<PAGE>
PROSPECTUS AND APPENDIX
This document is incorporated by reference to Post-Effective Amendment No. 10,
Registration Number 33-13530 filed on Form N-1A on April 30, 1995.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION (SAI)
<PAGE>
TABLE OF CONTENTS
Page
Investment Objective and Policies of the Fund 2
Investment Restrictions 7
Portfolio Transactions and Brokerage 8
Determination of Net Asset Value 9
Appendix
Investment Advisor and Sub-Advisor A-1
Directors and Officers A-2
Investment Policies and Techniques (continued) A-2
Options, Futures, Securities Lending, Repurchase and
Reverse Repurchase Agreements
Custodian A-6
Independent Auditors A-7
Financial Statements A-7
Bond Ratings A-7
Commercial Paper Ratings A-8
U.S. Government Obligations A-8
Taxes A-8
State Requirements A-9
Derivative Transactions - Definitions A-9
____________
INVESTMENT OBJECTIVE AND POLICIES OF THE FUND
The Prospectus describes the Fund's investment objective and its general
investment policies. This Statement of Additional information includes
additional information about engaging in options and futures trading and the
various investment restrictions of the Fund.
The investment policies described in the Prospectus and in this Statement of
Additional Information are not fundamental, and the Directors may change such
policies without stockholder approval.
DEPOSITARY RECEIPTS
As discussed in the Prospectus, the Fund may invest in American Depositary
Receipts ("ADRs") and European Depositary Receipts ("EDRs"). Generally, ADRs in
registered form are U.S. dollar denominated securities designed for use in the
U.S. securities markets, which represent and may be converted into the
underlying foreign security. EDRs are typically issued in bearer form and are
designed for use in the European securities markets. No more than 5% of the
Fund's assets will be invested in unsponsored ADRs or EDRs. Issuers of the stock
of such unsponsored ADRs and EDRs are not obligated to disclose material
information in the United States and, therefore, there may not be a correlation
between such information and the market value of such ADRs.
OPTIONS AND FUTURES PORTFOLIO STRATEGIES
The Fund may seek to increase its current return by writing covered call or put
option with respect to some or all of the debt or equity securities of issuers
in the United States ("U.S. Securities") held in
<PAGE>
TABLE OF CONTENTS
Page
Investment Objective and Policies of the Fund
Investment Restrictions
Portfolio Transactions and Brokerage
Determination of Net Asset Value
Appendix
Investment Advisor and Sub-Advisor
Directors and Officers
Investment Policies and Techniques (continued)
Custodian
Independent Auditors
Financial Statements
Bond Ratings
Commercial Paper Ratings
U.S. Government Obligations
Taxes
State Requirements
Derivative Transactions - Definitions
____________
INVESTMENT OBJECTIVE AND POLICIES OF THE FUND
The Prospectus describes the Fund's investment objective and its general
investment policies. This Statement of Additional information includes
additional information about engaging in options and futures trading and the
various investment restrictions of the Fund.
The investment policies described in the Prospectus and in this Statement of
Additional Information are not fundamental, and the Directors may change such
policies without stockholder approval.
DEPOSITARY RECEIPTS
As discussed in the Prospectus, the Fund may invest in American Depositary
Receipts ("ADRs") and European Depositary Receipts ("EDRs"). Generally, ADRs in
registered form are U.S. dollar denominated securities designed for use in the
U.S. securities markets, which represent and may be converted into the
underlying foreign security. EDRs are typically issued in bearer form and are
designed for use in the European securities markets. No more than 5% of the
Fund's assets will be invested in unsponsored ADRs or EDRs. Issuers of the stock
of such unsponsored ADRs and EDRs are not obligated to disclose material
information in the United States and, therefore, there may not be a correlation
between such information and the market value of such ADRs.
OPTIONS AND FUTURES PORTFOLIO STRATEGIES
The Fund may seek to increase its current return by writing covered call or put
option with respect to some or all of the debt or equity securities of issuers
in the United States ("U.S. Securities") held in
<PAGE>
its portfolio. In addition, through writing of options and purchase of put
option on U.S. Securities and the purchase and sale of futures contracts and
related options with respect to securities issued or guaranteed by the U.S.
government or its agencies or instrumentalities, and with respect to stock
indices, foreign fixed income securities and foreign currencies, the Fund may at
times seek to reduce fluctuations in net asset value by hedging against a
declines in the value of U.S. Securities or other securities owned by the Fund
or an increase in the price of U.S. Securities intended to reduce fluctuations
in the Fund's net asset value, the Fund nonetheless anticipates that its net
asset value will fluctuate to some degree. Expenses and any losses resulting
from such hedging strategies will tend to reduce the Fund's current return.
The Fund's ability to engage in options and futures strategies will depend on
the availability of liquid markets in such instruments. It is impossible to
predict the amount of trading interest that may exist in various types of
options or futures contracts. Therefore no assurance can be given that the Fund
will be able to utilize these instruments effectively for the purposes stated
above. Furthermore, the Fund's ability to engage in options and futures
contracts transactions may be limited by tax considerations. Although the Fund
will only engage in options and futures contracts transactions for limited
purposes, they involve certain risks which are described below under "Risk
factors in options and futures transactions."
In connection with transactions in futures contracts, including foreign currency
futures contracts and related options, the Fund will be required to deposit as
"initial margin" an amount of cash and short-term U.S. government securities of
up to 5% of the contract amount. Thereafter, subsequent payments are made to and
from the broker to reflect changes in the value of the futures contracts. The
Fund will not purchase or sell futures contracts or related options if, as a
result, the sum of the initial margin deposits on the Fund's existing futures
and related options positions and premiums paid for options on futures contracts
would exceed 5% of the Fund's assets. (For options are "in-the-money" at the
time of purchase, the amount by which the option is "in-the-money" is excluded
from this calculation.)
The Fund may purchase and sell options and futures on foreign securities and
currencies held in it portfolio when, in the opinion of the Adviser, the
investment characteristics of such options and contracts are acceptable. It is
expected that risks related to those transactions will not differ materially
from risks related to options and futures on U.S. Securities. However, position
limits and other rules of foreign exchanges may differ from those in the United
States. Also, options and futures markets in some countries, many of which are
relatively new, may be less liquid than comparable markets in the United States.
In addition to the options strategies described above, the Fund may engage in
"spread" transactions in which it purchases and writes a put or call option on
the same underlying security or currency, with the options having different
exercise prices and/or expiration dates. The Fund may also engage in so-called
"straddles," in which it purchases
<PAGE>
or sells combinations of put and call options on the same security or currency.
When it engages in spread and straddle transactions, the Fund seeks to profit
from differentials in the option premiums paid and received by it and in the
market options by the Fund in connection with these transactions may, under
certain circumstances, involve a limited degree of investment leverage, the Fund
will not enter into any spreads or straddles or otherwise purchase puts or calls
if, as a result, more than 5% of its net assets will be invested at any time in
such option transactions. Spread and straddle transactions require the Fund to
purchase and/or write more than one option simultaneously. Accordingly, the
Fund's ability to enter into such transactions and to liquidate its positions
when necessary or deemed advisable may be more limited than if the Fund were to
purchase or sell a single option. Similarly, costs incurred by the Fund in
connection with these transactions will in many cases be greater than if the
Fund were to purchase or sell a single option.
A call option included in a spread or straddle will be deemed to be covered if
the Fund holds, on a security-for-security or currency-for-currency basis, a
call option on the same security or currency with an exercise price equal to or
less than the exercise price of the call written (or, where the high-grade,
short-term debt obligations equal tot he difference). Similarly, a put option
included in a high-grade, short-term debt obligations equal to the difference).
Similarly, a put option included in a spread or straddle will be deemed to be
covered if the Fund holds, on a security-for-security or currency-for-currency
basis, a put option on the same security or currency with an exercise price
equal to or greater than the exercise price of the put option written by the
Fund (or, where the high-grade short-term debt obligations equal to the
difference). The Fund's ability to engage in spread or straddle transactions may
be limited by state securities laws.
RISK FACTORS IN OPTIONS AND FUTURES TRANSACTIONS
The use of options and futures for hedging may involve certain special risks.
Options and futures transactions involve costs and may result in losses. Options
and futures transactions involve certain special risks, including the risk that
the Fund may be unable at times to close out such positions, that hedging
transactions may not accomplish their purpose because of imperfect market
correlations, or that the Adviser may not forecast market or interest rate
movements correctly.
The effective use of options and futures strategies is dependent on, among other
things, the Fund's ability to terminate options and futures positions at times
when the Adviser deems it desirable to do so. Although the Fund will enter into
an option or futures contract position only if the Adviser believes that a
liquid secondary market exists for such an option or futures contract, there is
no assurance the Fund will be able to effect closing transactions at any
particular time or at any acceptable price. The Fund generally expects that its
option and futures contract transactions may purchase and sell options in the
over-the-counter market. The Fund's ability to terminate option positions in the
over-the-counter market may be more limited than for exchange-traded options and
may also involve the risk that securities dealers participating in such
transactions would fail to
<PAGE>
meet their obligations to the Fund. However, the Fund will engage in these
transactions only if, in the opinion of the Adviser, the pricing mechanism and
liquidity of the over-the-counter market are satisfactory and the participants
are responsible parties likely to meet their contractual obligations.
The use of options and futures strategies also involve the risk of imperfect
correlation between movements in options and futures contracts prices and
movements in the prices of securities or currencies which are the subject of the
hedge. The successful use of these strategies further depends on the ability of
the Adviser to forecast market or interest rate movements correctly.
The securities exchanges have established limitations governing the maximum
number of options which may be written by an investor or group of investors
acting in concert. It is possible that the Fund and other clients of the Adviser
may be considered to be such a group. These position limits may restrict the
Fund's ability to sell options on a particular security.
OPTIONS ON SECURITIES
WRITING COVERED OPTIONS. The Fund may write covered call options and covered put
options on optionable securities held in its portfolio, when in the opinion of
the Adviser such transactions are consistent with the Fund's investment
objectives and policies. Call options written by the Fund give the purchaser the
right to buy the underlying securities from the Fund at a stated exercise price;
put options give the purchaser the right to sell the underlying securities to
the Fund at a state price.
The Fund may write only covered options, which means that, so long as the Fund
is obligated as the writer of a call option, it will own the underlying
securities subject to the option (or comparable securities satisfying the cover
requirements of securities exchanges). In the case of put options, the Fund will
hold cash and/or high-grade short-term debt obligations equal to the price to be
paid if the option is exercised. In addition, the Fund will be considered to
have covered a put or call option if and to the extent that it holds an option
that offsets some or all of the risk of the option it has written. The Fund may
write combinations of covered puts and calls on the same underlying security.
The Fund will receive a premium from writing a put or call option, which
increases the Fund's return on the underlying security in the even the option
expires unexercised or is closed out at a profit. The amount of the premium
reflects, among other things, the relationship between the exercise price and
the current market value of the underlying security, the volatility of the
underlying security, the amount of time remaining until expiration, current
interest rates, and the effect of supply and demand in the options market and in
the market for the underlying security. By writing a call option, the Fund
limits its opportunity to profit from any increase in the market value of
<PAGE>
the underlying security above the exercise price of the option but continues to
bear the risk of a decline in the value of the underlying security. By writing a
put option, the Fund assumes the risk that it may be required to purchase the
underlying security for an exercise price higher than its then-current market
value, resulting in a potential capital loss unless the security subsequently
appreciates in value.
The Fund may terminate an option that it has written prior to its expiration by
entering into a closing purchase transaction, in which it purchases an
offsetting option. The Fund realizes a profit or loss from a closing transaction
if the cost of the transaction (option premium plus transaction costs) is less
or more than the premium received from writing the option. Because increases in
the market price of a call option generally reflect increases in the market
price of the security underlying the option, any loss resulting from a closing
purchase transaction may be offset in whole or in part by unrealized
appreciation of the underlying security owned by the Fund.
If the Fund writes a call option but does not own the underlying security, and
when it writes a put option, the Fund may be required to deposit cash or
securities with its broker as "margin," or collateral, for its obligation to buy
or sell the underlying security. As the value of the underlying security varies,
the Fund may have to deposit additional margin with the broker. Margin
requirements are complex and are fixed by individual brokers, subject to minimum
requirements currently imposed by the Federal Reserve Board and by stock
exchanges and other self-regulatory organizations.
PURCHASING PUT OPTIONS. The Fund may purchase put options to protect its
portfolio holdings in an underlying security against a decline in market value.
Such protection is provided during the life of the put option since the Fund, as
holder of the option, is able to sell the underlying security at the put
exercise price regardless of any decline in the underlying security's market
price. In order for a put option to be profitable, the market price of the
underlying security must decline sufficiently below the exercise price to cover
the premium and transaction costs. By using put options in this manner, the Fund
will reduce any profit it might otherwise have realized from appreciation of the
underlying security by the premium paid, for the put option and by transaction
costs.
PURCHASING CALL OPTIONS. The Fund may purchase call options to hedge against an
increase in the price of securities that the Fund wants ultimately to buy. Such
hedge protection is provided during the life of the call option since the Fund,
as holder of the call option, is able to buy the underlying security at the
exercise price regardless of any increase in the underlying security's market
price. In order for a call option to be profitable, the market price of the
underlying security must rise sufficiently above the exercise price to cover the
premium and transaction costs.
<PAGE>
for which market quotations are not readily available if, as a result, the
aggregate of such investments would exceed 5% of the value of the Fund's net
assets; provided, however, that this restriction shall not apply to U.S.
Government obligations. (Debt securities having equity features are not
considered "equity securities" for purposes of this restriction.)
Although the provisions of fundamental investment restrictions 1, 2 and 4 permit
the Fund to engage in certain practices to a limited extent, the Fund does not
have any present intention of engaging in such practices.
All percentage limitations on investments will apply at the time of the making
of an investment and shall not be considered violated unless an excess or
deficiency occurs or exists immediately after and as a result of such
investment.
The Investment Company Act of 1940 (the Act) provides that a "vote of a majority
of the outstanding voting securities" means the affirmative vote of the lesser
of (1) more than 50% of the outstanding shares of the Fund, or (2) 67% or more
of the shares present at a meeting in person or by proxy.
PORTFOLIO TRANSACTIONS AND BROKERAGE
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 security exchange are effected through brokers who charge a commission for
their services. Transactions in foreign securities generally involve the payment
of fixed brokerage commissions, which are generally higher than those in the
United States. There is generally no stated commission in the case of securities
traded in the over-the-counter markets, but the price paid by the Fund usually
includes an undisclosed dealer commission or mark-up. In the U.S. Government
securities 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 securities usually includes a profit to the dealer. 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." It will be the practice of the Advisor to allocate
purchase and sale transactions among the Fund and others whose assets are
managed in such manner as is deemed 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
<PAGE>
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. Portfolio securities are not purchased from or sold to the
Advisor or any affiliated person (as defined in the Act) of the Advisor.
In connection with effecting portfolio transactions, primary consideration will
be given to securing the 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
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
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 of 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. Research
services furnished by brokers are used for the benefit of all 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 Adviser by any amount that might be attributable to the value of such
services. The aggregate amount of brokerage commissions paid by the Fund during
1994 was $309,000; for 1993 was $427,400; and for 1992 it was $158,546.
Under the Sub-Advisory Agreement between the Advisor and the Sub-Advisor, 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 above. The Sub-Advisor currently provides investment advice to a
number of other clients. See "Sub-Adviser." References to "Advisor" in this
Statement of Additional
<PAGE>
instrument or commodity with the same delivery date. If the price of the initial
sale of the futures contract exceeds the price of the offsetting purchase, the
seller is paid the difference and realizes a gain. Conversely, if the price of
the offsetting purchase exceeds the price of the initial sale, the seller
realizes a loss. Similarly, the closing out of a futures contract purchase is
effected by the purchaser's entering into a futures contract sale. If the
offsetting sale price exceeds the purchase price, the purchaser realizes a gain,
and if the purchase price exceeds the offsetting sale price, he realizes a loss.
Unlike when the Fund purchases or sells a security, no price is paid or received
by the Fund upon the purchase or sale of a futures contract. Upon entering into
a contract, the Fund is required to deposit with its custodian in a segregated
account in the name of the futures broker an amount of cash and/or U.S.
Government Securities. This amount is known as "initial margin." The nature of
initial margin in futures transactions is different from that of margin in
security transactions in that futures contract margin does not involve the
borrowing of funds to finance the transactions. Rather, initial margin is
similar to a performance bond or good faith deposit which is returned to the
Fund upon termination of the futures contract, assuming all contractual
obligations have been satisfied. Futures contracts also involve brokerage costs.
Subsequent payments, called "variation margin," to and from the broker (or the
custodian) are made on a daily basis as the price of the underlying security or
commodity fluctuates, making the long and short positions in the futures
contract more or less valuable, a process known as "marking to the market." For
example, when the Fund has purchased a futures contract on a security and the
price of the underlying security has risen, that position will have increased in
value and the Fund will receive from the broker a variation margin payment based
on that increase in value. Conversely, when the Fund has purchased a security
futures contract and the price of the underlying security has declined, the
position would be less valuable and the Fund would be required to make a
variation margin payment to the broker.
The Fund may elect to close some or all of its futures positions at any time
prior to their expiration in order to reduce or eliminate a hedge position then
currently held by the Fund. The Fund may close its positions by taking opposite
positions which will operate to terminate the Fund's position in the futures
contracts. Final determinations of variation margin are then made, additional
cash is required to be paid by or released to the Fund, and the Fund realizes a
loss or a gain. Such closing transactions involve additional commission costs.
OPTIONS ON FUTURES CONTRACTS. The Fund may purchase and write call and put
options on futures contracts it may buy or sell and enter into closing
transactions with respect to such options to terminate existing positions. The
Fund may use options on
<PAGE>
futures contracts in lieu of writing or buying options directly on the
underlying securities or purchasing and selling the underlying futures
contracts. For example, to hedge against a possible decrease in the value of its
portfolio securities, the Fund may purchase put options or write call options on
futures contracts rather than selling futures contracts. Similarly, the Fund may
purchase call options or write put options on futures contracts rather than
selling futures contracts. Similarly, the Fund may purchase call options or
write put options on futures
<PAGE>
contracts as a substitute for the purchase of futures contracts to hedge against
a possible increase in the price of securities which the Fund expects to
purchase. Such options generally operate in the same manner as options purchased
or written directly on the underlying investments.
As with options on securities, the holder or writer of an option may terminate
his position by selling or purchasing an offsetting option. There is no
guarantee that such closing transactions can be effected.
The Fund will be required to deposit initial margin and maintenance margin with
respect to put and call options on futures contracts written by it pursuant to
brokers' requirements similar to those described above. With respect to long
positions assumed by the Fund, the Fund will establish a segregated asset
account with its custodian, and will deposit into it an amount of cash and other
assets permitted by CFTC regulations. The Fund does not intend to leverage the
futures contracts.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS. Successful use
of futures contracts by the Fund is subject to the Adviser's ability to predict
movements in the direction of interest rates and other factors affecting
securities markets. For example, if the Fund has hedged against the possibility
of decline in the values of its investments and the values of its investments
increase instead, the Fund will lose part or all of the benefit of the increase
through payments of daily maintenance margin. The Fund may have to sell
investments at a time when it may be disadvantageous to do so in order to meet
margin requirements.
Compared to the purchase or sale of futures contracts, the purchase of call or
put options on futures contracts involves less potential risk to the Fund
because the maximum amount at risk is the premium paid for the options (plus
transaction costs). However, there may be circumstances when the purchase of a
call or put option on the futures contract itself would result in a loss to the
Fund when the purchase or sale of a futures contract would not, such as when
there is no movement in the prices of the hedged investments. The writing of an
option on a futures contract involves risks similar to those risks relating to
the sale of futures contracts.
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain market clearing facilities
inadequate, and thereby result
<PAGE>
in the institution by exchanges of special procedures which may interfere with
the timely execution of customer orders.
To reduce or eliminate a hedge position held by the Fund, the Fund may seek to
close out a position. The ability to establish and close out positions will be
subject to the development and maintenance of a liquid secondary market. It is
not certain that this market will develop or continue to exist for a particular
futures contract or option. Reasons for the absence of a liquid secondary market
on an exchange include the following: (i) there may be insufficient trading
interest in certain contracts or options; (ii) restrictions may be imposed by an
exchange on opening transactions or closing transactions or both; (iii) trading
halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of contracts or options, or underlying securities;
(iv) unusual or unforeseen circumstances may interrupt normal operations on an
exchange; (v) the facilities of an exchange or a clearing corporation may not at
all times be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of contracts or options (or a particular
class or series of contracts or options), in which event the secondary market on
that exchange for such contracts or options (or a particular class or series of
contracts or options), in which event the secondary market on that exchange for
such contracts or options (or in the class or series of contracts or options)
would cease to exist, although outstanding contracts or options on the exchange
that had been issued by a clearing corporation as a result of trades on that
exchange would continue to be exercisable in accordance with their terms.
U.S. TREASURY SECURITY FUTURES CONTRACTS AND OPTIONS. If the Fund invests in
tax-exempt securities issued by a governmental entity, the Fund may purchase and
sell futures contracts and related options on U.S. Treasury securities when, in
the opinion of the Adviser, price movements in Treasury security futures and
related options will correlate closely with price movements in the tax-exempt
securities which are the subject of the hedge. U.S. Treasury security futures
contracts require the seller to deliver, or the purchaser to take delivery of,
the type of U.S. Treasury security called for in the contract at a specified
date and price. Options on U.S. Treasury security futures contracts give the
purchaser the right in return for the premium paid to assume a position in a
U.S. Treasury security futures contract at the specified option exercise price
at any time during the period of the option.
Successful use of U.S. Treasury security futures contracts by the Fund is
subject to the Adviser's ability to predict movements in the direction of
interest rates and other factors affecting markets for debt securities. For
example, if the Fund has sold U.S. Treasury security futures contracts in order
to hedge against the possibility of an increase in interest rates which would
adversely affect tax-exempt securities held in its
<PAGE>
portfolio, and the prices of the Fund's tax-exempt securities increase instead
as a result of a decline in interest rates, the Fund will lose part or all of
the benefit of the increased value of its securities which it has hedged because
it will have offsetting losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash, it may have to sell securities to
meet daily maintenance margin requirements at a time when it may be
disadvantageous to do so.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS
With respect to investments made for the International Fixed Income Securities
and the International Equity Securities investment categories, the Fund may
engage in foreign currency exchange transactions to protect against uncertainty
in the level of future exchange rates. The Adviser may engage in foreign
currency exchange transactions in connection with the purchase and sale of
portfolio securities ("transaction hedging"), and to protect the value of
specific portfolio positions ("position hedging").
The Fund may engage in "transaction hedging" to protect against a change in the
foreign currency exchange rate between the date on which the Fund contracts to
purchase or sell the security and the settlement date, or to "lock in" the U.S.
dollar equivalent of a dividend or interest payment in a foreign currency. For
the purpose, the Fund may purchase or sell a foreign currency on a spot (or
cash) basis at the prevailing spot rate in connection with the settlement of
transactions in portfolio securities denominated in that foreign currency.
If conditions warrant, the Fund may also enter into contract to purchase or sell
foreign currencies at a future date ("forward contracts") and purchase and sell
foreign currency futures contracts as a hedge against changes in foreign
currency exchange rates between the trade and settlement dates on particular
transactions and not for speculation. A foreign currency forward contract is a
negotiated agreement to exchange currency at a future time at a rate or rates
that may be higher or lower than the spot rate. Foreign currency futures
contracts are standardized exchange-traded contracts and have margin
requirements.
For transaction hedging purposes the Fund may also purchase exchange-listed and
over-the counter call and put options on foreign currency futures contracts and
on foreign currencies.
The Fund may engage in "position hedging" to protect against the decline in the
value relative to the U.S. dollar of the currencies in which its portfolio
securities are denominated or quoted (or an increase in the value of currency
for securities which the Fund expects to buy, when the Fund holds cash reserves
and short-term investments). For position hedging purposes the Fund may purchase
or sell foreign currency futures contracts and foreign currency forward
contracts, and may purchase put or call options on foreign currency futures
contracts and on foreign
<PAGE>
currencies on exchanges or over-the-counter markets. In connection with position
hedging, the Fund may also purchase or sell foreign currency on a spot basis. In
addition, as part of its position hedging strategies, the Fund may engage in the
forward contract, futures contract and options transactions described above
using a currency different from that in which the portfolio securities are
denominated ("cross-hedging") if the Adviser believes that the U.S. dollar value
of the currency used in cross-hedging will fall or rise, as the case may be,
whenever there is a decrease or increase, respectively, in the U.S. dollar value
of the currency in which the portfolio securities are denominated.
Hedging transactions involve costs and may result in losses. The Fund may write
covered call options on foreign currencies to offset some of the costs of
hedging those currencies, as well as to increase current return. The Fund will
engage in over-the-counter transactions only when appropriate exchange-traded
transactions are unavailable and when, in the opinion of the Adviser, the
pricing mechanism and liquidity are satisfactory and the participants are
responsible parties likely to meet their contractual obligations. The Fund's
ability to engage in hedging and related option transactions may be limited by
tax considerations.
LENDING OF SECURITIES
The FUND may make secured loans of its portfolio securities amounting to not
more than 25% of its total assets, thereby realizing additional income. The
risks in lending portfolio securities, as with other extensions of credit,
consist of possible delay in recovery of the securities or possible loss of
rights in the collateral should the borrower fail financially. As a matter of
policy, securities loans are made to broker-dealers pursuant to agreements
requiring that loans be continuously secured by collateral in cash or short-term
debt obligations at least equal at all times to the value of the securities
lent. The borrower pays to 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 retains all or a portion of the interest
received on investment of the cash collateral or receives a fee from the
borrower. Although voting rights, or rights to consent, with respect to the
loaned securities pass to the borrower, the Fund retains the right to call the
loans at any time on reasonable notice, and it will do so in order that the
securities may be voted by the Fund if the holders of such securities are asked
to vote upon or consent to matters materially affecting the investment. The Fund
may also call such loans in order to sell the securities involved. The Fund will
not loans its portfolio securities to the Adviser, the Sub-Adviser or an
affiliate thereof.
<PAGE>
FORWARD COMMITMENTS
The Fund may make contracts to purchase securities for a fixed price at a future
date beyond customary settlement time ("Forward commitments") if the Fund holds,
and maintains until the settlement date in a segregated account, cash or high-
grade debt obligations in an amount sufficient to meet the purchase price, or if
the Fund enters into offsetting contracts for the forward sale of other
securities it purchased declines prior to the settlement date, which risk is in
addition to the risk of decline in value of the Fund's other assets. Where such
purchases are made through dealers, the Fund relies on the dealer to consummate
the sale. The dealer's failure to do so may result in the loss to the Fund of an
advantageous yield of price. Although the Fund will generally enter into forward
commitments with the intention of acquiring the securities for its portfolio,
the Fund may dispose of a commitment prior to settlement if the Adviser deems it
appropriate to do so. The Fund may realize short-term profits or losses upon the
sale of forward commitments.
REPURCHASE AGREEMENTS
The FUND may enter into repurchase agreements with respect to the amount of its
total assets (taken at current value) specified in the Prospectus. A repurchase
agreement is a contract under which the Fund acquires a security for a
relatively short period (usually not more than one week) subject to the
obligation of the seller to repurchase and the Fund to re-sell such security at
a fixed time and price (representing the Fund's cost plus interest). It is the
Fund's present intention to enter into repurchase agreements only with
commercial banks and registered broker-dealers and only with respect to
obligations of the U.S. Government or its agencies or instrumentalities. The
Board of Directors of the Fund will evaluate the creditworthiness of all
entities with which the Fund proposes to enter into repurchase agreements.
Repurchase agreements may also be viewed as loans made by the Fund which are
collateralized by the securities subject to the repurchase. The Adviser will
monitor such transactions to ensure that the value of the underlying securities
will be at least equal at all times to the total amount of the repurchase
obligation, including the interest factor. If the seller defaults, the fund
could realize a loss on the sale of the underlying security to the extent that
the proceeds of sale including accrued interest are less than the resale price
provided in the agreement including interest. In addition, if the seller should
be involved in bankruptcy or insolvency proceedings, the Fund may incur delay
and costs in selling the underlying security or may suffer a loss of principal
and interest if the Fund is treated as an unsecured creditor and required to
return the underlying collateral to the seller's estate.
<PAGE>
INVESTMENT RESTRICTIONS
The following 17 restrictions are fundamental. The Fund may not and will not:
1. Borrow money in excess of 10% of the value (taken at the lower of cost or
current value) of its total assets (not including the amount borrowed) at the
time the borrowing is made, and then only from banks as a temporary measure to
facilitate the meeting of redemption requests (not for leverage) which might
otherwise require the untimely disposition of portfolio investments or for
extraordinary or emergency purposes. Such borrowings will be repaid before any
additional investments are purchased.
2. Pledge, hypothecate, mortgage or otherwise encumber its assets in excess of
15% of its total assets (taken at current value) and then only to secure
borrowings permitted by restriction 1 above. (The deposit of underlying
securities and other assets in escrow and other collateral arrangements in
connection with the writing of put or call options and collateral arrangements
with respect to margin for options on financial futures contracts are not deemed
to be pledges or other encumbrances.)
3. Purchase securities on margin, except such short-term credits as may be
necessary for the clearance of purchases and sales of securities, and except
that it may make margin payments in connection with options on financial futures
contracts.
4. Make short sales of securities or maintain a short sale position for the
account of the Fund unless at all times when a short position is open it owns an
equal amount of such securities or owns securities which, without payment of any
further consideration, are convertible into or exchangeable for securities of
the same issue as, and equal in amount to, the securities sold short.
5. Underwrite securities issued by other persons except to the extent that, in
connection with disposition of its portfolio investments, it may be deemed to be
an underwriter under certain federal securities laws.
6. Purchase or sell real estate, although it may purchase securities which are
secured by or represent interests in real estate.
7. Purchase or sell commodities or commodity contracts, except that the Fund
may write and purchase options on financial futures contracts.
8. Make loans, except by purchase of debt obligations in which the Fund may
invest consistent with its investment policies, by entering into repurchase
agreements with respect to not more than 25% of its total assets (taken at
current value), or through the
<PAGE>
lending of its portfolio securities with respect to not more than 25% of its
assets.
9. Invest in securities of any issuer, if, to the knowledge of the Fund,
officers and directors of the Fund and officers and directors of the Adviser or
the Sub-Adviser who beneficially own more than 0.5% of the shares of securities
of that issuer together own more than 5%.
10. Invest in securities of any issuer if, immediately after such investment,
more than 5% of the total assets of the Fund (taken at current value) would be
invested in the securities of such issuer; provided that this limitation does
not apply to securities issued by the U.S. government or its agencies or
instrumentalities (U.S. Government obligations).
11. Acquire more than 10% of the voting securities of any issuer.
12. Invest more than 25% of the value of its total assets in any one industry.
13. Invest in the securities of other investment companies, except as they may
be acquired as part of a merger of consolidation or acquisition of assets.
14. Invest more than 5% of its net assets in securities restricted as to resale.
15. Buy or sell oil, gas or other mineral leases, rights or royalty contracts.
16. Make investments for the purpose of gaining control of a company's
management.
17. Issue any class of securities which is senior to the Fund's stock. (For
purposes of this restriction, collateral arrangements with respect to the
writing of options are not deemed to be the issuance of a senior security).
The following three restrictions are not fundamental, but are contrary to the
Fund's present policy:
A. To invest in (i) securities which at the time of such investment are not
readily marketable, (ii) restricted securities and (iii) repurchase agreements
maturing in more than seven days, if, as a result, more than 10% of the Fund's
total assets (taken at current value) would then be invested in the aggregate in
securities described in (i), (ii) and (iii) above.
B. To invest in warrants (other than warrants acquired by the Fund as part of a
unit or attached to securities at the time of purchase).
C. To invest in securities of any issuer, which together with any predecessors
or controlling persons, has been in operation for less than three consecutive
years and in equity securities
<PAGE>
for which market quotations are not readily available if, as a result, the
aggregate of such investments would exceed 5% of the value of the Fund's net
assets; provided, however, that this restriction shall not apply to U.S.
Government obligations. (Debt securities having equity features are not
considered "equity securities" for purposes of this restriction.)
Although the provisions of fundamental investment restrictions 1, 2 and 4 permit
the Fund to engage in certain practices to a limited extent, the Fund does not
have any present intention of engaging in such practices.
All percentage limitations on investments will apply at the time of the making
of an investment and shall not be considered violated unless an excess or
deficiency occurs or exists immediately after and as a result of such
investment.
The Investment Company Act of 1940 (the Act) provides that a "vote of a majority
of the outstanding voting securities" means the affirmative vote of the lesser
of (1) more than 50% of the outstanding shares of the Fund, or (2) 67% or more
of the shares present at a meeting in person or by proxy.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser 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 security exchange are effected through brokers who charge a commission for
their services. Transactions in foreign securities generally involve the payment
of fixed brokerage commissions, which are generally higher than those in the
United States. There is generally no stated commission in the case of securities
traded in the over-the-counter markets, but the price paid by the Fund usually
includes an undisclosed dealer commission or mark-up. In the U.S. Government
securities 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 securities usually includes a profit to the dealer. 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 Adviser currently provides investment advice to a number of other clients.
See "Investment Adviser." It will be the practice of the Adviser to allocate
purchase and sale transactions among the Fund and others whose assets are
managed in such manner as is deemed 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
<PAGE>
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. Portfolio securities are not purchased from or sold to the
Adviser or any affiliated person (as defined in the Act) of the Adviser.
In connection with effecting portfolio transactions, primary consideration will
be given to securing the 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
might charge. The Adviser 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
from time to time, and, in that connection, will receive reports from the
Adviser and published data concerning transaction costs incurred by
institutional investors generally. The nature of the research services provided
to the Adviser 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 Adviser regards as a useful supplement of its own internal research
capabilities. The Adviser may from time to time direct trades to brokers which
have provided specific brokerage or research services for the benefit of the
Adviser's clients; in addition, the Adviser may allocate trades among brokers
that generally provide superior brokerage and research services. Research
services furnished by brokers are used for the benefit of all the Adviser's
clients and not solely or necessarily for the benefit of the Fund. The Adviser
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 Adviser by any amount that might be attributable to the value of such
services. The aggregate amount of brokerage commissions paid by the Fund during
1994 was $309,000; for 1993 was $427,400; and for 1992 it was $158,546.
Under the Sub-Advisory Agreement between the Adviser and the Sub-Adviser, the
Sub-Adviser may perform some, or substantially all, of the investment advisory
services required by the Fund, even though the Adviser remains primarily
responsible for investment decisions affecting the Fund. The Sub-Adviser will
follow the same procedures and policies which are followed by the Adviser as
described above. The Sub-Adviser currently provides investment advice to a
number of other clients. See "Sub-Adviser." References to "Adviser" in this
Statement of Additional
<PAGE>
Information include both Lincoln National Investment Management Company and the
Putnam Management Company, Inc.
DETERMINATION OF NET ASSET VALUE
A description of the days on which the Fund's net asset value per share will be
determined is given in the Prospectus. The New York Stock Exchange's most recent
announcement (which is subject to change) states that in 1995 it will be closed
on New Year's Day, January 1; President's Day, February 20; Good Friday, April
14; Memorial Day, May 29; Independence Day, July 4; Labor Day, September 4;
Thanksgiving Day, November 23; and Christmas Day, December 25. It may also be
closed on other days.
Since a significant portion of the Fund's portfolio may at any one time consist
of securities primarily listed on foreign exchanges or otherwise traded outside
the United States, those securities may be traded (and the net asset value of
the Fund could therefore be significantly affected) on days when the investor
has no access to the Fund.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION APPENDIX
This document is incorporated by reference to Post-Effective Amendment No. 10,
Registration Number 33-13530 filed on Form N-1A on April 30, 1995.
