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As filed with the Securities and Exchange Commission on April 28, 1995
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Registration No. 33-70272
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 2 X
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and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 4 X
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(Check appropriate box or boxes)
LINCOLN NATIONAL CAPITAL APPRECIATION FUND, INC.
(Exact name of registrant as specified in charter)
1300 South Clinton Street
Fort Wayne, Indiana 46802
ess of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code
(219)455-2000
Jack D. Hunter, Esq.
200 E. Berry Street
Fort Wayne, Indiana 46802
(Name and Address of Agent for Service)
Fiscal year-end: December 31
Registrant has elected, pursuant to Rule 24f-2 under the Investment Company
Act of 1940, to register an indefinite number of shares by this Registration
Statement. In accordance with Rule 24f-2 a registration fee in the amount of
$500.00 has been paid.
It is proposed that this filing will become effective:
___ immediately upon filing pursuant to paragraph (b)
___ on 4/29/95 pursuant to paragraph (b)
___ 60 days after filing pursuant to paragraph (a) (1)
___ on _________ pursuant to paragraph (a) (1)
___ 75 days after filing pursuant to paragraph (a) (2)
___ on ____ pursuant to paragraph (a)(2) of Rule 485.
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LINCOLN NATIONAL CAPITAL APPRECIATION FUND, INC.
CONTENTS OF
POST-EFFECTIVE AMENDMENT NO. 2
AND AMENDMENT NO. 4
on Form N-1A
This Registration Statement consists of the following papers and documents:
Facing Sheet
Contents Sheet
Cross-reference Sheet
Part A-
Prospectus
Part B-
Statement of Additional Information
Part C-
Items 24 through 32.
Signatures.
Exhibit Index.
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LINCOLN NATIONAL CAPITAL APPRECIATION FUND, INC.
CROSS REFERENCE SHEET
[as required by Rule 481(a)]
<TABLE>
<CAPTION>
Item Number - Part A Location in Prospectus
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<S> <C> <C>
1. Cover Page Preface
2. Synopsis Not Applicable
3. Condensed Financial
Information Preface
4. General Description of Description of the Fund; Investment
Registrant Policies and Techniques; Investment
Restrictions; Strategic Portfolio
Transactions (Prospectus and Appendix);
Special Risk Factors
5. Management of the Fund Description of the Fund; Investment
Policies and Techniques; Management
of the funds (Appendix)
5A. Management's Discussion Management Discussion of Fund
of Fund Performance Performance (Appendix)
6. Capital Stock and Other Description of Shares; Sales and
Securities Redemption of Shares; General
Securities Information;
Distribution and Federal Income Tax
Considerations (All in Appendix)
7. Purchase of Securities Net Asset Value; Purchase of
Being Offered Securities Being Offered; Sale and
Redemption of Shares (All in Appendix)
8. Redemption or Repurchase Sale and Redemption of Shares (Appendix)
9. Legal Proceedings Not Applicable
<CAPTION>
Location in Statement of
Item Number - Part B Additional Information
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<S> <C> <C>
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information Not Applicable
and History
13. Investment Objectives Investment Restrictions; Investment
and Policies Policies and Techniques (continued)
(Appendix); Strategic Portfolio
Transactions (Appendix)
</TABLE>
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LNCA - CROSS REFERENCE SHEET (Continued)
<TABLE>
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<S> <C> <C>
14. Management of the Directors and Officers (Appendix)
Fund
15. Control Persons and See "Management of the Funds" and
Principal "Description of Shares" in the
Prospectus Appendix
16. Investment Advisory Investment Advisor and Sub-Advisor;
and Other Services Custodian; Independent Auditors (All in
Appendix)
17. Brokerage Allocation Portfolio Transactions and Brokerage
18. Capital Stock and Not Applicable
Other Securities
19. Purchase, Redemption Purchase of Securities Being Offered;
and Pricing of Sale and Redemption of Shares; and
Securities Being Offered Net Asset Value; all in the Prospectus
Appendix
20. Tax Status Taxes
21. Underwriters Not Applicable
22. Calculation of Not Applicable (See the SAI for the
Performance Data Variable Annuity Account on Form N-4.)
23. Financial Statements Financial Statements
</TABLE>
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PREFACE TO THE MULTI FUND(R) PROSPECTUSES
THESE PAGES ARE PART OF THE PROSPECTUS FOR EACH OF THE FOLLOWING FUNDS:
Lincoln National Aggressive Growth Fund, Inc.
Lincoln National Bond Fund, Inc.
Lincoln National Capital Appreciation Fund, Inc.
Lincoln National Equity-Income Fund, Inc.
Lincoln National Global Asset Allocation Fund, Inc.
Lincoln National Growth and Income Fund, Inc.
Lincoln National International Fund, Inc.
Lincoln National Managed Fund, Inc.
Lincoln National Money Market Fund, Inc.
Lincoln National Social Awareness Fund, Inc.
Lincoln National Special Opportunities Fund, Inc.
Shares of all the Funds are sold to Lincoln National Life Insurance Company
(Lincoln Life) for allocation to our Variable Annuity Account C (the Variable
Annuity Account [VAA]) to fund Variable Annuity Contracts and for allocation to
our Variable Life Account K to fund Variable Life Insurance Contracts. Shares of
the Bond, Growth and Income, Managed, Money Market, and Special Opportunities
Funds are sold to Lincoln Life for allocation to our Variable Life Account D to
fund Variable Life Insurance Contracts. Shares of the Growth and Income Fund and
Special Opportunities Fund are sold to Lincoln Life for allocation to our
Variable Life Account G to fund Variable Life Insurance Contracts. Each of these
Variable Life and Annuity Accounts may be referred to as a Variable Account. For
each Fund listed above, see Description of the Fund in its Prospectus, for a
statement of that Fund's investment objective. We refer to each of these funds
individually as a Fund; collectively, the Funds.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (SEC) NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THESE PROSPECTUSES. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
These Prospectuses set forth concisely the information about each Fund that you
ought to know before investing. Please read and keep this Prospectus booklet for
future reference.
A separate Statement of Additional Information (SAI) for each Fund has been
filed with the SEC. By this reference, each SAI, dated April 29, 1995, is
incorporated into the Prospectus of the Fund with which it is registered. A free
copy will be provided upon request. Either write Kim Oakman, Lincoln National
Life Insurance Co., P.O. Box 2340, Fort Wayne, Indiana 46801 or call
1-800-348-1212, Ext. 4912.
The Financial Highlights of each Fund contain per-share data calculated on the
basis of a share outstanding throughout the period, together with financial
ratios and other supplemental data. The highlights are incorporated by reference
to the Fund's 1994 Annual Report (see pages 45-47 of the Report). A copy of the
Annual report will be provided on request and without charge. Please write or
call Eric Jones, Lincoln National Life Insurance Company, P.O. Box 2340, Fort
Wayne, Indiana 46801; telephone: 1-800-348-1212, Ext. 6536.
NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THESE
PROSPECTUSES, IN CONNECTION WITH THE OFFERS CONTAINED IN THEM. IF ANY ARE GIVEN
OR MADE, THE INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE FUND(S) IN QUESTION. THESE PROSPECTUSES DO NOT CONSTITUTE
OFFERS BY THE FUNDS TO SELL, OR SOLICITATIONS OF ANY OFFERS TO BUY, ANY OF THE
SECURITIES OFFERED BY THEM IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL FOR THE FUNDS TO MAKE THOSE OFFERS.
Prospectuses dated April 29, 1995
21
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DIRECTORY FOR THE FUND PROSPECTUSES
<TABLE>
<CAPTION>
Subject Page
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PREFACE 21
DESCRIPTION OF THE FUND
Aggressive Growth Fund 23
Bond Fund 29
Capital Appreciation Fund 33
Equity-Income Fund 37
Global Asset Allocation Fund 41
Growth and Income Fund 45
International Fund 47
Managed Fund 51
Money Market Fund 55
Social Awareness Fund 57
Special Opportunities Fund 59
____________________________________________________
INVESTMENT POLICIES TECHNIQUES
<S> <C>
Aggressive Growth Fund 23
Bond Fund 29
Capital Appreciation Fund 33
Equity-Income Fund 37
Global Asset Allocation Fund 41
Growth and Income Fund 45
International Fund 47
Managed Fund 51
Money Market Fund 55
Social Awareness Fund 57
Special Opportunities Fund 59
____________________________________________________
INVESTMENT RESTRICTIONS
<S> <C>
Aggressive Growth Fund 26
Bond Fund 30
Capital Appreciation Fund 35
Equity-Income Fund 39
Global Asset Allocation Fund 43
Growth and Income Fund 45
International Fund 49
Managed Fund 52
Money Market Fund 56
Social Awareness Fund 58
Special Opportunities Fund 60
____________________________________________________
Subject Page
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SPECIAL RISK FACTORS
<S> <C>
Aggressive Growth Fund 26
Capital Appreciation Fund 35
Equity-Income Fund 39
______________________________________________________
STRATEGIC PORTFOLIO TRANSACTIONS
<S> <C>
Aggressive Growth Fund 26
Bond Fund 31
Capital Appreciation Fund 36
Equity-Income Fund 40
Global Asset Allocation Fund 43
Growth and Income Fund 46
International Fund 49
Managed Fund 53
Money Market Fund 56
Social Awareness Fund 58
Special Opportunities Fund 60
____________________________________________________
<CAPTION>
APPENDIX - CONTAINS IMPORTANT
INFORMATION FOR ALL FUNDS
<S> <C>
Net asset value 63
Management of the funds 63
Purchase of securities being offered 65
Sale and redemption of shares 66
Distributions and federal income tax
considerations 66
Management discussion of fund performance 66
Description of shares 66
Strategic portfolio transactions-
additional information 67
Foreign investments 69
General information 70
Statement of Additional Information
table of contents - eleven underlying funds 71
</TABLE>
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LINCOLN NATIONAL CAPITAL APPRECIATION
FUND, INC.
DESCRIPTION OF THE FUND
The Capital Appreciation Fund (Fund) was incorporated in Maryland on July 9,
1993 as an open-end diversified management investment company whose investment
objective is long-term growth of capital in a manner consistent with the
preservation of capital. The Fund pursues its objective through a strategic
policy of investing in a diversified portfolio of common stock (and securities
convertible into common stock) of issuers of all sizes, with particular emphasis
on issuers with earnings growth potential that may not be recognized in the
market.
The Fund,s objective, strategic policy, and some restrictions are fundamental,
and cannot be changed without the affirmative vote of a majority of the Fund,s
outstanding shares. All other investment policies, practices and restrictions of
the Fund are not fundamental, so they may be changed by a majority vote of the
Board of Directors. See General information in the Appendix. There is no
assurance that the objective of the Fund will be achieved. Realization of income
is not a significant investment consideration, and any income realized on the
Fund,s investments will be incidental to its primary objective.
The Fund is not designed as a short-term trading vehicle, and should not be
relied upon for short-term financial needs. The principal risks of this Fund are
those normally associated with investing in the common stock of a broad range of
companies, and the potential for shares to fluctuate in value with the common
stock market. Additional risks are discussed under Special risk factors.
Because the strategic policy of this Fund is to emphasize investment in a broad
range of companies, it is expected that at times the volatility level may depart
somewhat from broad stock market indices such as the Dow Jones Industrial
Average and the Standard & Poor,s 500 Index. See Investment policies and
techniques.
Fund management expects securities selection for the Fund to closely parallel
that of the Janus Fund, a publicly available mutual fund, which is part of the
Janus Group of Funds. However, there is no precise correlation between the two.
Selection criteria for the securities and the relative weightings of the
selections can differ based on asset size, timing, cash flow, expenses and other
factors.
PORTFOLIO MANAGER
The portfolio manager for the Fund is James P. Craig, Vice-President of Janus
Capital Corporation, Sub-Advisor to the Fund. Craig has been active in
investment management for 12 years, 10 with Janus. He holds a Master,s Degree in
finance from the Wharton School, University of Pennsylvania.
INVESTMENT POLICIES AND TECHNIQUES
Common stocks selected for the Fund will generally be from those industries and
companies both in the United States and overseas, which are experiencing a high
demand for their products and services and for which both the competitive
environment and the regulatory climate are favorable. Within this framework the
Fund intends to buy stocks with earnings growth potential that may not be
recognized in the market. Capital growth potential is the sole criterion.
Realization of interest income is incidental. The Fund intends to purchase
stocks of a large number of issuers of all sizes, from large, well-established
companies to smaller, emerging growth companies. Under normal conditions a
minimum of 65% of the Fund,s total assets will be invested in common stocks at
any one time.
Up to 35% of the Fund,s total assets may be invested in debt securities, cash,
and/or cash equivalents, in any combination, either because the Fund anticipates
an opportunity for capital growth from those securities, or because it seeks a
return on idle cash. Debt securities include, but are not limited to, preferred
stocks, warrants, stock rights, corporate bonds and debentures, and longer-term
government securities. Cash equivalents include, but are not limited to, short-
term government securities (i.e., with remaining maturities of less than one
year), high-grade commercial paper, certificates of deposit, banker,s
acceptances, and time deposits.
The Fund intends to limit its investments in debt securities and cash
equivalents to those issued by: U.S. companies; the U.S. Government, its
agencies and instrumentalities; foreign governments, their agencies and
instrumentalities; and supranational organizations such as (but not limited to)
the European Economic Community and the World Bank. When the Fund invests in
debt securities and cash equivalents, the investment income of the Fund will
increase; however, the Fund will not be participating in market advances and
declines to the extent it would if it were fully invested in common stocks.
SPECIAL SITUATIONS
At times, the Fund may invest in certain securities under special situations. A
special situation arises when, in the
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Sub-Advisor's opinion , the securities of a particular company will be
recognized and appreciate in value due to a specific development at that
company. Developments creating a special situation might include a new product
or process, a management change, or a technological breakthrough. Investment in
special situations may carry an additional risk of loss in the event that the
anticipated development does not occur or does not attract the expected
attention. The impact of the strategy on the Fund will depend on the Fund's size
and the extent of the holdings of the special situation company relative to its
total assets.
FOREIGN INVESTMENTS; AMERICAN
DEPOSITARY RECEIPTS (ADRS)
The Fund may invest up to 25% of its assets in foreign securities, defined as
those which are denominated in a foreign currency and not publicly traded in the
United States. Foreign investing involves risks that differ from investing in
U.S. markets. For a discussion of those risks see Foreign investments in the
Appendix. A detailed discussion of how the Fund intends to handle these risks
appears in the SAI.
In addition, the Fund may purchase dollar-denominated ADRs, which do not involve
the same direct currency and liquidity risks as securities denominated in
foreign currency, because they are issued by domestic banks and publicly traded
in the U.S. ADRs are U.S. securities which indirectly replace foreign securities
and will not be subject to the 25% limit.
In connection with its foreign investments and as a non-fundamental policy, the
Fund will not commit more than 10% of its assets to the consummation of currency
cross-hedge contracts and will maintain high-grade, liquid assets to cover those
contracts. See Foreign investments in the Appendix for an explanation of these
transactions.
HIGH-YIELD/HIGH-RISK BONDS
The Fund has no pre-established minimum quality standards and may invest in debt
securities of any quality, including lower-rated bonds (including junk bonds)
that may offer higher yields because of the greater risk involved in those
investments. See Special risk factors. It may invest up to 35% of its assets in
those securities. Debt securities rated below investment grade by the primary
rating agencies (bonds rated Ba or lower by Moody's Investors Service and BB or
lower by Standard & Poor's Corporation) constitute lower-rated securities that
are subject to the above limit. Unrated bonds or bonds with split ratings are
included in this limit if the portfolio manager determines that these securities
have the same characteristics as non-investment-grade bonds. Even though the
Fund may at times invest in non-investment-grade securities, it invests
primarily in medium-grade obligations. See Special risk factors.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
The Fund may invest in mortgage- and asset-backed securities. These securities
are subject to prepayment risk, meaning there is the possibility that
prepayments on the underlying mortgages or other loans will cause the principal
and interest on the mortgage- and asset-backed securities to be paid prior to
their stated maturities. Unscheduled prepayments are more likely to speed up
during periods of declining long-term interest rates. In the event of a
prepayment during a period of declining interest rates, the Fund may be required
to invest the unanticipated proceeds at a lower interest rate. Prepayments
during those periods will also limit the Fund's ability to participate in as
large a market gain as may be experienced with a comparable security not subject
to prepayment.
WHEN-ISSUED SECURITIES
The Fund may purchase new issues of U.S. Government securities on a when-issued
basis. However, it does not intend to invest more than 20% of its assets in
when-issued securities. Because actual payment for and delivery of when-issued
securities generally take place 15 to 45 days after the purchase date, a fund
that purchases when-issued securities bears the risk that interest rates on debt
securities at the time of delivery may be higher or lower than those contracted
for on the when-issued security.
ILLIQUID SECURITIES
The Fund may invest up to 15% of its net assets in loans to other persons and/or
securities that are considered illiquid because of the absence of a readily
available market or due to legal or contractual restrictions. Certain restricted
securities that are not registered for sale to the general public but can be
resold to institutional investors may not be considered illiquid, provided that
a dealer or institutional trading market exists. The institutional trading
market is relatively new and liquidity of the Fund's investments could be
impaired if trading fails to further develop, or if it declines.
BORROWING
The Fund may borrow money from banks for temporary or emergency purposes in an
amount not to exceed 25% of its total assets. Certain state insurance
regulations may impose additional restrictions on the Fund's ability to borrow
money. See the SAI.
DIVERSIFICATION
The Fund qualifies as a diversified investment company under the Investment Act
of 1940 (1940 Act). As a fundamental policy, a diversified fund may not purchase
a security of any issuer (except cash items and U.S. Government securities) if:
a) it would cause the Fund to own more than 10% of the outstanding voting
securities of that issuer; or b) it would cause the Fund's holdings of that
issuer to amount to more than 5% of the Fund's
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total assets (as applied to 75% of the Fund's total assets). It may invest up to
25% of its total assets in the securities of one issuer. See Item 1. under
Investment restrictions.
The Fund does not anticipate concentrating its holdings in so few issuers unless
the Sub-Advisor believes a security has the potential for substantial capital
appreciation consistent with the Fund's investment policies and goals. However,
the Fund does intend to take advantage of the ability to invest more than 5% of
its total assets in the securities of one issuer. To the extent that the Fund
invests more than 5% of its assets in a particular issuer, its exposure to
credit risk and/or market risks associated with that issuer increases. As an
additional fundamental policy, the Fund will not invest more than 25% of its
total assets in any particular industry.
PORTFOLIO TURNOVER
Although it is the policy of the Fund to purchase and hold securities for
appreciation of capital, changes in the securities held by the Fund generally
will be made whenever the Fund believes changes are advisable. Investment
changes may result from liquidity needs, securities having reached a price or
yield objective, anticipated changes in interest rates or the credit standing of
an issuer, or by reason of economic or other developments in the United States
and abroad not foreseen at the time of the investment decision. Because
investment changes usually will be made without reference to the length of time
a security has been held, a significant number of short-term transactions may
result. It is expected that the Fund's portfolio turnover rate will not exceed
200% under normal market conditions. (For example, a rate of portfolio turnover
of 100% would occur if all of the Fund's portfolio were replaced in a period of
one year.)
To a limited extent the Fund may also purchase individual securities in
anticipation of relatively short-term price gains, and the rate of portfolio
turnover will not be a determining factor in the sale of such securities.
Certain tax rules may restrict the Fund's ability to sell securities in some
circumstances when the security has been held for less than three months.
Increased portfolio turnover results in higher brokerage costs for the Fund. The
Fund's turnover rate for 1994 was 185.28%.
INVESTMENT RESTRICTIONS
The following investment restrictions have been adopted by the Fund as
fundamental policies. See General information in the Appendix. For purposes of
the following restrictions: (1) all percentage limitations apply immediately
after the making of an investment; and (2) any subsequent change in any
applicable percentage resulting from market fluctuations does not require
elimination of any security from the portfolio.
The Fund may not:
1. Invest in the securities of a single issuer, unless the following conditions
are met: At least 75% of the value of the Fund's total assets must be
represented by: (a) U.S. Government obligations, cash and cash items; (b)
securities of other investment companies; and (c) securities of issuers as to
each of which, at the time the investment was made, the Fund's investment in
the issuer did not exceed 5% of the Fund's total assets. The Fund does not
anticipate that any more than 15% of the Fund's total assets would be
invested in the securities of a single issuer at any time, other than those
of the U.S. Government, its agencies and instrumentalities;
2. Acquire more than 10% of the voting securities of any issuer;
3. Invest more than 5% of its net assets in securities restricted as to resale;
and/or
4. Invest more than 25% of its assets in any one industry.
A complete listing of the Fund's fundamental and non-fundamental investment
restrictions can be found in the SAI.
SPECIAL RISK FACTORS
HIGH-YIELD/HIGH-RISK BONDS
Lower-rated bonds involve a higher degree of credit risk-that is, the risk that
the issuer will not make interest or principal payments when due. In the event
of an unanticipated default, the Fund would experience a reduction in its
income, and could expect a decline in the market value of the securities
affected. More careful analysis of the financial condition of each issuer of
lower grade securities is necessary. During an economic downturn or substantial
period of rising interest rates, highly leveraged issuers may experience
financial stress which would adversely affect their ability to honor their
principal and interest payment obligations, to meet projected business goals,
and obtain additional financing.
The market prices of lower-grade securities are generally less sensitive to
interest rate changes than higher-rated investments, but more sensitive to
adverse economic or political changes, or in the case of corporate issuers, to
individual corporate developments. Periods of economic or political uncertainty
and change can be expected to result in volatility of prices of these
securities. Since the last major economic recession, there has been a
substantial increase in the use of high-yield debt securities to fund highly
leveraged corporate acquisitions and restructurings, so past experience with
high-yield securities in a prolonged economic downturn may not provide an
accurate indication of future performance during such periods. Lower-rated
securities also may have less liquid markets than higher-rated securities, and
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their liquidity as well as their value may be negatively affected by adverse
economic conditions. Adverse publicity and investor perceptions as well as new
or proposed laws may also have a negative impact on the market for high-
yield/high-risk bonds.
The Fund may also invest in unrated debt securities of foreign and domestic
issuers. Unrated debt, while not necessarily of lower quality than rated
securities, may not have as broad a market. Sovereign debt of foreign
governments is generally rated by country. Because these ratings do not take
into account individual factors relevant to each issue and may not be updated
regularly, the Sub-Advisor may treat these securities as unrated debt. Unrated
debt securities will be included in the 35% limit of the Fund, unless the Sub-
Advisor deems these securities to be the equivalent of investment grade
securities. See the Appendix to the SAI for a description of bond rating
categories.
FIXED INCOME INVESTING
The performance of the debt component of the Fund depends primarily on interest
rate changes, the average weighted maturity of the Fund, and the quality of the
securities held. The debt component of the Fund will tend to decrease in value
when interest rates rise and increase when interest rates fall. Subject to
applicable maturity restrictions, the Fund will vary its average maturities
based on the Sub-Advisor's analysis of interest rate trends and other factors.
Generally, shorter-term securities are less sensitive to interest rate changes,
but offer lower yields; conversely, longer-term securities are more sensitive to
interest rate changes, but offer higher yields. The Fund's share price and yield
also depend, in part, on the quality of its investments. U.S. Government
securities generally are of high quality. U.S. Government securities that are
not backed by the full faith and credit of the United States (including those of
foreign governments), as well as other debt securities, may be affected by
changes in the creditworthiness of the issuer of the security. The extent that
these changes are reflected in the Fund's share price will depend upon the
extent of the Fund's investment in such securities.
STRATEGIC PORTFOLIO TRANSACTIONS
The portfolio manager (PM) for the Fund has considerable discretion in the
selection of appropriate Fund investments. In the exercise of that discretion,
the PM may, at any given time, invest a portion of the Fund's assets in one or
more strategic portfolio transactions which we define as derivative transactions
and cash enhancement transactions.
For your convenience, in the Appendix, we have included a basic discussion of
these special financial arrangement transactions and some of the risks
associated with them. Note also that the SAI booklet for the 11 Funds contains
definitions of the more commonly used derivative transactions, technical
explanations of how these transactions will be used, and the limits on their
use. You should consult your financial counselor if you have specific questions.
THE CAPITAL APPRECIATION FUND IS AUTHORIZED:
a) for derivative transactions, to: buy and sell options on securities
(including index options) and options on foreign currencies; buy and sell
futures contracts for instruments based on financial indices, including interest
rates or an index of U.S. Government or foreign government securities or equity
or fixed-income securities, futures contracts on foreign currencies and on
fixed-income securities; buy and sell options on futures contracts; engage in
forward contracts, interest rate swaps and swap-related products.
b) for cash enhancement transactions, to lend portfolio securities; engage in
repurchase and reverse repurchase transactions. Collateral will be continually
maintained at no less than 102% of the value of the loaned securities or of the
repurchase price, as applicable. As a matter of fundamental policy, the Fund
will not lend securities if, as a result, more than 25% of its total assets
would be lent to other parties.
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APPENDIX - CONTAINS
IMPORTANT INFORMATION FOR
ALL FUNDS
This Appendix constitutes part of the Prospectuses of Lincoln National
Aggressive Growth Fund, Inc. (Aggressive Growth Fund), Lincoln National Bond
Fund, Inc. (Bond Fund), Lincoln National Capital Appreciation Fund, Inc.
(Capital Appreciation Fund), Lincoln National Equity-Income Fund, Inc. (Equity-
Income Fund), Lincoln National Global Asset Allocation Fund, Inc. (Global Asset
Allocation Fund), Lincoln National Growth and Income Fund, Inc. (Growth and
Income Fund), Lincoln National International Fund, Inc. (International Fund),
Lincoln National Managed Fund, Inc. (Managed Fund), Lincoln National Money
Market Fund, Inc. (Money Market Fund), Lincoln National Social Awareness Fund,
Inc. (Social Awareness Fund), and Lincoln National Special Opportunities Fund,
Inc. (Special Opportunities Fund). Unless otherwise indicated, the following
information applies to each Fund.
NET ASSET VALUE
Each Fund's net asset value per share is determined as of close of business
(currently 4:00 p.m., New York Time) on the New York Stock Exchange (NYSE) on
each day it is open for trading. The net asset value per share for all Funds
except the Money Market Fund is determined by adding the values of all
securities and other assets, subtracting liabilities (including dividends
payable) and dividing by the number of shares outstanding. Debt securities and
other assets of the Fund, other than equity securities, for which market
quotations are readily available, are valued at their bid quotations.
When market quotations are not readily available, debt securities and other
assets are valued at their fair value as determined in good faith. This
valuation is made by or under the authority of the Fund's Board of Directors
and it may include the use of valuations furnished by outside sources, including
pricing services which utilize electronic data processing techniques for valuing
normal institutional-size trading units of debt securities. The value of equity
securities is based on the last sale prices of those securities on national
securities exchanges or, in the absence of recorded sales, at the average of
readily available closing bid and asked prices on exchanges or over-the-counter.
In the absence of readily available closing bid and asked prices, equity
securities will be valued at fair value.
Short-term investments. For Funds (other than the Money Market Fund) that trade
in short-term investments which mature in less than 60 days, these instruments
are valued at amortized cost; if these securities are acquired with a remaining
maturity of 61 days or more, the cost for purposes of valuation is deemed to be
the value on the sixty-first day prior to maturity.
Options trading. For those Funds engaging in options trading, Fund investments
underlying call options will be valued as described previously. Options are
valued at the last sale price or, if there has been no sale that day, at the
mean of the last bid and asked price on the principal exchange where the option
is traded, as of the close of trading on the NYSE. The Fund's net asset value
will be increased or decreased by the difference between the premiums received
on writing options and the cost of liquidating those positions measured by the
closing price of those options on the exchange where traded.
Foreign securities. For Funds investing in foreign securities, the value of a
foreign portfolio security held by a Fund is determined based upon its closing
price or upon the mean of the closing bid and asked prices on the foreign
exchange or market on which it is traded and in the currency of that market, as
of the close of the appropriate exchange. As of the close of business on the
NYSE, that Fund's portfolio securities which are quoted in foreign currencies
are converted into their U.S. dollar equivalents at the prevailing market rates,
as computed by the Custodian of the Fund's assets.
However, trading on foreign exchanges may take place on dates or at times of day
when the NYSE is not open; conversely, overseas trading may not take place on
dates or at times of day when the NYSE is open. Any of these circumstances could
affect the net asset value of Fund shares on days when the investor has no
access to the Fund. There are more detailed explanations of these circumstances
in the SAI for the various Funds. See the Preface to the Prospectus booklet for
information about how to obtain a copy of the SAI booklet.
Money Market Fund. The net asset value per share of the Money Market Fund is
determined by the amortized cost method of valuation, pursuant to Rule 2a-7 (the
Rule) of the 1940 Act. Under the Rule, the Fund's net asset value under the
amortized cost method must fairly reflect the value calculated under a
market-based valuation method. The Board of Directors of the Fund has put in
force procedures to assist Fund management and the Investment Advisor in
complying with the requirements of the Rule. In 1991, an amendment imposed
specific standards for the maturity, quality, and diversification of portfolio
securities. It also revised and expanded the duties of the Money Market Fund's
management and its Board of Directors. The Fund's procedures have been amended
in accordance with those requirements.
MANAGEMENT OF THE FUNDS
The business and affairs of each Fund are managed under the direction of its
Board of Directors. The Board has the power to amend the Bylaws of each Fund, to
declare and pay dividends, and to exercise all the powers of the Fund except
those granted to the shareholder. Lincoln Life is the sole shareholder of each
Fund.
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<PAGE>
INVESTMENT ADIVSOR. Lincoln National Investment Management Company (LNIMC) is
the Investment Advisor to the Funds and is headquartered at 200 East Berry
Street, Fort Wayne, Indiana 46802. LNIMC (the Advisor) is registered with the
Securities and Exchange Commission (the Commission) [SEC] as an Investment
Advisor and has acted as an Investment Advisor to mutual funds for over 40
years. The Advisor also acts as Investment Advisor to Lincoln National
Convertible Securities Fund, Inc., and Lincoln National Income Fund, Inc.,
closed-end investment companies as well as Lincoln Advisor Funds, Inc., an open-
end series.
The Advisor is a wholly-owned subsidiary of Lincoln National Corporation (LNC),
a publicly-held insurance holding company organized under Indiana law. Through
its subsidiaries, LNC provides life insurance and annuities, property-casualty
insurance, reinsurance, and financial services.
Under Advisory Agreements described in the Prospectus for the Variable Account,
the Advisor provides portfolio management and investment advice to the Funds and
administers their other affairs, subject to the supervision of each Fund's Board
of Directors.
As compensation for its services to each Fund, the Advisor is paid an Investment
Advisory Fee at an annual rate based on the average daily net asset value of
each Fund, as shown in the following chart:
<TABLE>
<CAPTION>
First Next In excess of
Fund $200 million..... $200 million.... $400 million
...Of average daily net asset value
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth .75 of 1% .70 of 1% .65 of 1%
Capital Appreciation .80 of 1 .80 of 1 .80 of 1
Equity-Income .95 of 1 .95 of 1 .95 of 1
Global Asset Allocation .75 of 1 .70 of 1 .68 of 1
International .90 of 1 .75 of 1 .60 of 1
All other Funds .48 of 1 .40 of 1 .30 of 1
</TABLE>
The Advisory fees for the Capital Appreciation, Equity-Income, and International
Funds reflect the more extensive services and increased expense associated with
portfolios of securities issued outside the United States.
- --------------------------------------------------------------------------------
FUND EXPENSES (see accompanying text below)
<TABLE>
<CAPTION>
1994 ration of the Advisor's 1994 ratio of total expenses
compensation to average to average net assets
Fund net assets operational fund
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Aggressive Growth* .75% 1.11%
Bond .47 .50
Capital Appreciation* .80 1.18
Equity-Income* .94 1.26
Global Asset Allocation .75 1.06
Growth and Income .35 .37
International .87 1.24
Managed .42 .44
Money Market .48 .52
Social Awareness .48 .53
Special Opportunities .45 .48
</TABLE>
Expenses specifically assumed by each Fund include:
compensation and expenses of Directors of the Fund who are not interested
persons of the Fund as defined in the 1940 Act; registration, filing, and other
fees in connection with filings with regulatory authorities, including the costs
of printing and mailing registration statements and updated prospectuses
provided to current Contract Owners; fees and expenses of independent auditors;
the expenses of printing and mailing proxy statements and shareholders reports;
custodian and transfer agent charges; brokerage commissions and securities and
options transaction costs incurred by the Fund; taxes and corporate fees; legal
fees incurred in connection with the affairs of the Fund (other than legal
services provided by personnel of the Advisor or its affiliated companies); the
fees of any trade association of which the Fund is a member; and expenses of
shareholder and Director meetings. The Aggressive Growth, Capital Appreciation,
and Equity-Income Funds (new in 1994) will bear their full share of Fund
expenses beginning in 1995. For 1994 Lincoln Life paid some of the expenses of
these Funds, as follows: $30,814 for Aggressive Growth; $15,544 for Capital
Appreciation; and $30,814 for Equity-Income.
*These ratios are based on less than a full year's experience.
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<PAGE>
SUB-ADVISORS. As Advisor, LNIMC is primarily responsible for investment
decisions affecting each of the Funds. However, LNIMC has entered into
Sub-Advisory agreements with several professional investment management firms.
These firms provide some or substantially all of the investment advisory
services required by the Funds, including day-to-day investment management of
those Fund's portfolios. Each Sub-Advisor makes investment decisions for its
respective Fund in accordance with that Fund's investment objectives and places
orders on behalf of that Fund to effect those decisions. See the following
tables for more information about the Sub-Advisors and their fees:
<TABLE>
<CAPTION>
Date of
Fund Sub-advisor agreement Annual fee rate based on average daily net asset value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive 12/20/93 .50 of 1% of the first $150 million
Growth Lynch & Mayer .35 of 1% of the excess over $150 million
Capital
Appreciation Janus 1/1/94 .60 of 1% of the first $100 million
.55 of 1% of the excess over $100 million
Equity-Income Fidelity 12/20/93 .75 of 1%
Global Asset the greater of (a) $40,000; or (b) .47 of 1% of the
Allocation Putnam 6/8/87 first $200 million; .42 of 1% of the next $200 million;
and .40 of 1% of any excess over $400 million
International Clay Finlay 11/19/90 .665 of 1% of the first $50 million; 475 of 1% of the next
$50 million; and .250 of 1% of any excess over $100 million
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Annual fee rate based on market value of securities held
Date of in the portfolio of each respective client fund at the close
Fund Sub-advisor agreement of business on the last trading day of each calendar quarter
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Growth and
Income Vantage 8/21/85 .20 of 1%
Managed Vantage 8/21/85 .20 of 1%
(stock portfolio only)
Social
Awareness Vantage 4/30/88 .20 of 1%
Special
Opportunities Vantage 8/21/85 .20 of 1%
</TABLE>
No additional compensation from the assets of the Funds will be assessed as a
result of the Sub-Advisory agreements; the Sub-Advisors are paid by LNIMC.
(There is no Sub-Advisor for the Bond and Money market Funds.)
SERVICE MARKS. The service mark for the Funds and the name Lincoln National
have been adopted by the Funds with the permission of LNC, and their continued
use is subject to the right of LNC to withdraw this permission in the event the
Advisor should not be the Investment Advisor of the Funds.
In the Prospectus and sales literature, the name Fidelity Investments will be
used with the Equity-Income Fund, Janus with the Capital Appreciation Fund, and
Putnam with the Global Asset Allocation Fund. The continued use of these names
is subject to the right of the respective Sub-Advisor to withdraw its permission
in the event it ceases to be the Sub-Advisor to the particular Fund it advises.
PURCHASE OF SECURITIES BEING OFFERED
Shares of the Funds' common stock ($.01 par value) will be sold to Lincoln Life
for allocation to the Variable Annuity Account (VAA), which has been established
for the purpose of funding Variable Annuity Contracts; shares in the Funds will
also be sold to Lincoln Life for allocation to one or more of the Variable Life
Accounts, which have been established for the purpose of funding variable life
insurance contracts. Shares of each Fund are sold and redeemed at their net
asset value determined daily. See Sale and redemption of shares. Also see Net
asset Value. The Funds' shares are sold to Lincoln Life for the Variable
Accounts on a no-load basis-that is; without the imposition of a sales charge.
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<PAGE>
SALES AND REDEMPTION OF SHARES
The shares of each Fund are sold and redeemed by the Fund at their net asset
value next determined after receipt of a purchase or redemption order in
acceptable form. The value of shares redeemed may be more or less than original
cost, depending upon the market value of the portfolio securities at the time of
redemption. Payment for shares redeemed will be made within seven days after the
redemption request is received in proper form by the Fund's. However, the right
to redeem Fund shares may be suspended or payment postponed for any period
during which (1) trading on the NYSE is restricted as determined by the
Commission, or the NYSE is closed for other than weekends and holidays; (2) an
emergency exists, as determined by the Commission, as a result of which (a)
disposal by each Fund of securities owned by it is not reasonably practicable,
or (b) it is not reasonably practicable for Fund to determine fairly the value
of its net assets; or (3) the Commission by order so permits for the position
of shareholders of the Funds.
DISTRIBUTION AND FEDERAL INCOME TAX CONSIDERATIONS
Each Fund's policy is to distribute, at least once a year, substantially all of
its net investment income. Net realized capital gains may only be disturbed
annually, These distributions, when paid to Lincoln Life for the Variable
Accounts, will be reinvested automatically in additional shares of that Fund,
at its net asset value.
Each Fund intends to qualify had has elected to be taxed as a regulated
investment company under the provisions of Subchapter M of the Internal Revenue
Code of 1986, as amended (the Code). If a Fund qualifies as a regulated
investment companies which distribute substantially all of their net income
(both ordinary income and capital gain) from Federal income tax and the four
percent nondeductible Federal Excise tax, the Funds will be relieved of those
taxes on the amounts dis distributed. See the SAI for more complete discussion.
Since the sole shareholder of the Funds is Lincoln Life, there is no discussion
here about the Federal income tax consequences at the shareholder level. For
information concerning the Federal income tax consequences to holders of
annuity or life insurance contracts, see the Prospectus for the Variable Account
at the front of this booklet.
INTERNAL REVENUE SERVICE (IRS) LIMITATIONS
As a condition of maintaining the tax-deferred status of variable contracts,
the Funds intend to comply with the diversification requirements currently
imposed by the IRS on separate accounts of insurance companies. More specific
information is contained in the prospectus for the Variable Account.
MANAGEMENT DISCUSSION OF FUND PERFORMANCE
In the Annual Report for the Funds, the portfolio manager for each Fund's
discusses that Fund's performance for the previous fiscal year and the factors
which affected that performance. We will send you a copy of the Annual Report
free upon request.
DESCRIPTION OF SHARES
The authorized capital stock of each Fund consists of 50 million shares of
common stock (100 million for the Growth and Income Fund), $.01 par value. As
of April 1, 1995, each Fund had the following number of shares issued and
outstanding:
<TABLE>
<CAPTION>
<S> <C>
Aggressive Growth Fund 7,879,088
Bond Fund 19,132,892
Capital Appreciation Fund 6,755,630
Equity-Income Fund 9,950,564
Global Asset Allocation Fund 18,158,185
Growth and Income Fund 55,124,560
International Fund 26,075,406
Managed Fund 35,857,439
Money Market Fund 8,297,560
Social Awareness Fund 10,652,462
Special Opportunities Fund 16,019,752
</TABLE>
Fund Shares will owned by Lincoln Life and will be held by it the Variable
Accounts. As stated in the Prospectuses for the Variable Accounts, Lincoln
Life provides to Contract Owners of the Variable Accounts the right to direct
the voting of Fund shares at shareholder meetings, to the extent provided by
law. However, if the 1940 Act or any regulation under it should change, and
as a result Lincoln Life determines it is permitted to vote Fund shares in its
own right, it may elect to do so.
All the shares of each Fund are of the same class with equal rights and
privileges. Each full share is entitled to one vote and fractional share is
entitled to a proportionate fractional vote, on all matters subjected to a
vote of the shareholder. All shares, full and fractional, participate
proportionately in any dividends and capital gains distributions and, in the
event of liquidation, in that Fund's net assets remaining after satisfaction
of outstanding liabilities.
When issued, each share is fully-paid and non-assessable and shareholders have
no preemptive or conversion
66
<PAGE>
rights. Fund shares have non-cumulative voting rights, which means that holders
of more than 50% of the shares voting for the election of directors can elect
100% of the directors if they choose to do so. In that event the holders of the
remaining shares so voting will not be able to elect any directors. Shares may
be redeemed as set forth under Sale and redemption of shares.
The Bylaws of the Funds allow them, in proper cases, to dispense with their
annual meetings of the shareholder. Generally, this may be done as long as: (1)
a majority of the Directors then in office have at some point been elected by
shareholder and, if any vacancy is filled by vote of the Board of Directors,
then immediately after filling the vacancy at least two thirds of the Directors
shall have been elected by the shareholder; (2) there is no change in the
independent auditor of the Funds; (3) there is no material change to the
investment advisory and/or sub-advisory agreements; and (4) a shareholder vote
is not required with respect to a distribution agreement. In adopting this
procedure for dispensing with annual meetings that are a formality, the
Directors of the Funds have undertaken to comply with the requirement of
Section 16(c)) of the 1940 Act. That Section protects Contract Owners by
providing a procedure by which they may require management to convene a meeting
of the shareholder to vote on removal of one or more Directors. The Directors
also have agreed to facilitate communication among Contract Owners for the
purpose of calling those meetings. Further information about these procedures
is available from Fund management.
STRATEGIC PORTFOLIO TRANSACTIONS-ADDITIONAL INFORMATION
Because of their different investment objective and portfolio management
philosophies many of the Funds engage to varying degrees in strategic portfolio
transactions, in order to preserve or enhance the value of their assets. These
can be generally identified as either derivative transactions or cash
enhancement transactions. Derivative transactions are recognized by the
investment community as an acceptable way to increase a Fund's overall value
(or, depending on the condition of the securities markets, at least to slow its
decrease). Cash enhancement transactions are designed to make some extra money
for the Fund when it has excess cash, or help a Fund obtain some cash for
temporary purposes when needed. SEE THE PROSPECTUS FOR EACH FUND FOR A LISTING
OF THE KINDS OF TRANSACTIONS IN WHICH EACH FUND MAY ENGAGE.
1. DERIVATIVE TRANSACTIONS
A. Introduction
A derivative transaction is a financial agreement the value of which is
dependent upon the values of one or more underlying assets or upon the
values of one more indices of assets values. The following types are
currently in fairly common use in the investmnent community, although
not every Fund will use all of them:
1. Equity contracts: stock options and indexed options; equity swaps;
stock index futures and options on futures; swaptions;
2. Interest rate contracts: interest rate futures and options on them;
forward rate agreements (FRAs): interest rate swaps and their related
transactions (e.g., caps, floors, collars and corridors); and/or
3. Currency derivative contracts: currency forward contracts; currency
options; currency futures; currency swaps; cross-currency interest
rate swaps.
SIMPLIFIED DEFINITIONS FOR THESE TRANSACTIONS ARE PROVIDED IN THE SAI APPENDIX.
Although they may be structured in complex combinations, derivative
transactions in which the Funds engage generally fall into two broad
categories: options contracts or forward contracts. The combined forms are
constantly evolving. In fact, variations on the types listed previously may
come into use after the date of these Prospectuses. Therefore, where the
Prospectus for a particular Fund discloses the intent of that Fund to engage in
any of the types listed, that Fund hereby reserves the right to engage in
related variations on those transactions.
The Funds intend to engage in derivative transactions only defensively.
Examples of this defensive use might be: to hedge against a perceived decrease
in a Fund's asset value; to control transaction costs associated with market
timing (e.g., by using futures on an unleveraged basis); and to lock in
returns, spreads, or currency exchange rates in anticipation of future cash
market transactions.
There is no discussion here of asset-backed or mortgage backed securities
(such as collateralized mortgage obligations, structured notes, inverse
floaters, principal only or interest-only securities, etc.). See the Prospectus
and SAI for the Capital Appreciation and Equity-Income Funds, which are
authorized to engage in this kind of trading.
B. Risk factors commonly associated with derivative transactions.
There are certain risks associated with derivatives, and some
derivatives involve more of these risks than others. We briefly
describe the most common ones here; however, this is not an exhaustive
list. Consult your financial counselor if you have additional
questions.
67
<PAGE>
CREDIT RISK is the possibility that a counterparty to a transaction will
fail to perform according to the terms and conditions of the transaction,
causing the holder of the claim to suffer a loss.
CROSS-CURRENCY SETTLEMENT RISK (or Herstatt risk) is related to the
settlement of foreign exchange contracts. It arises when one of the
counterparties to a contract pays out one currency prior to receiving
payment of the other. Herstatt risk arises because the hours of operation
of domestic interbank fund transfer systems often do not overlap due to
time zone differences. In the interval between the time one
counterparty(ies) receive payment in the others, those awaiting payment
are exposed to credit risk and market risk.
LEGAL RISK is the chance that a derivative transaction, which involves
highly complex financial arrangements, will be unenforceable in particular
jurisdictions or against a financially troubled entity; or will be subject
to regualtion from unanticipated sources.
MARKET LIQUIDITY RISK is the risk that a fund will unable to control its
losses if a liquid secondary market for a financial instrument does not
exist. It is often considered as the risk that a (negotiable or
assignable) financial instrument cannot be sold quickly and at a price
close to its fundmental value.
MARKET RISK is the risk of a change in the price of a financial
instrument, which may depend on the price of an underlying area asset.
OPERATING RISK is the potential of unexpected loss from inadequate
internal controls or procedures; human error; system (including data
processing system) failure; or employee dishonesty.
SETTLEMENT RISK between two counterparties is the possibility that a
counterparty to whom a firm has made a delivery of assets or money
defaults before the amounts due or assets have been received; or the risk
that technical difficulties interrupt delivery or settlement even if the
counterparties are able to perform. In the latter case, payment is likely
to be delayed but recoverable.
SYSTEMIC RISK is the uncertainty that a disruption (at a firm, in a market
segment, to a settlement system, etc.) might cause widespread difficulties
at other firms, in other market segments, or in the financial system as a
whole.
SPECIAL NOTE FOR OPTIONS AND FUTURES TRANSACTIONS: Gains and losses on
options and futures transactions depend on the portfolio manager's ability
to correctly predict the direction of stock prices and interest rates, and
other economic factors. Options and futures trading may fail as hedging
techniques in cases where the price movement of the securities underlying
the options and futures do not follow the price movements of the portfolio
securities subject to the hedge. The loss from investing in futures
transactions is potentially unlimited.
SOME OF THESE RISKS MAY BE PRESENT IN EACH TYPE OF TRANSACTION, WHILE
OTHERS MAY PERTAIN ONLY TO CERTAIN ONES. These risks are discussed here
only briefly. Before you invest in a particular Fund, please consult your
financial counselor if you have questions about the risks associated with
that Fund's use of derivatives.
C. Varying usage of derivative transactions
Subject to the terms of the Prospectus and SAI for each Fund, that Fund's
portfolio manager decides which types of derivative transactions to
employ, at which times and under what circumstances. For a description of
the limits, risk factors and circumstances under which derivative
transactions will be used by each Fund, refer to the SAI booklet.
D. Increased government scrutiny
Derivative transactions are coming under increased scrutiny by Congress
and industry regulators (such as the SEC and the Office of the Comptroller
of the Currency), and by self-regulatory agencies (such as the NASD).
Should legislation or regulatory initiatives be enacted resulting in
additional restrictive requirements for derivative transactions, we
reserve the right to make all necessary changes in the Contracts and/or
the Registration Statements for the Funds to comply with those
requirements.
2. CASH ENHANCEMENT TRANSACTIONS
Cash enhancement transactions also involve certain risks to the Fund. They
are discused more fully in the SAI.
A. Lending of portfolio securities
Any Fund authorized to do so may make secured loans of its portfolio
securities, in order to realize additional income. The loans are limited
to a maximum of a stipulated amount of the Fund's total assets. As a
matter of policy, securities loans are made to broker/dealers under
agreements requiring that the loans be continuously secured by collateral
in cash or short-term debt obligations at least equal at all times to
102% of the value of the securties lent.
The borrower pays the Fund an amount equal to any dividends or interest
received on securities lent. The Fund retains all or a portion of the
interest received on securities lent. The Fund also retains all or a
portion of the interest received on investment of the cash collateral, or
receives a fee from the borrower.
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<PAGE>
With respect to the loaned securities, voting rights or rights to consent
pass to the borrower. However, the Fund retains the right to call in the
loans and have the loaned securities returned at any time with reasonable
notice. This is important when issuers of the securities ask holders of those
securities-including the Fund-to vote or consent on matters which could
materially affect the holders' investment. The Fund may also call in the
loaned securities in order to sell them. None of the Funds' portfolio
securities will be loaned to LNIMC, to any Sub-Advisor, or to any of their
respective affiliates. The Fund may pay reasonable finder's fees to persons
unaffiliated with it in connection with the arrangement of the loans.
B. Repurchase (Repo) and reverse repurchase (Reverse Repo) transactions
1. Repos. From time to time, the Funds may enter into Repo transactions. In a
typical Repo transaction, the Fund involved buys U.S. Government or other
money market securities from a financial institution (such as a bank,
broker, or savings and loan association). At the same time, as part of the
arrangement, the Fund obtains an agreement from the seller to repurchase
those same securities form the Fund at a specified price on a fixed future
date.
The repurchase date is normally not more than seven days from the date of
purchase. Keeping the term under seven days is significant, because the
SEC considers Repo Agreements with maturities of more than seven days to
be illiquid assets of the Fund, and the Funds have strict limitations on
the percentage of their respective assets which may be illiquid.
2. Reverse repos. A Fund may also be authorized to enter into Reverse Repo
transactions. This simply means the Fund is on the reverse side of a Repo
transaction. That is, the Fund is the Seller of some of its portfolio
securities, subject to buying them back at a set price and date.
Authorized Funds will engage in Reverse Repos for temporary purposes, such
as for obtaining cash to fund redemptions; or for the purpose of
increasing the income of the Fund by investing the cash proceeds at a
higher rate than the cost of the agreement. Entering into a reverse repo
transaction is considered to be the borrowing of money by the Fund. Funds
authorized to engage in Repos as buyers are not necessarily authorized to
do Reverse Repos.
FOREIGN INVESTMENTS
There are certain risks involved in investing in foreign securities, including
those resulting from fluctuations in currency exchange rates; devaluation of
currencies; political or economic developments including the possible imposition
of currency exchange blockages or other foreign governmental laws or
restrictions; reduced availability of public information concerning issuers; and
the fact that foreign companies are not generally subject to uniform accounting,
auditing, and financial reporting standards or to other regulatory practices and
requirements comparable to those applicable to domestic companies. With respect
to certain foreign countries, there is also the possibility of expropriation,
nationalization, confiscatory taxation, and limitations on the use or removal of
cash or other assets of a Fund, including the withholding of interest payments
or dividends.
In addition, while the volume of transactions effected on foreign stock
exchanges has increased in recent years, in most cases it remains appreciably
below that of the NYSE. Accordingly, a Fund's foreign investments may be less
liquid and their prices may be more volatile than comparable investments in
securities of U.S. companies. Moreover, the settlement periods for foreign
securities, which are often longer than those for securities of U.S. issuers,
may affect portfolio liquidity. The Funds will incur costs in converting foreign
currencies into U.S. dollars. Custody charges are generally higher for foreign
securities. In buying and selling securities on foreign exchanges, a Fund
normally pays fixed commissions that are generally higher than the negotiated
commissions charged in the United States. In addition, there is generally less
governmental supervision and regulation of securities exchanges, brokers and
issuers in foreign countries that in the United States. There may be difficulty
in enforcing legal rights outside the United States. For example, in the event
of default on any foreign debt obligations, it may be more difficult or
impossible for the Fund or to enforce a judgment against the issuers of these
securities. The Advisor or Sub-Advisor will take all these factors into
consideration in managing a Fund's foreign investments.
Certain state insurance regulations impose additional restrictions on the extent
to which a Fund may invest in foreign securities. See the SAI.
The share price of a Fund that invests in foreign securities will reflect the
movements of both the prices of the portfolio securities and the currencies in
which those securities are denominated. Depending on the extent of a Fund's
investments abroad, changes in a Fund's share price may have a low correlation
with movements in the U.S. markets. Because most of the foreign securities in
which the Fund invests will be denominated in foreign currencies, or otherwise
will have values that depend on the performance of foreign currencies relative
to the U.S. dollar, the relative strength of the U.S. dollar may be an important
factor in the performance of the Fund.
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<PAGE>
FOREIGN CURRENCIES
When an Advisor or Sub-Advisor believes that a currency in which a portfolio
security or securities is denominated may suffer a decline against the U.S.
dollar, it may hedge that risk by entering into a forward contract to sell an
amount of foreign currency approximating the value of some or all of the
portfolio securities denominated in that foreign currency.
Because foreign securities generally are denominated and pay dividends or
interest in foreign currencies, and a Fund may hold various foreign currencies,
the value of the net assets of that Fund as measured in U.S. dollars will be
affected favorably or unfavorably by changes in exchange rates. Generally,
currency exchange transactions will be conducted on a spot (i.e., cash) basis at
the spot rate prevailing in the currency exchange market. The cost of currency
exchange transactions will generally be the difference between the bid and offer
spot rate of the currency being purchased or sold.
Investors should be aware that exchange rate movements can be significant and
can endure for long periods of time. In order to protect against uncertainty in
the level of future foreign currency exchange rates, a Fund's Advisor or Sub-
Advisor may attempt to manage exchange rate risk through active currency
management, including the use of certain foreign currency hedging transactions.
For example, it may hedge some or all of its investments denominated in a
foreign currency against a decline in the value of that currency relative to the
U.S. dollar by entering into contracts to exchange that currency for U.S.
dollars (not exceeding the value of the Fund's assets denominated in that
currency), or by participating in options or futures contracts with respect to
that currency. If the Advisor or Sub-Advisor believes that a particular currency
may decline relative to the U.S. dollar, the Fund may also enter into contracts
to sell that currency (up to the value of the Fund's assets denominated in that
currency) in exchange for another currency that the Advisor or Sub-Advisor
expects to remain stable or to appreciate relative to the U.S. dollar. This
technique is known as currency cross-hedging. Refer to the Prospectus for each
Fund to determine which Funds may engage in these transactions.
These strategies minimize the effect of currency appreciation as well as
depreciation, but do not protect against a decline in the underlying value of
the hedged security. In addition, these strategies may reduce or eliminate the
opportunity to profit from increases in the value of the original currency and
may adversely impact the Fund's performance if the Advisor or Sub-Advisor's
projection of future exchange rates is inaccurate. See Strategic portfolio
transactions.
GENERAL INFORMATION
Your inquiries should be directed to Lincoln National Life Insurance Co., at
P.O. Box 2348, Fort Wayne, Indiana 46801; or, you may call 1-800-348-1212.
The Funds will issue unaudited semi-annual reports showing current investments
in each Fund and other information and annual financial statements audited by
their independent auditors.
Under the 1940 Act a fundamental policy of a fund may not be changed without the
affirmative vote of a majority of the fund's outstanding shares.
As used in this Prospectus, the term majority of the Fund's outstanding shares
means the vote of: (1) 67% or more of each Fund's shares present at a meeting,
if the holders of more than 50% of the outstanding shares of each Fund are
present or represented by proxy, or (2) more than 50% of each Fund's outstanding
shares, whichever is less.
These Prospectuses do not contain all the information included in their
Registration Statements filed with the Commission. The Registration Statements,
including the exhibits filed with them, may be examined at the office of the
Commission in Washington, D.C. Statements contained in the Prospectuses about
the contents of any Contract or other document referred to in them are not
necessarily complete. In each instance, reference is made to the copy of that
Contract or other document filed as an exhibit to the Registration Statement of
which the particular Prospectus forms a part, and each statement is qualified in
all respects by that reference.
The use of Funds by both variable annuity and variable life insurance separate
accounts is known as mixed funding. Due to differences in redemption rates, tax
treatment, or other considerations, the interests of Contract Owners under the
Variable Life Accounts may conflict with those of Contract Owners under the
Variable Annuity Account, in those cases where mixed funding occurs. The Board
of Directors of each Fund will monitor for any material conflicts and determine
what action, if any, should be taken.
Should any conflict arise which requires that a substantial amount of assets be
withdrawn from any of the Funds, orderly portfolio management could be
disrupted, to the detriment of those Contract Owners still investing in that
Fund. Also, if that Fund believes that any portfolio has become so large as to
materially impair investment performance, then the Fund will examine other
investment options.
Lincoln Life performs the dividend and transfer functions for the Funds.
70
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STATEMENT OF ADDITIONAL INFORMATION
LINCOLN NATIONAL CAPITAL APPRECIATION FUND, INC.
This Statement of Additional Information should be read in conjunction with the
Prospectus of Lincoln National Capital Appreciation Fund, Inc. (the Fund) dated
April 29, 1995. You may obtain a copy of the Fund's Prospectus on request and
without charge. Please write Kim Oakman, The Lincoln National Life Insurance
Company, P.O. Box 2340, Fort Wayne, Indiana 46801 or call 1-800-348-1212,
Extension 4912.
____________
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS.
____________
The date of this Statement of Additional Information is April 29, 1995.
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TABLE OF CONTENTS
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Page
<S> <C>
Investment Objective and Policies
Investment Restrictions
Portfolio Transactions and Brokerage
Determination of Net Asset Value
Investment Techniques
Appendix
Investment Adviser and Sub-Adviser
Directors and Officers
Investment Policies and techniques (continued) custodian
Custodian
Independent Auditors
Financial Statements
Bond Ratings
Commercial Paper Ratings
U.S. Government Obligations
Taxes
State Requirements
Derivative Transactions-Definitions
</TABLE>
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INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is long-term growth of capital in a manner
consistent with the preservation of capital. The Fund's investment objective and
policies are fundamental and cannot be changed without the affirmative vote of a
majority of the outstanding voting securities of the Fund. See "General
Information," in the Prospectus. There can be no assurance that the objective of
the Fund will be achieved.
This Fund invests in investment-grade common stocks of established companies
with the objective of maximizing longer-term total return. The primary risk is
that associated with common stock investing and the shares will fluctuate in
value with the common stock market. Because the policy of this Fund is to
emphasize investment in established companies, it is expected that the
volatility will be in line with the broad stock market indices such as the Dow
Jones Industrial Average and the Standard & Poor's 500 Composite Index.
In addition the Fund may write (sell) and purchase options; invest in futures
contracts and options thereon; and engage in other derivative transactions such
as (but not limited to) swaps, forward arrangements, and currency options; and
employ other techniques to enhance the portfolio, such as lending its portfolio
securities and engaging in repurchase and reverse repurchase agreements. These
transactions and techniques are subject to limits set out elsewhere in the
Prospectus and in this SAI.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
<PAGE>
The Fund may make short-term investments in repurchase and reverse repurchase
agreements. A repurchase agreement typically involves the purchase by the Fund
of securities (U.S. Government or other money market securities) from a
financial institution such as a bank, broker, dealer or savings and loan
association, coupled with an agreement by the seller to repurchase the same
securities from the Fund at the specified price and at a fixed time in the
future, usually not more than seven days from the date of purchase. The
difference between the prchase price to the Fund and the resale price to the
seller represents the interest earned by the Fund which is unrelated to the
coupon rate or maturity of the purchased security. If the seller defaults, the
Fund may incur a loss if the value of the collateral securing the repurchase
agreement declines, or the Fund may incur disposition costs in connection with
liquidating the collateral. If bankruptcy proceedings are commenced with respect
to the seller, realization upon the collateral by the Fund may be delayed or
limited and a loss may be incurred if the collateral securing the repurchase
agreement declines in value during the bankruptcy proceedings. However,
repurchase agreements will be made only with brokers, dealers and institutions
deemed by the Board of Directors, or its delegate, to be creditworthy; they will
be fully collateralized; and the collateral for each transaction will be in the
actual or constructive possession of the Fund during the term of the
transaction, as provided in the agreement. Repurchase agreements with a duration
of more than seven days are considered illiquid securities and are subject to
the limit stated below.
When the Fund invests in a reverse repurchase agreement it sells a security to
another party, such as a bank or broker-dealer, in return for cash, and agrees
to buy the security back at a future date and price. Reverse repurchase
agreements may be used to provide cash to satisfy unusually heavy redemption
requests of for other temporary or emergency purposes without the necessity of
selling portfolio securities or to earn additional income on portfolio
securities, such as treasury bills and notes. Reverse repurchase agreements may
expose the Fund to greater fluctuation in the value of its assets.
FUTURES, OPTIONS AND OTHER DERIVATIVE INSTRUMENTS
Subject to certain limits described in the Statement of Additional
Information, the Fund may purchase and write options on securities (including
index options) and options on foreign currencies, and may invest in futures
contracts for the purchase or sale of instruments based on financial indices,
including interest rates or an index of U.S. Government or foreign government
securities or equity or fixed income securities, futures contracts on foreign
currencies and fixed income securities ("futures contract"), options on futures
contracts, forward contracts, interest rate swaps and swap-related products.
<PAGE>
These instruments will be used primarily to hedge the Fund's securities
positions, i.e., to attempt to reduce the overall level of investment risk that
normally would be expected to be associated with the Fund's securities and to
attempt to protect the Fund against market movements that might adversely affect
the value of its securities or the price of securities that it is considering
purchasing. The use of these instruments by the Fund involves certain risks.
The use of futures, options, forward contracts and swaps exposes the Fund to
additional investment risks and transaction costs. If the Sub-Adviser seeks to
protect the Fund against potential adverse movements in the securities, foreign
currency or interest rate markets using these instruments, and such markets do
not move in a direction adverse to the Fund, that Fund could be left in a less
favorable position than if such strategies had not been used. Risks inherent in
the use of futures, options, forward contracts and swaps include (1) the risk
that interest rates, securities prices and currency markets will not move in the
directions anticipated; (2) imperfect correlation between the price of futures,
options and forward contracts and movements in the prices of securities or
currencies being hedged; (3) the fact that skills needed to use these strategies
are different from those needed to select portfolio securities; (4) the possible
absence of a liquid secondary market for any particular instrument at any time;
and (5) the possible need to defer closing out certain hedged positions to avoid
adverse tax consequences.
INVESTMENT RESTRICTIONS
As indicated in the Prospectus, the Fund is subject to certain fundamental
policies and restrictions that may not be changed without the approval of the
holders of a "majority of the outstanding voting shares of the Fund." This term
is defined under General Information, in the Appendix.
As fundamental policies, the Fund may not: (1) Own more than 10% of the
outstanding voting securities of any one issuer and, as to seventy-five percent
(75%) of the value of the total assets of the Fund, purchase the securities of
any one issuer (except cash items and "government securities" as defined under
the 1940 Act), if immediately after and as a result of such purchase the value
of the holdings of the Fund in the securities of such issuer exceeds 5% of the
value of the Fund's total assets. 2) Invest more than 25% of the value of its
assets in any particular industry. or interests in real estate; however, the
Fund may own debt or equity securities issued by companies engaged in those
businesses. (4) Purchase or sell physical commodities other than foreign
currencies unless acquired as a result of ownership of securities (but this
limitation shall not prevent the Fund from purchasing or selling options,
futures, swaps and forward contracts or from investing in securities or other
<PAGE>
instruments backed by physical commodities). (5) Lend any security or make any
other loan if, as a result, more than 25% of the Fund's total assets would be
lent to other parties (but this limitation does not apply to purchases of
commercial paper, debt securities or repurchase agreements). (6) Act as an
underwriter of securities issued by others, except to the extent that the Fund
may be deemed an underwrite in connection with the disposition of its portfolio
securities. (7) Invest in the securities of other investment companies, except
as they may be acquired as part of a merger, consolidation or acquisition of
assets.
The Directors have adopted additional investment restrictions for the Fund.
These restrictions are non-fundamental operating policies of the Fund and, as
such, may be changed by the Directors without shareholder approval. The
additional investment restrictions adopted by the Directors to date include the
following:
(a) The Fund's investments in warrants, valued at the lower of cost or market,
may not exceed 5% of the value of its net assets. Included within that amount,
but not to exceed 2% of the value of the Fund's net assets, may be warrants that
are not listed on the New York American Stock Exchange. Warrants acquired by the
Fund in units or attached to securities shall be deemed to be without
value.
(b) The Fund will not (i) enter into any futures contracts and related options
for purposes other than bona fide hedging transactions within the meaning
of CFTC Regulations if the aggregate initial margin and premiums required
to establish positions in futures contracts and related options that do not
fall within the definition of 'bona fide hedging transactions' will exceed
five percent of the fair market value of the Fund's net assets, after
taking into account unrealized profits and unrealized losses on any such
contracts it has entered into; or (ii) enter into any futures contracts if
the aggregate amount of the Fund's commitments under its outstanding
futures contracts positions would exceed the market value of its total
assets.
(c) The Fund does not currently intend to sell securities short, unless it owns
or has the right to obtain securities equivalent in kind and amount to the
securities sold short without the payment of any additional consideration
therefor, and provided that transactions in options, futures, swaps and
forward contracts are not deemed to constitute selling securities short.
(d) The Fund does not currently intend to purchase securities on margin, except
that the Fund may obtain such short-term credits as are necessary for the
clearance of transactions, and provided that margin payments and other
deposits in connection with transactions in options, futures, swaps and
forward contracts shall not be deemed to constitute
<PAGE>
purchasing securities on margin.
(e) The Fund may not mortgage or pledge any securities owned or held by it in
amounts that exceed, in the aggregate, 15% of its net asset value, provided
that this limitation does not apply to reverse repurchase agreements,
assets deposited to margin, guarantee positions in futures, options, swaps
or forward contracts or the segregation of assets in connection with such
contracts.
(f) The Fund does not intend to purchase securities of any issuer (other than
U.S. Government agencies and instrumentalities or instruments guaranteed by an
entity with a record of more than three years' continuous operation, including
that of predecessors) with a record of less than three years' continuous
operation (including that of predecessors) is such purchase would cause the cost
of the Fund's investments in all such issuers to exceed 5% of the Fund's total
assets taken at market value at the time of such purchase.
(g) The Fund does not currently intend to invest directly in oil, gas, or other
mineral development or exploration programs or leases; however, the Fund
may own debt or equity securities of companies engaged in those businesses.
(h) The Fund may borrow money for temporary or emergency purposes (not for
leveraging or investment) in an amount not exceeding 25% of the value of
its total assets (including the amount borrowed) less liabilities (other
than borrowings). If borrowings exceed 25% of the value of the Fund's total
assets by reason of a decline in net assets, it will reduce its borrowings
within three business days to the extent necessary to comply with the 25%
limitation. This policy shall not prohibit reverse repurchase agreements,
deposits of assets to margin or guarantee positions in futures, options,
swaps or forward contracts, or the segregation of assets in connection with
such contracts.
(i) The Fund does not currently intend to purchase any security or enter into a
repurchase agreement, if as a result, more than 15% of its net assets would
be invested in repurchase agreements not entitling the holder to payment of
principal and interest within seven days, and in securities that are
illiquid by virtue of legal or contractual restrictions on resale or the
absence of a readily available market. The Directors, or (if such authority
is expressly delegated to them, the Adviser & Sub-Adviser) the Fund's
investment adviser acting pursuant to authority delegated by the Directors,
may determine that a readily available market exists for securities
eligible for resale pursuant to Rule 144A under the Securities Act of 1933,
or any successor to such rule, and therefore that such securities are not
subject to the foregoing limitation.
(j) The Fund may not invest in companies for the purpose of exercising control
or management.
PORTFOLIO TRANSACTIONS AND BROKERAGE
<PAGE>
The Adviser is responsible for decisions to buy and sell securities for the
Fund, the selection of brokers and dealers to effect the transactions, and the
negotiation of brokerage commissions, if any. Purchases and sales of securities
on a stock exchange are effected through brokers who charge a commission for
their services. In the over-the-counter market, securities are generally traded
on a "net" basis with dealers acting as principal for their own accounts without
a stated commission, although the price of the security usually includes a
profit to the dealer. In underwritten offerings, securities are purchased at a
fixed price which includes an amount of compensation to the underwriter,
generally referred to as the underwriter's concession or discount. On occasion,
certain money market instruments may be purchased directly from an issuer, in
which case no commissions or discounts are paid.
The Adviser currently provides investment advice to a number of other clients.
See Investment Adviser and Sub-Adviser in the Appendix. It will be the practice
of the Adviser to allocate purchase and sale transactions among the Fund and
others whose assets it manages in such manner as it deems equitable. In making
such allocations, major factors to be considered are investment objectives, the
relative size of portfolio holdings of the same or comparable securities, the
availability of cash for investment, the size of investment commitments
generally held and the opinions of the persons responsible for managing the
portfolios of the Fund and other client accounts. Fund securities are not
purchased from or sold to the Adviser or any affiliated person (as defined in
the Act) of the Adviser.
In connection with effecting portfolio transactions, primary consideration will
be given to securing most favorable price and efficient execution. Within the
framework of this policy, the reasonableness of commission or other transaction
costs is a major factor in the selection of brokers and is considered together
with other relevant factors, including financial responsibility, research and
investment information and other services provided by such brokers. It is
expected that, as a result of such factors, transaction costs charged by some
brokers may be greater than the amounts other brokers might charge. The Adviser
may determine in good faith that the amount of such higher transaction costs is
reasonable in relation to the value of the brokerage and research services
provided. The Board of Directors of the Fund will review regularly the
reasonableness of commission and other transaction costs incurred by the Fund in
the light of facts and circumstances deemed relevant from time to time, and, in
that connection, will receive reports from the Adviser and published data
concerning transaction costs incurred by institutional investors generally. The
nature of the research services provided to the Adviser by brokerage firms
varies from time to time but generally includes current and historical financial
data concerning particular companies and their
<PAGE>
securities; information and analysis concerning securities markets and economic
and industry matters; and technical and statistical studies and data dealing
with various investment opportunities, risks and trends, all of which the
Adviser regards as a useful supplement to its own internal research
capabilities. The Adviser may from time to time direct trades to brokers which
have provided specific brokerage or research services for the benefit of the
Adviser's clients; in addition the Adviser may allocate trades among brokers
that generally provide superior brokerage and research services. Research
services furnished by brokers are used for the benefit of all of the Adviser's
clients and not solely or necessarily for the benefit of the Fund. The Adviser
believes that the value of research services received is not determinable and
does not significantly reduce its expenses. The Fund does not reduce its fee to
the Adviser by any amount that might be attributable to the value of such
services.
If the Fund effects a closing purchase transaction with respect to an option
written by it, normally such transaction will be executed by the same broker-
dealer who executed the sale of the option. If a call written by the Fund is
exercised, normally the sale of the underlying securities will be executed by
the same broker-dealer who executed the sale of the call.
The writing of options by the Fund will be subject to limitations established by
each of the exchanges governing the maximum number of options in each class
which may be written by a single investor or group of investors acting in
concert, regardless of whether the options are written on the same or different
exchanges or are held or written in one or more accounts or through one or more
brokers. Thus, the number of options which the Fund may write may be affected by
options written by other investment advisory clients of its Adviser. An exchange
may order the liquidations of positions found to be in excess of these limits,
and it may impose certain other sanctions. As of the date of this Prospectus,
these limits (which are subject to change) are 2,000 options (200,000 shares) in
each class of puts or calls.
DETERMINATION OF NET ASSET VALUE
A description of the days on which the Fund's net asset value per share will be
determined is given in the Prospectus. The New York Stock Exchange's most recent
announcement (which is subject to change) states that in 1995 it will be closed
on President's Day, February 20; Good Friday, April 14; Memorial Day, May 29;
Independence Day, July 4; Labor Day, September 4; Thanksgiving Day, November 23;
and Christmas Day, December 25. It may also be closed on other days.
INVESTMENT TECHNIQUES
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
<PAGE>
In a repurchase agreement, the Fund purchases a security and simultaneously
commits to resell that security to the seller at an agreed upon price on an
agreed upon date within a number of days (usually not more than seven) from the
date of purchase. The resale price reflects the purchase price plus an agreed
upon incremental amount that is unrelated to the coupon rate or maturity of the
purchased security. A repurchase agreement involves the obligation of the seller
to pay the agreed upon price, which obligation is in effect secured by the value
(at least equal to the amount of the agreed upon resale price and marked-to-
market daily) of the underlying security. The Fund may engage in a repurchase
agreement with respect to any security in which it is authorized to invest.
While it does not presently appear possible to eliminate all risks from these
transactions (particularly the possibility of a decline in the market value of
the underlying securities, as well as delays and costs to the Fund in the event
of bankruptcy of the seller), it is the policy of the Fund to limit repurchase
agreements to those parties whose creditworthiness has been reviewed and found
satisfactory by the Adviser or Sub-Adviser. In addition, the Fund currently
intends to invest only in repurchase agreements collateralized by U.S.
Government securities.
Reverse Repurchase Agreements may be used to provide cash to satisfy unusually
heavy redemption requests or for other temporary or emergency purposes without
the necessity of selling portfolio securities, or to earn additional income on
portfolio securities, such as Treasury bills and notes. In a reverse repurchase
agreement, the Fund sells a portfolio security to another party, such as a bank
or broker-dealer, in return for cash and agrees to repurchase the instrument at
a particular price and time. While a reverse repurchase agreement is
outstanding, the Fund will maintain cash and appropriate liquid assets in a
segregated custodial account to cover its obligation under the agreement. The
Fund will enter into reverse repurchase agreements only with parties that the
Adviser of Sub-Adviser deems creditworthy. Reverse Repurchase Agreements may
expose the Fund to greater fluctuation in the value of its assets.
MORTGAGE-AND ASSET-BACKED SECURITIES
The Fund may invest in mortgage-and asset-backed securities. Government National
Mortgage Association ("GNMA") Certificates are mortgage-backed securities that
evidence an undivided interest in a pool of mortgage loans. GNMA Certificates
differ from bonds in that principal is paid back monthly by the borrowers over
the term of the loan rather than returned in a lump sum at maturity. GNMA
Certificates that the Fund may purchase are the "modified pass-through" type.
"Modified pass-through" GNMA Certificates entitle the holder to receive a share
of all interest and principal payments paid and owned on the mortgage pool, not
of fees paid to the "issuer" and GNMA,
<PAGE>
regardless of whether or not the mortgagor actually makes the payment. GNMA
Certificates are backed as to the timely payment of principal and interest by
the full faith and credit of the U.S. Government.
The Federal Home Loan Mortgage Corporation ("FHLMC") issues two types of
mortgage pass-through securities: mortgage participation certificates ("PCs")
and guaranteed mortgage certificates ("GMCs"). PCs resemble GNMA Certificates in
that each PC represents a pro rata share of all interest and principal payments
made and owned on the underlying pool. FHLMC guarantees timely payments of
interest on PCs and the full return of principal. GMCs also represent a pro rata
interest in a pool of mortgages. However, these instruments pay interest
semiannually and return principal once a year in guaranteed minimum payments.
This type of security is guaranteed by FHLMC as to timely payment of principal
and interest but it is not guaranteed by the full faith and credit of the U.S.
Government.
The Federal National Mortgage Association ("FNMA") issues guaranteed mortgage
pass-through certificates ("FNMA Certificates"). FNMA Certificates resemble GNMA
Certificates in that each FNMA Certificate represents a pro rata share of all
interest and principal payments made and owned on the underlying pool. The
principal and the timely payment of interest on FNMA Certificates are guaranteed
only by FNMA itself, not by the full faith and credit of the U.S. Government.
Each of the mortgage-backed securities described above is characterized by
monthly payments to the holder, reflecting the monthly payments made by the
borrowers who received the underlying mortgage loans. The payments to the
security holders (such as the Fund), like the payments on the underlying loans,
represent both principal and interest. Although the underlying mortgage loans
are for specified periods of time, such as 20 or 30 years, the borrowers can,
and typically do, pay them off sooner. Thus, the security holders frequently
receive prepayments of principal in addition to the principal that is part of
the regular monthly payments. A borrower is more likely to prepay a mortgage
that bears a relatively high rate of interest. This means that in times of
declining interest rates, some of the Fund's higher yielding mortgage-backed
securities might be converted to cash and the Fund will be forced to accept
lower interest rates where that cash is used to purchase additional securities
in the mortgage-backed securities sector or in the other investment sectors.
FUTURES, OPTIONS AND OTHER DERIVATIVE INSTRUMENTS
FUTURES CONTRACTS. The Fund may enter into contracts for the purchase or sale
for future delivery of fixed income securities, foreign currencies or contracts
based on financial indices including interest rates or an index of U.S.
Government
<PAGE>
securities, foreign government securities, equity securities or fixed income
securities. U.S. futures contracts are traded on exchanges which have been
designated "contract markets" by the Commodity Futures Trading Commission
("CFTC") and must be executed through a futures commission merchant (an "FCM"),
or brokerage firm, which is a member of the relevant contract market. Through
their clearing corporations, the exchanges guarantee performance of the
contracts as between the clearing members of the exchange.
The buyer or seller of a futures contract is not required to deliver or pay for
the underlying instrument unless the contract is held until the delivery date.
However, both the buyer and seller are required to deposit "initial margin" for
the benefit of an FCM when the contract is entered into. Initial margin deposits
are equal to a percentage of the contract's value, as set by the exchange on
which the contract is traded, and may be maintained in cash or certain high-
grade liquid assets. If the value of either party's position declines, that
party will be required to make additional "variation margin" payments with an
FCM to settle the change in value on a daily basis. The party that has a gain
may be entitled to receive all or a portion of this amount. Initial and
variation margin payments are similar to good faith deposits or performance
bonds, unlike margin extended by a securities broker, and initial and variation
margin payments do not constitute purchasing securities on margin for purposes
of the Fund's investment limitations. In the event of the bankruptcy of an FCM
that holds margin on behalf of the Fund, may be entitled to return of margin
owed to it only in proportion to the amount received by FCM's other customers.
Sub-Adviser will attempt to minimize the risk by careful monitoring of the
creditworthiness of the FCMs with which the Fund does business and by depositing
margin payments in a segregated account with the custodian when practical or
otherwise required by law.
The Fund intends to comply with guidelines of eligibility for exclusion from the
definition of the term "commodity pool operator" with the CFTC and the National
Futures Association, which regulate trading in the futures markets. The Fund
will use futures contracts and related options solely for bona fide hedging
purposes within the meaning of CFTC regulations; except that, in addition, the
Fund may hold positions in futures contracts and related options that do not
fall within the definition of bona fide hedging transactions, provided that the
aggregate initial margin and premiums required to establish such positions will
not exceed 5% of the fair market value of the Fund's net assets, after taking
into account unrealized profits and unrealized losses on any such contracts it
has entered into.
Although the Fund would hold cash and liquid assets in a segregated account with
a value sufficient to cover its open futures obligations, the segregated assets
would be available to
<PAGE>
the Fund immediately upon closing out the futures position, while settlement of
securities transactions could take several days. However, because the Fund's
cash that may otherwise be invested would be held uninvested or invested in
high-grade liquid assets so long as the futures position remains open, the
Fund's return could be diminished due to the opportunity losses of foregoing
other potential investments.
The acquisition or sale of a futures contract may occur, for example, when the
Fund holds or is considering purchasing equity securities and seeks to protect
itself from fluctuations in prices without buying or selling those securities.
For example, if prices were expected to decrease, the Fund might sell equity
index futures contracts, thereby hoping to offset a potential decline in the
value of equity securities in the portfolio by a corresponding increase in the
value of the futures contract position held by the Fund and thereby preventing
the Fund's net asset value from declining as much as it otherwise would have.
The Fund also could protect against potential price declines by selling
portfolio securities and investing in money market instruments. However, since
the futures market is more liquid than the cash market, the use of futures
contracts as an investment technique allows the Fund to maintain a defensive
position without having to sell portfolio securities.
Similarly, when prices of equity securities are expected to increase, futures
contracts may be bought to attempt to hedge against the possibility of having to
buy equity securities at higher prices. This technique is sometimes known as an
anticipatory hedge. Since the fluctuations in the value of futures contracts
should be similar to those of equity securities, the Fund could take advantage
of the potential rise in the value of equity securities without buying them
until the market has stabilized. At that time, the futures contracts could be
liquidated and the Fund could buy equity securities on the cash market. To the
extent the Fund enters into futures contracts for this purpose, the assets in
the segregated asset account maintained to cover the Fund's obligations with
respect to the futures contracts will consist of high-grade liquid assets from
its portfolio in an amount equal to the difference between the contract price
and the aggregate value of the initial and variation margin payments made by the
Fund with respect to the futures contracts.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial margin and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close out futures contracts through offsetting
transactions which could distort the normal price relationship between the cash
and futures markets. Second, the liquidity of the futures market depends on
participants entering
<PAGE>
into offsetting transactions rather than making or taking delivery. To the
extent participants decide to make or take delivery, liquidity in the futures
market could be reduced and prices in the futures market distorted. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of the foregoing
distortions, a correct forecast of general price trends by the Sub-Adviser still
may not result in a successful use of futures.
Futures contracts entail risk. Although the Fund believes that use of such
contracts will benefit the Fund, the Fund's overall performance could be worse
than if the Fund had not entered into futures contracts if the Sub-Adviser's
investment judgement proves incorrect. For example, if the Fund has hedged
against the effects of a possible decrease in prices of securities held in its
portfolio and prices increase instead, the Fund will lose part or all of the
benefit of the increased value of these securities because of offsetting losses
in its futures positions. In addition, if the Fund has insufficient cash, it may
have to sell securities from its portfolio to meet daily variation margin
requirements. Those sales may be, but not necessarily be, at increased prices
which reflect the rising market and may occur at a time when the sales are
disadvantageous to the Fund.
The prices of futures contracts depend primarily on the value of their
underlying instruments. Because there are a limited number of types of futures
contracts, it is possible that the standardized futures contracts available to
the Fund will not match exactly the Fund's current or potential investments. The
Fund may buy and sell futures contracts based on underlying instruments with
different characteristics from the securities in which it typically invests--for
example, by hedging investments in portfolio securities with a futures contract
based on a broad index of securities--which involves a risk that the futures
position will not correlate precisely with the performance of the Fund's
investments.
Futures prices can also diverge from the prices of their underlying instruments,
even if the underlying instruments closely correlate with the Fund's
investments. Futures prices are affected by factors such as current and
anticipated short-term interest rates, changes in volatility of the underlying
instruments and the time remaining until expiration of the contract. Those
factors may affect securities prices differently from futures prices. Imperfect
correlations between the Fund's investments and its futures positions also may
result from differing levels of demand in the futures markets and the securities
markets, from structural differences in how futures and securities are traded,
and from imposition of daily price
<PAGE>
fluctuation limits for futures contracts. The Fund may buy or sell futures
contracts with a greater or lesser value than the securities it wishes to hedge
or is considering purchasing in order to attempt to compensate for differences
in historical volatility between the futures contract and the securities,
although this may not be successful in all cases. If price changes in the Fund's
futures positions are poorly correlated with its other investments, its futures
position may fail to produce desired gains or result in losses that are not
offset by the gains in the Fund's other investments.
Because futures contracts are generally settled within a day from the date they
are closed out, compared with a settlement period of seven days for some types
of securities, the futures markets can provide superior liquidity to the
securities markets. Nevertheless, there is no assurance that a liquid secondary
market will exist for any particular futures contract at any particular time. In
addition, futures exchanges may establish daily price fluctuation limits for
futures contracts and may halt trading if a contract's price moves upward or
downward more than the limit in a given day. On volatile trading days when the
price fluctuation limit is reached, it may be impossible for the Fund to enter
into new positions or close out existing positions. If the secondary market for
a futures contract is not liquid because of price fluctuation limits or
otherwise, the Fund may not be able to promptly liquidate unfavorable futures
positions and potentially could be required to continue to hold a futures
position until the delivery date, regardless of changes in its value. As a
result, the Fund's access to other assets held to cover its futures positions
also could be impaired.
OPTIONS ON FUTURES CONTRACTS. The Fund may buy and write put and call options
on futures contracts for hedging purposes. An option on a future gives the Fund
the right (but not the obligation) to buy or sell a futures contract as a
specified price on or before a specified date. The purchase of a call option on
a futures contract is similar in some respects to the purchase of a call option
on an individual security. Depending on the pricing of the option compared to
either the price of the futures contract upon which it is based or the price of
the underlying instrument, ownership of the option may or may not be less risky
than ownership of the futures contract or the underlying instrument. As with the
purchase of futures contracts, when the Fund is not fully invested it may buy a
call option on a futures contract to hedge against a market advance.
The writing of a call option on a futures contract constitutes a partial hedge
against declining prices of the security or foreign currency which is
deliverable under, or of the index comprising, the futures contract. If the
futures price at the expiration of the option is below the exercise price, the
Fund will retain the full amount of the option premium which provides a partial
hedge
<PAGE>
against any decline that may have occurred in the Fund's portfolio holdings. The
writing of a put option on a futures contract constitutes a partial hedge
against increasing prices of the security or foreign currency which is
deliverable under, or of the index comprising, the futures contract. If the
futures price at expiration of the option is higher than the exercise price, the
Fund will retain the full amount of the option premium which provides a partial
hedge against any increase in the price of securities which the Fund is
considering buying. If a call or put option the Fund has written is exercised,
the Fund will incur a loss which will be reduced by the amount of the premium it
received. Depending on the degree of existing options on futures may to some
extent be reduced or increased by changes in the value of portfolio securities.
The purchase of a put option on a futures contract is similar in some respects
to the purchase of protective put options on portfolio securities. For example,
the Fund may buy a put option on a futures contract to hedge its portfolio
against the risk of falling prices.
The amount of risk the Fund assumes when it buys an option on a futures contract
is the premium paid for the option plus related transaction costs. In addition
to the correlation risks discussed above, the purchase of an option also entails
the risk that changes in the value of the underlying futures contract will not
be fully reflected in the value of the options bought.
FORWARD CONTRACTS. The Fund may enter into forward foreign currency exchange
contracts ("forward currency contracts") with stated contract values of up to
the value of the Fund's assets. A forward currency contract is on obligation to
buy or sell an amount of a specified currency for an agreed price (which may be
in U.S. dollars or a foreign currency). The Fund will exchange foreign
currencies for U.S. dollars and for other foreign currencies in the normal
course of business and may buy and sell currencies through forward currency
contracts in order to fix a price for securities it has agreed to buy or sell
("transaction hedge"). The Fund also may hedge some or all of its investments
denominated in foreign currency against a decline in the value of that currency
relative to the U.S. dollar by entering into forward currency contracts to sell
an amount of that currency (or a proxy currency whose performance is expected to
replicate the performance of that currency) approximating the value of some or
all of its portfolio securities denominated in that currency ("position hedge")
or by participating in options or futures contracts with respect to the
currency. The Fund also may enter into a forward currency contract with respect
to a currency where the Fund is considering the purchase of investments
denominated
<PAGE>
in that currency but has not yet done so ("anticipatory hedge").
In any of these circumstances the Fund may, alternatively, enter into a forward
currency contract with respect to a different foreign currency when the Fund
believes that the U.S. dollar value of that currency will correlate with the
U.S. dollar value of the currency in which portfolio securities of, or being
considered for purchase by, the Fund is denominated ("cross-hedge").
These types of hedging minimize the effect of currency appreciation as well as
depreciation, but do not protect against a decline in the security's value
relative to other securities denominated in the foreign currency. Shifting the
Fund's currency exposure from one foreign currency to another removes the
Funds's opportunity to profit from increases in the value of the original
currency and involves a risk of increased losses to the Fund if the Sub-
Adviser's projection of future exchange rates is inaccurate.
The Fund will cover outstanding forward positions by maintaining liquid
portfolio securities denominated in the currency underlying the forward contract
or, in the case of a cross-hedge, in the currency being hedged. To the extent
that the Fund is not able to cover its forward currency positions with
underlying portfolio securities, the Fund's custodian will segregate cash or
high-grade liquid assets having a value equal to the aggregate amount of the
Fund's commitments under forward contracts entered into with respect to position
hedges, cross-hedges and anticipatory hedges. If the value of the securities
used to cover a position or the value of segregated assets declines, the Fund
will find alternative cover or segregate additional cash or high-grade liquid
assets on a daily basis so that the value of the covered and segregated assets
will be equal to the amount of the Fund's commitments with respect to such
contracts. As an alternative to segregating assets, the Fund may buy call
options permitting the Fund to buy the amount of foreign currency being hedged
by a forward sale contract or the Fund may buy put options permitting it to sell
the amount of foreign currency subject to a forward buy contract.
While forward contracts are not currently regulated by the CFTC, the CFTC may in
the future assert authority to regulate forward contracts. In such event, the
Fund's ability to utilize forward contracts may be restricted. Forward contracts
will reduce the potential gain from a positive change in the relationship
between the U.S. dollar and foreign currencies. Unforeseen changes in currency
prices may result in poorer overall performance for the Fund than if it had not
entered into such contracts. The use of foreign currency forward contracts will
not eliminate fluctuations in the underlying U.S. dollar equivalent value of the
proceeds of or rates of return on the Fund's foreign currency
<PAGE>
denominated portfolio securities.
<PAGE>
The matching of the increase in value of a forward contract and the decline in
the U.S. dollar equivalent value of the foreign currency denominated asset that
is the subject of the hedge generally will not be precise. In addition, the Fund
may not always be able to enter into forward contracts at attractive prices and
may be limited in its ability to use these contracts to hedge Fund assets.
Also, with regard to the Fund's use of cross-hedges, there can be no assurance
that historical correlations between the movement of certain foreign currencies
relative to the U.S. dollar will continue. Poor correlation may exist between
movements in the exchange rates of the foreign currencies underlying the Fund's
cross-hedges and the movements in the exchange rates of the foreign currencies
in which its assets that are the subject of such cross-hedges are denominated.
OPTIONS ON FOREIGN CURRENCIES. The Fund may buy and write options on foreign
currencies for hedging purposes in a manner similar to that in which futures or
forward contracts on foreign currencies will be utilized. For example, a decline
in the U. S. dollar value of a foreign currency in which portfolio securities
are denominated will reduce the U.S. dollar value of such securities, even if
their value in the foreign currency remains constant. In order to protect
against such diminutions in the value of portfolio securities, the Fund may buy
put options on the foreign currency. If the value of the currency declines, the
Fund will have the right to sell such currency for a fixed amount in U.S.
dollars and will offset, in whole or in part, the adverse effect on its
portfolio.
Conversely, when a rise in the U.S. dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, the Fund may buy call options thereon. The purchase of
such options could offset, as least partially, the effects of the adverse
movements in exchange rates. As in the case of other types of options, however,
the benefit to the Fund from purchases of foreign currency options will be
reduced by the amount of the premium and related transaction costs. In addition,
if currency exchange rates do not move in the direction or to the extent
desired, the Fund could sustain losses on transactions in foreign currency
options that would require the Fund to forego a portion or all of the benefits
of advantageous changes in those rates.
The Fund may write options on foreign currencies for hedging purposes. For
example, to hedge against a potential decline in the U.S. dollar value of
foreign currency denominated securities due to adverse fluctuations in exchange
rates, the Fund could, instead of purchasing a put option, write a call option
on the
<PAGE>
relevant currency. If the expected decline occurs, the option will most likely
not be exercised and the diminution in value of portfolio securities will be
offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against a potential
increase in the U.S. dollar cost of securities to be acquired, the Fund could
write a put option on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the Fund to hedge the increased
cost up to the amount of the premium. As in the case of other types of options,
however, the writing of a foreign currency option will constitute only a partial
hedge up to the amount of the premium. If exchange rates do not move in the
expected direction, the option may be exercised and the Fund would be required
to buy or sell the underlying currency at a loss which may not be offset by the
amount of the premium. Through the writing of options on foreign currencies, the
Fund also may lose all or a portion of the benefits which might otherwise have
been obtained from favorable movements in exchange rates.
The Fund may write covered call options on foreign currencies. A call option
written on a foreign currency by the Fund is "covered" if the Fund owns the
underlying foreign currency covered by the call or has an absolute and immediate
right to acquire that foreign currency without additional cash consideration (or
for additional cash consideration held in a segregated account by its custodian)
upon conversion or exchange of other foreign currency held in its portfolio. A
call option is also covered if the Fund has a call on the same foreign currency
and in the same principal amount as the call written if the exercise price of
the call held (i) is equal to or less than the exercise price of the call
written or (ii) is greater than the exercise price of the call written, if the
difference is maintained by the Fund in cash or high-grade liquid assets in a
segregated account with the Fund's custodian.
The Fund also may write call options on foreign currencies for cross-hedging
purposes that would not be deemed to be covered. A call option on a foreign
currency is for cross-hedging purposes if it is not covered but is designed to
provide a hedge against a decline due to an adverse change in the exchange rate
in the U.S. dollar value of a security which the Fund owns or has the right to
acquire and which is denominated in the currency underlying the option. In such
circumstances, the Fund collateralizes the option by maintaining, in a
segregated account with the Fund's custodian, cash or high-grade liquid assets
in an amount not less than the value of the underlying foreign currency in U.S.
dollars marked-to-market daily.
<PAGE>
OPTIONS ON SECURITIES. In an effort to reduce fluctuations in net asset value
and preserve the Fund's assets, the Fund may write covered put and call options
and buy covered put and call options on securities that are traded on United
States and foreign securities exchanges and over-the-counter. The Fund may write
and buy options on the same types of securities that the Fund may purchase
directly.
A put option written by the Fund is "covered" if the Fund (i) maintains cash not
available for investment or high-grade liquid assets with a value equal to the
exercise price in a segregated account with its custodian or (ii) holds a put on
the same security and in the same principal amount as the put written and the
exercise price of the put held is equal to or greater than the exercise price of
the put written. The premium paid by the buyer of an option will reflect, among
other things, the relationship of the exercise price to the market price and the
volatility of the underlying security, the remaining term of the option, supply
and demand and interest rates.
A call option written by the Fund is "covered" if the Fund owns the underlying
security covered by the call 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 its custodian) upon conversion or
exchange of other securities held in its portfolio. A call option is also deemed
to be covered if the Fund holds a call on the same security and in the same
principal amount as the call written and the exercise price of the call held (i)
is equal to or less than the exercise price of the call written or (ii) is
greater than the exercise price of the call written if the difference is
maintained by the Fund in cash and high-grade liquid assets in a segregated
account with its custodian.
The Fund also may write call options that are not covered for cross-hedging
purposes. The Fund collateralizes its obligation under a written call option for
cross-hedging purposes by maintaining cash or high-grade liquid assets in a
segregated account with its custodian in an amount not less than the market
value of the underlying security, marked to market daily. The Fund would write a
call option for cross-hedging purposes, instead of writing a covered call
option, when the premium to be received from the cross-hedge transaction would
exceed that which would be received from writing a covered call option and the
Sub-Adviser believes that writing the option would achieve the desired hedge.
The writer of an option may have no control when the underlying securities must
be sold, in the case of a call option, or bought, in the case of a put option,
since with regard to certain
<PAGE>
options, the writer may be assigned an exercise notice at any time prior to the
termination of the obligation. Whether or not an option expires unexercised, the
writer retains the amount of the premium. This amount, of course, may, in the
case of a covered call option, be offset by a decline in the market value of the
underlying security during the option period. If a call option is exercised, the
writer must fulfill the obligation to buy the underlying security at the
exercise price, which will usually exceed the then market value of the
underlying security.
The writer of an option that wishes to terminate its obligation 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 being notified of the
exercise of an option. Likewise, an investor who is the holder of an option may
liquidate its position by effecting a "closing sale transaction". This is
accomplished by selling an option of the same series as the option previously
bought. there is no guarantee that either a closing purchase or a closing sale
transaction can be effected.
In the case of a written call option, effecting a closing transaction will
permit the Fund to write another call option on the underlying security with
either a different exercise price or expiration date or both. In the case of a
written put option, such transaction will permit the Fund to write another put
option to the extent that the exercise price thereof is secured by deposited
high-grade liquid assets. Effecting a closing transaction also will permit the
Fund to use the cash or proceeds from the con-current sale of any securities
subject to the option for other investments. If the Fund desires to sell a
particular security from its portfolio on which it has written a call option,
the Fund will effect a closing transaction prior to or concurrent with the sale
of the security.
The Fund will realize a profit from a closing transaction if the price of the
purchase transaction is less than the premium received from writing the option
or the price received from a sale transaction is more than the premium paid to
buy the option. The Fund will realize a loss from a closing transaction if the
price of the purchase transaction is more than the premium received from writing
the option or the price received from a sale transaction is less than the
premium paid to buy the option. Because increases in the market of a call option
generally will reflect increases in the market price of the underlying security,
any loss resulting from the repurchase of a call option is likely to be offset
in whole or in part by appreciation of the
<PAGE>
underlying security owned by the Fund.
An option position may be closed out only where a secondary market for an option
of the same series exists. If a secondary market does not exist, the Fund may
not be able to effect closing transactions in particular options and the Fund
would have to exercise the options in order to realize any profit. If the Fund
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 the
Fund delivers the underlying security upon exercise. The absence of a liquid
secondary market may be due to the following: (i) insufficient trading interest
in certain options, (ii) restrictions imposed by a national securities exchange
on which the option is traded ("Exchange") on opening or closing transactions or
both, (iii) trading halts, suspensions or other restrictions imposed with
respect to particular classes or series of options or underlying securities,
(iv) unusual or unforeseen circumstances that interrupt normal operations on an
Exchange, (v) the facilities of an Exchange or of the Options Clearing
Corporation ("OCC") 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 that class or series of options), in which event
the secondary market on that Exchange (or in that class or series of options)
would cease to exist, although outstanding options on that Exchange that had
been issued by the OCC as a result of trades on that Exchange would continue to
be exercisable in accordance with their terms.
The Fund may write options in connection with buy-and-write transactions. In
other words the Fund may buy a security and then write a call option against
that security. The exercise price of such call will depend upon the expected
price movement of the underlying security. The exercise price of a call option
may be below ("in-the-money"), equal to ("at-the-money") the current value of
the underlying security at the time the option is written. Buy-and-write
transactions using in-the-money call options may be used when it is expected
that the price of the underlying security will remain flat or decline moderately
during the option period. Buy-and-write transactions using at-the-money call
options may be used when it is expected that the price of the underlying
security will remain fixed or advance moderately during the option period. Buy-
and-write transactions using out-of-the-money call options may be used when it
is expected that the premiums received from writing the call option plus the
appreciation in the market price of the underlying security up to the exercise
price will be greater than the appreciation in the price of the underlying
security alone. If the call options are
<PAGE>
exercised in such transactions, the Fund's maximum gain will be the premium
received by it for writing the option, adjusted upwards or downwards by the
difference between the Fund's purchase price of the security and the exercise
price. If the options are not exercised and the price of the underlying security
declines, the amount of such decline will be offset by the amount of premium
received.
The writing of covered put options is similar in terms of risk and return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the premium
received. If the market price of the underlying security declines or otherwise
is below the exercise price, the Fund may elect to close the position or take
delivery of the security at the exercise price and the Fund's return will be the
premium received from the put options minus the amount by which the market price
of the security is below the exercise price.
The Fund may buy put options to hedge against a decline in the value of its
portfolio. By using put options in this way, the Fund will reduce any profit it
might otherwise have realized in the underlying security by the amount of the
premium paid for the put option and by transaction costs.
The Fund may buy call options to hedge against an increase in the price of
securities that it may buy in the future. The premium paid for the call option
plus any transaction costs will reduce the benefit, if any, realized by the Fund
upon exercise of the option, and, unless the price of the underlying security
rises sufficiently, the option may expire worthless to the Fund.
SWAPS AND SWAP-RELATED PRODUCTS. The Fund may enter into interest rate swaps,
caps and floors on either an asset-based or liability-based basis, depending
upon whether it is hedging its assets or its liabilities, and will usually enter
into interest rate swaps on a net basis (i.e., the two payment streams are
netted out, with the Fund receiving or paying, as the case may be, only the net
amount of the two payments). The net amount of the excess, if any, of the Fund's
obligations over its entitlement with respect to each interest rate swap will be
calculated on a daily basis and an amount of cash or high-grade liquid assets
having an aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account by the Fund's custodian. If the Fund enters
into an interest rate swap on other than a net basis, it would maintain a
segregated account in the full amount accrued on a daily basis of its
obligations with respect to the swap. The Fund will not
<PAGE>
enter into any interest rate swap, cap or floor transaction unless the unsecured
senior debt or the claims-paying ability of the other party thereto is rated in
one of the three highest rating categories of at least one nationally recognized
statistical rating organization at the time of entering into such transaction.
The Sub-Adviser will monitor the creditworthiness of all counterparties on an
ongoing basis. If there is a default by the other party to such a transaction,
the Fund will 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 agents
utilizing standardized swap documentation. The Sub-Adviser has determined that,
as a result, the swap market has become relatively liquid. Caps and floors are
more recent innovations for which standardized documentation has not yet been
developed and, accordingly, they are less liquid than swaps. To the extent the
Fund sells (i.e., writes) caps and floors, it will maintain cash or high-grade
liquid assets having an aggregate net asset value at least equal to the full
amount, accrued on a daily basis, of its obligations with respect to any caps or
floors in a segregated account.
There is no limit on the amount of interest rate swap transactions that may be
entered into by the Fund. These transactions may in some instances involve the
delivery of securities or other underlying assets by the Fund or its
counterparty to collateralize obligations under the swap. Under the
documentation currently used in those markets, the risk of loss with respect to
interest rate swaps is limited to the net amount of the payments that the Fund
is contractually obligated to make. If the other party to an interest rate swap
that is not collateralized defaults, the Fund would risk the loss of the net
amount of the payments that it contractually is entitled to receive. The Fund
may buy and sell (i.e., write) caps and floors without limitation, subject to
the segregated account requirement described above.
ADDITIONAL RISKS OF OPTIONS ON FOREIGN CURRENCIES, FORWARD CONTRACTS AND FOREIGN
INSTRUMENTS. Unlike transactions entered into by the Fund in futures contracts,
options on foreign currencies and forward contracts are not traded on contract
markets regulated by the CFTC or (with the exception of certain foreign currency
options) by the SEC. To the contrary, such instruments are traded through
financial institutions acting as market-makers, although foreign currency
options re also traded on certain national securities exchanges, such as the
Philadelphia Stock Exchange and the Chicago Board Options Exchange, subject to
SEC regulation. Similarly, options on
<PAGE>
currencies may be traded over-the-counter. In an over-the-counter trading
environment, many of the protections afforded to exchange participants will not
be available. For example, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent over a
period of time. Although the buyer of an option cannot lose more than the amount
of the premium plus related transaction costs, this entire amount could be lost.
Moreover, an option writer and a buyer or seller of futures or forward contracts
could lose amounts substantially in excess of any premium received or initial
margin or collateral posted due to the potential additional margin and
collateral requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges are within
the jurisdiction of the SEC, as are other securities traded on such exchanges.
As a result, many of the protections provided to traders on organized exchanges
will be available with respect to such transactions. In particular, all foreign
currency option positions entered into on a national securities exchange are
cleared and guaranteed by the OCC, thereby reducing the risk of counterparty
default. Further, a liquid secondary market in options traded on a national
securities exchange may be more readily available than in the over-the-counter
market, potentially permitting the Fund to liquidate open positions at a profit
prior to exercise or expiration, or to limit losses in the event of adverse
market movements.
The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exchange-traded options on foreign currencies
involve certain risks not presented by the over-the-counter market. For example,
exercise and settlement of such options must be made exclusively through the
OCC, which has established banking relationships in applicable foreign countries
for this purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on the OCC
Or its clearing member, impose special procedures on exercise and settlement,
such as technical changes in the mechanics of delivery of currency, the fixing
of dollar settlement prices or prohibitions on exercise.
In addition, options on U.S. Government securities, futures
<PAGE>
contracts, options on futures contracts, forward contracts and options on
foreign currencies may be traded on foreign exchanges and over-the-counter in
foreign countries. Such transactions are subject to the risk of governmental
actions affecting trading in or the prices of foreign currencies or securities.
The value of such positions also could be adversely affected by (i) other
complex foreign political and economic factors, (ii) lesser availability than in
the United States of data on which to make trading decisions, (iii) delays in
the Fund's ability to act upon economic events occurring in foreign markets
during non-business hours in the United States, (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States, and (v) low trading volume.
RISK FACTORS - FUTURES, OPTIONS AND OTHER DERIVATIVES
LENDING OF PORTFOLIO SECURITIES
The Fund may from time to time lend securities from its portfolio to brokers,
dealers and financial institutions and receive collateral from the borrower, in
the form of cash (which may be invested in short-term securities), U.S.
Government obligations or certificates of deposit. Such collateral will be
maintained at all times in an amount equal to at least 102% of the current
market value of the loaned securities, and will be in the actual or constructive
possession of the Fund during the term of the loan. The Fund will retain the
incidents of ownership of the loaned securities and will be entitled to the
interest or dividends payable on the loaned securities. In addition, the Fund
will recieve interest on the amount of the loan. The loans will be terminable by
the Fund at any time and will not be made to any affiliates of the Fund or the
Adviser. The Fund may pay reasonable finder's fees to persons unaffiliated with
it in connection with the arrangment of the loans.
As with any extensions of credit, there are risks of delay in recovery and, in
some cases, even loss of rights in the collateral or the loaned securities
should the borrower of securities fail financially. However, loans of portfolio
securities will be made only to firms deemed by the Adviser or Sub-Adviser to be
creditworthy. As a fundamental policy the Fund will not lend securities if, as a
result, more than 25% of its total assets would be lent to other parties.
<PAGE>
APPENDIX
(NOTE: THIS IS UNIFORM INFORMATION FOR THE ELEVEN FUNDS. SEE EACH FUND'S
SAI FOR INFORMATION SPECIFIC TO THAT FUND.)
THIS APPENDIX CONSTITUTES PART OF THE STATEMENTS OF ADDITIONAL INFORMATION OF
LINCOLN NATIONAL AGGRESSIVE GROWTH FUND, INC. (AGGRESSIVE GROWTH FUND), LINCOLN
NATIONAL BOND FUND, INC. (BOND FUND), LINCOLN NATIONAL CAPITAL APPRECIATION
FUND, INC. (CAPITAL APPRECIATION FUND), LINCOLN NATIONAL EQUITY-INCOME FUND,
INC. (EQUITY-INCOME FUND), LINCOLN NATIONAL GLOBAL ASSET ALLOCATION FUND, INC.
(GLOBAL ASSET ALLOCATION FUND), LINCOLN NATIONAL GROWTH AND INCOME FUND, INC.
(GROWTH AND INCOME FUND), LINCOLN NATIONAL INTERNATIONAL FUND, INC.
(INTERNATIONAL FUND), LINCOLN NATIONAL MANAGED FUND, INC. (MANAGED FUND),
LINCOLN NATIONAL MONEY MARKET FUND, INC. (MONEY MARKET FUND), LINCOLN NATIONAL
SOCIAL AWARENESS FUND, INC. (SOCIAL AWARENESS FUND), AND LINCOLN NATIONAL
SPECIAL OPPORTUNITIES FUND, INC. (SPECIAL OPPORTUNITIES FUND), UNLESS OTHERWISE
INDICATED, THE FOLLOWING INFORMATION APPLIES TO EACH FUND.
INVESTMENT ADVISOR AND SUB-ADVISOR
Lincoln National Investment Management Company (LNIMC) is the investment Advisor
to the funds and is headquartered at 200 E. Berry Street, Fort Wayne, Indiana
46802. LNIMC (the Advisor) is a wholly-owned subsidiary of Lincoln National
Corporation (LNC), a publicly-held insurance holding company organized under
Indiana law. Through its subsidiaries, LNC provides, on a national basis, life
insurance and annuities, property-casualty insurance, reinsurance, and financial
services. LNIMC is registered with the Securities and Exchange Commission (the
Commission) as an investment Advisor and has acted as an investment Advisor to
mutual funds for over 40 years. The Advisor also acts an investment Advisor
to Lincoln National Income Fund, Inc. (a closed-end investment company whose
investment objective is to provide a high level of current income from interest
of fixed-income securities); and Lincoln National Convertible Securities Fund,
Inc. (a closed-end investment company whose investment objective is a high level
of total return on its assets through a combination of capital appreciation and
current income), Lincoln Advisor Funds, Inc. (a retail mutual fund complex) and
to other clients.
Under Advisory Agreements with the Funds, the Advisor provides portfolio
management and investment advice to the Funds and administers its other affairs,
subject to the supervision of the Funds' Board of Directors. The Advisor, at its
expense, will provide office space to the Funds and all necessary office
facilities, equipment and personnel, and will make its officers and employees
available to the Funds as appropriate. In addition, the Advisor will pay all
expenses incurred by it or by the Funds in connection with the management of
each Fund's assets or the administration of its affairs, other than those
assumed by the Funds, as described below. Lincoln Life has paid the
organizational expenses of all the funds. The rates of compensation to the
Advisor and the Sub-Advisor are set forth in the Appendix to the
Prospectus.
During the last three years, the Advisor received the following amounts for
investment Advisor services:
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- -----------
<S> <C> <C> <C>
Aggressive Growth Fund $ 232,000 $ N/A $ N/A
Bond Fund 999,397 978,266 754,618
Capital Appreciation Fund 211,773 N/A N/A
Equity-Income Fund 348,255 N/A N/A
Global Asset Allocation Fund 1,381,059 901,004 643,332
Growth and Income Fund 3,896,902 3,293,315 2,537,432
International Fund 2,262,664 759,801 307,100
Managed Fund 1,919,150 1,756,544 1,403,073
Money Market Fund 404,441 449,374 570,352
Social Awareness Fund 736,602 542,142 331,256
Special opportunities Fund 1,351,374 1,052,967 733,475
</TABLE>
Expenses specifically assumed by the Funds include: compensation and expenses
of directors of the Funds who are not "interested persons" of the Funds as
defined in the Investment Company Act of 1940 (the Act);
<PAGE>
registration, filing and other fees in connection with filings with regulatory
authorities, including the costs of printing and mailing registration statements
and updated prospectuses provided to current stockholders; fees and expenses of
independent auditors; the expenses of printing and mailing proxy statement and
stockholder reports; custodian charges; brokerage commissions and securities
transaction costs incurred by the funds; taxes and corporate fees; legal fees
incurred in connection with the affairs of the Funds (other than legal services
provided by personnel of the Advisor or its affiliated companies); the fees of
any trade association of which the Funds are members: and expenses of
stockholder and director meetings.
If total expenses of the Funds (excluding taxes, interest, portfolio brokerage
commissions and fees, and expenses of an extraordinary and non-recurring nature,
but including the investment Advisory fee) exceed 1 1/2% per annum of the
average daily net assets of each Fund (2% for the International Fund), the
Advisor will pay such excess by offsetting it against the Advisory fee. If such
offset is insufficient to cover the excess, any balance remaining will be paid
directly by the Advisor to each Fund.
The current Advisory Agreements between the Advisor and the Funds will remain in
effect from year to year if approved annually by: (1) the Board of Directors of
each Fund or by the vote of a majority of the outstanding voting securities of
each Fund, and (2) a vote of a majority of the directors who are not "interested
persons" of the Funds or the Advisor, cast in person at a meeting called for the
purpose of voting on such approval. The Advisory Agreement may be terminated
without penalty at any time, on 60 days' written notice by: (1) the Board of
Directors of each Fund, (2) vote of majority of the outstanding voting
securities of each Fund or (3) the Advisor. The Advisory Agreement terminates
automatically in the event of assignment.
In like manner, the current Sub-Advisory Agreements will remain in effect from
year to year if approved annually by the Board of Directors of the applicable
Funds or by the vote of a majority of the outstanding voting securities of those
Funds. The Sub-Advisory Agreements may be terminated without penalty at any
time, on 60 days' written notice, by: (1) the Board of Directors of the
applicable fund, (2) vote of the majority of the outstanding voting securities
of the applicable Fund, (3) the Sub-Advisor, or (4) the Advisor. The Sub-
Advisory Agreements terminate automatically in the event of assignment.
DIRECTORS AND OFFICERS
The directors and executive officers of each Fund and their principal
occupations during the past five years are as follows:
<TABLE>
<CAPTION>
NAME AND BUSINESS POSITIONS WITH FUND PRINCIPAL OCCUPATION
ADDRESS DURING PAST FIVE YEARS
- ----------------- ------------------- ----------------------
<S> <C> <C>
*Kelly D. Clevenger Chairman of the Vice President, Lincoln National
1300 S. Clinton Street Board Life Insurance Company
Fort Wayne, Indiana 46802 President and
Director
John B. Borsch, Jr. Director Retired, formerly Associate Vice
1776 Sherwood Road President-Investments, Northwestern
Des Planes, IL 60016 University
Nancy L. Frisby, CPA Director Regional Vice President/Chief
Financial Officer (formerly Vice-President
700 Broadway -Finance; Regional Controller of
Fort Wayne, IN 46802 Finance) , St. Joseph Medical Center,
Fort Wayne, Indiana
*Barbara S. Kowalczyk Director Executive Vice President,, Lincoln
1300 S. Clinton National Investment Management
Street Fort Wayne, Company (formerly, Senior Vice
IN 46802 President, The Lincoln National
Life Insurance Company
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NAME AND BUSINESS POSITIONS WITH FUND PRINCIPAL OCCUPATION
ADDRESS DURING PAST FIVE YEARS
- ----------------- ------------------- ----------------------
<S> <C> <C>
Stanley R. Nelson Director Executive in Residence
420 Delaware St., S.E. Program in Health
Minneapolis, MN 55455 Services Administration,
University of Minnesota,
Minneapolis, Minnesota,
(formerly President, Henry
Ford Health Care
Corporation, Detroit,
Michigan)
* Max A. Roesler Vice President and Vice President and
1300 S. Clinton Street Treasurer Treasurer, The Lincoln
Fort Wayne, Indiana 46808 National Life Insurance
Company; Vice President and
Treasurer, Lincoln National
Corporation
* Cynthia A. Rose Assistant Secretary Assistant Secretary,
200 East Berry Street Lincoln National
Fort Wayne, IN 46802 Corporation; Assistant
Secretary, The Lincoln
National Life Insurance
Company
</TABLE>
* "Interested persons" of the Funds, as defined in the Act.
Directors' fees of $250 per meeting are paid by each Fund to each director who
is not an "interested person" of the Fund.
INVESTMENT POLICIES AND TECHNIQUES (CONTINUED)
OPTIONS AND FINANCIAL FUTURES TRADING
This discussion relates to the Bond, Growth, Managed, Social Awareness, and
Special Opportunities Funds. Neither the International Fund nor the Money Market
Fund has sought the authority to engage either in options or in futures trading.
(NOTE: The Aggressive Growth, Capital Appreciation, Equity-Income and Global
Asset Allocation Funds have their own respective discussions of the Strategic
Portfolio Transactions in which they may engage).
OPTIONS TRADING
The Fund may purchase or write (sell) options on financial instruments as a
means of achieving additional return or hedging the value of the Fund's
portfolio. The Fund may not write put or covered call options in an amount
exceeding 30% of the value of its total assets. The Fund would invest in options
in standard contracts which may be quoted on NASDAQ, or on national securities
exchanges. Currently options are traded on numerous securities and indices
including, without limitation, the S & P 100 Index, the S&P 500 Index, and the
NYSE Beta Index.
A) In General. Put and call options are generally short-term contracts with
durations of nine months or less. The Investment Advisor will generally write
covered call options when it anticipates declines in the market value of the
portfolio securities and the premiums received may offset to some extent the
decline in the Fund's net asset value. On the other hand, writing put options is
a useful portfolio investment strategy when the Fund has cash or other reserves
and it intends to purchase securities but expects prices to decline.
Generally, the risk to the Fund in writing options is that the Investment
Advisor's assumption about the price trend of the underlying security may prove
inaccurate. If, as a result, the Fund wrote a put, expecting the price of a
security to increase, and it decreased, or if the Fund wrote a call, expecting
the price to decrease but it increased, the Fund could suffer a loss if the
premium received in each case did not equal the difference between the exercise
price and the market price.
B) Call Options. The Fund may write only call options which are "covered,"
meaning that the Fund either owns the underlying security or has an absolute and
immediate right to acquire that security, without additional cash consideration,
upon conversion or exchange of other securities currently held in its portfolio.
In addition, the Fund will not, prior to the expiration of a call option, permit
the call to become uncovered. If the Fund writes a call option, the purchaser of
the option has the right to buy (and the Fund has the obligation to sell) the
underlying security at the exercise price throughout the term of the option. The
amount paid to the Fund by the purchaser of the option is the "premium." The
Fund's obligation to deliver the
<PAGE>
underlying security against payment of the exercise price would terminate either
upon expiration of the option or earlier if the Fund were to effect a "closing
purchase transaction" through the purchase of an equivalent option on an
exchange. The Fund would not be able to effect a closing purchase transaction
after it had received notice of exercise.
In order to write a call option, the Fund is required to deposit in escrow the
underlying security or other assets in accordance with the rules of The Options
Clearing Corporation and the various exchanges. The Fund may not purchase call
options except in connection with a closing purchase transaction. It is possible
that the cost of effecting a closing purchase transaction may be greater than
the premium received by the Fund for writing the option.
Generally, the investment Advisor (the Advisor) intends to write listed covered
calls during periods when it anticipates declines in the market valued of
portfolio securities and the premiums received (not of transaction costs) may
offset to some extent the decline in the Fund's net asset value occasioned by
such declines in market value. The Advisor will generally not write listed
covered call options when it anticipates that the market value of the Fund's
portfolio securities will increase.
If the Advisor decides that at a price higher than the current value a portfolio
security would be overvalued and should be sold, the Fund may write an option on
the security at that price. Should the security subsequently reach that price
and the option be exercised, the Fund would, in effect, have increased the
selling price of that security, which it would have sold at that price in any
event, by the amount of the premium. In the event the market price of the
security declined and the option were not exercised, the premium would offset
all or some portion of that decline. It is possible, of coarse, that the price
of the security could increase beyond the exercise price; in that event, the
Fund would forego the opportunity to sell the security at that higher price.
In addition, call options may be used as part of a different strategy in
connection with sales of portfolio securities. If, in the judgement of the
Advisor, the market price of a security is overvalued and it should be sold, the
Fund may elect to write a call with an exercise price substantially below the
current market price. So long as the value of the underlying security remains
above the exercise price during the term of the option, the option will be
exercised, and the Fund will be required to sell the security at the exercise
price. If the sum of the premium and the exercise price exceeds the market price
of the security at the time the call is written, the Fund would, in effect, have
increased the selling price of the security. The Fund would not write a call
under these circumstances if the sum of the premium and the exercise price were
less than the current market price of the security.
In summary, a principal reason for writing calls on a securities portfolio is to
attempt to realize, through receipt of premium income, a greater return than
would be earned on the securities alone. A covered call writer, such as the
Fund, which owns the underlying security has, in return for the premium, given
up the opportunity for profit from a price increase in the underlying security
above the exercise price, but has retained the risk of loss should the price of
the security decline. Unlike one who owns securities not subject to a call, the
Fund as a call writer may be required to hold such securities until the
expiration of the call option or until the Fund engages in a closing purchase
transaction at a price that may be below the prevailing market.
C) Put Options. The Fund may also write put options. If the Fund writes a put
option, it is obligated to purchase a given security at a specified price at any
time during the term of the option. The rules regarding the writing of put
options are generally comparable to those described above with respect to call
options.
Writing put options is a useful portfolio investment strategy when the Fund has
cash or other reserves available for investment as a result of sales of Fund
shares or because the Advisor believes a more defensive and less fully invested
position is desirable in light of market conditions. If the Fund wishes to
invest its cash or reserves in a particular security at a price lower than
current market value, it may write a put option on that security at an exercise
price which reflects the lower price it is willing to pay. The buyer of the put
option generally will not exercise the option unless the market price of the
underlying security declines to a price near or below the exercise price. If the
Fund writes a put option, the price of the underlying security declines and the
option is exercised, the premium, net of transaction charges, will reduce the
purchase price paid by the Fund for the security. Of course, the price of the
security may continue to decline after exercise of the put options, in which
event the Fund would have foregone an opportunity to purchase the security at a
lower price, or the option might never be exercised.
If, prior to the exercise of a put, the Advisor determines that it no longer
wishes to invest in the security on
<PAGE>
which the put has been written, the Fund may be able to effect a closing
purchase transaction on an exchange by purchasing a put of the same series as
the one which it has previously written. The cost of effecting a closing
purchase transaction may be greater than the premium received on writing the put
option, and there is no guarantee that a closing purchase transaction can be
effected. The Fund may purchase put options only in connection with a closing
transaction.
As with the writer of a call, a put writer generally hopes to realize premium
income. The risk position of the Fund as a put writer is similar to that of a
covered call writer which owns the underlying securities. Like the covered call
writer (who must bear the risk of his position in the underlying security), the
Fund as a put writer stands to incur a loss if and to the extent the price of
the underlying security falls below the exercise price plus premium.
At the time a put option is written, the Fund will be required to extablish, and
will maintain until the put is exercised or has expired, a segregated account
with its custodian consisting of cash or short-term U.S. government securities
equal in value to the amount which the Fund will be obligated to pay upon
exercise of the put. Principal factors affecting the market value of a put or
call option include supply and demand, interest rates, the current market price
and price volatility of the underlying security and the time remaining until the
expiration date. In addition, there is no assurance that the Fund will be able
to effect a closing transaction at a favorable price. If the Fund cannot enter
into such a transaction, it may be required to hold a security that it might
otherwise have sold, in which case it would continue to be a market risk on the
security. If a substantial number of covered options written by the Fund are
exercised, the Fund's rate or portfolio turnover could exceed historic levels.
This could result in higher transaction costs, including brokerage commissions.
The Fund will pay brokerage commissions in connection with the writing and
purchasing of option to close out previously written options. Such brokerage
commissions are normally higher than those applicable to purchases and sales of
portfolio securities.
FUTURES CONTRACTS AND OPTIONS THEREON
A. In General. Generally, the Fund may buy and sell financial futures
contracts ("futures contracts") and related options thereon solely for hedging
purposes. The Fund may sell a futures contract or purchase a put option on that
futures contract to protect the value of the Fund's portfolio in the event the
Investment Advisor anticipates declining security prices. Similarly, if security
prices are expected to rise, the Fund may purchase a futures contract or a call
option thereon. (For certain limited purposes, as explained below, the Fund is
also authorized to buy futures contracts on an unleveraged basis and not as an
anticipatory hedge.)
The Fund will not invest in futures contracts and options thereon if immediately
thereafter the amount committed to margins plus the amount paid or option
premiums exceeds 5% of the Fund's total assets. In addition the Fund will not
hedge more than one-third of its net assets.
B. Futures Contracts. The Fund may purchase and sell financial futures
contracts ("futures contracts") as a hedge against fluctuations in the value of
securities which are held in the Fund's portfolio or which the Fund intends to
purchase. The Fund will engage in such transactions consistent with the Fund's
investment objective. Currently, futures contracts are available on Treasury
bills, notes, and bonds.
There are a number of reasons why entering into futures contracts for hedging
purposes can be beneficial to the Fund. First, futures markets may be more
liquid than the corresponding cash markets on the underlying securities. Such
enhanced liquidity results from the standardization of the futures contracts and
the large transaction volumes. Greater liquidity permits a portfolio manager to
effect a desired hedge both more quickly and in greater volume than would be
possible in the cash market. Second, a desired sale and subsequent purchase can
generally be accomplished in the futures market for a fraction of the
transaction costs that might be incurred in the cash market.
The purpose of selling a futures contract is to protect the Fund's portfolio
from fluctuation in asset value resulting from stock price changes. Selling a
futures contract has an effect similar to selling a portion of the Fund's
portfolio securities. If stock prices were to decline, the value of the Fund's
futures contracts would increase, thereby keeping the net asset value of the
Fund from declining as much as it otherwise might have. In this way, selling
futures contracts acts as a hedge against the effects of declining stock prices.
However, an increase in the value of portfolio securities tends to be offset by
a decrease in the value of corresponding futures contracts.
Similarly, when stock prices are expected to rise, futures contracts may be
purchased to hedge against anticipated subsequent purchases of portfolio
securities at higher prices. By buying futures, the Fund could
<PAGE>
effectively hedge against an increase in the price of the securities it intends
to purchase at a later date in order to permit the purchase to be effected in an
orderly manner. At the time, the futures contracts could be liquidated at a
profit if stock prices had increased as expected, and the Fund's cash position
could be used to purchase securities.
When a purchase or sale of a futures contract occurs, a deposit of high-quality,
liquid securities called "initial margin" is made by both buyer and seller with
a custodian for the benefit of the broker. Unlike other types of margin, a
futures margin account does not involve any loan or borrowing but is merely a
good faith deposit that must be maintained in a minimum amount of cash or U.S.
Treasury bills. All futures positions, both long and short, are marked-to-market
daily, with cash payments called "variation margin" being made by buyers and
sellers to the custodian, and passed through to the sellers and buyers, to
reflect daily changes in the contract values.
Most futures contracts are typically cancelled or closed out before the
scheduled settlement date. The closing is accomplished by purchasing (or
selling) an identical futures contract to offset a short (or long) position.
Such an offsetting transaction cancels the contractual obligations established
by the original futures transaction. Other financial futures contracts call for
cash settlements rather than delivery of securities.
If the price of an offsetting futures transaction varies from the price of the
original futures transaction, the hedger will realize a gain or loss
corresponding to the difference. That gain or loss will tend to offset the
unrealized loss or gain on the hedged securities position, but may not always or
completely do so.
The Fund will not enter into any futures contract if, immediately thereafter,
the aggregate initial margin for all existing futures contracts and options
thereon and for premiums paid for related options would exceed 5% of the Fund's
total assets. The Fund will not purchase or sell futures contracts or related
options of immediately thereafter more than one-third of its net assets would be
hedged.
C. Risks and Limitations Involved in Futures Hedging. There are a number of
risks associated with futures hedging. Changes in the price of a futures
contract generally parallel but do not necessarily equal changes in the prices
of the securities being hedged. The risk of imperfect correlation increases as
the composition of the Fund's securities portfolio diverges from the securities
that are the subject of the futures contract. Because the change in the price
of the futures contract may be more or less than the change in the prices of the
underlying securities, even a correct forecast of stock price changes may not
result in a successful hedging transaction. Another risk is that the Investment
Advisor could be incorrect in its expectation as to the direction or extent of
various market trends or the time period within which the trends are to take
place.
The Fund intends to purchase and sell futures contracts only on exchanges where
there appears to be a market in such futures sufficiently active to accommodate
the volume of its trading activity. There can be no assurance that a liquid
market will always exist for any particular contract at any particular time.
Accordingly, there can be no assurance that it will always be possible to close
a futures position when such closing is desired, in the event of adverse price
movements, the Fund would continue to be required to make daily cash payments of
variation margin. However, in the event futures contracts have been sold to
hedge portfolio securities, such securities will not be sold until the
offsetting futures contracts can be executed. Similarly, in the event futures
have been bought to hedge anticipated securities purchases, such purchases will
not be executed until the offsetting futures contracts can be sold.
Successful use of futures contracts by the Fund is also subject to the ability
of the Investment Advisor to predict correctly movements in the direction of
interest rates and other factors affecting markets for securities. For example,
if the Fund has hedged against the possibility of an increase in interest rates
that would adversely affect the price of securities in its portfolio and prices
of such securities increase instead, the Fund will lose part or all of the
increased value of its securities because it will have offsetting losses in its
futures positions. In addition, in such situations, if the Fund has insufficient
cash to meet daily variation margin requirements, it may have to sell securities
to meet such requirements. Such sale of securities may be, but will not
necessarily be, at increased prices that reflect the rising market. The Fund may
have to sell securities at a time when it is disadvantageous to do so. Where
futures are purchased to hedge against a possible increase in the price of
securities before the Fund is able to invest its cash in an orderly fashion, it
is possible that the market may decline instead; if the Fund is able to invest
its cash in an orderly fashion, it is possible that the market may decline
instead; if the Fund then concludes not to invest in securities at that time
because of concern as to possible further market decline or for other reasons,
the Fund will realize a loss on the futures contract that is not offset by a
reduction in the price of the securities purchased.
<PAGE>
The selling of futures contracts by the Fund and use of related transactions in
options on futures contracts (discussed below) are subject to position limits,
which are affected by the activities of the Investment Advisor.
The hours of trading of futures contracts may not conform to the hours during
which the Fund may trade equity securities. To the extent that the futures
markets close before the equity securities markets, significant price and rate
movements can take place in the equity securities markets that cannot be
reflected in the futures markets.
Pursuant to Rule 4.5 under the Commodity Exchange Act, investment companies
registered under the Investment Company Act of 1940, as amended (the "Investment
Company Act"), are exempted from the definition of "commodity pool operator" in
the Commodity Exchange Act, subject to compliance with certain conditions. The
exemption is conditioned upon a requirement that all of the investment company's
commodity futures transactions constitute bona fide hedging transactions (except
on an unleveraged basis, as described in E. below). With respect to long
positions assumed by the Fund, the Fund will segregate with its custodian, an
amount of cash and other assets permitted by Commodity Futures Trading
Commission (CFTC) regulations equal to the market value of the futures contracts
and thereby insure that the use of futures contracts is unleveraged. The Fund
will use futures in a manner consistent with these requirements.
D. Options on Futures Contracts. The Fund only intends to engage in options on
futures contracts for bona fide hedging purposes in compliance with CFTC
regulations. An option on a futures contract gives the purchaser the right, but
not the obligations, to assume a position in a futures contract (which position
may be a long or short position) at a specified exercise price at any time
during the option exercise period. The writer of the option is required upon
exercise to assume an offsetting futures position (which position may be a long
or short position). Upon exercise of the option, the assumption of offsetting
futures positions by the writer and holder of the option will be accompanied by
delivery of the accumulated balance in the writer's futures margin account that
represents the amount by which the market price of the futures contract, at
exercise, exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract.
The holder or writer of an option may terminate its position by selling or
purchasing an option of the same series. There is no guarantee that such closing
transactions can be effected.
The Fund will be required to deposit initial and variation margin with respect
to put and call options on futures contracts written by it pursuant to the
Fund's futures commissions merchants' requirements similar to those applicable
to the futures contracts themselves, described above.
E. Risks of Futures Transactions. The Fund's successful use of futures
contracts and options thereon depends upon the ability of its Investment Advisor
to predict movements in the stock market and other factors affecting markets
for securities and upon the degree of correlation between the prices of the
futures contracts and the prices of the securities being hedged. As a result,
even a correct forecast of stock price changes may not result in a successful
hedging transaction. Although futures contracts and options thereon may limit
the Fund's exposure to loss, they may also limit the Fund's potential for
capital gains. For example, if the Fund has hedged against the possibility of
decrease in stock prices which would adversely affect the price of
securities in its portfolio and prices of such securities increase instead, the
Fund will lose part or all of the benefit of the increased value of its
securities because it will have offsetting losses in its futures positions.
Although the Fund will enter into futures contracts only where there appears to
be a liquid market, there can be no assurance that such liquidity will always
exist.
F. The Fund also is authorized, subject to the limitations set out in the
Prospectus, to purchase futures contracts on an unleveraged basis, when not
intended as an anticipatory hedge. When a contract is purchased on this basis
the investment company establishes a segregated account, composed of cash and/or
cash equivalents, equal to the total value of the contract (less margin on
deposit). As with other futures trading, these purchases must not be for
speculative purposes.
The ability to engage in these purchases on an unleveraged basis can
significantly decrease transaction costs to the Funds in certain instances. For
example, if an inordinately large deposit should occur on a single day, the
sheer volume of securities purchases required for that day may place the Fund at
a market disadvantage by requiring it to purchase particular securities in such
volume that its own buying activity could cause prices to increase. In
addition, if this deposit had involved 'market-timing' and as a result there
subsequently were an oversized withdrawal, the Fund could again suffer market
disadvantage, this time because the volume of sales could, for the same reason,
force prices of particular securities to decrease. The Fund, by buying a
<PAGE>
futures contract (followed by the appropriate closing transaction) instead of
purchasing securities could achieve considerable savings in transaction costs
without departing from Fund objectives. Furthermore, as stated in (B.) above,
price changes in a futures contract generally parallel price changes in the
securities that the Fund might otherwise have purchased. Thus, purchase of a
futures contract on an unleveraged basis allows the Fund to comply with its
objective while at the same time achieving these lower transaction costs.
<PAGE>
LENDING OF PORTFOLIO SECURITIES
As described in the Prospectus, the Funds may from time to time lend securities
from their portfolios to brokers, dealers and financial institutions and receive
collateral from the borrower, in the form of cash (which may be invested in
short-term securities), U.S. government obligations or certificates of deposit.
Such collateral will be maintained at all times in an amount equal to at least
100% of the current market value of the loaned securities, and and will be in
the actual or constructive possession of the particular Fund during the term of
the loan. The Fund will maintain the incidents of ownership of the loaned
securities and will continue to be entitled to the interest or dividends payable
on the loaned securities. In addition, the Fund will receive interest on the
amount of the loan. The loans will be terminable by the Fund at any time and
will not be made to any affiliates of the Fund or the Adviser. The Fund may pay
reasonable finder's fees to persons unaffiliated with it in connection with the
arrangement of the loans.
As with any extensions of credit, there are risks of delay in recovery and, in
some cases, even loss of rights in the collateral or the loaned securities
should the borrower of securities fail financially. However, loans of portfolio
securities will be made only to firms deemed by the Adviser to be
creditworthy.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
The Funds may make short-term investments in repurchase agreements. A repurchase
agreement typically involves the purchase by the Fund of securities (U.S.
government or other money market securities) from a financial institution such
as a bank, broker or savings and loan association, coupled with an agreement by
the seller to repurchase the same securities from the Fund at the specified
price and at a fixed time in the future, usually not more than seven days from
the date of purchase. The difference between the purchase price to the Fund and
the resale price to the seller represents the interest earned by the Fund which
is unrelated to the coupon rate or the maturity of the purchased security. If
the seller defaults, the Fund may incur a loss if the value of the collateral
securing the repurchase agreement declines, or the Fund may incur disposition
costs in connection with liquidating the collateral. If bankruptcy proceedings
are commenced with respect to the seller, realization upon the collateral by the
Fund may be delayed or limited and a loss may be incurred if the collateral
securing the repurchase agreement declines in value during the bankruptcy
proceedings. The Board of Directors of the Fund will evaluate the
creditworthiness of all entities, including banks and broker-dealers, with which
they propose to enter into repurchase agreements. These transactions will be
fully collateralized; and the collateral for each transaction will be in the
actual or constructive possession of the particular Fund during the terms of the
transaction, as provided in the agreement.
In a reverse repurchase agreement, the Fund involved sells a portfolio security
to another party, such as a bank or broker-dealer, in return for cash and agrees
to repurchase the instrument at a particular price and time. While a reverse
repurchase agreement is outstanding, the Fund will maintain cash and appropriate
liquid assets in a segregated custodial account to cover its obligation under
the agreement. The Fund will enter into reverse repurchase agreements only with
parties that the Advisor or Sub-Advisor deems creditworthy. Reverse repurchase
agreements are considered to be borrowing transactions, and thus are subject to
the Fund's limitation to borrowing. Not every Fund is authorized to enter into
reverse repurchase agreements.
CUSTODIAN
All securities, cash and other similar assets of the Bond, Growth and Income,
Managed, Money Market, Social Awareness and Special Opportunities Funds are
currently held in custody by Bankers Trust Company, 14 Wall Street, 4th Floor,
New York, New York 10005. Bankers Trust agreed to act as custodian for each Fund
pursuant to a Custodian Agreement dated June 17, 1985 (March 10, 1986 for the
Social Awareness Fund). These six Funds expect to change custodian to Chase
Manhattan Bank, New York, New York, in mid-1995.
All securities, cash and other similar assets of the Aggressive Growth, Capital
Appreciation, Equity-Income, Global Asset Allocation (formerly Putnam Master)
and International Funds are held in custody by State Street Bank and Trust
Company, 225 Franklin Street, Boston, Massachusetts 02110. State Street agreed
to act as custodian for these Funds pursuant to Custodian Contracts effective
July 21, 1987 for the Global Asset Allocation Fund, April 29, 1991 for the
International Fund, and December 6, 1993 for the other three funds.
Under these Agreements, the respective custodians shall (1) receive and disburse
money; (2) receive and hold securities; (3) transfer, exchange, or deliver
securities; (4) present for payment coupons and other income items, collect
interest and cash dividends received, hold stock dividends, etc.; (5) cause
escrow and deposit
<PAGE>
receipts to be executed; (6) register securities; and (7) deliver to the Funds
proxies, proxy statements, etc.
INDEPENDENT AUDITORS
Each Fund's Board of Directors has engaged Ernst & Young LLP, 2300 Fort Wayne
National Bank Building, Fort Wayne, Indiana 46802, to be the independent
auditors for the Fund. In addition to the audit of the 1994 financial statements
of the Funds, other services provided include review and consultation connected
with filings of annual reports and registration statements with the Securities
and Exchange Commission; consultation on financial accounting and reporting
matters; and meetings with the Audit Committee.
FINANCIAL STATEMENTS
The financial statements for the Funds are incorporated by reference to the
Funds' 1994 Annual Report (see Pages 34-47 for all Funds; and Page 10,
Aggressive Growth Fund; Pages 11-12, Bond Fund; Pages 13-14, Capital
Appreciation Fund; Pages 14-16, Equity-Income Fund; Pages 24-30, Global Asset
Allocation Fund; Pages 17-18, Growth and Income Fund; Pages 18-20, International
Fund; Pages 20-23, Managed Fund; Page 23, Money Market Fund; Pages 30-31, Social
Awareness Fund; and Pages 31-33, Special Opportunities Fund). We will provide a
copy of the Annual Report on request and without charge. Please write or call
Eric Jones, The Lincoln National Life Insurance Company, P.O. Box 2340, Fort
Wayne, Indiana 46801; telephone: 1-800-1212, Extension 6536.
BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
Aaa--Bonds which are rated Aaa are judged to be of the best quality and carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment some time in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments are
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.
<PAGE>
STANDARD & POOR'S CORPORATION
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA--Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas these bonds normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay principal and interest than
for bonds in the A category and higher.
BB-B-CCC-CC--Bonds rated BB,B,CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
COMMERCIAL PAPER RATINGS
MOODY'S INVESTORS SERVICE, INC.
Moody's Commercial Paper ratings are opinions of the ability of issuers to repay
punctually promissory obligations not having an original maturity in excess of
nine months. Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Prime 1--Highest Quality; Prime 2--Higher Quality; Prime 3--High Quality. (The
Fund will not invest in commercial paper rated Prime 3).
STANDARD & POOR'S CORPORATION
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. The Fund will invest in commercial paper rated in the "A" Categories,
as follows:
A Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
the designation 1, 2, and 3 to indicate the relative degree of safety. (The Fund
will not invest in commercial paper rated A-3).
A--1 This designation indicates that the degree of safety regarding timely
payment is very strong.
A--2 Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not overwhelming as for issues
designated A-1.
U.S. GOVERNMENT OBLIGATIONS
Securities issued or guaranteed as to principal and interest by the U.S.
government include a variety of Treasury securities, which differ only in their
interest rates, maturities and times of issuance. Treasury bills have a maturity
of one year or less. Treasury notes have maturities of one to seven years and
Treasury bonds generally have a maturity of greater than five years.
Various agencies of the U.S. government issue obligations. Some of these
securities are supported by the full faith and credit of the U.S. Treasury (for
example those issued by Export-Import Bank of the United States, Farmers Home
Administration, Federal Housing Administration, Government National Mortgage
association, Maritime Administration, Small Business Administration and The
Tennessee Valley Authority). Obligations of instrumentalities of the U.S.
government are supported by the right of the issuer to borrow from the Treasury
(for example, those issued by Federal Farm Credit Banks, Federal Home Loan Bank,
Federal Home Loan Mortgage Corporation, Federal Intermediate Credit Banks,
Federal Land Bank and the U.S. Postal Service).
<PAGE>
Obligations supported by the credit of the instrumentality include securities
issued by government sponsored corporations whose stock is publicly held (for
example, the Federal National Mortgage Association, and the Student Loan
Marketing Association).
TAXES
Each Fund intends to qualify and has elected to be taxed as a "regulated
investment company" under certain provisions of the Internal Revenue Code of
1986, as amended (the "Code"). If a Fund qualifies as a "regulated investment
company" and complies with the provisions of the Code relieving regulated
investment companies which distribute substantially all of their net income
(both net ordinary income and net capital gain) from Federal income tax, it will
be relieved from such tax on the part of its net ordinary income and net
realized capital gain which it distributes to its shareholders. To qualify for
treatment as a "regulated investment company," each Fund must, among other
things, derive in each taxable year at least 90 percent of its gross income from
dividends, interest, payments with respect to securities loans, and gains from
the sale or other disposition of stock or securities or foreign currencies
(subject to the authority of the Secretary of the Treasury to exclude foreign
currency gains which are not directly related to the Fund's principal business
of investing in stock or securities or options and futures with respect to such
stock or securities), or other income (including but not limited to gains from
options, futures, or forward contracts) derived with respect to its investing in
such stock, securities, or currencies. In addition to qualify as a "regulated
investment company" each Fund must derive less than 30% of its gross income from
the sale or other disposition of securities held for less than three months. In
order to meet these requirements, a Fund may be required to defer disposing of
certain futures contracts and underlying securities beyond the time when it
might otherwise be advantageous to do so. Specifically, these requirements may
limit a Fund's ability to (a) sell securities held for less than three months;
(b) effect closing transactions on futures contracts entered into less than
three months previously; (c) enter into futures contracts for a period of less
than three months; and (d) enter into futures contracts on securities held for
less than the long-term capital gains holding period. Further, for purposes of
the 30% test, increases (and decreases) in the value of positions that are part
of a "designated hedge" (as defined in the Code) are netted.
The Federal tax laws impose a four percent nondeductible excise tax on each
regulated investment company with respect to an amount, if any, by which such
company does not meet distribution requirements specified in such tax laws,
unless certain exceptions apply. Each Fund intends to comply with such
distribution requirements or qualify under one or more exceptions, and thus does
not except to incur the four percent nondeductible excise tax.
Since the sole shareholder of each Fund will be LNL, no discussion is stated
herein as to Federal income tax consequences at the shareholder level.
The discussion of Federal income tax considerations in the Prospectus, in
conjunction with the foregoing, is a general and abbreviated summary of the
applicable provisions of the Code and Treasury Regulations currently in effect
as interpreted by the Courts and the Internal Revenue Service. These
interpretations can be changed at any time. The above discussion covers only
Federal tax considerations with respect to the Fund. State and local taxes vary.
STATE REQUIREMENTS
The California Department of Insurance has established the following Guidelines
for an underlying portfolio of a Separate Account. The Funds intend to comply
with these Guidelines:
BORROWING
The borrowing limits for any variable contract separate account portfolio are
(1) 10% of net asset value when borrowing for any general purpose and (2) 25% of
net asset value when borrowing as a temporary measure to facilitate redemptions.
Net asset value of a portfolio is the market value of all investments or assets
owned less outstanding liabilities of the portfolio at the time that any new or
additional borrowing is undertaken.
FOREIGN INVESTMENTS--DIVERSIFICATION
The foreign country diversification guidelines to be followed by the Funds are
as follows:
1. A Portfolio will be invested in a minimum of five different foreign
countries at all times. However, this
<PAGE>
minimum is reduced to four when foreign country investments comprise less than
80% of the Portfolio's net asset value; to three when less than 60% of such
value; to two when less than 40%; and to one when less than 20%.
2. Except as set forth in items 3 and 4 below, a Portfolio will have no more
than 20% of its net asset value invested in securities of issuers located in any
one country.
3. A Portfolio may have an additional 15% of its value invested in securities
of issuers located in any one of the following countries: Australia, Canada,
France, Japan, the United Kingdom or West Germany.
4. A Portfolio's investments in United States issuers are not subject to the
foreign country diversification guidelines.
DERIVATIVE TRANSACTIONS - DEFINITIONS
The Prospectus for each Fund and the uniform Appendix for the Prospectus booklet
discuss the type of Derivative Transactions in which the Funds may engage and
the risks typically associated with many Derivative transactions. Here are some
definitions for the derivatives listed in the Appendix:
OPTION: a contract which gives the Fund the right, but not the obligation,
to buy or sell specified securities at a fixed price before or at a designated
future date. If the Contract allows the Fund to buy securities, it is a call
option; if to sell, it is a put option. It is common practice in options
trading to terminate an outstanding option contract by entering into an
offsetting transaction known as a 'closing transaction;, as a result of which
the Fund would either pay out or receive a cash settlement. This is discuss
below.
CURRENCY OPTION: Discussed below.
FIXED INCOME OPTION: one based on a fixed-income security, such as a
corporate or government bond.
INDEXED OPTION: one based on the value of an index which measures the
fluctuating value of a 'basket' of pre-selected securities.
STOCK (EQUITY) OPTION: one based on the shares of stock of a particular
company.
OPTION ON A FUTURES CONTRACT: Discussed below.
SWAP: a financial transaction in which the Fund and another party agree to
exchange streams of payments at periodic intervals under a predetermined set of
occurrences related to the price, level, performance or value of one or more
underlying securities, and pegged to a reference amount known as the 'notional
amount'. A swap is normally used to change the market risk associated with a
loan or bond borrowing from one interest rate base (fixed term or floating rate)
or currency of one denomination to another.
EQUITY SWAP: one which allows the Fund to exchange the rate of return
(or some portion of the rate) on its portfolio stocks (an individual
share, a basket or index) for the rate of return on another equity or
non-equity investment.
INTEREST RATE SWAP: one in which the Fund and another party exchange
different types of interest payment streams, pegged to an underlying
notional principal amount. The three main types of interest rate swaps
are coupon swaps (fixed rate to floating rate in the same currency);
basis swaps (one floating rate index to another floating rate index in
the same currency); and cross-currency interest rate swaps (fixed rate
in one currency to floating rate in another).
RELATED TRANSACTIONS TO INTEREST RATE SWAPS:
a. CAP: A contract for which the buyer pays a fee, or premium, to
obtain protection against a rise in a particular interest rate
above a certain level. For example, an interest rate cap may cover
a specified principal amount of a loan over a designated time
period, such as a calendar quarter. If the covered interest rate
rises above the rate ceiling, the seller of the rate cap pays the
purchaser an amount of money equal to the average rate
differential times the principal amount times one-quarter.
b. FLOOR: a contract in which the seller agrees to pay to the
purchaser, in return for the
<PAGE>
payment of a premium, the difference between current interest rates
and an agreed (strike) rate times the notional amount, should
interest rates fall below the agreed level (the 'floor'). A floor
contract has the effect of a string of interest rate guarantees.
c. COLLAR: an agreement to simultaneously purchase a cap and sell
a floor, in order to maintain interest rates within a defined range.
The premium income from the sale of the floor reduces or offsets the
cost of buying the cap.
d. CORRIDOR: an agreement to buy a cap at one interest rate and
sell a cap at a higher rate.
SWAPTION: an option to enter into, extend, or cancel a swap.
FUTURES CONTRACT: a contract which commits the Fund to buy or sell a specified
amount of a financial instrument at a fixed price on a fixed date in the future.
Futures contracts are normally traded on an exchange and their terms are
standardized, which makes it easier to buy and sell them.
INTEREST RATE FUTURES (AND OPTIONS ON THEM): futures contracts pegged to
U.S. and foreign fixed-income securities, debt indices and reference
rates.
STOCK INDEX FUTURES. futures contracts based on an index of pre-selected
stocks, with prices based on a composite of the changes to the prices of
the individual securities in the index (e.g., S&P 500).
OPTION ON A FUTURES CONTRACT: an option taken on a futures position.
FORWARD CONTRACT: an over-the-counter, individually-tailored futures contract.
FORWARD RATE AGREEMENT (FRA): a contract in which the Fund and another
party agree on the interest rate to be paid on a notional deposit of
specified maturity at a specific future time. Normally, no exchange of
principal is involved; the difference between the contracted rate and the
prevailing rate is settled in cash.
CURRENCY CONTRACT: a contract entered into for the purpose of reducing or
eliminating an anticipated rise or drop in currency exchange rates over time.
CURRENCY FUTURES: futures contracts on foreign currencies. Used to hedge
the purchase or sale of foreign securities.
CURRENCY OPTION: an option taken on foreign currency.
CURRENCY SWAP; a swap involving the exchange of cash flows and principal
in one currency for those in another, with an agreement to reverse the
principal swap at a future date.
CROSS-CURRENCY INTEREST RATE SWAP: a swap involving the exchange of
streams of interest rate payments (but not necessarily principal payments)
in different currencies and often on different interest bases (e.g., fixed
Deutsche Mark against floating dollar, but also fixed Deutsche Mark
against fixed dollar).
CURRENCY FORWARD CONTRACT: a contract to 'lock in' a currency rate at a
future date, to eliminate risk of currency fluctuation when the time comes
to convert from one currency to another.
<PAGE>
PART C - OTHER INFORMATION
Item 24. Financial Statements and Exhibits
a) List of Financial Statements
(1) Part A.
------
The financial highlights of Lincoln National Capital Appreciation
Fund, Inc. (the Fund) for the years ended December 31, 1994 and
1993 are incorporated by reference to Pages 45-47 of the Fund's
1994 Annual Report.
Part B.
------
The following financial statements of the Fund are incorporated
by reference to Pages 13-14 and 34-44, and 47 of the Fund's 1994
Annual Report:
- Statement of Net Assets -- December 31, 1994
- Statement of Operations -- Year Ended December
31, 1994
- Statement of Changes in Net Assets -- Years
Ended December 31, 1994 and 1993
- Notes to Financial Statements -- December 31,
1994
In total, only pages 13-14 and 34-47 of the Fund's 1994
Annual Report are incorporated by reference into this
Registration Statement. No other pages of that Report are
incorporated by reference.
(2) Schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the related instructions, are
inapplicable, or the required information is included in the
financial statements, and therefore have been omitted.
b) Exhibits:
11 - Consent of Ernst & Young LLP, Independent
Auditors
17(a)- Memorandum Concerning Books and Records
(2/16/95)
<PAGE>
Item 25. Persons Controlled by or Under Common Control with Registrant
See "Management of the Fund," "Purchase of Securities Being Offered,"
and "Description of Shares" in the Prospectus forming Part A of this
Registration Statement and "Investment Adviser and Sub-Adviser" in the
Statement of Additional Information forming Part B of this Registration
Statement. As of the date of this Post-Effective Amendment to the
Registration Statement, The Lincoln National Life Insurance Company
(LNL), for its Variable Annuity Account C and Variable Life Account K,
is the sole shareholder in the Fund.
Item 26. Number of Holders of Securities
As of April 1, 1995, there was one record holder of common stock,
$.01 par value per share.
Item 27. Indemnification
Reference is made to Article IX of the Fund's By-Laws (filed as
Exhibit No. (2) hereto); to Section 7 of the Agreement to Purchase
Shares between the Fund and The Lincoln National Life Insurance
Company (filed as Exhibit No. (13(a)) hereto; and to Section 2-418 of
the Maryland General Corporation Law.
Item 28. Business and Other Connections of Investment Adviser
See "Management of the Fund" in the Prospectus and "Investment
Adviser and Sub-Adviser" in the Statement of Additional Information.
(a) The Adviser.
-----------
As of April 4, 1995, the officers and/or directors of the investment
adviser held the following positions:
<PAGE>
<TABLE>
<CAPTION>
Position, Other Substantial Business
Investment Profession, Vocation or
Name Adviser Employment; Address
---- --------- --------------------------
<S> <C> <C>
David A. Berry Vice President Vice President, Lincoln Advisor
Funds, Inc., Lincoln National
Income Fund, Inc. and Lincoln
National Convertible Securities
Fund, Inc., 200 East Berry
Street, Fort Wayne, Indiana,
46802
JoAnn E. Becker Vice President 200 East Berry Street, Fort
Wayne, Indiana, 46802
Dennis A. Blume Senior Vice President Senior Vice President and
(formerly Executive Director, Lincoln National
Vice President) Realty Corporation; Vice
and Director President, Lincoln Advisor
Funds, Inc., 200 East Berry
Street, Fort Wayne, Indiana,
46802
Anne E. Bookwalter Vice President 200 East Berry Street, Fort
Wayne, Indiana, 46805
Philip C. Byrde Vice President 200 East Berry Street, Fort
Wayne, Indiana, 46802
Steven R. Brody Executive Vice Director, Lincoln National
President (formerly Realty Corporation; Vice
Senior Vice President) President, The Lincoln
and Assistant Treasurer National Life Insurance Company,
and Lincoln Advisor Funds, Inc.,
200 East Berry Street, Fort
Wayne, Indiana, 46802
Patrick R. Chasey Vice President 200 East Berry Street, Fort
Wayne, Indiana, 46802
Garrett W. Cooper Vice President 200 East Berry Street, Fort
Wayne, Indiana, 46802
David C. Fischer Vice President 200 East Berry Street, Fort
Wayne, Indiana, 46802
Luc N. Girard Vice President 200 East Berry Street, Fort
Wayne, Indiana, 46802
Donald P. Groover Vice President 200 East Berry Street, Fort
Wayne, Indiana, 46802
William N. Holm, Jr. Vice President 200 East Berry Street, Fort
Wayne, Indiana, 46802
Jennifer C. Hom Vice President 200 East Berry Street, Fort
Wayne, Indiana, 46802
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Position, Other Substantial Business
Investment Profession, Vocation or
Name Adviser Employment; Address
---- ---------- ---------------------------
<S> <C> <C>
John A. Kellogg Vice President Vice President, Lincoln National
Realty Corporation, 200 East
Berry Street, Fort Wayne,
Indiana, 46802
Timothy H. Kilfoil Vice President 200 East Berry Street, Fort
Wayne, Indiana, 46802
Lawrence T. Kissko Senior Vice President Vice President and Director,
Lincoln National Realty
Corporation; Vice President,
The Lincoln National Life
Insurance Company,
200 East Berry Street,
Fort Wayne, Indiana, 46802
Walter M. Korinke Vice President 200 East Berry Street, Fort
Wayne, Indiana, 46802
Lawrence M. Lee Vice President Vice President, Lincoln National
(formerly Second Realty Corporation, 200 East
Vice President) Berry Street, Fort Wayne,
Indiana, 46802
Thomas A. McAvity, Jr.Vice President 200 East Berry Street, Fort
Wayne, Indiana, 46802
H. Thomas McMeekin President and Senior Vice President, Lincoln
Director (formerly National Corporation, 200 East
Executive Vice Berry Street, Fort Wayne,
President, and Senior Indiana 46802
Vice President)
John David Moore Vice President 200 East Berry Street, Fort
Wayne, Indiana 46802
Oliver H. G. Nichols Senior Vice President Senior Vice President, Lincoln
National Realty Corporation, 200
East Berry Street, Fort Wayne,
Indiana, 46802
David C. Patch Vice President 200 East Berry Street, Fort
Wayne, Indiana, 46802
Joseph T. Pusateri Vice President Vice President, Lincoln National
Realty Corporation, 200 East
Berry Street, Fort Wayne,
Indiana, 46802
Gregory E. Reed Vice President 200 East Berry Street, Fort
Wayne, Indiana, 46802
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Position, Other Substantial Business
Investment Profession, Vocation or
Name Adviser Employment; Address
---- --------- --------------------------
<S> <C> <C>
Max A. Roesler Executive Vice Vice President and Treasurer,
President and Treasurer Lincoln National Aggressive Growth
Fund, Inc., Lincoln National Bond
Fund, Inc.; Lincoln National
Capital Appreciation Fund, Inc.;
Lincoln National Corporation;
Lincoln National Equity-Income
Fund, Inc.; Lincoln National Growth
Fund, Inc.; Lincoln National
International Fund, Inc.; The
Lincoln National Life Insurance
Company; Lincoln National Managed
Fund, Inc.; Lincoln National Money
Market Fund, Inc.; Lincoln National
Special Opportunities Fund, Inc.;
Lincoln National Variable Annuity
Funds A and B; Lincoln National
Putnam Master Fund, Inc.; and
Lincoln National Social Awareness
Fund, Inc., 1300 South Clinton
Street, Fort Wayne, Indiana 46802
Bill L. Sanders Vice President Vice President, The Lincoln
National Life Insurance Company,
200 East Berry Street, Fort Wayne,
Indiana, 46802
Roy D. Shimer Vice President 200 East Berry Street, Fort Wayne,
Indiana, 46802
Gerald M. Weiss Vice President 200 East Berry Street, Fort
(formerly Second Wayne, Indiana, 46802
Vice President)
C. Suzanne Womack Secretary Vice President and Assistant
Secretary, Lincoln National
Corporation and The Lincoln
National Life Insurance Company;
Secretary, Lincoln Advisor Funds,
Inc.; Lincoln National Aggressive
Growth Fund, Inc.; Lincoln National
Capital Appreciation Fund, Inc;
Lincoln National Equity-Income
Fund, Inc.; Lincoln National Growth
Fund, Inc.; Lincoln National
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Position, Other Substantial Business
Investment Profession, Vocation or
Name Adviser Employment; Address
---- --------- -------------------------
<S> <C> <C>
C. Suzanne Womack (Con't) International Fund, Inc.; Lincoln
National Managed Fund, Inc.;
Lincoln National Money Market Fund,
Inc.; Lincoln National Putnam
Master Fund; Lincoln National
Social Awareness Fund, Inc.;
Lincoln National Special
Opportunities Fund, Inc.; Lincoln
National Variable Annuity Fund A;
Lincoln National Variable Annuity
Fund B, 200 East Berry Street, Fort
Wayne, Indiana, 46802
</TABLE>
Item 28. (Cont'd.)
(b) The Sub-Adviser.
---------------
As of April 17, 1995, the officers and/or directors of the sub-
advisor held the following positions:
JANUS CAPITAL CORPORATION
OFFICERS AND DIRECTORS
<TABLE>
<S> <C>
Thomas H. Bailey President, Director, Chairman
Jack R. Thompson Executive Vice President,
Director
James P. Craig Vice President
James P. Goff Vice President
Helen Y. Hayes Vice President
Warren B. Lammert Vice President
Thomas F. Marsico Vice President
Scott W. Schoelzel Vice President
Ronald V. Speaker Vice President
David C. Tucker Vice President and General
Counsel, Secretary
E. Joy Heckendorf Vice President of Retail
Marketing
Christine K. Snyder Vice President of Public
Relations
Mark B. Whiston Vice President of Institutional
Services
John B. Mezger Vice President of Institutional
Services
David W. Agostine Vice President of Institutional
Services
Steven R. Goodbarn Treasurer, Chief Financial
Officer
Russell P. Shipman Assistant Vice President of
Institutional Services
Stephen L. Stieneker Assistant Vice President,
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Assistant Secretary
Janice M. Teague Assistant Secretary
Mark E. Stanish Assistant Treasurer
Michael E. Herman Independent Director
Thomas A. McDonnell Independent Director
Michael Stolper Independent Director
</TABLE>
Item 29. Principal Underwriters
Not applicable.
Item 30. Location of Accounts and Records
See Exhibit 17.
Item 31. Management Services
Not applicable.
Item 32. Undertakings
Registrant furnishes the following undertakings pursuant to the
Securities Act of 1933 (the "Act"):
(a) - (c): See prior filings.
(d) Registrant undertakes to provide, without charge, a copy of the
Fund's most recent Annual Report to any recipients of its
Prospectus who requests it.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Exhibit Name
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<S> <C>
11 Consent of Ernst & Young LLP, Independent
Auditors
17 Memorandum Concerning
Books and Records
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<PAGE>
EXHIBIT 11
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Independent Auditors"
in the Registration Statement (Form N-1A No. 33-70272) and related Statement of
Additional Information of Lincoln National Capital Appreciation Fund, Inc. dated
April 29, 1995 and to the incorporation by reference therein of our report dated
January 24, 1995, with respect to the financial statements of Lincoln National
Capital Appreciation Fund, Inc. included in its Annual Report for the year ended
December 31, 1994, included as item 24(a) to this registration statement.
/s/ Ernst & Young LLP
Fort Wayne, Indiana
April 24, 1995
<PAGE>
BOOKS AND RECORDS
LINCOLN NATIONAL CAPITAL APPRECIATION FUND, INC.
RULES UNDER SECTION 31 OF THE INVESTMENT COMPANY ACT OF 1940
Records to Be Maintained by Registered Investment Companies, Certain
Majority-Owned Subsidiaries Thereof, and Other Persons Having
Transactions with Registered Investment Companies.
Reg. 270.31a-1. (a) Every registered investment company, and every
underwriter, broker, dealer, or investment advisor which is a majority-owned
subsidiary of such a company, shall maintain and keep current the accounts,
books, and other documents relating to its business which constitute the record
forming the basis for financial statements required to be filed pursuant to
Section 30 of the Investment Company Act of 1940 and of the auditor's
certificates relating thereto.
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
Annual Reports Controllers Eric Jones Permanently, the first two
To Shareholders years in an easily accessible
place
Semi-Annual Controllers Eric Jones Permanently, the first two
Reports years in an easily accessible
place
Form N-SAR Controllers Eric Jones Permanently, the first two
years in an easily accessible
place
(b) Every registered investment company shall maintain and keep current the
following books, accounts, and other documents:
Type of Record
(1) Journals (or other records of original entry) containing an itemized daily
record in detail of all purchases and sales of securities (including sales and
redemptions of its own securities), all receipts and deliveries of securities
(including certificate numbers if such detail is not recorded by custodian or
transfer agent), all receipts and disbursements of cash and all other debits and
credits. Such records shall show for each such transaction the name and quantity
of securities, the unit and aggregate purchase or sale price, commission paid,
the market on which effected, the trade date, the settlement date, and the name
of the person through or from whom purchased or received or to whom sold or
delivered.
Purchases and Sales Journals
- ----------------------------
Daily reports State Mutual Funds Permanently, the first two
of securities Street Bank Division years in an easily accessible
transactions and Trust place
Company
Portfolio Securities
- --------------------
Equity State Mutual Funds Permanently, the first two
Notifications Street Bank Division years in an easily accessible
and Trust place
Company
<PAGE>
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
Receipts and Deliveries of Securities (shares)
- ----------------------------------------------
Not Applicable.
Portfolio Securities
- --------------------
Debit and State Mutual Funds Permanently, the first two
Credit Advices Street Bank Division years in an easily accessible
from Bankers and Trust place
Company
Receipts and Disbursements of Cash and other Debits and Credits
- ---------------------------------------------------------------
Investment State Mutual Funds Permanently, the first two
Journal Street Bank Division years in an easily accessible
and Trust place
Company
Daily Journals State Mutual Funds Permanently, the first two
Street Bank Division years in an easily accessible
and Trust place
Company
(2) General and auxiliary ledgers (or other record) reflecting all asset,
liability, reserve, capital, income and expense accounts, including:
(i) Separate ledger accounts (or other records) reflecting the
following:
(a) Securities in transfer;
(b) Securities in physical possession;
(c) Securities borrowed and securities loaned;
(d) Monies borrowed and monies loaned (together with a
record of the collateral therefore and substitutions in
such collateral);
(e) Dividends and interest received;
(f) Dividends receivable and interest accrued.
Instructions. (a) and (b) shall be stated in terms of securities quantities
only; (c) and (d) shall be stated in dollar amounts and securities quantities as
appropriate; (e) and (f) shall be stated in dollar amounts only.
General Ledger
- --------------
General Ledger State Mutual Funds Permanently, the first two
Street Bank Division years in an easily accessible
and Trust place
Company
Securities in Transfer
- ----------------------
File consisting State Mutual Funds Permanently, the first two
of bank advices, Street Bank Division years in an easily accessible
confirmations, and Trust place
and Notification Company
of Securities
Transaction
<PAGE>
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
Securities in Physical Possession
- ---------------------------------
Securities State Mutual Funds Permanently, the first two
Ledger Street Bank Division years in an easily accessible
and Trust place
Company
Portfolio State Mutual Funds Permanently, the first two
Listings Street Bank Division years in an easily accessible
and Trust place
Company
Securities Borrowed and Loaned
- ------------------------------
Their files State Mutual Funds Permanently, the first two
Street Bank Division years in an easily accessible
and Trust place
Company
Monies Borrowed and Loaned
- --------------------------
Not Applicable.
Dividends and Interest Received
- -------------------------------
Interest File State Mutual Funds Permanently, the first two
Accrual Street Bank Division years in an easily accessible
Activity and Trust place
Journal Company
Dividend Master State Mutual Funds Permanently, the first two
File Display Street Bank Division years in an easily accessible
and Trust place
Company
Dividends Receivable and Interest Accrued
- -----------------------------------------
Investment State Mutual Funds Permanently, the first two
Journal Street Bank Division years in an easily accessible
and Trust place
Company
Dividend Master State Mutual Funds Permanently, the first two
File Display Street Bank Division years in an easily accessible
and Trust place
Company
Interest File State Mutual Funds Permanently, the first two
Accrual Street Bank Division years in an easily accessible
Activity and Trust place
Journal Company
(ii) Separate ledger accounts (or other records) for each portfolio security,
showing (as of trade dates), (a) the quantity and unit and aggregate price for
each purchase, sale, receipt, and delivery of securities and commodities for
such accounts, and (b) all other debits and credits for such accounts.
<PAGE>
Securities positions and money balances in such ledger accounts (or other
records) shall be brought forward periodically but not less frequently than at
the end of fiscal quarters. Any portfolio security, the salability of which is
conditioned, shall be so noted. A memorandum record shall be available setting
forth, with respect to each portfolio security accounts, the amount and
declaration, ex-dividend, and payment dates of each dividend declared thereon.
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
Ledger Account for each portfolio Security
- ------------------------------------------
Inventory State Mutual Funds Permanently, the first two
(on line) Street Bank Division years in an easily accessible
and Trust place
Company
(iii) Separate ledger accounts (or other records) for each broker-dealer, bank
or other person with or through which transactions in portfolio securities are
affected, showing each purchase or sale of securities with or through such
persons, including details as to the date of the purchase or sale, the quantity
and unit and aggregate prices of such securities, and the commissions or other
compensation paid to such persons. Purchases or sales effected during the same
day at the same price may be aggregated.
Broker-Dealer State Mutual Funds Permanently, the first two
Ledger Street Bank Division years in an easily accessible
and Trust place
Company
(iv) Separate ledger accounts (or other records), which may be maintained by a
transfer agent or registrar, showing for each shareholder of record of the
investment company the number of shares of capital stock of the company held,
in respect of share accumulation accounts (arising from periodic investment
plans, dividend reinvestment plans, deposit of issued shares by the owner
thereof, etc.), details shall be available as to the dates and number of shares
of each accumulation, and except with respect to already issued shares deposited
by the owner thereof, prices of each such accumulation.
Shareholder Accounts
- --------------------
LNL - only State Mutual Funds Permanently, the first two
shareholder Street Bank Division years in an easily accessible
and Trust place
Company
(3) A securities record or ledger reflecting separately for each portfolio
security as of trade date all "long" and "short" positions carried by the
investment company for its own account and showing the location of all
securities long and the off-setting position of all securities short. The record
called for by this paragraph shall not be required in circumstances under which
all portfolio securities are maintained by a bank or banks or a member or
members of a national securities exchange as custodian under a custody agreement
or as agent for such custodian.
Securities Position Record
- --------------------------
Maintained by State Mutual Funds Permanently, the first two
Custodian of Street Bank Division years in an easily accessible
Securities and Trust place
Company
<PAGE>
(4) Corporate charters, certificates of incorporation or trust agreements, and
bylaws, and minute books of stockholders' and directors' or trustees' meetings;
and minute books of directors' or trustees' committee and advisory board or
advisory committee meetings.
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
Corporate Documents
- -------------------
Corporate Executive- Sue Womack Permanently, the first two
charter, cer- Corp. Secy. years in an easily accessible
tificate of place
incorporation.
Bylaws and Corp. Secy. Sue Womack
minute books.
(5) A record of each brokerage order given by or in behalf of the investment
company for, or in connection with, the purchase or sale of securities, whether
executed or unexecuted. Such record shall include the name of the broker, the
terms and conditions of the order and of any modification or cancellation
thereof, the time of entry or cancellation, the price at which executed, and the
time of receipt of report of execution. The record shall indicate the name of
the person who placed the order in behalf of the investment company.
Order Tickets
- -------------
Sales Order or State Mutual Funds Six years, the first two
Purchase Order Street Bank Division years in an easily accessible
and Trust place
Company
Notification State Mutual Funds Six years, the first two
From (From AOS) Street Bank Division years in an easily accessible
Trading System) and Trust place
Company
(6) A record of all other portfolio purchase or sales showing details comparable
to those prescribed in paragraph 5 above.
Short-Term Investments
- ----------------------
Notification State Mutual Funds Six years, the first two
Form (From AOS Street Bank Division years in an easily accessible
S-T System) and Trust place
Company
Bank Advice State Mutual Funds Six years, the first two
and Issuer Street Bank Division years in an easily accessible
Confirmation and Trust place
Company
(7) A record of all puts, calls, spreads, straddles, and other options in which
the investment company has any direct or indirect interest or which the
investment company has granted or guaranteed; and a record of any contractual
commitments to purchase, sell, receive or deliver securities or other property
(but not including open orders placed with broker-dealers for the purchase or
sale of securities, which may be cancelled by the company on notices without
penalty or cost of any kind); containing at least an identification of the
security, the number of units involved, the option price, the date of maturity,
the date of issuance, and the person to whom issued.
<PAGE>
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
Record of Puts, Calls, Spreads, Etc.
- ------------------------------------
Not Applicable.
(8) A record of the proof of money balances in all ledger accounts (except
shareholder accounts), in the form of trial balances. Such trial balances shall
be prepared currently at least once a month.
Trial Balance
- -------------
General Ledger State Mutual Funds Permanently, the first two
Street Bank Division years in an easily accessible
and Trust place
Company
(9) A record for each fiscal quarter, which shall be completed within 10 days
after the end of such quarter, showing specifically the basis or bases upon
which the allocation of orders for the purchase and sale of portfolio securities
to named brokers or dealers and the division of brokerage commissions or other
compensation on such purchase and sale orders among named persons were made
during such quarter. The record shall indicate the consideration given to (a)
sales of shares of the investment company by brokers or dealers, (b) the
supplying of services or benefits by brokers or dealers to the investment
company, its investment advisor or principal underwriter or any persons
affiliated therewith, and (c) any other considerations other than the technical
qualifications of the brokers and the dealers as such. The record shall show the
nature of their services or benefits made available, and shall describe in
detail the application of any general or specific formula or other determinant
used in arriving at such allocation of purchase and sales orders and such
division of brokerage commissions or other compensation. The record shall also
include the identities of the person responsible for the determination of such
allocation and such division of brokerage commissions or other compensation.
Brokerage State Mutual Funds Six Years, the first two
Allocation Street Bank Division/Nate years in an easily accessible
Report and Trust Wagley place
Company/Sec.
Compliance
(10) A record in the form of an appropriate memorandum identifying the person or
persons, committees, or groups authorizing the purchase or sale of portfolio
securities. Where an authorization is made by a committee or group, a record
shall be kept in the names of its members who participated in the authorization.
There shall be retained a part of the record required by this paragraph any
memorandum, recommendation, or instruction supporting or authorizing the
purchase or sale of portfolio securities. The requirements of this paragraph are
applicable to the extent they are not met by compliance with the requirements of
paragraph 4 of this Rule 31a1(b).
Trading State Mutual Funds Six years, the first two
Authorization Street Bank Division years in an easily accessible
and Trust place
Company
Advisory Law Division Diane Mierau Six years, the first two
Agreements years in an easily accessible
place
<PAGE>
(11) Files of all advisory material received from the investment advisor, any
advisory board or advisory committee, or any other persons from whom the
investment company accepts investment advice publications distributed generally.
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
Not Applicable.
(12) The term "other records" as used in the expressions "journals (or other
records of original entry)" and "ledger accounts (or other records)" shall be
construed to include, where appropriate, copies of voucher checks,
confirmations, or similar documents which reflect the information required by
the applicable rule or rules in appropriate sequence and in permanent form,
including similar records developed by the use of automatic data processing
systems.
Correspondence Product Jon Geist Six years, the first two
Admin. Nancy Alford years in an easily accessible
Product Pat Wiltshire place
Management
Pricing Sheets State Mutual Funds Permanently, the first two
Street Bank Division years in an easily accessible
and Trust place
Company
Bank State- State Mutual Funds Six years, the first two
ments, Street Bank Division years in an easily accessible
Cancelled and Trust place
Checks and Company
Cash Recon-
ciliations
February 15, 1995
