to current CONTRACT OWNERS; fees and expenses of independent auditors;
the expenses of printing and mailing proxy statements and shareholder reports;
custodian and transfer agent charges; brokerage commissions and securities and
options transaction costs incurred by the FUND; taxes and corporate fees; fees
for accounting, valuation and related services; legal fees incurred in
connection with the affairs of the FUND (other than legal services provided by
personnel of the ADVISOR or its affiliated companies); the fees of any trade
association of which the FUND is a member; and expenses of shareholder and
Director meetings.
DESCRIPTION OF SHARES
The authorized capital stock of each FUND consists of shares of common stock,
$0.01 par value. FUND shares will be owned by LINCOLN LIFE and will be held by
it in the VARIABLE ACCOUNTS. As sole shareholder of each FUND, LINCOLN LIFE may
be deemed to be a control person as that term is defined under the 1940 Act.
However, as stated in the Prospectuses for the VARIABLE ACCOUNTS, LINCOLN LIFE
provides to CONTRACT OWNERS of the VARIABLE ACCOUNTS the right to direct the
voting of FUND shares at shareholder meetings, to the extent provided by law.
LINCOLN LIFE will vote for or against any proposition, or will abstain from
voting, any FUND shares attributable to a CONTRACT for which no timely voting
instructions are received, and any FUND shares held by LINCOLN LIFE for its own
account, in proportion to the voting instructions that it received with respect
to all CONTRACTS participating in that FUND. However, if the 1940 Act or any
regulation under it should change, and as a result LINCOLN LIFE determines it is
permitted to vote FUND shares in its own right, it may elect to do so.
All the shares of each FUND are of the same class with equal rights and
privileges. Each full share is entitled to one vote and each fractional share is
entitled to a proportionate fractional vote, on all matters subjected to a vote
of the shareholder. All shares, full and fractional, participate proportionately
in any dividends and capital gains distributions and, in the event of
liquidation, in that FUND'S net assets remaining after satisfaction of
outstanding liabilities.
When issued, each share is fully-paid and non-assessable and the shareholder has
no preemptive or conversion rights. FUND shares have non-cumulative voting
rights, which means that holders of more than 50% of the shares voting for the
election of directors can elect 100% of the directors if they choose to do so.
In that event the holders of the remaining shares so voting will not be able to
elect any directors. Shares may be redeemed as set forth under Sale and
redemption of shares.
The Bylaws of the FUNDS allow them, in proper cases, to dispense with their
annual meetings of the shareholder. Generally, this may be done as long as: (1)
a majority of the Directors then in office have at some point been elected by
the shareholder and, if any vacancy is filled by vote of the Board of Directors,
then immediately after filling the vacancy at least two thirds of the Directors
shall have been elected by the shareholder; (2) there is no change in the
independent auditor of the FUNDS; (3) there is no material change to the
investment advisory and/or sub-advisory agreements and/or fundamental policies;
and (4) a shareholder vote is not required with respect to a distribution
agreement. In
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adopting this procedure for dispensing with annual meetings that are a
formality, the Directors of the FUNDS have undertaken to comply with the
requirements of Section 16(c) of the 1940 Act. That Section protects CONTRACT
OWNERS by providing a procedure by which they may require management to convene
a meeting of the shareholder to vote on removal of one or more Directors. The
Directors also have agreed to facilitate communication among CONTRACT OWNERS for
the purpose of calling those meetings. Further information about these
procedures is available from FUND management.
STRATEGIC PORTFOLIO TRANSACTIONS-ADDITIONAL INFORMATION
Because of their different investment objectives and portfolio management
philosophies many of the FUNDS engage to varying degrees in strategic portfolio
transactions, in order to preserve or enhance the value of their assets. These
can be generally identified as either derivative transactions or cash
enhancement transactions. Derivative transactions are recognized by the
investment community as an acceptable way to seek to increase the FUND'S overall
value (or, depending on the condition of the securities markets, at least to
slow its decrease). Cash enhancement transactions are designed to make some
extra money for the FUND when it has excess cash, or to help the FUND obtain
some cash for temporary purposes when needed. See the Prospectus for each FUND
for a listing of the kinds of transactions in which each FUND may engage.
1. DERIVATIVE TRANSACTIONS
A. Introduction
A derivative transaction is a financial agreement the value of which is
dependent upon the values of one or more underlying assets or upon the
values of one or more indices of asset values. The following types are
currently in fairly common use in the investment community, although not
every FUND will use all of them:
1. Equity contracts: stock options and indexed options; equity swaps;
stock index futures and options on futures; swaptions;
2. Interest rate contracts: interest rate futures and options on them;
forward rate agreements (FRAs); interest rate swaps and their
related transactions (E.G., caps, floors, collars and corridors);
and/or
3. Currency derivative contracts: currency forward contracts; currency
options; currency futures; currency swaps; cross-currency interest
rate swaps.
SIMPLIFIED DEFINITIONS FOR THESE TRANSACTIONS ARE PROVIDED AT THE END OF THIS
SAI APPENDIX.
Although they may be structured in complex combinations, derivative transactions
in which the FUNDS engage generally fall into two broad categories: options
contracts or forward contracts. The combined forms are constantly evolving. In
fact, variations on the types listed previously may come into use after the date
of these SAIs. Therefore, where a particular FUND discloses the intent of that
FUND to engage in any of the types listed, that FUND hereby reserves the right
to engage in related variations on those transactions.
The FUNDS intend to engage in derivative transactions only defensively. Examples
of this defensive use might be: to hedge against a perceived decrease in a
FUND'S asset value; to control transaction costs associated with market timing
(E.G., by using futures on an unleveraged basis); and to lock in returns,
spreads, or currency exchange rates in anticipation of future cash market
transactions.
There is no discussion here of asset-backed or mortgage-backed securities, or
securities such as collateralized mortgage obligations, structured notes,
inverse floaters, principal-only or interest-only securities, etc. For a
description of these securities see the Prospectus or SAI for the FUNDS that are
authorized to engage in this kind of trading.
B. Risk factors commonly associated with derivative transactions.
There are certain risks associated with derivatives, and some derivatives
involve more of these risks than others. We briefly describe the most
common ones here; however, this is not an exhaustive list. Consult your
financial counselor if you have additional questions.
CREDIT RISK is the possibility that a counterparty to a transaction will
fail to perform according to the terms and conditions of the transaction,
causing the holder of the claim to suffer a loss.
CROSS-CURRENCY SETTLEMENT RISK (or Herstatt risk) is related to the
settlement of foreign exchange contracts. It arises when one of the
counterparties to a contract pays out one currency prior to receiving
payment of the other. Herstatt risk arises because the hours of operation
of domestic interbank fund transfer systems often do not overlap due to
time zone differences. In the interval between the time one counterparty
has received payment in one indicated currency and the time the other
counterparty(ies) receive payment in the
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others, those awaiting payment are exposed to credit risk and market
risk.
LEGAL RISK is the chance that a derivative transaction, which involves
highly complex financial arrangements, will be unenforceable in
particular jurisdictions or against a financially troubled entity; or
will be subject to regulation from unanticipated sources.
MARKET LIQUIDITY RISK is the risk that a FUND will be unable to control
its losses if a liquid secondary market for a financial instrument does
not exist. It is often considered as the risk that a (negotiable or
assignable) financial instrument cannot be sold quickly and at a price
close to its fundamental value.
MARKET RISK is the risk of a change in the price of a financial
instrument, which may depend on the price of an underlying asset.
OPERATING RISK is the potential of unexpected loss from inadequate
internal controls or procedures; human error; system (including data
processing system) failure; or employee dishonesty.
SETTLEMENT RISK between two counterparties is the possibility that a
counterparty to whom a firm has made a delivery of assets or money
defaults before the amounts due or assets have been received; or the risk
that technical difficulties interrupt delivery or settlement even if the
counterparties are able to perform. In the latter case, payment is likely
to be delayed but recoverable.
SYSTEMIC RISK is the uncertainty that a disruption (at a firm, in a
market segment, to a settlement system, etc.) might cause widespread
difficulties at other firms, in other market segments, or in the
financial system as a whole.
SPECIAL NOTE FOR OPTIONS AND FUTURES TRANSACTIONS: Gains and losses on
options and futures transactions depend on the portfolio manager's
ability to correctly predict the direction of stock prices and interest
rates, and other economic factors. Options and futures trading may fail
as hedging techniques in cases where the price movements of the
securities underlying the options and futures do not follow the price
movements of the portfolio securities subject to the hedge. The loss from
investing in futures transactions is potentially unlimited.
SOME OF THESE RISKS MAY BE PRESENT IN EACH TYPE OF TRANSACTION, WHILE
OTHERS MAY PERTAIN ONLY TO CERTAIN ONES. These risks are discussed here
only briefly. Before you invest in a particular FUND, please consult your
financial counselor if you have questions about the risks associated with
that FUND'S use of derivatives.
C. Varying usage of derivative transactions
Subject to the terms of the Prospectus and SAI for each FUND, that FUND'S
portfolio manager decides which types of derivative transactions to
employ, at which times and under what circumstances. For a description of
the limits, risk factors and circumstances under which derivative
transactions will be used by each FUND, refer to the SAI booklet.
D. Increased government scrutiny
Derivative transactions are coming under increased scrutiny by Congress
and industry regulators (such as the SEC and the Office of the
Comptroller of the Currency), and by self-regulatory agencies (such as
the NASD). Should legislation or regulatory initiatives be enacted
resulting in additional restrictive requirements for derivative
transactions, LINCOLN LIFE and the FUNDS reserve the right to make all
necessary changes in the CONTRACTS and the Registration Statements for
the FUNDS, respectively, to comply with those requirements.
2. CASH ENHANCEMENT TRANSACTIONS
Cash enhancement transactions also involve certain risks to the FUND. They are
discussed more fully in the SAI.
A. Lending of portfolio securities
Any FUND authorized to do so may make secured loans of its portfolio
securities in order to realize additional income. The loans are limited
to a maximum of a stipulated amount of the FUND'S total assets. As a
matter of policy, securities loans are made to broker/dealers under
agreements requiring that the loans be continuously secured by collateral
in cash or short-term debt obligations at least equal at all times to
102% of the value of the securities lent.
The borrower pays the FUND an amount equal to any dividends or interest
received on securities lent. The FUND retains all or a portion of the
interest received on securities lent. The FUND also retains all or a
portion of the interest received on investment of the cash collateral, or
receives a fee from the borrower.
With respect to the loaned securities, voting rights or rights to consent
pass to the borrower. However, the FUND retains the right to call in the
loans and have the loaned securities returned at any time with reasonable
notice.
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<PAGE>
This is important when issuers of the securities ask holders of those
securities--including the FUND--to vote or consent on matters which could
materially affect the holders' investment. The FUND may also call in the
loaned securities in order to sell them. None of the FUND'S portfolio
securities will be loaned to LINCOLN INVESTMENT, to any SUB-ADVISOR, or
to any of their respective affiliates. The FUND may pay reasonable
finder's fees to persons unaffiliated with it in connection with the
arrangement of the loans.
B. Repurchase (Repo) and reverse repurchase (Reverse Repo) transactions
1. REPOS. From time to time, the FUNDS may enter into Repo
transactions. In a typical Repo transaction, the FUND involved buys
U.S. Government or other money market securities from a financial
institution (such as a bank, broker, or savings and loan
association). At the same time, as part of the arrangement, the FUND
obtains an agreement from the seller to repurchase those same
securities from the FUND at a specified price on a fixed future
date.
The repurchase date is normally not more than seven days from the
date of purchase. Repurchase agreements maturing in more than seven
days will be considered illiquid and subject to the FUND'S
restriction on illiquid securities.
2. REVERSE REPOS. A FUND may also be authorized to enter into Reverse
Repo transactions. This simply means the FUND is on the reverse side
of a Repo transaction. That is, the FUND is the Seller of some of
its portfolio securities, subject to buying them back at a set price
and date.
Authorized FUNDS will engage in Reverse Repos for temporary purposes,
such as for obtaining cash to fund redemptions; or for the purpose of
increasing the income of the FUND by investing the cash proceeds at a
higher rate than the cost of the agreement. Entering into a reverse
repo transaction is considered to be the borrowing of money by the
FUND. FUNDS authorized to engage in Repos as buyers are not
necessarily authorized to do Reverse Repos.
RISKS OF OPTIONS AND FINANCIAL FUTURES TRADING
This discussion relates to all FUNDS except the International Fund and the Money
Market Fund. (Note: The Aggressive Growth, Capital Appreciation, Equity-Income
and Global Asset Allocation Funds provide additional disclosures concerning the
types and risks of the strategic portfolio transactions in which they may
engage.)
OPTIONS TRADING
The FUND may purchase or write (sell) options on financial instruments as a
means of achieving additional return or hedging the value of the FUND'S
portfolio. The FUND may not purchase or write put or covered call options in an
aggregate cost exceeding 30% of the value of its total assets. The FUND would
invest in options in standard contracts which may be quoted on NASDAQ, or on
national securities exchanges. Currently options are traded on numerous
securities and indices including, without limitation, the Standard and Poor's
100 Index (S&P 100), the Standard and Poor's 500 Index (S&P 500), and the NYSE
Beta Index.
Put and call options are generally short-term contracts with durations of nine
months or less. The INVESTMENT ADVISOR will generally write covered call options
when it anticipates declines in the market value of the portfolio securities and
the premiums received may offset to some extent the decline in the FUND'S net
asset value. On the other hand, writing put options may be a useful portfolio
investment strategy when the FUND has cash or other reserves and it intends to
purchase securities but expects prices to increase.
Generally, the risk to the FUND in writing options is that the INVESTMENT
ADVISOR'S assumption about the price trend of the underlying security may prove
inaccurate. If the FUND wrote a put, expecting the price of a security to
increase, and it decreases, or if the FUND wrote a call, expecting the price to
decrease but it increased, the FUND could suffer a loss if the premium received
in each case did not equal the difference between the exercise price and the
market price.
As with the writer of a call, a put writer generally hopes to realize premium
income. The risk position of the FUND as a put writer is similar to that of a
covered call writer which owns the underlying securities. Like the covered call
writer (who must bear the risk of the position in the underlying security), the
FUND as a put writer stands to incur a loss if and to the extent the price of
the underlying security falls below the exercise price plus premium.
A-8
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Principal factors affecting the market value of a put or call option include
supply and demand, interest rates, the current market price and price volatility
of the underlying security and the time remaining until the expiration date. In
addition, there is no assurance that the FUND will be able to effect a closing
transaction at a favorable price. If the FUND cannot enter into such a
transaction, it may be required to hold a security that it might otherwise have
sold, in which case it would continue to be at market risk on the security. If a
substantial number of covered options written by the FUND are exercised, the
FUND'S rate of portfolio turnover could exceed historic levels. This could
result in higher transaction costs, including brokerage commissions. The FUND
will pay brokerage commissions in connection with the writing and purchasing of
options to close out previously written options. Such brokerage commissions are
normally higher than those applicable to purchases and sales of portfolio
securities.
FUTURES CONTRACTS AND OPTIONS THEREON
The FUND may buy and sell financial futures contracts (futures contracts) and
related options thereon solely for hedging purposes. The FUND may sell a futures
contract or purchase a put option on that futures contract to protect the value
of the FUND'S portfolio in the event the INVESTMENT ADVISOR anticipates
declining security prices. Similarly, if security prices are expected to rise,
the FUND may purchase a futures contract or a call option thereon. (For certain
limited purposes, the FUND is also authorized to buy futures contracts on an
unleveraged basis and not as an anticipatory hedge.)
The FUND may purchase and sell financial futures contracts (futures contracts)
as a hedge against fluctuations in the value of securities which are held in the
FUND'S portfolio or which the FUND intends to purchase. The FUND will engage in
such transactions consistent with the FUND'S investment objective. Currently,
futures contracts are available on Treasury bills, notes, and bonds as well as
interest-rate and stock market indexes.
The FUND will not enter into any futures contract and options thereon if,
immediately thereafter, the aggregate initial margin for all existing futures
contracts and options thereon and for premiums paid for related options would
exceed 5% of the FUND'S total assets. The FUNDS will not purchase or sell
futures contracts or related options if immediately thereafter more than 1/3 of
its net assets would be hedged.
There are a number of risks associated with futures hedging. Changes in the
price of a futures contract generally parallel but do not necessarily equal
changes in the prices of the securities being hedged. The risk of imperfect
correlation increases as the composition of the FUND'S securities portfolio
diverges from the securities that are the subject of the futures contract.
Because the change in the price of the futures contract may be more or less than
the change in the prices of the underlying securities, even a correct forecast
of price changes may not result in a successful hedging transaction. Another
risk is that the INVESTMENT ADVISOR could be incorrect in its expectation as to
the direction or extent of various market trends or the time period within which
the trends are to take place.
The FUND intends to purchase and sell futures contracts only on exchanges where
there appears to be a market in such futures sufficiently active to accommodate
the volume of its trading activity. There can be no assurance that a liquid
market will always exist for any particular contract at any particular time.
Accordingly, there can be no assurance that it will always be possible to close
a futures position when such closing is desired and, in the event of adverse
price movements, the FUND would continue to be required to make daily cash
payments of variation margin. However, in the event futures contracts have been
sold to hedge portfolio securities, such securities will not be sold until the
offsetting futures contracts can be executed. Similarly, in the event futures
have been bought to hedge anticipated securities purchases, such purchases will
not be executed until the offsetting futures contracts can be sold.
Successful use of futures contracts by the FUND is also subject to the ability
of the INVESTMENT ADVISOR to predict correctly movements in the direction of
interest rates and other factors affecting markets for securities. For example,
if the FUND has hedged against the possibility of an increase in interest rates
that would adversely affect the price of securities in its portfolio and prices
of such securities increase instead, the FUND will lose part or all of the
benefit of the increased value of its securities because it will have offsetting
losses in its futures positions. In addition, in such situations, if the FUND
has insufficient cash to meet daily variation margin requirements, it may have
to sell securities to meet such requirements. Such sale of securities may be,
but will not necessarily be, at increased prices that reflect the rising market.
The FUND may have to sell securities at a time when it is disadvantageous to do
so. Where futures are purchased to hedge against a possible increase in the
price of securities before the FUND is able to invest its cash in an orderly
fashion, it is possible that the market may decline instead; if the FUND then
concludes not to invest in securities at that time because of concern as to
possible further market decline or for other reasons, the FUND will realize a
loss on the futures contract that is not offset by a reduction in the price of
the securities purchased.
The selling of futures contracts by the FUND and use of related transactions in
options on futures contracts are subject to position limits, which are affected
by the activities of the INVESTMENT ADVISOR.
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The hours of trading of futures contracts may not conform to the hours during
which the FUND may trade securities. To the extent that the futures markets
close before the securities markets, significant price and rate movements can
take place in the securities markets that cannot be reflected in the futures
markets.
The FUND'S successful use of futures contracts and options thereon depends upon
the ability of its INVESTMENT ADVISOR to predict movements in the securities
markets and other factors affecting markets for securities and upon the degree
of correlation between the prices of the futures contracts and the prices of the
securities being hedged. As a result, even a correct forecast of price changes
may not result in a successful hedging transaction. Although futures contracts
and options thereon may limit the FUND'S exposure to loss, they may also limit
the FUND'S potential for capital gains. For example, if the FUND has hedged
against the possibility of decrease in prices which would adversely affect the
price of securities in its portfolio and prices of such securities increase
instead, the FUND will lose part or all of the benefit of the increased value of
its securities because it will have offsetting losses in its futures positions.
Although the FUND will enter into futures contracts only where there appears to
be a liquid market, there can be no assurance that such liquidity will always
exist.
LENDING OF PORTFOLIO SECURITIES
The FUNDS may from time to time lend securities from their portfolios to
brokers, dealers and financial institutions and receive collateral from the
borrower, in the form of cash (which may be invested in short-term securities),
U.S. Government obligations or certificates of deposit. Such collateral will be
maintained at all times in an amount equal to at least 102% of the current
market value of the loaned securities, and will be in the actual or constructive
possession of the particular FUND during the term of the loan. The FUND will
maintain the incidents of ownership of the loaned securities and will continue
to be entitled to the interest or dividends payable on the loaned securities. In
addition, the FUND will receive interest on the amount of the loan. The loans
will be terminable by the FUND at any time and will not be made to any
affiliates of the FUND or the ADVISOR. The FUND may pay reasonable finder's fees
to persons unaffiliated with it in connection with the arrangement of the loans.
As with any extensions of credit, there are risks of delay in recovery and, in
some cases, even loss of rights in the collateral or the loaned securities
should the borrower of securities fail financially. However, loans of portfolio
securities will be made to firms deemed by the ADVISOR to be creditworthy.
RISKS OF REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
The FUNDS may make short-term investments in repurchase agreements. The
difference between the purchase price to the FUND and the resale price to the
seller represents the interest earned by the FUND which is unrelated to the
coupon rate or maturity of the purchased security. If the seller defaults, the
FUND may incur a loss if the value of the collateral securing the repurchase
agreement declines, or the FUND may incur disposition costs in connection with
liquidating the collateral. If bankruptcy proceedings are commenced with respect
to the seller, realization upon the collateral by the FUND may be delayed or
limited and a loss may be incurred if the collateral securing the repurchase
agreement declines in value during the bankruptcy proceedings. The Board of
Directors of the FUNDS or its delegate will evaluate the creditworthiness of all
entities, including banks and broker-dealers, with which they propose to enter
into repurchase agreements. These transactions will be fully collateralized; and
the collateral for each transaction will be in the actual or constructive
possession of the particular FUND during the terms of the transaction, as
provided in the agreement.
Similarly, the FUND will enter into reverse repurchase agreements only with
parties that the ADVISOR or SUB-ADVISOR deems creditworthy. While a reverse
repurchase agreement is outstanding, the FUNDS will maintain cash and
appropriate liquid assets in a segregated custodial account to cover its
obligation under the agreement.
FOREIGN INVESTMENTS
There are certain risks involved in investing in foreign securities, including
those resulting from fluctuations in currency exchange rates; devaluation of
currencies; political or economic developments including the possible imposition
of currency exchange blockages, bars preventing the removal of assets, or other
foreign governmental laws or restrictions; reduced availability of public
information concerning issuers; and the fact that foreign companies are not
generally subject to uniform accounting, auditing, and financial reporting
standards or to other regulatory practices and requirements comparable to those
applicable to domestic companies. With respect to certain foreign countries,
there is also the possibility of expropriation, nationalization, confiscatory
taxation, and limitations on the use or removal of cash or other assets of a
FUND, including the withholding of
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interest payments or dividends. These risks may be particularly great in
so-called developing or undeveloped countries, sometimes referred to as Emerging
Markets.
In addition, while the volume of transactions effected on foreign stock
exchanges has increased in recent years, in most cases it remains appreciably
below that of the NYSE. Accordingly, a FUND'S foreign investments may be less
liquid and their prices may be more volatile than comparable investments in
securities of U.S. companies. Moreover, the settlement periods for foreign
securities, which are often longer than those for securities of U.S. issuers,
may affect portfolio liquidity. The FUNDS will incur costs in converting foreign
currencies into U.S. dollars. Custody charges are generally higher for foreign
securities. In buying and selling securities on foreign exchanges, a FUND
normally pays fixed commissions that are generally higher than the negotiated
commissions charged in the United States. In addition, there is generally less
governmental supervision and regulation of securities exchanges, brokers and
issuers in foreign countries than in the United States. There may be difficulty
in enforcing legal rights outside the United States. For example, in the event
of default on any foreign debt obligations, it may be more difficult or
impossible for the FUND to obtain or to enforce a judgment against the issuers
of these securities. The ADVISOR or SUB-ADVISOR will take all these factors into
consideration in managing a FUND'S foreign investments.
The share price of a FUND that invests in foreign securities will reflect the
movements of both the prices of the portfolio securities and the currencies in
which those securities are denominated. Depending on the extent of a FUND'S
investments abroad, changes in a FUND'S share price may have a low correlation
with movements in the U.S. markets. Because most of the foreign securities in
which the FUND invests will be denominated in foreign currencies, or otherwise
will have values that depend on the performance of foreign currencies relative
to the U.S. dollar, the relative strength of the U.S. dollar may be an important
factor in the performance of the FUND.
FOREIGN CURRENCIES
When an ADVISOR or SUB-ADVISOR believes that a currency in which a portfolio
security or securities is denominated or exposed may suffer a decline against
the U.S. dollar, it may hedge that risk by entering into a forward contract to
sell an amount of foreign currency approximating the value of some or all of the
portfolio securities denominated in or exposed to that foreign currency.
Because foreign securities generally are denominated and pay dividends or
interest in foreign currencies, and a FUND may hold various foreign currencies,
the value of the net assets of that FUND as measured in U.S. dollars will be
affected favorably or unfavorably by changes in exchange rates. Generally,
currency exchange transactions will be conducted on a spot (I.E., cash) basis at
the spot rate prevailing in the currency exchange market. The cost of currency
exchange transactions will generally be the difference between the bid and offer
spot rate of the currency being purchased or sold. Some foreign currency values
may be volatile, and there is the possibility of government controls on currency
exchange or governmental intervention in currency markets which could adversely
affect the FUND.
Investors should be aware that exchange rate movements can be significant and
can endure for long periods of time. In order to protect against uncertainty in
the level of future foreign currency exchange rates, a FUND'S ADVISOR or
SUB-ADVISOR may attempt to manage exchange rate risk through active currency
management, including the use of certain foreign currency hedging transactions.
For example, it may hedge some or all of its investments denominated in a
foreign currency against a decline in the value of that currency relative to the
U.S. dollar by entering into contracts to exchange that currency for U.S.
dollars (not exceeding the value of the FUND'S assets denominated in or exposed
to that currency), or by participating in options or futures contracts with
respect to that currency. If the ADVISOR or SUB-ADVISOR believes that a
particular currency may decline relative to the U.S. dollar, the FUND may also
enter into contracts to sell that currency (up to the value of the FUND'S assets
denominated in or exposed to that currency) in exchange for another currency
that the ADVISOR or SUB-ADVISOR expects to remain stable or to appreciate
relative to the U.S. dollar. This technique is known as currency cross-hedging.
Refer to the Prospectus for each FUND to determine which FUNDS may engage in
these transactions.
These strategies are intended to minimize the effect of currency appreciation as
well as depreciation, but do not protect against a decline in the underlying
value of the hedged security. In addition, these strategies may reduce or
eliminate the opportunity to profit from increases in the value of the original
currency and may adversely impact the FUND'S performance if the ADVISOR or
SUB-ADVISOR'S projection of future exchange rates is inaccurate. See Strategic
portfolio transactions.
[Additionally, several European countries are participating in the European
Economic and Monetary Union, which established a common European currency for
participating countries. This currency is commonly known as the "Euro." Each
participating country replaced its existing currency with the Euro on January 1,
1999. Additional European countries may elect to participate after that date.
FUNDS investing in securities of participating countries could be adversely
affected if
A-11
<PAGE>
the computer systems used by their major service providers are not properly
prepared to handle both the implementation of this single currency and the
prospect of the adoption of the Euro by additional countries in the future.
These FUNDS are taking steps to obtain satisfactory assurances that their major
service providers are, in turn, taking steps reasonably designed to address
these matters with respect to the computer systems they use. There can be no
assurances that these steps will be sufficient to avoid any adverse impact on
the business of any FUND.] [to be updated]
VALUATION OF PORTFOLIO SECURITIES
SHORT-TERM INVESTMENTS. For FUNDS (other than the Money Market Fund) that own
short-term investments which mature in less than 60 days, these instruments are
valued at amortized cost. Such securities acquired with a remaining maturity of
61 days or more are valued at their fair value until the sixty-first day prior
to maturity; thereafter, their cost for valuation purposes is deemed to be their
fair value on such sixty-first day.
OPTIONS TRADING. For those FUNDS engaging in options trading, FUND investments
underlying call options will be valued as described previously. Options are
valued at the last sale price or, if there has been no sale that day, at the
mean of the last bid and asked price on the principal exchange where the option
is traded, as of the close of trading on the NYSE. The FUND'S net asset value
will be increased or decreased by the difference between the premiums received
on writing options and the cost of liquidating those positions measured by the
closing price of those options on the exchange where traded.
FUTURES CONTRACTS AND OPTIONS THEREON. For those FUNDS buying and selling
futures contracts and related options thereon, the futures contracts and options
are valued at their daily settlement price.
FOREIGN SECURITIES. For FUNDS investing in foreign securities, the value of a
foreign portfolio security held by a FUND is determined based upon its closing
price or upon the mean of the closing bid and asked prices on the foreign
exchange or market on which it is traded and in the currency of that market, as
of the close of the appropriate exchange. As of the close of business on the
NYSE, that FUND'S portfolio securities which are quoted in foreign currencies
are converted into their U.S. dollar equivalents at the prevailing market rates,
as computed by the custodian of the FUND'S assets.
However, trading on foreign exchanges may take place on dates or at times of day
when the NYSE is not open; conversely, overseas trading may not take place on
dates or at times of day when the NYSE is open. Any of these circumstances could
affect the net asset value of FUND shares on days when the investor has no
access to the FUND. There are more detailed explanations of these circumstances
in the SAI for the various FUNDS. See the Preface to this Prospectus booklet for
information about how to obtain a copy of the SAI booklet for the 11 FUNDS.
CUSTODIAN
All securities, cash and other similar assets of the Bond, Growth and Income,
Managed, Money Market, Social Awareness and Special Opportunities FUNDS are
currently held in custody by The Chase Manhattan Bank, N.A., 4 Chase MetroTech
Center, Brooklyn, NY 11245. Chase Manhattan agreed to act as custodian for each
FUND pursuant to a Custodian Agreement dated March 30, 1998.
All securities, cash and other similar assets of the Aggressive Growth, Capital
Appreciation, Equity-Income, Global Asset Allocation and International Funds are
held in custody by State Street Bank and Trust Co., 225 Franklin Street, Boston,
Massachusetts 02110. State Street agreed to act as custodian for these FUNDS
pursuant to Custodian Contracts effective July 21, 1987 for the Global Asset
Allocation FUND, April 29, 1991 for the International FUND, and December 6, 1993
for the other three FUNDS.
Under these Agreements, the respective custodians shall (1) receive and disburse
money; (2) receive and hold securities; (3) transfer, exchange, or deliver
securities; (4) present for payment coupons and other income items, collect
interest and cash dividends received, hold stock dividends, etc.; (5) cause
escrow and deposit receipts to be executed; (6) register securities; and (7)
deliver to the FUNDS proxies, proxy statements, etc.
INDEPENDENT AUDITORS
Each FUND'S Board of Directors has engaged Ernst & Young LLP, Two Commerce
Square, Suite 4000, 2001 Market Street, Philadelphia, PA 19103, to be the
independent auditors for the FUND. In addition to the audit of the 1998
financial statements of the FUNDS, other services provided include review and
consultation connected with filings of annual reports and registration
statements with the Securities and Exchange Commission (SEC); consultation on
financial accounting and reporting matters; and meetings with the Audit
Committee.
FINANCIAL STATEMENTS
The audited financial statements and the report of Ernst & Young LLP,
Independent Auditors, for the FUNDS
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<PAGE>
are incorporated by reference to the FUNDS' 1998 Annual Report. We will provide
a copy of the Annual Report on request and without charge. Either write Lincoln
National Life Insurance Co., P.O. Box 2340, Fort Wayne, Indiana 46801 or call:
1-800-4LINCOLN (452-6265).
BOND AND COMMERCIAL PAPER RATINGS
Certain of the FUNDS' investment policies and restrictions include references to
bond and commercial paper ratings. The following is a discussion of the rating
categories of Moody's Investors Service, Inc. and Standard & Poor's Corp.
MOODY'S INVESTORS SERVICE, INC.
Aaa -- Bonds which are rated Aaa are judged to be of the best quality and carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa -- Bonds which are rated Baa are considered as medium grade obligations,
I.E., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
STANDARD & POOR'S CORP.
AAA -- This is the highest rating assigned by Standard & Poor's Corp. to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA -- Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
A -- Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas these bonds normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest than for
bonds in the A category and higher.
BB-B-CCC-CC -- Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and C the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
MOODY'S INVESTORS SERVICE, INC.
Moody's Commercial Paper ratings are opinions of the ability of issuers to repay
punctually promissory obligations not having an original maturity in excess of
nine months. Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Prime 1 -- Highest Quality;
Prime 2 -- Higher Quality;
Prime 3 -- High Quality.
A-13
<PAGE>
(The FUND will not invest in commercial paper rated Prime 3).
STANDARD & POOR'S CORP.
A Standard & Poor's Corp. commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. The FUND will invest in commercial paper rated in the A Categories, as
follows:
A -- Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
the designation 1, 2, and 3 to indicate the relative degree of safety. (The FUND
will not invest in commercial paper rated A-3).
A -- 1 this designation indicates that the degree of safety regarding timely
payment is very strong.
A -- 2 Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not overwhelming as for issues
designated A-1.
U.S. GOVERNMENT OBLIGATIONS
Securities issued or guaranteed as to principal and interest by the U.S.
Government include a variety of Treasury securities, which differ only in their
interest rates, maturities and times of issuance. Treasury bills have a maturity
of one year or less. Treasury notes have maturities of two to ten years and
Treasury bonds generally have a maturity of greater than ten years.
Various agencies of the U.S. Government issue obligations. Some of these
securities are supported by the full faith and credit of the U.S. Treasury (for
example those issued by Export-Import Bank of the United States, Farmers Home
Administration, Federal Housing Administration, Government National Mortgage
Association, Maritime Administration, Small Business Administration and The
Tennessee Valley Authority).
Obligations of instrumentalities of the U.S. Government are supported by the
right of the issuer to borrow from the Treasury (for example, those issued by
Federal Farm Credit Banks, Federal Home Loan Bank, Federal Home Loan Mortgage
Corp., Federal Intermediate Credit Banks, Federal Land Bank and the U.S. Postal
Service). Obligations supported by the credit of the instrumentality include
securities issued by government-sponsored corporations whose stock is publicly
held (for example, the Federal National Mortgage Association, and the Student
Loan Marketing Association). There is no guarantee that the government will
support these types of securities, and therefore they may involve more risk than
other government obligations.
TAXES
Each FUND intends to qualify and has elected to be taxed as a regulated
investment company under certain provisions of the Internal Revenue Code of
1986, as amended (the Code). If a FUND qualifies as a regulated investment
company and complies with the provisions of the Code relieving regulated
investment companies which distribute substantially all of their net income
(both net ordinary income and net capital gain) from federal income tax, it will
be relieved from such tax on the part of its net ordinary income and net
realized capital gain which it distributes to its shareholders. To qualify for
treatment as a regulated investment company, each FUND must, among other things,
derive in each taxable year at least 90% of its gross income from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stock or securities or foreign currencies (subject to the
authority of the Secretary of the Treasury to exclude foreign currency gains
which are not directly related to the FUND'S principal business of investing in
stock or securities or options and futures with respect to such stock or
securities), or other income (including but not limited to gains from options,
futures, or forward contracts) derived with respect to its investing in such
stocks, securities, or currencies.
The federal tax laws impose a 4% nondeductible excise tax on each regulated
investment company with respect to an amount, if any, by which such company does
not meet distribution requirements specified in such tax laws, unless certain
exceptions apply. Each FUND intends to comply with such distribution
requirements or qualify under one or more exceptions, and thus does not expect
to incur the 4% nondeductible excise tax.
Since the sole shareholder of each FUND will be LINCOLN LIFE, no discussion is
stated herein as to the federal income tax consequences at the shareholder
level.
The discussion of federal income tax considerations in the Prospectus, in
conjunction with the foregoing, is a general and abbreviated summary of the
applicable provisions of the Code and Treasury Regulations currently in effect
as interpreted by the Courts and the Internal Revenue Service (IRS). These
interpretations can be changed at any time. The above discussion covers only
federal tax considerations with respect to the FUND. State and local taxes vary.
DERIVATIVE TRANSACTIONS-DEFINITIONS
The SAI for each FUND and this uniform APPENDIX discuss the type of derivative
transactions in which the FUNDS may engage and the risks typically associated
with
A-14
<PAGE>
many derivative transactions. Here are some definitions for the derivatives
listed in the APPENDIX:
OPTION. A contract which gives the FUND the right, but not the obligation, to
buy or sell specified securities at a fixed price before or at a designated
future date. If the contract allows the FUND to buy securities, it is a call
option; if to sell, it is a put option. It is common practice in options trading
to terminate an outstanding option contract by entering into an offsetting
transaction known as a closing transaction; as a result of which the FUND would
either pay out or receive a cash settlement. This is discussed below.
CURRENCY OPTION. Discussed later.
FIXED INCOME OPTION. One based on a fixed-income security, such as a corporate
or government bond.
INDEX OPTION. One based on the value of an index which measures the fluctuating
value of a basket of pre-selected securities.
STOCK (EQUITY) OPTION. One based on the shares of stock of a particular company.
OPTION ON A FUTURES CONTRACT. Discussed later.
SWAP. A financial transaction in which the FUND and another party agree to
exchange streams of payments at periodic intervals under a predetermined set of
occurrences related to the price level, performance or value of one or more
underlying securities, and pegged to a reference amount known as the notional
amount. A swap is normally used to change the market risk associated with a loan
or bond borrowing from one interest rate base (fixed term or floating rate) or
currency of one denomination to another.
EQUITY SWAP. One which allows the FUND to exchange the rate of return (or some
portion of the rate) on its portfolio stocks (an individual share, a basket or
index) for the rate of return on another equity or non-equity investment.
INTEREST RATE SWAP. One in which the FUND and another party exchange different
types of interest payment streams, pegged to an underlying notional principal
amount. The three main types of interest rate swaps are coupon swaps (fixed rate
to floating rate in the same currency); basis swaps (one floating rate index to
another floating rate index in the same currency); and cross-currency interest
rate swaps (fixed rate in one currency to floating rate in another).
RELATED TRANSACTIONS TO INTEREST RATE SWAPS:
a. Cap. A contract for which the buyer pays a fee, or premium, to obtain
protection against a rise in a particular interest rate above a certain
level. For example, an interest rate cap may cover a specified principal
amount of a loan over a designated time period, such as a calendar quarter.
If the covered interest rate rises above the rate ceiling, the seller of the
rate cap pays the purchaser an amount of money equal to the average rate
differential times the principal amount times one-quarter.
b. Floor. A contract in which the seller agrees to pay to the purchaser, in
return for the payment of a premium, the difference between current interest
rates and an agreed (strike) rate times the notional amount, should interest
rates fall below the agreed level (the floor). A floor contract has the
effect of a string of interest rate guarantees.
c. Collar. An arrangement to simultaneously purchase a cap and sell a floor, in
order to maintain interest rates within a defined range. The premium income
from the sale of the floor reduces or offsets the cost of buying the cap.
d. Corridor. An agreement to buy a cap at one interest rate and sell a cap at a
higher rate.
SWAPTION. An option to enter into, extend, or cancel a swap.
FUTURES CONTRACT. A contract which commits the FUND to buy or sell a specified
amount of a financial instrument at a fixed price on a fixed date in the future.
Futures contracts are normally traded on an exchange and their terms are
standardized, which makes it easier to buy and sell them.
INTEREST RATE FUTURES (AND OPTIONS ON THEM). Futures contracts pegged to U.S.
and foreign fixed-income securities, debt indices and reference rates.
STOCK INDEX FUTURES. Futures contracts based on an index of pre-selected stocks,
with prices based on a composite of the changes to the prices of the individual
securities in the index (E.G., S&P 500).
OPTION ON A FUTURES CONTRACT. An option taken on a futures position.
FORWARD CONTRACT. An over-the-counter, individually-tailored futures contract.
FORWARD RATE AGREEMENT (FRA). A contract in which the FUND and another party
agree on the interest rate to be paid on a notional deposit of specified
maturity at a specific future time. Normally, no exchange of principal is
involved; the difference between the contracted rate and the prevailing rate is
settled in cash.
CURRENCY CONTRACT. A contract entered into for the purpose of reducing or
eliminating an anticipated rise or drop in currency exchange rates over time.
CURRENCY FUTURES. Futures contracts on foreign currencies. Used to hedge the
purchase or sale of foreign securities.
CURRENCY OPTION. An option taken on foreign currency.
A-15
<PAGE>
CURRENCY SWAP. A swap involving the exchange of cash flows and principal in one
currency for those in another, with an agreement to reverse the principal swap
at a future date.
CROSS-CURRENCY INTEREST RATE SWAP. A swap involving the exchange of streams of
interest rate payments (but not necessarily principal payments) in different
currencies and often on different interest bases (E.G., fixed Deutsche Mark
against floating dollar, but also fixed Deutsche Mark against fixed dollar).
FORWARD CURRENCY CONTRACT. A contract to lock in a currency exchange rate at a
future date, to eliminate risk of currency fluctuation when the time comes to
convert from one currency to another.
A-16
<PAGE>
THIS PAGE WAS INTENTIONALLY LEFT BLANK.
A-17
<PAGE>
PART C - OTHER INFORMATION
Item 22. Financial Statements
(1) Part A.
------
The financial highlights of Lincoln National Special Opportunities
Fund, Inc. (the Fund) for the years ended December 31, 1998, 1997,
1996, 1995, 1994, 1993, 1992, 1991, 1990, is incorporated by reference
to Pages of the Fund's 1998 Annual Report.
Part B.
------
The following financial statements of the Fund are incorporated by
reference to Pages of the Fund's 1998 Annual Report:
- Statement of Net Assets -- December 31, 1998
- Statement of Operations -- Year Ended December 31, 1998
- Statements of Changes in Net Assets -- Years Ended December 31, 1998
and 1997
- Notes to Financial Statements -- December 31, 1998
- Report of Independent Auditors, Ernst & Young, LLP
In total, only pages of the Fund's 1998 Annual Report are incorporated by
reference into this Registration Statement. No other pages of that Report
are incorporated by reference.
(2) Schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required
under the related instructions, are inapplicable, or the required
information is included in the financial statements, and therefore have
been omitted.
Item 23. Exhibits:
(a) - Articles of Incorporation*
(b) - By-Laws*
(c) - Certificate*
(d)1. - Advisory Agreement between Lincoln Investment Management Inc.
and Lincoln National Special Opportunities Fund, Inc.*
(d)2. - Sub-Advisory Agreement between Lincoln Investment
Management Inc. and Modern Portfolio Theory Associates
dated April 30, 1988.*
(e)1. NA
(e)2. - Specimen Agents Contract (Filed with Post-Effective
Amendment No. 17 to this Registration Statement)
(f) - N/A
(g) - Custody Agreement*
(h)1. - Agreement to Purchase Shares*
(h)2. - Trade Name Agreement*
(h)3. - Services Agreement between Delaware Management Holdings,
Inc., Delaware Service Company, Inc. and Lincoln National
Life Insurance Company is incorporated herein by reference
to the Registration Statement for Lincoln National Life
Insurance Company on Form S-6 (333-40745) filed on
November 21, 1997.
(i) - Opinion of Counsel*
(j) - Consent of Ernst & Young LLP, Independent Auditors to be
filed by Amendment
(k) - N/A
(l) - Investment Letter*
(m) - N/A
(n) - Financial Data Schedule to be filed by Amendment
(o) - N/A
(p)1. - Power of Attorney, Nancy L. Frisby*
(p)2. - Power of Attorney, Barbara S. Kowalczyk*
(p)3. - Power of Attorney, John B. Borsch, Jr.*
(q) - Organization Chart to be filed by the Amendment
(r) - Memorandum Concerning Books and Records to be filed by
Amendment
* Filed with Post-Effective Amendment No. 18 to this Registration Statement
<PAGE>
Item 24. Persons Controlled by or Under Common Control with Registrant
See "Management of the Fund", "Purchase of Securities Being Offered", and
"Description of Shares" in the Prospectus forming Part A of this Registration
Statement and "Investment Adviser..." in the Statement of Additional Information
forming Part B of this Registration Statement. As of the date of this
Post-Effective Amendment, The Lincoln National Life Insurance Company (Lincoln
Life), for its Variable Annuity Account C and Variable Life Accounts D and K, is
the sole shareholder in the Fund.
No persons are controlled by the Registrant. A diagram of all persons under
common control with the Registrant is filed as Exhibit 15(a) to the Form N-4
Registrant Statement filed by Lincoln National Variable Annuity Account C (File
No. 33-25990), and is incorporated by reference into this Registration
Statement.
Item 25. Indemnification
Reference is made to Article IX of Registrant's Bylaws (filed as Exhibit
(b) to this Registration Statement), Section 8 of the Agreement to Purchase
Shares between Registrant and Lincoln National Pension Insurance Company
(filed as Exhibit (h)1 to the Registration Statement, File No. 2-74479), and
Section 2-418 of the Maryland General Corporation Law.
Item 26. Business and Other Connections of Investment Adviser
Information pertaining to any business and other connections of
Registrant's investment adviser, Lincoln Investment, is hereby incorporated by
reference from the section captioned "Management of the Fund" in the Prospectus
forming Part A of this Registration Statement, the section captioned "Investment
Adviser and Sub-Adviser" in the Statement of Additional Information forming Part
B of this Registration Statement, and Item 7 of Part II of Lincoln Investment's
Form ADV filed separately with the Commission (File No. 801-5098). Information
pertaining to any business and other connections of Registrant's sub-investment
adviser, Vantage Global Advisors, Inc. ("Vantage") is incorporated by reference
from the section of the Prospectus captioned "Management of the Fund," the
section of the Statement of Additional Information captioned "Investment Adviser
and Sub-Adviser," and Item 7 of Part II of Vantage's Form ADV filed separately
with the Commission (File No. 801-15202).
The other businesses, professions, vocations, and employment of a
substantial nature, during the past two years, of the directors and officers of
Lincoln Investment and Vantage are hereby incorporated by reference,
respectively, from Schedules A and D of Lincoln Investment's Form ADV and from
Schedules A and D of Vantage's Form ADV.
As of January 13, 1999, the officers and/or directors of the
Investment Adviser held the following positions:
(a)
<TABLE>
<CAPTION>
POSITION OTHER SUBSTANTIAL BUSINESS
INVESTMENT PROFESSION, VOCATION OR
NAME ADVISER EMPLOYMENT; ADDRESS
- ------------------------ --------------------- ---------------------------------------------------------
<S> <C> <C>
JoAnn Becker Senior Vice President 200 East Berry Street,
Fort Wayne, Indiana 46802
David A. Berry Vice President Vice President, Lincoln National Income Fund, Inc. and
Lincoln National Convertible Securities Fund, Inc.,
Second Vice President, Lincoln Life & Annuity Company of
New York, 200 East Berry Street, Fort Wayne, Indiana
46802
Steven R. Brody Senior Vice President President and Director, Lincoln National Realty
and Director Corporation; Vice President, The Lincoln National Life
Insurance Company, and Lincoln Advisor Funds, Inc., 200
East Berry Street, Fort Wayne, Indiana 46802
David C. Fischer Vice President Vice President, Lincoln National Income Fund, Inc.,
200 East Berry Street
Fort Wayne, Indiana 46802
J. Michael Keefer Vice President 200 East Berry Street,
General Counsel and Fort Wayne, Indiana 46802
Assistant Secretary,
And Director
Mark Laurent Second Vice President 200 East Berry Street, Fort Wayne, Indiana 46802
Thomas M. McMeekin President and President and Director, Lincoln National Convertible
Director Securities Fund, Inc., Lincoln National Income Fund,
Inc., President, Chief Executive Officer and Director,
Lincoln National Mezzanine Corporation; Executive Vice
President and Chief Investment Officer, Lincoln National
Corporation; Director, Delaware Management Holdings,
Inc., Lincoln National (China) Inc., Lincoln National
(India) Inc., Lincoln National Investment Companies,
Inc., Lincoln National Realty Corporation, Lynch & Mayer,
Inc., Vantage Global Advisors, Lincoln National Life
Insurance Company,
200 East Berry Street,
Fort Wayne, Indiana 46802
Jil Schoeff-Lindholm Portfolio Manager 200 East Berry Street,
Fort Wayne, Indiana 46802
Cedrick Walta Short Term Investment 200 East Berry Street,
Manager Fort Wayne, Indiana 46802
Denny Westrick Second Vice President 200 East Berry Street,
Fort Wayne, Indiana 46802
Jay Yentis Second Vice President 200 East Berry Street,
Fort Wayne, Indiana 46802
</TABLE>
<PAGE>
(b) The Sub-Adviser.
As of March 12, 1998, the officers and/or directors of the sub-adviser
held the following positions:
Vantage Investment Advisors
630 Fifth Avenue
New York, NY 10111
OFFICERS
--------
T. Scott Wittman President
Perry D. Keck Senior Vice President
Enrique Chang Senior Vice President
Kevin S. Lee Vice President
Florence P. Leong Vice President
Evelyn M. Poy Vice President
Mark C. Viani Vice President
Pamela L. Friedman Assistant Vice President
Chris P. Harvey Assistant Vice President
Christopher J. Rowe Assistant Vice President
BOARD OF DIRECTORS
------------------
Jeffery J. Nick
Bruce D. Barton
Dennis A. Blume
H. Thomas McMeekin
T. Scott Wittman
Item 27. Principal Underwriters
Not applicable.
Item 28. Location of Accounts and Records
See Exhibit 23(r)
Item 29. Management Services
Not applicable.
Item 30. Undertakings
(a) - (c) The undersigned Registrant hereby undertakes to file a
post-effective amendment, using financial statements which need
not be certified, within four to six months from the effective
date of Registrant's 1933 Act Registration Statement.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors officers
and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred
or paid by a director, officer, or controlling person of the
registrant in the successful defense of any such action, suit
or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final
adjudication of such issue.
(d) The registrant undertakes to provide, without charge, a copy of
the Fund's most recent Annual Report to any recipient of its
prospectus who requests it.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Amendment
to the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Fort Wayne, and State of Indiana, on
the 28th day of January 1999.
LINCOLN NATIONAL
SPECIAL OPPORTUNITIES FUND, INC.
By /s/ Kelly D. Clevenger
------------------------------
Kelly D. Clevenger
President
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
the Registration Statement has been signed below on January 28, 1999, by the
following persons in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ----------
<S> <C> <C>
/s/ Kelly D. Clevenger Chairman of the Board,
- ------------------------- President and Director January 28, 1999
Kelly D. Clevenger (Principal Executive
Officer)
* Director
- ------------------------- January __, 1999
John B. Borsch, Jr.
*** Director
- ------------------------- January 28, 1999
Barbara S. Kowalczyk
** Director
- ------------------------- January 28, 1999
Nancy L. Frisby
Director
- ------------------------- January __, 1999
Kenneth G. Stella
/s/ Eric Jones Chief Accounting Officer
- ------------------------- (Principal Accounting January 28, 1999
Eric Jones Officer)
/s/ Janet C. Chrzan Vice President and
- ------------------------- Treasurer (Principal Financial January 28, 1999
Janet C. Chrzan Officer)
*By /s/ John L. Steinkamp pursuant to a Power of Attorney filed with
----------------------, Post-Effective Amendment No. 2 to this
John L. Steinkamp Registration Statement.
**By /s/ Jeremy Sachs pursuant to a Power of Attorney filed with
-------------------, Post-Effective Amendment No. 13 to this
Jeremy Sachs Registration Statement.
***By pursuant to a Power of Attorney filed with
------------------, Post-Effective Amendment No. 14 to this
Jeremy Sachs Registration Statement.
</TABLE>
