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As filed with the Securities and Exchange Commission on February 27, 1998
Registration No. 33-38335
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Post-Effective Amendment No. 8 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 9 [X]
(Check appropriate box or boxes)
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LINCOLN NATIONAL INTERNATIONAL FUND, INC.
(Exact name of registrant as specified in charter)
1300 South Clinton Street
Fort Wayne, Indiana 46802
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code (219)455-2000
Jack D. Hunter, Esq.
200 East Berry Street
Fort Wayne, Indiana 46802
(Name and Address of Agent for Service)
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Copies of all communications to
Freedman, Levy, Kroll & Simonds
1050 Connecticut Avenue, N.W.,
Suite 825
Washington, D.C. 20036
Attention: Gary O. Cohen, Esq.
Bruce Rosenblum, Esq.
Fiscal year-end: December 31
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It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b)
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on ______ pursuant to paragraph (b)
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60 days after filing pursuant to paragraph (a)(1)
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X on 5/1/98 pursuant to paragraph (a)(1)
---
75 days after filing pursuant to paragraph (a)(2)
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on __________ pursuant to paragraph (a)(2) of Rule 485.
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<PAGE>
LINCOLN NATIONAL INTERNATIONAL FUND, INC.
CONTENTS OF
POST-EFFECTIVE AMENDMENT NO. 8 TO THE REGISTRATION STATEMENT
AND AMENDMENT NO. 9
on Form N-1A
This Registration Statement consists of the following papers and documents:
Facing Sheet
Contents Sheet
Cross-reference Sheet
Part A-
Prospectus
Part B-
Statement of Additional Information
Part C-
Items 24 through 32.
Signatures.
Exhibit Index.
Exhibits
<PAGE>
LINCOLN NATIONAL INTERNATIONAL FUND, INC.
CROSS REFERENCE SHEET
[as required by Rule 481(a)]
Item Number - Part A Location in Prospectus
- --------------------- ----------------------
1. Cover Page Preface
2. Synopsis Not Applicable
3. Condensed Financial
Information Preface
4. General Description of Description of the Fund; Investment
Registrant Policies and Techniques; Investment
Restrictions; Strategic Portfolio
Transactions (Prospectus and
Appendix)
5. Management of the Fund Description of the Fund; Investment
Policies and Techniques; Management
of the funds (Appendix)
5A. Management's Discussion Management Discussion of Fund
of Fund Performance Performance (Appendix)
6. Capital Stock and Other Description of Shares; Sales and
Securities Redemption of Shares; General
Securities Information; Distribution
and Federal Income Tax Considerations
(All in Appendix)
7. Purchase of Securities Net Asset Value; Purchase of
Being Offered Securities Being Offered; Sale and
Redemption of Shares (All in Appendix)
8. Redemption or Repurchase Sale and Redemption of Shares
(Appendix)
9. Legal Proceedings Not Applicable
<PAGE>
Location in Statement of
Item Number - Part B Additional Information
- --------------------- ------------------------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information General Information and History
and History
13. Investment Objectives Investment Restrictions; Investment
and Policies Policies and Techniques (continued)
(Appendix); Strategic Portfolio
Transactions (Appendix)
14. Management of the Directors and Officers (Appendix)
Fund
15. Control Persons and See "Management of the Funds" and
Principal "Description of Shares" in the
Prospectus Appendix
16. Investment Advisory Investment Advisor and Sub-Advisor;
and Other Services Custodian; Independent Auditors (All in
Appendix)
17. Brokerage Allocation Portfolio Transactions and Brokerage
18. Capital Stock and Not Applicable
Other Securities
19. Purchase, Redemption Purchase of Securities Being Offered;
and Pricing of Sale and Redemption of Shares; and
Securities Being Offered Net Asset Value; all in the Prospectus
Appendix
20. Tax Status Taxes
21. Underwriters Not Applicable
22. Calculation of Not Applicable (See the SAI for the
Performance Data Variable Annuity Account on Form
N-4.)
23. Financial Statements Financial Statements
<PAGE>
Preface to the Multi Fund-Registered Trademark- Prospectuses
The Preface and Directory are part of the Prospectus for each of the following
FUNDS:
Lincoln National Aggressive Growth Fund, Inc. (AG)
Lincoln National Bond Fund, Inc. (B)
Lincoln National Capital Appreciation Fund, Inc. (CA)
Lincoln National Equity-Income Fund, Inc. (E-I)
Lincoln National Global Asset Allocation Fund, Inc. (GAA)
Lincoln National Growth and Income Fund, Inc. (GI)
Lincoln National International Fund, Inc. (I)
Lincoln National Managed Fund, Inc. (M)
Lincoln National Money Market Fund, Inc. (MM)
Lincoln National Social Awareness Fund, Inc. (SA)
Lincoln National Special Opportunities Fund, Inc. (SO)
Shares of all the FUNDS are sold to Lincoln National Life Insurance Co. (LINCOLN
LIFE) for allocation to its Variable Annuity Account C (THE VARIABLE ANNUITY
ACCOUNT [VAA]) to fund VARIABLE ANNUITY CONTRACTS and for allocation to its
Variable Life Account K to fund variable life insurance contracts.
To fund its variable life contracts, Variable Life Account D buys shares of the
Bond, Growth and Income, Managed, Money Market and Special Opportunities Funds.
To fund its variable life contracts, Variable Life Account G buys shares of the
Growth and Income and Special Opportunities Funds.
Each of these Variable Life and Annuity Accounts may be referred to as a
VARIABLE ACCOUNT. For each FUND listed above, 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 2340, Fort Wayne, Indiana 46801 or call 1-800-4LINCOLN (454-6265).
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 2340, Fort Wayne, Indiana 46801 or call
1-800-4LINCOLN (454-6265).
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
25
<PAGE>
Directory for the fund prospectuses
<TABLE>
<CAPTION>
SUBJECT PAGE
<S> <C>
- --------------------------------------------------------
Preface 1
Description of the fund
Aggressive Growth Fund 27
Bond Fund 33
Capital Appreciation Fund 37
Equity-Income Fund 41
Global Asset Allocation Fund 45
Growth and Income Fund 51
International Fund 53
Managed Fund 57
Money Market Fund 61
Social Awareness Fund 63
Special Opportunities Fund 67
- --------------------------------------------------------
Investment policies and techniques
Aggressive Growth Fund 27
Bond Fund 33
Capital Appreciation Fund 37
Equity-Income Fund 41
Global Asset Allocation Fund 45
Growth and Income Fund 51
International Fund 53
Managed Fund 57
Money Market Fund 61
Social Awareness Fund 63
Special Opportunities Fund 67
- --------------------------------------------------------
Investment restrictions
Aggressive Growth Fund 30
Bond Fund 35
Capital Appreciation Fund 40
Equity-Income Fund 43
Global Asset Allocation Fund 48
Growth and Income Fund 51
International Fund 55
Managed Fund 59
Money Market Fund 62
Social Awareness Fund 64
Special Opportunities Fund 68
<CAPTION>
SUBJECT PAGE
- --------------------------------------------------------
<S> <C>
Strategic portfolio transactions
Aggressive Growth Fund 31
Bond Fund 35
Capital Appreciation Fund 40
Equity-Income Fund 44
Global Asset Allocation Fund 48
Growth and Income Fund 52
International Fund 55
Managed Fund 59
Money Market Fund 62
Social Awareness Fund 64
Special Opportunities Fund 69
- --------------------------------------------------------
Appendix -- contains important information
for all funds
Net asset value 71
Management of the funds 71
Purchase of securities being offered 73
Sale and redemption of shares 74
Distributions and federal income tax
considerations 74
Management discussion of fund performance 74
Description of shares 74
Strategic portfolio transactions --
additional information 75
Foreign investments 77
General information 78
Statement of Additional Information
Table of contents -- 11 underlying funds 81
</TABLE>
26
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Lincoln National
International Fund, Inc.
Description of the fund
The International Fund (FUND) is an open-end diversified management investment
company whose investment objective is long-term capital appreciation. The
objective is pursued through a strategic policy of investing primarily in a
portfolio of equity and equity-linked securities issued outside the United
States. The FUND is primarily designed to provide an investment program for
investors seeking to take advantage of significant opportunities in foreign
capital markets. This 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 in the Appendix. There is no
assurance that the objective of the FUND will be achieved.
The FUND was originally incorporated in Maryland in 1986, and was intended for
use with a different objective. It remained inactive until 1990, at which time
it changed to the current objective and its name was changed accordingly.
Portfolio trading began in 1991. See General information and history in the SAI.
Portfolio manager
The investment program for the FUND is managed on a team basis. The program is
defined by the Investment Policy Committee consisting of the eight senior
portfolio managers, who are Principals of Clay Finlay Inc. and is implemented by
the New York based investment team. Decisions regarding individual securities
are made by consensus. This investment team has managed the FUND since the
FUND'S inception in May 1991. Clay Finlay is a wholly owned subsidiary of United
Asset Management Corporation, a financial services holding company headquartered
in Boston, Massachusetts.
Delaware International Advisers, Ltd. (DIAL) will assume portfolio management
responsibility on approximately August 1, 1998 as sub-advisor to the fund. DIAL,
a company formed under the laws of England is a wholly-owned subsidiary of
Delaware Holdings, Ltd., which in turn, is wholly-owned by Lincoln National
Corporation, a publicly held insurance holding company organized under Indiana
law. Once DIAL assumes portfolio management, the FUND will be managed by Clive
A. Gillmore and Elizabeth A. Desmond, Senior Portfolio Managers and Directors of
DIAL. Gillmore has been active in investment management since 1982, and was a
founder member of DIAL in 1990. He is a graduate of the University of Warwick.
Ms. Desmond has been active in investment management since 1987, and with DIAL
since 1991. She holds a Masters degree in East Asian studies from Stanford
University.
The switch to DIAL will not result in any material change to the investment
policies and techniques utilized by the FUND. DIAL, however, expects that during
its first year as sub-adviser, it will restructure the FUND'S portfolio by
replacing approximately 90% of the securities held by the FUND. This
restructuring could adversely impact the FUND'S performance as a result of
increased FUND brokerage commissions and other transaction costs and losses
associated with liquidating foreign securities. For a more detailed discussion
of the possible impact on the FUND'S performance see Portfolio Turnover in this
prospectus.
Investment policies and techniques
In recent years activity in securities markets outside the United States has
increased dramatically, providing a whole new panorama of investment
opportunities. This phenomenon, identified as the internationalization of the
securities markets, has been the catalyst to the establishment of the FUND.
The FUND will pursue the following general investment policies. These general
policies are not fundamental, and thus may be changed by the fund's Board of
Directors without your approval. However, you will be notified of any material
changes, additions or deletions.
Asset mix and allocation
The FUND may invest anywhere outside the United States. There is no requirement
that the FUND allocate any specific percentage of its assets to issuers located
in any one country. Under normal circumstances the FUND anticipates that at
least 65% of its overall assets will be invested in equity and equity-linked
securities, and those securities will be allocated in at least five different
countries. See, however Foreign investments-diversification in the SAI Appendix.
The FUND at times may invest in equity securities of issuers domiciled in
developing countries. Although there is no universally accepted definition of a
developing country, it is generally considered to be one which is in the initial
stages of its industrialization cycle and which has a low per capita gross
national product. Investment in these countries may take the form of direct
purchase of securities of the issuers themselves (including governmental
entities), or of participation in so-called country
53
<PAGE>
funds. Country funds are investment vehicles established by the country for the
purpose of receiving investment funds from abroad, while at the same time
maintaining some level of government control over the use of those funds. The
FUND does not anticipate having more than 10% of its total assets invested in
developing countries at any one time.
When warranted by prevailing political, economic, market or currency conditions,
up to 35% of the FUND'S overall assets may be invested either in non-U.S. debt
securities or in non-U.S. money market instruments, or in a combination of both
(including securities of a national, regional or local character issued by
governments other than the United States). If in debt securities, no more than
5% of the FUND'S overall assets may be rated as other than high-grade. The term
other than high-grade, for purposes of this Prospectus, means those bonds
receiving a Standard and Poor's Corp. rating of BBB or lower, or a Moody's
Investors Service rating of Baa or lower, or their equivalents from other rating
services in the United States or abroad. Bonds rated lower than BBB or Baa are
commonly known as junk bonds. Generally speaking, these instruments bear a
greater element of risk than those rated in the top three categories. That risk
can involve increased market price volatility stemming from the sensitivity of
interest rates, concerns over creditworthiness, and availability of quotations
on the secondary market, in addition to the special risk factors associated with
foreign securities. See Foreign investments in the Prospectus Appendix and Risk
factors and special considerations in the FUND'S SAI.
Allocation of the FUND'S assets among issuers located in foreign countries is a
dynamic process based upon a continuing analysis of such factors as the economic
and political conditions in different areas of the world. Other factors include
the growth potential of the different non-U.S. securities markets; currency and
exchange considerations; and the availability of attractively priced securities
within the respective foreign markets. The FUND'S directors, as advised by the
ADVISOR and sub-advisor, will bear the responsibility for the FUND'S investment
program. See Management of the fund in the Appendix.
The FUND may, for temporary defensive purposes, invest without limit in high
quality debt securities issued by entities organized in the United States or any
foreign country, denominated in U.S. dollars or in the currency of any foreign
country. These investments may include short-term (less than 12 months to
maturity) and medium-term (not greater than five years to maturity) obligations
issued or guaranteed by the U.S. Government or the government of a foreign
country, or by their respective agencies or instrumentalities. Other investments
may include certificates of deposit and bankers acceptances of U.S. and foreign
banks; commercial paper rated at least Prime-1 by Moody's Investors Service or A
or better by Standard & Poor's Corp. or, if unrated, of comparable quality as
determined by LINCOLN INVESTMENT; and repurchase agreements with banks and
broker-dealers with respect to such securities. In all markets, selection of
securities is designed to achieve steady growth in the portfolio, through a
value-oriented approach in which emphasis is placed on identifying well-managed
companies representing exceptional values in terms of such factors as assets,
earnings and growth potential. No assurance is given that the FUND will achieve
its objective, and upon redemption, shares may be worth more or less than their
value at the time of investment.
To facilitate overseas securities transactions, the FUND may hold a portion of
its assets in foreign-currency-denominated cash or cash equivalents and foreign
government securities. The amount held in cash may range between 2% and 15%,
although the FUND anticipates that under normal circumstances approximately 3%
to 4% would be held in cash. The amount held in cash equivalents, combined with
all other non-U.S. debt securities and money market instruments, would not
exceed the 35% limitation previously discussed. For purposes of your redemptions
and other required transactions of the VARIABLE ACCOUNT, a portion of the FUND'S
assets will be held in U.S. dollar-denominated cash or cash equivalents. See the
Prospectus for the VARIABLE ACCOUNT, at the front of this booklet, for an
explanation of transactions required at the VARIABLE ACCOUNT level.
Definitions of equity and equity-linked securities
In making purchases for its portfolio, the FUND may consider equity and equity
linked securities to include common stock, convertible and non-convertible
preferred stock, whether voting or non-voting, convertible bonds, bonds with
warrants, unattached warrants, rights to equity and equity-linked securities and
Depositary Receipts given for those securities. The term equity-linked
securities refers both to debt securities convertible into equity and to
securities such as warrants, options and futures, the prices of which reflect
the value of the equity securities receivable upon exercise or settlement.
Depositary Receipts consist of American Depositary Receipts (ADRs) and European
Depositary Receipts (EDRs), and involve investing indirectly in the underlying
security. Generally ADRs, which are in registered form, are U.S.
dollar-denominated securities designed for use in the U.S. securities markets
and which may be converted into underlying security. EDRs, which are in bearer
form, are designed for use in the European securities markets.
Foreign investments
Foreign investments can involve risks not present in domestic investments. They
can be affected favorably or unfavorably by changes in currency rates and in
54
<PAGE>
exchange control regulations, and costs may be incurred in connection with
conversions between currencies. There may be less publicly available information
about a foreign company than about a U.S. company, and foreign companies may not
be subject to accounting, auditing, and financial reporting standards and
requirements comparable to those applicable to U.S. companies. There is
generally less government regulation of securities exchanges, brokers and listed
companies abroad than in the United States. Securities of some foreign companies
are less liquid or subject to more price volatility than securities of U.S.
companies, and foreign brokerage commissions and custodian fees are generally
higher than in the United States. Investments in foreign securities can involve
other risks different from those affecting investments in securities of U.S.
companies, including local political or economic developments, expropriation or
nationalization of assets and imposition of withholding taxes on dividend or
interest payments.
With respect to foreign debt obligations, it may be more difficult for the FUND
to obtain or to enforce a judgment against the issuers of such securities in the
event of a default. To hedge against possible variations in foreign exchange
rates pending the settlement of transactions in foreign securities, the fund may
deal in foreign currency forward contracts. Foreign securities, like other
assets of the FUND, will be held by the FUND'S custodian or by a sub-custodian.
See Foreign investments in the Prospectus Appendix and Risk factors and special
considerations in the FUND'S SAI, for an expanded discussion of these and other
risk factors.
Warrants
The FUND may invest in warrants of issues consistent with its objective.
Warrants are a type of security, usually issued together with another security
of an issuer, that entitles the holder to buy a fixed amount of common or
preferred stock of such issuer at a specified price for a fixed period of time
(which may be in perpetuity). Warrants are commonly issued attached to other
securities of the issuer as a method of making such securities more attractive
and are usually detachable and thus may be bought or sold separately from the
issued security. Warrants can be a speculative instrument. The value of a
warrant may decline because of a decrease in the value of the underlying stock,
the passage of time or a change in perception as to the potential of the
underlying stock or any other combination. If the market price of the underlying
stock is below the exercise price set forth in the warrant on the expiration
date, the warrant will expire worthless. Warrants generally are freely
transferable and are traded on the major stock exchanges.
Portfolio turnover
The FUND'S annual portfolio turnover rate, which is not a matter of fundamental
policy, is expected typically to average approximately 50% (For example, a rate
of portfolio turnover of 100% would occur if all of the FUND'S portfolio were
replaced in a period of one year.) As a result of the switch to DIAL as the new
sub-adviser to the FUND, however, the portfolio turnover rate is expected to be
approximately 125% during DIAL's first year as sub-advisor as the FUND'S
portfolio is restructured. High portfolio turnover may involve corresponding
greater brokerage commissions and other transaction costs, as well as losses
associated with the difference in bid and ask prices of the individual
securities bought and sold, all of which are borne directly by the FUND. See
Portfolio transactions and brokerage in the SAI. DIAL estimates that the adverse
impact of this one-time increase in the FUND'S portfolio turnover rate may
decrease the FUND'S total return by a total of up to one or two percent over
what it otherwise would be. DIAL has advised the FUND that in restructuring the
FUND'S portfolio, DIAL will attempt where possible to minimize the FUND'S
transaction costs.
As a general matter, portfolio turnover will not be a limiting factor when
prudent strategy dictates more frequent trading. Additionally, the actual
turnover rate will vary, depending upon the volatility of worldwide equity
markets, changing economic conditions and the resultant changes in geographic
allocation and individual security selection. During 1997 the FUND'S portfolio
turnover was 77.58% and in 1996 it was 68.6%.
Investment restrictions
The Investment restrictions have been adopted by the FUND as fundamental. See
General information in the 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. 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);
2. Acquire more than 10% of the voting securities of any one issuer;
3. 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,
55
<PAGE>
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;
4. Invest more than 10% of its total assets in securities (including repurchase
agreements maturing in more than 7 days) which are subject to legal or
contractual conditions upon resale, are not listed on a securities exchange,
or are otherwise not readily marketable; and/or
5. Invest more than 25% of its assets in any one industry. For purposes of this
restriction, gas, electric, water and telephone utilities are treated as
separate industries; also, the term industry does not include the U.S.
Government, or its agencies or instrumentalities. However, a foreign
government (including its agencies, instrumentalities, or a country fund) is
deemed to be one industry.
A complete listing of the FUND'S investment restrictions can be found in the
SAI.
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 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 11 FUNDS contains
definitions of the more commonly used derivative transactions, technical
explanations of how these transactions will be used and the limits on their use.
You should consult your financial counselor if you have specific questions.
The International Fund is authorized:
a) for derivative transactions, to: engage in forward commitments and foreign
currency forward contracts.
b) for cash enhancement transactions, to: lend portfolio securities (up to 25%
of assets); engage in repurchase transactions (up to 5% of assets). Collateral
will be continually maintained at no less than 102% of the value of the loaned
securities or of the repurchase price, as applicable.
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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 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.
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 all FUNDS
except the Money Market 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 (other
than for the Money Market Fund), options, futures and options thereon, and
foreign securities.
Money Market Fund. The net asset value per share of the Money Market Fund is
determined by the amortized cost method of valuation, under Rule 2a-7, as
amended (the Rule) under the Investment Company Act of 1940 (1940 Act). Under
the Rule, the FUND'S net asset value using the amortized cost method must fairly
reflect market value. The Board of Directors of the FUND has established
procedures to assist FUND management and the INVESTMENT ADVISOR in complying
with the requirements of the Rule, which imposes specific standards for the
maturity, quality and diversification of portfolio securities. The Rule also
assigns certain specific duties to FUND management and the Board.
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 is the sole shareholder 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.
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<PAGE>
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
Capital Appreciation .75 of 1% of the first $500 million; .70 of 1% of the excess over
$500 million
Equity-Income .75 of 1% of the first $500 million; .70 of 1% of the excess over
$500 million
Global Asset Allocation .75 of 1% of the first $200 million; .70 of 1% of the next $200
million; and .68 of 1% of the excess over $400 million
International .90 of 1% of the first $200 million; .75 of 1% of the next $200
million; and .60 of 1% in excess over $400 million
All other FUNDS .48 of 1% of the first $200 million; .40 of 1% of the next $200
million; and .30 of 1% in excess over $400 million
</TABLE>
- --------------------------------------------------------------------------------
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>
- ----------------------------------------------------------------------------------------------------------
Aggressive Growth % %
Bond
Capital Appreciation
Equity-Income
Global Asset Allocation
Growth and Income
International
Managed
Money Market
Social Awareness
Special Opportunities
</TABLE>
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 several professional investment
management firms. These firms provide some or substantially all of the
investment advisory services required by a number of the FUNDS, including day-
to-day investment management of those FUNDS' portfolios. Each sub-advisor makes
investment decisions for its respective fund in accordance with that FUND'S
investment objectives and places orders on behalf of that FUND to effect those
decisions. See the following tables for more information about the sub-advisors
and their fees:
72
<PAGE>
<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
Capital Janus 1/1/94; .55 of 1% of the first $100 million .50 of 1% of the
Appreciation 100 Fillmore Street Amended next $400 million; and .45 of 1% of the excess over
Denver, CO 80206 5/1/98 $500 million
Equity Income Fidelity 12/20/93 .48 of 1%
82 Devonshire Street Amended
Boston, MA 02108 2/ - /98
Global Asset Putnam 6/8/87 the greater of (a) $40,000; or (b) .47 of 1% of the
Allocation One Post Office first $200 million; .42 of 1% of the next $200
Square million; and .40 of 1% of any excess over $400
Boston, MA 02104 million
International Clay Finlay 8/29/96 .665 of 1% of the first $50 million; .475 of 1% of
200 Park Avenue the next $50 million; and .250 of 1% of any excess
New York, NY 10166 over $100 million
(until approximately
8/1/98)
Delaware 2/ - /98 .50 of 1% of the first $200 million; .40 of 1% of the
International next $200 million; and .35 of 1% of any excess over
Advisers, Ltd. $400 million
80 Cheapside, Third
Floor
London, England
EC2V 6EE
(on or after 8/1/98)
- ------------------------------------------------------------------------------------------------------
<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>
Growth and Vantage 8/21/85 .20 of 1%
Income 630 5th Avenue
New York, NY 10111
Managed Vantage 8/21/85 .20 of 1%
(STOCK PORTFOLIO
ONLY)
Social Vantage 4/30/88 .20 of 1%
Awareness
Special Vantage 8/21/85 .20 of 1%
Opportunities
</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. (There is no sub-advisor for the Bond and Money Market Funds.)
Service marks. The service mark for the FUNDS and the name Lincoln National have
been adopted by the FUNDS with the permission of LNC, and their continued use is
subject to the right of LNC to withdraw this permission in the event the advisor
should not be the INVESTMENT ADVISOR of the FUNDS.
In the Prospectus and sales literature, the name Fidelity Investments will be
used with the Equity-Income Fund, Janus with the Capital Appreciation Fund and
Putnam with the Global Asset Allocation Fund. The continued use of these names
is subject to the right of the respective sub-advisor to withdraw its permission
in the event it ceases to be the sub-advisor to the particular FUND it advises.
Purchase of securities being offered
Shares of the FUNDS' common stock ($0.01 par value) will be sold to LINCOLN LIFE
for allocation to the VARIABLE ANNUITY ACCOUNT (VAA), which has been established
for the purpose of funding VARIABLE ANNUITY CONTRACTS; shares
73
<PAGE>
in the FUNDS will also be sold to LINCOLN LIFE for allocation to one or more of
the variable life accounts, which have been established for the purpose of
funding variable life insurance 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 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 of a purchase or
redemption order in acceptable form. Redemption of FUND shares held by LINCOLN
LIFE 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 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 shareholder of the FUNDS is LINCOLN LIFE, 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 at the front of this booklet.
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 each FUND consists of 50 million shares of
common stock (150 million for the Growth and Income Fund and 100 million each
for the Equity-Income Fund, International Fund, Social Awareness Fund and
Managed Fund), $0.01 par value. As of April 1, 1998, each FUND had the following
number of shares issued and outstanding:
<TABLE>
<S> <C>
Aggressive Growth
Bond
Capital Appreciation
Equity-Income
Global Asset Allocation
Growth and Income
International
Managed
Money Market
Social Awareness
Special Opportunities
</TABLE>
74
<PAGE>
FUND shares will be owned by LINCOLN LIFE and will be held by it in the VARIABLE
ACCOUNTS. As sole shareholder of each FUND, LINCOLN LIFE may be deemed to be a
control person as that term is defined under the 1940 Act. However, as stated in
the Prospectuses for the VARIABLE ACCOUNTS, LINCOLN LIFE provides to CONTRACT
OWNERS of the VARIABLE ACCOUNTS the right to direct the voting of FUND shares at
shareholder meetings, to the extent provided by law. LINCOLN LIFE will vote for
or against any proposition, or will abstain from voting, any FUND shares
attributable to a contract for which no timely voting instructions are received,
and any FUND shares held by LINCOLN LIFE for its own account, in proportion to
the voting instructions that it received with respect to all contracts
participating in that FUND. However, if the 1940 Act or any regulation under it
should change, and as a result LINCOLN LIFE determines it is permitted to vote
FUND shares in its own right, it may elect to do so.
All the shares of each FUND are of the same class with equal rights and
privileges. Each full share is entitled to one vote and each fractional share is
entitled to a proportionate fractional vote, on all matters subjected to a vote
of the shareholder. All shares, full and fractional, participate proportionately
in any dividends and capital gains distributions and, in the event of
liquidation, in that FUND'S net assets remaining after satisfaction of
outstanding liabilities.
When issued, each share is fully-paid and non-assessable and the shareholder has
no preemptive or conversion rights. FUND shares have non-cumulative voting
rights, which means that holders of more than 50% of the shares voting for the
election of directors can elect 100% of the directors if they choose to do so.
In that event the holders of the remaining shares so voting will not be able to
elect any directors. Shares may be redeemed as set forth under Sale and
redemption of shares.
The Bylaws of the FUNDS allow them, in proper cases, to dispense with their
annual meetings of the shareholder. Generally, this may be done as long as: (1)
a majority of the Directors then in office have at some point been elected by
the shareholder and, if any vacancy is filled by vote of the Board of Directors,
then immediately after filling the vacancy at least two thirds of the Directors
shall have been elected by the shareholder; (2) there is no change in the
independent auditor of the FUNDS; (3) there is no material change to the
investment advisory and/or sub-advisory agreements and/or fundamental policies;
and (4) a shareholder vote is not required with respect to a distribution
agreement. In adopting this procedure for dispensing with annual meetings that
are a formality, the Directors of the FUNDS have undertaken to comply with the
requirements of Section 16(c) of the 1940 Act. That Section protects CONTRACT
OWNERS by providing a procedure by which they may require management to convene
a meeting of the shareholder to vote on removal of one or more Directors. The
Directors also have agreed to facilitate communication among CONTRACT OWNERS for
the purpose of calling those meetings. Further information about these
procedures is available from FUND management.
Strategic portfolio transactions -- additional information
Because of their different investment objectives and portfolio management
philosophies many of the FUNDS engage to varying degrees in strategic portfolio
transactions, in order to preserve or enhance the value of their assets. These
can be generally identified as either derivative transactions or cash
enhancement transactions. Derivative transactions are recognized by the
investment community as an acceptable way to seek to increase the FUND'S overall
value (or, depending on the condition of the securities markets, at least to
slow its decrease). Cash enhancement transactions are designed to make some
extra money for the FUND when it has excess cash, or to help the FUND obtain
some cash for temporary purposes when needed. See the Prospectus for each FUND
for a listing of the kinds of transactions in which each FUND may engage.
1. Derivative transactions
A. Introduction
A derivative transaction is a financial agreement the value of which is
dependent upon the values of one or more underlying assets or upon the
values of one or more indices of asset values. The following types are
currently in fairly common use in the investment community, although not
every FUND will use all of them:
1. Equity contracts: stock options and indexed options; equity swaps;
stock index futures and options on futures; swaptions;
2. Interest rate contracts: interest rate futures and options on them;
forward rate agreements (FRAs); interest rate swaps and their related
transactions (e.g., caps, floors, collars and corridors); and/or
3. Currency derivative contracts: currency forward contracts; currency
options; currency futures; currency swaps; cross-currency interest rate
swaps.
Simplified definitions for these transactions are provided 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
75
<PAGE>
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.
There is no discussion here of asset-backed or mortgage-backed securities (such
as collateralized mortgage obligations, structured notes, inverse floaters,
principal-only or interest-only securities, etc.). See the Prospectus and SAI
for the Capital Appreciation and Equity-Income FUNDS, which are authorized to
engage in this kind of trading.
B. Risk factors commonly associated with derivative transactions.
There are certain risks associated with derivatives, and some derivatives
involve more of these risks than others. We briefly describe the most
common ones here; however, this is not an exhaustive list. Consult your
financial counselor if you have additional questions.
Credit risk is the possibility that a counterparty to a transaction will
fail to perform according to the terms and conditions of the transaction,
causing the holder of the claim to suffer a loss.
Cross-currency settlement risk (or Herstatt risk) is related to the
settlement of foreign exchange contracts. It arises when one of the
counterparties to a contract pays out one currency prior to receiving
payment of the other. Herstatt risk arises because the hours of operation
of domestic interbank fund transfer systems often do not overlap due to
time zone differences. In the interval between the time one counterparty
has received payment in one indicated currency and the time the other
counterparty(ies) receive payment in the 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
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<PAGE>
employ, at which times and under what circumstances. For a description of
the limits, risk factors and circumstances under which derivative
transactions will be used by each FUND, refer to the SAI booklet.
D. Increased government scrutiny
Derivative transactions are coming under increased scrutiny by Congress
and industry regulators (such as the SEC and the Office of the Comptroller
of the Currency), and by self-regulatory agencies (such as the NASD).
Should legislation or regulatory initiatives be enacted resulting in
additional restrictive requirements for derivative transactions, LINCOLN
LIFE and the FUNDS reserve the right to make all necessary changes in the
CONTRACTS and the Registration Statements for the FUNDS, respectively, to
comply with those requirements.
2. Cash enhancement transactions
Cash enhancement transactions also involve certain risks to the fund. They are
discussed more fully in the SAI.
A. Lending of portfolio securities
Any FUND authorized to do so may make secured loans of its portfolio
securities, in order to realize additional income. The loans are limited
to a maximum of a stipulated amount of the FUND'S total assets. As a
matter of policy, securities loans are made to broker/dealers under
agreements requiring that the loans be continuously secured by collateral
in cash or short-term debt obligations at least equal at all times to 102%
of the value of the securities lent.
The borrower pays the FUND an amount equal to
any dividends or interest received on securities lent. The FUND retains
all or a portion of the interest received on securities lent. The FUND
also retains all or a portion of the interest received on investment of
the cash collateral, or receives a fee from the borrower.
With respect to the loaned securities, voting rights or rights to consent
pass to the borrower. However, the FUND retains the right to call in the
loans and have the loaned securities returned at any time with reasonable
notice. 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) and reverse repurchase (Reverse Repo) transactions
1. Repos. From time to time, the FUNDS may enter into Repo transactions.
In a typical Repo transaction, the FUND involved buys U.S. Government
or other money market securities from a financial institution (such as
a bank, broker, or savings and loan association). At the same time, as
part of the arrangement, the FUND obtains an agreement from the seller
to repurchase those same securities from the FUND at a specified price
on a fixed future date.
The repurchase date is normally not more than seven days from the date
of purchase. Keeping the term under seven days is significant, because
the SEC considers Repo Agreements with maturities of more than seven
days to be illiquid assets of the FUND, and the FUNDS have strict
limitations on the percentage of their respective assets which may be
illiquid.
2. Reverse repos. A FUND may also be authorized to enter into Reverse
Repo transactions. This simply means the FUND is on the reverse side of
a Repo transaction. That is, the FUND is the Seller of some of its
portfolio securities, subject to buying them back at a set price and
date.
Authorized FUNDS will engage in Reverse Repos for temporary purposes,
such as for obtaining cash to fund redemptions; or for the purpose of
increasing the income of the FUND by investing the cash proceeds at a
higher rate than the cost of the agreement. Entering into a reverse
repo transaction is considered to be the borrowing of money by the
FUND. FUNDS authorized to engage in Repos as buyers are not necessarily
authorized to do Reverse Repos.
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
77
<PAGE>
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
When an ADVISOR or sub-advisor believes that a currency in which a portfolio
security or securities is denominated or exposed may suffer a decline against
the U.S. dollar, it may hedge that risk by entering into a forward contract to
sell an amount of foreign currency approximating the value of some or all of the
portfolio securities denominated in or exposed to that foreign currency.
Because foreign securities generally are denominated and pay dividends or
interest in foreign currencies, and a FUND may hold various foreign currencies,
the value of the net assets of that FUND as measured in U.S. dollars will be
affected favorably or unfavorably by changes in exchange rates. Generally,
currency exchange transactions will be conducted on a spot (i.e., cash) basis at
the spot rate prevailing in the currency exchange market. The cost of currency
exchange transactions will generally be the difference between the bid and offer
spot rate of the currency being purchased or sold. Some foreign currency values
may be volatile, and there is the possibility of government controls on currency
exchange or governmental intervention in currency markets which could adversely
affect the FUND.
Investors should be aware that exchange rate movements can be significant and
can endure for long periods of time. In order to protect against uncertainty in
the level of future foreign currency exchange rates, a FUND'S ADVISOR or
sub-advisor may attempt to manage exchange rate risk through active currency
management, including the use of certain foreign currency hedging transactions.
For example, it may hedge some or all of its investments denominated in a
foreign currency against a decline in the value of that currency relative to the
U.S. dollar by entering into contracts to exchange that currency for U.S.
dollars (not exceeding the value of the FUND'S assets denominated in or exposed
to that currency), or by participating in options or futures contracts with
respect to that currency. If the ADVISOR or sub-advisor believes that a
particular currency may decline relative to the U.S. dollar, the FUND may also
enter into contracts to sell that currency (up to the value of the FUND'S assets
denominated in or exposed to that currency) in exchange for another currency
that the ADVISOR or sub-advisor expects to remain stable or to appreciate
relative to the U.S. dollar. This technique is known as currency cross-hedging.
Refer to the Prospectus for each FUND to determine which FUNDS may engage in
these transactions.
These strategies are intended to minimize the effect of currency appreciation as
well as depreciation, but do not protect against a decline in the underlying
value of the hedged security. In addition, these strategies may reduce or
eliminate the opportunity to profit from
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<PAGE>
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.
General information
Your inquiries should be directed to Lincoln National Life Insurance Co., at
P.O. Box 2340, Fort Wayne, Indiana 46801; or, you may call 1-800-4LINCOLN
(454-6265).
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 each FUND recommended, and
shareholders of each FUND approved, changes to the fundamental policies for
certain of the FUNDS. The Board of Directors of each FUND also changed or
eliminated certain non-fundamental policies of certain 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.
The use of FUNDS by both variable annuity and variable life insurance separate
accounts is known as mixed funding. Due to differences in redemption rates, tax
treatment, or other considerations, the interests of CONTRACT OWNERS under the
VARIABLE LIFE ACCOUNTS may conflict with those of CONTRACT OWNERS under the
variable annuity account, in those cases where mixed funding occurs. 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.
79
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THIS PAGE WAS INTENTIONALLY LEFT BLANK.
80
<PAGE>
Lincoln National
International Fund, Inc.
Statement of Additional Information (SAI)
This SAI should be read in conjunction with the Prospectus
of Lincoln National International 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 IF-2
- ------------------------------------------------------
Investment objective, policies and
practices IF-2
- ------------------------------------------------------
Risk factors and special considerations IF-6
- ------------------------------------------------------
Determination of net asset value IF-7
- ------------------------------------------------------
Investment restrictions IF-7
- ------------------------------------------------------
Portfolio transactions and brokerage IF-8
- ------------------------------------------------------
The EAFE(sm) and other unmanaged indices IF-9
- ------------------------------------------------------
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-12
- ------------------------------------------------------
Derivative transactions-definitions A-12
- ------------------------------------------------------
</TABLE>
This SAI is not a Prospectus.
The date of this SAI is May 1, 1998.
IF-1
<PAGE>
General information and history
The FUND was originally incorporated in Maryland in January, 1986, under the
name of Lincoln National Real Estate Fund, Inc. It remained dormant under that
name until May, 1990, when the name was changed to Lincoln National
International Fund, Inc., in order to provide an investment vehicle for
CONTRACTOWNERS of the VARIABLE ACCOUNT who desire to take advantage of
investment opportunities outside the United States.
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 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 broad
international stock market indices which are comparable to U.S. indices as the
Dow Jones Industrial Average and the Standard & Poor's 500 Index (S&P 500).
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.)
References to ADVISOR in this SAI include both Lincoln Investment Management,
Inc. (LINCOLN INVESTMENT) and Clay Finlay Inc., until approximately August 1,
1998, and Delaware International Advisers, Ltd. thereafter.
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 preferred, if not only, mechanism
through which the FUND may invest in securities of companies in certain
countries (India, Taiwan, Brazil, Chile, Argentina and Korea, as of the date of
this Prospectus) and the only means, in some cases, by which the FUND may invest
in securities of South Korean and Argentina 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 (1940 Act), 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.) 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.
If the FUND invests in an entity which is classified as a Passive Foreign
Investment Co. (PFIC) for U.S. tax purposes, the application of certain
technical tax provisions
IF-2
<PAGE>
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 multinational lending institutions and supranational institutions)
which have been determined by the FUND'S INVESTMENT ADVISOR or sub-advisor to be
of comparable credit quality to securities rated in the three highest categories
by Moody's Investors Service, Inc. or Standard & Poor's Corp.
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, the FUND may avail itself of Rule 144A of
the Securities Act of 1933 which permits the FUND to purchase securities which
have been privately placed and resell such securities to certain qualified
institutional buyers without restriction. 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 United
States. Accordingly, if the FUND wishes to sell unregistered foreign securities
in the United States, it will avail itself of Rule 144A.
Convertible securities. The FUND may invest in fixed-income 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 foreign currency forward contracts to
purchase or sell foreign currencies. The FUND may enter into foreign currency
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 foreign
currency 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 foreign currency forward contracts will only be entered into with United
States banks and their foreign branches. A foreign currency 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 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 foreign
currency forward contract to buy or sell, for a fixed amount of dollars, the
amount of foreign currency
IF-3
<PAGE>
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
foreign currency forward contract, at the maturity of the foreign currency
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 provided for certain
transactions in a foreign currency other than the taxpayer's functional currency
(i.e., unless certain special rules apply, currencies other than the U.S.
dollar). In general, foreign currency gains or losses from forward contracts,
from futures contracts that are not regulated futures contracts, and from
unlisted options will be treated as ordinary income or loss under Code Section
988. Also, certain foreign exchange gains or losses derived with respect to
foreign fixed-income securities are also subject to Section 988 treatment. In
general, therefore, Code Section 988 gains or losses will increase or decrease
the amount of the FUND'S investment company taxable income available to be
distributed to shareholders as ordinary income, rather than increasing or
decreasing the amount of the FUND'S net capital gain. Additionally, if Code
Section 988 losses exceed other investment company taxable income during a
taxable year, the FUND would not be able to make any ordinary dividend
distributions.
Lending of securities. Consistent with applicable regulatory requirements and
procedures adopted by the Board of Directors, the FUND may lend its portfolio
securities to brokers, dealers and other financial institutions, in order to
realize additional income. Such loans must be callable at any time by the FUND
(subject to notice provisions described below), and be at all times secured by
cash or cash equivalents, which are maintained in a segregated account pursuant
to applicable regulations and that are equal to at least 102% of the market
value, determined daily, of the loaned securities. The advantage of such loans
is that the FUND continues to receive the income on the loaned securities while
at the same time earning interest on the cash amounts deposited as collateral,
which will be invested in short-term obligations.
A loan may be terminated by the borrower on one business day's notice, or by the
FUND on four business days' notice. If the borrower fails to deliver the loaned
securities within four days after receipt of notice, the FUND could use the
collateral to replace the securities while holding the borrower liable for any
excess of replacement cost over collateral. As with any extensions of credit,
there are risks of delay in recovery and in some cases, even loss of rights in
the collateral should the borrower of the securities fail financially. However,
these loans of portfolio securities will only be made to firms deemed by the
FUND'S management to be creditworthy and when the income which can be earned
from such loans justifies the attendant risks. Upon termination of the loan, the
borrower is required to return the securities to the FUND. Any gain or loss in
the market price during the loan period would inure to the FUND. The FUND will
pay reasonable finder's, administrative and custodial fees in connection with a
loan of its securities. The creditworthiness of firms to which the FUND lends
its portfolio securities will be monitored on an ongoing basis by the Board of
Directors or its delegate. The FUND will not loan its portfolio securities to
the advisor, the sub-advisor, or any affiliate thereof.
IF-4
<PAGE>
Although voting or consent rights which accompany loaned securities pass to the
borrower, the FUND will follow the policy of calling the loaned securities, to
be delivered within one day after notice, to permit the exercise of such rights
by the FUND if the matters involved would have a material effect on the FUND'S
investment in such loaned securities. The FUND will not lend portfolio
securities with a value in excess of 25% of its total assets at the time of the
loan.
Repurchase agreements. When cash may be available for only a few days, it may be
invested by the FUND in repurchase agreements in an amount up to 5% of its total
assets (taken at current value), until such time as it may otherwise be invested
or used for payments of obligations of the FUND. These agreements, which may be
viewed as a type of secured lending by the FUND, typically involve the
acquisition by the FUND of government securities or other securities from a
selling financial institution such as a bank, savings and loan association or
broker-dealer. The agreement provides that the FUND will sell back to the
institution, and that the institution will repurchase, the underlying security
(collateral) at a specified price and at a fixed time in the future, usually not
more than seven days from the date of purchase. The FUND will accrue interest
from the institution until the time when the repurchase is to occur. Although
such date is deemed by the FUND to be the maturity date of a repurchase
agreement, the maturities of securities subject to repurchase agreements are not
subject to any limits and may exceed one year.
While repurchase agreements involve certain risks not associated with direct
investments in debt securities, the FUND follows procedures designed to minimize
such risks. These procedures include effecting repurchase transactions only with
large, well capitalized and well established financial institutions under
guidelines established and monitored by the Directors of the FUND or its
delegate. In addition, the collateral will be maintained in a segregated account
and will be marked-to-market daily to determine that the full value of the
collateral, as specified in the agreement, does not decrease below 102% of the
purchase price plus accrued interest. If such decrease occurs, additional
collateral will be requested and, when received, added to maintain full
collateralization. In the event of a default or bankruptcy by a selling
financial institution, the FUND will seek to liquidate such collateral. However,
the exercise of the FUND'S right to liquidate such collateral could involve
certain costs or delays and, to the extent that proceeds from any sale upon a
default of the obligation to repurchase were less than the repurchase price, the
FUND could suffer a loss. It is the current policy of the FUND not to invest in
repurchase agreements that do not mature 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 the FUND makes the commitment to purchase
securities on a when-issued or delayed delivery basis, the FUND will record the
transaction and thereafter reflect the value, each day, of such security in
determining the net asset value of the FUND. 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 before 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 before
settlement if the ADVISOR deems it appropriate to do so.
IF-5
<PAGE>
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 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 (SEC). 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 Corp. Securities rated less than Baa by Moody's or BBB by Standard and
Poor's Corp. are classified as non-investment grade securities (high yield
bonds, commonly known as Junk bonds) 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 the sub-advisor'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 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 Standard and Poor's
Corp. 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 before the expiration date. Rights and
warrants purchased by the FUND which expire without being exercised will result
in a loss to the FUND.
IF-6
<PAGE>
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
United States 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 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 United
States 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 in 1998 it will be
closed on the following U.S. holidays: New Year's Day, Martin Luther King Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day. 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.
Since the FUND intends under normal conditions to invest virtually exclusively
in securities issued outside the United States, 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
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 1940 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 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.
IF-7
<PAGE>
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 techniques 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.
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. Pledge its assets or assign or otherwise encumber them except to secure
borrowings effected within the limitations set forth in Restriction 20 in
the Prospectus.
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 restriction 20. (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.)
15. Hold more than 10% of the outstanding voting securities of any one issuer.
16. 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.
17. 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).
Portfolio transactions and brokerage
The ADVISOR is responsible for decisions to buy and sell securities for the
FUND, the selection of brokers and dealers to effect the transactions, and the
negotiation of brokerage commissions, if any. Purchases and sales of securities
on a stock exchange are effected through brokers who charge a commission for
their services. In the over-the-counter market, securities are generally traded
on a net basis with dealers acting as principal for their own accounts without a
stated commission, although the price of the security usually includes a profit
to the dealer. 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 it manages in such manner as it deems equitable. In making
such allocations, major factors to be considered are investment objectives, the
relative size of portfolio holdings of the same or comparable securities, the
availability of cash for investment, the size of investment commitments
generally held and the opinions of the persons responsible for managing the
portfolios of the FUND and other client accounts. Securities of the same issuer
may be purchased, held, or sold at the same time by the FUND or other accounts
or companies for which the ADVISOR provides investment advice (including
affiliates of the advisor). On occasions when the ADVISOR deems the purchase or
sale of a security to be in the best interest of the FUND, as well as 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
IF-8
<PAGE>
position obtainable for the FUND. Portfolio securities are not purchased from or
sold to the ADVISOR or any affiliated person (as defined in the 1940 Act) of the
advisor.
In connection with effecting portfolio transactions, primary consideration will
be given to securing most favorable price and efficient execution. Within the
framework of this policy, the reasonableness of commission or other transaction
costs is a major factor in the selection of brokers and is considered together
with other relevant factors, including financial responsibility, research and
investment information and other services provided by such brokers. It is
expected that, as a result of such factors, transaction costs charged by some
brokers may be greater than the amounts other brokers might charge. The ADVISOR
may determine in good faith that the amount of such higher transaction costs is
reasonable in relation to the value of the brokerage and research services
provided. The Board of Directors of the FUND will review regularly the
reasonableness of commission and other transaction costs incurred by the FUND in
the light of facts and circumstances deemed relevant from time to time, and, in
that connection, will receive reports from the ADVISOR and published data
concerning transaction costs incurred by institutional investors generally. The
nature of the research services provided to the ADVISOR by brokerage firms
varies from time to time but generally includes current and historical financial
data concerning particular companies and their securities; information and
analysis concerning securities markets and economic and industry matters; and
technical and statistical studies and data dealing with various investment
opportunities, risks and trends, all of which the ADVISOR regards as a useful
supplement to its own internal research capabilities. The ADVISOR may from time
to time direct trades to brokers which have provided specific brokerage or
research services for the benefit of the ADVISOR'S clients; in addition the
ADVISOR may allocate trades among brokers that generally provide superior
brokerage and research services. During 1997, the ADVISOR directed transactions
totaling approximately $ to these brokers and paid commissions of
approximately $ in connection with these transactions. Research services
furnished by brokers are used for the benefit of all of the ADVISOR'S clients
and not solely or necessarily for the benefit of the FUND. The ADVISOR believes
that the value of research services received is not determinable and does not
significantly reduce its expenses. The FUND does not reduce its fee to the
ADVISOR by any amount that might be attributable to the value of such services.
The aggregate amount of brokerage commissions paid by the FUND in 1995, 1996 and
1997 was $975,265, $1,556,397, and respectively.
Under the sub-advisory agreement between the ADVISOR and the sub-advisor, the
sub-advisor may perform some, or substantially all, of the investment advisory
services required by the FUND, even though the ADVISOR remains primarily
responsible for investment decisions affecting the FUND. The sub-advisor will
follow the same procedures and policies which are followed by the ADVISOR as
described previously. The sub-advisor currently provides investment advice to a
number of other clients.
The EAFE(sm) and other unmanaged indices
The FUND may compare its investment 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 United States and Canada.
IF-9
<PAGE>
THIS PAGE WAS INTENTIONALLY LEFT BLANK.
IF-10
<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 $1,428,803 $ 725,544
Bond Fund 1,188,030 1,061,701
Capital Appreciation Fund 1,549,656 726,011
Equity-Income Fund 3,303,336 1,457,623
Global Asset Allocation Fund 2,072,722 1,570,876
Growth and Income Fund 7,063,276 5,077,981
International Fund 3,319,701 2,770,197
Managed Fund 2,480,524 2,120,656
Money Market Fund 417,468 385,019
Social Awareness Fund 1,877,030 1,048,366
Special Opportunities Fund 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.
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 $1,250 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
$ .
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 Bankers Trust Co., 14 Wall Street, 4th Floor, New
York, New York 10005. Bankers Trust agreed to act as custodian for each FUND
pursuant to a Custodian Agreement dated June 17, 1985 (March 10, 1986 for the
Social Awareness Fund). It is anticipated that in the future the custodian for
each of these FUNDS will be changed to The Chase Manhattan Bank, N.A., 4 Chase
MetroTech Center, Brooklyn, New York, 11245. This change is not expected to
result in any material variation in the custodial services currently provided to
these FUNDS.
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, 2300 Fort Wayne
National Bank Building, Fort Wayne, Indiana 46802, 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 financial statements 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
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ratings. The following is a discussion of the rating categories of Moody's
Investors Service, Inc. and Standard & Poor's Corp.
Moody's Investors Service, Inc.
Aaa -- Bonds which are rated Aaa are judged to be of the best quality and carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa -- Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
Standard & Poor's Corp.
AAA -- This is the highest rating assigned by Standard & Poor's Corp. to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA -- Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
A -- Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas these bonds normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest than for
bonds in the A category and higher.
BB-B-CCC-CC -- Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and C the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
Moody's Investors Service, Inc.
Moody's Commercial Paper ratings are opinions of the ability of issuers to repay
punctually promissory obligations not having an original maturity in excess of
nine months. Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Prime 1 -- Highest Quality;
Prime 2 -- Higher Quality;
Prime 3 -- High Quality.
(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.
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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, 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
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level (the floor). A floor contract has the effect of a string of interest
rate guarantees.
c. Collar. An arrangement to simultaneously purchase a cap and sell a floor, in
order to maintain interest rates within a defined range. The premium income
from the sale of the floor reduces or offsets the cost of buying the cap.
d. Corridor. An agreement to buy a cap at one interest rate and sell a cap at a
higher rate.
Swaption. An option to enter into, extend, or cancel a swap.
Futures contract. A contract which commits the FUND to buy or sell a specified
amount of a financial instrument at a fixed price on a fixed date in the future.
Futures contracts are normally traded on an exchange and their terms are
standardized, which makes it easier to buy and sell them.
Interest rate futures (and options on them). Futures contracts pegged to U.S.
and foreign fixed-income securities, debt indices and reference rates.
Stock index futures. Futures contracts based on an index of pre-selected stocks,
with prices based on a composite of the changes to the prices of the individual
securities in the index (e.g., S&P 500).
Option on a futures contract. An option taken on a futures position.
Forward contract. An over-the-counter, individually-tailored futures contract.
Forward rate agreement (FRA). A contract in which the FUND and another party
agree on the interest rate to be paid on a notional deposit of specified
maturity at a specific future time. Normally, no exchange of principal is
involved; the difference between the contracted rate and the prevailing rate is
settled in cash.
Currency contract. A contract entered into for the purpose of reducing or
eliminating an anticipated rise or drop in currency exchange rates over time.
Currency futures. Futures contracts on foreign currencies. Used to hedge the
purchase or sale of foreign securities.
Currency option. An option taken on foreign currency.
Currency swap. A swap involving the exchange of cash flows and principal in one
currency for those in another, with an agreement to reverse the principal swap
at a future date.
Cross-currency interest rate swap. A swap involving the exchange of streams of
interest rate payments (but not necessarily principal payments) in different
currencies and often on different interest bases (e.g., fixed Deutsche Mark
against floating dollar, but also fixed Deutsche Mark against fixed dollar).
Forward currency contract. A contract to lock in a currency exchange rate at a
future date, to eliminate risk of currency fluctuation when the time comes to
convert from one currency to another.
A-13
<PAGE>
THIS PAGE WAS INTENTIONALLY LEFT BLANK.
A-14
<PAGE>
PART C - OTHER INFORMATION
Item 24. Financial Statements and Exhibits
a) Financial Statements:
(1) Part A.
------
The financial highlights of Lincoln National International Fund, Inc. (the
Fund) for the years ended December 31, 1997, 1996, 1995, 1994, 1993, 1992, and
for the period from May 1, 1991 to December 31, 1991 are incorporated by
reference to Pages 53 and 54 of the Fund's 1997 Annual Report.
Part B.
------
The following financial statements of the Fund are incorporated by reference
to pages 43, and 45-53 of the Fund's 1997 Annual Report:
- Statement of Net Assets -- December 31, 1997
- Statement of Operations -- Year Ended December 31, 1997
- Statements of Changes in Net Assets -- Years Ended December 31, 1997
and 1996
- Notes to Financial Statements -- December 31, 1997
In total, only pages 43, and 45-54 of the Fund's 1997 Annual Report are
incorporated by reference into this Registration Statement. No other pages
of that Report are incorporated by reference.
(2) Schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions, are inapplicable, or the required information is included
in the financial statements, and therefore have been omitted.
b) Exhibits:
1(a) Articles
1(b) Articles Supplementary (Filed with Post-effective
amendment No. 7 to this Registration Statement)
2 By-Laws
3 NA
4 Contracts (TO BE FILED BY AMENDMENT)
5(a) Advisory agreement between Lincoln Investment
Management, Inc. and Lincoln National International
Fund, Inc. (TO BE FILED BY AMENDMENT)
5(b) Sub-Advisory Agreement between Lincoln Investment
Management, Inc. and Clay Finlay, Inc., dated
August 29, 1996, (Filed with post-effective
amendment No. 7 to this Registration Statement.)
5(c) Form of Sub-Advisory Agreement between Lincoln
Investment Management, Inc. and Delaware
International Advisers, Ltd. dated February__,
1998
6(a) Specimen Agent's Contract (Filed with Post-effective
amendment No. 7 to this Registration Statement)
6(b) Agreement to Purchase Shares (TO BE FILED BY
AMENDMENT.)
7 NA
8 Custody Fee Schedule (Filed with Post-effective
amendment No. 7)
9(a) (TO BE FILED BY AMENDMENT)
9(b) (TO BE FILED BY AMENDMENT)
9(b) Services Agreement between Alamo Direct Mail
Services, Inc. and Lincoln Life dated September 18,
1996. (Filed with Post-effective amendment No. 7
to this Registration Statement)
9(d) Services Agreement between Delaware Management
Holdings, Inc., Delaware Services Company, Inc.
and Lincoln National Life Insurance Company is
incorporated herein by reference to the
Registration Statement of Lincoln National Life
Insurance Co., Form S-6 (333-40745)
filed November 21, 1997.
10 Opinion of Counsel (TO BE FILED BY AMENDMENT)
11 Consent of Ernst & Young LLP,
Independent Auditors (TO BE FILED BY AMENDMENT)
12 NA
13 NA
14 NA
15 NA
16 Schedule of Computation (TO BE FILED BY AMENDMENT)
17(a) Financial Data Schedule (TO BE FILED BY AMENDMENT)
18(a) Power of Attorney (TO BE FILED BY AMENDMENT)
18(b) Power of Attorney (TO BE FILED BY AMENDMENT)
18(c) Power of Attorney (TO BE FILED BY AMENDMENT)
19(a) ORG Chart (TO BE FILED BY AMENDMENT)
19(b) Memorandum Concerning
Books and Records (TO BE FILED BY AMENDMENT)
Item 25. Persons Controlled by or Under Common Control with Registrant
See "Management of the Fund," "Purchase of Securities Being Offered," and
"Description of Shares" in the Prospectus forming Part A of this Registration
Statement and "Investment Adviser and Sub-Adviser" in the Statement of
Additional Information forming Part B of this Registration Statement. As of the
date of this Post-Effective Amendment to the Registration Statement, The Lincoln
National Life Insurance Company (Lincoln Life), for its Variable Annuity Account
C and its Variable Life Account K, is the sole shareholder in the Fund.
No persons are controlled by the Registrant. A diagram of all persons under
common control with the Registrant is filed as Exhibit 15(a) to the Form N-4
Registrant Statement filed by Lincoln National Variable Annuity Account C
(File No. 33-25990), and is incorporated by reference into this Registration
Statement.
<PAGE>
Item 26. Number of Holders of Securities
As of February 1, 1998, there was one record holder of common stock, $.01 par
value per share.
Item 27. Indemnification
See prior filings.
Item 28. Business and Other Connections of Investment Adviser
Information pertaining to any business and other connections of
Registrant's investment adviser, Lincoln Investment, is hereby incorporated
by reference from the section captioned "Management of the Fund" in the
Prospectus forming Part A of this Registration Statement, the section
captioned "Investment Adviser and Sub-Adviser" in the Statement of
Additional Information forming Part B of this Registration Statement, and
Item 7 of Part II of Lincoln Investment's Form ADV filed separately with
the Commission (File No. 801-5098). Information pertaining to any business
and other connections of Registrant's sub-investment adviser, Clay Finlay
Inc. ("Clay Finlay") and Delaware International Adviser, Ltd. ("DIAL") is
incorporated by reference from the section of the Prospectus captioned
"Management of the Fund," the section of the Statement of Additional
Information captioned "Investment Adviser and Sub-Adviser," and Item 7 of
Part II of Clay Finlay's and DIAL's Form ADV filed separately with the
Commission (File Nos. 801-17316 and 801-37702, respectively.)
The other businesses, professions, vocations, and employment of a
substantial nature, during the past two years, of the directors and
officers of Lincoln Investment and Clay Finlay are hereby incorporated by
reference, respectively, from Schedules A and D of Lincoln Investment's
Form ADV and from Schedules A and D of Clay Finlay's and DIAL's Form ADV.
a) As of February 1, 1998, the officers and/or directors of the Investment
Adviser held the following positions: (TO BE FILED BY AMENDMENT)
b) The Sub-Adviser.
As of ____________, 1998, the officers and/or directors of the sub-advisor
held the following positions:
Clay Finlay, Inc.
Officers and Directors
Francis Finlay Co-Chairman
John P. Clay Co-Chairman
Frances Dakers Principal
Robert Schletter Principal
William O'Donnell Treasurer
As of February 5, 1998 the officers and/or directors of the sub-advisor held
the following positions:
Delaware International Advisers, LTD
Officers/Directors Names Principal Occupation
- --------------------------------------------------------------------------------
Wayne A. Stork Chairman & Chief Executive Officer
G. Roger H. Kitson Vice Chairman
David G. Tilles Managing Director and Chief Investment
Officer
Ian G. Sims Deputy Managing Director/Chief Investment
Officer--Global Fixed Income
Clive A. Gillmore Senior Portfolio Manager/Director U.S.
Mutual Fund Liaison
Harnish O. Parker Senior Portfolio Manager/Director U.S.
Marketing Liaison
Timothy W. Sanderson Chief Investment Officer--Equity/Deputy
Compliance Officer/Director
Elizabeth A. Desmond Senior Portfolio Manager/Director of
Pacific Basic Group
Nigel G. May Senior Portfolio Manager/Director of
European Group
John Emberson Secretary, Compliance Officer and
Finance Director
- --------------------------------------------------------------------------------
David K. Downes
George M. Chamberlain, Jr.
John C. E. Campbell
Richard J. Flannery
George E. Deming
Item 29. Principal Underwriters
Not applicable.
Item 30. Location of Accounts and Records
See Exhibit 19.
Item 31. Management Services
Not applicable.
Item 32. Undertakings
(a)-(d) See Prior Filings.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Fort Wayne, and State of Indiana,
on the 27th day of February, 1998.
LINCOLN NATIONAL
INTERNATIONAL FUND, INC.
By /s/ Kelly D. Clevenger
----------------------------
Kelly D. Clevenger
President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below on February 27, 1998, by the following
persons in the capacities indicated.
Signature Title Date
- ---------- ----- ----
/s/ Kelly D. Clevenger Chairman of the Board, February 27, 1998
- ---------------------------- President and Director
Kelly D. Clevenger (Principal Executive Officer)
* Director February 27, 1998
- ----------------------------
John B. Borsch, Jr.
Director February , 1998
- ----------------------------
Kenneth G. Stella
*** Director February 27, 1998
- ----------------------------
Barbara S. Kowalczyk
** Director February 27, 1998
- ----------------------------
Nancy L. Frisby
/s/ Eric C. Jones Chief Accounting Officer February 27, 1998
- ---------------------------- (Principal Accounting
Eric C. Jones Officer)
/s/ Janet C. Whitney Vice President and February 27, 1998
- ---------------------------- Treasurer (Principal
Janet C. Whitney Financial Officer)
*By /s/ Jeremy Sachs pursuant to a Power of Attorney filed with the
----------------------- initial Registration Statement on Form N-1A.
Jeremy Sachs
**By /s/ Jeremy Sachs pursuant to a Power of Attorney filed with Post-
---------------------- Effective Amendment No. 3 to this Registration
Jeremy Sachs Statement.
***By /s/ Jeremy Sachs pursuant to a Power of Attorney filed with Post-
--------------------- Effective Amendment No. 4 to this Registration
Jeremy Sachs Statement.
<PAGE>
Exhibit Index to Form N-1A
--------------------------
Exhibit Number Description
- --------------- -----------
1(a) Articles
2 By-Laws
5(c) Form of Sub-Advisory Agreement between Lincoln
Investment Management, Inc. and Delaware
International Advisers, Ltd. dated February__,
1998
<PAGE>
ARTICLES OF INCORPORATION
of LINCOLN NATIONAL REAL ESTATE FUND, INC.
(A Maryland Corporation)
FIRST: INCORPORATOR. The undersigned, whose address is 1300 South
Clinton Street, P. 0. Box 1110, Fort Wayne, IN 46801, being at least 18 years of
age, is acting as sole incorporator to form a corporation under and by virtue of
the General Laws of the State of Maryland authorizing the formation of
corporations (hereinafter referred to as the "General Corporation Law").
SECOND: NAME. The name of the corporation (hereinafter called the
"Corporation") is Lincoln National Real Estate Fund, Inc.
THIRD: PURPOSE. The purposes for which the Corporation is formed are:
A. To engage in, conduct, operate and carry on the business of an
open-end management investment company as defined in the Investment Company Act
of 1940 (including any amendment thereof or successor statute) (hereinafter
called the "1940 Act");
B. To invest and reinvest in, buy or otherwise acquire, hold for
investment or otherwise, sell or otherwise dispose of, lend or pledge, trade or
deal in securities, obligations, commodities, commodity futures contracts or
interests therein of all kinds, however evidenced, (Or rights, options, or
warrants to acquire or dispose of such securities, obligations, commodities,
commodity futures contracts or interests) of, or issued or guaranteed by or on
behalf of: (I) any national, state or local governments, foreign or domestic,
or their agencies, instrumentalities or subdivisions (including, without
limitation, the United States, any state of the United States, multi-state
agency, political subdivision of a state, municipality, or any governmental
entity, unit, agency or instrumentality of any of the foregoing), and (ii) any
private or public company, corporation, association, board of trade, exchange,
general or limited partnership, trust or other enterprise or organization,
foreign or domestic; including as to both clauses (I) and (ii) without
limitation stocks, and all other forms of equity securities, convertible
securities, bonds. debentures, bills, notes and all other evidences of
indebtedness, negotiable or non-negotiable instruments, government securities,
money market instruments, certificates of deposit, finance paper, commercial
paper, secured call loans, commodities, commodity futures contracts, bankers
acceptances, investment contracts and repurchase agreements; and
-1-
<PAGE>
C. To do every other act not inconsistent with law which is appropriate
to promote and attain the purposes set forth in these Articles of Incorporation.
FOURTH: PRINCIPAL OFFICE AND RESIDENT AGENT. The address of the
principal office of the Corporation in this State is 929 North Howard Street,
Baltimore, Maryland 21201. The name of the resident agent of the Corporation in
this State is The Prentice-Hall Corporation System, Maryland, Inc., a
corporation of this State, and the address of the resident agent is 929 North
Howard Street, Baltimore, Maryland 21201.
FIFTH: CAPITAL STOCK.
A. AUTHORIZED SHARES. The total number of shares of stock which the
Corporation shall have authority to issue is 50,000,000 shares of the par value
of $.0l per share, all of which shall be of a single class designated Common
Stock (and hereinafter referred to as such), such shares having an aggregate par
value of $500,000.
B. PREEMPTIVE RIGHTS. No holder of any stock of the Corporation shall as
such holder have any preemptive or other right to purchase or subscribe for any
stock which the Corporation may issue or sell, whether or not exchangeable for
any other stock of the Corporation, and whether out of the number of shares
authorized by the Articles of Incorporation as originally filed or by any
amendment thereof or Out of shares -of the stock of the Corporation acquired by
it after the issue thereof.
C. FRACTIONAL SHARES. The Corporation may issue fractional as well as
full shares, and each fractional share shall be dealt with and have rights
identical to those to which a full share is entitled but in such proportion, in
all instances, as such fractional share bears to a full share; provided,
however, that the Corporation shall in no event be obliged to issue certificates
for fractional shares.
D. MAJORITY VOTE. Notwithstanding any provision of the General
Corporation Law requiring that any action be taken or authorized by the
affirmative vote of the holders of a designated proportion greater than a
majority of the shares or votes entitled to be cast, such action shall be
effective and valid if taken or authorized by the affirmative vote of the
holders of a majority of the total number of shares outstanding and entitled to
vote thereon.
SIXTH: REDEMPTION OF SHARES. All shares of Common Stock now or
hereafter authorized shall be subject to redemption, in the sense used in the
General Corporation Law, in the manner,
-2-
<PAGE>
upon the terms and conditions and at the redemption price determined as provided
in these Articles of Incorporation. All shares so redeemed or repurchased shall
be deemed to be acquired for retirement in the sense contemplated by the General
Corporation Law and the number of authorized shares of Common Stock shall not be
reduced by the number of any shares redeemed or repurchased by the Corporation
A. REDEMPTION BY STOCKHOLDERS. Each holder of Common Stock, upon request
in proper form as determined by the Board of Directors, delivered to the
Corporation or its agent appointed for such purpose, accompanied, in the case of
shares for which certificates have been issued, by surrender of the appropriate
stock certificate or certificates in proper form for transfer, as determined by
the Board of Directors, shall be entitled to require the Corporation to redeem
all or any part of the shares of Common Stock standing in the name of such
holder on the books of the Corporation, to the extent that funds or property are
legally available therefor, at a redemption price per share equal to the net
asset value per share applicable to such redemption, determined as provided in
these Articles of Incorporation and in resolutions of the Board of Directors
adopted from time to time. Payment of the redemption price shall be made not
later than the seventh day following the day of receipt by the Corporation or
such agent of the written request and stock certificates, if any, in proper form
as described in the preceding sentence, except that no payment need be made
until funds for the purchase price of shares redeemed have been collected by or
for the account of the Corporation.
B. RIGHTS OF HOLDERS OF SHARES REDEEMED. The right of any holder of
shares of Common Stock redeemed as provided in Paragraph A to receive dividends
or distributions thereon and all other rights of such holder with respect to
such shares shall terminate at the time as of which the redemption price of such
shares is determined, except the right of such holder to receive (I) the
redemption price of such shares in accordance with the provisions hereof, and
(ii) any dividend or distribution to which such holder had previously become
entitled.
C. DETERMINATION OF NET ASSET VALUE PER SHARE. The Board of Directors
shall determine from time to time the net asset value per share of the
outstanding shares of Common Stock. It may delegate this authority to any one
or more of the Directors or officers of the Corporation, to the investment
adviser, the custodian of the Corporation's assets or to another agent of the
Corporation or agent of any of the foregoing appointed for such purpose; except
that the authority to suspend the determination of the net asset value may not
be delegated. The net asset value shall be determined as of the close of
trading on
-3-
<PAGE>
the New York Stock Exchange on each day such Exchange is open for trading,
unless the Board of Directors shall, by resolution, prescribe a different time
or times as of which such determination shall be made. The time at which shares
of Common Stock issued and sold by the Corporation shall be deemed to be
outstanding and the time at which shares of Common Stock redeemed or repurchased
by the Corporation shall be deemed no longer to be outstanding shall be fixed by
resolution of the Board of Directors. A determination of net asset value shall
be applicable to requests for redemption and, if and to the extent determined by
the Board of Directors, to other transactions of the Corporation in shares of
Common Stock, effected during such periods as the Board of Directors shall
prescribe by resolution.
D. SUSPENSION OF REDEMPTION RIGHTS. The Board of Directors may declare a
suspension of the redemption rights granted in Paragraph A: (I) for any period
during which the New York Stock Exchange is closed (other than customary weekend
and holiday closings), or during which trading in the markets customarily
utilized by the Corporation is restricted; (ii) for any period during which an
emergency exists, as determined by the Securities and Exchange Commission, as a
result of which disposal of the Corporation's investments or determination of
net asset value is not reasonably practicable; or (iii) for such periods as the
Securities and Exchange Commission by order may permit for the protection of the
Corporation's investors. Such suspension shall take effect at such time as the
Board of Directors or authorized officer shall specify and shall continue until
the Board of Directors or authorized officer shall declare the suspension at an
end, except that the suspension shall terminate in any event on the first day on
which (1) the condition giving rise to the suspension shall have ceased to exist
and (2) no other condition exists under which suspension is authorized under
this Paragraph D. Each declaration by the Board of Directors pursuant to this
Paragraph D shall be consistent with applicable rules and regulations, if any,
of the Securities and Exchange Commission or any other governmental body having
jurisdiction over the Corporation. To the extent not inconsistent with such
rules and regulations, the determination of the Board of Directors shall be
conclusive.
E. EFFECT OF SUSPENSION OF REDEMPTION RIGHTS. Notwithstanding any other
provision of this Article Sixth, the rights of holders of Common Stock to
require the Corporation to redeem and receive payment for their shares,
including holders who shall have requested redemption of shares but who shall
not have received payment therefor, shall be suspended during any period when a
suspension of redemption rights authorized by Paragraph D is in effect. No
determination of net asset value per share shall be required to be made during a
period when
-4-
<PAGE>
such a suspension is in effect. Any holder who shall have his redemption right
so suspended may, during the period of such suspension, by appropriate written
notice of revocation delivered to the office or agency where request for
redemption was made, revoke any request or instruction for redemption not
honored and withdraw any certificates tendered for redemption. The redemption
price of shares for which redemption requests have not been revoked shall be the
net asset value of such shares determined after the termination of such
suspension, payment shall be made within seven days after the date upon which
the requirements of Paragraph A were met plus the period during which such
suspension was in effect.
SEVENTH: BOARD OF DIRECTORS. The number of Directors the Corporation
shall be four, which number may be changed pursuant to the By-Laws of the
corporation. The names of the Directors, who shall act until the first annual
meeting or until their successors are duly elected and qualified, are:
Robert A. Nikels
John B. Borsch, Jr.
Roxanne Decyk
Stanley R. Nelson
A. POWERS. The following powers are expressly vested in the Board of
Directors of the Corporation and may be exercised without the approval of the
stockholders of the Corporation:
(i) To make; adopt, alter, amend and repeal By-Laws of the Corporation;
(ii) To declare and pay dividends and distributions in cash, shares of
Common Stock or other securities or property from surplus or any funds
legally available therefor, at such intervals (which may be as
frequently as daily) or on such other periodic bases as it shall
determine; to declare such dividends or distributions by means of a
formula or other method of determination at meetings held less
frequently than the frequency of the effectiveness of such
declarations; to provide that dividends may be paid in cash or in
shares of Common Stock at the election of each stockholder; to
establish payment dates for dividends or any other distributions on
any bases, including dates occurring less frequently than the
effectiveness of the declaration thereof; and to provide for the
payment of declared dividends on a date earlier than the specified
payment date;
(iii) Inasmuch as the computation of net income, profits or earnings
for Federal income tax purposes may
-5-
<PAGE>
vary from the computation thereof on the books of the Corporation, in
its discretion, to distribute for any fiscal year as dividends and as
capital gains distributions, respectively, additional amounts
sufficient to enable the Corporation to avoid or reduce its liability
for taxes;
(iv) To issue, reissue, sell or cause to be issued and sold any of the
authorized shares of Common Stock, including any additional shares
hereafter authorized and any shares redeemed or repurchased by the
Corporation, to such persons as the Board of Directors shall
determine, for such consideration, not less than the greater of the
par value thereof or the net asset value per share determined as
provided in these Articles of Incorporation and in resolutions of the
Board of Directors adopted from time to time, and upon terms and
conditions determined by the Board of Directors, all such shares when
so issued and sold being fully paid and nonassessable; provided that
no shares of Common stock shall be issued or sold by the Corporation,
except as a stock dividend distributed to stockholders, for less than
an amount which would result in proceeds to the Corporation at least
equal to the net asset value per share, determined as provided in
these Articles of Incorporation and in resolutions of the Board of
Directors adopted from time to time, and provided further that in the
case of shares issued or sold for a consideration other than cash, the
resolution authorizing their issue or sale shall include a fair
description of any consideration other than cash and a statement of
the actual value of such consideration as determined by the Board of
Directors or a statement that the Board of Directors has determined
that the actual value is or will be not less than a certain sum; and
(v) To authorize the purchase by the Corporation, either directly or
through an agent, of shares of Common Stock, in the open market or
otherwise, upon terms and conditions determined by the Board of
Directors at prices not in excess of the net asset value of such
shares determined as provided in these Articles of Incorporation and
in resolutions of the Board of Directors adopted from time to time.
B. GOOD-FAITH DETERMINATIONS CONCLUSIVE. Any determination made in good
faith and, so far as accounting matters are involved in accordance with
generally accepted accounting principles, by or pursuant to the direction of the
Board of Directors, as to: the amount of the assets, debts, obligations or
liabilities of the Corporation; the amount of any reserves or charges set up and
the propriety thereof; the purpose for
-6-
<PAGE>
creating such reserves or charges the use, alteration or cancellation of any
reserves or charges (whether or not any debt, obligation or liability for which
such reserves or charges were created shall have been paid or discharged or
shall be then or thereafter required to be paid or discharged); the price or bid
or asked price or yield equivalent of any investment owned or held by the
Corporation; the market or fair value of any investment or any other asset of
the Corporation; the number of shares of Common Stock of the Corporation
outstanding; the ability to liquidate investments in orderly fashion; and any
matters relating to the issue, sale, redemption, purchase and/or other
acquisition or disposition of investments or Common Stock of the Corporation,
shall be final and conclusive, and shall be binding upon the Corporation and all
holders of its Common Stock, past, present and future, and Common Stock of the
Corporation shall be issued and sold on the condition and understanding that any
and all such determinations shall be binding as aforesaid.
EIGHTH: GENERAL:
A. The Corporation reserves the right from time to time to amend, alter,
change, add to, or repeal any provisions contained in these Articles of
Incorporation in the manner now or hereafter prescribed or permitted by statute,
including any amendment which alters the contract rights, as expressly set forth
in these Articles of Incorporation, of any outstanding Common Stock, and all
rights conferred on stockholders and others herein are granted subject to this
reservation.
B. Nothing contained in these Articles of Incorporation shall be deemed
to authorize any action in contravention of any provision of the 1940 Act or any
rule or regulation thereunder.
C. The titles contained in these Articles of Incorporation are for
convenience only and shall not affect the interpretation of any of the
provisions hereof.
IN WITNESS WHEREOF, the undersigned incorporator hereby acknowledges these
Articles of Incorporation to be his act and further acknowledges that, to the
best to his knowledge, information and belief, the matters and facts set forth
therein are true in all material respects and that this statement is made under
the penalties for perjury.
9/29/87 /s/ JEREMY SACHS
Dated Jeremy Sachs
-7-
<PAGE>
Bylaws
of
Lincoln National International Fund, Inc.
ARTICLE I
STOCKHOLDERS
SECTION 1. ANNUAL MEETINGS: (a) The annual meeting of the stockholders of
the Corporation (if such meeting be held) shall be held on the third Tuesday in
August in each year (or if said day be a legal holiday then on the next
succeeding day not a legal holiday), at 10:30 a.m., at the office of the
Corporation in the City of Baltimore, Maryland, or at such other time and place
within the United States as may be fixed by the Board of Directors, for the
purpose of electing directors and for transacting such other business as may
properly be brought before the meeting. Only such business, in addition to that
prescribed by law, by the Articles of Incorporation or by these Bylaws, may be
brought before such meeting as may be specified by resolution of the Board of
Directors, or by writing filed with the Secretary of the Corporation and signed
by the Chairman of the Board or the President or by a majority of the directors
or by stockholders holding at least one-half of the Common Stock of the
Corporation outstanding and entitled to vote at the meeting.
(b) Upon the affirmative vote of a majority of the whole board, the annual
meeting may be dispensed with in any year in which none of following is required
to be acted upon by stockholders pursuant to the Investment Company Act of
1940:
I. Election of directors;
ii. Approval of an investment advisory agreement;
iii. Ratification of the selection of independent public accountants; and
iv. Approval of a distribution agreement.
SECTION 2. Special Meetings: Special meetings of the stockholders for any
purpose or purposes may be held upon call by the Chairman of the Board or the
President or by a majority of the Board of Directors, and shall be called by the
Chairman of the Board, the President, a Vice President, the Secretary or any
director at the request in writing of a majority of the Board of Directors or of
stockholders holding at least one-quarter of the stock of the Corporation (or in
the case of removal of a director, 1/10th of the stock of the of Corporation)
outstanding and entitled to vote at the meeting, at such time and date and at
such place where an annual meeting of stockholders could be held, each as may be
<PAGE>
fixed by the Chairman of the Board, the President or the Board of Directors, as
the case may be, and as may be stated in the notice setting forth such call.
Such request shall state the purpose or purposes of the proposed meeting and the
matters proposed to be acted upon and only such matters so specified may
properly be brought before such meeting.,
Special meetings of the stockholders shall be called by the Chairman of the
Board, the President, a Vice President, the Secretary or any Director when
requested to do so by stockholders representing the requisite beneficial
interest in the Corporation pursuant to Section 16(c) of the Investment Company
Act of 1940, for the purpose of removing one or more directors. The time and
place for any such meeting will be fixed as provided in the previous paragraph.
Whenever stockholders or beneficial owners of stock in the Corporation apply to
the Board of Directors for assistance in communicating with other stockholders
or beneficial owners for this purpose, the Board shall facilitate that
communication pursuant to that Section 16(c).
Whenever the Board of Directors shall change the independent public
accountant for the Corporation, a meeting of stockholders shall be called by the
Board for the purpose of ratifying or rejecting the selection of the new
accountant. The time and place for any such meeting will be fixed as provided
in the first paragraph of this SECTION.
SECTION 3. NOTICE OF MEETINGS: Written or printed notice of every annual
or special meeting of stockholders, stating the time and place thereof and, in
the case of every special meeting, the purpose of such meeting, shall be
delivered personally or mailed to each stockholder of record entitled to vote at
the meeting at his address as the same appears on the books of the Corporation
or left at his residence or usual place of business, in each case at least ten
days but not more than ninety days prior to such meeting. Such further notice
shall be given as may be required by law. Meetings may be held without notice if
all of the stockholders entitled to vote are present or represented at the
meeting, or if notice is waived in writing, either before or after the meeting,
by those not present or represented at the meeting. No notice of an adjourned
meeting of the stockholders other than an announcement of the time and place
thereof at the preceding meeting shall be required.
SECTION 4. QUORUM: At every meeting of the stockholders, the holders of
record of a majority of the outstanding shares of Common Stock of the
Corporation entitled to vote at the meeting, whether present in person or
represented by proxy, shall, except as otherwise provided by law, constitute a
quorum. If at any meeting there shall be no quorum, the holders of record of a
majority of such shares entitled to vote at the meeting so present or
represented may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall have been obtained, when any
business may be transacted which
<PAGE>
might have been transacted at the meeting as first convened had there been a
quorum.
SECTION 5. PRESIDING OFFICER: Meetings of the stockholders shall be
presided over by the Chairman of the Board or, if he is not present, the
President or, if neither is present by a Vice President or, in their absence, by
a chairman to be chosen at the meeting. The Secretary of the Corporation, or,
if he is not present, an Assistant Secretary of the Corporation or, if neither
is present, a secretary to be chosen at the meeting shall act as secretary of
the meeting.
SECTION 6. PROXIES: Each stockholder entitled to vote at any meeting
shall have one vote in person or by proxy for each share of Common Stock held by
him, but no proxy shall be voted on after eleven months from its date, unless
such proxy provides for a longer period. Fractional shares shall be entitled to
fractional votes. All elections of directors shall be had and all questions,
except as otherwise provided by law or by the Articles of Incorporation or by
these Bylaws, shall be decided by a majority of the votes cast by stockholders
present or represented and entitled to vote thereon in person or by proxy.
SECTION 7. BALLOTING: The vote on the election of directors, and other
questions properly brought before any meeting, need not be by ballot except when
so demanded by a majority vote of the shares present in person or by proxy and
entitled to vote theron, or when so ordered by the chairman of such meeting.
The chairman of each meeting at which directors are to be elected by ballot or
at which any question is to be so voted on shall, at the request of any
stockholder present or represented by proxy at the meeting and entitled to vote
at such election or on such question, appoint two inspectors of election. No
director or candidate for the office of director shall be appointed as such
inspector. Inspectors shall first take and subscribe an oath or affirmation
faithfully to execute the duties of inspectors at such meeting with strict
impartiality and according to the best of their ability, and shall take charge
of the polls and after the balloting shall make a certificate of the result of
the vote taken.
SECTION 8. RECORD DATE: The Board of Directors may close the stock
transfer books of the Corporation for a period not exceeding twenty days
preceding the date of any meeting of stockholders, or the date for the payment
of any dividend, or the date for the allotment of rights, or the date when any
change or conversion or exchange of stock shall go into effect; or, in lieu of
closing the stock transfer books, the Board of Directors may fix in advance a
date, not exceeding sixty days and not less than ten days preceding the date of
any meeting of stockholders, and not exceeding sixty days preceding the date for
the payment of any dividend, or the date for the allotment of rights, or the
date when any change or conversion or exchange of stock shall go into
<PAGE>
effect, or a date in connection with the obtaining of any consent, as a record
date for the determination of the stockholders entitled to notice of, and to
vote at any such meeting and at any adjournment thereof, or entitled to receive
payment of any such dividend, or to receive any such allotment of rights, or to
exercise the rights in respect of any such change, conversion or exchange of
stock, or to give such consent, and in such case such stockholders, and only
such stockholders, as shall be stockholders of record on the date so fixed,
shall be entitled to such notice of, and to vote at, such meeting and any
adjournment thereof, or to receive payment of such dividend, or to receive such
allotment of rights, or to exercise such rights, or to give such consent, as the
case may be, notwithstanding any transfer of any stock on the books of the
Corporation after any such record date fixed as aforesaid.
ARTICLE II
BOARD OF DIRECTORS
SECTION 1. NUMBER QUALIFICATION AND TERM OF OFFICE: The Board of
Directors of the Corporation shall consist of not less than three nor more than
ten persons, none of whom need be stockholders of the Corporation. The number
of directors shall be five unless increased or decreased by the Board of
Directors from time to time, as it sees fit, by vote of a majority of the whole
Board. The directors shall be elected and shall hold office, except as
otherwise provided in SECTIONS 2 and 3 hereof, until their respective successors
are elected and qualify. A majority of the whole Board, but in no event less
than two, shall constitute a quorum for the transaction of business, but if at
any meeting of the Board there shall be less than a quorum present, a majority
of the directors present may adjourn the meeting from time to time, until a
quorum shall have been obtained, when any business may be transacted which might
have been transacted at the meeting as first convened had there been a quorum.
No notice of an adjourned meeting of the directors other than an announcement of
the time and place thereof at the preceding meeting shall be required. The acts
of the majority of the directors present at any meeting at which there is a
quorum shall, except as otherwise provided by law, by the Articles of
Incorporation or by these Bylaws, be the acts of the Board.
SECTION 2. RESIGNATIONS: Any director may resign his office at any time
by delivering a written resignation to the Board of Directors, the President or
the Secretary. Unless otherwise specified therein, such resignation shall take
effect upon delivery and need not be accepted. A director who is an "interested
person," as defined in the Investment Company Act of 1940 shall resign as a
director of the Corporation upon the termination of his employment relationship
with the investment adviser or an affiliated corporation of the investment
adviser. The Board of Directors
<PAGE>
may, at its option, decline to accept the resignation of a director who tenders
his resignation under these circumstances.
SECTION 3. VACANCIES: (a) The Board of Directors, by vote of a majority
of the whole Board, may elect directors to fill vacancies in the Board resulting
from an increase in the number of directors or from any other cause except
removal of a director pursuant to Subsection (b) of this SECTION 3. A director
so chosen shall hold office until the expiration of the term of the director
whom he shall have succeeded, and, in the case of an increase in the number of
directors, the directors so chosen shall hold office until the next meeting of
stockholders and until their respective successors are elected and qualify.
(b) The stockholders, at any meeting called for the purpose, may, with or
without cause, remove any director by the affirmative vote of two-thirds of the
outstanding shares of the Corporation which are entitled to be represented at
such meeting.
The stockholders may, at any meeting called for the purpose, fill the
vacancy in the Board thus caused, by the affirmative vote of not less than a
majority of the outstanding shares of the Corporation entitled to be cast at
such meeting.
SECTION 4. PLACE. TIME AND NOTICE OF MEETINGS:
Meetings of the Board of Directors shall be held at such place, within or
without the State of Maryland, as may from time to time be fixed by resolution
of the Board or as may be specified in the call of any meeting. Regular
meetings of the Board of Directors shall be held at such times as may from time
to time be fixed by resolution of the Board, and special meetings may be held at
any time upon the call of a majority of the persons constituting the Board of
Directors, the Chairman of the Board, the president or the Secretary, by oral,
telephonic, telegraphic or written notice, duly served on, sent, mailed or given
to each director at least twenty- four hours before the meeting. The notice of
any special meeting shall specify the purposes thereof. Notice need not be
given of regular meetings of the Board held at times fixed by resolution of the
Board. Meetings may be held at any time without notice if all of the directors
are present or if notice is waived in writing, either before or after the
meeting, by those not present.
SECTION 5. CONFERENCE TELEPHONE: Members of the Board of Directors or a
committee of the Board of Directors may participate in a meeting by means of a
conference telephone or similar communications equipment if all persons
<PAGE>
participating in the meeting can hear each other at the same time. Participation
in a meeting by these means constitutes presence in person at the meeting.
SECTION 6. PRESIDING OFFICER: Meetings of the Board of Directors shall be
presided over by the Chairman of the Board, or, if he is not present, by the
President or, if neither of the above is present, by a Vice President or, if
none of the above is present, by a chairman to be chosen at the meeting; and the
Secretary or, if he is not present, an Assistant Secretary or, if neither is
present, a secretary to be chosen at the meeting shall act as secretary of the
meeting.
SECTION 7. COMPENSATION: The directors, other than those who are
"interested persons" as defined in the Investment Company Act of 1940 shall
receive such fees or compensation for services to the Corporation (including
attendance at meetings of the Board or of committees designated by the Board
pursuant to Section 9 of this Article II) as may be fixed by the Board of
Directors.
SECTION 8. CONFLICTS OF INTEREST: Except as otherwise provided by law or
in the Articles of Incorporation, a director of the Corporation shall not, in
the absence of fraud, be disqualified by his office from dealing or contracting
with the Corporation either as a vendor, purchaser or otherwise, nor in the
absence of fraud shall any transaction or contract of the Corporation be void or
voidable or affected by reason of the fact that any directors, or any firm of
which any director is a member, or any corporation of which any director is an
officer, director or stockholder, is in any way interested in such transaction
or contract; provided, that at the meeting of the Board of Directors authorizing
or confirming said contract or transaction, the existence of an interest of such
director, firm or corporation is disclosed or made known and there is present a
quorum of the Board of Directors, and such contract or transaction is approved
by a majority of such quorum, which majority shall consist of directors not so
interested or connected. Nor shall any director be liable to account to the
Corporation for any profit realized by him from or through any such transaction
or contract of the Corporation, ratified or approved as aforesaid, by reason of
the fact that he or any firm of which he is a member, or any corporation of
which he is an officer, director or shareholder, was interested in such
transaction or contract. Directors so interested may be counted when present at
meetings of the Board of Directors for the purpose of determining the existence
of a quorum. Any contract, transaction or act of the Corporation or of the
Board of Directors (whether or not approved or ratified as hereinabove provided)
which shall be ratified by a majority in interest of a quorum of the
stockholders having voting power at any annual meeting or any special meeting
called for such purpose or approved in writing by a majority in interest of the
stockholders having voting power without a meeting shall,
<PAGE>
except as otherwise provided by law, be as valid and as binding as though
ratified by every stockholder of the Corporation.
SECTION 9. COMMITTEES: The Board of Directors may, by resolution or
resolutions passed by a majority of the whole Board, designate one or more
committees, each such committee to consist of two or more of the directors of
the Corporation, which, to the extent permitted by law and provided in said
resolution or resolutions, shall have and may exercise the powers of the Board
over the business and affairs of the Corporation, and may have power to
authorize the seal of the Corporation to be affixed to all papers which may
require it. Such committee or committees shall have such name or names as may be
determined from time to time by resolution adopted by the Board of Directors. A
majority of the members of any such committee may determine its action and fix
the time and place of its meetings unless the Board of Directors shall otherwise
provide. The Board of Directors shall have power at any time to change the
membership of, to fill vacancies in, or to dissolve any such committee.
ARTICLE III
OFFICERS
SECTION 1. GENERAL: The Board of Directors annually shall elect from
among its members a Chairman of the Board and a President of the Corporation,
and shall elect one or more Vice Presidents, a Secretary and a Treasurer and,
from time to time, any other officers and agents as it may deem proper. Any two
of the above-mentioned officers, except those of the President and a Vice
President, may be held by the same person, but no officer shall execute,
acknowledge or verify any instrument in more than one capacity if such
instrument be required by law or by these Bylaws to be executed, acknowledged or
verified by any two or more officers. The Board of Directors may fill any
vacancy which occurs in any office.
SECTION 2. TERM OF OFFICE: The term of office of all officers shall be
one year or until their respective successors are chosen; but any officer or
agent chosen or elected by the Board of Directors may be removed, if the Board
of Directors in its judgment finds that the best interests of the Corporation
will be thus served, at any time, by the affirmative vote of a majority of the
members of the Board then in office.
SECTION 3. POWERS: Subject to such limitations as the Board of Directors
may from time to time prescribe, the officers of the Corporation shall each have
such powers and duties as generally appertain to their respective offices, as
well as such powers and duties as from time to time may be conferred by the
Board of Directors. Any officer, agent or employee of the Corporation may be
required by the Board of
<PAGE>
Directors to give bond for the faithful discharge of his duties, in such sum and
of such character as the Board may from time to time prescribe.
ARTICLE IV
CERTIFICATES OF STOCK
SECTION 1. CERTIFICATES: Each stockholder of the Corporation shall be
entitled, upon written request by such stockholder to the Corporation, to a
certificate or certificates, in such form as the Board of Directors may from
time to time prescribe, which shall represent and certify the number of whole
shares of stock of the Corporation owned by such stockholder. The certificates
for shares of stock of the Corporation shall bear the signature, either manual
or facsimile, of the President or a Vice President and the Treasurer or an
Assistant Treasurer or the Secretary or an Assistant Secretary, and shall be
sealed with the seal of the Corporation or bear a facsimile of such seal. The
validity of any stock certificate shall not be affected if any officer whose
signature appears thereon ceases to be an officer of the Corporation before such
certificate is issued.
SECTION 2. TRANSFERS: The shares of stock of the Corporation shall be
transferable on the books of the Corporation by the holder thereof in person or
by a duly authorized attorney, upon surrender for cancellation of a certificate
or certificates for a like number of shares, with a duly executed assignment and
power of transfer endorsed thereon or attached thereto, or, if no certificate
has been issued to the holder in respect of shares of stock of the Corporation,
upon receipt of written instructions, signed by such holder, to transfer such
shares from the account maintained in the name of such holder by the Corporation
or its agent. Such proof of the authenticity of the signatures as the
Corporation or its agent may reasonably require shall be provided.
SECTION 3. LOST, STOLEN OR DESTROYED CERTIFICATES:
No certificate for shares of stock of the Corporation shall be issued in place
of any certificate alleged to have been lost, stolen, mutilated or destroyed
except upon production of such evidence of the loss, theft, mutilation or
destruction, and upon indemnification of the Corporation and its agents to such
extent and in such manner as the Board of Directors may from time to time
prescribe.
ARTICLE V
CORPORATE BOOKS
The books of the Corporation, except the original or a duplicate stock
ledger which shall be kept at the office of the Corporation located in Fort
Wayne, Indiana, may be
<PAGE>
kept outside the State of Maryland at such place or places as the Board of
Directors may from time to time determine.
ARTICLE VI
SIGNATURES
Except as otherwise provided in these Bylaws or as the Board of Directors
may generally or in particular cases authorize the execution thereof in some
other manner, all deeds, leases, transfers, contracts, bonds, notes, checks,
drafts and other obligations made, accepted or endorsed by the Corporation and
all endorsements, assignments, transfers, stock powers or other instruments of
transfer of securities owned by or standing in the name of the Corporation shall
be signed or executed by the President or any Vice President or by any other
officer or agent authorized to act in such matters, whether by law, the Articles
of Incorporation, these Bylaws, or any general or special authorization of the
Board of Directors. If the corporate seal is required, it shall be affixed by
the Secretary or an Assistant Secretary.
ARTICLE VII
FISCAL YEAR
The Corporation's fiscal year shall end on December 31 each year.
ARTICLE VIII
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Corporation shall indemnify directors, officers, employees and agents
of the Corporation against judgments, fines, settlements and expenses to the
fullest extent authorized and in the manner permitted by applicable federal and
state law.
ARTICLE IX
ADDITIONAL PROVISIONS
In any case where an officer or director of the Corporation or of any
investment adviser of the Corporation or a member of any committee of the
Corporation, is also an officer or director of another corporation and the
purchase or sale of the securities issued by such other corporation is under
consideration, the officer, director or committee member concerned will abstain
from participating in any decision made on behalf of the Corporation to purchase
or sell any securities issued by such other corporation.
<PAGE>
ARTICLE X
AMENDMENTS
The Bylaws of the Corporation may be amended, added to, rescinded or
repealed at any meeting of the stockholders, or by vote of a majority of the
directors then in office at any meeting of the Board of Directors, provided
notice of the substance of the proposed change is contained in the notice of the
meeting or any waiver thereof; except that after the initial issue of any shares
of capital stock of the Corporation, the provisions of this Article XI may be
altered, amended or repealed only upon the affirmative vote of the holders of a
majority of all shares of capital stock of the Corporation at the time
outstanding and entitled to vote.
<PAGE>
Exhibit 5(c)
FORM OF
SUB-ADVISORY AGREEMENT
Sub-Advisory Agreement executed as of , between LINCOLN INVESTMENT
MANAGEMENT, INC., an Illinois corporation (the "Adviser"), and DELAWARE
INTERNATIONAL ADVISERS LIMITED, a company formed under the laws of England (the
"Sub-Adviser").
Witnesseth:
That in consideration of the mutual covenants herein contained, it is
agreed as follows:
1. SERVICES TO BE RENDERED BY SUB-ADVISER TO THE FUND.
(a) Subject always to the control of the Directors of Lincoln National
International Fund, Inc. (the "Fund"), a Maryland corporation, which is an
eligible investment fund for Lincoln National Variable Annuity Account C
and one or more other separate accounts of The Lincoln National Life
Insurance Company (the "Separate Accounts"), the Sub-Adviser, at its
expense, will furnish continuously an investment program for the Fund which
shall at all times meet the diversification requirements of Section 817(h)
of the Internal Revenue Code of 1986, as amended (the "Code"). The
Sub-Adviser will make investment decisions on behalf of the Fund and place
all orders for the purchase and sale of portfolio securities. In the
performance of its duties, the Sub-Adviser will comply with the provisions
of the organizational documents and Bylaws of the Fund and the stated
investment objective, policies and restrictions of the Fund, and will use
its best efforts to safeguard and promote the welfare of the Fund, and to
comply with other policies which the Directors or the Adviser, as the case
may be, may from time to time determine. The Sub-Adviser shall make its
officers and employees available to the Adviser from time to time at such
reasonable times as the parties may agree to review investment policies of
the Fund and to consult with the Adviser regarding the investment affairs
of the Fund.
(b) The Sub-Adviser, at its expense, will furnish (i) all necessary investment
and management facilities, including salaries of personnel, required for it
to execute its duties faithfully and (ii) administrative facilities,
including bookkeeping, clerical personnel and equipment necessary for the
efficient conduct of the investment affairs of the Fund (excluding
determination of net asset value per share and shareholder accounting
services).
(c) In the selection of brokers and dealers and the placing of orders for the
purchase and sale of portfolio investments for the Fund, the Sub-Adviser
shall use its best efforts to obtain for the Fund the most favorable price
and execution available, except to the extent it may be permitted to pay
higher brokerage commissions for brokerage and research services as
described below. In using its best efforts to obtain for the Fund the best
execution
<PAGE>
available, the Sub-Adviser, bearing in mind the Fund's best interests at
all times, shall consider all factors it deems relevant, including by way
of illustration: price; the size of the transaction; the nature of the
market for the security; the amount of the commission; the timing of the
transaction taking into account market prices and trends; the reputation,
experience and financial stability of the broker or dealer involved; and
the quality of service rendered by the broker or dealer in other
transactions. Subject to such policies as the Directors of the Fund may
determine, the Sub-Adviser shall not be deemed to have acted unlawfully or
to have breached any duty created by this Agreement or otherwise solely by
reason of its having caused the Fund to pay a broker or dealer that
provides brokerage and research services to the Sub-Adviser an amount of
commission for effecting a portfolio investment transaction in excess of
the amount of commission another broker or dealer would have charged for
effecting that transaction, if the Sub-Adviser determines in good faith
that such amount of commission was reasonable in relation to the value of
the brokerage and research services provided by such broker or dealer,
viewed in terms of either that particular transaction or the Sub-Adviser's
over-all responsibilities with respect to the Fund and to other clients of
the Sub-Adviser as to which the Sub-Adviser exercises investment
discretion.
(d) The Sub-Adviser shall not be obligated to pay any expenses of or for the
Fund not expressly assumed by the Sub-Adviser pursuant to this Section 1
other than as provided in Section 3.
2. OTHER AGREEMENTS, ETC.
It is understood that any of the shareholders, Directors, officers and
employees of the Fund may be a shareholder, director, officer or employee
of, or be otherwise interested in, the Sub-Adviser, and in any person
controlled by or under common control with the Sub-Adviser; and that the
Sub-Adviser and any person controlled by or under common control with the
Sub-Adviser may have an interest in the Fund or one or more Separate
Accounts, or any other investment vehicle for which the Fund is an eligible
investment fund.
3. COMPENSATION TO BE PAID BY THE ADVISER TO THE SUB-ADVISER.
The Adviser will pay to the Sub-Adviser as compensation for the
Sub-Adviser's services rendered and for the expenses borne by the
Sub-Adviser pursuant to Section 1, a fee, computed and paid at the annual
rate of 0.50 of 1% of the first $200 million of average net assets of the
Fund, 0.40 of 1% of the next $200 million of average net assets, and 0.35
of 1% of any excess over $400 million. Such fee shall be paid by the
Adviser, and not by the Fund, and without regard to any reduction in the
fees paid by the Fund to the Adviser under its management contract as a
result of any statutory or regulatory limitation on investment company
expenses or voluntary fee reduction assumed by the Adviser. Such fee shall
be payable for each month within 10 business days after the end of such
month.
If the Sub-Adviser shall serve for less than the whole of a month, the
foregoing compensation shall be prorated.
<PAGE>
4. ASSIGNMENT TERMINATES THIS AGREEMENT; AMENDMENTS OF THIS AGREEMENT.
This Agreement shall automatically terminate, without the payment of any
penalty, in the event of its assignment or in the event that the investment
advisory contract between the Adviser and the Fund shall have terminated
for any reason; and this Agreement shall not be amended unless such
amendment be approved at a meeting by the affirmative vote of a majority of
the outstanding shares of the Fund and by the vote, cast in person at a
meeting called for the purpose of voting on such approval, of a majority of
the Directors of the Fund who are not interested persons of the Fund or of
the Adviser or of the Sub-Adviser.
5. EFFECTIVE PERIOD AND TERMINATION OF THIS AGREEMENT.
This Agreement shall become effective upon its execution, and shall remain
in full force and effect continuously thereafter (unless terminated
automatically as set forth in Section 4) until terminated as follows:
(a) The Fund may at any time terminate this Agreement by not more than sixty
days' written notice delivered or mailed by registered mail, postage
prepaid, to the Adviser and the Sub-Adviser; or
(b) If (i) the Directors of the Fund or the shareholders by the affirmative
vote of a majority of the outstanding shares of the Fund and (ii) a
majority of the Directors who are not interested persons of the Fund or of
the the Adviser or of the Sub-Adviser, by vote cast in person at a meeting
called for the purpose of voting on such approval, do not specifically
approve at least annually the continuance of this Agreement, then this
Agreement shall automatically terminate at the close of business on the
second anniversary of its execution, or upon the expiration of one year
from the effective date of the last such continuance, whichever is later;
provided, however, that if the continuance of this Agreement is submitted
to the shareholders of the Fund for their approval and such shareholders
fail to approve such continuance of this Agreement as provided herein, the
Sub-Adviser may continue to serve hereunder in a manner consistent with the
Investment Company Act of 1940 and the Rules and Regulations thereunder; or
(c) The Adviser may at any time terminate this Agreement by not less than
ninety days' written notice delivered or mailed by registered mail, postage
prepaid, to the Sub-Adviser, and the Sub-Adviser may at any time terminate
this Agreement by not less than 90 days' written notice delivered or mailed
by registered mail, postage prepaid, to the Adviser.
Action by the Fund under (a) above may be taken either (i) by vote of a
majority of its Directors, or (ii) by the affirmative vote of a majority of
the outstanding shares of the Fund.
Termination of this Agreement pursuant to this Section 5 shall be without
the payment of any penalty.
<PAGE>
6. CERTAIN INFORMATION.
The Sub-Adviser shall promptly notify the Adviser in writing of the
occurrence of any of the following events:
(a) the Sub-Adviser shall fail to be registered as an investment adviser under
the Investment Advisers Act of 1940, as amended from time to time, and
under the laws of any jurisdiction in which the Sub-Adviser is required to
be registered as an investment adviser in order to perform its obligations
under this Agreement;
(b) the Sub-Adviser shall have been served or otherwise have notice of any
action, suit, proceeding, inquiry or investigation, at law or in equity,
before or by any court, public board or body, involving the affairs of the
Fund;
(c) the ownership of more than 51% of the common stock of the Sub-Adviser
issued and outstanding as of the effective date of this Agreement will be
transferred; and
(d) the Chairman of the Board of Directors or the President of the Sub-
Adviser, or any of the Sub-Adviser's portfolio managers for the Fund shall
have changed.
7. CERTAIN DEFINITIONS.
For the purposes of this Agreement, the "affirmative vote of a majority of
the outstanding shares" means the affirmative vote, at a duly called and held
meeting of shareholders, (a) of the holders of 67% or more of the shares of the
Fund present (in person or by proxy) and entitled to vote at such meeting, if
the holders of more than 50% of the outstanding shares of the Fund entitled to
vote at such meeting are present in person or by proxy, or (b) of the holders of
more than 50% of the outstanding shares of the Fund entitled to vote at such
meeting, whichever is less.
For the purposes of this Agreement, the terms "affiliated person,"
"control," "interested person" and "assignment" shall have their respective
meanings defined in the Investment Company Act of 1940 and the Rules and
Regulations thereunder, subject, however, to such exemptions as may be granted
by the Securities and Exchange Commission under said Act; the term "specifically
approve at least annually" shall be construed in a manner consistent with the
Investment Company Act of 1940 and the Rules and Regulations thereunder; and the
term "brokerage and research services" shall have the meaning given in the
Securities Exchange Act of 1934 and the Rules and Regulations thereunder.
8. NONLIABILITY OF SUB-ADVISER.
In the absence of willful misfeasance, bad faith or gross negligence on the
part of the Sub-Adviser, or reckless disregard of its obligations and duties
hereunder, the Sub-Adviser shall not be subject to any liability to the Fund or
to any shareholder of the Fund, for any act or
<PAGE>
omission in the course of, or connected with, the rendering of services
hereunder.
Sub-Adviser agrees to indemnify the Adviser, the Separate Accounts and the
Depositor of the Separate Accounts for, and hold them harmless against, any
and all losses, claims, damages, liabilities (including amounts paid in
settlement with the written consent of the Sub-Adviser) or litigation
(including legal and other expenses) to which the Adviser, the Separate
Accounts or the Depositor of the Separate Accounts may become subject under
any statute, at common law or otherwise, insofar as such losses, claims,
damages, liabilities or expenses (or actions in respect thereof) or
settlements arise as a result of any failure by the Sub-Adviser, whether
unintentional or in good faith or otherwise, to adequately diversify the
investment program of the Fund, pursuant to the requirements of Section
817(h) of the Code, and the regulations issued thereunder (including, but
not by way of limitation, Reg. Sec. 1.817-5, March 2, 1989, 54 F.R. 8730),
relating to the diversification requirements for separate accounts,
endowment, and life insurance contracts.
IN WITNESS WHEREOF, LINCOLN INVESTMENT MANAGEMENT, INC. and DELAWARE
INTERNATIONAL ADVISERS LIMITED have each caused this Instrument to be signed in
duplicate on its behalf by its duly authorized representative, all as of the day
and year first above written.
LINCOLN INVESTMENT
MANAGEMENT, INC.
By:
Printed Name:
Title:
DELAWARE INTERNATIONAL ADVISERS LIMITED
By:
Printed Name:
Title:
Accepted and agreed to as of the day and year
first above written:
LINCOLN NATIONAL INTERNATIONAL FUND, INC.
By:
Printed Name:
Title:
