LINCOLN ADVISOR FUNDS, INC.
Supplement dated November 17, 1995 to
the Prospectus dated January 27, 1995
Strategic Transactions -- Limitations on Futures and Other
Transactions
The Board of Directors of Lincoln Advisor Funds, Inc. (the
"Fund") has approved and adopted an amendment to the Fund's
Prospectus and Statement of Additional Information regarding the
purchase or sale of futures contracts or options on futures
contracts. Effective as of the date hereof, the Prospectus is
amended to enable each Portfolio, except The Lincoln Cashfund
Portfolio, to take futures positions where the aggregate amount
committed to initial margins and options premiums on the futures
contracts does not exceed five percent (5%) of the Portfolio's
net asset value without reference to the definition of "bona
fide hedging transactions and positions", consistent with the
revised regulations under The Commodity Exchange Act. In
addition, the requirement that each such futures contract be
covered by cash equivalent set-asides equal to the total
contract value is hereby deleted. Discussion of the purchase or
sale of futures contracts or options on futures contracts is set
forth at Appendix A under the headings: "Strategic Transactions
- -- General", "--Limitations on Futures and Options
Transactions", and "--Futures Contracts and Options Thereon".
LINCOLN ADVISOR FUNDS, INC.
Supplement dated November 17, 1995 to
Statement of Additional Information dated January 27, 1995
INVESTMENT OBJECTIVES AND POLICIES -- Futures Contracts and
Options Thereon
The Board of Directors of Lincoln Advisor Funds, Inc. (the
"Fund") has approved and adopted an amendment to the Fund's
Prospectus and Statement of Additional Information regarding the
purchase or sale of futures contracts or options on futures
contracts. Effective as of the date hereof, the Prospectus is
amended to enable each Portfolio except, The Lincoln Cashfund
Portfolio, to take futures positions where the aggregate amount
committed to initial margins and options premiums on the futures
contracts does not exceed five percent (5%) of the Portfolio's
net asset value without reference to the definition of "bona
fide hedging transactions and positions", consistent with the
revised regulations under The Commodity Exchange Act, or
requiring that each such futures contract be covered by cash
equivalent set-asides equal to the total contract value.
Discussion of the purchase or sale of futures contracts or
options on futures contracts is set forth beginning at page 9
under the heading "INVESTMENT OBJECTIVES AND POLICIES -- Futures
Contracts and Options Thereon" and "-- Risks of Transactions in
Futures Contracts".
Therefore, the SAI is hereby amended by deleting in its
entirety each of the third paragraph and the fourth paragraph
under the sub-heading "-- Risks of Transactions in Futures
Contracts" from page 10 thereof, which paragraphs read as follows:
"Under regulations of the Commodity Exchange Act,
investment companies registered under the Investment Company Act
are exempted from the definition of "commodity pool operator",
subject to compliance with certain conditions. The exemption is
conditioned upon a requirement that all of the investment company's
futures transactions constitute bona fide hedging transactions
within the meaning of the regulations of the CFTC."
"With respect to long positions assumed by a
Portfolio, the Portfolio will segregate with the Fund's Custodian
an amount of cash, government securities or liquid, high-grade
debt securities so that the amount so segregated plus the amount of
initial and variation margin held in the account of its broker
equals the market value of the futures contracts and thereby
insures that the use of futures contracts is unleveraged."
<PAGE>
LINCOLN ADVISOR FUNDS, INC.
200 East Berry Street - Fort Wayne, Indiana 46802
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information expands upon and
supplements the information contained in the current Prospectus
of the Lincoln Advisor Funds, Inc. (the "Fund"), dated January
27, 1995, as amended or supplemented from time to time, and
should be read in conjunction with the Fund's Prospectus. The
Fund's Prospectus may be obtained by calling the Fund's
shareholder services representative at 1-800-9ADVISOR
(1-800-923-8476). This Statement of Additional Information,
although not in itself a prospectus, is incorporated by
reference into the Prospectus in its entirety.
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
Investment Objectives and Policies 1
Investment Restrictions 24
Management 27
Dividends, Distributions and Taxes 39
Purchase and Redemption of Shares 45
Execution of Portfolio Transactions 48
Calculation of Performance Data 50
Net Asset Value 53
Shareholder Services 55
General Information 56
Appendix A - Description of Security Ratings A-1
</TABLE>
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
In general, the Fund is an open-end, diversified management
investment company consisting of nine separate Portfolios (each
a "Portfolio" and collectively the "Portfolios"): the Lincoln
Growth and Income Portfolio, the Lincoln Enterprise Portfolio,
the Lincoln U.S. Growth Portfolio, the Lincoln World Growth
Portfolio, the Lincoln New Pacific Portfolio, the Lincoln
Government Income Portfolio, the Lincoln Corporate Income
Portfolio, the Lincoln Tax-Free Income Portfolio and the Lincoln
Cashfund Portfolio. This Statement of Additional Information is
applicable to all of the Portfolios. Lincoln National
Investment Management Company (the "Investment Advisor") serves
as the Investment Advisor to the Fund. Beutel, Goodman Capital
Management serves as the Sub-Advisor for the Lincoln Growth and
Income Portfolio; Lynch & Mayer, Inc. serves as the Sub-Advisor
for the Lincoln Enterprise Portfolio; Provident Investment
Counsel, a wholly owned subsidiary of United Asset Management
Corporation, serves as the Sub-Advisor for the Lincoln U.S.
Growth Portfolio; Walter Scott & Partners Limited serves as the
Sub-Advisor for the Lincoln World Growth Portfolio; and John
Govett & Company Limited serves as the Sub-Advisor for the
Lincoln New Pacific Portfolio. Each of the foregoing
Sub-Advisors are referred to herein as a "Sub-Advisor" or
collectively as "Sub-Advisors".
The Prospectus discusses the Portfolios' investment
objectives and the policies followed to achieve those objectives.
The following discussion supplements the description of the
Portfolios' investment objectives and policies in the
Prospectus. Capitalized terms that are not defined herein are
defined in the Fund's Prospectus.
LOWER-RATED DEBT SECURITIES
Each of the Portfolios, except for the Lincoln Government
Income Portfolio and the Lincoln Cashfund Portfolio, may
purchase lower-rated debt securities which are securities that
are rated lower than Baa by Moody's Investors Service, Inc.
("Moody's") or lower than BBB by Standard & Poor's Corporation
("S&P"). These securities are often considered to be
speculative and involve significantly higher risk of default on
the payment of principal and interest or are more likely to
experience significant price fluctuation due to changes in the
issuer's creditworthiness. Market prices of these securities
may fluctuate more than higher-rated debt securities and may
decline significantly in periods of general economic difficulty
which may follow periods of rising interest rates. While the
market for high yield corporate debt securities has been in
existence for many years and has weathered previous economic
downturns, the market in recent years has experienced a dramatic
increase in the large-scale use of such securities to fund
highly leveraged corporate acquisitions and restructurings.
Accordingly, past experience may not provide an accurate
indication of future performance of the high yield bond market,
especially during periods of economic recession. See
"Description of Security Ratings" herein.
The market for lower-rated securities may be less active
than that for higher-rated securities, which can adversely affect
the prices at which these securities can be sold. If market
quotations are not available, these securities will be valued in
accordance with procedures established by the Board of
Directors, including the use of outside pricing services.
Judgment plays a greater role in valuing high yield corporate
debt securities than is the case for securities for which more
external sources for quotations and last-sale information are
available. Adverse publicity and changing investor perceptions
may affect the ability of outside pricing services used by a
Portfolio to value its portfolio securities and the Portfolio's
ability to dispose of these lower-rated debt securities.
<PAGE>
Since the risk of default is higher for lower-quality
securities, the Investment Advisor's and/or applicable
Sub-Advisor's research and credit analysis is an integral part
of managing any securities of this type held by a Portfolio. In
considering investments for a Portfolio, the Investment Advisor
and /or Sub-Advisor, if any, will attempt to identify those
issuers of high-yielding securities whose financial condition is
adequate to meet future obligations, has improved, or is
expected to improve in the future. The Investment Advisor's
and/or Sub-Advisor's analysis focuses on relative values based
on such factors as interest or dividend coverage, asset
coverage, earnings prospects, and the experience and managerial
strength of the issuer. There can be no assurance that such
analysis will prove accurate.
A Portfolio may choose, at its expense or in conjunction
with others, to pursue litigation or otherwise exercise its rights
as security holder to seek to protect the interests of security
holders if it determines this to be in the best interest of
shareholders.
MORTGAGE-BACKED SECURITIES
Each Portfolio may invest in mortgage-related securities
including those representing an undivided ownership interest in
a pool of mortgages.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION CERTIFICATES.
Certificates issued by the Government National Mortgage
Association ("GNMA") are mortgage-backed securities representing
part ownership of a pool of mortgage loans, which are issued by
lenders such as mortgage bankers, commercial banks and savings
and loan associations, and are either insured by the Federal
Housing Administration or guaranteed by the Veterans
Administration. A pool of these mortgages is assembled and,
after being approved by GNMA, is offered to investors through
securities dealers. The timely payment of interest and
principal on each mortgage is guaranteed by GNMA and backed by
the full faith and credit of the U.S. Government.
Principal is paid back monthly by the borrower over the
term of the loan. Investment of prepayments may occur at higher
or lower rates than the anticipated yield on the certificates.
Due to the prepayment feature and the need to reinvest prepayments
of principal at current market rates, GNMA certificates can be
less effective than typical bonds of similar maturities at
"locking in" yields during periods of declining interest rates.
GNMA certificates typically appreciate or decline in market
value during periods of declining or rising interest rates,
respectively. Due to the regular repayment of principal and the
prepayment feature, the effective maturities of mortgage
pass-through securities are shorter than stated maturities, will
vary based on market conditions and cannot be predicted in
advance. The effective maturities of newly-issued GNMA
certificates backed by relatively new loans at or near the
prevailing interest rates are generally assumed to range between
approximately 9 and 12 years.
FNMA AND FHLMC MORTGAGE-BACKED OBLIGATIONS. The Federal
National Mortgage Association ("FNMA"), a federally chartered
and privately-owned corporation, issues pass-through securities
representing interests in a pool of conventional mortgage loans.
FNMA guarantees the timely payment of principal and interest
but this guarantee is not backed by the full faith and credit of
the U.S. Government. The Federal Home Loan Mortgage Corporation
("FHLMC"), a corporate instrumentality of the U.S. Government,
issues participation certificates which represent an interest in
a pool of conventional mortgage loans. FHLMC guarantees the
timely payment of interest and the
<PAGE>
ultimate collection of principal, and maintains reserves to
protect holders against losses due to default, but the
certificates are not backed by the full faith and credit of the
U.S. Government.
As is the case with GNMA certificates, the actual maturity
of and realized yield on particular FNMA and FHLMC pass-through
securities will vary based on the prepayments of the underlying
pool of mortgages and cannot be predicted.
OTHER MORTGAGE-BACKED SECURITIES. The Lincoln Government
Income, Lincoln Corporate Income and Lincoln Tax-Free Income
Portfolios may invest in mortgage-backed securities issued by
financial institutions such as commercial banks, savings and
loan associations, mortgage bankers and securities
broker-dealers (or separate trusts or affiliates of such
institutions established to issue these securities). These
securities include mortgage pass-through certificates,
collateralized mortgage obligations ("CMOs") (which include real
estate mortgage investment conduits as authorized under the
Internal Revenue Code of 1986) or mortgage-backed bonds. Each
class of bonds in a CMO series may have a different maturity
than the other classes of bonds in the series and may bear a
different coupon. The different maturities occur because
payments of principal, both regular principal payments as well
as any prepayments are passed through first to the holders of
the class with the shortest maturity until it is completely
retired. Thereafter, principal payments are passed through to
the next class of bonds in the series, until all the classes
have been paid off. As a result, an acceleration in the rate of
prepayments may also be associated with declining interest
rates, shortening the expected life of each class, with the
greatest cash flow impact on those classes with the shortest
maturities. Should the rate of prepayments slow down, as may
happen in times of rising interest rates, the expected life of
each class lengthens, again with the greatest cash flow impact
on those classes with the shortest maturities. In the case of
some CMO series, each class may receive a different proportion
of the monthly interest and principal repayments on the
underlying collateral. In these series the classes have
proportionally greater interests in principal repayments
generally and would be more affected by a change in the rate of
prepayments although the percentage impact on those classes
consisting mostly of interest payments could be greater.
ASSET-BACKED SECURITIES. The Lincoln Government Income and
Lincoln Corporate Income Portfolios may invest in bonds or notes
backed by loan paper or accounts receivable originated by banks,
credit card companies, or other providers of credit. These
securities are often "enhanced" by a bank letter of credit or by
insurance coverage provided by an institution other than the
issuer; such an enhancement typically covers only a portion of
the par value until exhausted. Generally, the originator of the
loan or accounts receivable paper sells it to a specially
created trust, which repackages it as securities with a term of
five years or less. Examples of these types of securities
include "certificates for automobile receivables" (commonly
referred to as "CARs") and bonds backed by credit card loan
receivables (commonly referred to as "plastic bonds"). The
loans underlying these securities are subject to prepayments
which can decrease maturities and returns. The values of these
securities are ultimately dependent upon payment of the
underlying loans by individuals, and the holders generally have
no recourse against the originator of the loans. Holders of
these securities may experience losses or delays in payment if
the original payments of principal and interest are not made to
the trust with respect to the underlying loans. The values of
these securities also may fluctuate due to changes in the market
perception of the creditworthiness of the servicing agent for
the loan pool, the originator of the loan, or the financial
institution providing the credit enhancement.
<PAGE>
FOREIGN INVESTMENTS
The Lincoln World Growth and Lincoln New Pacific Portfolios
may invest all of their assets in foreign investments. Certain of
the Portfolios may invest the following percentages of their
assets in foreign securities: the Lincoln Growth and Income
Portfolio (15%), the Lincoln Enterprise Portfolio (15%), the
Lincoln U.S. Growth Portfolio (20%) and the Lincoln Tax-Free
Income Portfolio (10%). Foreign investments can involve
significant risks in addition to the risks inherent in U.S.
investments. The value of securities denominated in or indexed
to foreign currencies, and of dividends and interest from such
securities, can change significantly when foreign currencies
strengthen or weaken relative to the U.S. dollar. Foreign
securities markets generally have less trading volume and less
liquidity than U.S. markets, and prices on some foreign markets
can be highly volatile. Many foreign countries lack uniform
accounting and disclosure standards comparable to those
applicable to U.S. companies, and it may be more difficult to
obtain reliable information regarding an issuer's financial
condition and operations. In addition, the costs of foreign
investing, including withholding taxes, brokerage commissions,
and custodial costs, are generally higher than for U.S.
investments.
Foreign markets may offer less protection to investors
than U.S. markets. Foreign issuers, brokers, and securities
markets may be subject to less government supervision. Foreign
security trading practices, including those involving the release
of assets in advance of payment, may involve increased risks in
the event of a failed trade or the insolvency of a broker-dealer,
and may involve substantial delays. It may also be difficult to
enforce legal rights in foreign countries.
Investing abroad also involves different political and
eocnomic risks. Foreign investments may be affected by actions
of foreign governments adverse to the interests of U.S. investors,
including the possibility of expropriation or nationalization of
assets, confiscatory taxation, restrictions on U.S. investment
or on the ability to repatriate assets or convert currency into
U.S. dollars, or other government intervention. There may be a
greater possibility of default by foreign governments or foreign
government-sponsored enterprises. Investments in foreign
countries also involve a risk of local political, economic, or
social instability, military action or unrest, or adverse
diplomatic developments. There is no assurance that the
Investment Advisor or Sub-Advisor will be able to anticipate or
counter these potential events.
The considerations noted above generally are intensified
for investments in developing countries. Developing countries may
have relatively unstable governments, economies based on only a
few industries, and securities markets that trade a small number
of securities.
The Portfolios may invest in foreign securities that
impose restrictions on transfer within the United States or to
U.S. persons. Although securities subject to transfer
restrictions may be marketable abroad, they may be less liquid
than foreign securities of the same class that are not subject
to such restrictions.
American Depository Receipts and European Depository
Receipts ("ADRs" and "EDRs") are certificates evidencing
ownership of shares of a foreign-based issuer held in trust by
a bank or similar financial institution. Designed for use in
U.S. and European securities markets, respectively, ADRs and
EDRs are alternatives to the purchase of the underlying
securities in their national markets and currencies.
<PAGE>
The Lincoln Cashfund Portfolio may invest in certificates of
deposit which are issued or guaranteed by banks, including
foreign banks. The term "certificate of deposit" includes both
Eurodollar certificates of deposit, for which there is generally
a market, and Eurodollar time deposits, for which there is
generally not a market. Eurodollars are U.S. dollars deposited
in branches of banks outside the United States.
MORTGAGE DOLLAR ROLLS
Each Portfolio may enter into mortgage "dollar rolls" in
which the Portfolio sells mortgage-backed securities for delivery
in the current month and simultaneously contracts to repurchase
substantially similar (same type, coupon and maturity)
securities on a specified future date. Dollar roll transactions
consist of the sale by a Portfolio of mortgage-backed
securities, together with a commitment to purchase similar, but
not necessarily identical, securities at a future date. Any
difference between the sale price and the purchase price is
netted against the interest income foregone on the securities to
arrive at an implied borrowing (reverse repurchase) rate.
Alternatively, the sale and purchase transactions which
constitute the dollar roll can be executed at the same price,
with the Portfolio being paid a fee as consideration for
entering into the commitment to purchase. Dollar rolls may be
renewed prior to cash settlement and initially may involve only
a firm commitment agreement by the Portfolio to buy a security.
If the broker-dealer to whom the Portfolio sells the security
becomes insolvent, the Portfolio's right to purchase or
repurchase the security may be restricted; the value of the
security may change adversely over the term of the dollar roll;
the security that the Portfolio is required to repurchase may be
worth less than the security that the Portfolio originally held,
and the return earned by the Portfolio with the proceeds of a
dollar roll may not exceed transaction costs. The Portfolio
will place U.S. Government or other liquid, high quality assets
in a segregated account in an amount sufficient to cover its
repurchase obligation.
OPTIONS ON FOREIGN AND U.S. CURRENCIES AND SECURITIES
The Portfolios, except for the Lincoln Cashfund Portfolio,
may purchase and sell (write) put and call options on securities,
although the present intent is to write only covered call
options. These covered call options must remain covered so long
as a Portfolio is obligated as a writer. A call option written
by a Portfolio is "covered" if the Portfolio owns the security
underlying the option or has an absolute and immediate right to
acquire that security without additional cash consideration (or
for additional cash consideration held in a segregated account
by the Fund's Custodian) upon conversion or exchange of other
securities held in its portfolio. A call option is also covered
if a Portfolio holds on a share-for-share basis a call on the
same security as the call written where the exercise price of
the call held is equal to or less than the exercise price of the
call written or greater than the exercise price of the call
written if the difference is maintained by the Portfolio in
cash, treasury bills or other high grade, short-term debt
obligations in a segregated account with the Fund's Custodian.
The premium paid by the purchaser of an option will reflect,
among other things, the relationship of the exercise price to
the market price and volatility of the underlying security, the
remaining term of the option, supply and demand and interest
rates.
If the writer of an option wishes to terminate the obligation,
he or she may effect a "closing purchase transaction." This is
accomplished by buying an option of the same series as the
option previously written. The effect of the purchase is that
the writer's position will be canceled by the clearing
corporation. However, a writer may not effect a closing
purchase transaction after he or she has been notified of the
exercise of an option. Similarly, an investor who is the holder
of an option
<PAGE>
may liquidate his or her position by effecting a "closing sale
transaction." This is accomplished by selling an option of the
same series as the option previously purchased. There is no
guarantee that either a closing purchase or a closing sale
transaction can be effected. To secure the obligation to
deliver the underlying security in the case of a call option,
the writer of the option (whether an exchange-traded option or a
NASDAQ option) is required to pledge for the benefit of the
broker the underlying security or other assets in accordance
with the rules of The Options Clearing Corporation (OCC), the
Chicago Board of Trade and the Chicago Mercantile Exchange,
institutions which interpose themselves between buyers and
sellers of options. Technically, each of these institutions
assumes the other side of every purchase and sale transaction
on an exchange and, by doing so, guarantees the transaction.
An option position may be closed out only on an exchange, board
of trade or other trading facility which provides a secondary
market for an option of the same series. Although a Portfolio
will generally purchase or write only those options for which
there appears to be an active secondary market, there is no
assurance that a liquid secondary market on an exchange or other
trading facility will exist for any particular option, or at any
particular time, and for some options no secondary market on an
exchange or otherwise may exist. In such event it might not be
possible to effect closing transactions in particular options,
with the result that the Portfolio would have to exercise its
options in order to realize any profit and would incur brokerage
commissions upon the exercise of call options and upon the
subsequent disposition of underlying securities acquired through
the exercise of call options or upon the purchase of underlying
securities for the exercise of put options. If a Portfolio as a
covered call option writer is unable to effect a closing
purchase transaction in a secondary market, it will not be able
to sell the underlying security until the option expires or it
delivers the underlying security upon exercise.
Reasons for the absence of a liquid secondary market on an
exchange include the following: (i) there may be insufficient
trading interest in certain options; (ii) restrictions may be
imposed by an exchange on opening transactions or closing
transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes
or series of options or underlying securities; (iv) unusual or
unforeseen circumstances may interrupt normal operations on an
exchange; (v) the facilities of an exchange or a clearing
corporation may not at all times be adequate to handle current
trading volume; or (vi) one or more exchanges could, for
economic or other reasons, decide or be compelled at some future
date to discontinue the trading of options (or a particular
class or series of options), in which event the secondary market
on that exchange (or in the class or series of options) would
cease to exist, although outstanding options on that exchange
that had been issued by a clearing corporation as a result of
trades on that exchange would continue to be exercisable in
accordance with their terms. There is no assurance that higher
than anticipated trading activity or other unforeseen events
might not, at times, render certain of the facilities of any of
the clearing corporations inadequate, and thereby result in the
institution by an exchange of special procedures which may
interfere with the timely execution of customers' orders.
However, the OCC, based on forecasts provided by the U.S.
exchanges, believes that its facilities are adequate to handle
the volume of reasonably anticipated options transactions, and
such exchanges have advised such clearing corporation that they
believe their facilities will also be adequate to handle
reasonably anticipated volume.
<PAGE>
OPTIONS ON STOCK INDICES
Options on stock indices are similar to options on stock except
that, rather than the right to take or make delivery of stock at
a specified price, an option on a stock index gives the holder
the right to receive, upon exercise of the option, an amount of
cash if the closing level of the stock index upon which the
option is based is greater than, in the case of a call, or less
than, in the case of a put, the exercise price of the option.
This amount of cash is equal to such difference between the
closing price of the index and the exercise price of the option
expressed in dollars times a specified multiple (the
"multiplier"). The writer of the option is obligated, in return
for the premium received, to make delivery of this amount.
Unlike stock options, all settlements are in cash.
The multiplier for an index option performs a function similar
to the unit of trading for a stock option. It determines the
total dollar value per contract of each point in the difference
between the exercise price of an option and the current level
of the underlying index. A multiplier of 100 means that a
one-point difference will yield $100. Options on different
indices may have different multipliers.
Except as described below, a Portfolio will write call options
on indices only if on such date it holds a portfolio of
securities at least equal to the value of the index times the
multiplier times the number of contracts. When a Portfolio
writes a call option on a broadly-based stock market index, the
Portfolio will segregate or put into escrow with the Fund's
Custodian, or pledge to a broker as collateral for the option,
cash, cash equivalents or at least one "qualified security" with
a market value at the time the option is written of not less
than 100% of the current index value times the multiplier times
the number of contracts. A Portfolio will write call options on
broadly-based stock market indices only if at the time of
writing it holds a diversified portfolio of stocks.
If a Portfolio has written an option on an industry or market
segment index, it will so segregate or put into escrow with the
Fund's Custodian, or pledge to a broker as collateral for the
option, at least ten "qualified securities," which are stocks of
an issuer in such industry or market segment, with a market
value at the time the option is written of not less than 100% of
the current index value times the multiplier times the number of
contracts. Such stocks will include stocks which represent at
least 50% of the Portfolio's holdings in that industry or market
segment. No individual security will represent more than 15% of
the amount so segregated, pledged or escrowed in the case of
broadly-based stock market index options or 25% of such amount
in the case of industry or market segment index options.
If at the close of business, the market value of such qualified
securities so segregated, escrowed or pledged falls below 100%
of the current index value times the multiplier times the number
of contracts, a Portfolio will segregate, escrow or pledge an
amount in cash, Treasury bills or other high grade short-term
debt obligations equal in value to the difference. In addition,
when a Portfolio writes a call on an index which is in-the-money
at the time the call is written, the Portfolio will segregate
with the Fund's Custodian or pledge to the broker as collateral,
cash, U.S. Government or other high grade short-term debt
obligations equal in value to the amount by which the call is
in-the-money times the multiplier times the number of contracts.
Any amount segregated pursuant to the foregoing sentence may be
applied to the Portfolio's obligation to segregate additional
amounts in the event that the market value of the qualified
securities falls below 100% of the current index value times the
multiplier times the number of contracts. However, if a
Portfolio holds a call on the same index as the call written
where the exercise price of the call held is equal to or less
than the exercise price of the call written or greater than the
exercise price of the call written if the difference is
maintained by the
<PAGE>
Portfolio in cash, Treasury bills or other high grade short-term
debt obligations in a segregated account with the Fund's
Custodian, it will not be subject to the requirements described
in this paragraph.
RISKS OF OPTIONS ON STOCK INDICES. Index prices may be
distorted if trading of certain securities included in the index
is interrupted. Trading in the index options also may be
interrupted in certain circumstances, such as if trading were
halted in a substantial number of securities included in the
index. If this occurred, a Portfolio would not be able to close
out options which it had purchased or written and, if
restrictions on exercise were imposed, may be unable to exercise
an option it holds, which could result in substantial losses to
the Portfolio. It is the Portfolios' policy to purchase or
write options only on indices which include a number of
securities sufficient to minimize the likelihood of a trading
halt in the index.
SPECIAL RISKS OF WRITING CALLS ON STOCK INDICES. Unless a
Portfolio has other liquid assets which are sufficient to
satisfy the exercise of a call, the Portfolio would be required
to liquidate portfolio securities in order to satisfy the
exercise. Because an exercise must be settled within hours
after receiving the notice of exercise, if a Portfolio fails to
anticipate an exercise it may have to borrow from a bank (in
amounts not exceeding 20% of the value of the Portfolio's total
assets) pending settlement of the sale of securities in its
portfolio and would incur interest charges thereon.
When a Portfolio has written a call, there is also a risk that
the market may decline between the time the Portfolio has a call
exercised against it, at a price which is fixed as of the
closing level of the index on the date of exercise, and the time
the Portfolio is able to sell securities in its portfolio. As
with stock options, a Portfolio will not learn that an index
option has been exercised until the day following the exercise
date. Unlike a call on stock where the Portfolio would be able
to deliver the underlying securities in settlement, the
Portfolio may have to sell part of its portfolio in order to
make settlement in cash, and the price of such securities might
decline before they can be sold. This timing risk makes certain
strategies involving more than one option substantially more
risky with index options than with stock options. For example,
even if an index call which a Portfolio has written is "covered"
by an index call held by the Portfolio with the same strike
price, the Portfolio will bear the risk that the level of the
index may decline between the close of trading on the date the
exercise notice is filed with the clearing corporation and the
close of trading on the date the Portfolio exercises the call it
holds or the time the Portfolio sells the call, which in either
case would occur no earlier than the day following the day the
exercise notice was filed.
OVER-THE-COUNTER OPTIONS AND ILLIQUID SECURITIES. As indicated
in the Prospectus, all Portfolios may deal in over-the-counter
("OTC") options. The Portfolios understand the position of the
staff of the Securities and Exchange Commission ("SEC") to be
that purchased OTC options and the assets used as "cover" for
written OTC options are illiquid securities. The Portfolios,
the Investment Advisor, and the Sub-Advisors disagree with this
position and have found the dealers with which they engage in
OTC options transactions generally agreeable to and capable of
entering into closing transactions. As also indicated in the
Prospectus, the Portfolios have adopted procedures for engaging
in OTC options for the purpose of reducing any potential adverse
impact of such transactions upon the liquidity of each
Portfolio's portfolio.
<PAGE>
As part of these procedures the Portfolios will engage in OTC
options transactions only with primary dealers that have been
specifically approved by the Board of Directors of the Fund.
The Fund and the Investment Advisor and/or Sub-Advisors believe
that the approved dealers should be agreeable and able to enter
into closing transactions if necessary and, therefore, present
minimal credit risks to the Portfolios. The Portfolios
anticipate entering into written agreements with those dealers
to whom the Portfolios may sell OTC options, pursuant to which
the Portfolios would have the absolute right to repurchase the
OTC options from such dealers at any time at a price determined
pursuant to a formula set forth in certain no action letters
published by the SEC staff. A Portfolio will not engage in OTC
options transactions if the amount invested by the Portfolio in
OTC options plus, with respect to OTC options written by the
Portfolio, the amounts required to be treated as illiquid
pursuant to the terms of such letters (and the value of the
assets used as cover with respect to OTC option sales which are
not within the scope of such letters), plus the amount invested
by the Portfolio in illiquid securities, would exceed 15% of
the Portfolio's total assets. OTC options on securities other
than U.S. Government securities may not be within the scope of
such letters and, accordingly, the amount invested by a
Portfolio in OTC options on such other securities and the value
of the assets used as cover with respect to OTC option sales
regarding such non-U.S. Government securities will be treated as
illiquid and subject to the 15% limitation on the Portfolio's
assets that may be invested in illiquid securities. See
"Illiquid Investments" herein.
FUTURES CONTRACTS AND OPTIONS THEREON
A futures contract is an agreement in which the writer (or
seller) of the contract agrees to deliver to the buyer an amount
of cash or securities equal to a specific dollar amount times
the difference between the value of a specific fixed-income
security or index at the close of the last trading day of the
contract and the price at which the agreement is made. No
physical delivery of the underlying securities is made. When
the futures contract is entered into, each party deposits with a
broker or in a segregated custodial account approximately 5% of
the contract amount, called the "initial margin." Subsequent
payments to and from the broker, called "variation margin," will
be made on a daily basis as the price of the underlying security
or index fluctuates, making the long and short positions in the
futures contracts more or less valuable, a process known as
"marking to market." In the case of options on futures
contracts, the holder of the option pays a premium and receives
the right, upon exercise of the option at a specified price
during the option period, to assume a position in the futures
contract (a long position if the option is a call and a short
position if the option is a put). If the option is exercised by
the holder before the last trading day during the option period,
the option writer delivers the futures position, as well as any
balance in the writer's futures margin account. If it is
exercised on the last trading day, the option writer delivers to
the option holder cash in an amount equal to the difference
between the option exercise price and the closing level of the
relevant security or index on the date the option expires.
Each Portfolio, except the Lincoln Cashfund Portfolio, intends
to engage in futures contracts and options thereon as a hedge
against changes, resulting from market conditions, in the value
of securities which are held by the Portfolio or which the
Portfolio intends to purchase, in accordance with the rules and
regulations of the Commodity Futures Trading Commission
("CFTC"). Additionally, the Portfolios, except for the Lincoln
Cashfund Portfolio, may write options on futures contracts to
realize through the receipt of premium income a greater return
than would be realized in a Portfolio's portfolio securities
alone.
<PAGE>
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS. There are several
risks in connection with the use of futures contracts as a
hedging device. Successful use of futures contracts by a
Portfolio is subject to the ability of the Portfolio's
Investment Advisor or Sub-Advisor to correctly predict movements
in the direction of interest rates or changes in market
conditions. These predictions involve skills and techniques
that may be different from those involved in the management of
the portfolio being hedged. In addition, there can be no
assurance that there will be a correlation between movements in
the price of the underlying index or securities and movements in
the price of the securities which are the subject of the hedge.
A decision of whether, when and how to hedge involves the
exercise of skill and judgment, and even a well-conceived hedge
may be unsuccessful to some degree because of market behavior or
unexpected trends in interest rates.
Although certain Portfolios will purchase or sell futures
contracts only on exchanges where there appears to be an
adequate secondary market, there is no assurance that a liquid
secondary market on an exchange will exist for any particular
contract or at any particular time. Accordingly, there can be
no assurance that it will be possible, at any particular time,
to close a futures position. In the event a Portfolio could not
close a futures position and the value of such position
declined, the Portfolio would be required to continue to make
daily cash payments of variation margin. However, in the event
futures contracts have been used to hedge portfolio securities,
such securities will not be sold until the futures contract can
be terminated. In such circumstances, an increase in the price
of the securities, if any, may partially or completely offset
losses on the futures contract. However, there is no guarantee
that the price movements of the securities will, in fact,
correlate with the price movements in the futures contract and
thus provide an offset to losses on a futures contract.
Under regulations of the Commodity Exchange Act, investment
companies registered under the Investment Company Act are
exempted from the definition of "commodity pool operator,"
subject to compliance with certain conditions. The exemption is
conditioned upon a requirement that all of the investment
company's futures transactions constitute bona fide hedging
transactions within the meaning of the regulations of the CFTC.
With respect to long positions assumed by a Portfolio, the
Portfolio will segregate with the Fund's Custodian an amount of
cash, government securities or liquid, high-grade debt
securities so that the amount so segregated plus the amount of
initial and variation margin held in the account of its broker
equals the market value of the futures contracts and thereby
insures that the use of futures contracts is unleveraged.
The hours of trading of futures contracts may not conform to
the hours during which a Portfolio may trade the underlying
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 market.
FOREIGN CURRENCY TRANSACTIONS. The Lincoln Growth and Income
Portfolio, the Lincoln Enterprise Portfolio, the Lincoln U.S.
Growth Portfolio, the Lincoln World Growth Portfolio, the
Lincoln New Pacific Portfolio and the Lincoln Corporate Income
Portfolio may hold foreign currency deposits from time to time
and may convert dollars and foreign currencies in the foreign
exchange markets. Currency conversion involves dealer spreads
and other costs, although commissions usually are not charged.
Currencies may be exchanged on a spot (i.e.,cash) basis, or by
entering into forward contracts to purchase or sell foreign
currencies at a future date and price. Forward contracts
generally are traded in an interbank market conducted directly
between currency traders (usually large commercial banks) and
their customers. The parties to a forward contract may agree to
offset or terminate the contract before its maturity, or may
hold the contract to maturity and complete the contemplated
currency exchange.
<PAGE>
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Portfolios' dealings in forward contracts will be limited
to hedging involving either specific transactions or portfolio
positions. Transaction hedging is the purchase or sale of
forward contracts with respect to specific receivables or
payables of a Portfolio generally arising in connection with the
purchase or sale of its portfolio securities and accruals of
interest or dividends receivable and Portfolio expenses.
Position hedging is the sale of a foreign currency with respect
to portfolio security positions denominated or quoted in that
currency. A Portfolio may not position hedge with respect to a
particular currency for an amount greater than the aggregate
market value (determined at the time of making any sale of a
forward contract) of securities held in its portfolio
denominated or quoted in, or currently convertible into, such
currency.
When a Portfolio enters into a contract for the purchase or
sale of a security denominated in a foreign currency, or when a
Portfolio anticipates the receipt in a foreign currency of
dividends or interest payments on a security which it holds, the
Portfolio may desire to "lock in" the U.S. dollar price of the
security or the U.S. dollar equivalent of such dividend or
interest payment as the case may be. By entering into a forward
contract for a fixed amount of dollars for the purchase or sale
of the amount of foreign currency involved in the underlying
transactions, a Portfolio will be able to protect itself against
a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the subject foreign
currency during the period between the date on which the
security is purchased or sold, or on which the dividend or
interest payment is declared, and the date on which such
payments are made or received.
Additionally, when the Investment Advisor and/or applicable
Sub-Advisor believes that the currency of a particular foreign
country may suffer a substantial decline against the U.S.
dollar, a Portfolio may enter into a forward contract for a
fixed amount of dollars, to sell the amount of foreign currency
approximating the value of some or all of the securities of the
Portfolio denominated in such foreign currency.
The Portfolios may use currency forward contracts to manage
currency risks and to facilitate transactions in foreign
securities. The following discussion summarizes the principal
currency management strategies involving forward contracts that
could be used by these Portfolios.
In connection with purchases and sales of securities
denominated in foreign currencies, a Portfolio may enter into
currency forward contracts to fix a definite price for the
purchase or sale in advance of the trade's settlement date.
This technique is sometimes referred to as a "settlement hedge"
or "transaction hedge". The Investment Advisor and/or
Sub-Advisors expect to enter into settlement hedges in the
normal course of managing the Portfolios' foreign investments.
The Portfolios could also enter into forward contracts to
purchase or sell a foreign currency in anticipation of future
purchases or sales of securities denominated in foreign
currency, even if the specific investments have not yet been
selected by the Investment Advisor and/or Sub-Advisor.
<PAGE>
The Portfolios may also use forward contracts to hedge against
a decline in the value of existing investments denominated in
foreign currency. For example, if a Portfolio owned securities
denominated in pounds sterling, it could enter into a forward
contract to sell pounds sterling in return for U.S. dollars to
hedge against possible declines in the pound's value. Such a
hedge (sometimes referred to as a "position hedge") would tend
to offset both positive and negative currency fluctuations, but
would not offset changes in security values caused by other
factors. The Portfolio could also hedge the position by selling
another currency expected to perform similarly to the pound
sterling -- for example, by entering into a forward contract to
sell Deutschemarks or European Currency Units in return for U.S.
dollars. This type of hedge, sometimes referred to as a "proxy
hedge", could offer advantages in terms of cost, yield, or
efficiency, but generally will not hedge currency exposure as
effectively as a simple hedge into U.S. dollars. Proxy hedges
may result in losses if the currency used to hedge does not
perform similarly to the currency in which the hedged securities
are denominated.
Under certain conditions, SEC guidelines require mutual funds
to set aside cash and appropriate liquid assets in a segregated
custodian account to cover currency forward contracts. As
required by SEC guidelines, the Lincoln Growth and Income
Portfolio, the Lincoln Enterprise Portfolio, the Lincoln U.S.
Growth Portfolio, the Lincoln World Growth Portfolio, the
Lincoln New Pacific Portfolio and the Lincoln Corporate Income
Portfolio will segregate assets to cover currency forward
contracts, if any, whose purpose is essentially speculative.
The Portfolios will not segregate assets to cover forward
contracts, including settlement hedges, position hedges, and
proxy hedges. Successful use of forward currency contracts will
depend on the Investment Advisor's and/or Sub-Advisors' skill in
analyzing and predicting currency values. Forward contracts may
substantially change the Portfolios' investment exposure to
changes in currency exchange rates, and could result in losses
to the Portfolios if currencies do not perform as the Investment
Advisor and/or Sub-Advisors anticipate. For example, if a
currency's value rose at a time when the Investment Advisor
and/or applicable Sub-Advisor had hedged a Portfolio by selling
that currency in exchange for dollars, the Portfolio would be
unable to participate in the currency's appreciation. If the
Investment Advisor and/or applicable Sub-Advisor hedges currency
exposure through proxy hedges, a Portfolio could realize
currency losses from the hedge and the security position at the
same time if the two currencies do not move in tandem.
Similarly, if the Investment Advisor and/or Sub-Advisor
increases a Portfolio's exposure to a foreign currency, and that
currency's value declines, the Portfolio will realize a loss.
There is no assurance that the Investment Advisor's and/or
Sub-Advisors' use of forward currency contracts will be
advantageous to the Portfolios or that it will hedge at an
appropriate time.
FOREIGN CURRENCY OPTIONS
The Lincoln Growth and Income Portfolio, the Lincoln Enterprise
Portfolio, the Lincoln U.S. Growth Portfolio, the Lincoln World
Growth Portfolio, the Lincoln New Pacific Portfolio and the
Lincoln Corporate Income Portfolio may purchase U.S.
exchange-listed call and put options on foreign currencies.
Such options on foreign currencies operate similarly to options
on securities. Options on foreign currencies are affected by
all of those factors which influence foreign exchange rates and
investments generally.
<PAGE>
The value of a foreign currency option is dependent upon the
value of the foreign currency and the U.S. dollar, and may have
no relationship to the investment merits of a foreign security.
Because foreign currency transactions occurring in the interbank
market involve substantially larger amounts than those that may
be involved in the use of foreign currency options, investors
may be disadvantaged by having to deal in an odd lot market
(generally consisting of transactions of less than $1 million)
for the underlying foreign currencies at prices that are less
favorable than for round lots.
There is no systematic reporting of last sale information for
foreign currencies and there is no regulatory requirement that
quotations available through dealer or other market sources be
firm or revised on a timely basis. Available quotation
information is generally representative of very large
transactions in the interbank market and thus may not reflect
relatively smaller transactions (less than $1 million) where
rates may be less favorable. The interbank market in foreign
currencies is a global, around-the-clock market. To the extent
that the U.S. options markets are closed while the markets for
the underlying currencies remain open, significant price and
rate movements may take place in the underlying markets that
cannot be reflected in the options market.
FOREIGN CURRENCY CONVERSION
Although foreign exchange dealers do not charge a fee for
currency conversion, they do realize a profit based on the
difference (the "spread") between prices at which they are
buying and selling various currencies. Thus, a dealer may offer
to sell a foreign currency to the Lincoln Growth and Income
Portfolio, the Lincoln Enterprise Portfolio, the Lincoln U.S.
Growth Portfolio, the Lincoln World Growth Portfolio, the
Lincoln New Pacific Portfolio and the Lincoln Corporate Income
Portfolio at one rate, while offering a lesser rate of exchange
should those Portfolios desire to resell that currency to the
dealer.
COMBINED TRANSACTIONS
Each Portfolio, except for the Lincoln Cashfund Portfolio, may
enter into multiple transactions, including multiple options
transactions, multiple futures transactions, multiple currency
transactions (including forward currency contracts) and multiple
interest rate transactions and any combination of futures,
options, currency and interest rate transactions ("component"
transactions), instead of a single transaction, as part of a
single or combined strategy when, in the opinion of the
Investment Advisor and/or Sub-Advisor, it is in the best
interests of the Portfolio to do so. A combined transaction
will usually contain elements of risk that are present in each
of its component transactions. Although combined transactions
are normally entered into based on the Investment Advisor's
and/or Sub-Advisor's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired
portfolio management goal, it is possible that the combination
will instead increase such risks or hinder achievement of the
portfolio management objective.
SWAPS, CAPS, FLOORS AND COLLARS
Each Portfolio, except for the Lincoln Cashfund Portfolio, may
enter interest rate, currency and index swaps and the purchase
or sale of related caps, floors and collars. The Portfolios
expect to enter into these transactions primarily to preserve a
return or spread on a particular investment or portion of its
portfolio, to protect against currency fluctuations, as a
duration management technique or to protect against any increase
in the price of securities the Portfolio anticipates purchasing
at a later date. The Portfolios intend to use these
transactions as hedges and not speculative investments
<PAGE>
and will not sell interest rate caps or floors where it does not
own securities or other instruments providing the income stream
the Portfolio may be obligated to pay. Interest rate swaps
involve the exchange by the Portfolio with another party of
their respective commitments to pay or receive interest, e.g.,
an exchange of floating rate payments for fixed rate payments
with respect to a nominal amount of principal. A currency swap
is an agreement to exchange cash flows on a notional amount of
two or more currencies based on the relative value differential
among them and an index swap is an agreement to swap cash flows
on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser
to receive payments on a notional principal amount from the
party selling such cap to the extent that a specified index
exceeds a predetermined interest rate or amount. The purchase
of a floor entitles the purchaser to receive payments on a
notional principal amount from the party selling such floor to
the extent that a specified index falls below a predetermined
interest rate or amount. A collar is a combination of a cap and
a floor that preserves a certain return within a predetermined
range of interest rates or values.
A Portfolio will usually enter into swaps on a net basis, i.e.,
the two payment streams are netted out in a cash settlement on
the payment date or dates specified in the instrument, with the
Portfolio receiving or paying, as the case may be, only the net
amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging
purposes, the Investment Advisor and the Portfolio believe such
obligations do not constitute senior securities under the
Investment Company Act and, accordingly, will not treat them as
being subject to its borrowing restrictions. A Portfolio will
not enter into any swap, cap, floor or collar transaction
unless, at the time of entering into such transaction, the
unsecured long-term debt of the counterparty, combined with any
credit enhancements, is rated at least A by S&P or Moody's or is
determined to be of equivalent credit quality by the Investment
Advisor and/or Sub-Advisor. If there is a default by the
counterparty, the Portfolio may have contractual remedies
pursuant to the agreements related to the transaction. The swap
market has grown substantially in recent years with a large
number of banks and investment banking firms acting both as
principals and as agent utilizing standardized swap
documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent
innovations for which standardized documentation has not yet
been fully developed and, accordingly, they are less liquid than
swaps.
EURODOLLAR INSTRUMENTS
The Portfolios (other than the Lincoln Tax-Free Income
Portfolio and the Lincoln Cashfund Portfolio) may make
investments in Eurodollar instruments. Eurodollar instruments
are U.S. dollar-denominated futures contracts or options thereon
which are linked to the London Interbank Offered Rate ("LIBOR"),
although foreign currency-denominated instruments are available
from time to time. Eurodollar futures contracts enable
purchasers to obtain a fixed rate for the lending of funds and
sellers to obtain a fixed rate for borrowings. A Portfolio
might use Eurodollar futures contracts and options thereon to
hedge against changes in LIBOR, to which many interest rate
swaps and fixed income instruments are linked.
<PAGE>
LENDING OF PORTFOLIO SECURITIES
As discussed in the Prospectus, each Portfolio has the ability
to lend securities from its portfolio to brokers, dealers and
other financial organizations. Such loans, if and when made,
may not exceed one-third of a Portfolio's total assets. A
Portfolio may not lend its portfolio securities to Lincoln
National Corporation or its affiliates unless it has applied for
and received specific authority from the SEC. Loans of
securities by the Portfolios will be collateralized by cash,
letters of credit or U.S. Government securities, which will be
maintained at all times in an amount equal to at least 100% of
the current market value of the loaned securities. From time to
time, a Portfolio may return a part of the interest earned from
the investment of collateral received for securities loaned to
the borrower and/or a third party, which is unaffiliated with
the Fund or with Lincoln National Corporation, and which is
acting as a "finder".
In lending its portfolio securities, a Portfolio can increase
its income by continuing to receive interest on the loaned
securities as well as by either investing the cash collateral in
short-term instruments or obtaining yield in the form of
interest paid by the borrower when government securities are
used as collateral. Requirements of the SEC, which may be
subject to future modifications, currently provide that the
following conditions must be met whenever portfolio securities
are loaned: (a) the Portfolio must receive at least 102% cash
collateral or equivalent securities from the borrower; (b) the
borrower must increase such collateral whenever the market value
of the loaned securities rises above the level of such
collateral; (c) the Portfolio must be able to terminate the loan
at any time; (d) the Portfolio must receive reasonable interest
on the loan, as well as an amount equal to any dividends,
interest or other distributions on the loaned securities, and
any increase in market value; (e) the Portfolio may pay only
reasonable custodian fees in connection with the loan; and (f)
voting rights on the loaned securities may pass to the borrower;
however, if a material event adversely affecting the investment
occurs, the Fund's Board of Directors must terminate the loan
and regain the right to vote the securities. The risks in
lending portfolio securities, as with other extensions of
secured credit, consist of possible delay in receiving
additional collateral or in the recovery of the securities or
possible loss of rights in the collateral should the borrower
fail financially.
WHEN-ISSUED SECURITIES
As discussed in the Prospectus, the Portfolios may purchase
securities on a "when-issued" basis. When a Portfolio agrees to
purchase securities, the Portfolio's Custodian will set aside
cash or liquid portfolio securities equal to the amount of the
commitment in a separate account. Normally, the Custodian will
set aside portfolio securities to satisfy a purchase commitment.
In such a case, a Portfolio may be required subsequently to
place additional assets in the separate account in order to
assure that the value of the account remains equal to the amount
of the Portfolio's commitment. It may be expected that a
Portfolio's net assets will fluctuate to a greater degree when
it sets aside portfolio securities to cover such purchase
commitments than when it sets aside cash. No Portfolio intends
to purchase "when-issued" securities for speculative purposes
but only in furtherance of its investment objective. Because a
Portfolio will set aside cash or liquid portfolio securities to
satisfy its purchase commitments in the manner described, the
Portfolio's liquidity and the ability of the Investment Advisor
or Sub-Advisor to manage the Portfolio might be affected in the
event its commitments to purchase when-issued securities ever
exceeded 25% of the value of its assets.
<PAGE>
When a Portfolio engages in "when-issued" transactions, it
relies on the seller to consummate the trade. Failure of the
seller to do so may result in the Portfolio's incurring a loss
or missing the opportunity to obtain a price considered to be
advantageous.
MONEY MARKET INSTRUMENTS
With regard to the Lincoln Cashfund Portfolio, investments will
be limited to those obligations which, at the time of purchase,
(i) possess one of the two highest short-term ratings from a
nationally recognized statistical rating organization ("NRSRO")
in the case of single-rated securities; or (ii) possess, in the
case of multiple-rated securities, one of the two highest
short-term ratings by at least two NRSROs or (iii) do not
possess a rating (i.e., are unrated) but are determined by the
Investment Advisor to be of comparable quality to the rated
instruments eligible for purchase by the Portfolio under the
guidelines adopted by the Board of Directors (collectively,
"Eligible Securities"). A security that has not received a
rating will be deemed to possess the rating assigned to an
outstanding class of the issuer's short-term debt obligations if
determined by the Investment Advisor to be comparable in
priority and security to the obligation selected for purchase by
the Lincoln Cashfund Portfolio.
A security subject to a tender or demand feature will be
considered an Eligible Security only if both the demand feature
and the underlying security possess a high quality rating or, if
such do not possess a rating, are determined by the Investment
Advisor to be of comparable quality; provided, however, that
where the demand feature would be readily exercisable in the
event of a default in payment of principal or interest on the
underlying security, the obligation may be acquired based on the
rating possessed by the demand feature or, if the demand feature
does not possess a rating, a determination of comparable
quality by the Investment Advisor. A security which at the time
of issuance had a maturity exceeding 397 days but, at the time
of purchase, has a remaining maturity of 397 days or less, is
not considered an Eligible Security if it does not possess a
high quality rating and the long-term rating, if any, is not
within the two highest rating categories.
Eligible Securities include First Tier Securities and Second
Tier Securities. First Tier Securities include those that
possess a rating in the highest category in the case of a
single-rated security or at least two ratings in the highest
rating category in the case of multiple-rated securities or, if
the securities do not possess a rating, are determined to be of
comparable quality by the Advisor pursuant to the guidelines
adopted by the Board of Directors. Second Tier Securities are
all other Eligible Securities.
The Lincoln Cashfund Portfolio will not invest more than 5% of
its total assets in the First Tier Securities of any one issuer,
except that the Portfolio may invest more than 5% of its total
assets in the First Tier Securities of a single issuer for a
period of up to three business days. In addition, the Portfolio
may not invest more than 5% of its total assets in Second Tier
Securities, with investment in the Second Tier Securities of any
one issuer further limited to the greater of 1% of the
Portfolio's total assets or $1.0 million. If a percentage
limitation is satisfied at the time of purchase, a later
increase in such percentage resulting from a change in the
Portfolio's net asset value or a subsequent change in a
security's qualification as a First Tier or Second Tier Security
will not constitute a violation of the limitation. In addition,
there is no limit on the percentage of the Portfolio's assets
that may be invested in obligations issued or guaranteed by the
U.S. Government, its agencies, or instrumentalities and
repurchase agreements fully collateralized by such obligations.
<PAGE>
Under the guidelines adopted by the Fund's Board of Directors
and in accordance with Rule 2a-7 under the Investment Company
Act, the Investment Advisor and/or Sub-Advisor, if any, may be
required to promptly dispose of an obligation held in the
Portfolio's portfolio in the event of certain developments that
indicate a diminishment of the instrument's credit quality, such
as where an NRSRO downgrades an obligation below the second
highest rating category, or in the event of a default relating
to the financial condition of the issuer.
The Appendix to this Statement of Additional Information
identifies each NRSRO which may be utilized by the Investment
Advisor with regard to portfolio investments for the Portfolio
and provides a description of relevant ratings assigned by each
such NRSRO. A rating by an NRSRO may be utilized only where the
NRSRO is neither controlling, controlled by, or under common
control with the issuer of, or any issuer, guarantor, or
provider of credit support for, the instrument.
The Lincoln Cashfund Portfolio may invest, and each of the
other Portfolios may invest for defensive purposes, in corporate
and government bonds and notes and money market instruments.
Money market instruments in which the Portfolios may invest
include U.S. Government securities; certificates of deposit,
time deposits and bankers' acceptances issued by domestic banks
(including their branches located outside the U.S. and
subsidiaries located in Canada), domestic branches of foreign
banks, savings and loan associations and similar institutions;
high grade commercial paper; and repurchase agreements with
respect to the foregoing types of instruments. The following is
a more detailed description of such money market instruments.
BANK OBLIGATIONS
Certificates of deposit ("CDs") are short-term negotiable
obligations of commercial banks; time deposits ("TDs") are
non-negotiable deposits maintained in banking institutions for
specified periods of time at stated interest rates; and bankers'
acceptances are time drafts drawn on commercial banks by
borrowers usually in connection with international transactions.
Obligations of foreign branches of domestic banks, such as CDs
and TDs, may be general obligations of the parent bank in
addition to the issuing branch, or may be limited by the terms
of a specific obligation and government regulation. Such
obligations are subject to different risks than are those of
domestic banks or domestic branches of foreign banks. These
risks include foreign economic and political developments,
foreign governmental restrictions that may adversely affect
payment of principal and interest on the obligations, foreign
exchange controls and foreign withholding and other taxes on
interest income. Foreign branches of domestic banks are not
necessarily subject to the same or similar regulatory
requirements that apply to domestic banks, such as mandatory
reserve requirements, loan limitations, and accounting, auditing
and financial recordkeeping requirements. In addition, less
information may be publicly available about a foreign branch of
a domestic bank than about a domestic bank. CDs issued by
wholly owned Canadian subsidiaries of domestic banks are
guaranteed as to repayment of principal and interest (but not as
to sovereign risk) by the domestic parent bank.
<PAGE>
Obligations of domestic branches of foreign banks may be
general obligations of the parent bank in addition to the
issuing branch, or may be limited by the terms of a specific
obligation and by governmental regulation as well as
governmental action in the country in which the foreign bank has
its head office. A domestic branch of a foreign bank with
assets in excess of $1 billion may or may not be subject to
reserve requirements imposed by the Federal Reserve System or by
the state in which the branch is located if the branch is
licensed in that state. In addition, branches licensed by the
Comptroller of the Currency and branches licensed by certain
states ("State Branches") may or may not be required to: (a)
pledge to the regulator by depositing assets with a designated
bank within the state, an amount of its assets equal to 5% of
its total liabilities; and (b) maintain assets within the state
in an amount equal to a specified percentage of the aggregate
amount of liabilities of the foreign bank payable at or through
all of its agencies or branches within the state. The deposits
of state branches may not necessarily be insured by the FDIC.
In addition, there may be less publicly available information
about a domestic branch of a foreign bank than about a domestic
bank.
In view of the foregoing factors associated with the purchase
of CDs and TDs issued by foreign branches of domestic banks or
by domestic branches of foreign banks, the Investment Advisor
and/or Sub-Advisors will carefully evaluate such investments on
a case-by-case basis.
Savings and loan associations whose CDs may be purchased by the
Portfolios are supervised by the Office of Thrift Supervision
and are insured by the Savings Association Insurance Fund, which
is administered by the FDIC and is backed by the full faith and
credit of the U.S. Government. As a result, such savings and
loan associations are subject to regulation and examination.
REVERSE REPURCHASE AGREEMENTS
All Portfolios are authorized to enter into reverse repurchase
agreements. A reverse repurchase agreement is the sale of a
security by a Portfolio and its agreement to repurchase the
security at a specified time and price. A Portfolio will
maintain in a segregated account with the Fund's Custodian cash,
cash equivalents or U.S. Government securities in an amount
sufficient to cover its obligations under reverse repurchase
agreements with broker-dealers (but no collateral is required on
reverse repurchase agreements with banks). Under the Investment
Company Act, reverse repurchase agreements may be considered
borrowings by a Portfolio; accordingly, each Portfolio will
limit its investments in reverse repurchase agreements, together
with any other borrowings, to no more than one-third of its
total assets. The use of reverse repurchase agreements by a
Portfolio creates leverage which increases the Portfolio's
investment risk. If the income and gains on securities
purchased with the proceeds of reverse repurchase agreements
exceed the costs of the agreements, a Portfolio's earnings or
net asset value will increase faster than otherwise would be
the case; conversely, if the income and gains fail to exceed the
costs, earnings or net asset value would decline faster than
otherwise would be the case.
<PAGE>
"ROLL" TRANSACTIONS
Each Portfolio may engage in "roll" transactions. A "roll"
transaction is the sale of securities together with a commitment
(for which a Portfolio may receive a fee) to purchase similar,
but not identical, securities at a future date. Under the
Investment Company Act, these transactions may be considered
borrowings by the Portfolios; accordingly, each Portfolio will
limit its use of these transactions, together with any other
borrowings, to no more than one-third of its total assets. The
Portfolios will segregate liquid assets such as cash, U.S.
Government securities or other high grade debt obligations in an
amount sufficient to meet their payment obligations in these
transactions. Although these transactions will not be entered
into for leveraging purposes, to the extent a Portfolio's
aggregate commitments under these transactions exceed its
holdings of cash and securities that do not fluctuate in value
(such as short-term money market instruments), the Portfolio
temporarily will be in a leveraged position (i.e., it will have
an amount greater than its net assets subject to market risk).
Should the market value of a Portfolio's portfolio securities
decline while the Portfolio is in a leveraged position, greater
depreciation of its net assets would likely occur than were it
not in such a position. As a Portfolio's aggregate commitments
under these transactions increase, the opportunity for leverage
similarly increases.
REPURCHASE AGREEMENTS
The Portfolios may additionally engage in repurchase agreement
transactions. Under the terms of a typical repurchase
agreement, a Portfolio would acquire an underlying debt
obligation for a relatively short period (usually not more than
one week) subject to an obligation of the seller to repurchase,
and the Portfolio to resell, the obligation at an agreed-upon
price and time, thereby determining the yield during the
Portfolio's holding period. This arrangement results in a fixed
rate of return that is not subject to market fluctuations during
the Portfolio's holding period. The Portfolios will enter into
repurchase agreements with respect to their portfolio securities
with member banks of the Federal Reserve System or primary
government securities dealers recognized by the Federal Reserve
Bank of New York. Under each repurchase agreement, the selling
institution will be required to maintain the value of the
securities subject to the repurchase agreement at not less than
their repurchase price, including accrued interest earned on the
underlying securities.
Repurchase agreements could involve certain risks in the event
of default or insolvency of the other party, including possible
delays or restrictions upon a Portfolio's ability to dispose of
the underlying securities. The Investment Advisor and/or
Sub-Advisors, acting under the supervision of the Fund's Board
of Directors, review the creditworthiness of those banks and
dealers with which the Portfolios enter into repurchase
agreements to evaluate these risks, and monitors on an ongoing
basis the value of the securities subject to repurchase
agreements to ensure that the collateral is maintained at the
required level.
<PAGE>
ILLIQUID SECURITIES
Illiquid securities are securities that cannot be sold or
disposed of in the ordinary course of business at approximately
the prices at which they are valued. Under the supervision of
the Board of Directors, the Investment Advisor and/or
Sub-Advisors determine the liquidity of the Portfolios'
securities and monitors trading activity in illiquid securities.
In determining the liquidity of a Portfolio's securities, the
Investment Advisor and/or Sub-Advisors may consider various
factors, including (1) the frequency of trades and quotations,
(2) the number of dealers and prospective purchasers in the
marketplace, (3) dealer undertakings to make a market, (4) the
nature of the security (including any demand or tender
features), and (5) the nature of the marketplace for trades
(including the ability to assign or offset the Portfolio's
rights and obligations relating to the investment). Securities
currently considered by the Portfolio to be illiquid include
repurchase agreements not entitling the holder to payments of
principal and interest within seven days, loans and other direct
debt instruments, over-the-counter options, non-government
stripped fixed-rate mortgage-backed securities, and certain
restricted securities and government-stripped fixed-rate
mortgage backed securities determined by the Investment Advisor
and/or Sub-Advisors to be illiquid. Rule 144A securities for
which a market exists will not be considered illiquid
securities. In the absence of market quotations, illiquid
securities are priced at fair value as determined in good faith
by the Pricing Committee of the Board of Directors.
VARIABLE AND FLOATING RATE NOTES
Variable rate master demand notes, in which the Portfolios may
invest, are unsecured demand notes that permit the indebtedness
thereunder to vary and provide for periodic adjustments in the
interest rate according to the terms of the instrument. A
Portfolio will not invest over 5% of its assets in variable rate
master demand notes. Because master demand notes are direct
lending arrangements between a Portfolio and the issuer, they
are not normally traded. Although there is no secondary market
in the notes, a Portfolio may demand payment of principal and
accrued interest at any time. While the notes are not typically
rated by credit rating agencies, issuers of variable amount
master demand notes (which are normally manufacturing, retail,
financial, and other business concerns) must satisfy the same
criteria as set forth above for commercial paper. In
determining average weighted portfolio maturity, a variable
amount master demand note will be deemed to have a maturity
equal to the period of time remaining until the principal amount
can be recovered from the issuer through demand.
A variable rate note is one whose terms provide for the
adjustment of its interest rate on set dates and which, upon
such adjustment, can reasonably be expected to have a market
value that approximates its par value. A floating rate note is
one whose terms provide for the adjustment of its interest rate
whenever a specified interest rate changes and which, at any
time, can reasonably be expected to have a market value that
approximates its par value. Such notes are frequently not rated
by credit rating agencies; however, unrated variable and
floating rate notes purchased by a Portfolio will be determined
by the Portfolio's Investment Advisor and/or Sub-Advisor, if
any, under guidelines established by the Fund's Board of
Directors to be of comparable quality at the time of purchase to
rated instruments eligible for purchase under the Portfolio's
investment policies. In making such determinations, the
Investment Advisor and/or Sub-Advisor, if any, will consider the
earning power, cash flow and other liquidity ratios of the
issuers of such notes (such issuers include financial,
merchandising, bank holding and other companies) and will
continuously monitor their financial condition. Although there
may be no active secondary market with respect to a particular
variable or
<PAGE>
floating rate note purchased by a Portfolio, the Portfolio may
re-sell the note at any time to a third party. The absence of
such an active secondary market, however, could make it
difficult for the Portfolio to dispose of the variable or
floating rate note involved in the event the issuer of the note
defaulted on its payment obligations, and the Portfolio could,
for this or other reasons, suffer a loss to the extent of the
default. Variable or floating rate notes may be secured by bank
letters of credit.
With respect to the Lincoln Cashfund Portfolio, variable or
floating rate notes with stated maturities of more than 397 days
may be deemed to have shorter maturities as follows:
(1) A note that is issued or guaranteed by the United States
Government or any agency thereof which has a variable rate of
interest readjusted no less frequently than 397 days will be
deemed by a Portfolio to have a maturity equal to the period
remaining until the next readjustment of the interest rate.
(2) A variable rate note, the principal amount of which is
scheduled on the face of the instrument to be paid in one year
or less, will be deemed by a Portfolio to have a maturity equal
to the period remaining until the next readjustment of the
interest rate.
(3) A variable rate note that is subject to a demand feature
will be deemed by a Portfolio to have a maturity equal to the
longer of the period remaining until the next readjustment of
the interest rate or the period remaining until the principal
amount can be recovered through demand.
(4) A floating rate note that is subject to a demand feature
will be deemed by a Portfolio to have a maturity equal to the
period remaining until the principal amount can be recovered
through demand.
As used above, a note is "subject to a demand feature" where
the Portfolio is entitled to receive the principal amount of the
note either at any time on no more than thirty days' notice or
at specified intervals not exceeding one year and upon no more
than 30 days notice.
Variable and floating rate notes for which no readily available
market exists will be purchased in an amount which, together
with securities with legal or contractual restrictions on resale
or for which no readily available market exists (including
repurchase agreements providing for settlement more than seven
days after notice), exceed 10% of the Portfolio's total assets
only if such notes are subject to a demand feature that will
permit the Portfolio to demand payment of the Principal within
seven days after demand by the Portfolio. If not rated, such
instruments must be found by the Portfolio's Investment Advisor
and/or Sub-Advisor, if any, under guidelines established by the
Fund's Board of Directors, to be of comparable quality to
instruments that are rated high quality. A rating may be relied
upon only if it is provided by a nationally recognized
statistical rating organization that is not affiliated with the
issuer or guarantor of the instruments. For a description of
the rating symbols of S&P and Moody's used in this paragraph,
see the Appendix. The Portfolio may also invest in Canadian
Commercial Paper which is commercial paper issued by a Canadian
corporation or a Canadian counterpart of a U.S. corporation and
in Europaper which is U.S. dollar denominated commercial paper
of a foreign issuer.
<PAGE>
MUNICIPAL SECURITIES
Municipal Securities are issued to obtain funds for various
public purposes, including the construction of a wide range of
public facilities such as bridges, highways, roads, schools,
water and sewer works, and other utilities. Other public
purposes for which Municipal Securities may be issued include
refunding outstanding obligations, obtaining funds for general
operating expenses and obtaining funds to lend to other public
institutions and facilities. In addition, certain debt
obligations known as "private activity bonds" may be issued by
or on behalf of municipalities and public authorities to obtain
funds to provide certain water, sewage and solid waste
facilities, qualified residential rental projects, certain local
electric, gas and other heating or cooling facilities, qualified
hazardous waste facilities, high-speed intercity rail
facilities, governmentally-owned airports, docks and wharves and
mass commuting facilities, certain qualified mortgages, student
loan and redevelopment bonds and bonds used for certain
organizations exempt from federal income taxation. Certain debt
obligations known as "industrial development bonds" under prior
federal tax law may have been issued by or on behalf of public
authorities to obtain funds to provide certain
privately-operated housing facilities, sports facilities,
industrial parks, convention or trade show facilities, airport,
mass transit, port or parking facilities, air or water pollution
control facilities, sewage or solid waste disposal facilities,
and certain facilities for water supply. Other private activity
bonds and industrial development bonds issued to finance the
construction, improvement, equipment or repair of
privately-operated industrial, distribution, research, or
commercial facilities may also be Municipal Securities, but the
size of such issues is limited under current and prior federal
tax law. The Lincoln Tax-Free Income Portfolio may not be a
desirable investment for "substantial users" of facilities
financed by private activity bonds or industrial development
bonds or for "related persons" of "substantial users". See
"Additional Tax Information Concerning the Lincoln Tax-Free
Income Portfolio."
The Lincoln Tax-Free Income Portfolio may also acquire "moral
obligation" issues, which are normally issued by special purpose
authorities, and other tax-exempt investments including
pollution control bonds and tax-exempt commercial paper. The
Portfolio may purchase short-term tax-exempt General Obligations
Notes, Tax Anticipation Notes, Bond Anticipation Notes, Revenue
Anticipation Notes, Project Notes, and other forms of short-term
tax-exempt loans. Such notes are issued with a short-term
maturity in anticipation of the receipt of tax funds, the
proceeds of bond placements, or other revenues. Project Notes
are issued by a state or local housing agency and are sold by
the Department of Housing and Urban Development. While the
issuing agency has the primary obligations with respect to its
Project Notes, they are also secured by the full faith and
credit of the United States through agreements with the issuing
authority which provide that, if required, the federal
government will lend the issuer an amount equal to the principal
of and interest on the Project Notes.
The Lincoln Tax-Free Income Portfolio may invest in Municipal
Securities either by purchasing them directly or by purchasing
certificates of accrual or similar instruments evidencing direct
ownership of interest payments or principal payments, or both,
on Municipal Securities, provided that, in the opinion of
counsel to the initial seller of each such certificate or
instrument, any discount accruing on such certificate or
instrument that is purchased at a yield not greater than the
coupon rate of interest on the related Municipal Securities will
to the same extent as interest on such Municipal Securities be
exempt from federal income tax and state income tax (where
applicable) and not treated as a preference item for individuals
for purposes of the federal alternative minimum tax. The
Portfolio may also invest in Municipal Securities by purchasing
from banks participation interests in all or part of specific
holdings of Municipal Securities. Such participation may be
backed in whole or in part by
<PAGE>
an irrevocable letter of credit or guarantee of the selling
bank. The selling bank may receive a fee from a Portfolio in
connection with the arrangement. The Portfolio will not
purchase participation interests unless it receives an opinion
of counsel or a ruling of the Internal Revenue Service that
interest earned by it on Municipal Securities in which it holds
such participation interest is exempt from federal income tax
and state income tax (where applicable) and not treated as a
preference item for individuals for purposes of the federal
alternative minimum tax.
Information about the financial condition of issuers of
Municipal Securities may be less available than about
corporations with a class of securities registered under the
Securities Exchange Act of 1934.
PUTS
The Lincoln Tax-Free Income Portfolio may acquire "puts" with
respect to Municipal Securities held in its portfolio. A put is
a right to sell a specified security (or securities) within a
specified period of time at a specified exercise price. The
Portfolio may sell, transfer, or assign a put only in
conjunction with the sale, transfer, or assignment of the
underlying security or securities.
The amount payable to the Lincoln Tax-Free Income Portfolio
upon its exercise of a "put" is normally (i) the Portfolio's
acquisition cost of the Municipal Securities (excluding any
accrued interest which the Portfolio paid on acquisition), less
any amortized market premium or plus any amortized market or
original issue discount during the period the Portfolio owned
the securities, plus (ii) all interest accrued on the securities
since the last interest payment date during that period.
Puts may be used to facilitate the reinvestment of the
Portfolio's assets at a rate of return more favorable than that
of the underlying security. Puts may, under certain
circumstances, also be used to shorten the maturity of
underlying variable rate or floating rate securities for
purposes of calculating the remaining maturity of those
securities and the dollar-weighted average portfolio maturity of
the Portfolio's assets. See "Variable and Floating Rate Notes"
and "Net Asset Value."
PORTFOLIO TURNOVER
While the Portfolios do not intend to trade in securities for
short-term profits, securities may be sold without regard to the
amount of time they have been held by a Portfolio when warranted
by the circumstances. A Portfolio's portfolio turnover rate is
calculated by dividing the lesser of purchases or sales of
portfolio securities for a year by the monthly average value of
portfolio securities for that year. Securities with remaining
maturities of one year or less at the date of acquisition are
excluded from the calculation. A portfolio turnover rate of
100% would occur, for example, if all the securities in the
Portfolio's portfolio were replaced once during a period of one
year. A high rate of portfolio turnover in any year may
increase brokerage commissions paid and could result in high
amounts of realized investment gain subject to the payment of
taxes by shareholders.
<PAGE>
INVESTMENT RESTRICTIONS
Each Portfolio has adopted policies and investment
restrictions. The investment restrictions numbered 1 through 9
may not be changed without a majority vote of its outstanding
shares, and are considered fundamental. Such majority is
defined in the Investment Company Act as the vote of the lesser
of (i) 67% or more of the outstanding voting securities present
at a meeting, if the holders of more than 50% of the outstanding
voting securities are present in person or by proxy, or (ii)
more than 50% of the outstanding voting securities. All
percentage limitations expressed in the following investment
restrictions are measured immediately after and giving effect to
the relevant transaction. Investment restrictions numbered 10
through 12 may be changed by the vote of a majority of the Board
of Directors.
Each Portfolio normally may not:
1. Purchase any security (other than
obligations of the U.S. Government, its agencies
or instrumentalities) if as a result, with respect
to 75% of the Portfolio's total assets, more than
5% of the Portfolio's assets (determined at the
time of investment) would then be invested in
securities of a single issuer;
2. Purchase any securities (other than
obligations of the U.S. Government, its agencies and
instrumentalities) if as a result 25% or more of the
value of the Portfolio's total assets (determined
at the time of investment) would be invested in the
securities of one or more issuers conducting their
principal business activities in the same industry,
provided that there is no limitation with respect to
money market instruments of domestic banks, U.S.
branches of foreign banks that are subject to the same
regulations as U.S. banks and foreign branches of
domestic banks (provided that the domestic bank is
unconditionally liable in the event of the failure of
the foreign branch to make payment on its instruments
for any reason). Foreign governments, including
agencies and instrumentalities thereof, and each of the
electric utility, natural gas distribution, natural gas
pipeline, combined electric and natural gas utility, and
telephone industries shall be considered as a separate
industry for this purpose;
3. Buy or sell real estate, interests in
real estate or commodities or commodity contracts;
however, the Portfolio may invest in debt securities
secured by real estate or interests therein, or issued
by companies which invest in real estate or interests
therein, including real estate investment trusts, and
may purchase or sell currencies (including forward
currency contracts) and financial futures contracts
and options thereon;
4. Engage in the business of underwriting
securities of other issuers, except to the extent that
the disposal of an investment position may technically
cause the Fund to be considered an underwriter as that
term is defined under the Securities Act of 1933, as
amended;
5. Make loans in an aggregate amount in
excess of one-third of the Portfolio's total assets,
taken at the time any loan is made, provided that
entering into certain repurchase agreements and
purchasing debt securities shall not be deemed loans
for the purposes of this restriction;
<PAGE>
6. Make short sales of securities or
maintain a short position if, when added together,
more than 25% of the value of the Portfolio's net
assets would be (i) deposited as collateral for
the obligation to replace securities borrowed to
effect short sales and (ii) allocated to segregated
accounts in connection with short sales;
7. Borrow money, except from banks for
temporary or emergency purposes not in excess of
one-third of the value of the Portfolio's assets,
and except that the Portfolio may enter into reverse
repurchase agreements and engage in "roll" transactions,
provided that reverse repurchase agreements, "roll"
transactions and any other transactions constituting
borrowing by the Portfolio may not exceed one-third of
the Portfolio's total assets. Notwithstanding the above,
Lincoln's Cashfund Portfolio will not borrow money in
excess of 5% (taken at the lower of cost or current value)
of its total assets (not including amounts borrowed), will
not purchase equity securities or rights or warrants to
acquire equity securities, and will not write or purchase
options;
8. Invest in securities of other investment
companies except as may be acquired as part of a merger,
consolidation, reorganization or acquisition of assets in
and except that each of the Portfolios other than the
Lincoln Cashfund Portfolio may invest up to 5% of its
total assets in the securities of any one investment
company, but may not own more than 3% of the securities
of any investment company or invest more than 10% of its
total assets in the securities of other investment
companies;
9. Make investments for the purpose of
exercising control or management;
10. Invest in securities of any issuer if,
to the knowledge of the Portfolio, any officer or director
of the Fund or LNIMC or the Fund's Sub-Advisor owns more than
1/2 of 1% of the outstanding securities of such issuer, and
such officers and directors who own more than 1/2 of 1% own
in the aggregate more than 5% of the outstanding securities of
such issuer;
11. Purchase any security if as a result the
Portfolio would then have more than 5% of its total assets
(determined at the time of investment) invested in securities
of companies (including predecessors) less than three years
old. In the case of Lincoln Tax-Free Income Portfolio, the
Portfolio will not purchase any security if as a result the
Portfolio would then have more than 5% of its total assets
(determined at the time of investment) invested in industrial
development revenue bonds when the prviate entity on whose
credit the security is based directly or indirectly is less
than three years old (including predecessors); or
12. Purchase illiquid securities or other
securities that are not readily marketable if more than 10%
of the total assets of the Portfolio would be invested in
such securities, which include: (1) repurchase agreements
with maturities greater than seven calendar days; (2) to the
extent a liquid secondary market does not exist for the
instruments, futures contracts and options thereon; (3)
over-the-counter options; (4) variable rate demand notes
with a demand period of more than seven days; (5) time
deposits maturing in more than seven calendar days; (6)
certain Rule 144A restricted securities; and (7) foreign
securities not traded on a recognized domestic or foreign
exchange, to the extent a liquid secondary market does not
exist for such instruments.
<PAGE>
In order to comply with certain state "blue sky" restrictions,
each Portfolio will not as a matter of operating policy:
1. Invest in oil, gas and mineral leases or
programs;
2. Purchase warrants if as a result the
Portfolio would then have more than 5% of its net assets
(determined at the time of investment) invested in warrants.
Warrants will be valued at the lower of cost or market and
investment in warrants which are not listed on the New York
Stock Exchange or American Stock Exchange will be limited
to 2% of the Fund's net assets (determined at the time of
investment). For the purpose of this limitation, warrants
acquired in units or attached to securities are deemed to
be without value;
3. In connection with investment restriction
number eight above, invest in securities issued by other
investment companies without waiving the advisory fee on
that portion of its assets invested in such securities; or
4. Purchase puts, calls, straddles, spreads,
and any combination thereof if by reason thereof the value
of its aggregate investment in such classes of securities
will exceed 5% of its total assets.
<PAGE>
MANAGEMENT
DIRECTORS AND OFFICERS
*JON A. BOSCIA (42), Director (8/93 - present) (formerly
President 9/93 - 6/94) of the Fund. President, Chief Operating
Officer and Director (5/94 to present) of the Lincoln National
Insurance Company; Director (7/89 - present) (formerly President
5/89 - 5/94) of Lincoln National Convertible Securities Fund,
Inc. and Lincoln National Income Fund, Inc., Director, National
Re Holdings, Inc. Formerly Executive Vice President (9/91 -
5/94) of Lincoln National Corporation and The Lincoln National
Life Insurance Company; Formerly President (7/91 - 5/94);
Executive Vice President (5/85 - 7/91) of Lincoln National
Investment Management Company.
*PRISCILLA S. BROWN (36), President (6/94 - present) (formerly
Vice President 9/93 - 6/94) and Director (8/93 - present) of the
Fund. President and Director (6/94 - present) of LNC Equity
Sales Corporation. Formerly Vice President (3/91 - 6/94) of
Lincoln National Investment Management Company; formerly
Director of Marketing (1988 - 1991) of Equitable Financial
Company.
RICHARD M. BURRIDGE (64), Director (9/93 - present) of the Fund.
Director (since 1972); President (since March 1986) of The
Burridge Group, Inc. (investment management); Director of
Computer Access International, Inc., Cincinnati Financial
Corporation, Lincoln National Convertible Securities Fund, Inc.,
Lincoln National Income Fund, Inc. and St. Joseph Light and
Power Company; Chairman of the Board of Fort Dearborn Income
Securities, Inc.
JORGE G. CASTRO (36), Director (9/93 - present) of the Fund.
Principal (since 1990) of CIC Asset Management, Inc. (investment
management); Trustee (since 1993) of Milton Academy; previously
Vice President & Product Manager, Fixed Income Division of
Goldman Sachs & Co. (1985 - 1990); prior thereto member of JP
Morgan Asset-Liability Management Group (1983-1985).
ADELA CEPEDA (35), Director (9/93 - present) of the Fund.
Founder and Managing Director of Abacus Financial Group, Inc.
(since 1991); previously Vice President, Corporate Finance
Department of Smith Barney, Harris Upham & Co. Incorporated
(1980 - 1991)
ROGER J. DESHAIES (43), Director (9/93 - present) of the Fund.
Director (since 1992); Senior Vice President-Finance
(1990-present) of Parkview Memorial Hospital, Fort Wayne,
Indiana; Senior Vice President-Finance (1988-1990) of
Crozier-Chester medical Center, Upland, Pennsylvania; Vice
President-Finance and Treasurer (1985-1988) of Medical College
of Pennsylvania; Director of Lincoln National Convertible
Securities Fund, Inc.
CHARLES G. FREUND (69), Director (9/93 - present) of the Fund.
Director (since 1972); Chairman of the Board (July 1987-April
1989 and since July 1989) (previously, Chairman of the Executive
Committee (July 1987-July 1989)) of First National Bank of
Lincolnshire; Director of Lincoln National Convertible
Securities Fund, Inc., and Mathers Fund, Inc.
*PHILIP L. HOLSTEIN (40), Director (9/93 - present) of the
Fund. President (since 1982) of The Holstein Company, Inc.
(financial services); Vice President (since 1992) of The Morgan
Financial Group, Inc.; Registered Principal\Investment Sales
Coordinator (since 1985) of LNC Equity Sales Corporation; Agent
(since 1982) of Lincoln National Life Insurance Company.
<PAGE>
*H. THOMAS MCMEEKIN (41), Director (6/94 - present) of the Fund.
President (5/94 - present) and Director (5/91 - present),
Lincoln National Investment Management Company; Executive Vice
President (5/94 - present), (formerly Senior Vice President
11/92 - 5/94) Lincoln National Corporation; President (5/94 -
present) and Director (5/90 - present), Lincoln Convertible
Securities Fund, Inc. and Lincoln National Income Fund, Inc.
Formerly Executive Vice President (2/92 - 11/92); Senior Vice
President (11/87 - 2/92) Lincoln National Investment Management
Company.
BARBARA A. PECK (45), Director (9/93 - present) of the Fund.
Assistant Dean of Academic Administration for the College of
Business Administration at the University of Illinois at Chicago
("UIC") (since May 1993); lecturer in Accounting Department of
the College of Business Administration at UIC (since August
1991); accounting lecturer at Northwestern University's
University College (since June 1990); previously Chief Financial
Officer of the Chicago Board of Education (January 1987 -
October 1989).
* "Interested" Director as defined in the Investment Company Act.
Mr. Boscia also serves as director of the following investment
companies advised by LNIMC: Lincoln National Bond Fund, Inc.,
Lincoln National Growth Fund, Inc., Lincoln National
International Fund, Inc., Lincoln National Managed Fund, Inc.,
Lincoln National Money Market Fund, Inc., Lincoln National
Putnam Master Fund, Inc., Lincoln National Social Awareness
Fund, Inc. and Lincoln National Special Opportunities Fund, Inc.
The officers conduct and supervise the daily business
operations of the Portfolios, while the Directors, in addition
to their functions set forth under "Management" in the
Prospectus, review such actions and decide on general policy.
Pursuant to the Investment Advisory Agreement with the Fund,
LNIMC pays compensation of officers and employees of the Fund as
well as the fees and expenses of all Directors of the Fund who
are affiliated persons of LNIMC.
The Fund pays each of its Directors who is not an affiliated
person of the Fund estimated annual compensation of $15,000 in
addition to certain out-of-pocket expenses.
Mmes. Cepeda and Peck and Messrs. Burridge, Castro, Deshaies
and Freund serve as members of the Fund's Audit Committee which
is comprised of Directors who are not interested persons of the
Fund. Mr. Freund is the Chairperson of the Audit Committee.
The committee will meet at least annually with each Portfolio's
independent accountants and officers to review distribution
activities and Rule 12b-1 expenditures, accounting principles
used by each Portfolio and the adequacy of each Portfolio's
internal controls.
The Investment/Pricing Committee performs interim functions for
the Board of Directors including dividend declaration and
portfolio pricing matters. Members are Mmes. Cepeda and Peck
and Messrs. Burridge, Castro, Deshaies and Freund. Mr.
Burridge is the Chairperson of the Investment/Pricing Committee.
<PAGE>
Responsibilities of the Nominating Committee of the Fund
include recommending a slate of Directors; preparing for and
recommending replacements for any vacancies in Directors'
positions; and initial review of policy issues regarding the
size, composition and compensation of the Board. Members of the
Nominating Committee are Mmes. Cepeda and Peck and Messrs.
Burridge, Castro, Deshaies and Freund. Ms. Cepeda is the
Chairperson of the Nominating Committee.
<TABLE>
<CAPTION>
OFFICERS
<S> <C>
JoAnn E. Becker Vice President
David A. Berry Vice President
Dennis A. Blume Vice President
Steven R. Brody Vice President
Melanie T. Hall Vice President
Richard D. Shafer Vice President
Ann L. Warner Vice President
C. Suzanne Womack Secretary
David G. Humes Assistant Vice President and
Chief Accounting Officer
Brian S. Becher Assistant Secretary
Robert K. Gongwer Assistant Secretary
Kharis K. Roach Assistant Secretary
Cynthia A. Rose Assistant Secretary
Walter W. Bonham, Jr. Assistant Treasurer
Eldon J. Summers Assistant Treasurer
</TABLE>
<PAGE>
PRINCIPAL HOLDERS OF SECURITIES
As of October 31, 1994, the officers and trustees of the Funds,
as a group, owned less than 1% of the outstanding shares of each
Fund.
Listed below are the shareholders of record who held 25% or
more of the outstanding shares of each Class as of October 31,
1994.
<TABLE>
<CAPTION>
PORTFOLIO NAME AND ADDRESS OF SHAREHOLDER PERCENT HELD
<S> <C> <C>
Lincoln Growth and Income Lincoln National Life Insurance 93.75
Portfolio (Class A) Co.
1300 South Clinton St.
Fort Wayne, IN 46801
Lincoln Growth and Income NFSC FMTC IRA Rollover 53.51
Portfolio (Class B) FBO Lawrence B. Silver, MD
1800 Linglestown Road, Suite 404
Harrisburg, PA 17110
Lincoln Growth and Income Robert F. Bossi 59.7
Portfolio (Class C) Francene M. Bossi
401 Key West Dr.
Charlottesville VA 22901
Lincoln Growth and Income Federated Life Insurance Co. 87.18
Portfolio (Class D) Attn: Tom Koch
121 E. Park Sq.
Owatonna, MN 55060
Lincoln Enterprise American States Insurance Co. 87.14
Portfolio (Class A) Attn. Corporate Accounting P/C
David Rogers
500 North Meridian St.
Indianapolis, IN 46207
Lincoln Enterprise Marlin & Jeanne Drake, Trustees 36.38
Portfolio (Class B) Unitrust Dated 11/28/89
c/o Renaissance Inc.
11595 North Meridian Street Ste 250
Carmel, IN 46032
Lincoln Enterprise John Robertson Plumbing Inc. 53.42
Portfolio (Class C) PO Box 118
Burlington, KY 41005
Marlin & Jeanne Drake, Trustees 38.58
Unitrust Dated 11/28/89
c/o Renaissance Inc.
11595 North Meridian Street Ste 250
Carmel, IN 46032
<PAGE>
PORTFOLIO NAME AND ADDRESS OF SHAREHOLDER PERCENT HELD
Lincoln Enterprise Federated Life Insurance Co. 100
Portfolio (Class D) Attn: Tom Koch
121 E. Park Square
Owatonna, MN 55060
Lincoln U.S. Growth American States Insurance Co. 95.74
Portfolio (Class A) Attn. Corporate Accounting P/C
David Rogers
500 North Meridian St.
Indianapolis, IN 46207
Lincoln U.S. Growth NFSC/FMTC IRA Rollover 59.54
Portfolio (Class A) FBO Lawrence B. Silver, MD
1800 Linglestown Road, Suite 404
Harrisburg, PA 17110
Lincoln U.S. Growth Senen S. Santos Cust. 64.28
Portfolio (Class C) Imedla May Cardona UGMA of CA
2109 Charlemagne Ave
Long Beach, CA 90815
Michael Meschter & 35.35
Donald Meschter Jt Ten
5 Pinewood Drive North
Douglassville, PA 19518
Lincoln U.S. Growth Federated Life Insurance Co. 88.01
Portfolio (Class D) Attn: Tom Koch
121 E. Park Square
Owatonna, MN 55060
Lincoln World Growth Lincoln National Life Insurance 94.23
Portfolio (Class A) Co.
1300 South Clinton St.
Fort Wayne, IN 46801
Lincoln World Growth None
Portfolio (Class B)
Lincoln World Growth John Robertson Plumbing Inc. 26.25
Portfolio (Class C) PO Box 118
Burlington, KY 41005
Lincoln World Growth Federated Life Insurance Co. 100
Portfolio (Class D) Attn: Tom Koch
121 E. Park Square
Owatonna, MN 55060
Lincoln New Pacific Lincoln National Life Insurance 92.62
Portfolio (Class A) Co.
1300 South Clinton St.
Fort Wayne, IN 46801
<PAGE>
PORTFOLIO NAME AND ADDRESS OF SHAREHOLDER PERCENT HELD
Lincoln New Pacific Marlin & Jeanne Drake, Trustees 31.27
Portfolio (Class B) Unitrust Dated 11/28/89
c/o Renaissance Inc.
11595 North Meridian Street Ste 250
Carmel, IN 46032
NFSC/FMTC IRA Rollover 31.19
FBO Lawrence B. Silver, MD
1800 Linglestown Road, Suite 404
Harrisburg, PA 17110
Lincoln New Pacific Marlin & Jeanne Drake, Trustees 55.53
Portfolio (Class C) Unitrust Dated 11/28/89
c/o Renaissance Inc.
11595 North Meridian Street Ste 250
Carmel, IN 46032
NFSC FEBO 35.35
Chester M. Boltwood
Karen A. Boltwood
828 Cobblestone Circle
Modesto, CA 95355
Lincoln New Pacific Federated Life Insurance Co. 100
Portfolio (Class D) Attn: Tom Koch
121 E. Park Square
Owatonna, MN 55060
Lincoln Government Income Lincoln National Life Insurance Co. 98.42
Portfolio (Class A 1300 South Clinton St.
Fort Wayne, IN 46801
Lincoln Government Income NFSC/FMTC IRA Rollover 81.93
Portfolio (Class B) FBO Lawrence B. Silver, MD
1800 Linglestown Road, Suite 404
Harrisburg, PA 17110
Lincoln Government Income Bonnie J. Hales 98.01
Portfolio (Class C) 626 North Dearborn Street Sp 30
Redlands, CA 92374
Lincoln Government Income Federated Life Insurnace Co. 100
Portfolio (Class D) Attn: Tom Koch
121 E. Park Square
Owatonna, MN 55060
Lincoln Corporate Income Lincoln National Life Insurance 64.74
Portfolio (Class A) Co.
1300 South Clinton St.
Fort Wayne, IN 46801
<PAGE>
PORTFOLIO NAME AND ADDRESS OF SHAREHOLDER PERCENT HELD
Lincoln Corporate Income NFSC/FMTC IRA Rollover 87.72
Portfolio (Class B) FBO Lawrence B. Silver, MD
1800 Linglestown Road, Suite 404
Harrisburg, PA 17110
Lincoln Corporate Income NFSC FEBO 99.94
Portfolio (Class C) Marco A. Fuentalba
Marta Fuentalba
3121 Woods Way Apt #3
Gulf Breeze, FL 32561
Lincoln Corporate Income Federated Life Insurance Co. 78.87
Portfolio (Class D) Attn: Tom Koch
121 E. Park Square
Owatonna, MN 55060
Lincoln Tax-Free Income American States Insurance Co. 98.1
Portfolio (Class A) Attn. Cooperaate Accounting P/C
David Rogers
500 North Meridian St.
Indianapolis, IN 46207
Lincoln Tax-Free Income Jean Stone 64.81
Portfolio (Class B) 1360 Summitridge Place
Beverly Hills, CA 90210
Lincoln Tax-Free Income NFSC FEBO 100
Portfolio (Class C) Marco A. Fuentalba
Marta Fuentalba
3121 Woods Way Apt #3
Gulf Breeze, FL 32561
Lincoln Tax-Free Income None
Portfolio (Class D)
Lincoln Cashfund Lincoln National Life Insurance Co. 63.19
Portfolio (Class A) 1300 South Clinton St.
Fort Wayne, IN 46801
</TABLE>
Listed below are the shareholders who held at least 5% but less
than 25% of the outstanding shares of each Class as of October
31, 1994.
<TABLE>
<CAPTION>
PORTFOLIO NAME AND ADDRESS OF SHAREHOLDER PERCENT HELD
<S> <C> <C>
Lincoln Growth and Income
Portfolio Class A) None
Lincoln Growth and Income NFSC FMTC IRA Rollover 24.52
Portfolio (Class B) FBO Albert L. Wedner
7453 Light House Point
Pittsburgh, PA 15221
<PAGE>
PORTFOLIO NAME AND ADDRESS OF SHAREHOLDER PERCENT HELD
Lincoln Growth and Income NFSC FEBO 19.67
Portfolio (Class C) Chester M. Boltwood
Karen A. Boltwood
828 Cobblestone Circle
Modesto, CA 95355
Michael Meschter & 7.01
Donald Meschter Jt Ten
Pinewood Drive North
Douglassville, Pa 19518
NFSC/FMTC IRA 5.5
FBO Cheryl A. Laver
1257 Kiefer Street
Wooster, OH 44691
Lincoln Growth and Income Federated Life Insurance Co.
Portfolio (Class D) Attn: Tom Koch
121 E. Park Square
Owatonna, MN 55060 12.82
Lincoln Enterprise None
Portfolio (Class A)
Lincoln Enterprise NFSC FEBO, NFSC/FMTC IRA 15.54
Portfolio (Class B) FBO Lawrence B. Silver, MD
1800 Linglestown Road, Suite 404
Harrisburg, PA 17110
Lincoln Enterprise None
Portfolio (Class C)
Lincoln Enterprise None
Portfolio (Class D)
Lincoln U.S. Growth None
Portfolio (Class A)
Lincoln U.S. Growth NFSC FEBO
Portfolio Class B) Lisa Lynn Mervis
3213 Caves Road
Owings Mills, MD 21117 6.56
Gregory C. Eifert 5.65
HR-10 Retirement Plan
5525 Pine Green Cove
Ft Wayne, IN 46865
Lincoln U.S. Growth None
Portfolio Class C)
Lincoln U.S. Growth Federated Life Insurance Co. 11.99
Portfolio (Class D) Attn: Tom Koch
121 E. Park Square
Owatonna, MN 55060
Lincoln World Growth None
Portfolio (Class A)
<PAGE>
PORTFOLIO NAME AND ADDRESS OF SHAREHOLDER PERCENT HELD
Lincoln World Growth Robert Bossi 6.97
Portfolio (Class B) Francene M. Bossi
401 Key West Drive
Charlottesville, VA 22901
Marlin & Jeanne Drake, Trustees 23.92
Unitrust Dated 11/28/89
c/o Renaissance Inc.
11595 North Meridian Street Ste 250
Carmel, IN 46032
NFSC FEBO, NFSC/FMTC IRA 23.7
FBO Lawrence B. Silver, MD
1800 Linglestown Road, Suite 404
Harrisburg, PA 17110
NFSC FEBO 9.81
Joan Miller
4917 Waterfowl Way
Rockville, MD 20853
Lincoln World Growth Marlin & Jeanne Drake, Trustees 16.97
Portfolio (Class C) Unitrust Dated 11/28/89
c/o Renaissance Inc.
11595 North Meridian Street Ste 250
Carmel, IN 46032
NFSC FEBO 24.29
Patricia C. Miller
4998 Elkhead Road
Yoncalla, OR 97499
NFSC FEBO 24.92
Chester M. Boltwood
Karen A. Boltwood
828 Cobblestone Circle
Modesto, CA 95355
Lincoln World Growth None
Portfolio (Class D)
Lincoln Government Income None
Portfolio (Class A)
Lincoln Government Income NFSC FEBO 6.14
Portfolio (Class B) Geraldine W. Nixon
802 Timothy Drive
Oxford, AL
Lincoln Government Income None
Portfolio (Class C, Class
D)
Lincoln Tax-Free None
Portfolio (Class A)
<PAGE>
PORTFOLIO NAME AND ADDRESS OF SHAREHOLDER PERCENT HELD
Lincoln Tax-Free NFSC FEBO 20.16
Portfolio (Class B) Geraldine W. Nixon
802 Timothy Drive
Oxford, AL
NFSC FEBO 20.16
Rita J. Obringer
910 Powers Street
New Haven, IN 36203
Lincoln Tax-Free Income None
Portfolio (Class C,
Class D)
Lincoln New Pacific None
Portfolio (Class A)
Lincoln New Pacific None
Portfolio (Class B)
Lincoln New Pacific None
Portfolio (Class C)
Lincoln New Pacific None
Portfolio (Class D)
Lincoln Corporate Income None
Portfolio (Class A)
Lincoln Corporate Income None
Portfolio (Class B)
Lincoln Corporate Income None
Portfolio (Class C)
Lincoln Corporate Income Federated Life Insurance Co. 21.13
Portfolio (Class D) Attn: Tom Koch
121 E. Park Square
Owatonna, MN 55060
Lincoln Cashfund None
Portfolio (Classes A,B)
</TABLE>
INVESTMENT ADVISOR
The investment advisor to all of the Portfolios is Lincoln
National Investment Management Company ("LNIMC" or the
"Investment Advisor"), 200 East Berry Street, Fort Wayne,
Indiana 46802. LNIMC was incorporated in Illinois in 1930 and
is a wholly-owned subsidiary of Lincoln National Corporation.
Lincoln National Corporation, whose principal office is located
at 1300 South Clinton Street, Fort Wayne, Indiana, is a
publicly-held holding company organized under Indiana law which,
through subsidiaries, provides, on a national basis, life
insurance and annuities, property-casualty insurance and related
services. LNIMC, a registered investment advisor, receives
advisory fees monthly based upon each Portfolio's average daily
net assets. See "Management-Investment Advisor" in the
Prospectus.
<PAGE>
As of September 30, 1994, LNIMC managed and/or administered
closed-end management investment companies with assets of
approximately $232.5 million and managed an aggregate of $30.8
billion in assets, including those of other clients.
The Investment Advisor also serves as investment advisor to the
following registered investment companies: Lincoln National
Bond Fund, Inc., Lincoln National Growth Fund, Inc., Lincoln
National Income Fund, Inc., Lincoln National Managed Fund, Inc.,
Lincoln National Money Market Fund, Inc., Lincoln National
Putnam Master Fund, Inc., Lincoln National Social Awareness
Fund, Inc., Lincoln National Special Opportunities Fund, Inc.,
Lincoln National Convertible Securities Fund, Inc. and Lincoln
National International Fund, Inc.
While LNIMC acts as investment advisor for all of the
Portfolios, it will be solely responsible for the investment
management of the Lincoln Government Income Portfolio, Lincoln
Corporate Income Portfolio, Lincoln Tax-Free Income Portfolio
and Lincoln Cashfund Portfolio.
SUB-ADVISORS
The following registered investment advisors serve as
Sub-Advisors to the Portfolios indicated: Beutel, Goodman
Capital Management serves as Sub-Advisor to the Lincoln Growth
and Income Portfolio; Lynch & Mayer, Inc. serves as Sub-Advisor
to the Lincoln Enterprise Portfolio; Provident Investment
Counsel serves as Sub-Advisor to the Lincoln U.S. Growth
Portfolio; Walter Scott & Partners Limited serves as Sub-Advisor
of the Lincoln World Growth Portfolio and John Govett & Company
Limited serves as Sub-Advisor of the Lincoln New Pacific
Portfolio.
Beutel, Goodman Capital Management. Beutel, Goodman and
Company Ltd. was formed in 1967 and is currently one of the
largest investment advisory firms in Canada. The firm manages
pension investments for a number of fortune 500 companies with
Canadian plans. In 1980, the firm established Beutel, Goodman
Capital Management, its U.S. affiliate, with combined locations
managing assets in excess of $7.5 billion.
Lynch & Mayer, Inc. Dennis Lynch and Eldon Mayer established
Lynch & Mayer, Inc. in 1976. Currently the firm manages $5.6
billion in assets for pension funds, foundations, endowments,
trusts and high net worth individuals and families. The firm
also manages a closed-end convertible security fund which is
traded on the New York Stock Exchange. Lynch & Mayer's
investment expertise is in equities and convertible securities.
Provident Investment Counsel. Provident Investment Counsel
evolved from a predecessor firm founded in 1951. In February
1995 Provident Investment Counsel will be acquired by United
Asset Management Corporation, a financial services holding
company. For the first twenty years of its history, the firm
managed primarily taxable accounts. Since the seventies, the
firm has sought non-taxable assets and today approximately 96%
of its $14.3 billion of assets under management are non-taxed.
Walter Scott & Partners Limited. Walter Scott & Partners
Limited was founded in 1983. The firm is an investment advisor
registered with the Securities and Exchange Commission. The
firm's area of expertise is in providing both international and
global management of equity securities. The firm manages money
for pension funds and foundations of over $1.5 billion for
investors in the United Kingdom and United States.
<PAGE>
John Govett & Company Limited. The London-based investment
management firm of John Govett & Company Limited was established
in 1920. The investment firm manages assets of over $4.5
billion for investment trusts, investment companies, mutual
funds and pension funds. The firm has other investment offices
in Singapore and San Francisco.
CUSTODIAN AND ADMINISTRATOR
Investors Bank & Trust Company ("Investors Bank"), 89 South
Street, Boston, MA 02111, serves as Custodian and Administrator
for each of the Portfolios. The Fund has entered into separate
custodian and administration agreements with Investors Bank. As
Custodian, Investors Bank segregates and maintains assets and
accounts for the Portfolios. As Administrator, Investors Bank
administers the Fund's corporate affairs and, in connection
therewith, furnishes the Fund with office facilities, maintains
certain records and supplies ordinary clerical, bookkeeping and
recordkeeping services. See "Management-Custodian and
Administrator" in the Prospectus for further information.
DISTRIBUTOR
LNC Equity Sales Corporation, 3811 Illinois Road, Suite 212,
Fort Wayne, Indiana 46804, serves as Distributor of the shares
of each of the Portfolios. See "Management - Distributor" in
the Prospectus for further information.
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
TAX INFORMATION CONCERNING ALL PORTFOLIOS OF THE FUND
It is the policy of each Portfolio of the Fund to meet the
requirements necessary to qualify as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"). By following such policy, each
Portfolio expects to eliminate or reduce to a nominal amount the
federal income taxes to which it may be subject.
In order to qualify as a regulated investment company, each
Portfolio must, among other things, (1) derive at least 90% of
its gross income from dividends, interest, payment with respect
to securities loans, and gains from the sale or other
disposition of stock or securities, foreign currencies or other
income (including gains from options, futures or forward
contracts) derived with respect to its business of investing in
stock, securities or currencies, (2) derive less than 30% of its
gross income from the sale or other disposition of stock,
securities, options, futures, forward contracts, and certain
foreign currencies (or options, futures, or forward contracts on
foreign currencies) held for less than three months, and (3)
diversify its holdings so that at the end of each quarter of its
taxable year (i) at least 50% of the market value of the
Portfolio's assets is represented by cash or cash items
(including receivables), United States Government securities,
securities of other regulated investment companies, and other
securities limited, in respect of any one issuer, to an amount
not greater than 5% of the value of the Portfolio's assets at
the date of purchase and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the
value of its assets is invested in the securities of any one
issuer (other than United States Government securities or the
securities of other regulated investment companies) or of two or
more issuers that the Fund controls and that are engaged in the
same, similar or related trades or businesses. These
requirements may restrict the degree to which the Fund may
engage in short-term trading and limit the range of the Fund's
investments. If a Portfolio qualifies as a regulated investment
company, it will not be subject to federal income tax on the
part of its income distributed to shareholders, provided the
Portfolio distributes at least 90% of its net investment income
(including short-term capital gains) other than long-term
capital gains in each year. Each Portfolio intends to make
sufficient distributions to shareholders to meet this
requirement.
The Code imposes a non-deductible excise tax on regulated
investment companies that do not distribute in each calendar
year (regardless of whether they otherwise have a non-calendar
taxable year) an amount equal to 98% of their "ordinary income"
(as defined) for the calendar year plus 98% of their "capital
gain net income" (as defined) for the 1-year period ending on
October 31 of such calendar year plus 100% of the prior calendar
year's undistributed income (if any). The balance, if any, of
such income must be distributed during the next calendar year.
For the foregoing purposes, a Portfolio is treated as having
distributed any amount on which it is subject to income tax for
any taxable year ending in such calendar year. If distributions
during a calendar year are less than the required amount, that
particular Portfolio will be subject to a non-deductible excise
tax equal to 4% of the deficiency.
Shareholders of the Portfolios will generally pay federal
income tax on distributions received from the Funds except in
the case of dividends from net investment income paid by the
Lincoln Tax-Free Income Portfolio as discussed below. Dividends
that are attributable to a Portfolio's taxable net investment
income will be taxed as ordinary income. Distributions of net
capital gain that are designated by a Portfolio as capital gain
dividends will generally be taxable as long-term capital gain.
<PAGE>
Distributions in excess of a Portfolio's current and accumulated
earnings and profits will be treated by shareholders receiving
such distributions as a return of capital; a return of capital
is taxable to shareholder as capital gain to the extent that it
exceeds such shareholder's basis in its shares in the Portfolio.
Shareholders not subject to tax on their income generally will
not be required to pay tax on amounts distributed to them. Such
shareholders will include qualified retirement plans.
Certain investments and hedging activities of the Portfolios,
including transactions in options, futures contracts, hedging
transactions, forward contracts, straddles, foreign currencies,
and foreign securities will be subject to special tax rules.
See "Option Transactions," "Straddles" and "Wash Sales" herein.
In a given case, these rules may accelerate income to the
Portfolio, defer losses to the Portfolio, cause adjustments in
the holding periods of the Portfolio's securities, convert
short-term capital losses into long-term capital losses, or
otherwise affect the character of the Portfolio's income. These
rules could therefore affect the amount, timing and character of
distributions to shareholders. The Portfolio will endeavor to
make any available elections pertaining to such transactions in
a manner believed to be in the best interest of the Portfolio.
Certain securities purchased by the Portfolios (such as STRIPS,
CUBES, TRS, TIGRS and CATS), are sold at original issue discount
and do not make periodic cash interest payments. A Portfolio
will be required to include as part of its current income the
imputed interest on such obligations even though the Portfolio
has not received any interest payments on such obligations
during that period. Because a Portfolio distributes all of its
net investment income to its shareholders (including such
imputed interest), the Portfolio may have to sell securities in
order to generate the cash necessary for the required
distributions. Such sales may occur at a time when the
Investment Advisor would not have chosen to sell such securities
and which may result in a taxable gain or loss.
The Portfolio will be required in certain cases to withhold and
remit to the United States Treasury 31% of taxable dividends or
of gross proceeds from redemptions paid to any shareholder who
has provided either an incorrect tax identification number or no
number at all, or who is subject to withholding by the Internal
Revenue Service for failure to properly include on his tax
return payments of interest or dividends. This withholding,
known as backup withholding, is not an additional tax, and any
amounts withheld may be credited against the shareholder's
ultimate U.S. tax liability.
The foregoing is only a summary of some of the important
federal tax considerations generally affecting purchasers of
shares of a Portfolio of the Fund. Further tax information
regarding the Lincoln Tax-Free Income Portfolio and the Lincoln
World Growth and Lincoln New Pacific Portfolios are included in
following sections of this Statement of Additional Information.
No attempt is made to present a detailed explanation of the
federal income tax treatment of each Portfolio or its
shareholders, and this discussion is not intended as a
substitute for careful tax planning. Accordingly, prospective
purchasers of shares of a Portfolio are urged to consult their
tax advisors with specific reference to their own tax situation,
including the potential application of state and local taxes.
The foregoing discussion and the discussion below regarding the
Lincoln Tax-Free Income Portfolio and the Lincoln World Growth
and Lincoln New Pacific Portfolios are based on tax laws and
regulations which are in effect on the date of this Statement of
Additional Information; such laws and regulations may be changed
by legislative or administrative action, and such changes may be
retroactive.
<PAGE>
ADDITIONAL TAX INFORMATION CONCERNING THE LINCOLN TAX-FREE
INCOME PORTFOLIO
The Code permits a regulated investment company which has
invested, at the close of each quarter of its taxable year, at
least 50% of its assets in tax-free Municipal Securities and
other securities exempt from the regular federal income tax to
pay exempt-interest dividends to its shareholders. As discussed
below, exempt-interest dividends are generally not subject to
federal income tax.
The policy of the Lincoln Tax-Free Income Portfolio is to
distribute each year as exempt-interest dividends substantially
all the Portfolio's net exempt interest income. An
exempt-interest dividend is any dividend or part thereof (other
than a capital gain dividend) paid by the Lincoln Tax-Free
Income Portfolio and designated as an exempt-interest dividend
in a written notice mailed to shareholders after the close of
the Portfolio's taxable year, which does not exceed, in the
aggregate, the net interest income from Municipal Securities and
other securities exempt from regular federal income tax received
by the Portfolio during the taxable year. The percentage of the
total dividends paid for any taxable year which qualifies as
federal exempt-interest dividends will be the same for all
shareholders receiving dividends from the Portfolio during such
year, regardless of the period for which the shares were held.
Exempt-interest dividends may be treated by the Portfolio's
shareholders as items of interest excludable from their gross
income under Section 103(a)(1) of the Code. However, each
shareholder is advised to consult his or her tax advisor with
respect to whether exempt-interest dividends would retain the
exclusion under Section 103(a)(1) if such shareholder were
treated as a "substantial user" or a "related person" to such
user under Section 147(a) with respect to facilities financed
through any of the tax-exempt obligations held by the Portfolio.
"Substantial user" is defined under U.S. Treasury Regulations
to include a non-exempt person who regularly uses a part of such
facilities in his trade or business and (a)(i) whose gross
revenues derived with respect to the facilities financed by the
issuance of bonds are more than 5% of the total revenues derived
by all users of such facilities or (ii) who occupies more than
5% of the usable area of the facility or (b) for whom such
facilities or a part thereof were specifically constructed,
reconstructed or acquired. "Related persons" includes certain
related natural persons, affiliated corporations, partners and
partnerships.
Dividends attributable to interest on certain private activity
bonds issued after August 7, 1986 must be included in
alternative minimum taxable income for purposes of determining
liability (if any) for the alternative minimum tax for
individuals and corporations. In the case of corporations, all
tax-exempt interest dividends will be taken into account in
determining adjusted current earnings for the purpose of
computing the alternative minimum tax imposed on corporations
(as defined for federal income tax purposes).
The Lincoln Tax-Free Income Portfolio may acquire rights
regarding specified portfolio securities under puts. See
"Puts." The policy of the Portfolio is to limit its acquisition
of puts to those under which the Portfolio will be treated for
federal income tax purposes as the owner of the Municipal
Securities acquired subject to the put and the interest on the
Municipal Securities will be tax-exempt to the Portfolio.
Although the Internal Revenue Service has issued a published
ruling that provides some guidance regarding the tax
consequences of the purchase of puts, there is currently no
guidance available from the Internal Revenue Service that
definitively establishes the tax consequences of many of the
types of puts that the Portfolio could acquire under the
Investment Company Act. Therefore, although the Portfolio will
only acquire a put after concluding that it will have the tax
<PAGE>
consequences described above, the Internal Revenue Service could
reach a different conclusion from that of the Portfolio.
If for any taxable year the Portfolio does not qualify for the
special tax treatment afforded regulated investment companies,
all of its taxable income would be subject to tax at regular
corporate rates (without any deduction for distributions to
shareholders), and Municipal Securities interest income,
although not taxable to the Portfolio, would be taxable to
shareholders when distributed as dividends.
The foregoing is only a summary of some of the important tax
considerations generally affecting purchasers of shares of the
Lincoln Tax-Free Income Portfolio.
Additional tax information concerning all Portfolios is
contained in the immediately preceding section of this Statement
of Additional Information. No attempt is made to present a
detailed explanation of the federal income tax treatment of the
Lincoln Tax-Free Income Portfolio or its shareholders, and this
discussion is not intended as a substitute for careful tax
planning. Accordingly, prospective purchasers of shares of the
Portfolio are urged to consult their tax advisors with specific
reference to their own tax situation, including the potential
application of state and local taxes.
ADDITIONAL TAX INFORMATION CONCERNING THE LINCOLN WORLD GROWTH
AND LINCOLN NEW PACIFIC PORTFOLIOS
Gain or loss on the sale or other disposition of foreign
currency by the Lincoln World Growth and Lincoln New Pacific
Portfolios on a spot (or cash) basis will result in ordinary
gain or loss for federal income tax purposes.
Gains from foreign currencies (including foreign currency
options, foreign currency futures and foreign currency forward
contracts) will constitute qualifying income for purposes of the
90% test. However, future Treasury regulations may exclude
from qualifying income foreign currency gains not directly
related to a Portfolio's business of investing in stock or
securities (and may further define those foreign currency
transactions that are not directly related).
Investment by a Portfolio in certain "passive foreign
investment companies" could subject the Portfolio to U.S.
federal income tax or other charge on distributions received
from, or the sale of its investment in, such a company, which
tax cannot be eliminated by making distributions to
shareholders. If the Portfolios elect to treat a passive
foreign investment company as a "qualified electing fund",
different rules would apply, although the Portfolios do not
expect to be in the position to make such elections.
<PAGE>
FOREIGN TAX CREDIT
Shareholders of the Lincoln World Growth and Lincoln New
Pacific Portfolios who are U.S. citizens may be able to claim a
foreign tax credit or deduction on their U.S. income tax returns
with respect to foreign taxes paid by the Portfolios.
Generally, a credit for foreign taxes is subject to the
limitation that it may not exceed the shareholder's U.S. tax
attributable to his or her total foreign source taxable income.
For this purpose, the source of a Portfolio's income flows
through to its shareholders. A Portfolio's gains from the sale
of securities generally will be treated as derived from U.S.
sources and certain currency fluctuation gains, including
fluctuation gains from foreign currency denominated debt
securities, receivables and payables, will be treated as
ordinary income derived from U.S. sources. With limited
exceptions, the foreign tax credit is allowed to offset only 90%
of the alternative minimum tax imposed on corporations and
individuals. Because of these limitations, shareholders may be
unable to claim a credit for the full amount of their
proportionate share of the foreign taxes paid by a Portfolio.
The foregoing is only a general description of the treatment of
foreign withholding or other foreign taxes under the U.S.
federal income tax laws. Because the availability of a credit
or deduction depends on the particular circumstances of each
shareholder, shareholders are advised to consult their own tax
advisors.
TAXATION OF SHAREHOLDERS
Gain or loss on the sale of a security generally will be
long-term capital gain or loss if the Portfolio has held the
securities for more than one year. Gain or loss on the sale of
securities held for not more than one year will be short-term.
If one of the Portfolios acquires a debt security at a
substantial discount, a portion of any gain upon the sale or
redemption will be taxed as ordinary income, rather than capital
gain to the extent it reflects accrued market discount.
Alternatively, this discount may be accredited as ordinary
income on a daily basis rather than recognized at disposition.
Dividends of net investment income and distributions of net
realized short-term capital gains will be taxable to
shareholders as ordinary income for federal income tax purposes,
whether received in cash or reinvested in additional shares.
Dividends received by corporate shareholders will qualify for
the dividends-received deduction only to the extent that each of
the Equity Portfolios designates the amount distributed as a
dividend and the amount so designated does not exceed the
aggregate amount of dividends received by the Portfolio from
domestic corporations for the taxable year. The federal
dividends-received deduction for corporate shareholders may be
further reduced or disallowed if the shares with respect to
which dividends are received are treated as debt-financed or are
deemed to have been held for less than 46 days.
Foreign countries may impose withholding and other taxes on
dividends and interest paid to the Portfolios with respect to
investments in foreign securities. However, certain foreign
countries have entered into tax conventions with the U.S. to
reduce or eliminate such taxes.
<PAGE>
Distributions of long-term capital gains will be taxable to
shareholders as such, whether paid in cash or reinvested in
additional shares and regardless of the length of time that the
shareholder has held his or her interest in one of the
Portfolios. If a shareholder receives a distribution taxable as
long-term capital gain with respect to his or her investment in
a Portfolio and redeems or exchanges the shares before he or she
has held them for more than six months, any loss on the
redemption or exchange that is less than or equal to the amount
of the distribution will be treated as a long-term capital loss.
If a shareholder (a) incurs a sales charge or in acquiring or
redeeming shares of one of the Portfolios, (b) disposes of those
shares and acquires within 90 days after the original
acquisition or (c) acquires within 90 days of the redemption
those shares in a mutual fund for which the otherwise applicable
sales charge is reduced by reason of reinvestment right (i.e.,
an exchange privilege), the original sales charge increases the
shareholder's tax basis in the original shares only to the
extent the other applicable sales charge for the second
acquisition is not reduced. The portion of the original sales
charge that does not increase the shareholder's tax basis in the
original shares would be treated as incurred with respect to the
second acquisition and, as a general rule, would increase the
shareholder's tax basis in the newly acquired shares.
Furthermore, the same rule also applies to a disposition of the
newly acquired or redeemed shares made within 90 days of the
second acquisition. This provision prevents a shareholder from
immediately deducting the sales charge by shifting his or her
investment in a family of mutual funds.
Investors considering buying shares of one of the Portfolios
just prior to a record date for a taxable dividend or capital
gain distribution should be aware that, regardless of whether
the price of the Portfolio shares to be purchased reflects the
amount of the forthcoming dividend or distribution payment, any
such payment will be a taxable dividend or distribution payment.
This is of particular concern for investors in the Equity
Portfolios since these Portfolios may make distributions on an
annual basis.
OPTIONS TRANSACTIONS
The tax consequences of options transactions entered into by
the Portfolios will vary depending on the nature of the
underlying security and whether the "straddle" rules, discussed
separately below, apply to the transaction. When a Portfolio
writes a call or put option on a debt security, it will receive
a premium that will, subject to the "section 1256 contract" and
straddle rules discussed below, be treated as follows for tax
purposes. If the option expires unexercised, or if a Portfolio
entered into a closing purchase transaction, the Portfolio will
realize a gain (or loss if the cost of the closing purchase
transaction exceeds the amount of the premium) without regard to
any unrealized gain or loss on the underlying security. Any
such gain or loss will be short-term capital gain or loss,
except that any loss on a "qualified" covered call option not
treated as part of a straddle may be treated as long-term
capital loss. If a call option written by a Portfolio is
exercised, the Portfolio will recognize a capital gain or loss
from the sale of the underlying security, and will treat the
premium as additional sales proceeds. Whether the gain or loss
will be long-term or short-term will depend on the holding
period of the underlying security. If a put option written by a
Portfolio is exercised, the amount of the premium will reduce
the tax basis of the security the Portfolio then purchases.
<PAGE>
STRADDLES
The Code contains rules applicable to "straddles", that is,
"offsetting positions in actively traded personal property."
Such personal property includes offsetting puts of the same
class, section 1256 contracts or other investment contracts.
Where applicable, the straddle rules generally override the
other provisions of the Code. In general, investment positions
will be offsetting if there is a substantial diminution in the
risk of loss from holding one position by reason of holding one
or more other positions (although certain covered call options
would not be treated as part of a straddle). The Portfolios,
except for Lincoln Cashfund Portfolio, are authorized to enter
into covered call and covered put positions. Depending on what
other investments are held by a Portfolio, at the time it enters
into one of the above transactions, the Portfolio may create a
straddle for purposes of the Code.
WASH SALES
"Wash sale" rules will apply to prevent the recognition of loss
with respect to a position where an identical or substantially
identical position has been acquired thirty days prior to or
thirty days after the date of the loss.
The foregoing is only a summary of certain federal tax
considerations generally affecting the Portfolios and their
shareholders and is not intended as a substitute for careful tax
planning. Shareholders are urged to consult their tax advisors
with specific reference to their own tax situations, including
their state and local tax liabilities.
PURCHASE AND REDEMPTION OF SHARES
The Portfolios (other than the Lincoln Cashfund Portfolio)
issue the following classes of shares: Class A shares are sold
to investors choosing the initial sales charge alternative,
Class B shares are sold to investors choosing the deferred sales
charge alternative, Class C shares are sold to investors
choosing the annual distribution fee alternative and Class D
shares are sold to investors choosing the no sales charge
alternative and are only available to insurance companies
(including general and separate accounts), affiliates of
insurance companies and investment companies registered under
the Investment Company Act of 1940. The Lincoln Tax-Free Income
Portfolio does not presently intend to offer the sale of Class D
shares. The four classes of shares bear their own expenses
under the Plan of Distribution and have separate exchange
privileges. See "Distributor" and "Exchange Privileges."
Each Portfolio offers its shares to the public on a continuous
basis. Under the current distribution arrangements between the
Fund and the Distributor, the public offering price per Class A
share of a Portfolio is the net asset value per share at the
time of purchase plus a maximum sales charge of 5.5% on Equity
Portfolios and 4.5% on Fixed-Income Portfolios. The public
offering price per Class B share, Class C share and Class D
share is equal to the net asset value per share at the time of
purchase.
<PAGE>
The Lincoln Cashfund Portfolio offers two classes of shares:
Regular Shares and Class B Exchange Shares. The Regular shares
are offered and sold at the net asset value ($1.00) without a
sales charge and without any service or distribution fees. The
Class B Exchange Shares, which are issued only upon the exchange
of shares of Class B of any other Portfolio, are subject to the
applicable CDSC, if any, upon redemption and are charged service
and distribution fees of 1% on the net asset value of the shares.
The Fund has received exemptive relief from the Securities and
Exchange Commission relating to multiple classes of stock. In
addition, the Fund has made the filings required to sell
multiple classes of stock in the following states: Arizona,
Iowa, Maine, Maryland, Massachusetts, Michigan, Mississippi,
Nebraska, New Mexico, North Dakota, New Hampshire, Puerto Rico,
South Dakota, Tennessee, Texas, Vermont, Washington, West
Virginia and Wisconsin.
REDUCTION AND WAIVER OF INITIAL SALES CHARGE--CLASS A SHARES
Sales charges do not apply to shares of the Portfolios
purchased: (1) by registered representatives, immediate family
members and other employees of broker/dealers having agreements
with the Distributor; (2) by a director or officer of a fund
managed or advised by LNIMC or a director (including a retired
director), officer or employee of Lincoln National Corporation
or its subsidiaries or a director, officer or employee acting as
a custodian for a child or a person acting as trustee of a trust
for the sole benefit of a director, officer or employee or the
immediate family member of a director, officer or
employee; (3) in accounts as to which as to which a
broker-dealer charges an account management fee, provided the
broker-dealer has an agreement with the Distributor; (4) as part
of an employee benefit plan having more than 100 eligible
employees or a minimum of $1,000,000 invested in the Fund,
provided that certain other requirements, as explained in the
Statement of Additional Information, are met; (5) with certain
redemption proceeds from other mutual fund complexes on which
the investor paid a front-end sales charge only as part of
certain promotional programs established by the Fund and/or
Distributor; (6) by one or more members of a group of at least
1,000 persons engaged in a common business, profession, civic or
charitable endeavor or other activity and retirees and immediate
family members of such persons pursuant to a marketing program
between the Distributor and such group; (7) by directors,
officers, employees and immediate family members of current
sub-advisors to the Portfolios; or (8) by employees and
immediate family members of the current custodian and
shareholder services agent.
Immediate family members are defined as the spouse, parents,
siblings, natural or adopted children, mother-in-law,
father-in-law, brother-in-law and sister-in-law of a director,
officer or employee. The term "employee" is deemed to include
current and retired employees.
Exemptions must be qualified in advance by the distributor and
employee benefit plan investors must meet all requirements
specified in the Statement of Additional Information. Your
investment professional should call the distributor or
shareholder services for more information.
Additional information on waiver of the contingent deferred
sales charges on Class B shares can be found in the Prospectus.
<PAGE>
Combined Purchase and Cumulative Purchase Privilege. If an
investor or eligible group of related investors purchases Class
A shares of a Portfolio concurrently with Class A shares of
other Portfolios of the Fund, the purchases may be combined to
take advantage of the reduced sales charges applicable to larger
purchases. See the table of breakpoints under "Purchase of
Shares--Initial Sales Charge Alternative--Class A Shares" in the
Prospectus.
An eligible group of related Fund investors includes any
combination of the following:
(a) an individual;
(b) the individual's spouse, their children,
their parents, their mother-in-law, father-in-law,
brother-in-law and sister-in-law;
(c) the individual's Individual Retirement
Account (IRA);
(d) any company controlled by the individual
(a person, entity or group that holds 25% or more of the
outstanding voting securities of a corporation will be
deemed to control the corporation, and a partnership will
be deemed to be controlled by each of its general partners);
(e) a trust created by the individual, the
beneficiaries of which are the individual, his or her
spouse, parents or children;
(f) a Uniform Gifts to Minors Act/Uniform
Transfers to Minors Act account created by the individual
or the individual's spouse; and
(g) one or more employee benefit plans of a
company controlled by an individual.
In addition, an eligible group of related Fund investors may
include the following:
(h) any employer (or group of related
employers) and one or more qualified retirement plans of
such employer or employers (an employer controlling,
controlled by or under comment control with another
employer is deemed related to that employer).
The Combined Purchase and Cumulative Purchase Privilege does
not apply to individual participants described above under
"Retirement and Group Plans."
EXCHANGE PRIVILEGE
Except as noted below, shareholders of any Portfolio may
exchange all or part of their shares for shares of the same
class of the other Portfolios of the Fund or for shares of the
Lincoln Cashfund Portfolio on the basis of relative net asset
value per share at the time of exchange as follows:
<PAGE>
(i) Class A shares of any Portfolio purchased with a
sales charge may be exchanged for Class A shares of any of the other
Portfolios, and the sales charge differential, if any, will be applied.
Class A shares of any Portfolio may be exchanged without a sales charge
for shares of the Portfolios that are offered without a sales charge.
Class A shares of any Portfolio purchased without a sales charge may be
exchanged for shares sold with a sales charge, and the appropriate sales
charge differential will be applied.
(ii) Class A shares of any Portfolio acquired by a
previous exchange of shares purchased with a sales charge may be
exchanged for Class A shares of any of the other Portfolios and the sales
charge differential, if any, will be applied.
(iii) Class B shares of any Portfolio may be exchanged
without a sales charge. For purposes of calculating contingent deferred
sales charge rates and conversion periods, Class B shares of a Portfolio
exchanged for Class B shares of another Portfolio will be deemed to have been
held since the date the shares being exchanged were purchased. This includes
Class B shares of the Lincoln Cashfund Portfolio.
(iv) Class C shares of any Portfolio may be exchanged
without sales charge.
The exchange privilege enables shareholders to acquire shares
of the same class in a Portfolio with different investment
objectives when they believe a shift between Portfolios is an
appropriate investment decision. This privilege is available to
shareholders residing in any state in which the Portfolio shares
being acquired may legally be sold. Prior to any exchange, the
investor should obtain and review a copy of the current
Prospectus for information on the Portfolio into which an
exchange is being considered.
Upon receipt of proper instructions and all necessary
supporting documents, shares submitted for exchange are redeemed
at the then-current net asset value and, subject to any
applicable contingent deferred sales charge, the proceeds are
immediately invested, at a price as described above, in shares
of the Portfolio being acquired. The Fund reserves the right to
reject any exchange request. The exchange privilege may be
modified or terminated at any time after notice to shareholders.
EXECUTION OF PORTFOLIO TRANSACTIONS
The Investment Advisor and the Sub-Advisors (collectively
referred to as the "Advisor" in this section) are responsible
for decisions to buy and sell securities and futures and options
thereon for each Portfolio, the selection of brokers, dealers
and futures commission merchants to effect the transactions and
the negotiation of brokerage commissions. Purchases and sales
of securities on a securities exchange are effected through
brokers who charge a commission for their services.
Broker-dealers may also receive commissions in connection with
options and futures transactions including the purchase and sale
of underlying securities upon the exercise of options. Orders
may be directed to any broker or futures commission merchant.
<PAGE>
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.
In placing orders for portfolio securities for each Portfolio,
the Advisor is required to give primary consideration to
obtaining the most favorable price and efficient execution. The
Advisor seeks to effect each transaction at a price and
commission, if any, that provides the most favorable total costs
or proceeds reasonably attainable in the circumstances. Within
the framework of this policy, the Advisor will consider the
research and investment services provided by brokers, dealers or
futures commission merchants who effect or are parties to
portfolio transactions of the Fund (including each of the
Portfolios), the Advisor or the Advisor's other clients. Such
research and investment services are those which brokerage
houses customarily provide to institutional investors and
include statistical and economic data and research reports on
particular companies and industries. Such services are used by
the Advisor in connection with all of its investment activities,
and some of such services obtained in connection with the
execution of transactions for the Fund may be used in managing
other investment accounts. Conversely, brokers, dealers or
futures commission merchants furnishing such services may be
selected for the execution of transactions of such other
accounts, whose aggregate assets are far larger than the Fund
and the services furnished by such brokers, dealers or futures
commission merchants may be used by the Advisor in providing
investment management for the Fund. Commission rates are
established pursuant to negotiations with the broker based on
the quality and quantity of execution services provided by the
broker, dealer or futures commission merchant in the light of
generally prevailing rates. The Advisor's policy is to pay
higher commissions to brokers for particular transactions than
might be charged if a different broker had been selected, on
occasions when, in the Advisor's opinion, this policy furthers
the objective of obtaining best price and execution. The
Advisor is authorized to pay higher commissions on brokerage
transactions for the Fund to brokers in order to secure the
research and investment services described above, subject to
review by the Fund's Board of Directors from time to time as to
the extent and continuation of this practice. The allocation of
orders among brokers and the commission rates paid are reviewed
periodically.
Subject to the above considerations, an affiliate of the
Advisor may act as a securities broker or futures commission
merchant for the Fund. In order for an affiliate of the Advisor
to effect any portfolio transactions for the Fund, the
commissions, fees or other remuneration received by the
affiliate must be reasonable and fair compared to the
commissions, fees or other remuneration paid to other brokers or
futures commission merchants in connection with comparable
transactions involving similar securities or futures being
purchased or sold on an exchange or board of trade during a
comparable period of time. This standard would allow an
affiliate of the Advisor to receive no more than the
remuneration which would be expected to be received by an
unaffiliated broker or futures commission merchant in a
commensurate arm's-length transaction. Furthermore, the
Trustees of the Fund, including a majority of the Trustees who
are not "interested" persons, have adopted procedures which are
reasonably designed to provide that any commissions, fees or
other remuneration paid to an affiliate of the Advisor are
consistent with the foregoing standard. In accordance with
Section 11(a) under the Securities Exchange Act of 1934, an
affiliate of the Advisor may not retain compensation for
effecting transactions on a national securities exchange for the
Fund unless the Fund has expressly authorized the retention of
such compensation in a written contract executed by the Fund and
such
<PAGE>
affiliate. Section 11(a) provides that an affiliate of the
Advisor must furnish to the Fund at least annually a statement
setting forth the total amount of all compensation retained by
the affiliate from transactions effected for the Fund during the
applicable period. Brokerage and futures transactions with an
affiliate of the Advisor are also subject to such fiduciary
standards as may be imposed by applicable law. No such trades
have been made through affiliates to date.
CALCULATION OF PERFORMANCE DATA
With respect to the Lincoln Cashfund Portfolio, the yield will
be computed by determining the percentage net change, excluding
capital changes, in the value of one share of the particular
class of the Portfolio over the base period, and multiplying the
net change by 365/7 (or approximately 52 weeks). The effective
yield of each class of the Portfolio will represent a
compounding of the yield by adding 1 to the number representing
the percentage change in value of the investment during the base
period, raising the same to a power equal to 365/7, and
subtracting 1 from the result.
Performance information for all of the other Portfolios showing
the Portfolio's total return and/or 30-day yield with respect to
a particular class may be presented from time to time in
advertising and sales literature. A 30-day yield is calculated
by dividing the net investment income per share earned during
the 30-day base period by the maximum offering price per share
earned during the 30-day base period by the maximum offering
price per share on the last day of the period, according to the
following formula.
30-day yield = 2[(a-b/cd + 1)6-1]
"a" represents dividends and interest earned during the 30-day
base period; "b" represents expenses accrued to a particular
class for the 30-day base period (net of reimbursements); "c"
represents the average daily number of shares of a particular
class outstanding during the 30-day base period that were
entitled to receive dividends; and "d" represents the maximum
offering price per share of a particular class on the last day
of the 30-day base period.
From time to time the tax equivalent 30-day yield of a
particular class of the Lincoln Tax-Free Income Portfolio may be
presented in advertising and sales literature. The tax
equivalent 30-day yield will be computed by dividing that
portion of the Portfolio's yield (relating to a particular
class) which is tax-exempt by one minus a stated income tax rate
and adding the product of the portion, if any, of the yield of
the Portfolio (relating to the particular class) that is not
tax-exempt.
The performance of the Portfolios will fluctuate from time to
time and is not necessarily representative of future results.
Accordingly, a Portfolio's performance may not provide a good
comparison for other investments that pay a fixed rate of return
for a stated period of time. Performance is a function of a
Portfolio's quality, composition and maturity, as well as the
expenses allocated to the Fund.
The Lincoln Cashfund Portfolio may quote actual total return
performance in advertising and other types of literature
compared to indices or averages of alternative financial
products available to prospective investors. The performance
comparisons may include the average return of various bank
instruments, some of which may carry certain return guarantees
offered by leading banks and thrifts, as monitored by the Bank
Rate Monitor, and those of corporate and government security
price indices of
<PAGE>
various durations prepared by Shearson Lehman Brothers and
Salomon Brothers, Inc. These indices are not managed for any
investment goals.
The Lincoln Cashfund Portfolio may also use comparative
performance information computed by and available from certain
industry and general market research and publications, such as
Lipper Analytical Services, Inc.
Each of the Portfolios, except the Lincoln Cashfund Portfolio,
will prepare total return information. These returns are
computed by assuming a hypothetical initial payment of $1,000.
It is then assumed that all of the dividends and distributions
paid by each Portfolio over the relevant time periods were
reinvested. It is then assumed that at the end of the periods,
the entire amount was redeemed and any applicable contingent
deferred sales charge paid upon redemption was deducted from the
redeemed amount. The average annual total return is then
determined by calculating the annual rate required for the
initial payment to grow to the amount which would have been
received upon redemption. Total return does not take into
account any federal or state income taxes that may be payable
upon redemption.
Total return is computed according to the following formula:
P(1+T)n=ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1, 5 or 10 year periods at the end
of the 1, 5 or 10 year periods (or fractional portion thereof).
Statistical and performance information compiled and maintained
by CDA Technologies, Inc. and Interactive Data Corporation may
also be used. CDA is a performance evaluation service that
maintains a statistical data base of performance, as reported by
a diverse universe of independently-managed mutual funds.
Interactive Data Corporation is a statistical access service
that maintains a data base of various industry indicators, such
as historical and current price/earning information and
individual stock and fixed income price and return information.
Current interest rate and yield information on government debt
obligations of various durations, as reported weekly by the
Federal Reserve (Bulletin H.15), may also be used. Also current
rate information on municipal debt obligations of various
durations, as reported daily by the Bond Buyer, may also be
used. The Bond Buyer is published daily and is an
industry-accepted source for current municipal bond market
information.
Comparative information on the Consumer Price Index may also be
included. This Index, as prepared by the U.S. Bureau of Labor
Statistics, is the most commonly used measure of inflation. It
indicates the cost fluctuations of a representative group of
consumer goods. It does not represent a return on investment.
From time to time, the Portfolios may quote actual total return
performance in advertising and other types of literature
compared to results reported by the Dow Jones Industrial Average.
<PAGE>
The Dow Jones Industrial Average is an industry-accepted
unmanaged index of generally conservative securities used for
measuring general market performance. The performance reported
will reflect the reinvestment of all distributions on a
quarterly basis and market price fluctuations. The index does
not take into account any brokerage commissions or other fees.
Comparative information on the Consumer Price Index may also be
included.
The MSCI EAFE index is the industry standard performance
benchmark for international equity investment. The index is
market weighted and represents approximately 60% of the
aggregate market value of the stock exchanges that are included.
The index consists of 1079 companies with a market
capitalization of $6,843 billion. The following countries are
constituents: Austria, Belgium, Denmark, Finland, France,
Germany, Ireland, Italy, Netherlands, Norway, Spain, Sweden,
Switzerland, United Kingdom, Australia, Hong Kong, Japan,
Malaysia, New Zealand and Singapore.
The Portfolios may also promote the yield and/or total return
performance and use comparative performance information computed
by and available from certain industry and general market
research and publications, such as Lipper Analytical Services,
Inc.
<PAGE>
NET ASSET VALUE
The net asset value per share of a Portfolio is the net worth
of such Portfolio (assets including securities at value minus
liabilities) divided by the number of shares of such Portfolio
outstanding. The Fund will compute the net asset value of each
such Portfolio once daily at the times indicated in the
Prospectus, on days the New York Stock Exchange is open for
trading, except on days on which no orders to purchase, sell or
redeem shares of the Fund have been received or on days on which
changes in the value of a Portfolio's portfolio securities do
not effect net asset value. The New York Stock Exchange is
closed on the following holidays: New Year's Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. The value of equity
securities, other than options listed on national securities
exchanges, is based on the last sale on national securities
exchanges as of the close of the New York Stock Exchange (which
is currently 4:00 P.M., or later for certain trading, New York
time), or, in the absence of recorded sales, at the average of
readily available closing bid and asked prices on such exchanges
or over-the-counter. If no quotations are available, securities
will be valued at fair value as determined in good faith by the
Board of Directors. Options on stocks and stock indices traded
on national securities exchanges are valued as of the close of
options trading on such exchanges (which is currently 4:10 P.M.,
New York time), and stock index futures and options thereon,
which are traded on commodities exchanges or boards of trade,
are valued at their last sale price as of the close of such
commodities exchanges (which is currently 4:15 P.M., New York
time) or, if there was no sale on the applicable securities
exchange, commodities exchange or board of trade on such day, at
the average of quoted bid and asked prices as of the close of
such exchange or board of trade. Short-term investments which
mature in 60 days or less are valued at amortized cost on the
60th day prior to maturity, if their original term to maturity
when acquired by a Portfolio was more than 60 days, unless this
is determined not to represent fair value by the Board of
Directors. Securities or other assets for which reliable market
quotations are not readily available are valued by the
Investment Advisor in good faith at fair value in accordance
with procedures adopted by the Fund's Board of Directors on the
basis of the following factors: cost of the security,
transactions in comparable securities, relationships among
various securities and such other factors as may be determined
by the Investment Advisor to materially affect the value of the
security.
Bonds for which market quotations are readily available are
valued at their bid quotations. Securities for which market
quotations are not readily available are valued at fair value in
accordance with procedures adopted by the Board of Directors.
Under these procedures the Portfolio values municipal securities
on the basis of valuations provided by a pricing service which
uses information with respect to transactions in bonds,
quotations from bond dealers, market transactions in comparable
securities and various relationships between securities in
determining value. The Directors believe that reliable market
quotations are generally not readily available for purposes of
valuing tax-exempt securities. As a result, depending on the
particular tax-exempt securities owned by a Portfolio, it is
likely that most of the valuations for such securities will be
based upon fair value determined under the foregoing procedures.
Short-term investments which mature in less than 60 days are
valued at amortized cost on the 60th day prior to maturity, if
their original term to maturity when acquired by a Portfolio was
more than 60 days, unless this is determined not to represent
fair value by the Directors.
<PAGE>
The Lincoln Cashfund Portfolio uses the amortized cost method
to determine the value of its portfolio securities in accordance
with regulations of the SEC. The amortized cost method involves
valuing a security at its cost and amortizing any discount or
premium over the period until maturity. The method does not
take into account unrealized capital gains and losses which may
result from the effect of fluctuating interest rates on the
market value of the security.
With respect to the Lincoln Cashfund Portfolio, the Directors
have determined to maintain a dollar-weighted average portfolio
maturity of 90 days or less, to purchase instruments having
remaining maturities of thirteen months or less and to invest
only in securities determined by the Investment Advisor under
the supervision of the Board of Directors to present minimal
credit risks and to be of "eligible quality" in accordance with
regulations of the SEC. The Board of Directors has adopted
procedures designed to stabilize, to the extent reasonably
possible, the Lincoln Cashfund Portfolio's price per share as
computed for the purpose of sales and redemptions at $1.00.
Such procedures will include review of the Lincoln Cashfund
Portfolio's holdings by the Board of Directors, at such
intervals as they may deem appropriate, to determine whether the
Lincoln Cashfund Portfolio's net asset value calculated by using
available market quotations deviates from $1.00 per share based
on amortized cost. The extent of any deviation will be examined
by the Board of Directors. If such deviation exceeds 1/2 of 1%,
the Board of Directors will promptly consider what action, if
any, will be initiated. In the event the Board of Directors
determines that a deviation exists which may result in material
dilution or other unfair results to prospective investors or
existing shareholders, the Directors will take such corrective
action as they consider necessary and appropriate, including the
sale of portfolio instruments prior to maturity to realize
capital gains or losses or to shorten average portfolio
maturity, the withholding of dividends, redemptions of shares in
kind, or the use of available market quotations to establish a
net asset value per share.
Because the New York Stock Exchange or the national securities
exchanges on which stock options are traded have adopted
different trading hours on either a permanent or temporary
basis, the Board of Directors of the Fund may reconsider the
time at which net asset value is computed. In addition, a
Portfolio may compute its net asset value as of any time
permitted pursuant to any exemption, order or statement of the
SEC or its staff.
Although the legal rights of Class A, Class B, Class C and
Class D shares are substantially identical, the different
expenses borne by each class will result in different net asset
values and dividends. The net asset value of Class B and Class
C shares will generally be lower than Class A shares and the net
asset value of Class A, Class B and Class C shares will
generally be lower than Class D shares as a result of the
respective service and distribution fees charged. It is
expected, however, that the net asset value per share of each of
the classes will tend to converge immediately after the
recording of dividends since the dividends will differ by
approximately the amount of the distribution expense accrual
differential between the classes.
<PAGE>
SHAREHOLDER SERVICES
Upon the initial purchase of shares of any Portfolio, a
Shareholder Investment Account is established for each investor
under which a record of the shares held is maintained by
Shareholder Services. If a share certificate is desired, it
must be requested in writing for each transaction. Certificates
are issued only for full shares and may be redeposited in the
Account at any time. There is no charge to the investor for
issuance of a certificate. Whenever a transaction takes place
in the Shareholder Investment Account, the shareholder will be
mailed a statement showing the transaction and the status of the
Account.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS
Unless indicated otherwise on the account application,
investors' dividends and capital gains distributions are
automatically reinvested in full and fractional shares of the
applicable Portfolio at net asset value without a sales charge.
Changes to initial dividend elections must be directed to
Shareholder Services in writing or by telephone not less than 5
full business days prior to the record date. In the case of
recently purchased shares for which registration instructions
have not been received, cash payment will be made directly to
the dealer. Any shareholder who received a cash payment
representing a dividend or distribution may reinvest such
dividend or distribution at net asset value by returning the
check or the proceeds to Shareholder Services within 30 days
after the payment date. The investment will be made at the net
asset value per share next determined after receipt of the check
or proceeds by Shareholder Services.
TAX-DEFERRED RETIREMENT PLANS
Various qualified retirement plans, including a 401(k) plan,
self-directed individual retirement accounts and "tax-deferred
accounts" under Section 403(b)(7) of the Internal Revenue Code
are available through the Distributor. These plans are for use
by both self-employed individuals and corporate employers.
These plans permit either self-direction of accounts by
participants, or a pooled account arrangement. Information
regarding the establishment of these plans, and the
administration, custodial fees and other details are available
from LNC Equity Sales or Shareholder Services.
AUTOMATIC INVESTMENT PLAN
Under the Automatic Investment Plan, an investor may arrange to
have a fixed amount automatically invested in Class A, Class B
or Class C shares of a Portfolio monthly, quarterly or
semi-annually by authorizing his or her bank account to be
debited to invest specified dollar amounts in shares of the
Portfolio. The investor's bank must be a member of the
Automatic Clearing House System. Further information about this
plan and an application form can be obtained from Shareholder
Services.
<PAGE>
SYSTEMATIC WITHDRAWAL PLAN
A withdrawal plan is available for shareholders having Class A,
Class B or Class C shares of any Portfolio who maintain a
minimum balance of $10,000. The plan provides for monthly or
quarterly checks in any amount, but not less than $50 (which
amount is not necessarily recommended). To the extent such
withdrawals exceed the current net assets value of reinvested
dividends, they may be subject to the contingent deferred sales
charge. See "Redemption of Shares -- Contingent Deferred Sales
Charge -- Class B Shares" in the Prospectus.
Dividends and distributions on shares held under this plan are
invested in additional full and fractional shares at net asset
value. See "Shareholder Investment Account -- Automatic
Reinvestment of Dividends and Distributions." Shareholder
Services acts as agent for the shareholder in redeeming
sufficient full and fractional shares to provide the amount of
the periodic withdrawal payment. The plan may be terminated at
any time, and the Distributor reserves the right to initiate a
fee per withdrawal, upon 30 days' written notice to the
shareholder.
Withdrawal payments should not be considered as dividends,
yield or income. If periodic withdrawals continuously exceed
reinvested dividends and distributions, the shareholder's
original investment will be correspondingly reduced and
ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of
shares, and any gain or loss realized must be recognized for
federal income tax purposes. In addition, withdrawals made
concurrently with purchases of additional shares are inadvisable
because of the sales charge applicable to (i) the purchase of
Class A shares and (ii) the withdrawal of Class B shares. Each
shareholder should consult his or her own tax advisor with
regard to the tax consequences of the plan.
GENERAL INFORMATION
The Fund was incorporated under the laws of Maryland on August
12, 1993. The Fund and all Portfolios therein shall continue
perpetually subject to the provisions in the Articles of
Incorporation concerning termination by action of the
shareholders or by the Directors by written notice to the
shareholders.
The authorized capital of the Fund consists of 810,000,000
shares of Common Stock, $.01 par value, issued in separate
series. Each Portfolio, for federal income tax purposes, will
constitute a separate entity which will be governed by the
provisions of the Articles of Incorporation. All shares of any
Portfolio issued and outstanding will be fully paid and
non-assessable by the Fund. The assets of the Fund received for
the issue or sale of the shares of each Portfolio and all
income, earnings, profits and proceeds thereof, subject only to
the rights of creditors of such Portfolio, are specially
allocated to such Portfolio and constitute the underlying assets
of such Portfolio. The underlying assets of each Portfolio are
segregated on the books of account, and are to be charged with
the liabilities in respect to such Portfolio and with a share of
the general liabilities incurred by each Portfolio of the Fund.
General liabilities of the Fund include, without limitation,
director's fees, professional expenses and printing expenses.
Under no circumstances would the assets of a Portfolio be used
to meet liabilities which are not otherwise properly chargeable
to it. Expenses with respect to any two or more Portfolios are
to be allocated in proportion to the net asset value of the
respective Portfolio except where allocations of direct expenses
can otherwise be fairly made. The officers of the Fund, subject
to
<PAGE>
the general supervision of the Board of Directors, have the
power to determine which liabilities are allocable to a given
Portfolio or which are general or allocable to two or more
Portfolios. Upon redemption of shares of a Portfolio, the
shareholder will receive proceeds solely of the assets of such
Portfolio. In the event of the dissolution or liquidation of
the Fund, the holders of the shares of any Portfolio are
entitled to receive as a class the underlying assets of such
Portfolio available for distribution to shareholders.
Shares of the Fund entitle their holders to one vote per share.
However, on any matter submitted to a vote of the shareholders,
all shares then entitled to vote will be voted by individual
Portfolios, unless otherwise required by the Investment Company
Act (in which case all shares will be voted in the aggregate).
For example, a change in investment policy for a Portfolio would
be voted upon only by shareholders of the Portfolio involved.
Additionally, approval of the investment advisory agreement is a
matter to be determined separately by each Portfolio. Approval
by the shareholders of one Portfolio is effective as to that
Portfolio whether or not enough votes are received from the
shareholders of the other Portfolios to approve the proposals as
to those Portfolios.
Rule 18f-2 under the Investment Company Act provides that any
matter required to be submitted to the holders of the
outstanding voting securities of an investment company such as
the Fund shall not be deemed to have been effectively acted upon
unless approved by the holders of a majority of the outstanding
shares of each Portfolio affected by the matter. For purposes
of determining whether the approval of a majority of the
outstanding shares of a Portfolio will be required in
connection with a matter, a Portfolio will be deemed to be
affected by a matter unless it is clear that the interests of
each Portfolio in the matter are identical, or that the matter
does not affect any interest of the Fund. Under Rule 18f-2, the
approval of an investment advisory agreement or any change in
investment policy would be effectively acted upon with respect
to a Portfolio and/or class only if approved by a majority of
the outstanding shares of such Portfolio and/or class. However,
Rule 18f-2 also provides that the ratification of independent
public accountants, the approval of principal underwriting
contracts, and the election of directors may be effectively
acted upon by shareholders of the Fund voting without regard to
the separate Portfolios and/or class.
Pursuant to the Articles of Incorporation, the Directors may
authorized the creation of additional series of shares (the
proceeds of which would be invested in separate, independently
managed portfolios with distinct investment objectives and
policies and share purchase, redemption and net asset valuation
procedures) and additional classes of shares within any
Portfolio (which would be used to distinguish among the rights
of different categories of shareholders as might be required by
future regulations or other unforeseen circumstances) with such
preferences, privileges, limitations and voting and dividend
rights as the Directors may determine. All consideration
received by the Fund for shares of any additional series or
class, and all assets in which such consideration is invested,
would belong to that series or class (subject only to the rights
of creditors of such series or class) and would be subject to
the liabilities related thereto. Pursuant to the Investment
Company Act, shareholders of any additional series or class of
shares would normally have to approve the adoption of any
advisory contract relating to such series or class and of any
changes in the investment policies related thereto.
The Fund does not intend to hold shareholders' meetings unless
otherwise required by law. The Fund will not be required to
hold meetings of shareholders unless the election of directors
is required to be acted on by shareholders under the Investment
Company Act. Shareholders have certain rights, including the
right to call a meeting upon a vote of 10% of the Fund's
outstanding shares for the purpose of voting on the removal of
one or more directors or to transact any other business.
<PAGE>
TRANSFER AND DIVIDEND DISBURSING AGENT
Fundamental Shareholder Services, Inc. ("Shareholder Services")
serves as the Transfer and Dividend Disbursing Agent of the
Fund. Its mailing address is 90 Washington Street, New York,
New York 10006. Shareholder Services provides customary
transfer agency services to the Fund including the handling of
shareholder communications, the processing of shareholders
transactions, the maintenance of shareholder account records,
payment of dividends and distributions and related functions.
INDEPENDENT PUBLIC ACCOUNTANTS
Coopers & Lybrand L.L.P. serve as the Fund's independent
accountants and in that capacity will audit the Fund's annual
financial statements.
REGISTRATION STATEMENT
This Statement of Additional Information and the prospectus do
not contain all of the information set forth in the Registration
Statement the Fund has filed with the SEC. The complete
Registration Statement may be obtained from the SEC upon payment
of the fee prescribed by the rules and regulations of the SEC.
FINANCIAL STATEMENTS AND REPORTS
Shareholders will receive unaudited semi-annual reports and
annual reports audited by independent public accountants.
INVESTMENT ADVISOR
Lincoln National Investment Management Company ("LNIMC")
INVESTMENT SUB-ADVISORS
Beutel, Goodman Capital Management (Lincoln Growth and Income
Portfolio), Provident Investment Counsel (Lincoln U.S. Growth
Portfolio), Lynch & Mayer, Inc. (Lincoln Enterprise Portfolio),
Walter Scott & Partners Limited (Lincoln World Growth
Portfolio), John Govett & Company Limited (Lincoln New Pacific
Portfolio)
DISTRIBUTOR
LNC Equity Sales Corporation ("LNC Equity Sales")
ADMINISTRATOR AND CUSTODIAN
Investors Bank & Trust Company ("Investors Bank")
<PAGE>
Audited Financial Statement for the period ending October 31, 1994
<PAGE>
DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE
BOND RATINGs
Aaa: Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt edge." 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 Aaa 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 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 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 sometime 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.
C: Bonds which are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
<PAGE>
SHORT-TERM DEBT RATINGS
Moody's short term debt ratings are opinions of the ability of
issuers to repay punctually senior obligations which have an
original maturity not exceeding one year.
P-1: Issuers rated "Prime-1" or "P-1" (or supporting
institutions) have superior ability for repayment of senior
short term debt obligations.
P-2: Issuers rated "Prime-2" or "P-2" (or supporting
institutions) have a strong ability for repayment of senior
short term debt obligations.
P-3: Issuers rated "Prime-3" or "P-3" (or supporting
institutions) have an acceptable ability for repayment of senior
short term debt obligations.
Municipal Note Ratings
Issuers or the features associated with Moody's MIG or VMIG
ratings are identified by date of issue, date of maturity or
maturities or rating expiration date and description to
distinguish each rating from other ratings. Each rating
designation is unique with no implication as to any other
similar issue of the same obligor. MIG ratings terminate at the
retirement of the obligation while VMIG rating expiration will
be a function of each issue's specific structural or credit
features.
MIG 1/VMIG 1: This designation denotes best quality. There is
present strong protection by established cash flows, superior
liquidity support, or demonstrated broad-based access to the
market for refinancing.
MIG 2/VMIG 2: This designation denotes high quality. Margins
of protection are ample although not so large as in the
preceding group.
MIG 3/VMIG 3: This designation denotes favorable quality. All
security elements are accounted for but there is lacking the
undeniable strength of the preceding grades. Liquidity and
cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
MIG 4/VMIG 4: This designation denotes adequate quality.
Protection commonly regarded as required of an investment
security is present and although not distinctly or predominantly
speculative, there is specific risk.
<PAGE>
STANDARD & POOR'S CORPORATION
BOND RATINGS
AAA: Debt rated AAA has the highest rating assigned by
Standard & Poor's to a debt obligation. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest
and repay principal and differs from the highest rated issues
only in small degree.
A: Debt rated A has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity
to pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt
in this category than in higher rated categories.
BB, B, CCC and CC: Debt rated BB, B, CCC or CC is regarded, on
balance, as predominantly speculative with respect to capacity
to pay interest and repay principal in accordance with the terms
of the obligation. BB indicates the lowest degree of
speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
C: This rating is reserved for income bonds on which no
interest is being paid.
D: Debt rated D is in default, and payment of interest and/or
repayment of principal is in arrears.
COMMERCIAL PAPER RATINGS
Standard & Poor's commercial paper ratings are current
assessments of the likelihood of timely payment of debt having
an original maturity of no more than 365 days.
A-1: The A-1 designation indicates that the degree of safety
regarding timely payment is either overwhelming or very strong.
A plus (+) designation is applied to those issues rated A-1
which possess an overwhelming degree of safety.
A-2: Capacity for timely payment on issues with the
designation A-2 is strong. However, the relative degree of
safety is not as high as for issues designated A-1.
A-3: Issues carrying this designation have a satisfactory
capacity for timely payment. They are, however, somewhat more
vulnerable to the adverse effects of changes in circumstances
than obligations carrying the higher designations.
<PAGE>
MUNICIPAL NOTE RATINGS
A Standard & Poor's municipal note rating reflects the
liquidity concerns and market access risks unique to notes.
Notes due in 3 years or less will likely receive a note rating.
Notes maturing beyond 3 years will most likely receive a
long-term debt rating. The following criteria will be used in
making that assessment:
Amortization schedule (the larger the final maturity
relative to other maturities, the more likely it will be treated as a
note).
Source of payment (the more dependent the issue is on the
market for its refinancing, the more likely it will be treated
as a note).
SP-1: Very strong or strong capacity to pay principal and
interest. Those issues determined to possess overwhelming
safety characteristics will be given a plus (+) designation.
SP-2: Satisfactory capacity to pay principal and interest.
SP-3: Speculative capacity to pay principal and interest.
