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PROSPECTUS AND APPENDIX
This document is incorporated by reference to Post-Effective Amendment No. 5,
Registration Number 33-38335 filed on Form N-1A on April 30, 1995.
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STATEMENT OF ADDITIONAL INFORMATION
LINCOLN NATIONAL INTERNATIONAL FUND, INC.
This Statement of Additional Information should be read in conjunction with the
Prospectus of Lincoln National International Fund, Inc. (the Fund) dated April
29, 1995. You may obtain a copy of the Fund's Prospectus on request and without
charge. Please write Kim Oakman, The Lincoln National Life Insurance Company,
P.O. Box 2340, Fort Wayne, Indiana 46801 or call 1-800-348-1212, Extension 4912.
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THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS.
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The date of this Statement of Additional Information is April 29, 1995.
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TABLE OF CONTENTS
Page
Investment Objective, Policies and Practices 2
Risk Factors and Special Considerations 5
Determination of Net Asset Value 6
Investment Restrictions 6
Portfolio Transactions and Brokerage 7
General Information and History 7
Clay Finlay, Inc. 8
The EAFE and Other Unmanaged Indices 8
Appendix
Investment Advisor and Sub-Advisor A-1
Directors and Officers A-2
Investment policies and Techniques (continued) A-2
Options, Futures, Securities Lending, Repurchase
and Reverse Repurchase Agreements
Custodian A-6
Independent Auditors A-7
Financial Statements A-7
Bond Ratings A-7
Commercial Paper Ratings A-8
U.S. Government Obligations A-8
Taxes A-8
State Requirements A-9
Derivative Transactions - Definitions A-9
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INVESTMENT OBJECTIVE, POLICIES AND PRACTICES
The investment objective of the Fund is long-term capital appreciation,
implemented through a strategic policy of investing primarily in a portfolio of
equity and equity-linked securities issued outside the United States. The Fund's
investment objective and strategic policy are fundamental and cannot be changed
without the affirmative vote of a majority of the outstanding voting securities
of the Fund. See "General Information," page A-3 in the Prospectus. There can be
no assurance that the objective of the Fund will be achieved.
This Fund invests principally in high-grade common stocks of established
companies domiciled outside the U.S., with the objective of maximizing longer-
term total return. The primary risk is that associated with common stock
investing, and the shares will fluctuate in value with the common stock market
in the country where issued. Secondary risks are those generally associated with
investments outside the U.S. (See "Foreign Investments" in the Prospectus.)
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 Composite Index, or their overseas equivalents.
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The Fund pursues its investment objective by investing primarily in a portfolio
of common stock and securities convertible into common stock. (See Description
of the Fund and Investment Policies and Techniques, in the Prospectus.)
TYPE OF EQUITY AND EQUITY-LINKED SECURITIES IN WHICH THE FUND MAY INVEST. As
discussed in the Prospectus, the Fund seeks to achieve its investment objective
through investment primarily in equity and equity-linked securities. In addition
to investing directly in equity securities, the Fund may invest in American
Depositary Receipts ("ADRs") and European Depositary Receipts ("EDRs").
Generally, ADRs in registered form are U.S. dollar denominated securities
designed for use in the U.S. securities markets, which represent and may be
converted into the underlying foreign security. EDRs are typically issued in
bearer form and are designed for use in the European securities markets. No more
than 5% of the Fund's assets will be invested in unsponsored ADRs or EDRs.
Issuers of the stock of such unsponsored ADRs and EDRs are not obligated to
disclose material information in the United States and, therefore, there may not
be a correlation between such information and the market value of such ADRs.
INVESTMENT COMPANY SHARES. The Fund also may purchase shares of investment
companies or trusts which invest principally in securities in which the Fund is
authorized to invest. The purchase of the stock of these investment companies
(called "country funds") currently is the only mechanism through which the Fund
may invest in securities of companies in certain countries (India, Taiwan,
Brazil and Chile, as of the date of this Prospectus) and the only means by which
the Fund may invest in securities of South Korean companies, other than through
the purchase of South Korean convertible securities or through the purchase of
securities with the prior approval of the Ministry of Finance. The return on the
Fund's investments in investment companies will be reduced by the operating
expenses, including investment advisory and administrative fees, of such
companies. The Fund's investment in an investment company may require the
payment of a premium above the net asset value of the investment company's
shares, and the market price of the investment company thereafter may decline
without any change in the value of the investment company's assets. The Fund,
however, will not invest in any investment company or trust unless it is
believed that the potential benefits of such investment are sufficient to
warrant the payment of any such premium. Under the Investment Company Act of
1940, the Fund may not invest more than 10% of its assets in investment
companies or more than 5% of its total assets in the securities of any one
investment company, nor may it own more than 3% of the outstanding voting
securities of any such company. (See "Investment Restrictions", below.) To the
extent the Fund invests in securities in bearer form it may be more difficult to
recover securities in the event such securities are lost or stolen.
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If the Fund invests in an entity which is classified as a "passive foreign
investment company" ("PFIC") for U.S. tax purposes, the application of certain
technical tax provisions applying to such companies could result in the
imposition of federal income tax with respect to such investments at the Fund
level which could not be eliminated by distributions to shareholders. The U.S.
Treasury is currently considering various solutions to this problem and, in any
event, it is not anticipated that any taxes on the Fund with respect to
investments in PFIC's would be significant.
TYPE OF FOREIGN DEBT SECURITIES IN WHICH THE FUND MAY INVEST. As discussed in
the Prospectus, the Fund may invest up to 35% of its total assets in non-U.S.
debt securities and non-U.S. money-market instruments, without equity features.
These investments may include bonds denominated in any currency, issued by
foreign governments (including their agencies and instrumentalities); and debt
instruments denominated in any currency, issued by private and public entities
(including their agencies and instrumentalities); and debt instruments
denominated in any currency, issued by private and public entities (including
multinational lending institutions and supranational institutions) which have
been determined by the Fund's investment adviser or sub-adviser to be of
comparable credit quality to securities rated in the three highest categories by
Moody's Investors Service, Inc. or Standard & Poor's Corporation.
PRIVATE PLACEMENTS. The Fund may invest up to 10% of its total assets in
securities which are subject to restriction on resale because they have not been
registered under the Securities Act of 1933, or which are otherwise not readily
marketable. These securities are generally referred to as private placements or
restricted securities. Limitations on the resale of such securities may have an
adverse effect on their marketability, and may prevent the fund from disposing
of them promptly at reasonable prices. The Fund may have to bear the expense of
registering such securities for resale and risk the substantive delays in
effecting such registration. However, as described in the Prospectus, the Fund
may avail itself of recently adopted regulatory changes to the Securities Act of
1933 ("Rule 144A") which permits the Fund to purchase securities which have been
privately placed and resell such securities to certain qualified institutional
buyers without restriction. Since it is not possible to predict with assurance
exactly how this market for restricted securities sold and offered under Rule
144A will develop, the Board of Directors will carefully monitor the Fund's
investments in these securities, focusing on such factors, among others, as
valuation, liquidity and availability of information.
Securities of foreign issuers often have not been registered in the U.S.
Accordingly, if the Fund wishes to sell unregistered foreign securities in the
U.S. it will avail itself of Rule 144A.
CONVERTIBLE SECURITIES. The Fund may invest in fixed-income
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securities which are convertible into common stock. Convertible securities rank
senior to common stocks in a corporation's capital structure and, therefore,
entail less risk than the corporation's common stock. The value of a convertible
security is a function of its "investment value" (its value as if it did not
have a conversion privilege), and its "conversion value" (the security's worth
if it were to be exchanged for the underlying security, at market value,
pursuant to its conversion privilege).
To the extent that a convertible security's investment value is greater than its
conversion value, its price will be primarily a reflection of such investment
value and its price will be likely to increase when interest rates fall and
decrease when interest rates rise, as with a fixed-income security (the credit
standing of the issuer and other factors may also have an effect on the
convertible security's value). If the conversion value exceeds the investment
value, the price of the convertible security will rise above its investment
value and, in addition, will sell at some premium over its conversion value.
(This premium represents the price investors are willing to pay for the
privilege of purchasing a fixed-income security with a possibility of capital
appreciation due to the conversion privilege.) At such times the price of the
convertible security will tend to fluctuate directly with the price of the
underlying equity security. Convertible securities may be purchased by the Fund
at varying price levels above their investment values and/or their conversion
values in keeping with the Fund's objectives.
FOREIGN CURRENCY TRANSACTIONS. When the Fund agrees to purchase or sell a
security in a foreign market it will generally be obligated to pay or be
entitled to receive, a specified amount of foreign currency. The Fund's
Custodian will conduct its foreign currency exchange transactions either on a
spot basis (i.e., cash) at the spot rate prevailing in the foreign currency
exchange market, or through entering into forward foreign currency contracts
("forward contracts") to purchase or sell foreign currencies. The Fund may enter
into forward contracts in order to lock in the U.S. dollar amount it must pay or
expects to receive for a security it has agreed to buy or sell. A forward
contract involves an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. These
contracts are traded in the interbank market conducted directly between currency
traders (usually large, commercial banks) and their customers. Such forward
contracts will only be entered into with United States banks and their foreign
branches. A forward contract generally has no deposit requirement, and no
commissions are charged at any stage for trades.
When management of the Fund believes that the currency of a particular foreign
country may suffer an increase against the U.S. dollar from the time the Fund
agrees to purchase a security until it is required to make payment, or a decline
against the
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U.S. dollar from the time the Fund agrees to sell a security until the buyer is
required to make payment, the Fund may enter into a forward contract to buy or
sell, for a fixed amount of dollars, the amount of foreign currency
approximating the amount of foreign currency the Fund will be required to pay or
expects to receive. The Fund's custodian bank will place cash, U.S.
Government securities, debt securities or equity securities in a separate
account of the Fund in an amount equal to the value of the Fund's total assets
committed to the consummation of any such contract in such account and if the
value of the securities placed in the separate account declines, additional cash
or securities will be placed in the account on a daily basis so that the value
of the account will equal the amount of the Fund's commitments with respect to
such contracts. If, rather than cash, portfolio securities are used to secure
such a forward contract, at the maturity of the forward contract for delivery by
the Fund of a foreign currency, the Fund may either sell the portfolio security
and make delivery of the foreign currency, or it may retain the security and
terminate its contractual obligation to deliver the foreign currency by
purchasing an "offsetting" contract with the same currency trader obligating it
to purchase, on the same maturity date, the same amount of foreign currency.
The Fund's use of forward contracts will not eliminate fluctuations in the
underlying prices of the securities which the Fund owns or intends to purchase
or sell. They simply establish a rate of exchange for a future point in time.
Additionally, while this technique tends to minimize the risk of loss due to a
decline in the value of the hedged currency, their use tends to limit any
potential gain which might result from the increase in value of such currency.
In addition such transactions involve costs and may result in losses.
Although the Fund values its assets daily in terms of U.S. dollars, it does not
intend to convert its holdings of foreign currencies into U.S. dollars on a
daily basis. Indeed it may hold a number of foreign currencies on a regular
basis. It will, however, convert some foreign currency to U.S. dollars from time
to time, and vice versa. For example, in the event of a purchase the Fund may
convert U.S. dollars or other currencies to the currency of the country in which
the securities are issued. In the event of a sale, the Fund may hold the
proceeds in the currency of the country in which the security was issued, or
convert it to U.S. dollars, or to currencies of other countries. Investors
should take note of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the spread between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at
one rate, while offering a lesser rate of exchange should the Fund desire to
resell that currency to the dealer.
Under Internal Revenue Code Section 988, special rules are
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allocate trades among brokers that generally provide superior brokerage and
research services. Research services furnished by brokers are used for the
benefit of all of the Adviser's clients and not solely or necessarily for the
benefit of the Fund. The Adviser believes that the value of research services
received is not determinable and does not significantly reduce its expenses. The
Fund does not reduce its fee to the Adviser by any amount that might be
attributable to the value of such services.
The aggregate amount of brokerage commissions paid by the Fund in 1993 and 1994
was $478,991 and $359,000, respectively.
GENERAL INFORMATION AND HISTORY
The Fund was originally incorporated in Maryland on January 17, 1986, under the
name of Lincoln National Real Estate Fund, Inc. It remained dormant under that
name until May 11, 1990, when the name was changed to Lincoln National
International Fund, Inc., in order to provide an investment vehicle for Contract
Owners of the Variable Account who desire to take advantage of investment
opportunities outside the United States.
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THE EAFE(SM) AND OTHER UNMANAGED INDICES
The Fund may from time to time compare its investment results to various
unmanaged indices for equity securities issued both inside and outside the
United States. For example, the Fund may refer to the Standard and Poor's 500
Stock Index, described in the SAI for the Variable Account at the front of this
booklet.
In addition, the Fund may compare its results to various unmanaged indices of
foreign equity securities, including, but not by way of limitation, that family
of indices maintained by Morgan Stanley & Co. Incorporated, New York, New York,
under the name Morgan Stanley Capital International (MSCI).
In particular, the Fund may compare its results, as appropriate, with one or
more of the 20 MSCI National Indices, and with its EAFE(SM) Index. EAFE(SM) is
an aggregate index produced from the results of those National Indices from
Europe, Australia and the Far East. It excludes the MSCI indices for the U.S.
and Canada.
(Note: SM=Service Mark)
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within seven days if any such investment, together with any other illiquid
assets held by the Fund, amount to more than 10% of its total assets.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD
COMMITMENTS. From time to time in the ordinary course of business, the Fund may
purchase securities on a when-issued or delayed delivery basis and may purchase
or sell securities on a forward commitment basis. When such transactions are
negotiated, the price is fixed at the time of the commitment, but delivery and
payment can take place a month or more after the date of the commitment. The
securities so purchased are subject to market fluctuation and no interest
accrues to the purchaser during this period. While the Fund will only purchase
securities on a when-issued, delayed delivery or forward commitment basis with
the intention of acquiring the securities, the Fund may sell the securities
before the settlement date, if it is deemed advisable. At the time of delivery
of the securities, the value may be more or less than the purchase price. The
Fund will also establish a segregated account with the Fund's custodian bank in
which it will continuously maintain cash or U.S. Government securities or other
high grade debt portfolio securities equal in value to commitments for such
when-issued or delayed delivery securities; subject to this requirement, the
Fund may purchase securities on such basis without limit. An increase in the
percentage of the Fund's assets committed to the purchase of securities on a
when-issued or delayed delivery basis may increase the volatility of the Fund's
net asset value. The Fund's management and the Directors do not believe that
the Fund's net asset value or income will be adversely affected by its purchases
of securities on such basis.
ADDITIONAL INFORMATION ABOUT FORWARD COMMITMENTS. The Fund may make contracts
to purchase securities for a fixed price at a future date beyond customary
settlement time ("forward commitments") if the Fund holds, and maintains until
the settlement date in a segregated account, cash or high-grade debt obligations
in an amount sufficient to meet the purchase price, or if the Fund enters into
offsetting contracts for the forward sale of other securities it owns. Forward
commitments may be considered securities in themselves, and involve a risk of
loss if the value of the security to be purchased declines prior to the
settlement date, which risk is in addition to the risk of decline in value of
the Fund's other assets. Where such purchases are made through dealers, the
Fund relies on the dealer to consummate the sale. The dealer's failure to do so
may result in the loss to the Fund of an advantageous yield or price. Although
the Fund will generally enter into forward commitments with the intention of
acquiring the securities for its portfolio, the fund may dispose of a commitment
prior to settlement if the Adviser deems it appropriate to do so. The Fund may
realize short-term profits or losses upon the sale of forward commitments.
RISK FACTORS AND SPECIAL CONSIDERATIONS
FOREIGN SECURITIES. The Fund is authorized to invest in Eastern European
countries; however, it does not presently intend to invest more than 5% of its
assets in those securities. Investments in Eastern Europe are speculative and
involve a high degree of risk of loss. The emergence of Eastern European
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capital markets is in part a function of the demise of the Soviet Union. Should
a repressive central government re-emerge in the region, there is no assurance
that the Eastern European markets would continue to constitute a viable
investment opportunity for the Fund, and there may be a high degree of risk of
expropriation without compensation.
The governments of a number of Eastern European countries previously
expropriated large quantities of private property, and the claims of many
property owners against those governments were never finally settled. Since the
Communist Party was responsible for such expropriation, if it should re-surface
there is no assurance that expropriation would not occur again. If it were to
reoccur, the Fund could lose all or a substantial portion of its investments in
those countries.
Further, no accounting standards comparable to U.S. models exist in Eastern
European countries. Finally, even though certain Eastern European currencies may
be convertible into United States dollars and other hard currencies, the
conversion rates may be artificial when compared to actual market values, and
this may have an adverse impact on the Fund.
The governments of certain Eastern European countries may require that a
governmental or quasi-governmental authority act as custodian of the Fund's
assets invested in such countries. These authorities may not be qualified to act
as foreign custodians under the 1940 Act and as a result, the Fund would not be
able to invest in the countries in the absence of exemptive relief from the
Securities and Exchange Commission. In addition, the risk of loss through
government confiscation may be increased in such countries.
RISKS OF DEBT SECURITIES. The Fund may invest up to 5% of its assets in bonds
rated below Baa by Moody's Investor Service Inc. ("Moody's) or BBB by Standard &
Poor's Corporation ("S&P") ("high yield bonds," commonly known as "Junk bonds").
Securities rated less than Baa by Moody's or BBB by S&P are classified as non-
investment grade securities and are considered speculative by those rating
agencies. It is the Fund's policy not to rely exclusively on ratings issued by
credit rating agencies but to supplement those ratings with Advisor's and/or
CFI's own independent and ongoing review of credit quality. These bonds may be
issued as a consequence of corporate restructurings, such as leveraged buyouts,
mergers, acquisitions, debt recapitalizations, or similar events or by smaller
or highly leveraged companies. Since the market for high yield bonds is
relatively new, many of the outstanding bonds have not endured a major economic
downturn, and a long-term track record on defaults does not exist for this
market. When economic conditions appear to be deteriorating, these bonds may
decline in market value regardless of prevailing interest rates, due to
heightened investor concerns over credit quality. In those periods the ability
of highly leveraged issuers to service principal and interest payments, to meet
their business goals, or obtain
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additional financing could be adversely affected. Therefore, the market for
these bonds may be less liquid than for investment grade bonds, and their prices
more volatile. In addition, there may at times be significant disparities in the
prices quoted for these bonds by various dealers, making it difficult for the
Fund to rely on those quotes. Prices for high yield bonds may also be affected
by legislative and regulatory developments. For example, new federal rules
require that savings and loans gradually reduce their holding of high yield
securities. Also, from time to time Congress has considered legislation to
restrict or eliminate the corporate tax deduction for interest payments or to
regulate corporate restructurings such as takeovers, mergers or leveraged
buyouts. Such legislation, if enacted, may depress the prices of outstanding
high yield bonds.
Debt securities rated in the lowest categories by Moody's are of poor standing
and there may be present elements of danger with respect to principal or
interest. Debt securities rated in the lowest category by S&P have a currently
identifiable vulnerability to default and are dependent upon favorable business,
financial and economic conditions to meet timely payment of interest and
repayment of principal. In the event of adverse business conditions they are not
likely to have the capacity to pay interest and repay principal.
RIGHTS AND WARRANTS. As mentioned in the Prospectus, the Fund may invest in
rights and warrants which entitle the holder to buy equity securities at a
specified price for a specific period of time. Rights and warrants do not
entitle a holder to dividends or voting rights with respect to the securities
which may be purchased, nor do they represent any rights to the assets of the
issuing company. The value of a right or warrant may be more volatile than the
value of the underlying securities. Also, their value does not necessarily
change with the value of the underlying securities and a right or warrant ceases
to have value if it is not exercised prior to the expiration date. Rights and
warrants purchased by the Fund which expire without being exercised will result
in a loss to the Fund.
FOREIGN CUSTODY. Rules adopted under the 1940 Act permit the Fund to maintain
its securities and cash in the custody of certain eligible banks and securities
depositories. The Fund's portfolio of securities of issuers located outside the
U.S. will be held by its sub-custodians who will be approved by the directors in
accordance with those Rules. Approval under the Rules will be given following a
consideration of a number of factors, including, but not limited to, the
reliability and financial stability of the institution; the ability of the
institution to perform custodial services for the Fund; the reputation of the
institution in its national market; the political and economic stability of the
country in which the institution is located; and the risks of potential
nationalization or expropriation of the Fund's assets. However, no assurances
can be given that the directors' appraisal of the
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risks in connection with foreign custodial arrangements will always be correct
or that expropriation, nationalization, freezes (including currency blockage),
or confiscations of assets that would affect assets of the Fund will not occur,
and shareholders bear the risk of losses arising from those or other similar
events.
ADDITIONAL RISKS. Securities in which the Fund may invest, whether in the U.S.
or in another country, are subject to the provisions of bankruptcy, insolvency
or other laws affecting the rights and remedies of creditors in the country
where issued, including the laws, if any, which may be enacted extending the
time for payment of principal or interest, or both, or imposing other
constraints upon enforcement of such obligations.
DETERMINATION OF NET ASSET VALUE
As explained in the Prospectus, the Fund's net asset value per share will be
determined on those days on which the New York Stock Exchange (NYSE) is open for
trading. In addition to being closed on weekends, the NYSE, through its most
current announcement--which is subject to change--states that it will be closed
on the following U.S. holidays: New Year's Day, January 1; President's Day,
February 20; Good Friday, April 14; Memorial Day, May 29; Independence Day, July
4, Labor Day, September 4; Thanksgiving Day, November 23; and Christmas Day,
December 25. It may also be closed on other days.
Since the Fund intends to invest virtually exclusively in securities issued
outside the U.S., investors should be aware that trading in securities on
exchanges and over-the-counter markets in Europe, the Far East and elsewhere is
normally completed at various times other than the current closing time of the
NYSE. Furthermore, trading on foreign exchanges may take place on days on which
the NYSE is closed; and, conversely, there may be no trading in some markets on
days when the NYSE is open. Consequently, the calculation of the Fund's net
asset value per share may not always occur contemporaneously with the
determination of the most current market prices of the individual portfolio
securities included in that calculation. In addition, the value of the net
assets held by the Fund may be significantly affected on days when the investor
has no access to the Fund for purposes of purchase or redemption.
INVESTMENT RESTRICTIONS
The following investment restrictions (which include those listed in the
Prospectus) have been adopted by the Fund as fundamental policies. Under the
Investment Company Act of 1940, as amended (the 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. For purposes of the following restrictions: (1) all
percentage limitations apply immediately after the making of an investment; and
(2) any subsequent change
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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 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.
3. Purchase or sell real estate or interests therein (including real estate
limited partnership programs), 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 25% of
its total assets at any one time. See "Investment Policies and Practices--
Lending of Securities," in the Prospectus. The purchase of debt securities
and the entry into repurchase agreements are not considered the making of
loans.
5. Purchase puts, calls or combinations thereof.
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, are not listed on a
securities exchange, 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.
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10. Purchase or sell commodities or commodity futures contracts.
11. Purchase securities of other investment companies, except to the limited
extent described under "Investment Objective and Strategic Policy, and 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. Invest in interests in oil, gas and other mineral exploration or
development programs, except that the Fund may invest in the securities of
companies which invest in or sponsor such programs.
14. Invest in securities of any issuer if, to the knowledge of the Fund,
officers or directors of the Fund or its Adviser, who individually own
beneficially 1/2 of 1% or more of the securities of such issuer,
collectively own beneficially more than 5% of the securities of such issuer.
15. Pledge its assets or assign or otherwise encumber them except to secure
borrowings effected within the limitations set forth in Restriction 1 in
the Prospectus.
16. Issue senior securities as defined in the Act except insofar as the Fund
may be deemed to have issued a senior security by borrowing money in
accordance with the restrictions described above. (For purposes of this
restriction, collateral arrangements for entering into repurchase agreements
and lending portfolio securities are not deemed to be the issuance of a
senior security.)
17. Hold more than 10% of the outstanding voting securities of any one issuer.
18. Invest more than 10% of its total assets in investment companies or more
than 5% of its total assets in the securities of any one investment company,
nor may it own more than 3% of the outstanding voting securities of any such
company.
19. Invest more than 10% of its total assets in issues of companies which have
been in operation for less than three years.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser (including, for purposes of this section, the Sub-Adviser) is
responsible for decisions to buy and sell securities for the Fund, the selection
of brokers and dealers to effect the transactions, and the negotiation of
brokerage commissions, if any. Purchases and sales of securities on a stock
exchange are effected through brokers who charge a commission for their
services. In the over-the-counter market, securities are
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generally traded on a "net" basis with dealers acting as principal for their own
accounts without a stated commission, although the price of the security usually
includes a profit to the dealer. In underwritten offerings, securities are
purchased at a fixed price which includes an amount of compensation to the
underwriter, generally referred to as the underwriter's concession or discount.
On occasion, certain money market instruments may be purchased directly from an
issuer, in which case no commissions or discounts are paid.
The Adviser currently provides investment advice to a number of other clients.
See Investment Adviser and Sub-Adviser, in the Appendix. It will be the practice
of the Adviser to allocate purchase and sale transactions among the Fund and
others whose assets it manages in such manner as it deems equitable. In making
such allocations, major factors to be considered are investment objectives, the
relative size of portfolio holdings of the same or comparable securities, the
availability of cash for investment, the size of investment commitments
generally held and the opinions of the persons responsible for managing the
portfolios of the Fund and other client accounts. Portfolio securities are not
purchased from or sold to the Adviser or any affiliated person (as defined in
the Act) of the Adviser.
In connection with effecting portfolio transactions, primary consideration will
be given to securing most favorable price and efficient execution. Within the
framework of this policy, the reasonableness of commission or other transaction
costs is a major factor in the selection of brokers and is considered together
with other relevant factors, including financial responsibility, research and
investment information and other services provided by such brokers. It is
expected that, as a result of such factors, transaction costs charged by some
brokers may be greater than the amounts other brokers might charge. The Adviser
may determine in good faith that the amount of such higher transaction costs is
reasonable in relation to the value of the brokerage and research services
provided. The Board of Directors of the Fund will review regularly the
reasonableness of commission and other transaction costs incurred by the Fund in
the light of facts and circumstances deemed relevant from time to time, and, in
that connection, will receive reports from the Adviser and published data
concerning transaction costs incurred by institutional investors generally. The
nature of the research services provided to the Adviser by brokerage firms
varies from time to time but generally includes current and historical financial
data concerning particular companies and their securities; information and
analysis concerning securities markets and economic and industry matters; and
technical and statistical studies and data dealing with various investment
opportunities, risks and trends, all of which the Adviser regards as a useful
supplement to its own internal research capabilities. The Adviser may from time
to time direct trades to brokers which have provided specific brokerage or
research services for the benefit of the Adviser's clients; in addition the
Adviser may
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allocate trades among brokers that generally provide superior brokerage and
research services. Research services furnished by brokers are used for the
benefit of all of the Adviser's clients and not solely or necessarily for the
benefit of the Fund. The Adviser believes that the value of research services
received is not determinable and does not significantly reduce its expenses. The
Fund does not reduce its fee to the Adviser by any amount that might be
attributable to the value of such services.
The aggregate amount of brokerage commissions paid by the Fund in 1993 and 1994
was $478,991 and $359,000, respectively.
GENERAL INFORMATION AND HISTORY
The Fund was originally incorporated in Maryland on January 17, 1986, under the
name of Lincoln National Real Estate Fund, Inc. It remained dormant under that
name until May 11, 1990, when the name was changed to Lincoln National
International Fund, Inc., in order to provide an investment vehicle for Contract
Owners of the Variable Account who desire to take advantage of investment
opportunities outside the United States.
CLAY FINLAY INC. (CFI)
The sub-adviser of the International Fund is Clay Finlay Inc. of New York.
Founded in 1982 by John Clay and Francis Finlay, the firm's current level of
assets under management exceeds 5 billion. Clay Finlay and its associates have
twelve investment professionals with more than 280 years of collective
experience in international investments. They gather investment information
through personal visits of the managements of 250 non-U.S. companies per year,
conversations with security analysts, and their review of statistical
information from banks, brokers, and individual companies.
The direction of the International Fund for The Lincoln National Life Insurance
Company's Multi Fund Variable Annuity will be to invest worldwide in non-U.S.
equities. Chief Investment Officer, Francis Finlay, leads the investment group
to an agreement on the broad lines of asset allocation and stock selection. The
investment group is directly responsible to its client. All client accounts are
reviewed daily.
Clay Finlay searches for companies with steady, sustainable earnings growth. It
looks for companies benefiting from corporate or management restructuring as
well as companies in favorable, cyclical business trends.
Clay Finlay's success is based on five factors:
STABILITY--There has been no change in investment principals since the inception
of the company.
VESTED INTEREST--All investment principals have invested their own money to fund
the business.
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PLANNED APPROACH--They have developed an intelligent investment process
structured around highly experienced investment professionals.
GEOGRAPHIC LOCATIONS--They and their associates have portfolio managers resident
in the principal money centers of New York, Tokyo, London, Geneva, Hong Kong and
Melbourne.
FLEXIBILITY--They have established communications technology that enables
effective decision making on investment opportunities almost immediately.
Clay Finlay has its headquarters in New York City and associates in London,
Geneva, Tokyo, Hong Kong and Melbourne.
THE EAFE(SM) AND OTHER UNMANAGED INDICES
The Fund may from time to time compare its investment results to various
unmanaged indices for equity securities issued both inside and outside the
United States. For example, the Fund may refer to the Standard and Poor's 500
Stock Index, described in the SAI for the Variable Account at the front of this
booklet.
In addition, the Fund may compare its results to various unmanaged indices of
foreign equity securities, including, but not by way of limitation, that family
of indices maintained by Morgan Stanley & Co. Incorporated, New York, New York,
under the name Morgan Stanley Capital International (MSCI).
In particular, the Fund may compare its results, as appropriate, with one or
more of the 20 MSCI National Indices, and with its EAFE(SM) Index. EAFE(SM) is
an aggregate index produced from the results of those National Indices from
Europe, Australia and the Far East. It excludes the MSCI indices for the U.S.
and Canada.
(Note: SM=Service Mark)
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STATEMENT OF ADDITIONAL INFORMATION APPENDIX
This document is incorporated by reference to Post-Effective Amendment No. 5,
Registration Number 33-38335 filed on Form N-1A on April 30, 1995.
