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PREFACE TO THE LINCOLN NATIONAL FUND PROSPECTUSES
THE PREFACE AND DIRECTORY ARE PART OF THE PROSPECTUS FOR EACH OF THE FOLLOWING
FUNDS:
Lincoln National Aggressive Growth Fund, Inc. (AG)
Lincoln National Social Awareness Fund, Inc. (SA)
Shares of the FUNDS are sold to Lincoln National Life Insurance Co. (LINCOLN
LIFE) for allocation to its Variable Annuity Account L and to Lincoln Life &
Annuity Company of New York (LLANY) for allocation to its Variable Annuity
Account L. Lincoln Life and LLANY use these shares to fund VARIABLE ANNUITY
CONTRACTS.
Each of these Variable Annuity Accounts may be referred to as a VARIABLE
ACCOUNT. For each FUND, see Description of the fund in its Prospectus for a
statement of that FUND'S investment objective. Each of these FUNDS is referred
to individually as a FUND; collectively, as the FUNDS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (SEC) NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THESE PROSPECTUSES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
These Prospectuses set forth concisely the information about each FUND that you
ought to know before investing. Please read and keep this Prospectus booklet for
future reference.
A separate STATEMENT OF ADDITIONAL INFORMATION (SAI) for each FUND has been
filed with the SEC. By this reference, each SAI, dated May 1, 1998, is
incorporated into the Prospectus of the FUND with which it is registered. A free
copy will be provided upon request. Either write Lincoln National Life Insurance
Co., P.O. Box 9740, Portland, Maine 04104 or call 1-800-341-0441. For Variable
Annuity contracts issued by LLANY, either write Lincoln Life & Annuity Company
of New York, TDA Client Services, P.O. Box 1337, Syracuse, NY 13201-1337 or call
1-800-893-1337.
The Financial Highlights table of each FUND contains per-share data calculated
on the basis of a share outstanding throughout the period, together with
financial ratios and other supplemental data. The Financial Highlights table is
incorporated by reference to the FUND'S 1997 Annual Report. A copy of the Annual
Report will be provided on request and without charge. Either write Lincoln
National Life Insurance Co., P.O. Box 9740, Portland, Maine 04104 or call
1-800-341-0441. For Variable Annuity contracts issued by LLANY, either write
Lincoln Life & Annuity Company of New York, TDA Client Services, P.O. Box 1337,
Syracuse, NY 13201-1337 or call 1-800-893-1337.
NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THESE
PROSPECTUSES, IN CONNECTION WITH THE OFFERS CONTAINED IN THEM. IF ANY ARE GIVEN
OR MADE, THE INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE FUND(S) IN QUESTION. THESE PROSPECTUSES DO NOT CONSTITUTE
OFFERS BY THE FUNDS TO SELL, OR SOLICITATIONS OF ANY OFFERS TO BUY, ANY OF THE
SECURITIES OFFERED BY THEM IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL FOR THE FUNDS TO MAKE THOSE OFFERS.
Prospectuses dated May 1, 1998
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DIRECTORY FOR THE FUND PROSPECTUSES
<TABLE>
<CAPTION>
SUBJECT PAGE
<S> <C>
- --------------------------------------------------------
PREFACE 1
DESCRIPTION OF THE FUND
Aggressive Growth Fund 3
Social Awareness Fund 9
- --------------------------------------------------------
INVESTMENT POLICIES AND TECHNIQUES
Aggressive Growth Fund 3
Social Awareness Fund 9
- --------------------------------------------------------
INVESTMENT RESTRICTIONS
Aggressive Growth Fund 6
Social Awareness Fund 10
- --------------------------------------------------------
STRATEGIC PORTFOLIO TRANSACTIONS
Aggressive Growth Fund 7
Social Awareness Fund 10
<CAPTION>
SUBJECT PAGE
- --------------------------------------------------------
<S> <C>
APPENDIX -- CONTAINS IMPORTANT INFORMATION
FOR ALL FUNDS
Net asset value 13
Management of the funds 13
Purchase of securities being offered 14
Sale and redemption of shares 14
Distributions and federal income tax
considerations 15
Management discussion of fund performance 15
Description of shares 15
Strategic portfolio transactions --
additional information 16
Foreign investments 18
General information 19
Statement of Additional Information
Table of contents 21
</TABLE>
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LINCOLN NATIONAL
SOCIAL AWARENESS FUND, INC.
DESCRIPTION OF THE FUND
The Social Awareness Fund (FUND) was incorporated in Maryland in 1986. It is an
open-end, diversified management investment company whose investment objective
is long-term capital appreciation. The FUND'S objective is fundamental and
cannot be changed without the affirmative vote of a majority of the outstanding
shares of the FUND. See General information in the Appendix. The FUND will
pursue its objective by investing primarily in a portfolio of common stock and
securities convertible into common stock, all selected in accordance with the
FUND'S Social Criteria. There is no assurance that the objective of the FUND
will be achieved.
This FUND invests in common stocks of established companies which satisfy the
Social Criteria, with the objective of maximizing long-term capital
appreciation, while giving some emphasis to income. The primary risk associated
with common stock investing is that the shares will fluctuate in value as the
common stock market fluctuates. Because the policy of this FUND is to emphasize
investment in established companies, it is expected that the volatility will be
in line with the broad stock market indices such as the Dow Jones Industrial
Average and the Standard & Poor's 500 Index (S&P 500). See Investment policies
and techniques. The Social Criteria impose restrictions on the content of the
portfolio. Because of its Social Criteria, the FUND may not be able to take the
same advantage of certain investment opportunities as do those funds which do
not have Social Criteria.
PORTFOLIO MANAGER
The primary portfolio manager for the FUND is T. Scott Wittman, President,
Vantage Investment Advisors, sub-advisor to the FUND. Vantage is a wholly owned
subsidiary of Lincoln National Corp., a publicly held insurance holding company
organized under Indiana law. Wittman, a Chartered Financial Analyst, has managed
the FUND since October, 1993. He has been with Vantage since February, 1991;
before that he was managing director at TSA Capital Management. Wittman
specializes in quantitative investment analysis.
Jil Schoelf Lindholm, Short-Term Investment Manager for LINCOLN INVESTMENT, the
ADVISOR of the FUND manages the short-term investments segment of the FUND'S
portfolio. She has been a Short-Term Investment Manager with LINCOLN INVESTMENT
since February 1995. She was a GIC Sales Executive for LINCOLN LIFE from March,
1992 through February, 1995. Ms. Lindholm holds a Master's Degree in business
administration from Indiana University.
INVESTMENT POLICIES AND TECHNIQUES
In seeking to attain capital appreciation in a common stock portfolio, it is
important to attempt to minimize losses. When conditions dictate a defensive
strategy or until the proceeds from the sale of the FUND'S shares have been
invested or when cash is otherwise available, the FUND may invest in money
market instruments, including commercial paper of domestic corporations,
certificates of deposit, bankers' acceptances and other obligations of domestic
banks, loan participation certificates, and obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities. When cash is available
only for a few days, it may be invested by the FUND in repurchase agreements
until such time as it may otherwise be invested or used for payment of
obligations of the FUND.
SOCIAL CRITERIA
The FUND will adhere to the following Social Criteria, all as a matter of
non-fundamental policy. The Board of Directors can add to, modify, or eliminate
any of these at any time, without shareholder approval.
The FUND will not knowingly invest in or hold securities of companies which
engage in:
1. Activities which result or are likely to result in damage to the natural
environment;
2. The production of nuclear power, the design or construction of nuclear power
plants, or the manufacture of equipment for the production of nuclear power;
3. The manufacturing of, or contracting for, military weapons,
4. The liquor, tobacco or gambling industries; and/or
5. The use of animals to test their products when developing new cosmetics and
personal care products.
Social criteria number 5 above, added May 1, 1998, is not expected to have a
material impact on the FUND'S performance, although the FUND will be required to
sell certain portfolio securities acquired prior to May 1, 1998.
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Neither the FUND nor its ADVISOR or sub-advisor will exercise any discretion
over which securities to exclude from purchase on the basis of the Social
Criteria. Instead, the FUND will rely upon the Social Investment Database
published by Kinder, Lydenberg, Domini & Co., Inc. (KLD). KLD's principal office
is in Cambridge, Massachusetts. KLD specializes in providing the financial
community with social research on publicly traded U.S. corporations. Securities
of companies appearing in the KLD Database and for which KLD indicates a concern
or a major concern relating to one or more of the Social Criteria will be
excluded from purchase by the FUND.
KLD will determine the extent to which a company's involvement in the activities
prohibited by the Social Criteria is significant enough to merit a concern or a
major concern. Significance may be determined on the basis of the percentage of
revenue generated by, or the size of the operations attributable to, activities
related to these Criteria, or other factors selected by KLD. The social
screening undergoes continual refinement and modification.
Securities of companies not excluded by any of the Social Criteria will be
eligible for consideration for purchase by the FUND according to the objectives
and policies described in this Prospectus.
PERIOD FOR DISINVESTMENT. It is possible that the FUND may at some point find
that securities in its portfolio no longer meet the Social Criteria, although at
the time of purchase they did. It is also possible that securities which do not
meet the Social Criteria have been inadvertently acquired by the FUND. Should
either event occur, the FUND will commence the orderly sale of those securities,
in a manner so as to minimize any adverse effect of the sale on the FUND'S
assets. Except in an extreme case, the FUND will sell these securities within 90
days from the date on which FUND management determines them to be in violation.
An extreme case is one for which, in the ADVISOR'S or sub-advisor's opinion, a
sale within the 90-day period would produce a significant loss to the overall
value of the FUND'S assets.
FOREIGN INVESTMENTS
The FUND may invest up to 15% of its assets in securities principally traded in
foreign markets. Eurodollar certificates of deposit are excluded for purposes of
these limitations. Foreign investments can involve risks not present in domestic
investments. For a discussion of those risks, see Foreign investments in the
Appendix.
PORTFOLIO TURNOVER
The FUND does not expect its portfolio turnover rate to exceed 100%. (A rate of
portfolio turnover of 100% would occur if all of the FUND'S portfolio were
replaced in a period of one year.) However, the FUND is not restricted in policy
with regard to portfolio turnover, and when it engages in short-term trading in
attempting to achieve its objectives, it may increase the turnover rate and
incur larger brokerage commissions and other expenses than usual. A turnover
rate higher than expected could occur if the FUND should be required to
liquidate any portfolio securities because of their failure to conform to the
Social Criteria. During 1997 the FUND'S portfolio turnover was 34.84% and in
1996 it was 45.90%.
INVESTMENT RESTRICTIONS
The investment restrictions are fundamental. See General information in the
Appendix. For purposes of the restrictions, all percentage limitations apply
immediately after the making of an investment; 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 in the securities of a single issuer, unless the following conditions
are met: At least 75% 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, and (c) securities of issuers as
to each of which, at the time the investment was made, the FUND'S investment
in the issuer did not exceed 5% of the FUND'S total assets. (The FUND does
not anticipate that any more than 15% of the FUND'S total assets would be
invested in the securities of a single issuer at any time, other than those
of the U.S. Government, its agencies and instrumentalities.);
2. 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); and/or
3. Hold more than 10% of the outstanding voting securities of any one issuer.
Additional investment restrictions can be found in the SAI. Certain
socially-motivated limitations on FUND activity are explained in this Prospectus
under Social criteria.
STRATEGIC PORTFOLIO TRANSACTIONS
The portfolio manager for the FUND has considerable discretion in the selection
of appropriate FUND investments. In the exercise of that discretion, the
portfolio manager may, at any given time, invest a portion of the FUND'S assets
in one or more strategic portfolio transactions
10
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which we define as derivative transactions and cash enhancement transactions.
For your convenience, in the Appendix, 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 booklet for the 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 SOCIAL AWARENESS 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%.); buy and sell financial futures contracts and buy 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. See
the SAI.) Amounts committed to margin and paid for option premiums on futures
contracts may not exceed 5% of 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 at any
one time, 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.
11
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THIS PAGE WAS INTENTIONALLY LEFT BLANK.
12
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APPENDIX -- CONTAINS IMPORTANT INFORMATION FOR ALL FUNDS
This Appendix constitutes part of the Prospectuses of Lincoln National
Aggressive Growth Fund, Inc. (Aggressive Growth) and Lincoln National Social
Awareness Fund, Inc. (Social Awareness). Unless otherwise indicated, the
following information applies to each FUND.
NET ASSET VALUE
Each FUND'S net asset value per share is determined as of close of business
(currently 4:00 p.m., New York Time) on the New York Stock Exchange (NYSE) on
each day it is open for trading. The net asset value per share for each FUND is
determined by adding the values of all securities and other assets, subtracting
liabilities (including dividends payable) and dividing by the number of shares
outstanding. Debt securities and other assets of the FUND, other than equity
securities, for which market quotations are readily available, are valued at
their bid quotations.
When market quotations are not readily available, debt securities and other
assets are valued at their fair value as determined in good faith. This
valuation is made by or under the authority of each FUND'S Board of Directors
and it may include the use of valuations furnished by outside sources, including
pricing services which utilize electronic data processing techniques for valuing
normal institutional-size trading units of debt securities. The value of equity
securities is based on the last sale prices of those securities 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. In the absence of readily available closing bid and asked
prices, equity securities will be valued at fair value. See the SAI Appendix for
a discussion of the methodology utilized to value short-term investments,
options, futures and options thereon, and foreign securities.
MANAGEMENT OF THE FUNDS
The business and affairs of each FUND 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 shareholder. LINCOLN LIFE and LLANY are the sole
shareholders of each FUND.
INVESTMENT ADVISOR. LINCOLN INVESTMENT is the INVESTMENT ADVISOR to the FUNDS
and is headquartered at 200 East Berry Street, Fort Wayne, Indiana 46802.
LINCOLN INVESTMENT (THE ADVISOR) is registered with the Securities and Exchange
Commission (the Commission or 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 Convertible Securities Fund, Inc., and
Lincoln National Income Fund, Inc., closed-end investment companies, and also
acts as 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. Through its
subsidiaries, LNC provides life insurance and annuities, property-casualty
insurance, reinsurance and financial services. Directors, officers and employees
of the ADVISOR and each FUND are permitted to engage in personal securities
transactions subject to restrictions and procedures set forth in the Code of
Ethics adopted by the ADVISOR and each FUND. Such 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.
Under advisory agreements described in the Prospectus for the VARIABLE ACCOUNT,
the ADVISOR provides portfolio management and investment advice to the FUNDS and
administers their other affairs, subject to the supervision of each FUND'S Board
of Directors.
As compensation for its services to each FUND, the advisor is paid a monthly
investment advisory fee at an annual rate 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
- ----------------------------------------------------------------------------------------------------------
<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
Social Awareness .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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FUND EXPENSES (see accompanying text below)
<TABLE>
<CAPTION>
1997 RATIO OF THE
ADVISOR'S
COMPENSATION TO 1997 RATIO OF TOTAL
AVERAGE EXPENSES
FUND NET ASSETS TO AVERAGE NET ASSETS
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
Aggressive Growth .73% .81%
Social Awareness .36 .41
</TABLE>
Other expenses 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.
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 professional investment management
firms. These firms provide some or substantially all of the investment advisory
services required by 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>
DATE OF ANNUAL FEE RATE BASED ON AVERAGE DAILY NET ASSET
FUND SUB-ADVISOR AGREEMENT VALUE
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
Aggressive Lynch & Mayer 12/20/93 .50 of 1% of the first $150 million .35 of 1% of the
Growth 520 Madison Avenue excess over $150 million
New York, NY 10022
- -------------
<CAPTION>
ANNUAL FEE RATE BASED ON MARKET VALUE OF SECURITIES
HELD IN THE PORTFOLIO OF EACH RESPECTIVE CLIENT FUND
DATE OF AT THE CLOSE OF BUSINESS ON THE LAST TRADING DAY OF
FUND SUB-ADVISOR AGREEMENT EACH CALENDAR QUARTER
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Social Vantage Investment 4/30/88 .20 of 1%
Awareness Advisors
630 5th Avenue
New York, NY 10111
</TABLE>
No additional compensation from the assets of the FUNDS will be assessed as a
result of the sub-advisory agreements; the sub-advisors are paid by LINCOLN
INVESTMENT.
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.
PURCHASE OF SECURITIES BEING OFFERED
Shares of the FUNDS' common stock ($0.01 par value) will be sold to LINCOLN LIFE
and LLANY for allocation to the VARIABLE ACCOUNTS, which have been established
for the purpose of funding VARIABLE ANNUITY CONTRACTS. Shares of each FUND are
sold and redeemed at their net asset value per share determined daily. See Sale
and redemption of shares. Also see Net asset value. The FUNDS' shares are sold
to LINCOLN LIFE and LLANY for the VARIABLE ACCOUNTS on a no-load basis -- that
is, without the imposition of a sales charge.
SALE AND REDEMPTION OF SHARES
The shares of each FUND are sold and redeemed by the FUND at their net asset
value per share next determined after receipt by LINCOLN LIFE or LLANY of a
purchase or redemption order in acceptable form. Redemption of
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FUND shares held by LINCOLN LIFE or LLANY for its own account will be effected
at the FUND'S net asset value per share next determined after receipt of the
redemption request by the FUND. The value of shares redeemed may be more or less
than original cost, depending upon the market value of the portfolio securities
at the time of redemption. Payment for shares redeemed will be made within seven
days after the redemption request is received in proper form by the FUNDS.
However, the right to redeem FUND shares may be suspended or payment postponed
for any period during which (1) trading on the NYSE is restricted as determined
by the Commission, or the NYSE is closed for other than weekends and holidays;
(2) an emergency exists, as determined by the Commission, as a result of which
(a) disposal by each FUND of securities owned by it is not reasonably
practicable, or (b) it is not reasonably practicable for each FUND to determine
fairly the value of its net assets; or (3) the Commission by order so permits
for the protection of shareholders of the FUNDS.
DISTRIBUTION AND FEDERAL INCOME TAX CONSIDERATIONS
Each FUND'S policy is to distribute, at least once a year, substantially all of
its net investment income. Net realized capital gains may only be distributed
annually. These distributions, when paid to LINCOLN LIFE or LLANY for the
VARIABLE ACCOUNTS, will be reinvested automatically in additional shares of that
FUND, at its net asset value per share.
Each FUND intends to qualify and has elected to be taxed as a regulated
investment company under the provisions of Subchapter M 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 ordinary income and capital gain) from Federal income tax and the
4% nondeductible Federal excise tax, the FUNDS will be relieved of those taxes
on the amounts distributed. See the SAI for a more complete discussion.
Each FUND is subject to asset diversification requirements under Section 817(h)
of the code and the related regulation that the United States Treasury
Department has adopted. Each FUND intends to comply with these diversification
requirements.
Since the sole shareholders of the FUNDS are LINCOLN LIFE and LLANY, there is no
discussion here about the Federal income tax consequences at the shareholder
level. For information concerning the Federal income tax consequences to holders
of annuity or life insurance contracts, including the failure of a FUND to
comply with the diversification requirements discussed above. See the Prospectus
for the VARIABLE ACCOUNT.
MANAGEMENT DISCUSSION OF FUND PERFORMANCE
In the Annual Report for the FUNDS, the portfolio manager for each FUND
discusses that FUND'S performance for the previous fiscal year and the factors
which affected that performance. We will send you a copy of the Annual Report
free upon request.
DESCRIPTION OF SHARES
The authorized capital stock of Aggressive Growth and Social Awareness consists
of 50 million and 150 million shares of common stock, respectively, $0.01 par
value. As of March 1, 1998, each FUND had the following number of shares issued
and outstanding:
<TABLE>
<S> <C>
Aggressive Growth 24,053,290
Social Awareness 39,436,497
</TABLE>
FUND shares will be owned by LINCOLN LIFE and LLANY and will be held in the
VARIABLE ACCOUNTS. As sole shareholders of each FUND, LINCOLN LIFE and LLANY
each 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 and LLANY 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 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 or LLANY
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
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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 shareholders. Generally, this may be done as long as: (1) a
majority of the Directors then in office have at some point been elected by
shareholders 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 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 shareholders 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 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 each 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 IN THE 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 Prospectuses. Therefore, where the Prospectus for 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.
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
16
<PAGE>
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 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, LLANY 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
17
<PAGE>
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. 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 FUNDS'
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) transactions
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 FUNDS restriction on illiquid
securities.
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 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 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 that 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.
Certain state insurance regulations impose additional restrictions on the extent
to which a FUND may invest in foreign securities. See the SAI.
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
The following only applies to Aggressive Growth. When the 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
18
<PAGE>
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, the 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.
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 will establish a common European currency for
participating countries. This currency will commonly be known as the "Euro". It
is anticipated that each such participating country will replace 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 the computer systems used
by their major service providers are not properly prepared to handle both the
imminent 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.
GENERAL INFORMATION
Your inquiries should be directed to Lincoln National Life Insurance Co., at
P.O. Box 9740, Portland, Maine 04104 or call 1-800-341-0441. For Variable
Annuity contracts issued by LLANY, inquiries should be directed to Lincoln Life
& Annuity Company of New York, TDA Client Services, P.O. Box 1337, Syracuse, NY
13201-1337 or call 1-800-893-1337.
The FUNDS will issue unaudited semiannual reports showing current investments in
each FUND and other information; and annual financial statements audited by
their independent auditors. In 1998, in response to certain changes to the
federal securities laws, the Board of Directors of Social Awareness recommended,
and shareholders approved, changes to the fundamental policy of the FUND. The
Board of Directors of each FUND also changed or eliminated certain
non-fundamental policies of the FUNDS.
Under the 1940 Act a fundamental policy of a fund may not be changed without the
affirmative vote of a majority of the fund's outstanding shares.
As used in this Prospectus, the term majority of the FUND'S outstanding shares
means the vote of: (1) 67% or more of each FUND'S shares present at a meeting,
if the holders of more than 50% of the outstanding shares of each FUND are
present or represented by proxy, or (2) more than 50% of each FUND'S outstanding
shares, whichever is less.
These Prospectuses do not contain all the information included in their
Registration Statements filed with the Commission. The Registration Statements,
including the exhibits filed with them, may be examined at the office of the
Commission in Washington, D.C. Statements contained in the Prospectuses about
the contents of any CONTRACT or other document referred to in them are not
necessarily complete. In each instance, reference is made to the copy of that
CONTRACT or other document filed as an exhibit to the Registration Statement of
which the particular Prospectus forms a part, and each statement is qualified in
all respects by that reference.
Due to differences in redemption rates, tax treatment, or other considerations,
the interests of CONTRACT OWNERS under one VARIABLE ACCOUNT may conflict with
those of
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<PAGE>
CONTRACT OWNERS under another variable account or other variable annuity
accounts. For example, violation of the federal tax laws by one VARIABLE ACCOUNT
investing in the FUNDS could cause the contracts and Policies 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, should be taken.
Should any conflict arise which requires that a substantial amount of assets be
withdrawn from any of the FUNDS, orderly portfolio management could be
disrupted, to the detriment of those CONTRACT OWNERS still investing in that
FUND. Also, if that FUND believes that any portfolio has become so large as to
materially impair investment performance, then the FUND will examine other
investment options.
LINCOLN LIFE performs the dividend and transfer functions for the FUNDS.
PREPARING FOR YEAR 2000
THE 'YEAR 2000' ISSUE. Many existing computer programs use only two digits to
identify a year in the date field. These programs were designed and developed
without considering the impact of the upcoming change in the century. If not
corrected, many computer applications could fail or create erroneous results by
or at the year 2000. This 'year 2000 issue' affects virtually all companies and
organizations.
Lincoln Life is responsible, as part of its year 2000 updating process, for the
updating of FUND-related computer systems. An affiliate of Lincoln Life,
Delaware Service Company (Delaware), provides substantially all of the necessary
accounting and valuation services for the FUNDS. Delaware, for its part, is
responsible for updating all of its computer systems, including those which
serve the FUNDS, to accommodate the year 2000. Lincoln Life and Delaware have
begun formal discussions with each other to assess the requirements for their
respective systems to interface properly in order to facilitate the accurate and
orderly operation of the FUND beginning in the year 2000.
The year 2000 issue is pervasive and complex and affects virtually every aspect
of the businesses of Lincoln Life, Delaware, and the FUNDS (the Companies). The
computer systems of Lincoln Life and Delaware (including those computer systems
which serve the FUNDS) and their interfaces with the computer systems of
vendors, suppliers, customers and other business partners are particularly
vulnerable. The inability to properly recognize date-sensitive electronic
information and to transfer data between systems could cause errors or even
complete failure of systems, which would result in a temporary inability to
process transactions correctly and engage in normal business activities for the
FUNDS. Lincoln Life and Delaware, respectively, are redirecting significant
portions of their internal information technology efforts and are contracting,
as needed, with outside consultants to help update their systems to accommodate
the year 2000. Also, in addition to the discussions with each other noted above,
Lincoln Life and Delaware have respectively initiated formal discussions with
other critical parties that interface with their systems to gain an
understanding of the progress by those parties in addressing year 2000 issues.
While Lincoln Life and Delaware are making substantial efforts to address their
own systems (including those which serve the FUNDS) and the systems with which
they interface, it is not possible to provide assurance that operational
problems will not occur. Lincoln Life and Delaware presently believe that,
assuming the modification of existing computer systems, updates by vendors and
conversion to new software and hardware, the year 2000 issue will not pose
significant operations problems for their respective computer systems. In
addition, the Companies are incorporating potential issues surrounding year 2000
into their contingency planning process, in the event that, despite these
substantial efforts, there are unresolved year 2000 problems. If the remediation
efforts noted above are not completed timely or properly, the year 2000 issue
could have a material adverse impact on the operation of the businesses of
Lincoln Life, Delaware, the FUNDS, or all of them.
The cost of addressing year 2000 issues and the timeliness of completion will be
closely monitored by management for Lincoln Life, Delaware and the FUNDS.
Nevertheless, there can be no guarantee by Lincoln Life, by Delaware or by the
FUNDS that estimated costs will be achieved, and actual results could differ
significantly from those anticipated. Specific factors that might cause such
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer problems, and other uncertainties.
20
<PAGE>
STATEMENT OF ADDITIONAL
INFORMATION TABLE OF
CONTENTS
<TABLE>
<CAPTION>
ITEM ITEM
- ------------------------------------------------ ------------------------------------------------
<S> <C>
General Information and History Appendix
Investment objective Investment advisor and sub-advisor
Investment policies and techniques Directors and officers
Investment restrictions Investment policies and techniques
Portfolio transactions and brokerage (continued): options, futures, securities
Determination of net asset value valuation, securities lending, repurchase and
reverse repurchase agreements
Custodian
Independent auditors
Financial statements
Bond and commercial paper ratings
U.S. Government obligations
Taxes
State requirements
Derivative transactions -- definitions
*NOTE: THIS IS A GENERIC TABLE. THERE ARE
VARIATIONS IN THE CONTENTS OF THE SAI FROM FUND
TO FUND.
</TABLE>
- --------------------------------------------------------------------------------
Please send me a free copy of the current Statement of Additional Information
for the FUNDS
(Please Print)
Name: __________________________________________________________________________
Address: _______________________________________________________________________
City _________________________________ State ____________________ Zip __________
Mail to Lincoln National Life Insurance Co., P.O. Box 9740, Portland, Maine
04104 or Lincoln Life & Annuity Company of New York, TDA Client Services, P.O.
Box 1337, Syracuse, NY 13201-1337
21
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THIS PAGE WAS INTENTIONALLY LEFT BLANK.
22
<PAGE>
LINCOLN NATIONAL
SOCIAL AWARENESS FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
This SAI should be read in conjunction with the Prospectus
of Lincoln National Social Awareness Fund, Inc. (FUND)
dated May 1, 1998. You may obtain a copy of the FUND'S
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).
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
- ------------------------------------------------------
GENERAL INFORMATION AND HISTORY SA-2
- ------------------------------------------------------
INVESTMENT POLICIES AND TECHNIQUES SA-2
- ------------------------------------------------------
INVESTMENT RESTRICTIONS SA-3
- ------------------------------------------------------
PORTFOLIO TRANSACTIONS AND BROKERAGE SA-4
- ------------------------------------------------------
DETERMINATION OF NET ASSET VALUE SA-5
- ------------------------------------------------------
APPENDIX
Investment advisor and sub-advisor A-1
- ------------------------------------------------------
Directors and officers A-3
- ------------------------------------------------------
Investment policies and techniques
(continued): options, futures, securities
valuation, securities lending, repurchase
and reverse repurchase agreements A-4
- ------------------------------------------------------
<CAPTION>
PAGE
- ------------------------------------------------------
<S> <C>
Custodian A-9
- ------------------------------------------------------
Independent auditors A-9
- ------------------------------------------------------
Financial statements A-9
- ------------------------------------------------------
Bond and commercial paper ratings A-9
- ------------------------------------------------------
U.S. Government obligations A-11
- ------------------------------------------------------
Taxes A-11
- ------------------------------------------------------
State requirements A-11
- ------------------------------------------------------
Derivative transactions-definitions A-12
- ------------------------------------------------------
</TABLE>
THIS SAI IS NOT A PROSPECTUS.
The date of this SAI is May 1, 1998.
SA-1
<PAGE>
GENERAL INFORMATION AND HISTORY
Lincoln National Social Awareness Fund, Inc. was incorporated in Maryland in
1986 as Lincoln National Government Securities Fund, Inc. It remained a
development stage enterprise under that name until December, 1987, when the name
was changed to Lincoln National Social Awareness Fund, Inc. The FUND commenced
investment activity in May, 1988.
INVESTMENT POLICIES AND TECHNIQUES
The Prospectus describes the FUND'S investment objective and its general
investment policies. This SAI includes additional information about various
investment practices and restrictions of the FUND. References to ADVISOR in this
SAI include both Lincoln Investment Management, Inc. (LINCOLN INVESTMENT) and
Vantage Global Advisors, Inc.
The investment policies described in the Prospectus are not fundamental, and the
Directors may change such policies without shareholder approval.
In addition, the FUND may engage in these strategic portfolio transactions:
OPTIONS TRADING
The FUND may write (sell) put and covered call options and purchase covered put
options for stock and stock indices and write and purchase options to close out
positions previously entered into by the FUND: provided, that the aggregate cost
of all outstanding options would not exceed 30% of the FUND'S total assets. The
FUND will only write and purchase options in standard contracts which may be
noted on NASDAQ or traded on the national securities exchanges.
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 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 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.)
The FUND will not invest in futures contracts and options thereon if immediately
thereafter the amount committed to margins plus the amount paid for option
premiums exceeds 5% of the FUND'S total assets. See the SAI Appendix 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. A repurchase
agreement typically involves the purchase by the FUND of securities (U.S.
Government or other money market securities) from a financial institution such
as a bank, broker-dealer or savings and loan association, coupled with an
agreement by the seller to repurchase the same securities from the FUND at the
specified price and at a fixed time in the future, usually not more than seven
days from the date of purchase. The difference between the
SA-2
<PAGE>
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. However, repurchase agreements will be made
only with brokers or dealers deemed by the Board of Directors or its delegate to
be creditworthy; they will be fully collateralized; and the collateral for each
transaction will be in the actual or constructive possession of the FUND during
the term of the transaction, as provided in the agreement.
INVESTMENT RESTRICTIONS
In addition to the investment restrictions listed in the Prospectus, the
following investment restrictions have been adopted by the FUND as fundamental
policies. Under the Investment Company Act of 1940, as amended (1940 Act), a
fundamental policy may not be changed without the affirmative vote of a majority
of the outstanding voting securities of the FUND, as defined in the Act. See
General information in the Prospectus Appendix. 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.
2. Invest in the securities of any one issuer unless at least 75% of the value
of the FUND'S total assets is represented by: (a) U.S. Government
obligations, cash and cash items, (b) securities of other investment
companies, and (c) securities of issuers as to each of which, at the time
the investment was made, the FUND'S investment in the issuer did not exceed
5% of the FUND'S total assets.
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 Investment policies and
techniques. 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 Investment policies and techniques.
6. Underwrite the securities of other issuers, except insofar as the FUND may
be deemed an underwriter 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, or with the effect of, acquiring
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 previously. (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.)
15. Hold more than 10% of the outstanding voting securities of any one issuer.
SA-3
<PAGE>
The following restriction is not fundamental, but it is the FUND'S present
policy not to invest in equity securities 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.)
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 an 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 and SUB-ADVISOR in the Appendix. 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 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 the most favorable price and efficient execution. Within
the framework of this policy, the reasonableness of brokerage commissions 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, commissions 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. During 1997,
the ADVISOR directed transactions totaling approximately $21.0 million to these
brokers and paid commissions of approximately $26,000 in connection with these
transactions. 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 ADVISOR by any
SA-4
<PAGE>
amount that might be attributable to the value of such services.
The aggregate amount of brokerage commissions paid by the FUND during 1997,
1996, and 1995, was $909,290, $628,906, and $309,365, 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) 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.
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 1998 it 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.
It may also be closed on other days. It may also be closed on other days.
Although the Directors expect the same holiday schedule to be observed in the
future, the NYSE may modify its holiday schedule at any time. To the extent that
the FUND'S securities are traded in other markets on days when the NYSE is
closed, the FUND'S NAV may be affected on days when investors do not have access
to the FUND to purchase or redeem shares.
SA-5
<PAGE>
THIS PAGE WAS INTENTIONALLY LEFT BLANK.
SA-6
<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 FUND), LINCOLN NATIONAL BOND FUND, INC. (BOND
FUND), LINCOLN NATIONAL CAPITAL APPRECIATION FUND, INC. (CAPITAL APPRECIATION
FUND), LINCOLN NATIONAL EQUITY-INCOME FUND, INC. (EQUITY-INCOME FUND), LINCOLN
NATIONAL GLOBAL ASSET ALLOCATION FUND, INC. (GLOBAL ASSET ALLOCATION FUND),
LINCOLN NATIONAL GROWTH AND INCOME FUND, INC. (GROWTH AND INCOME FUND), LINCOLN
NATIONAL INTERNATIONAL FUND, INC. (INTERNATIONAL FUND), LINCOLN NATIONAL MANAGED
FUND, INC. (MANAGED FUND), LINCOLN NATIONAL MONEY MARKET FUND, INC. (MONEY
MARKET FUND), LINCOLN NATIONAL SOCIAL AWARENESS FUND, INC. (SOCIAL AWARENESS
FUND), AND LINCOLN NATIONAL SPECIAL OPPORTUNITIES FUND, INC. (SPECIAL
OPPORTUNITIES FUND). 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>
1997 1996 1995
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth Fund $2,109,952 $1,428,803 $ 725,544
Bond Fund 1,221,295 1,188,030 1,061,701
Capital Appreciation Fund 2,940,632 1,549,656 726,011
Equity-Income Fund 6,053,404 3,303,336 1,457,623
Global Asset Allocation Fund 2,808,358 2,072,722 1,570,876
Growth and Income Fund 9,714,765 7,063,276 5,077,981
International Fund 3,741,563 3,319,701 2,770,197
Managed Fund 2,873,786 2,480,524 2,120,656
Money Market Fund 451,243 417,468 385,019
Social Awareness Fund 3,355,544 1,877,030 1,048,366
Special Opportunities Fund 2,824,015 2,274,229 1,809,514
</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.
The current advisory agreements between the ADVISOR and the FUNDS will remain in
effect from year to year if approved annually by: (1) the Board of Directors of
each FUND or by the vote of a majority of the outstanding voting securities of
each FUND, and (2) a vote of a majority of the directors who are not interested
persons of the FUNDS or the advisor, cast in person at a meeting called for the
purpose of voting on such approval. The advisory agreement may be terminated
without penalty at any time, on 60 days' written notice by: (1) the Board of
Directors of each FUND, (2) vote of a majority of the outstanding voting
securities of each FUND or (3) the advisor. The advisory agreement terminates
automatically in the event of assignment.
In like manner, the current sub-advisory agreement will remain in effect from
year to year if approved annually by the Board of Directors of the applicable
FUNDS or by the vote of a majority of the outstanding voting securities of those
FUNDS. The sub-advisory agreements may be terminated without penalty at any
time, on 60 days' written notice, by: (1) the Board of Directors of the
applicable FUND, (2) vote of the majority of the outstanding voting securities
of the applicable FUND, (3) the sub-advisor, or (4) the advisor. The
sub-advisory agreements terminate automatically in the event of assignment.
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>
1997 1996 1995
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth Fund $1,229,800 $ 893,059 $ 483,982
Bond Fund N/A N/A N/A
Capital Appreciation Fund 2,072,388 1,117,383 545,800
Equity-Income Fund 4,781,931 2,612,405 1,152,337
Global Asset Allocation Fund 1,724,369 1,284,185 1,034,321
Growth and Income Fund 6,155,225 4,440,325 3,108,208
International Fund 1,503,294 1,326,484 1,146,153
Managed Fund 974,080 820,633 672,474
Money Market Fund N/A N/A N/A
Social Awareness Fund 1,901,560 923,516 462,593
Special Opportunities Fund 1,519,961 1,168,134 868,019
</TABLE>
A-2
<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
45
1300 S. Clinton Street
Fort Wayne, IN 46802
- ------------------------------------------------------------------------------------------------------------------
JOHN B. BORSCH, JR. Retired, formerly Associate Vice President--Investments, Northwestern
DIRECTOR, age 64 University
1776 Sherwood Road
Des Plaines, IL 60016
- ------------------------------------------------------------------------------------------------------------------
NANCY L. FRISBY, CPA Regional Vice President/Chief Financial Officer (formerly Vice
DIRECTOR, age 56 President--Finance; Regional Controller of Finance), St. Joseph Medical
700 Broadway Center, Fort Wayne, Indiana
Fort Wayne, IN 46802
- ------------------------------------------------------------------------------------------------------------------
* BARBARA S. KOWALCZYK Senior Vice President and Director, Corporate Planning and Development,
DIRECTOR, age 46 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 54
One America Square
Indianapolis, IN 46282
- ------------------------------------------------------------------------------------------------------------------
* JANET C. WHITNEY Vice President and Treasurer, Lincoln National Corp. (formerly Vice
TREASURER, age 49 President and General Auditor)
200 East Berry Street
Fort Wayne, IN 46802
- ------------------------------------------------------------------------------------------------------------------
* CYNTHIA A. ROSE Assistant Secretary, Lincoln National Life Insurance Co.
SECRETARY, age 43
200 East Berry Street
Fort Wayne, IN 46802
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
* Interested persons of the FUNDS, as defined in the 1940 Act. Directors' fees
of $250 per meeting are paid by each FUND to each director who is not an
interested person of the FUND. During 1997, each FUND paid $1,000 in director's
fees to each such director, plus out of pocket expenses to attend meetings.
During 1997, the FUND complex paid each of these directors aggregate fees of
$11,000. Mr. Stanley R. Nelson, a director who retired in 1997, received $750 in
director fees from each FUND and aggregate fees of $8,250 from the FUND complex.
Mr. Stella became a director in 1998 and thus received no fees during 1997.
A-3
<PAGE>
INVESTMENT POLICIES AND TECHNIQUES
OPTIONS AND FINANCIAL FUTURES TRADING
This discussion relates to the Bond, Growth and Income, Managed, Social
Awareness and Special Opportunities Funds. Neither the International Fund nor
the Money Market Fund has sought the authority to engage either in options or in
futures trading. (NOTE: The Aggressive Growth, Capital Appreciation,
Equity-Income and Global Asset Allocation Funds have their own respective
discussions 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.
A. In General. 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.
B. Call Options. The FUND may write only call options which are covered,
meaning that the FUND either owns the underlying security or has an absolute
and immediate right to acquire that security, without additional cash
consideration, upon conversion or exchange of other securities currently
held in its portfolio. In addition, the FUND will not, before the expiration
of a call option, permit the call to become uncovered. If the FUND writes a
call option, the purchaser of the option has the right to buy (and the FUND
has the obligation to sell) the underlying security at the exercise price
throughout the term of the option. The amount paid to the FUND by the
purchaser of the option is the premium. The FUND'S obligation to deliver the
underlying security against payment of the exercise price would terminate
either upon expiration of the option or earlier if the FUND were to effect a
closing purchase transaction through the purchase of an equivalent option on
an exchange. The FUND would not be able to effect a closing purchase
transaction after it had received notice of exercise.
In order to write a call option, the FUND is required to deposit in escrow the
underlying security or other assets in accordance with the rules of The Options
Clearing Corp. (OCC) and the various exchanges. The FUND may not purchase call
options except in connection with a closing purchase transaction. It is possible
that the cost of effecting a closing purchase transaction may be greater than
the premium received by the FUND for writing the option.
Generally, the INVESTMENT ADVISOR (THE ADVISOR) intends to write listed covered
calls during periods when it anticipates declines in the market values of
portfolio securities and the premiums received (net of transaction costs) may
offset to some extent the decline in the FUND'S net asset value occasioned by
such declines in market value. The ADVISOR will generally not write listed
covered call options when it anticipates that the market value of the FUND'S
portfolio securities will increase.
If the ADVISOR decides that at a price higher than the current value a portfolio
security would be overvalued and should be sold, the FUND may write a call
option on the security at that price. Should the security subsequently reach
that price and the option be exercised, the FUND would, in effect, have
increased the selling price of that security, which it would have sold at that
price in any event, by the amount of the premium. In the event the market price
of the security declined and the option were not exercised, the premium would
offset all or some portion of that decline. It is possible, of course, that the
price of the security could increase beyond the exercise price; in that event,
the FUND would forego the opportunity to sell the security at that higher price.
In addition, call options may be used as part of a different strategy in
connection with sales of portfolio securities. If, in the judgment of the
advisor, the market price of a security is overvalued and it should be sold, the
FUND may elect to write a call with an exercise price substantially below the
current market price. So long as the value of the underlying security remains
above the exercise price during the term of the option, the option will be
exercised, and the FUND will be required to sell
A-4
<PAGE>
the security at the exercise price. If the sum of the premium and the exercise
price exceeds the market price of the security at the time the call is written,
the FUND would, in effect, have increased the selling price of the security. The
FUND would not write a call under these circumstances if the sum of the premium
and the exercise price were less than the current market price of the security.
In summary, a principal reason for writing calls on a securities portfolio is to
attempt to realize, through the receipt of premium income, a greater return than
would be earned on the securities alone. A covered call writer, such as the
FUND, which owns the underlying security has, in return for the premium, given
up the opportunity for profit from a price increase in the underlying security
above the exercise price, but has retained the risk of loss should the price of
the security decline. Unlike one who owns securities not subject to a call, the
FUND as a call writer may be required to hold such securities until the
expiration of the call option or until the FUND engages in a closing purchase
transaction at a price that may be below the prevailing market.
C. Put Options. The FUND may also write put options. If the FUND writes a put
option, it is obligated to purchase a given security at a specified price at
any time during the term of the option. The rules regarding the writing of
put options are generally comparable to those described above with respect
to call options.
Writing put options may be a useful portfolio investment strategy when the FUND
has cash or other reserves available for investment as a result of sales of FUND
shares or because the ADVISOR believes a more defensive and less fully invested
position is desirable in light of market conditions. If the FUND wishes to
invest its cash or reserves in a particular security at a price lower than
current market value, it may write a put option on that security at an exercise
price which reflects the lower price it is willing to pay. The buyer of the put
option generally will not exercise the option unless the market price of the
underlying security declines to a price near or below the exercise price. If the
FUND writes a put option, the price of the underlying security declines and the
option is exercised, the premium, net of transaction charges, will reduce the
purchase price paid by the FUND for the security. Of course, the price of the
security may continue to decline after exercise of the put options, in which
event the FUND would have foregone an opportunity to purchase the security at a
lower price, or the option might never be exercised.
If, before the exercise of a put, the ADVISOR determines that it no longer
wishes to invest in the security on which the put has been written, the FUND may
be able to effect a closing purchase transaction on an exchange by purchasing a
put of the same series as the one which it has previously written. The cost of
effecting a closing purchase transaction may be greater than the premium
received on writing the put option, and there is no guarantee that a closing
purchase transaction can be effected. The FUND may purchase put options only in
connection with a closing transaction.
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.
At the time a put option is written, the FUND will be required to establish, and
will maintain until the put is exercised or has expired, a segregated account
with its custodian consisting of cash or short-term U.S. Government securities
equal in value to the amount which the FUND will be obligated to pay upon
exercise of the put. 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
A. In General. 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, as
explained later, the FUND is also authorized to buy futures contracts on an
unleveraged basis and not as an anticipatory hedge.)
A-5
<PAGE>
The FUND will not invest in futures contracts and options thereon if immediately
thereafter the amount committed to margins plus the amount paid or option
premiums exceeds 5% of the FUND'S total assets. In addition the FUND will not
hedge more than 1/3 of its net assets.
B. Futures contracts. 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.
There are a number of reasons why entering into futures contracts for hedging
purposes can be beneficial to the FUND. First, futures markets may be more
liquid than the corresponding cash markets on the underlying securities. Such
enhanced liquidity results from the standardization of the futures contracts and
the large transaction volumes. Greater liquidity permits a portfolio manager to
effect a desired hedge both more quickly and in greater volume than would be
possible in the cash market. Second, a desired sale and subsequent purchase can
generally be accomplished in the futures market for a fraction of the
transaction costs that might be incurred in the cash market.
The purpose of selling a futures contract is to protect the FUND'S portfolio
from fluctuation in asset value resulting from security price changes. Selling a
futures contract has an effect similar to selling a portion of the FUND'S
portfolio securities. If security prices were to decline, the value of the
FUND'S futures contracts would increase, thereby keeping the net asset value of
the FUND from declining as much as it otherwise might have. In this way, selling
futures contracts acts as a hedge against the effects of declining prices.
However, an increase in the value of portfolio securities tends to be offset by
a decrease in the value of corresponding futures contracts.
Similarly, when security prices are expected to rise, futures contracts may be
purchased to hedge against anticipated subsequent purchases of portfolio
securities at higher prices. By buying futures, the FUND could effectively hedge
against an increase in the price of the securities it intends to purchase at a
later date in order to permit the purchase to be effected in an orderly manner.
At that time, the futures contracts could be liquidated at a profit if prices
had increased as expected, and the FUND'S cash position could be used to
purchase securities.
When a purchase or sale of a futures contract occurs, a deposit of high-quality,
liquid securities called initial margin is made by both buyer and seller with a
custodian for the benefit of the broker. Unlike other types of margin, a futures
margin account does not involve any loan or borrowing but is merely a good faith
deposit that must be maintained in a minimum amount of cash or U.S. Treasury
bills. All futures positions, both long and short, are marked-to-market daily,
with cash payments called variation margin being made by buyers and sellers to
the custodian, and passed through to the sellers and buyers, to reflect daily
changes in the contract values.
Most futures contracts are typically canceled or closed out before the scheduled
settlement date. The closing is accomplished by purchasing (or selling) an
identical futures contract to offset a short (or long) position. Such an
offsetting transaction cancels the contractual obligations established by the
original futures transaction. Other financial futures contracts call for cash
settlements rather than delivery of securities.
If the price of an offsetting futures transaction varies from the price of the
original futures transaction, the hedger will realize a gain or loss
corresponding to the difference. That gain or loss will tend to offset the
realized loss or gain on the hedged securities position, but may not always or
completely do so.
The FUND will not enter into any futures contract 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 FUND will not purchase or sell futures contracts or related
options if immediately thereafter more than 1/3 of its net assets would be
hedged.
C. Risks and limitations involved in futures hedging. 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
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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 (discussed later) are subject to position limits,
which are affected by the activities of the investment advisor.
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.
Pursuant to Rule 4.5 under the Commodity Exchange Act, investment companies
registered under the 1940 Act are exempted from the definition of commodity pool
operator in the Commodity Exchange Act, subject to compliance with certain
conditions. The exemption is conditioned upon a requirement that all of the
investment company's commodity futures transactions constitute bona fide hedging
transactions (except on an unleveraged basis, as described in (F.) With respect
to long positions assumed by the FUND, the FUND will segregate with its
custodian an amount of cash and other assets permitted by Commodity Futures
Trading Commission (CFTC) regulations equal to the market value of the futures
contracts and thereby insure that the use of futures contracts is unleveraged.
The FUND will use futures in a manner consistent with these requirements.
D. Options on futures contracts. The FUND only intends to engage in options on
futures contracts for bona fide hedging purposes in compliance with CFTC
regulations. An option on a futures contract gives the purchaser the right,
but not the obligation, to assume a position in a futures contract (which
position may be a long or short position) at a specified exercise price at
any time during the option exercise period. The writer of the option is
required upon exercise to assume an offsetting futures position (which
position may be a long or short position). Upon exercise of the option, the
assumption of offsetting futures positions by the writer and holder of the
option will be accompanied by delivery of the accumulated balance in the
writer's futures margin account that represents the amount by which the
market price of the futures contract, at exercise, exceeds, in the case of a
call, or is less than, in the case of a put, the exercise price of the
option on the futures contract.
The holder or writer of an option may terminate its position by selling or
purchasing an option of the same series. There is no guarantee that such closing
transactions can be effected.
The FUND will be required to deposit initial and variation margin with respect
to put and call options on futures contracts written by it pursuant to the
FUND'S futures commissions merchants' requirements similar to those applicable
to the futures contracts themselves, described previously.
E. Risks of futures transactions. 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,
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there can be no assurance that such liquidity will always exist.
F. The FUND also is authorized, subject to the limitations set out in the
Prospectus, to purchase futures contracts on an unleveraged basis, when not
intended as an anticipatory hedge. When a contract is purchased on this
basis the investment company establishes a segregated account, composed of
cash and/or cash equivalents, equal to the total value of the contract (less
margin on deposit). As with other futures trading, these purchases must not
be for speculative purposes.
The ability to engage in these purchases on an unleveraged basis can
significantly decrease transaction costs to the FUNDS in certain instances. For
example, if an inordinately large deposit should occur on a single day, the
sheer volume of securities purchases required for that day may place the FUND at
a market disadvantage by requiring it to purchase particular securities in such
volume that its own buying activity could cause prices to increase. In addition,
if this deposit had involved market-timing and as a result there subsequently
were an oversized withdrawal, the FUND could again suffer market disadvantage,
this time because the volume of sales could, for the same reason, force prices
of particular securities to decrease. The FUND, by buying a futures contract
(followed by the appropriate closing transaction) instead of purchasing
securities could achieve considerable savings in transaction costs without
departing from FUND objectives. Furthermore, as stated in (C.), price changes in
a futures contract generally parallel price changes in the securities that the
FUND might otherwise have purchased. Thus, purchase of a futures contract on an
unleveraged basis allows the FUND to comply with its objective while at the same
time achieving these lower transaction costs.
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.
LENDING OF PORTFOLIO SECURITIES
As described in the Prospectus, 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.
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REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
The FUNDS may make short-term investments in repurchase agreements. A repurchase
agreement typically involves the purchase by the FUND of securities (U.S.
Government or other money market securities) from a financial institution such
as a bank, broker-dealer or savings and loan association, coupled with an
agreement by the seller to repurchase the same securities from the FUND at the
specified price and at a fixed time in the future, usually not more than seven
days from the date of purchase. 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.
In a reverse repurchase agreement, the FUND involved sells a portfolio security
to another party, such as a bank or broker-dealer, in return for cash and agrees
to repurchase the instrument at a particular price and time. 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. The FUND will enter into reverse repurchase
agreements only with parties that the ADVISOR or sub-advisor deems creditworthy.
Reverse repurchase agreements are considered to be borrowing transactions, and
thus are subject to the FUND'S limitation on borrowing. Not every FUND is
authorized to enter into reverse repurchase agreements.
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 1997
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 are incorporated by reference to the FUNDS'
1997 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.
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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.
(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).
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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.
STATE REQUIREMENTS
The California Department of Insurance has established the following guidelines
for an underlying portfolio of a VARIABLE ACCOUNT. The FUNDS intend to comply
with these guidelines:
BORROWING
The borrowing limit for any FUND is 33 1/3 percent of total assets. Entering
into a reverse repurchase agreement shall be considered "borrowing" as that term
is used herein.
FOREIGN INVESTMENTS -- DIVERSIFICATION
The diversification guidelines to be followed by international and global FUNDS
are as follows:
a. An international FUND or a global FUND is sufficiently diversified if it is
invested in a minimum of three different countries at all times, and has
invested no more than 50 percent of total assets in any one second-tier
country and no more than 25 percent of total assets in any one third-tier
country. First-tier countries are: Germany, the United Kingdom,
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Japan, the United States, France, Canada, and Australia. Second-tier
countries are all countries not in the first or third tier. Third-tier
countries are countries identified as "emerging" or "developing" by the
International Bank for Reconstruction and Development ("World Bank") or
International Finance Corporation.
b. A regional FUND is sufficiently diversified if it is invested in a minimum
of three countries. The name of the FUND must accurately describe the FUND.
c. The name of a single country FUND must accurately describe the FUND.
d. An index FUND must substantially mirror the index.
DERIVATIVE TRANSACTIONS-
DEFINITIONS
The Prospectus for each FUND and the uniform Appendix for the Prospectus booklet
discuss the type of derivative transactions in which the FUNDS may engage and
the risks typically associated with 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).
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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.
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.
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