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As filed with the Securities and Exchange Commission on April 17, 1998
Registration No. 33-70272
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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. 5 [x]
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and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 7 [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
(Address 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)
Copies of all communications to
Freedman, Levy, Kroll & Simonds
1050 Connecticut Avenue, N.W.,
Suite 825
Washington, D.C. 20036
Attention: Gary O. Cohen, Esq.
Bruce Rosenblum, Esq.
Fiscal year-end: December 31
It is proposed that this filing will become effective:
___ immediately upon filing pursuant to paragraph (b)
X on 5/1/98 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. 5
AND AMENDMENT NO. 7
on Form N-1A
This Registration Statement consists of the following papers and documents:
Facing Sheet
Contents Sheet
Cross-reference Sheet
Part A-
Prospectus
Part B-
Statement of Additional Information
Part C-
Items 24 through 32.
Signatures.
Exhibit Index.
Exhibits
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LINCOLN NATIONAL CAPITAL APPRECIATION FUND, INC.
CROSS REFERENCE SHEET
[as required by Rule 481(a)]
Item Number - Part A Location in Prospectus
- -------------------- ----------------------
1. Cover Page Preface
2. Synopsis Not Applicable
3. Condensed Financial Preface
Information
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
<PAGE>
PREFACE TO THE MULTI FUND-REGISTERED TRADEMARK- PROSPECTUSES
THE PREFACE AND DIRECTORY ARE PART OF THE PROSPECTUS FOR EACH OF THE FOLLOWING
FUNDS:
Lincoln National Aggressive Growth Fund, Inc. (AG)
Lincoln National Bond Fund, Inc. (B)
Lincoln National Capital Appreciation Fund, Inc. (CA)
Lincoln National Equity-Income Fund, Inc. (E-I)
Lincoln National Global Asset Allocation Fund, Inc. (GAA)
Lincoln National Growth and Income Fund, Inc. (GI)
Lincoln National International Fund, Inc. (I)
Lincoln National Managed Fund, Inc. (M)
Lincoln National Money Market Fund, Inc. (MM)
Lincoln National Social Awareness Fund, Inc. (SA)
Lincoln National Special Opportunities Fund, Inc. (SO)
Shares of all the FUNDS are sold to Lincoln National Life Insurance Co. (LINCOLN
LIFE) for allocation to its Variable Annuity Account C (THE VARIABLE ANNUITY
ACCOUNT [VAA]) to fund VARIABLE ANNUITY CONTRACTS and for allocation to its
Variable Life Account K to fund variable life insurance contracts.
To fund its variable life contracts, Variable Life Account D buys shares of the
Bond, Growth and Income, Managed, Money Market and Special Opportunities Funds.
To fund its variable life contracts, Variable Life Account G buys shares of the
Growth and Income and Special Opportunities Funds.
Each of these Variable Life and Annuity Accounts may be referred to as a
VARIABLE ACCOUNT. For each FUND listed above, see Description of the fund in its
Prospectus for a statement of that FUND'S investment objective. Each of these
FUNDS is referred to individually as a FUND; collectively, as the FUNDS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (SEC) NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THESE PROSPECTUSES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
These Prospectuses set forth concisely the information about each FUND that you
ought to know before investing. Please read and keep this Prospectus booklet for
future reference.
A separate STATEMENT OF ADDITIONAL INFORMATION (SAI) for each FUND has been
filed with the SEC. By this reference, each SAI, dated May 1, 1998, is
incorporated into the Prospectus of the FUND with which it is registered. A free
copy will be provided upon request. Either write Lincoln National Life Insurance
Co., P.O. Box 2340, Fort Wayne, Indiana 46801 or call 1-800-4LINCOLN (454-6265).
The Financial Highlights table of each FUND contains per-share data calculated
on the basis of a share outstanding throughout the period, together with
financial ratios and other supplemental data. The Financial Highlights table is
incorporated by reference to the FUND'S 1997 Annual Report. A copy of the Annual
Report will be provided on request and without charge. Either write Lincoln
National Life Insurance Co., P.O. Box 2340, Fort Wayne, Indiana 46801 or call
1-800-4LINCOLN (454-6265).
NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THESE
PROSPECTUSES, IN CONNECTION WITH THE OFFERS CONTAINED IN THEM. IF ANY ARE GIVEN
OR MADE, THE INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE FUND(S) IN QUESTION. THESE PROSPECTUSES DO NOT CONSTITUTE
OFFERS BY THE FUNDS TO SELL, OR SOLICITATIONS OF ANY OFFERS TO BUY, ANY OF THE
SECURITIES OFFERED BY THEM IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL FOR THE FUNDS TO MAKE THOSE OFFERS.
Prospectuses dated May 1, 1998
27
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DIRECTORY FOR THE FUND PROSPECTUSES
<TABLE>
<CAPTION>
SUBJECT PAGE
<S> <C>
- --------------------------------------------------------
PREFACE 27
DESCRIPTION OF THE FUND
Aggressive Growth Fund 29
Bond Fund 35
Capital Appreciation Fund 39
Equity-Income Fund 43
Global Asset Allocation Fund 47
Growth and Income Fund 53
International Fund 55
Managed Fund 59
Money Market Fund 63
Social Awareness Fund 65
Special Opportunities Fund 69
- --------------------------------------------------------
INVESTMENT POLICIES AND TECHNIQUES
Aggressive Growth Fund 29
Bond Fund 35
Capital Appreciation Fund 39
Equity-Income Fund 43
Global Asset Allocation Fund 47
Growth and Income Fund 53
International Fund 55
Managed Fund 59
Money Market Fund 63
Social Awareness Fund 65
Special Opportunities Fund 69
- --------------------------------------------------------
INVESTMENT RESTRICTIONS
Aggressive Growth Fund 32
Bond Fund 37
Capital Appreciation Fund 41
Equity-Income Fund 45
Global Asset Allocation Fund 50
Growth and Income Fund 53
International Fund 57
Managed Fund 61
Money Market Fund 64
Social Awareness Fund 66
Special Opportunities Fund 70
<CAPTION>
SUBJECT PAGE
- --------------------------------------------------------
<S> <C>
STRATEGIC PORTFOLIO TRANSACTIONS
Aggressive Growth Fund 32
Bond Fund 37
Capital Appreciation Fund 42
Equity-Income Fund 46
Global Asset Allocation Fund 50
Growth and Income Fund 54
International Fund 58
Managed Fund 61
Money Market Fund 64
Social Awareness Fund 66
Special Opportunities Fund 71
- --------------------------------------------------------
APPENDIX -- CONTAINS IMPORTANT INFORMATION
FOR ALL FUNDS
Net asset value 73
Management of the funds 73
Purchase of securities being offered 75
Sale and redemption of shares 76
Distributions and federal income tax
considerations 76
Management discussion of fund performance 76
Description of shares 76
Strategic portfolio transactions --
additional information 77
Foreign investments 79
General information 80
Statement of Additional Information
Table of contents -- 11 underlying funds 83
</TABLE>
28
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LINCOLN NATIONAL
CAPITAL APPRECIATION FUND, INC.
DESCRIPTION OF THE FUND
The Capital Appreciation Fund (FUND) was incorporated in Maryland in 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 Standard & Poor's 500 Index
(S&P 500). 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
Since 1994 the portfolio manager for the FUND has been James P. Craig, Vice
Chairman, Chief Investment Officer and Director of Janus Capital Corporation,
sub-advisor to the FUND. Craig has been active in investment management since
1981, with Janus since 1983. 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, in the opinion of the
sub-advisor, 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, repurchase
agreements, banker's acceptances and time deposits.
The FUND intends to invest in debt securities and cash equivalents issued by:
U.S. companies; the U.S. Government, its agencies and instrumentalities; foreign
companies; 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
39
<PAGE>
income of the FUND may increase; however, the FUND will not be participating in
stock 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 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 connection with its foreign investments and as a non-fundamental policy, the
FUND will not commit more than 10% of its assets to the 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.
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.
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 Corp.) 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 before
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. On the other hand, these securities are also subject to maturity
extension risk. This is the risk that in a period of rising interest rates,
prepayments may occur at a slower than expected rate, which may cause these
securities to fluctuate more widely in response to changes in interest rates.
WHEN-ISSUED SECURITIES
The FUND may purchase new issues of either corporate or 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 assumes the risk of any
decline in value of the security beginning on the date of the agreement or
purchase.
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%
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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
Company 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 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.
SPECIAL RISK FACTORS
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/high risk debt securities to fund
highly leveraged corporate acquisitions and restructurings, so past experience
with high-yield/high risk 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 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 credit rating
categories.
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.
Increased portfolio turnover results in higher brokerage costs for the FUND.
During 1997 the FUND'S portfolio turnover was 137.07% and in 1996 it was 92.73%.
INVESTMENT RESTRICTIONS
The following is a partial list of the investment restrictions that 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
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any applicable percentage resulting from market fluctuations does not require
elimination of any security from the portfolio.
The FUND may not:
1. Own more than 10% of the outstanding voting securities of any one issuer
and, as to 75% of the value of the total assets of the FUND, purchase the
securities of any one issuer [except cash item and government securities as
defined under the Investment Company Act of 1940 (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. (With respect to the remaining 25% 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. Invest more than 5% of its net assets in securities restricted as to resale;
and/or
3. 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.
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. Debt securities that are not backed by
the full faith and credit of the United States (including those of foreign
governments) 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 for the FUND has considerable discretion in the selection
of appropriate FUND investments. In the exercise of that discretion, the
portfolio manager may, at any given time, invest a portion of the FUND'S assets
in one or more strategic portfolio transactions which we define as derivative
transactions and cash enhancement transactions.
For your convenience, in the Appendix, we have included a basic discussion of
these special financial arrangement transactions and some of the risks
associated with them. Note also that the SAI booklet for the 11 FUNDS contains
definitions of the more commonly used derivative transactions, technical
explanations of how these transactions will be used and the limits on their use.
You should consult your financial counselor if you have specific questions.
THE 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 each FUND'S Board of Directors
and it may include the use of valuations furnished by outside sources, including
pricing services which utilize electronic data processing techniques for valuing
normal institutional-size trading units of debt securities. The value of equity
securities is based on the last sale prices of those securities on national
securities exchanges or over-the-counter, or in the absence of recorded sales,
at the average of readily available closing bid and asked prices on exchanges or
over-the-counter. In the absence of readily available closing bid and asked
prices, equity securities will be valued at fair value. See the SAI Appendix for
a discussion of the methodology utilized to value short-term investments (other
than for the Money Market Fund), options, futures and options thereon, and
foreign securities.
MONEY MARKET FUND. The net asset value per share of the Money Market Fund is
determined by the amortized cost method of valuation, under Rule 2a-7, as
amended (the Rule) under the Investment Company Act of 1940 (1940 Act). Under
the Rule, the FUND'S net asset value using the amortized cost method must fairly
reflect market value. The Board of Directors of the FUND has established
procedures to assist FUND management and the INVESTMENT ADVISOR in complying
with the requirements of the Rule, which imposes specific standards for the
maturity, quality and diversification of portfolio securities. The Rule also
assigns certain specific duties to FUND management and the Board.
MANAGEMENT OF THE FUNDS
The business and affairs of each FUND are managed under the direction of its
Board of Directors. The Board has the power to amend the bylaws of each FUND, to
declare and pay dividends and to exercise all the powers of the FUND except
those granted to the shareholder. LINCOLN LIFE is the sole shareholder of each
FUND.
INVESTMENT ADVISOR. LINCOLN INVESTMENT is the INVESTMENT ADVISOR to the FUNDS
and is headquartered at 200 East Berry Street, Fort Wayne, Indiana 46802.
LINCOLN INVESTMENT (THE ADVISOR) is registered with the Securities and Exchange
Commission (the Commission or SEC) as an INVESTMENT ADVISOR and has acted as an
INVESTMENT ADVISOR to mutual funds for over 40 years. The ADVISOR also acts as
INVESTMENT ADVISOR to Lincoln National Convertible Securities Fund, Inc., and
Lincoln National Income Fund, Inc., closed-end investment companies, and also
acts as sub-adviser to two of the series of Delaware Group Adviser Funds, Inc.,
an open-end series investment company.
The ADVISOR is a wholly-owned subsidiary of Lincoln National Corp. (LNC), a
publicly-held insurance holding company organized under Indiana law. Through its
subsidiaries, LNC provides life insurance and annuities, property-casualty
insurance, reinsurance and financial services. Directors, officers and employees
of the ADVISOR and each FUND are permitted to engage in personal securities
transactions subject to restrictions and procedures set forth in the Code of
Ethics adopted by the ADVISOR and each FUND. Such restrictions and procedures
include substantially all of the recommendations of the Advisory Group of the
Investment Company Institute and comply with SEC rules and regulations.
Under advisory agreements described in the Prospectus for the VARIABLE ACCOUNT,
the ADVISOR provides portfolio management and investment advice to the FUNDS and
administers their other affairs, subject to the supervision of each FUND'S Board
of Directors.
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<PAGE>
As compensation for its services to each FUND, the advisor is paid a monthly
investment advisory fee at an annual rate based on the average daily net asset
value of each FUND, as shown in the following chart:
<TABLE>
<CAPTION>
FUND ...OF AVERAGE DAILY NET ASSET VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C>
Aggressive Growth .75 of 1% of the first $200 million; .70 of 1% of the next $200
million; .65 of 1% of the excess over $400 million
Capital Appreciation* .75 of 1% of the first $500 million; .70 of 1% of the excess over
$500 million
Equity-Income* .75 of 1% of the first $500 million; .70 of 1% of the excess over
$500 million
Global Asset Allocation .75 of 1% of the first $200 million; .70 of 1% of the next $200
million; and .68 of 1% of the excess over $400 million
International .90 of 1% of the first $200 million; .75 of 1% of the next $200
million; and .60 of 1% in excess over $400 million
All other FUNDS .48 of 1% of the first $200 million; .40 of 1% of the next $200
million; and .30 of 1% in excess over $400 million
</TABLE>
- --------------------------------------------------------------------------------
FUND EXPENSES (see accompanying text below)
<TABLE>
<CAPTION>
1997 RATIO OF THE
ADVISOR'S
COMPENSATION TO 1997 RATIO OF TOTAL
AVERAGE EXPENSES
FUND NET ASSETS TO AVERAGE NET ASSETS
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
Aggressive Growth .73% .81%
Bond .46 .53
Capital Appreciation* .75 .84
Equity-Income* .75 .82
Global Asset Allocation .72 .89
Growth and Income .32 .35
International .79 .93
Managed .37 .42
Money Market .48 .59
Social Awareness .36 .41
Special Opportunities .37 .42
</TABLE>
* The management fees for the Capital Appreciation and the Equity-Income funds
have been decreased effective May 1, 1998 and January 1, 1998 respectively, and
the expense information in this table has been restated to reflect current fees.
Expenses specifically assumed by each FUND include: compensation and expenses of
Directors of the FUND who are not interested persons of the FUND as defined in
the 1940 Act; registration, filing, printing, and other fees in connection with
filings with regulatory authorities, including the costs of printing and mailing
updated Prospectuses and SAIs provided to current CONTRACT OWNERs; fees and
expenses of independent auditors; the expenses of printing and mailing proxy
statements and shareholder reports; custodian and transfer agent charges;
brokerage commissions and securities and options transaction costs incurred by
the FUND; taxes and corporate fees; fees for accounting, valuation and related
services; legal fees incurred in connection with the affairs of the FUND (other
than legal services provided by personnel of the ADVISOR or its affiliated
companies); the fees of any trade association of which the FUND is a member; and
expenses of shareholder and Director meetings.
SUB-ADVISORS. As ADVISOR, LINCOLN INVESTMENT is primarily responsible for
investment decisions affecting each of the FUNDS. However, LINCOLN INVESTMENT
has entered into sub-advisory agreements with several professional investment
management firms. These firms provide some or substantially all of the
investment advisory services required by a number of the FUNDS, including day-
to-day investment management of those FUNDS' portfolios. Each sub-advisor makes
investment decisions for its respective fund in accordance with that FUND'S
investment objectives and places orders on behalf of that FUND to effect those
decisions. See the following tables for more information about the sub-advisors
and their fees:
73
<PAGE>
<TABLE>
<CAPTION>
DATE OF ANNUAL FEE RATE BASED ON AVERAGE DAILY NET ASSET
FUND SUB-ADVISOR AGREEMENT VALUE
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
Aggressive Lynch & Mayer 12/20/93 .50 of 1% of the first $150 million .35 of 1% of the
Growth 520 Madison Avenue excess over $150 million
New York, NY 10022
Capital Janus 1/1/94; .55 of 1% of the first $100 million .50 of 1% of the
Appreciation 100 Fillmore Street Amended next $400 million; and .45 of 1% of the excess over
Denver, CO 80206 5/1/98 $500 million
Equity Income Fidelity 12/20/93 .48 of 1%
82 Devonshire Street Amended
Boston, MA 02108 1/1/98
Global Asset Putnam 6/8/87 the greater of (a) $40,000; or (b) .47 of 1% of the
Allocation One Post Office first $200 million; .42 of 1% of the next $200
Square million; and .40 of 1% of any excess over $400
Boston, MA 02104 million
International Delaware 4/27/98 .50 of 1% of the first $200 million; .40 of 1% of the
International next $200 million; and .35 of 1% of any excess over
Advisers, Ltd. $400 million
80 Cheapside,
London, England
EC2V 6EE
- -------------
<CAPTION>
ANNUAL FEE RATE BASED ON MARKET VALUE OF SECURITIES
HELD IN THE PORTFOLIO OF EACH RESPECTIVE CLIENT FUND
DATE OF AT THE CLOSE OF BUSINESS ON THE LAST TRADING DAY OF
FUND SUB-ADVISOR AGREEMENT EACH CALENDAR QUARTER
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Growth and Vantage 8/21/85 .20 of 1%
Income 630 5th Avenue
New York, NY 10111
Managed Vantage 8/21/85 .20 of 1%
(STOCK PORTFOLIO
ONLY)
Social Vantage 4/30/88 .20 of 1%
Awareness
Special Vantage 8/21/85 .20 of 1%
Opportunities
</TABLE>
No additional compensation from the assets of the FUNDS will be assessed as a
result of the sub-advisory agreements; the sub-advisors are paid by LINCOLN
INVESTMENT. (There is no sub-advisor for the Bond and Money Market Funds.)
SERVICE MARKS. The service mark for the FUNDS and the name Lincoln National have
been adopted by the FUNDS with the permission of LNC, and their continued use is
subject to the right of LNC to withdraw this permission in the event the advisor
should not be the INVESTMENT ADVISOR of the FUNDS.
In the Prospectus and sales literature, the name Fidelity Investments will be
used with the Equity-Income Fund, Janus with the Capital Appreciation Fund and
Putnam with the Global Asset Allocation Fund. The continued use of these names
is subject to the right of the respective sub-advisor to withdraw its permission
in the event it ceases to be the sub-advisor to the particular FUND it advises.
PURCHASE OF SECURITIES BEING OFFERED
Shares of the FUNDS' common stock ($0.01 par value) will be sold to LINCOLN LIFE
for allocation to the VARIABLE ANNUITY ACCOUNT (VAA), which has been established
for the purpose of funding VARIABLE ANNUITY CONTRACTS; shares in the FUNDS will
also be sold to LINCOLN LIFE for allocation to one or more of the variable life
accounts, which have been established for the purpose of funding variable life
insurance contracts. Shares of each FUND are sold and redeemed at their net
asset value per share determined daily. See Sale and redemption of shares. Also
see Net asset value. The FUNDS' shares are sold to LINCOLN LIFE for the VARIABLE
ACCOUNTS on a no-load basis -- that is, without the imposition of a sales
charge.
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<PAGE>
SALE AND REDEMPTION OF SHARES
The shares of each FUND are sold and redeemed by the FUND at their net asset
value per share next determined after receipt by LINCOLN LIFE of a purchase or
redemption order in acceptable form. Redemption of FUND shares held by LINCOLN
LIFE for its own account will be effected at the FUND'S net asset value per
share next determined after receipt of the redemption request by the FUND. The
value of shares redeemed may be more or less than original cost, depending upon
the market value of the portfolio securities at the time of redemption. Payment
for shares redeemed will be made within seven days after the redemption request
is received in proper form by the FUNDS. However, the right to redeem FUND
shares may be suspended or payment postponed for any period during which (1)
trading on the NYSE is restricted as determined by the Commission, or the NYSE
is closed for other than weekends and holidays; (2) an emergency exists, as
determined by the Commission, as a result of which (a) disposal by each FUND of
securities owned by it is not reasonably practicable, or (b) it is not
reasonably practicable for each FUND to determine fairly the value of its net
assets; or (3) the Commission by order so permits for the protection of
shareholders of the FUNDS.
DISTRIBUTION AND FEDERAL INCOME TAX CONSIDERATIONS
Each FUND'S policy is to distribute, at least once a year, substantially all of
its net investment income. Net realized capital gains may only be distributed
annually. These distributions, when paid to LINCOLN LIFE for the VARIABLE
ACCOUNTS, will be reinvested automatically in additional shares of that FUND, at
its net asset value per share.
Each FUND intends to qualify and has elected to be taxed as a regulated
investment company under the provisions of Subchapter M of the Internal Revenue
Code of 1986, as amended (the CODE). If a FUND qualifies as a regulated
investment company and complies with the provisions of the CODE relieving
regulated investment companies which distribute substantially all of their net
income (both ordinary income and capital gain) from Federal income tax and the
4% nondeductible Federal excise tax, the FUNDS will be relieved of those taxes
on the amounts distributed. See the SAI for a more complete discussion.
Each FUND is subject to asset diversification requirements under Section 817(h)
of the code and the related regulation that the United States Treasury
Department has adopted. Each FUND intends to comply with these diversification
requirements.
Since the sole shareholder of the FUNDS is LINCOLN LIFE, there is no discussion
here about the Federal income tax consequences at the shareholder level. For
information concerning the Federal income tax consequences to holders of annuity
or life insurance contracts, including the failure of a FUND to comply with the
diversification requirements discussed above, see the Prospectus for the
VARIABLE ACCOUNT at the front of this booklet.
MANAGEMENT DISCUSSION OF FUND PERFORMANCE
In the Annual Report for the FUNDS, the portfolio manager for each FUND
discusses that FUND'S performance for the previous fiscal year and the factors
which affected that performance. We will send you a copy of the Annual Report
free upon request.
DESCRIPTION OF SHARES
The authorized capital stock of each FUND consists of 50 million shares of
common stock (150 million for the Growth and Income Fund and 100 million each
for the Equity-Income Fund, International Fund, Social Awareness Fund and
Managed Fund), $0.01 par value. As of March 1, 1998, each FUND had the following
number of shares issued and outstanding:
<TABLE>
<S> <C>
Aggressive Growth 24,053,290
Bond 23,710,935
Capital Appreciation 29,127,492
Equity-Income 42,380,182
Global Asset Allocation 30,669,482
Growth and Income 91,450,856
International 31,597,979
Managed 49,579,824
Money Market 9,274,413
Social Awareness 39,436,497
Special Opportunities 27,558,445
</TABLE>
FUND shares will be owned by LINCOLN LIFE and will be held by it in the VARIABLE
ACCOUNTS. As sole shareholder of each FUND, LINCOLN LIFE may be deemed to be a
control person as that term is defined under the 1940 Act. However, as stated in
the Prospectuses for the VARIABLE ACCOUNTS, LINCOLN LIFE provides to CONTRACT
OWNERS of the VARIABLE ACCOUNTS the right to direct the voting of FUND shares at
shareholder meetings, to the extent provided by law. LINCOLN LIFE will vote for
or against any proposition, or will abstain from voting, any FUND shares
75
<PAGE>
attributable to a contract for which no timely voting instructions are received,
and any FUND shares held by LINCOLN LIFE for its own account, in proportion to
the voting instructions that it received with respect to all contracts
participating in that FUND. However, if the 1940 Act or any regulation under it
should change, and as a result LINCOLN LIFE determines it is permitted to vote
FUND shares in its own right, it may elect to do so.
All the shares of each FUND are of the same class with equal rights and
privileges. Each full share is entitled to one vote and each fractional share is
entitled to a proportionate fractional vote, on all matters subjected to a vote
of the shareholder. All shares, full and fractional, participate proportionately
in any dividends and capital gains distributions and, in the event of
liquidation, in that FUND'S net assets remaining after satisfaction of
outstanding liabilities.
When issued, each share is fully-paid and non-assessable and the shareholder has
no preemptive or conversion rights. FUND shares have non-cumulative voting
rights, which means that holders of more than 50% of the shares voting for the
election of directors can elect 100% of the directors if they choose to do so.
In that event the holders of the remaining shares so voting will not be able to
elect any directors. Shares may be redeemed as set forth under Sale and
redemption of shares.
The Bylaws of the FUNDS allow them, in proper cases, to dispense with their
annual meetings of the shareholder. Generally, this may be done as long as: (1)
a majority of the Directors then in office have at some point been elected by
the shareholder and, if any vacancy is filled by vote of the Board of Directors,
then immediately after filling the vacancy at least two thirds of the Directors
shall have been elected by the shareholder; (2) there is no change in the
independent auditor of the FUNDS; (3) there is no material change to the
investment advisory and/or sub-advisory agreements and/or fundamental policies;
and (4) a shareholder vote is not required with respect to a distribution
agreement. In adopting this procedure for dispensing with annual meetings that
are a formality, the Directors of the FUNDS have undertaken to comply with the
requirements of Section 16(c) of the 1940 Act. That Section protects CONTRACT
OWNERS by providing a procedure by which they may require management to convene
a meeting of the shareholder to vote on removal of one or more Directors. The
Directors also have agreed to facilitate communication among CONTRACT OWNERS for
the purpose of calling those meetings. Further information about these
procedures is available from FUND management.
STRATEGIC PORTFOLIO TRANSACTIONS -- ADDITIONAL INFORMATION
Because of their different investment objectives and portfolio management
philosophies many of the FUNDS engage to varying degrees in strategic portfolio
transactions, in order to preserve or enhance the value of their assets. These
can be generally identified as either derivative transactions or cash
enhancement transactions. Derivative transactions are recognized by the
investment community as an acceptable way to seek to increase the FUND'S overall
value (or, depending on the condition of the securities markets, at least to
slow its decrease). Cash enhancement transactions are designed to make some
extra money for the FUND when it has excess cash, or to help the FUND obtain
some cash for temporary purposes when needed. See the Prospectus for each FUND
for a listing of the kinds of transactions in which each FUND may engage.
1. DERIVATIVE TRANSACTIONS
A. Introduction
A derivative transaction is a financial agreement the value of which is
dependent upon the values of one or more underlying assets or upon the
values of one or more indices of asset values. The following types are
currently in fairly common use in the investment community, although not
every FUND will use all of them:
1. Equity contracts: stock options and indexed options; equity swaps;
stock index futures and options on futures; swaptions;
2. Interest rate contracts: interest rate futures and options on them;
forward rate agreements (FRAs); interest rate swaps and their related
transactions (e.g., caps, floors, collars and corridors); and/or
3. Currency derivative contracts: currency forward contracts; currency
options; currency futures; currency swaps; cross-currency interest rate
swaps.
SIMPLIFIED DEFINITIONS FOR THESE TRANSACTIONS ARE PROVIDED IN THE SAI APPENDIX.
Although they may be structured in complex combinations, derivative transactions
in which the FUNDS engage generally fall into two broad categories: options
contracts or forward contracts. The combined forms are 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
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<PAGE>
reserves the right to engage in related variations on those transactions.
The FUNDS intend to engage in derivative transactions only defensively. Examples
of this defensive use might be: to hedge against a perceived decrease in a
FUND'S asset value; to control transaction costs associated with market timing
(E.G., by using futures on an unleveraged basis); and to lock in returns,
spreads, or currency exchange rates in anticipation of future cash market
transactions.
There is no discussion here of asset-backed or mortgage-backed securities (such
as collateralized mortgage obligations, structured notes, inverse floaters,
principal-only or interest-only securities, etc.). See the Prospectus and SAI
for the Capital Appreciation and Equity-Income FUNDS, which are authorized to
engage in this kind of trading.
B. Risk factors commonly associated with derivative transactions.
There are certain risks associated with derivatives, and some derivatives
involve more of these risks than others. We briefly describe the most
common ones here; however, this is not an exhaustive list. Consult your
financial counselor if you have additional questions.
CREDIT RISK is the possibility that a counterparty to a transaction will
fail to perform according to the terms and conditions of the transaction,
causing the holder of the claim to suffer a loss.
CROSS-CURRENCY SETTLEMENT RISK (or Herstatt risk) is related to the
settlement of foreign exchange contracts. It arises when one of the
counterparties to a contract pays out one currency prior to receiving
payment of the other. Herstatt risk arises because the hours of operation
of domestic interbank fund transfer systems often do not overlap due to
time zone differences. In the interval between the time one counterparty
has received payment in one indicated currency and the time the other
counterparty(ies) receive payment in the others, those awaiting payment
are exposed to credit risk and market risk.
LEGAL RISK is the chance that a derivative transaction, which involves
highly complex financial arrangements, will be unenforceable in particular
jurisdictions or against a financially troubled entity; or will be subject
to regulation from unanticipated sources.
MARKET LIQUIDITY RISK is the risk that a FUND will be unable to control
its losses if a liquid secondary market for a financial instrument does
not exist. It is often considered as the risk that a (negotiable or
assignable) financial instrument cannot be sold quickly and at a price
close to its fundamental value.
MARKET RISK is the risk of a change in the price of a financial
instrument, which may depend on the price of an underlying asset.
OPERATING RISK is the potential of unexpected loss from inadequate
internal controls or procedures; human error; system (including data
processing system) failure; or employee dishonesty.
SETTLEMENT RISK between two counterparties is the possibility that a
counterparty to whom a firm has made a delivery of assets or money
defaults before the amounts due or assets have been received; or the risk
that technical difficulties interrupt delivery or settlement even if the
counterparties are able to perform. In the latter case, payment is likely
to be delayed but recoverable.
SYSTEMIC RISK is the uncertainty that a disruption (at a firm, in a market
segment, to a settlement system, etc.) might cause widespread difficulties
at other firms, in other market segments, or in the financial system as a
whole.
SPECIAL NOTE FOR OPTIONS AND FUTURES TRANSACTIONS: Gains and losses on
options and futures transactions depend on the portfolio manager's ability
to correctly predict the direction of stock prices and interest rates, and
other economic factors. Options and futures trading may fail as hedging
techniques in cases where the price movements of the securities underlying
the options and futures do not follow the price movements of the portfolio
securities subject to the hedge. The loss from investing in futures
transactions is potentially unlimited.
SOME OF THESE RISKS MAY BE PRESENT IN EACH TYPE OF TRANSACTION, WHILE
OTHERS MAY PERTAIN ONLY TO CERTAIN ONES. These risks are discussed here
only briefly. Before you invest in a particular fund, please consult your
financial counselor if you have questions about the risks associated with
that FUND'S use of derivatives.
C. Varying usage of derivative transactions
Subject to the terms of the Prospectus and SAI for each FUND, that FUND'S
portfolio manager decides which types of derivative transactions to
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
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Derivative transactions are coming under increased scrutiny by Congress
and industry regulators (such as the SEC and the Office of the Comptroller
of the Currency), and by self-regulatory agencies (such as the NASD).
Should legislation or regulatory initiatives be enacted resulting in
additional restrictive requirements for derivative transactions, LINCOLN
LIFE and the FUNDS reserve the right to make all necessary changes in the
CONTRACTS and the Registration Statements for the FUNDS, respectively, to
comply with those requirements.
2. CASH ENHANCEMENT TRANSACTIONS
Cash enhancement transactions also involve certain risks to the fund. They are
discussed more fully in the SAI.
A. Lending of portfolio securities
Any FUND authorized to do so may make secured loans of its portfolio
securities, in order to realize additional income. The loans are limited
to a maximum of a stipulated amount of the FUND'S total assets. As a
matter of policy, securities loans are made to broker/dealers under
agreements requiring that the loans be continuously secured by collateral
in cash or short-term debt obligations at least equal at all times to 102%
of the value of the securities lent.
The borrower pays the FUND an amount equal to any dividends or interest
received on securities lent. The FUND retains all or a portion of the
interest received on securities lent. The FUND also retains all or a
portion of the interest received on investment of the cash collateral, or
receives a fee from the borrower.
With respect to the loaned securities, voting rights or rights to consent
pass to the borrower. However, the FUND retains the right to call in the
loans and have the loaned securities returned at any time with reasonable
notice. This is important when issuers of the securities ask holders of
those securities -- including the FUND -- to vote or consent on matters
which could materially affect the holders' investment. The FUND may also
call in the loaned securities in order to sell them. None of the FUNDS'
portfolio securities will be loaned to LINCOLN INVESTMENT, to any
sub-advisor, or to any of their respective affiliates. The FUND may pay
reasonable finder's fees to persons unaffiliated with it in connection
with the arrangement of the loans.
B. Repurchase (Repo) and reverse repurchase (Reverse Repo) transactions
1. Repos. From time to time, the FUNDS may enter into Repo transactions.
In a typical Repo transaction, the FUND involved buys U.S. Government
or other money market securities from a financial institution (such as
a bank, broker, or savings and loan association). At the same time, as
part of the arrangement, the FUND obtains an agreement from the seller
to repurchase those same securities from the FUND at a specified price
on a fixed future date.
The repurchase date is normally not more than seven days from the date
of purchase. Repurchase agreements maturing in more than seven days
will be considered illiquid and subject to the FUNDS restriction on
illiquid securities.
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. These risks may be particularly great in so-called developing or
undeveloped countries, sometimes referred to as Emerging Markets.
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<PAGE>
In addition, while the volume of transactions effected on foreign stock
exchanges has increased in recent years, in most cases it remains appreciably
below that of the NYSE. Accordingly, a FUND'S foreign investments may be less
liquid and their prices may be more volatile than comparable investments in
securities of U.S. companies. Moreover, the settlement periods for foreign
securities, which are often longer than those for securities of U.S. issuers,
may affect portfolio liquidity. The FUNDS will incur costs in converting foreign
currencies into U.S. dollars. Custody charges are generally higher for foreign
securities. In buying and selling securities on foreign exchanges, a FUND
normally pays fixed commissions that are generally higher than the negotiated
commissions charged in the United States. In addition, there is generally less
governmental supervision and regulation of securities exchanges, brokers and
issuers in foreign countries that in the United States. There may be difficulty
in enforcing legal rights outside the United States. For example, in the event
of default on any foreign debt obligations, it may be more difficult or
impossible for the FUND to obtain or to enforce a judgment against the issuers
of these securities. The ADVISOR or sub-advisor will take all these factors into
consideration in managing a FUND'S foreign investments.
Certain state insurance regulations impose additional restrictions on the extent
to which a FUND may invest in foreign securities. See the SAI.
The share price of a FUND that invests in foreign securities will reflect the
movements of both the prices of the portfolio securities and the currencies in
which those securities are denominated. Depending on the extent of a FUND'S
investments abroad, changes in a FUND'S share price may have a low correlation
with movements in the U.S. markets. Because most of the foreign securities in
which the FUND invests will be denominated in foreign currencies, or otherwise
will have values that depend on the performance of foreign currencies relative
to the U.S. dollar, the relative strength of the U.S. dollar may be an important
factor in the performance of the FUND.
FOREIGN CURRENCIES
When an ADVISOR or sub-advisor believes that a currency in which a portfolio
security or securities is denominated or exposed may suffer a decline against
the U.S. dollar, it may hedge that risk by entering into a forward contract to
sell an amount of foreign currency approximating the value of some or all of the
portfolio securities denominated in or exposed to that foreign currency.
Because foreign securities generally are denominated and pay dividends or
interest in foreign currencies, and a FUND may hold various foreign currencies,
the value of the net assets of that FUND as measured in U.S. dollars will be
affected favorably or unfavorably by changes in exchange rates. Generally,
currency exchange transactions will be conducted on a spot (i.e., cash) basis at
the spot rate prevailing in the currency exchange market. The cost of currency
exchange transactions will generally be the difference between the bid and offer
spot rate of the currency being purchased or sold. Some foreign currency values
may be volatile, and there is the possibility of government controls on currency
exchange or governmental intervention in currency markets which could adversely
affect the FUND.
Investors should be aware that exchange rate movements can be significant and
can endure for long periods of time. In order to protect against uncertainty in
the level of future foreign currency exchange rates, a FUND'S ADVISOR or
sub-advisor may attempt to manage exchange rate risk through active currency
management, including the use of certain foreign currency hedging transactions.
For example, it may hedge some or all of its investments denominated in a
foreign currency against a decline in the value of that currency relative to the
U.S. dollar by entering into contracts to exchange that currency for U.S.
dollars (not exceeding the value of the FUND'S assets denominated in or exposed
to that currency), or by participating in options or futures contracts with
respect to that currency. If the ADVISOR or sub-advisor believes that a
particular currency may decline relative to the U.S. dollar, the FUND may also
enter into contracts to sell that currency (up to the value of the FUND'S assets
denominated in or exposed to that currency) in exchange for another currency
that the ADVISOR or sub-advisor expects to remain stable or to appreciate
relative to the U.S. dollar. This technique is known as currency cross-hedging.
Refer to the Prospectus for each FUND to determine which FUNDS may engage in
these transactions.
These strategies are intended to minimize the effect of currency appreciation as
well as depreciation, but do not protect against a decline in the underlying
value of the hedged security. In addition, these strategies may reduce or
eliminate the opportunity to profit from increases in the value of the original
currency and may adversely impact the FUND'S performance if the ADVISOR or
sub-advisor's projection of future exchange rates is inaccurate. See Strategic
portfolio transactions.
Additionally, several European countries are participating in the European
Economic and Monetary Union, which will establish a common European currency for
participating countries. This currency will commonly be known as the "Euro". It
is anticipated that each such participating country will replace its existing
currency with the Euro on January 1, 1999. Additional European countries may
elect to participate after that date. FUNDS investing in securities of
participating countries could be adversely affected if the computer systems used
by their major service providers are not properly prepared to
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handle both the imminent implementation of this single currency and the prospect
of the adoption of the Euro by additional countries in the future. These FUNDS
are taking steps to obtain satisfactory assurances that their major service
providers are, in turn, taking steps reasonably designed to address these
matters with respect to the computer systems they use. There can be no
assurances that these steps will be sufficient to avoid any adverse impact on
the business of any FUND.
GENERAL INFORMATION
Your inquiries should be directed to Lincoln National Life Insurance Co., at
P.O. Box 2340, Fort Wayne, Indiana 46801; or, you may call 1-800-4LINCOLN
(454-6265).
The FUNDS will issue unaudited semiannual reports showing current investments in
each FUND and other information; and annual financial statements audited by
their independent auditors. In 1998, in response to certain changes to the
federal securities laws, the Board of Directors of each FUND recommended, and
shareholders of each FUND approved, changes to the fundamental policies for
certain of the FUNDS. The Board of Directors of each FUND also changed or
eliminated certain non-fundamental policies of certain FUNDS.
Under the 1940 Act a fundamental policy of a fund may not be changed without the
affirmative vote of a majority of the fund's outstanding shares.
As used in this Prospectus, the term majority of the FUND'S outstanding shares
means the vote of: (1) 67% or more of each FUND'S shares present at a meeting,
if the holders of more than 50% of the outstanding shares of each FUND are
present or represented by proxy, or (2) more than 50% of each FUND'S outstanding
shares, whichever is less.
These Prospectuses do not contain all the information included in their
Registration Statements filed with the Commission. The Registration Statements,
including the exhibits filed with them, may be examined at the office of the
Commission in Washington, D.C. Statements contained in the Prospectuses about
the contents of any CONTRACT or other document referred to in them are not
necessarily complete. In each instance, reference is made to the copy of that
CONTRACT or other document filed as an exhibit to the Registration Statement of
which the particular Prospectus forms a part, and each statement is qualified in
all respects by that reference.
The use of FUNDS by both variable annuity and variable life insurance separate
accounts is known as mixed funding. Due to differences in redemption rates, tax
treatment, or other considerations, the interests of CONTRACT OWNERS under the
VARIABLE LIFE ACCOUNTS may conflict with those of CONTRACT OWNERS under the
variable annuity account, in those cases where mixed funding occurs. For
example, violation of the federal tax laws by one VARIABLE ACCOUNT investing in
the FUNDS could cause the contracts and Policies funded through another VARIABLE
ACCOUNT to lose their tax-deferred status, unless remedial action were taken.
The Board of Directors of each FUND will monitor for any material conflicts and
determine what action, if any, should be taken.
Should any conflict arise which requires that a substantial amount of assets be
withdrawn from any of the FUNDS, orderly portfolio management could be
disrupted, to the detriment of those CONTRACT OWNERS still investing in that
FUND. Also, if that FUND believes that any portfolio has become so large as to
materially impair investment performance, then the FUND will examine other
investment options.
LINCOLN LIFE performs the dividend and transfer functions for the FUNDS.
PREPARING FOR YEAR 2000
THE 'YEAR 2000' ISSUE. Many existing computer programs use only two digits to
identify a year in the date field. These programs were designed and developed
without considering the impact of the upcoming change in the century. If not
corrected, many computer applications could fail or create erroneous results by
or at the year 2000. This 'year 2000 issue' affects virtually all companies and
organizations.
Lincoln Life is responsible, as part of its year 2000 updating process, for the
updating of FUND-related computer systems. An affiliate of Lincoln Life,
Delaware Service Company (Delaware), provides substantially all of the necessary
accounting and valuation services for the FUNDS. Delaware, for its part, is
responsible for updating all of its computer systems, including those which
serve the FUNDS, to accommodate the year 2000. Lincoln Life and Delaware have
begun formal discussions with each other to assess the requirements for their
respective systems to interface properly in order to facilitate the accurate and
orderly operation of the FUND beginning in the year 2000.
The year 2000 issue is pervasive and complex and affects virtually every aspect
of the businesses of Lincoln Life, Delaware, and the FUNDS (the Companies). The
computer systems of Lincoln Life and Delaware (including those computer systems
which serve the FUNDS) and their interfaces with the computer systems of
vendors, suppliers, customers and other business partners are particularly
vulnerable. The inability to properly recognize date-sensitive electronic
information and to transfer data between systems could cause errors or even
complete failure of systems, which would result in a temporary inability to
process transactions correctly and
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engage in normal business activities for the FUNDS. Lincoln Life and Delaware,
respectively, are redirecting significant portions of their internal information
technology efforts and are contracting, as needed, with outside consultants to
help update their systems to accommodate the year 2000. Also, in addition to the
discussions with each other noted above, Lincoln Life and Delaware have
respectively initiated formal discussions with other critical parties that
interface with their systems to gain an understanding of the progress by those
parties in addressing year 2000 issues. While Lincoln Life and Delaware are
making substantial efforts to address their own systems (including those which
serve the FUNDS) and the systems with which they interface, it is not possible
to provide assurance that operational problems will not occur. Lincoln Life and
Delaware presently believe that, with the modification of existing computer
systems, updates by vendors and conversion to new software and hardware, the
year 2000 issue will not pose significant operations problems for their
respective computer systems. In addition, the Companies are incorporating
potential issues surrounding year 2000 into their contingency planning process,
in the event that, despite these substantial efforts, there are unresolved year
2000 problems. If the remediation efforts noted above are not completed timely
or properly, the year 2000 issue could have a material adverse impact on the
operation of the businesses of Lincoln Life, Delaware, the FUNDS, or all of
them.
The cost of addressing year 2000 issues and the timeliness of completion will be
closely monitored by management for Lincoln Life, Delaware and the FUNDS and,
for each company, will be based on its management's best estimates which are
derived utilizing numerous assumptions of future events, including the continued
availability of certain resources, third-party modification plans and other
factors. Nevertheless, there can be no guarantee by Lincoln Life, by Delaware or
by the FUNDS that estimated costs will be achieved, and actual results could
differ significantly from those anticipated. Specific factors that might cause
such differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer problems, and other uncertainties.
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STATEMENT OF ADDITIONAL
INFORMATION TABLE OF
CONTENTS -- 11 UNDERLYING
FUNDS*
<TABLE>
<CAPTION>
ITEM ITEM
- ------------------------------------------------ ------------------------------------------------
<S> <C>
General Information and History Appendix
Investment objective Investment advisor and sub-advisor
Investment policies and techniques Directors and officers
Investment restrictions Investment policies and techniques
Portfolio transactions and brokerage (continued): options, futures, securities
Determination of net asset value valuation, securities lending, repurchase and
reverse repurchase agreements
Custodian
Independent auditors
Financial statements
Bond and commercial paper ratings
U.S. Government obligations
Taxes
State requirements
Derivative transactions -- definitions
*NOTE: THIS IS A GENERIC TABLE. THERE ARE
VARIATIONS IN THE CONTENTS OF THE SAI FROM FUND
TO FUND.
</TABLE>
- --------------------------------------------------------------------------------
Please send me a free copy of the current Statement of Additional Information
for Lincoln National Life Insurance Co. Variable Annuity Account C:
(Please Print)
Name: __________________________________________________________________________
Address: _______________________________________________________________________
City _________________________________ State ____________________ Zip __________
Mail to Lincoln National Life Insurance Co., P.O. Box 2340, Fort Wayne, Indiana
46081
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THIS PAGE WAS INTENTIONALLY LEFT BLANK.
84
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LINCOLN NATIONAL
CAPITAL APPRECIATION FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
This SAI should be read in conjunction with the Prospectus
of Lincoln National Capital Appreciation Fund, Inc. (FUND)
dated May 1, 1998. You may obtain a copy of the FUND'S
Prospectus on request and without charge. Please write
Lincoln National Life Insurance Co., P.O. Box 2340, Fort
Wayne, Indiana 46801 or call 1-800-4LINCOLN (454-6265).
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
- --------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES CA-2
- --------------------------------------------------
INVESTMENT RESTRICTIONS CA-3
- --------------------------------------------------
PORTFOLIO TRANSACTIONS AND BROKERAGE CA-4
- --------------------------------------------------
DETERMINATION OF NET ASSET VALUE CA-5
- --------------------------------------------------
INVESTMENT TECHNIQUES CA-5
- --------------------------------------------------
APPENDIX
Investment advisor and sub-advisor A-1
- --------------------------------------------------
Directors and officers A-3
- --------------------------------------------------
Investment policies and techniques
(continued): options, futures, securities
valuation, securities lending, repurchase
and reverse repurchase agreements A-4
- --------------------------------------------------
<CAPTION>
PAGE
- --------------------------------------------------
<S> <C>
Custodian A- 9
- --------------------------------------------------
Independent auditors A- 9
- --------------------------------------------------
Financial statements A- 9
- --------------------------------------------------
Bond and commercial paper ratings A- 9
- --------------------------------------------------
U.S. Government obligations A-11
- --------------------------------------------------
Taxes A-12
- --------------------------------------------------
State requirements A-12
- --------------------------------------------------
Derivative transactions-definitions A-12
- --------------------------------------------------
</TABLE>
THIS SAI IS NOT A PROSPECTUS.
The date of this SAI is May 1, 1998
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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 common stocks of issuers of all sizes with the objective of
maximizing longer-term growth of capital. 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 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 Standard &
Poor's 500 Index (S&P 500). References to ADVISOR in this SAI include both
Lincoln Investment Management, Inc. (LINCOLN INVESTMENT) and Janus Capital
Corporation.
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
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 or savings and loan association,
coupled with an agreement by the seller to repurchase the same securities from
the FUND at the specified price and at a fixed time in the future, usually not
more than seven days from the date of purchase. The difference between the
purchase price to the FUND and the resale price to the seller represents the
interest earned by the FUND which is unrelated to the coupon rate or maturity of
the purchased security. If the seller defaults, the FUND may incur a loss if the
value of the collateral securing the repurchase agreement declines, or the FUND
may incur disposition costs in connection with liquidating the collateral. If
bankruptcy proceedings are commenced with respect to the seller, realization
upon the collateral by the FUND may be delayed or limited and a loss may be
incurred if the collateral securing the repurchase agreement declines in value
during the bankruptcy proceedings. 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 dura-tion of more than seven days are considered
illiquid securities and are sub-ject 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 SAI, 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.
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-advisor 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,
CA-2
<PAGE>
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
shareholders 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 75% of the value of the total assets of the FUND, purchase the
securities of any one issuer [except cash item and government securities as
defined under the Investment Company Act of 1940 (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. (With respect to the remaining 25% 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. Invest more than 25% of the value of its assets in any particular industry.
3. Invest directly in real estate 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 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 underwriter 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.
8. Invest more than 5% of its net assets in securities restricted as to resale.
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 will not (1) enter into any futures contracts and related options
for purposes other than bona fide hedging transactions within the meaning of
Commodity Futures Trading Commission (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 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; or (2) 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.
b. 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.
c. 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 purchasing securities on
margin.
d. 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
CA-3
<PAGE>
positions in futures, options, swaps or forward contracts or the segregation
of assets in connection with such contracts.
e. 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.
f. 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 ADVISOR & sub-advisor) the FUND'S
INVESTMENT ADVISOR 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.
g. The FUND may not invest in companies for the purpose of exercising control
or management.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The ADVISOR is responsible for decisions to buy and sell securities for the
FUND, the selection of brokers and dealers to effect the transactions and the
negotiation of brokerage commissions, if any. Purchases and sales of securities
on a stock exchange are effected through brokers who charge a commission for
their services. In the over-the-counter market, securities are generally traded
on a net basis with dealers acting as principal for their own accounts without a
stated commission, although the price of the security usually includes a profit
to the dealer. In underwritten offerings, securities are purchased at a fixed
price which includes an amount of compensation to the underwriter, generally
referred to as the underwriter's concession or discount. On occasion, certain
money market instruments may be purchased directly from an issuer, in which case
no commissions or discounts are paid.
The ADVISOR currently provides investment advice to a number of other clients.
See Investment advisor and sub-advisor in the Appendix. It will be the practice
of the ADVISOR to allocate purchase and sale transactions among the FUND and
others whose assets it manages in such manner as it deems equitable. In making
such allocations, major factors to be considered are investment objectives, the
relative size of portfolio holdings of the same or comparable securities, the
availability of cash for investment, the size of investment commitments
generally held and the opinions of the persons responsible for managing the
portfolios of the FUND and other client accounts. Securities of the same issuer
may be purchased, held, or sold at the same time by the FUND or other accounts
or companies for which the ADVISOR provides investment advice (including
affiliates of the ADVISOR). On occasions when the ADVISOR deems the purchase or
sale of a security to be in the best interest of the FUND, as well as the other
clients of the advisor, the advisor, to the extent permitted by applicable laws
and regulations, may aggregate such securities to be sold or purchased for the
FUND with those to be sold or purchased for other clients in order to obtain
best execution and lower brokerage commissions, if any. In such event,
allocation of the securities so purchased or sold, as well as the expenses
incurred in the transaction, will be made by the ADVISOR in the manner it
considers to be equitable and consistent with its fiduciary obligations to all
such clients, including the FUND. In some instances, the procedures may impact
the price and size of the position obtainable for the FUND. FUND securities are
not purchased from or sold to the ADVISOR or any affiliated person [as defined
in the 1940 Act] of the ADVISOR.
In connection with effecting portfolio transactions, primary consideration will
be given to securing most favorable price and efficient execution. Within the
framework of this policy, the reasonableness of commission or other transaction
costs is a major factor in the selection of brokers and is considered together
with other relevant factors, including financial responsibility, research and
investment information and other services provided by such brokers either with
respect to the FUND or other clients of the advisor or sub-advisor. It is
expected that, as a result of such factors, transaction costs charged by some
brokers may be greater than the amounts other brokers might charge. The ADVISOR
may determine in good faith that the amount of such higher transaction costs is
reasonable in relation to the value of the brokerage and research services
provided. The Board of Directors of the FUND will review regularly the
reasonableness of commission and other transaction costs incurred by the FUND in
the light of facts and circumstances deemed relevant from time to time, and, in
CA-4
<PAGE>
that connection, will receive reports from the advisor and published data
concerning transaction costs incurred by institutional investors generally. The
nature of the research services provided to the ADVISOR by brokerage firms
varies, but generally includes current and historical financial data concerning
particular companies and their securities; information and analysis concerning
securities markets and economic and industry matters; and technical and
statistical studies and data dealing with various investment opportunities,
risks and trends, all of which the ADVISOR regards as a useful supplement to its
own internal research capabilities. The ADVISOR may direct trades to brokers
which have provided specific brokerage or research services for the benefit of
the ADVISOR'S clients; in addition the ADVISOR may allocate trades among brokers
that generally provide superior brokerage and research services. During 1997,
the ADVISOR directed transactions totaling approximately $2,491,076 million to
these brokers and paid commissions of approximately $73,483 in connection with
these transactions. Research services furnished by brokers are used for the
benefit of all of the ADVISOR'S clients and not solely or necessarily for the
benefit of the FUND. The ADVISOR believes that the value of research services
received is not determinable and does not significantly reduce its expenses. The
FUND does not reduce its fee to the ADVISOR by any amount that might be
attributable to the value of such services. The aggregate amount of brokerage
commissions paid by the FUND during 1997 was $1,088,656, for 1996 it was
$383,399, and for 1995 it was $468,173.
If the FUND effects a closing purchase transaction with respect to an option
written by it, normally such transaction will be executed by the same
broker-dealer who executed the sale of the option. If a call written by the FUND
is exercised, normally the sale of the underlying securities will be executed by
the same broker-dealer who executed the sale of the call.
The writing of options by the FUND will be subject to limitations established by
each of the exchanges governing the maximum number of options in each class
which may be written by a single investor or group of investors acting in
concert, regardless of whether the options are written on the same or different
exchanges or are held or written in one or more accounts or through one or more
brokers. Thus, the number of options which the FUND may write may be affected by
options written by other investment advisory clients of its ADVISOR. An exchange
may order the liquidations of positions found to be in excess of these limits,
and it may impose certain other sanctions. As of the date of this Prospectus,
these limits (which are subject to change) are 2,000 options (200,000 shares) in
each class of puts or calls.
Under the sub-advisory agreement between the ADVISOR and the sub-advisor, the
sub-advisor may perform some, or substantially all, of the investment advisory
services required by the FUND, even though the ADVISOR remains primarily
responsible for investment decisions affecting the FUND. The sub-advisor will
follow the same procedures and policies which are followed by the ADVISOR as
described previously. The sub-advisor currently provides investment advice to a
number of other clients.
DETERMINATION OF NET ASSET VALUE
A description of the days on which the FUND'S net asset value per share will be
determined is given in the Prospectus. The New York Stock Exchange's most recent
announcement (which is subject to change) states that in 1998 it will be closed
on New Year's Day, Martin Luther King Day, President's Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
It may also be closed on other days. Although the Directors expect the same
holiday schedule to be observed in the future, the NYSE may modify its holiday
schedule at any time. To the extent that the FUND'S securities are traded in
other markets on days when the NYSE is closed, the FUND'S NAV may be affected on
days when investors do not have access to the FUND to purchase or redeem shares.
INVESTMENT TECHNIQUES
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
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 Board of Directors or its delegates. In addition,
the FUND
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currently intends to invest only in repurchase agreements collateralized by U.S.
Government or money market 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
Board of Directors, or its delegate, deems creditworthy.
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, net of fees paid to the issuer and GNMA, 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 Corp. (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 when that cash is used to purchase additional securities in
the mortgage-backed securities sector or in the other investment sectors. On the
other hand, mortgage-backed securities are also subject to maturity extension
risk. This is the risk that in a period of rising interest rates, prepayments
may occur at a slower than expected rate, which may cause these securities to
fluctuate more widely in response to changes in interest rates.
Asset-backed securities consist of undivided fractional interests in pools of
consumer loans (unrelated to mortgage loans) held in a trust. Payments of
principal and interest are passed through to certificate holders and are
typically supported by some form of credit enhancement, such as a letter of
credit, surety bond, limited guaranty or senior/subordination. The degree of
credit enhancement varies, but generally amounts to only a fraction of the
asset-backed security's par value until exhausted. Asset-backed securities are
ultimately dependent upon payment of consumer loans by individuals, and the
certificate holder generally has no recourse to the entity that originated the
loans. The underlying loans are subject to prepayments which shorten the
securities' weighted average life and may lower their return. (As prepayments
flow through at par, total returns would be affected by the prepayments; if a
security were trading at a premium, its total return would be lowered by
prepayments, and if a security were trading at a discount, its total return
would be increased by prepayments.) Additionally, asset-backed securities are
also subject to maturity extension risk. This is the risk that in a period of
rising interest rates, prepayments may occur at a slower than expected rate,
which may cause these securities to fluctuate more
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widely in response to changes in interest rates. If the credit enhancement is
exhausted, certificate holders may experience losses or delays in payment if the
required payments of principal and interest are not made to the trust with
respect to the underlying loans. The value of these securities also may change
because of changes in the market's perception of the creditworthiness of the
servicing agent for the loan pool, the originator of the loans, or the financial
institution providing the credit enhancement.
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 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 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 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. The sub-advisor 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 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 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 liquid assets from
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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 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-advisor 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-advisor'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 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 three 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
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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 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 correlation between change in
the value of its portfolio securities and changes in the value of the futures
positions, the FUND'S losses from 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 previously, 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 an 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 or
exposed to 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 or exposed to 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 in or exposed to 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 FUND'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-advisor's projection
of future exchange rates is inaccurate.
The FUND will cover outstanding forward positions by maintaining liquid
portfolio securities denominated in or exposed to 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 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 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
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to regulate forward contacts. 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 denominated portfolio securities.
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
decreases 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, at 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 relevant currency. If the expected decline occurs, the option will most
likely not be exercised and the decrease 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 (1) is equal to or less than the exercise price of the call
written or (2) is greater than the exercise price of the call written, if the
difference is maintained by the FUND in cash or 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
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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 liquid assets in an amount not less than the value of
the underlying foreign currency in U.S. dollars marked-to-market daily.
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 (1) maintains cash not
available for investment or liquid assets with a value equal to the exercise
price in a segregated account with its custodian or (2) 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 (1)
is equal to or less than the exercise price of the call written or (2) is
greater than the exercise price of the call written if the difference is
maintained by the FUND in cash and 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 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-advisor
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 options, the writer may be assigned an exercise
notice at any time before 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
liquid assets. Effecting a closing transaction also will permit the FUND to use
the cash or proceeds from the concurrent 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 before 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 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
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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: (1) insufficient trading interest in certain options,
(2) restrictions imposed by a national securities exchange on which the option
is traded (Exchange) on opening or closing transactions or both, (3) trading
halts, suspensions or other restrictions imposed with respect to particular
classes or series of options or underlying securities, (4) unusual or unforeseen
circumstances that interrupt normal operations on an Exchange, (5) the
facilities of an Exchange or of the Options Clearing Corp. (OCC) may not at all
times be adequate to handle current trading volume, or (6) 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) or above (out-of-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 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 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 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 credit rating categories of at least one nationally recognized
statistical rating organization at the time of entering into such transaction.
The sub-advisor will monitor the creditworthiness of all counterparties on an
ongoing basis. If there is a default by the other party to
CA-12
<PAGE>
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-advisor 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 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 previously.
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 Securities and Exchange Commission (SEC). To the contrary, such
instruments are traded through financial institutions acting as market-makers,
although foreign currency options are 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 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
before 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
previously, 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 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 (1) other complex foreign
political and economic factors, (2) lesser availability than in the United
States of data on which to make trading decisions, (3) delays in the FUND'S
ability to act upon economic events occurring in foreign markets during
non-business hours in the United States, (4) the imposition of different
exercise and settlement terms and procedures and margin
CA-13
<PAGE>
requirements than in the United States, and (5) low trading volume.
LENDING OF PORTFOLIO SECURITIES
The FUND may from time to time lend securities from its portfolio to brokers,
dealers and financial institutions and receive collateral from the borrower, in
the form of cash (which may be invested in short-term securities), U.S.
Government obligations or certificates of deposit. Such collateral will be
maintained at all times in an amount equal to at least 102% of the current
market value of the loaned securities, and will be in the actual or constructive
possession of the FUND during the term of the loan. The FUND will retain the
incidents of ownership of the loaned securities and will be entitled to the
interest or dividends payable on the loaned securities. In addition, the FUND
will receive interest on the amount of the loan. The loans will be terminable by
the FUND at any time and will not be made to any affiliates of the FUND or the
ADVISOR. The FUND may pay reasonable finder's fees to persons unaffiliated with
it in connection with the arrangement of the loans.
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 ADVISOR or sub-advisor 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.
CA-14
<PAGE>
APPENDIX
(NOTE: THIS IS UNIFORM INFORMATION FOR THE 11 FUNDS. SEE EACH FUND'S SAI FOR
INFORMATION SPECIFIC TO THAT FUND.)
THIS APPENDIX CONSTITUTES PART OF THE SAIS OF LINCOLN NATIONAL AGGRESSIVE GROWTH
FUND, INC. (AGGRESSIVE GROWTH FUND), LINCOLN NATIONAL BOND FUND, INC. (BOND
FUND), LINCOLN NATIONAL CAPITAL APPRECIATION FUND, INC. (CAPITAL APPRECIATION
FUND), LINCOLN NATIONAL EQUITY-INCOME FUND, INC. (EQUITY-INCOME FUND), LINCOLN
NATIONAL GLOBAL ASSET ALLOCATION FUND, INC. (GLOBAL ASSET ALLOCATION FUND),
LINCOLN NATIONAL GROWTH AND INCOME FUND, INC. (GROWTH AND INCOME FUND), LINCOLN
NATIONAL INTERNATIONAL FUND, INC. (INTERNATIONAL FUND), LINCOLN NATIONAL MANAGED
FUND, INC. (MANAGED FUND), LINCOLN NATIONAL MONEY MARKET FUND, INC. (MONEY
MARKET FUND), LINCOLN NATIONAL SOCIAL AWARENESS FUND, INC. (SOCIAL AWARENESS
FUND), AND LINCOLN NATIONAL SPECIAL OPPORTUNITIES FUND, INC. (SPECIAL
OPPORTUNITIES FUND). UNLESS OTHERWISE INDICATED, THE FOLLOWING INFORMATION
APPLIES TO EACH FUND.
INVESTMENT ADVISOR AND SUB-ADVISOR
LINCOLN INVESTMENT Management, Inc. (LINCOLN INVESTMENT) is the investment
ADVISOR to the FUNDS and is headquartered at 200 E. Berry Street, Fort Wayne,
Indiana 46802. LINCOLN INVESTMENT (THE ADVISOR) is a subsidiary of Lincoln
National Corp. (LNC), a publicly-held insurance holding company organized under
Indiana law. Through its subsidiaries, LNC provides, on a national basis,
insurance and financial services. LINCOLN INVESTMENT is registered with the
Securities and Exchange Commission (SEC) as an INVESTMENT ADVISOR and has acted
as an INVESTMENT ADVISOR to mutual funds for over 40 years. The ADVISOR also
acts as INVESTMENT ADVISOR to Lincoln National Income Fund, Inc. (a closed-end
investment company whose investment objective is to provide a high level of
current income from interest on fixed-income securities) and Lincoln National
Convertible Securities Fund, Inc. (a closed-end investment company whose
investment objective is a high level of total return on its assets through a
combination of capital appreciation and current income) and to other clients,
and also acts as sub-adviser to two of the series of Delaware Group Adviser
Funds, Inc. (the Corporate Income Fund and the Federal Bond Fund of that retail
mutual fund complex).
Under Advisory Agreements with the FUNDS, the ADVISOR provides portfolio
management and investment advice to the FUNDS and administers its other affairs,
subject to the supervision of the funds' Board of Directors. The advisor, at its
expense, will provide office space to the FUNDS and all necessary office
facilities, equipment and personnel and will make its officers and employees
available to the FUNDS as appropriate. In addition, the ADVISOR will pay all
expenses incurred by it or by the FUNDS in connection with the management of
each FUND'S assets or the administration of its affairs, other than those
assumed by the FUNDS, as described in the Appendix to the Prospectus. LINCOLN
LIFE has paid the organizational expenses of all the FUNDS. The rates of
compensation to the ADVISOR and the sub-advisors are set forth in the Appendix
to the Prospectus.
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth Fund $2,109,952 $1,428,803 $ 725,544
Bond Fund 1,221,295 1,188,030 1,061,701
Capital Appreciation Fund 2,940,632 1,549,656 726,011
Equity-Income Fund 6,053,404 3,303,336 1,457,623
Global Asset Allocation Fund 2,808,358 2,072,722 1,570,876
Growth and Income Fund 9,714,765 7,063,276 5,077,981
International Fund 3,741,563 3,319,701 2,770,197
Managed Fund 2,873,786 2,480,524 2,120,656
Money Market Fund 451,243 417,468 385,019
Social Awareness Fund 3,355,544 1,877,030 1,048,366
Special Opportunities Fund 2,824,015 2,274,229 1,809,514
</TABLE>
A-1
<PAGE>
During the last three years, the ADVISOR received the amounts, as mentioned
above, for investment advisory services. If total expenses of the FUNDS
(excluding taxes, interest, portfolio brokerage commissions and fees, and
expenses of an extraordinary and non-recurring nature, but including the
investment advisory fee) exceed 1 1/2% per annum of the average daily net assets
of each FUND (2% for the International Fund), the ADVISOR will pay such excess
by offsetting it against the advisory fee. If such offset is insufficient to
cover the excess, any balance remaining will be paid directly by the ADVISOR to
each FUND.
The current advisory agreements between the ADVISOR and the FUNDS will remain in
effect from year to year if approved annually by: (1) the Board of Directors of
each FUND or by the vote of a majority of the outstanding voting securities of
each FUND, and (2) a vote of a majority of the directors who are not interested
persons of the FUNDS or the advisor, cast in person at a meeting called for the
purpose of voting on such approval. The advisory agreement may be terminated
without penalty at any time, on 60 days' written notice by: (1) the Board of
Directors of each FUND, (2) vote of a majority of the outstanding voting
securities of each FUND or (3) the advisor. The advisory agreement terminates
automatically in the event of assignment.
In like manner, the current sub-advisory agreement will remain in effect from
year to year if approved annually by the Board of Directors of the applicable
FUNDS or by the vote of a majority of the outstanding voting securities of those
FUNDS. The sub-advisory agreements may be terminated without penalty at any
time, on 60 days' written notice, by: (1) the Board of Directors of the
applicable FUND, (2) vote of the majority of the outstanding voting securities
of the applicable FUND, (3) the sub-advisor, or (4) the advisor. The
sub-advisory agreements terminate automatically in the event of assignment.
During the last three years each SUB-ADVISOR received the following amounts for
investment sub-advisory services. LINCOLN INVESTMENT, not the FUND, pays all
sub-advisory fees owed.
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth Fund $1,229,800 $ 893,059 $ 483,982
Bond Fund N/A N/A N/A
Capital Appreciation Fund 2,072,388 1,117,383 545,800
Equity-Income Fund 4,781,931 2,612,405 1,152,337
Global Asset Allocation Fund 1,724,369 1,284,185 1,034,321
Growth and Income Fund 6,155,225 4,440,325 3,108,208
International Fund 1,503,294 1,326,484 1,146,153
Managed Fund 974,080 820,633 672,474
Money Market Fund N/A N/A N/A
Social Awareness Fund 1,901,560 923,516 462,593
Special Opportunities Fund 1,519,961 1,168,134 868,019
</TABLE>
A-2
<PAGE>
DIRECTORS AND OFFICERS
The directors and executive officers of each FUND, their business addresses,
positions with FUND, age and their principal occupations during the past five
years are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
* KELLY D. CLEVENGER Vice President, Lincoln National Life Insurance Co.
CHAIRMAN OF THE BOARD,
PRESIDENT AND DIRECTOR, age
45
1300 S. Clinton Street
Fort Wayne, IN 46802
- ------------------------------------------------------------------------------------------------------------------
JOHN B. BORSCH, JR. Retired, formerly Associate Vice President--Investments, Northwestern
DIRECTOR, age 64 University
1776 Sherwood Road
Des Plaines, IL 60016
- ------------------------------------------------------------------------------------------------------------------
NANCY L. FRISBY, CPA Regional Vice President/Chief Financial Officer (formerly Vice
DIRECTOR, age 56 President--Finance; Regional Controller of Finance), St. Joseph Medical
700 Broadway Center, Fort Wayne, Indiana
Fort Wayne, IN 46802
- ------------------------------------------------------------------------------------------------------------------
* BARBARA S. KOWALCZYK Senior Vice President and Director, Corporate Planning and Development,
DIRECTOR, age 46 Lincoln National Corporation; Director, Lincoln Life and Annuity Company
1300 S. Clinton St. of New York (formerly Executive Vice President, LINCOLN INVESTMENT
Fort Wayne, IN 46802 Management, Inc.)
- ------------------------------------------------------------------------------------------------------------------
KENNETH G. STELLA President, Indiana Hospital and Health Association
DIRECTOR, age 54
One America Square
Indianapolis, IN 46282
- ------------------------------------------------------------------------------------------------------------------
* JANET C. WHITNEY Vice President and Treasurer, Lincoln National Corp. (formerly Vice
TREASURER, age 49 President and General Auditor)
200 East Berry Street
Fort Wayne, IN 46802
- ------------------------------------------------------------------------------------------------------------------
* CYNTHIA A. ROSE Assistant Secretary, Lincoln National Life Insurance Co.
SECRETARY, age 43
200 East Berry Street
Fort Wayne, IN 46802
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
* Interested persons of the FUNDS, as defined in the 1940 Act. Directors' fees
of $250 per meeting are paid by each FUND to each director who is not an
interested person of the FUND. During 1997, each FUND paid $1,000 in director's
fees to each such director, plus out of pocket expenses to attend meetings.
During 1997, the FUND complex paid each of these directors aggregate fees of
$11,000. Mr. Stanley R. Nelson, a director who retired in 1997, received $750 in
director fees from each FUND and aggregate fees of $8,250 from the FUND complex.
Mr. Stella became a director in 1998 and thus received no fees during 1997.
A-3
<PAGE>
INVESTMENT POLICIES AND TECHNIQUES
OPTIONS AND FINANCIAL FUTURES TRADING
This discussion relates to the Bond, Growth and Income, Managed, Social
Awareness and Special Opportunities Funds. Neither the International Fund nor
the Money Market Fund has sought the authority to engage either in options or in
futures trading. (NOTE: The Aggressive Growth, Capital Appreciation,
Equity-Income and Global Asset Allocation Funds have their own respective
discussions of the strategic portfolio transactions in which they may engage.)
OPTIONS TRADING
The FUND may purchase or write (sell) options on financial instruments as a
means of achieving additional return or hedging the value of the FUND'S
portfolio. The FUND may not purchase or write put or covered call options in an
aggregate cost exceeding 30% of the value of its total assets. The FUND would
invest in options in standard contracts which may be quoted on NASDAQ, or on
national securities exchanges. Currently options are traded on numerous
securities and indices including, without limitation, the Standard and Poor's
100 Index (S&P 100), the Standard and Poor's 500 Index (S&P 500), and the NYSE
Beta Index.
A. In General. Put and call options are generally short-term contracts with
durations of nine months or less. The INVESTMENT ADVISOR will generally
write covered call options when it anticipates declines in the market value
of the portfolio securities and the premiums received may offset to some
extent the decline in the FUND'S net asset value. On the other hand, writing
put options may be a useful portfolio investment strategy when the FUND has
cash or other reserves and it intends to purchase securities but expects
prices to increase.
Generally, the risk to the FUND in writing options is that the investment
ADVISOR'S assumption about the price trend of the underlying security may prove
inaccurate. If the FUND wrote a put, expecting the price of a security to
increase, and it decreases, or if the FUND wrote a call, expecting the price to
decrease but it increased, the FUND could suffer a loss if the premium received
in each case did not equal the difference between the exercise price and the
market price.
B. Call Options. The FUND may write only call options which are covered,
meaning that the FUND either owns the underlying security or has an absolute
and immediate right to acquire that security, without additional cash
consideration, upon conversion or exchange of other securities currently
held in its portfolio. In addition, the FUND will not, before the expiration
of a call option, permit the call to become uncovered. If the FUND writes a
call option, the purchaser of the option has the right to buy (and the FUND
has the obligation to sell) the underlying security at the exercise price
throughout the term of the option. The amount paid to the FUND by the
purchaser of the option is the premium. The FUND'S obligation to deliver the
underlying security against payment of the exercise price would terminate
either upon expiration of the option or earlier if the FUND were to effect a
closing purchase transaction through the purchase of an equivalent option on
an exchange. The FUND would not be able to effect a closing purchase
transaction after it had received notice of exercise.
In order to write a call option, the FUND is required to deposit in escrow the
underlying security or other assets in accordance with the rules of The Options
Clearing Corp. (OCC) and the various exchanges. The FUND may not purchase call
options except in connection with a closing purchase transaction. It is possible
that the cost of effecting a closing purchase transaction may be greater than
the premium received by the FUND for writing the option.
Generally, the INVESTMENT ADVISOR (THE ADVISOR) intends to write listed covered
calls during periods when it anticipates declines in the market values of
portfolio securities and the premiums received (net of transaction costs) may
offset to some extent the decline in the FUND'S net asset value occasioned by
such declines in market value. The ADVISOR will generally not write listed
covered call options when it anticipates that the market value of the FUND'S
portfolio securities will increase.
If the ADVISOR decides that at a price higher than the current value a portfolio
security would be overvalued and should be sold, the FUND may write a call
option on the security at that price. Should the security subsequently reach
that price and the option be exercised, the FUND would, in effect, have
increased the selling price of that security, which it would have sold at that
price in any event, by the amount of the premium. In the event the market price
of the security declined and the option were not exercised, the premium would
offset all or some portion of that decline. It is possible, of course, that the
price of the security could increase beyond the exercise price; in that event,
the FUND would forego the opportunity to sell the security at that higher price.
In addition, call options may be used as part of a different strategy in
connection with sales of portfolio securities. If, in the judgment of the
advisor, the market price of a security is overvalued and it should be sold, the
FUND may elect to write a call with an exercise price substantially below the
current market price. So long as the value of the underlying security remains
above the exercise price during the term of the option, the option will be
exercised, and the FUND will be required to sell
A-4
<PAGE>
the security at the exercise price. If the sum of the premium and the exercise
price exceeds the market price of the security at the time the call is written,
the FUND would, in effect, have increased the selling price of the security. The
FUND would not write a call under these circumstances if the sum of the premium
and the exercise price were less than the current market price of the security.
In summary, a principal reason for writing calls on a securities portfolio is to
attempt to realize, through the receipt of premium income, a greater return than
would be earned on the securities alone. A covered call writer, such as the
FUND, which owns the underlying security has, in return for the premium, given
up the opportunity for profit from a price increase in the underlying security
above the exercise price, but has retained the risk of loss should the price of
the security decline. Unlike one who owns securities not subject to a call, the
FUND as a call writer may be required to hold such securities until the
expiration of the call option or until the FUND engages in a closing purchase
transaction at a price that may be below the prevailing market.
C. Put Options. The FUND may also write put options. If the FUND writes a put
option, it is obligated to purchase a given security at a specified price at
any time during the term of the option. The rules regarding the writing of
put options are generally comparable to those described above with respect
to call options.
Writing put options may be a useful portfolio investment strategy when the FUND
has cash or other reserves available for investment as a result of sales of FUND
shares or because the ADVISOR believes a more defensive and less fully invested
position is desirable in light of market conditions. If the FUND wishes to
invest its cash or reserves in a particular security at a price lower than
current market value, it may write a put option on that security at an exercise
price which reflects the lower price it is willing to pay. The buyer of the put
option generally will not exercise the option unless the market price of the
underlying security declines to a price near or below the exercise price. If the
FUND writes a put option, the price of the underlying security declines and the
option is exercised, the premium, net of transaction charges, will reduce the
purchase price paid by the FUND for the security. Of course, the price of the
security may continue to decline after exercise of the put options, in which
event the FUND would have foregone an opportunity to purchase the security at a
lower price, or the option might never be exercised.
If, before the exercise of a put, the ADVISOR determines that it no longer
wishes to invest in the security on which the put has been written, the FUND may
be able to effect a closing purchase transaction on an exchange by purchasing a
put of the same series as the one which it has previously written. The cost of
effecting a closing purchase transaction may be greater than the premium
received on writing the put option, and there is no guarantee that a closing
purchase transaction can be effected. The FUND may purchase put options only in
connection with a closing transaction.
As with the writer of a call, a put writer generally hopes to realize premium
income. The risk position of the FUND as a put writer is similar to that of a
covered call writer which owns the underlying securities. Like the covered call
writer (who must bear the risk of the position in the underlying security), the
FUND as a put writer stands to incur a loss if and to the extent the price of
the underlying security falls below the exercise price plus premium.
At the time a put option is written, the FUND will be required to establish, and
will maintain until the put is exercised or has expired, a segregated account
with its custodian consisting of cash or short-term U.S. Government securities
equal in value to the amount which the FUND will be obligated to pay upon
exercise of the put. Principal factors affecting the market value of a put or
call option include supply and demand, interest rates, the current market price
and price volatility of the underlying security and the time remaining until the
expiration date. In addition, there is no assurance that the FUND will be able
to effect a closing transaction at a favorable price. If the FUND cannot enter
into such a transaction, it may be required to hold a security that it might
otherwise have sold, in which case it would continue to be at market risk on the
security. If a substantial number of covered options written by the FUND are
exercised, the FUND'S rate of portfolio turnover could exceed historic levels.
This could result in higher transaction costs, including brokerage commissions.
The FUND will pay brokerage commissions in connection with the writing and
purchasing of options to close out previously written options. Such brokerage
commissions are normally higher than those applicable to purchases and sales of
portfolio securities.
FUTURES CONTRACTS AND OPTIONS THEREON
A. In General. The FUND may buy and sell financial futures contracts (futures
contracts) and related options thereon solely for hedging purposes. The FUND
may sell a futures contract or purchase a put option on that futures
contract to protect the value of the FUND'S portfolio in the event the
INVESTMENT ADVISOR anticipates declining security prices. Similarly, if
security prices are expected to rise, the FUND may purchase a futures
contract or a call option thereon. (For certain limited purposes, as
explained later, the FUND is also authorized to buy futures contracts on an
unleveraged basis and not as an anticipatory hedge.)
A-5
<PAGE>
The FUND will not invest in futures contracts and options thereon if immediately
thereafter the amount committed to margins plus the amount paid or option
premiums exceeds 5% of the FUND'S total assets. In addition the FUND will not
hedge more than 1/3 of its net assets.
B. Futures contracts. The FUND may purchase and sell financial futures
contracts (futures contracts) as a hedge against fluctuations in the value
of securities which are held in the FUND'S portfolio or which the FUND
intends to purchase. The FUND will engage in such transactions consistent
with the FUND'S investment objective. Currently, futures contracts are
available on Treasury bills, notes, and bonds as well as interest-rate and
stock market indexes.
There are a number of reasons why entering into futures contracts for hedging
purposes can be beneficial to the FUND. First, futures markets may be more
liquid than the corresponding cash markets on the underlying securities. Such
enhanced liquidity results from the standardization of the futures contracts and
the large transaction volumes. Greater liquidity permits a portfolio manager to
effect a desired hedge both more quickly and in greater volume than would be
possible in the cash market. Second, a desired sale and subsequent purchase can
generally be accomplished in the futures market for a fraction of the
transaction costs that might be incurred in the cash market.
The purpose of selling a futures contract is to protect the FUND'S portfolio
from fluctuation in asset value resulting from security price changes. Selling a
futures contract has an effect similar to selling a portion of the FUND'S
portfolio securities. If security prices were to decline, the value of the
FUND'S futures contracts would increase, thereby keeping the net asset value of
the FUND from declining as much as it otherwise might have. In this way, selling
futures contracts acts as a hedge against the effects of declining prices.
However, an increase in the value of portfolio securities tends to be offset by
a decrease in the value of corresponding futures contracts.
Similarly, when security prices are expected to rise, futures contracts may be
purchased to hedge against anticipated subsequent purchases of portfolio
securities at higher prices. By buying futures, the FUND could effectively hedge
against an increase in the price of the securities it intends to purchase at a
later date in order to permit the purchase to be effected in an orderly manner.
At that time, the futures contracts could be liquidated at a profit if prices
had increased as expected, and the FUND'S cash position could be used to
purchase securities.
When a purchase or sale of a futures contract occurs, a deposit of high-quality,
liquid securities called initial margin is made by both buyer and seller with a
custodian for the benefit of the broker. Unlike other types of margin, a futures
margin account does not involve any loan or borrowing but is merely a good faith
deposit that must be maintained in a minimum amount of cash or U.S. Treasury
bills. All futures positions, both long and short, are marked-to-market daily,
with cash payments called variation margin being made by buyers and sellers to
the custodian, and passed through to the sellers and buyers, to reflect daily
changes in the contract values.
Most futures contracts are typically canceled or closed out before the scheduled
settlement date. The closing is accomplished by purchasing (or selling) an
identical futures contract to offset a short (or long) position. Such an
offsetting transaction cancels the contractual obligations established by the
original futures transaction. Other financial futures contracts call for cash
settlements rather than delivery of securities.
If the price of an offsetting futures transaction varies from the price of the
original futures transaction, the hedger will realize a gain or loss
corresponding to the difference. That gain or loss will tend to offset the
realized loss or gain on the hedged securities position, but may not always or
completely do so.
The FUND will not enter into any futures contract if, immediately thereafter,
the aggregate initial margin for all existing futures contracts and options
thereon and for premiums paid for related options would exceed 5% of the FUND'S
total assets. The FUND will not purchase or sell futures contracts or related
options if immediately thereafter more than 1/3 of its net assets would be
hedged.
C. Risks and limitations involved in futures hedging. There are a number of
risks associated with futures hedging. Changes in the price of a futures
contract generally parallel but do not necessarily equal changes in the
prices of the securities being hedged. The risk of imperfect correlation
increases as the composition of the FUND'S securities portfolio diverges
from the securities that are the subject of the futures contract. Because
the change in the price of the futures contract may be more or less than the
change in the prices of the underlying securities, even a correct forecast
of price changes may not result in a successful hedging transaction. Another
risk is that the INVESTMENT ADVISOR could be incorrect in its expectation as
to the direction or extent of various market trends or the time period
within which the trends are to take place.
The FUND intends to purchase and sell futures contracts only on exchanges where
there appears to be a market in such futures sufficiently active to accommodate
the volume of its trading activity. There can be no assurance that a liquid
market will always exist for any particular contract at any particular time.
Accordingly, there can be no assurance that it will always be possible to close
a futures position when such closing is desired and, in the event of adverse
price movements, the FUND would
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continue to be required to make daily cash payments of variation margin.
However, in the event futures contracts have been sold to hedge portfolio
securities, such securities will not be sold until the offsetting futures
contracts can be executed. Similarly, in the event futures have been bought to
hedge anticipated securities purchases, such purchases will not be executed
until the offsetting futures contracts can be sold.
Successful use of futures contracts by the FUND is also subject to the ability
of the INVESTMENT ADVISOR to predict correctly movements in the direction of
interest rates and other factors affecting markets for securities. For example,
if the FUND has hedged against the possibility of an increase in interest rates
that would adversely affect the price of securities in its portfolio and prices
of such securities increase instead, the FUND will lose part or all of the
benefit of the increased value of its securities because it will have offsetting
losses in its futures positions. In addition, in such situations, if the FUND
has insufficient cash to meet daily variation margin requirements, it may have
to sell securities to meet such requirements. Such sale of securities may be,
but will not necessarily be, at increased prices that reflect the rising market.
The FUND may have to sell securities at a time when it is disadvantageous to do
so. Where futures are purchased to hedge against a possible increase in the
price of securities before the FUND is able to invest its cash in an orderly
fashion, it is possible that the market may decline instead; if the FUND then
concludes not to invest in securities at that time because of concern as to
possible further market decline or for other reasons, the FUND will realize a
loss on the futures contract that is not offset by a reduction in the price of
the securities purchased.
The selling of futures contracts by the FUND and use of related transactions in
options on futures contracts (discussed later) are subject to position limits,
which are affected by the activities of the investment advisor.
The hours of trading of futures contracts may not conform to the hours during
which the FUND may trade securities. To the extent that the futures markets
close before the securities markets, significant price and rate movements can
take place in the securities markets that cannot be reflected in the futures
markets.
Pursuant to Rule 4.5 under the Commodity Exchange Act, investment companies
registered under the 1940 Act are exempted from the definition of commodity pool
operator in the Commodity Exchange Act, subject to compliance with certain
conditions. The exemption is conditioned upon a requirement that all of the
investment company's commodity futures transactions constitute bona fide hedging
transactions (except on an unleveraged basis, as described in (F.) With respect
to long positions assumed by the FUND, the FUND will segregate with its
custodian an amount of cash and other assets permitted by Commodity Futures
Trading Commission (CFTC) regulations equal to the market value of the futures
contracts and thereby insure that the use of futures contracts is unleveraged.
The FUND will use futures in a manner consistent with these requirements.
D. Options on futures contracts. The FUND only intends to engage in options on
futures contracts for bona fide hedging purposes in compliance with CFTC
regulations. An option on a futures contract gives the purchaser the right,
but not the obligation, to assume a position in a futures contract (which
position may be a long or short position) at a specified exercise price at
any time during the option exercise period. The writer of the option is
required upon exercise to assume an offsetting futures position (which
position may be a long or short position). Upon exercise of the option, the
assumption of offsetting futures positions by the writer and holder of the
option will be accompanied by delivery of the accumulated balance in the
writer's futures margin account that represents the amount by which the
market price of the futures contract, at exercise, exceeds, in the case of a
call, or is less than, in the case of a put, the exercise price of the
option on the futures contract.
The holder or writer of an option may terminate its position by selling or
purchasing an option of the same series. There is no guarantee that such closing
transactions can be effected.
The FUND will be required to deposit initial and variation margin with respect
to put and call options on futures contracts written by it pursuant to the
FUND'S futures commissions merchants' requirements similar to those applicable
to the futures contracts themselves, described previously.
E. Risks of futures transactions. The FUND'S successful use of futures
contracts and options thereon depends upon the ability of its investment
ADVISOR to predict movements in the securities markets and other factors
affecting markets for securities and upon the degree of correlation between
the prices of the futures contracts and the prices of the securities being
hedged. As a result, even a correct forecast of price changes may not result
in a successful hedging transaction. Although futures contracts and options
thereon may limit the FUND'S exposure to loss, they may also limit the
FUND'S potential for capital gains. For example, if the FUND has hedged
against the possibility of decrease in prices which would adversely affect
the price of securities in its portfolio and prices of such securities
increase instead, the FUND will lose part or all of the benefit of the
increased value of its securities because it will have offsetting losses in
its futures positions. Although the FUND will enter into futures contracts
only where there appears to be a liquid market,
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there can be no assurance that such liquidity will always exist.
F. The FUND also is authorized, subject to the limitations set out in the
Prospectus, to purchase futures contracts on an unleveraged basis, when not
intended as an anticipatory hedge. When a contract is purchased on this
basis the investment company establishes a segregated account, composed of
cash and/or cash equivalents, equal to the total value of the contract (less
margin on deposit). As with other futures trading, these purchases must not
be for speculative purposes.
The ability to engage in these purchases on an unleveraged basis can
significantly decrease transaction costs to the FUNDS in certain instances. For
example, if an inordinately large deposit should occur on a single day, the
sheer volume of securities purchases required for that day may place the FUND at
a market disadvantage by requiring it to purchase particular securities in such
volume that its own buying activity could cause prices to increase. In addition,
if this deposit had involved market-timing and as a result there subsequently
were an oversized withdrawal, the FUND could again suffer market disadvantage,
this time because the volume of sales could, for the same reason, force prices
of particular securities to decrease. The FUND, by buying a futures contract
(followed by the appropriate closing transaction) instead of purchasing
securities could achieve considerable savings in transaction costs without
departing from FUND objectives. Furthermore, as stated in (C.), price changes in
a futures contract generally parallel price changes in the securities that the
FUND might otherwise have purchased. Thus, purchase of a futures contract on an
unleveraged basis allows the FUND to comply with its objective while at the same
time achieving these lower transaction costs.
VALUATION OF PORTFOLIO SECURITIES
SHORT-TERM INVESTMENTS. For FUNDS (other than the Money Market FUND) that own
short-term investments which mature in less than 60 days, these instruments are
valued at amortized cost. Such securities acquired with a remaining maturity of
61 days or more are valued at their fair value until the sixty-first day prior
to maturity; thereafter, their cost for valuation purposes is deemed to be their
fair value on such sixty-first day.
OPTIONS TRADING. For those FUNDS engaging in options trading, FUND investments
underlying call options will be valued as described previously. Options are
valued at the last sale price or, if there has been no sale that day, at the
mean of the last bid and asked price on the principal exchange where the option
is traded, as of the close of trading on the NYSE. The FUND'S net asset value
will be increased or decreased by the difference between the premiums received
on writing options and the cost of liquidating those positions measured by the
closing price of those options on the exchange where traded.
FUTURES CONTRACTS AND OPTIONS THEREON. For those FUNDS buying and selling
futures contracts and related options thereon, the futures contracts and options
are valued at their daily settlement price.
FOREIGN SECURITIES. For FUNDS investing in foreign securities, the value of a
foreign portfolio security held by a FUND is determined based upon its closing
price or upon the mean of the closing bid and asked prices on the foreign
exchange or market on which it is traded and in the currency of that market, as
of the close of the appropriate exchange. As of the close of business on the
NYSE, that FUND'S portfolio securities which are quoted in foreign currencies
are converted into their U.S. dollar equivalents at the prevailing market rates,
as computed by the custodian of the FUND'S assets.
However, trading on foreign exchanges may take place on dates or at times of day
when the NYSE is not open; conversely, overseas trading may not take place on
dates or at times of day when the NYSE is open. Any of these circumstances could
affect the net asset value of FUND shares on days when the investor has no
access to the FUND. There are more detailed explanations of these circumstances
in the SAI for the various FUNDS. See the Preface to this Prospectus booklet for
information about how to obtain a copy of the SAI booklet.
LENDING OF PORTFOLIO SECURITIES
As described in the Prospectus, the FUNDS may from time to time lend securities
from their portfolios to brokers, dealers and financial institutions and receive
collateral from the borrower, in the form of cash (which may be invested in
short-term securities), U.S. Government obligations or certificates of deposit.
Such collateral will be maintained at all times in an amount equal to at least
102% of the current market value of the loaned securities, and will be in the
actual or constructive possession of the particular FUND during the term of the
loan. The FUND will maintain the incidents of ownership of the loaned securities
and will continue to be entitled to the interest or dividends payable on the
loaned securities. In addition, the FUND will receive interest on the amount of
the loan. The loans will be terminable by the FUND at any time and will not be
made to any affiliates of the FUND or the advisor. The FUND may pay reasonable
finder's fees to persons unaffiliated with it in connection with the arrangement
of the loans.
As with any extensions of credit, there are risks of delay in recovery and, in
some cases, even loss of rights in the collateral or the loaned securities
should the borrower of securities fail financially. However, loans of portfolio
securities will be made to firms deemed by the ADVISOR to be creditworthy.
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REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
The FUNDS may make short-term investments in repurchase agreements. A repurchase
agreement typically involves the purchase by the FUND of securities (U.S.
Government or other money market securities) from a financial institution such
as a bank, broker-dealer or savings and loan association, coupled with an
agreement by the seller to repurchase the same securities from the FUND at the
specified price and at a fixed time in the future, usually not more than seven
days from the date of purchase. The difference between the purchase price to the
FUND and the resale price to the seller represents the interest earned by the
FUND which is unrelated to the coupon rate or maturity of the purchased
security. If the seller defaults, the FUND may incur a loss if the value of the
collateral securing the repurchase agreement declines, or the FUND may incur
disposition costs in connection with liquidating the collateral. If bankruptcy
proceedings are commenced with respect to the seller, realization upon the
collateral by the FUND may be delayed or limited and a loss may be incurred if
the collateral securing the repurchase agreement declines in value during the
bankruptcy proceedings. The Board of Directors of the FUNDS or its delegate will
evaluate the creditworthiness of all entities, including banks and
broker-dealers, with which they propose to enter into repurchase agreements.
These transactions will be fully collateralized; and the collateral for each
transaction will be in the actual or constructive possession of the particular
FUND during the terms of the transaction, as provided in the agreement.
In a reverse repurchase agreement, the FUND involved sells a portfolio security
to another party, such as a bank or broker-dealer, in return for cash and agrees
to repurchase the instrument at a particular price and time. While a reverse
repurchase agreement is outstanding, the FUNDS will maintain cash and
appropriate liquid assets in a segregated custodial account to cover its
obligation under the agreement. The FUND will enter into reverse repurchase
agreements only with parties that the ADVISOR or sub-advisor deems creditworthy.
Reverse repurchase agreements are considered to be borrowing transactions, and
thus are subject to the FUND'S limitation on borrowing. Not every FUND is
authorized to enter into reverse repurchase agreements.
CUSTODIAN
All securities, cash and other similar assets of the Bond, Growth and Income,
Managed, Money Market, Social Awareness and Special Opportunities Funds are
currently held in custody by The Chase Manhattan Bank, N.A., 4 Chase MetroTech
Center, Brooklyn, NY 11245. Chase Manhattan agreed to act as custodian for each
FUND pursuant to a Custodian Agreement dated March 30, 1998.
All securities, cash and other similar assets of the Aggressive Growth, Capital
Appreciation, Equity-Income, Global Asset Allocation and International Funds are
held in custody by State Street Bank and Trust Co., 225 Franklin Street, Boston,
Massachusetts 02110. State Street agreed to act as custodian for these FUNDS
pursuant to Custodian Contracts effective July 21, 1987 for the Global Asset
Allocation Fund, April 29, 1991 for the International Fund, and December 6, 1993
for the other three FUNDS.
Under these Agreements, the respective custodians shall (1) receive and disburse
money; (2) receive and hold securities; (3) transfer, exchange, or deliver
securities; (4) present for payment coupons and other income items, collect
interest and cash dividends received, hold stock dividends, etc.; (5) cause
escrow and deposit receipts to be executed; (6) register securities; and (7)
deliver to the FUNDS proxies, proxy statements, etc.
INDEPENDENT AUDITORS
Each FUND'S Board of Directors has engaged Ernst & Young LLP, Two Commerce
Square, Suite 4000, 2001 Market Street, Philadelphia, PA 19103, to be the
independent auditors for the FUND. In addition to the audit of the 1997
financial statements of the FUNDS, other services provided include review and
consultation connected with filings of annual reports and registration
statements with the Securities and Exchange Commission (SEC); consultation on
financial accounting and reporting matters; and meetings with the Audit
Committee.
FINANCIAL STATEMENTS
The audited financial statements and the report of Ernst & Young LLP,
Independent Auditors, for the FUNDS are incorporated by reference to the FUNDS'
1997 Annual Report. We will provide a copy of the Annual Report on request and
without charge. Either write Lincoln National Life Insurance Co., P.O. Box 2340,
Fort Wayne, Indiana 46801 or call: 1-800-4LINCOLN (452-6265).
BOND AND COMMERCIAL PAPER RATINGS
Certain of the funds' investment policies and restrictions include references to
bond and commercial paper ratings. The following is a discussion of the rating
categories of Moody's Investors Service, Inc. and Standard & Poor's Corp.
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MOODY'S INVESTORS SERVICE, INC.
Aaa -- Bonds which are rated Aaa are judged to be of the best quality and carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa -- Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
STANDARD & POOR'S CORP.
AAA -- This is the highest rating assigned by Standard & Poor's Corp. to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA -- Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
A -- Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas these bonds normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest than for
bonds in the A category and higher.
BB-B-CCC-CC -- Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and C the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
MOODY'S INVESTORS SERVICE, INC.
Moody's Commercial Paper ratings are opinions of the ability of issuers to repay
punctually promissory obligations not having an original maturity in excess of
nine months. Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Prime 1 -- Highest Quality;
Prime 2 -- Higher Quality;
Prime 3 -- High Quality.
(The FUND will not invest in commercial paper rated Prime 3).
STANDARD & POOR'S CORP.
A Standard & Poor's Corp. commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. The FUND will invest in commercial paper rated in the A Categories, as
follows:
A -- Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
the designation 1, 2, and 3 to indicate the relative degree of safety. (The FUND
will not invest in commercial paper rated A-3).
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A -- 1 this designation indicates that the degree of safety regarding timely
payment is very strong.
A -- 2 Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not overwhelming as for issues
designated A-1.
U.S. GOVERNMENT
OBLIGATIONS
Securities issued or guaranteed as to principal and interest by the U.S.
Government include a variety of Treasury securities, which differ only in their
interest rates, maturities and times of issuance. Treasury bills have a maturity
of one year or less. Treasury notes have maturities of two to ten years and
Treasury bonds generally have a maturity of greater than ten years.
Various agencies of the U.S. Government issue obligations. Some of these
securities are supported by the full faith and credit of the U.S. Treasury (for
example those issued by Export-Import Bank of the United States, Farmers Home
Administration, Federal Housing Administration, Government National Mortgage
Association, Maritime Administration, Small Business Administration and The
Tennessee Valley Authority).
Obligations of instrumentalities of the U.S. Government are supported by the
right of the issuer to borrow from the Treasury (for example, those issued by
Federal Farm Credit Banks, Federal Home Loan Bank, Federal Home Loan Mortgage
Corp., Federal Intermediate Credit Banks, Federal Land Bank and the U.S. Postal
Service). Obligations supported by the credit of the instrumentality include
securities issued by government-sponsored corporations whose stock is publicly
held (for example, the Federal National Mortgage Association, and the Student
Loan Marketing Association). There is no guarantee that the government will
support these types of securities, and therefore they may involve more risk than
other government obligations.
TAXES
Each FUND intends to qualify and has elected to be taxed as a regulated
investment company under certain provisions of the Internal Revenue Code of
1986, as amended (the CODE). If a FUND qualifies as a regulated investment
company and complies with the provisions of the CODE relieving regulated
investment companies which distribute substantially all of their net income
(both net ordinary income and net capital gain) from Federal income tax, it will
be relieved from such tax on the part of its net ordinary income and net
realized capital gain which it distributes to its shareholders. To qualify for
treatment as a regulated investment company, each FUND must, among other things,
derive in each taxable year at least 90% of its gross income from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stock or securities or foreign currencies (subject to the
authority of the Secretary of the Treasury to exclude foreign currency gains
which are not directly related to the FUND'S principal business of investing in
stock or securities or options and futures with respect to such stock or
securities), or other income (including but not limited to gains from options,
futures, or forward contracts) derived with respect to its investing in such
stocks, securities, or currencies.
The Federal tax laws impose a 4% nondeductible excise tax on each regulated
investment company with respect to an amount, if any, by which such company does
not meet distribution requirements specified in such tax laws, unless certain
exceptions apply. Each FUND intends to comply with such distribution
requirements or qualify under one or more exceptions, and thus does not expect
to incur the 4% nondeductible excise tax.
Since the sole shareholder of each FUND will be LINCOLN LIFE, no discussion is
stated herein as to the Federal income tax consequences at the shareholder
level.
The discussion of Federal income tax considerations in the Prospectus, in
conjunction with the foregoing, is a general and abbreviated summary of the
applicable provisions of the CODE and Treasury Regulations currently in effect
as interpreted by the Courts and the Internal Revenue Service (IRS). These
interpretations can be changed at any time. The above discussion covers only
Federal tax considerations with respect to the FUND. State and local taxes vary.
STATE REQUIREMENTS
The California Department of Insurance has established the following guidelines
for an underlying portfolio of a VARIABLE ACCOUNT. The FUNDS intend to comply
with these guidelines:
BORROWING
The borrowing limit for any FUND is 33 1/3 percent of total assets. Entering
into a reverse repurchase agreement shall be considered "borrowing" as that term
is used herein.
FOREIGN INVESTMENTS -- DIVERSIFICATION
The diversification guidelines to be followed by international and global FUNDS
are as follows:
a. An international FUND or a global FUND is sufficiently diversified if it is
invested in a minimum of three different countries at all times, and has
invested no more than 50 percent of total assets in any one second-tier
country and no more than 25 percent of total assets in any one third-tier
country. First-tier countries are: Germany, the United Kingdom,
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Japan, the United States, France, Canada, and Australia. Second-tier
countries are all countries not in the first or third tier. Third-tier
countries are countries identified as "emerging" or "developing" by the
International Bank for Reconstruction and Development ("World Bank") or
International Finance Corporation.
b. A regional FUND is sufficiently diversified if it is invested in a minimum
of three countries. The name of the FUND must accurately describe the FUND.
c. The name of a single country FUND must accurately describe the FUND.
d. An index FUND must substantially mirror the index.
DERIVATIVE TRANSACTIONS-
DEFINITIONS
The Prospectus for each FUND and the uniform Appendix for the Prospectus booklet
discuss the type of derivative transactions in which the FUNDS may engage and
the risks typically associated with many derivative transactions. Here are some
definitions for the derivatives listed in the Appendix:
OPTION. A contract which gives the FUND the right, but not the obligation, to
buy or sell specified securities at a fixed price before or at a designated
future date. If the contract allows the FUND to buy securities, it is a call
option; if to sell, it is a put option. It is common practice in options trading
to terminate an outstanding option contract by entering into an offsetting
transaction known as a closing transaction; as a result of which the FUND would
either pay out or receive a cash settlement. This is discussed below.
CURRENCY OPTION. Discussed later.
FIXED INCOME OPTION. One based on a fixed-income security, such as a corporate
or government bond.
INDEX OPTION. One based on the value of an index which measures the fluctuating
value of a basket of pre-selected securities.
STOCK (EQUITY) OPTION. One based on the shares of stock of a particular company.
OPTION ON A FUTURES CONTRACT. Discussed later.
SWAP. A financial transaction in which the FUND and another party agree to
exchange streams of payments at periodic intervals under a predetermined set of
occurrences related to the price, level, performance or value of one or more
underlying securities, and pegged to a reference amount known as the notional
amount. A swap is normally used to change the market risk associated with a loan
or bond borrowing from one interest rate base (fixed term or floating rate) or
currency of one denomination to another.
EQUITY SWAP. One which allows the FUND to exchange the rate of return (or some
portion of the rate) on its portfolio stocks (an individual share, a basket or
index) for the rate of return on another equity or non-equity investment.
INTEREST RATE SWAP. One in which the FUND and another party exchange different
types of interest payment streams, pegged to an underlying notional principal
amount. The three main types of interest rate swaps are coupon swaps (fixed rate
to floating rate in the same currency); basis swaps (one floating rate index to
another floating rate index in the same currency); and cross-currency interest
rate swaps (fixed rate in one currency to floating rate in another).
Related transactions to interest rate swaps:
a. Cap. A contract for which the buyer pays a fee, or premium, to obtain
protection against a rise in a particular interest rate above a certain
level. For example, an interest rate cap may cover a specified principal
amount of a loan over a designated time period, such as a calendar quarter.
If the covered interest rate rises above the rate ceiling, the seller of the
rate cap pays the purchaser an amount of money equal to the average rate
differential times the principal amount times one-quarter.
b. Floor. A contract in which the seller agrees to pay to the purchaser, in
return for the payment of a premium, the difference between current interest
rates and an agreed (strike) rate times the notional amount, should interest
rates fall below the agreed level (the floor). A floor contract has the
effect of a string of interest rate guarantees.
c. Collar. An arrangement to simultaneously purchase a cap and sell a floor, in
order to maintain interest rates within a defined range. The premium income
from the sale of the floor reduces or offsets the cost of buying the cap.
d. Corridor. An agreement to buy a cap at one interest rate and sell a cap at a
higher rate.
SWAPTION. An option to enter into, extend, or cancel a swap.
FUTURES CONTRACT. A contract which commits the FUND to buy or sell a specified
amount of a financial instrument at a fixed price on a fixed date in the future.
Futures contracts are normally traded on an exchange and their terms are
standardized, which makes it easier to buy and sell them.
INTEREST RATE FUTURES (AND OPTIONS ON THEM). Futures contracts pegged to U.S.
and foreign fixed-income securities, debt indices and reference rates.
STOCK INDEX FUTURES. Futures contracts based on an index of pre-selected stocks,
with prices based on a composite of the changes to the prices of the individual
securities in the index (e.g., S&P 500).
A-12
<PAGE>
OPTION ON A FUTURES CONTRACT. An option taken on a futures position.
FORWARD CONTRACT. An over-the-counter, individually-tailored futures contract.
FORWARD RATE AGREEMENT (FRA). A contract in which the FUND and another party
agree on the interest rate to be paid on a notional deposit of specified
maturity at a specific future time. Normally, no exchange of principal is
involved; the difference between the contracted rate and the prevailing rate is
settled in cash.
CURRENCY CONTRACT. A contract entered into for the purpose of reducing or
eliminating an anticipated rise or drop in currency exchange rates over time.
CURRENCY FUTURES. Futures contracts on foreign currencies. Used to hedge the
purchase or sale of foreign securities.
CURRENCY OPTION. An option taken on foreign currency.
CURRENCY SWAP. A swap involving the exchange of cash flows and principal in one
currency for those in another, with an agreement to reverse the principal swap
at a future date.
CROSS-CURRENCY INTEREST RATE SWAP. A swap involving the exchange of streams of
interest rate payments (but not necessarily principal payments) in different
currencies and often on different interest bases (e.g., fixed Deutsche Mark
against floating dollar, but also fixed Deutsche Mark against fixed dollar).
FORWARD CURRENCY CONTRACT. A contract to lock in a currency exchange rate at a
future date, to eliminate risk of currency fluctuation when the time comes to
convert from one currency to another.
A-13
<PAGE>
THIS PAGE WAS INTENTIONALLY LEFT BLANK.
A-14
<PAGE>
PART C - OTHER INFORMATION
Item 24. Financial Statements and Exhibits
a) 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, 1997,
1996, 1995, 1994 and 1993 are incorporated by reference to Pages
53-54 of the Fund's 1997 Annual Report.
Part B.
The following financial statements and report of Independent
Auditors of the Fund are incorporated by reference to
Pages 15-16, 42, 44, 46-52 and 55 of the Fund's 1997
Annual Report:
- Statement of Net Assets -- December 31, 1997
- Statement of Operations -- Year Ended December 31, 1997
- Statements of Changes in Net Assets -- Years Ended
December 31, 1997 and 1996
- Notes to Financial Statements -- December 31, 1997
- Report of Independent Auditors
In total, only pages 15-16, 42, 44, and 46-55 of the Fund's
1997 Annual Report are incorporated by reference into
this Registration Statement. No other pages of that Report are
incorporated by reference.
(2) Schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the related instructions, are
inapplicable, or the required information is included in the
financial statements, and therefore have been omitted.
b) Exhibits:
1 - Articles
2 - By-Laws
3 - NA
4 - Certificate
5(a)- Sub-Advisory Agreement between Lincoln Investment Management
Inc. and Janus Capital Corporation dated January 1, 1994.
5(b)- Advisory Agreement between Lincoln Investment Management Inc.
and Lincoln National Capital Appreciation Fund, Inc.
dated SEPTEMBER 23, 1993.
5(c)- Amendment dated May 1, 1998 to advisory agreement between
Lincoln Investment Management Company and Lincoln National
Capital Appreciation Fund, Inc.
5(d)- Amendment dated May 1, 1998 to sub-advisory agreement
between Lincoln Investment Management Company and Janus
Capital Corporation.
6(a)- Specimen Agents Contract (Filed with Post-Effective Amendment
No. 4 to this Registration Statement)
7 - NA
8(a)- Custody Agreement
8(b)- Custody Fee Schedule (Filed with Post-Effective Amendment No. 4
to this Registration Statement)
9(a)- Agreement to Purchase Shares
9(b)- Trade Name Agreement
9(c)- NA
9(d)- Services Agreement between Delaware Management Holdings,
Inc., Delaware Service Company, Inc. and Lincoln National
Life Insurance Company is incorporated herein by reference
to the Registration Statement on Form S-6 (333-40745) filed
on November 21, 1997.
10 - Opinion of Counsel
11 - Consent of Ernst & Young LLP, Independent Auditors
12 - NA
13 - INVESTMENT LETTER
14 - NA
15 - NA
16 - NA
17(a)- Financial Data Schedule
18(a)- Power of Attorney, John B. Borsch Jr.
18(b)- Power of Attorney, Nancy L. Frisby
18(c)- Power of Attorney, Barbara S. Kowalczyk
19(a)- Org Chart
19(b)- Memorandum Concerning Books and Records
Item 25. Persons Controlled by or Under Common Control with Registrant
See "Management of the Fund," "Purchase of Securities Being Offered,"
and "Description of Shares" in the Prospectus forming Part A of this
Registration Statement and "Investment Adviser and Sub-Adviser" in the
Statement of Additional Information forming Part B of this Registration
Statement. As of the date of this Post-Effective Amendment to the
Registration Statement, The Lincoln National Life Insurance Company
(Lincoln Life), for its Variable Annuity Account C and Variable Life
Account K, is the sole shareholder in the Fund.
No persons are controlled by the Registrant. A diagram of all persons
under common control with the Registrant is filed as Exhibit 15(a) to
the Form N-4 Registrant Statement filed by Lincoln National Variable
Annuity Account C (File No. 33-25990), and is incorporated by reference
into this Registration Statement.
Item 26. Number of Holders of Securities
As of April 1, 1998, 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.
<PAGE>
Item 28. Business and Other Connections of Investment Adviser
Information pertaining to any business and other connections of
Registrant's investment adviser, Lincoln Investment, is hereby incorporated
by reference from the section captioned "Management of the Fund" in the
Prospectus forming Part A of this Registration Statement, the section
captioned "Investment Adviser and Sub-Adviser" in the Statement of
Additional Information forming Part B of this Registration Statement, and
Item 7 of Part II of Lincoln Investment's Form ADV filed separately with
the Commission (File No. 801-5098). Information pertaining to any business
and other connections of Registrant's sub-investment adviser, Janus Capital
Corporation ("Janus") is incorporated by reference from the section of the
Prospectus captioned "Management of the Fund," the section of the Statement
of Additional Information captioned "Investment Adviser and Sub-Adviser,"
and Item 7 of Part II of Janus' Form ADV filed separately with the
Commission (File No. 801-13991).
The other businesses, professions, vocations, and employment of a
substantial nature, during the past two years, of the directors and
officers of Lincoln Investment and Janus are hereby incorporated by
reference, respectively, from Schedules A and D of Lincoln Investment's
Form ADV and from Schedules A and D of Janus' Form ADV.
(a) The Adviser.
As of April 1, 1998, the officers and/or directors of the
investment adviser held the following positions:
<TABLE>
<CAPTION>
POSITION OTHER SUBSTANTIAL BUSINESS
INVESTMENT PROFESSION, VOCATION OR
NAME ADVISER EMPLOYMENT; ADDRESS
- ------------------------ --------------------- ---------------------------------------------------------
<S> <C> <C>
JoAnn Becker Senior Vice President 200 East Berry Street,
and Director Fort Wayne, Indiana 46802
David A. Berry Vice President Vice President, Lincoln National Income Fund, Inc. and
Lincoln National Convertible Securities Fund, Inc.,
Second Vice President, Lincoln Life & Annuity Company of
New York,
200 East Berry Street,
Fort Wayne, Indiana 46802
Steven R. Brody Senior Vice President President and Director, Lincoln National Realty
and Director Corporation; Vice President, The Lincoln National Life
Insurance Company, and Lincoln Advisor Funds, Inc.,
200 East Berry Street,
Fort Wayne, Indiana 46802
David C. Fischer Vice President Vice President, Lincoln National Income Fund, Inc.
200 East Berry Street,
Fort Wayne, Indiana 46802
Mark Laurent Second Vice President 200 East Berry Street,
Fort Wayne, Indiana 46802
Thomas M. McMeekin President and President and Director, Lincoln National Convertible
Director Securities Fund, Inc., Lincoln National Income Fund,
Inc., President, Chief Executive Officer and Director,
Lincoln National Mezzanine Corporation; Executive Vice
President and Chief Investment Officer, Lincoln National
Corporation; Director, Delaware Management Holdings,
Inc., Lincoln National (China) Inc., Lincoln National
(India) Inc., Lincoln National Investment Companies,
Inc., Lincoln National Realty Corporation, Lynch & Mayer,
Inc., Vantage Global Advisors, Lincoln National Life
Insurance Company,
200 East Berry Street,
Fort Wayne, Indiana 46802
Jil Schoeff-Lindholm Portfolio Manager 200 East Berry Street,
Fort Wayne, Indiana 46802
Cedrick Walta Short Term Investment 200 East Berry Street,
Manager Fort Wayne, Indiana 46802
Denny Westrick Second Vice President 200 East Berry Street,
Fort Wayne, Indiana 46802
Jay Yentis Second Vice President 200 East Berry Street,
Fort Wayne, Indiana 46802
</TABLE>
<PAGE>
(b) The Sub-Adviser.
As of March 16, 1998, the officers and/or directors of the sub-
advisor held the following positions:
JANUS CAPITAL CORPORATION
100 FILLMORE STREET
DENVER CO 80206-4928
OFFICERS AND DIRECTORS
Thomas H. Bailey Chairman, CEO, Director and President
James P. Craig Chief Investment Officer, Vice Chairman and Director
Steven R. Goodbarn Vice President of Finance, Treasurer and Chief
Financial Officer
Margie G. Hurd Vice President and Chief Operations Officer
Mark B. Whiston Vice President and Chief Marketing Officer
Michael E. Herman Director
Thomas A. McDonnell Director
Landon H. Rowland Director
Michael N. Stolpher Director
Item 29. Principal Underwriters
Not applicable.
Item 30. Location of Accounts and Records
See Exhibit 19.
Item 31. Management Services
Not applicable.
Item 32. Undertakings
Registrant furnishes the following undertakings pursuant to the
Securities Act of 1933 (the "Act"):
Registrant undertakes to file a post-effective amendment, using
financial statements which need not be certified, within four to
six months from the effective date of this Registration Statement.
Insofar as Indemnification for liability for arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registration pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and
is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officers or
controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Act and will be governed by the funal adjudication of each issue.
Registrant undertakes to furnish, to each person to whom a prospectus
is delivered, a copy of Registrant's latest annual report to
shareholder, upon request and without charge.
Registrant undertakes to call a meeting of contract owners within
the first year of commencement of operation (or later, if the
Commission approves) for the purpose of electing directors,
approving the investment advisory and sub-advisory contract, and
ratifying the selection of independent public accountants.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Amendment to the Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly
caused this Amendment to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Fort Wayne, and State of Indiana, on the 17th
day of April, 1998.
LINCOLN NATIONAL
CAPITAL APPRECIATION FUND, INC.
By /s/ Kelly D. Clevenger
----------------------------
Kelly D. Clevenger
President
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
the Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ Kelly D. Clevenger Chairman of the Board April 17, 1998
- ----------------------- and President
Kelly D. Clevenger (Principal Executive Officer)
* Director April 17, 1998
- -----------------------
John B. Borsch, Jr.
Director April 17, 1998
- -----------------------
Kenneth G. Stella
** Director April 17, 1998
- -----------------------
Barbara S. Kowalczyk
* Director April 17, 1998
- -----------------------
Nancy L. Frisby
/s/ Eric C. Jones Chief Accounting Officer April 17, 1998
- ----------------------- (Principal Accounting Officer)
Eric C. Jones
/s/ Janet C. Whitney Vice President and Treasurer April 17, 1998
- ----------------------- (Principal Financial Officer)
Janet C. Whitney
</TABLE>
*By /s/ Jeremy Sachs pursuant to a Power of Attorney filed with the initial
------------------- filing of this Registration Statement.
Jeremy Sachs
**By /s/ Jeremy Sachs pursuant to a Power of Attorney filed with
------------------ Post-Effective Amendment No.2 to this Registration
Jeremy Sachs Statement.
<PAGE>
EXHIBIT INDEX
Exhibit Number Exhibit Name
- -------------- ------------
1 Articles
2 By-Laws
4 Certificate
5(a) Sub-Advisory Agreement between Lincoln Investment
Management, Inc. and Janus Capital Corporation dated
January 1, 1994.
5(b) Advisory Agreement between Lincoln Investment Management,
Inc. and Lincoln National Capital Appreciation Fund, Inc.
dated .
5(c) Amendment dated May 1, 1998 to advisory agreement
between Lincoln Investment Management Company
and Lincoln National Capital Appreciation Fund, Inc.
5(d) Amendment dated May 1, 1998 to sub-advisory agreement
between Lincoln Investment Management Company and
Janus Capital Corporation.
8(a) Custody Agreement
9(a) Agreement to Purchase Shares
9(b) Trade Name Agreement
10 Opinion of Counsel
11 Consent of Ernst & Young LLP, Independent Auditors
13 INVESTMENT LETTER
17(a) Financial Data Schedule
18(a) Power of Attorney - John B. Borsch Jr.
18(b) Power of Attorney - Nancy L. Frisby
18(c) Power of Attorney - Barbara S. Kowalczyk
19(a) ORG chart
19(b) Memorandum Concerning Books and Records
<PAGE>
Exhibit 1
ARTICLES OF INCORPORATION
OF
LINCOLN NATIONAL CAPITAL APPRECIATION FUND, INC.
(A Maryland Corporation)
FIRST: INCORPORATOR. The undersigned, whose address is 1300 South
Clinton Street, Fort Wayne, Indiana 46802, being at least eighteen (18) years of
age, is acting as sole incorporator to form a corporation under and by virtue of
the General Laws of the State of Maryland authorizing the formation of
corporations (hereinafter referred to as the "General Corporation Law").
SECOND: NAME. The name of the corporation (hereinafter called the
"Corporation") is Lincoln National Capital Appreciation Fund, Inc.
THIRD. PURPOSE. The purposes for which the Corporation is formed are:
A. To engage in, conduct, operate and carry on the business of an
open-end management investment company as defined in the Investment Company Act
of 1940 (including any amendment thereof or successor statute) (hereinafter
called the "1940 Act");
B. To invest and reinvest in, buy or otherwise acquire, hold for
investment or otherwise, sell or otherwise dispose of, lend or pledge, trade or
deal in securities, obligations, commodities, commodity futures contracts or
interests therein of all kinds, however evidenced, (or rights, options, or
warrants to acquire or dispose of such securities, obligations, commodities,
commodity futures contracts or interests) of, or issued or guaranteed by or on
behalf of: (I) any national, state or local governments, foreign or domestic,
or their agencies, instrumentalities or subdivisions (including, without
limitation, the United States, any state of the United States, multi-state
agency, political subdivision of a state, municipality, or any governmental
entity, unit, agency or instrumentality of any of the foregoing), and (ii) any
private or public company, corporation, association, board of trade, exchange,
general or limited partnership, trust or other enterprise or organization,
foreign or domestic; including as to both clauses (I) and (ii) without
limitation stocks, and all other forms of equity securities, convertible
securities, bonds, debentures, bills, notes and all other evidences of
indebtedness, negotiable or non-negotiable instruments, government securities,
money market instruments, certificates of deposit, finance paper, commercial
paper, secured call loans, commodities, commodity futures contracts, bankers'
acceptances, investment contracts and repurchase agreements; and
C. To do every other act not inconsistent with law which is appropriate
to promote and attain the purposes set forth in these Articles of Incorporation
or any other lawful purpose.
FOURTH: PRINCIPAL OFFICE AND RESIDENT AGENT. The address of the
principal office of the Corporation in this State is 11 East Chase Street,
Baltimore, Maryland 21202. The name of the resident agent of the Corporation in
this State is The Prentice-Hall Corporation System, Maryland,
-1-
<PAGE>
a corporation of this State, and the address of the resident agent is 11 East
Chase Street, Baltimore, Maryland 21202.
FIFTH: CAPITAL STOCK.
A. AUTHORIZED SHARES. The total number of shares of stock which the
Corporation shall have authority to issue is 50,000,000 shares of the par value
of $.0l per share, all of which shall be of a single class designated Common
Stock (and hereinafter referred to as such), such shares having an aggregate par
value of $500,000. After the effective date of the registration of the
Corporation as an open-end management investment company under the 1940 Act, the
Board of Directors may increase or decrease the aggregate number of shares of
stock that the Corporation has authority to issue.
B. VOTES. Each outstanding share of Common Stock of the Corporation is
entitled to one vote on each matter submitted to a vote of the stockholders.
C. PREEMPTIVE RIGHTS. No holder of any stock of the Corporation shall
as such holder have any preemptive or other right to purchase or subscribe for
any Stock which the Corporation may issue or sell, whether or not exchangeable
for any other stock of the Corporation, and whether out of the number of shares
authorized by the Articles of Incorporation as originally filed or by any
amendment thereof or out of shares of the stock of the Corporation acquired by
it after the issue thereof.
D. FRACTIONAL SHARES. The Corporation may issue fractional as well as
full shares, and each fractional share shall be dealt with and have rights
identical to those to which a full share is entitled but in such proportion, in
all instances, as such tractional share bears to a full share; provided,
however, that the Corporation shall in no event be obliged to issue certificates
for fractional shares.
E. MAJORITY VOTE. Notwithstanding any provision of the General
Corporation Law requiring that any action be taken or authorized by the
affirmative vote of the holders of a designated proportion greater than a
majority of the shares or votes entitled to be cast, such action shall be
effective and valid if taken or authorized by the affirmative vote of the
holders of a majority of the total number of shares outstanding and entitled to
vote thereon.
SIXTH: REDEMPTION OF SHARES. All shares of Common Stock now or
hereafter authorized shall be subject to redemption, in the sense used in the
General Corporation Law, in the manner, upon the terms and conditions and at the
redemption price determined as provided in these Articles of Incorporation. All
shares so redeemed shall be deemed to again be authorized and unissued shares
and available for reissue by the Corporation.
A. REDEMPTION BY STOCKHOLDERS. Each holder of Common Stock, upon request
in proper form as determined by the Board of Directors, delivered to the
Corporation or its agent appointed for such purpose, accompanied, in the case of
shares for which certificates have been issued, by surrender of the appropriate
stock certificate or certificates in proper form for transfer,
-2-
<PAGE>
as determined by the Board of Directors, shall be entitled to require the
Corporation to redeem all or any part of the shares of Common Stock standing in
the name of such holder on the books of the Corporation, to the extent that
funds or property are legally available therefor, at a redemption price per
share equal to the net asset value per share applicable to such redemption,
determined as provided in these Articles of Incorporation and in resolutions of
the Board of Directors adopted from time to time. Payment of the redemption
price shall be made not later than the seventh day following the day of receipt
by the Corporation or such agent of the written request and stock certificates,
if any, in proper form as described in the preceding sentence, except that no
payment need be made until funds for the purchase price of shares redeemed have
been collected by or for the account of the Corporation.
B. RIGHTS OF HOLDERS OF SHARES REDEEMED. The right of any holder of
share. of Common Stock redeemed as provided in Paragraph A to receive dividends
or distributions thereon and all other rights of such holder with respect to
such shares shall terminate at the time as of which the redemption price of such
shares is determined, except the right of such holder to receive (I) the
redemption price of such shares in accordance with the provisions hereof, and
(ii) any dividend or distribution to which such holder had previously become
entitled.
C. DETERMINATION OF NET ASSET VALUE PER SHARE. The Board of Directors
shall determine from time to time the net asset value per share of the
outstanding shares of Common Stock. It may delegate this authority to any one
or more of the Directors or officers of the Corporation, to the investment
adviser, the custodian of the Corporation's assets or to another agent of the
Corporation or agent of any of the foregoing appointed for such purpose; except
that the authority to suspend the determination of the net asset value may not
be delegated. The net asset value shall be determined as of the close of
trading on the New York Stock Exchange on each day such Exchange is open for
trading, unless the Board of Directors shall, by resolution, prescribe a
different time or times as of which such determination shall be made. The time
at which shares of Common Stock issued and sold by the Corporation shall be
deemed to be outstanding and the time at which shares of Common Stock redeemed
or repurchased by the Corporation shall be deemed no longer to be outstanding
shall be fixed by resolution of the Board of Directors. A determination of net
asset value shall be applicable to requests for redemption and, if and to the
extent determined by the Board of Directors, to other transactions of the
Corporation in shares of Common Stock, effected during such periods as the Board
of Directors shall prescribe by resolution.
D. SUSPENSION OF REDEMPTION RIGHTS. The Board of Directors may declare a
suspension of the redemption rights granted in Paragraph A: (I) for any period
during which the New York Stock Exchange is closed (other than customary weekend
and holiday closings), or during which trading in the markets customarily
utilized by the Corporation is restricted; (ii) for any period during which an
emergency exists, as determined by the Securities and Exchange Commission, as a
result of which disposal of the Corporation's investments or determination of
net asset value is not reasonably practicable; or (iii) for such periods as the
Securities and Exchange Commission by order may permit for the protection of the
Corporation's
-3-
<PAGE>
investors. Such suspension shall take effect at such time as the Board of
Directors or authorized officer shall specify and shall continue until the Board
of Directors or authorized officer shall declare the suspension at an end,
except that the suspension shall terminate in any event on the first day on
which (1) the condition giving rise to the suspension shall have ceased to exist
and (2) no other condition exists under which suspension is authorized under
this Paragraph D. Each declaration by the Board of Directors pursuant to this
Paragraph D shall be consistent with applicable rules and regulations, if any,
of the Securities and Exchange Commission or any other governmental body having
jurisdiction over the Corporation. To the extent not inconsistent with such
rules and regulations, the determination of the Board of Directors shall be
conclusive.
E. EFFECT OF SUSPENSION OF REDEMPTION RIGHTS. Notwithstanding any other
provision of this Article Sixth, the rights of holders of Common Stock to
require the Corporation to redeem and tender payment for their shares, including
holders who shall have requested redemption of shares but who shall not have
received payment therefor, shall be suspended during any period when a
suspension of redemption rights authorized by Paragraph D is in effect. No
determination of net asset value per share shall be required to be made during a
period when such a suspension is in effect. Any holder who shall have his
redemption right so suspended may, during the period of such suspension, by
appropriate written notice of revocation delivered to the office or agency where
request for redemption was made, revoke any request or instruction for
redemption not honored and withdraw any certificates tendered for redemption.
The redemption price of shares for which redemption requests have not been
revoked shall be the net asset value of such shares determined after the
termination of such suspension, and payment shall be made within seven days
after the date upon which the requirements of Paragraph A were met plus the
period during which such suspension was in effect.
SEVENTH: BOARD OF DIRECTORS. The number of Directors of the Corporation
shall be five, which number may be changed pursuant to the bylaws of the
Corporation. The names of the Directors, who shall act until the first annual
meeting or until their successors are duly elected and qualified, are:
Robert A. Nikels
John B. Borsch, Jr.
Jon A. Boscia
Nancy L. Frisby
Stanley R. Nelson
A. POWERS. The following powers are expressly vested in the Board of
Directors of the Corporation and may be exercised without the approval of the
stockholders of the Corporation:
(i) To make, adopt, alter, amend and repeal bylaws of the
Corporation, except as may otherwise be provided in the bylaws;
(ii) To declare and pay dividends and distributions in cash, shares of
Common Stock or other securities or property from surplus or any
funds legally available therefor, at such intervals (which may be
as
-4-
<PAGE>
frequently as daily) or on such other periodic bases as it shall determine; to
declare such dividends or distributions by means of a formula or other method of
determination at meetings held less frequently than the frequency of the
effectiveness of such declarations: to provide that dividends may be paid in
cash or in shares of Common Stock at the election of each stockholder; to
establish payment dates for dividends or any other distributions on any bases,
including dates occurring less frequently than the effectiveness of the
declaration thereof; and to provide for the payment of declared dividends on a
date earlier than the specified payment date;
(iii) Inasmuch as the computation of net income, profits or earnings
for Federal income tax purposes may vary from the computation
thereof on the books of the Corporation, in its discretion to
distribute for any fiscal year as dividends and as capital gains
distributions, respectively, additional amounts sufficient to
enable the Corporation to avoid or reduce its liability for
taxes;
(iv) To issue, reissue and sell (or cause to be issued, reissued and
sold) any of the authorized shares of Common Stock, including any
additional shares hereafter authorized and any shares redeemed or
repurchased by the Corporation, to such persons as the Board of
Directors shall determine, for such consideration, not less than
the greater of the par value thereof or the net asset value per
share determined as provided in these Articles of Incorporation
and in resolutions of the Board of Directors adopted from time to
time, and upon terms and conditions determined by the Board of
Directors, all such shares when so issued and sold being fully
paid and nonassessable; provided that no shares of Common Stock
shall be issued or sold by the Corporation (except as a stock
dividend distributed to stockholders) for less than an amount
which would result in proceeds to the Corporation at least equal
to the net asset value per share, determined as provided in these
Articles of Incorporation and in resolutions of the Board of
Directors adopted from time to time, and provided further that in
the case of shares issued or sold for a consideration other than
cash, the resolution authorizing their issue or sale shall
include a fair description of any consideration other than cash
and a statement of the actual value of such consideration as
determined by the Board of Directors or a statement that the
Board of Directors has determined that the actual value is or
will be not less than a certain sum; and
(v) To authorize the purchase by the Corporation, either directly or
through an agent, of shares of its Common Stock, in the open
market or otherwise, upon terms and conditions determined by the
Board of Directors at prices not in excess of the net asset value
of such shares determined as provided in these Articles of
Incorporation and in resolutions of the Board of Directors
adopted from time to time.
B. GOOD-FAITH DETERMINATION CONCLUSIVE. Any determination made in good
faith and, so far as accounting matters are involved in accordance with
generally accepted accounting principles, by or pursuant to the direction of the
Board of Directors, as to: the amount of the assets, debts, obligations or
liabilities of the Corporation; the amount of any reserves or charges set up and
the propriety thereof; the purpose for creating such reserves or
-5-
<PAGE>
charges; the use, alteration or cancellation of any reserves or charges (whether
or not any debt, obligation or liability for which such reserves or charges were
created shall have been paid or discharged or shall be then or thereafter
required to be paid or discharged); the price or bid or asked price or yield
equivalent of any investment owned or held by the Corporation; the market or
fair value of any investment or any other asset of the Corporation; the number
of shares of Common Stock of the Corporation outstanding; the ability to
liquidate investments in orderly fashion; and any matters relating to the issue,
sale, redemption, purchase and/or other acquisition or disposition of
investments or Common Stock of the Corporation, shall be final and conclusive,
and shall be binding upon the Corporation and all holders of its Common Stock,
past, present and future, and Common Stock of the Corporation shall be issued
and sold on the condition and understanding that any and all such determinations
shall be binding as aforesaid.
EIGHTH: GENERAL.
A. The Corporation reserves the right from time to time to amend, alter,
change, add to, or repeal any provisions contained in these Articles of
Incorporation in the manner now or hereafter prescribed or permitted by statute,
including any amendment which alters the contract rights, as expressly set forth
in these Articles of Incorporation, of any outstanding Common Stock, and all
rights conferred on stockholders and others herein are granted subject to this
reservation.
B. Nothing contained in these Articles of Incorporation shall be deemed
to authorize any action in contravention of any provision of the 1940 Act or any
rule or regulation thereunder.
C. The titles contained in these Articles of Incorporation are for
convenience only and shall not affect the interpretation of any of the
provisions hereof.
IN WITNESS WHEREOF, the undersigned incorporator hereby acknowledges these
Articles of Incorporation to be his act and further acknowledges that, to the
best of his knowledge, information and belief, the matters and facts set forth
therein are true in all material respects and that this statement is made under
the penalties for perjury.
July 2, 1993 /s/ JEREMY SACHS
Dated Jeremy Sachs
<PAGE>
Exhibit 2
Bylaws
(As Adopted August 3, 1993)
of
LINCOLN NATIONAL CAPITAL APPRECIATION FUND, INC.
ARTICLE I
STOCKHOLDERS
SECTION 1. ANNUAL MEETINGS: (a) The annual meeting of the stockholders of
the Corporation (if such meeting be held) shall be held on the third Tuesday in
August in each year (or if said day be a legal holiday then on the next
succeeding day not a legal holiday), at 10:30 a.m., at the office of the
Corporation in the City of Baltimore, Maryland, or at such other time and place
within the United States as may be fixed by the board of directors, for the
purpose of electing directors and for transacting such other business as may
properly be brought before the meeting. Only such business, in addition to that
prescribed by law, by the Articles of Incorporation or by these Bylaws, may be
brought before such meeting as may be specified by resolution of the Board of
Directors, or by writing filed with the Secretary of the Corporation and signed
by the Chairman of the Board or the President or by a majority of the directors
or by stockholders holding at least one-half of the Common Stock of the
Corporation outstanding and entitled to vote at the meeting.
(b) Upon the affirmative vote of a majority of the whole board, the annual
meeting may be dispensed with in any year in which none of following is required
to be acted upon by stockholders pursuant to the Investment Company Act of
1940:
i. Election of directors;
ii. Approval of an investment advisory agreement;
iii. Ratification of the selection of independent public accountants; or
iv. Approval of a distribution agreement.
(c) If action is required on election of directors, an annual or special
meeting, as applicable, shall be held within 120 days after the occurrence of
the event requiring the meeting.
SECTION 2. SPECIAL MEETINGS: Special meetings of the stockholders for any
purpose or purposes may be held upon call by the Chairman of the Board or the
President or by a majority of the Board of Directors, and shall be called by the
Secretary at the request in writing of stockholders holding at least one-quarter
of the stock of the Corporation outstanding and entitled to vote at the meeting,
at such time
<PAGE>
and date and at such place where an annual meeting of stockholders could be
held, each as may be fixed by the person calling the meeting and as may be
stated in the notice Betting forth such call. Such request shall state the
purpose or purposes of the proposed meeting and the matters proposed to be acted
upon and only such matters so specified may properly be brought before such
meeting.
Special meetings of the stockholders shall be called by the Chairman of the
Board, the President, a Vice President, the Secretary or any Director when
requested to do 50 by stockholders representing the requisite beneficial
interest in the Corporation pursuant to Section 16(c) of the Investment Company
Act of 1940, for the purpose of removing one or more directors. The time and
place for any such meeting will be fixed as provided in the previous paragraph.
Whenever stockholders or beneficial owners of stock in the Corporation apply to
the Board of Directors for assistance in communicating with other stockholders
or beneficial owners for this purpose, the Board shall facilitate that
communication pursuant to that Section 16(c).
Whenever the Board of Directors shall change the independent public
accountant for the Corporation, a meeting of stockholders shall be called by the
Board for the purpose of ratifying or rejecting the selection of the new
accountant. The time and place for any such meeting will be fixed as provided
in the first paragraph of this SECTION.
SECTION 3. NOTICE OF MEETINGS: Written or printed notice of every annual
or special meeting of stockholders, stating the time and place thereof and, in
the case of every special meeting, the purpose of such meeting, shall be
delivered personally or mailed to each stockholder of record entitled to vote at
or entitled to notice of the meeting at his address as the same appears on the
books of the Corporation or left at his residence or usual place of business, in
each case at least ten days but not more than ninety days prior to such meeting.
Such further notice shall be given as may be required by law. Meetings may be
held without notice if all of the stockholders entitled to vote are present or
represented at the meeting, or if notice is waived in writing, either before or
after the meeting, by those not present or represented at the meeting. No
notice of an adjourned meeting of the stockholders other than an announcement of
the time and place thereof at the preceding meeting shall be required
SECTION 4. QUORUM; REQUIRED VOTES: At every meeting of the stockholders,
the holders of record of a majority of all of the votes entitled to be cast at
the meeting, whether present in person or represented by proxy, shall, except as
otherwise provided by law, constitute a quorum. If at any meeting there shall
be no quorum, the holders of record of a majority of such shares entitled to
vote at the meeting so present or represented may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
shall have been
<PAGE>
obtained, at which time any business may be transacted which might have been
transacted at the meeting as first convened had there been a quorum. Unless
otherwise required by law or by the Articles of Incorporation, a majority of all
the votes cast at a meeting at which a quorum is present is sufficient to
approve any matter which properly comes before the meeting.
SECTION 5. PRESIDING OFFICER: Meetings of the stockholders shall be
presided over by the Chairman of the Board or, if not present, by the President
or, if neither is present, by a Vice President or, if no one so named is
present, by a chairman to be chosen at the meeting. The Secretary of the
Corporation, or, if not present, an Assistant Secretary of the Corporation or,
if neither is present, a secretary to be chosen at the meeting, shall act as
secretary of the meeting.
SECTION 6. PROXIES: Each stockholder entitled to vote at any meeting
shall have one vote in person or by proxy for each share of Common Stock held by
him. The proxy shall be in writing and signed by the stockholder or his duly
authorized attorney-in-fact, and shall not be voted after eleven months from its
date, unless such proxy provides for a longer period. Fractional shares shall
be entitled to fractional votes. All elections of directors shall be had and
all questions, except as otherwise provided by law or by the Articles of
Incorporation or by these Bylaws, shall be decided by a majority of the votes
cast by stockholders present or represented and entitled to vote thereon in
person or by proxy.
SECTION 7. BALLOTING: The vote on the election of directors, and other
questions properly brought before any meeting, need not be by ballot except when
so demanded by a majority vote of the shares present in person or by proxy and
entitled to vote thereon, or when so ordered by the chairman of such meeting.
The chairman of each meeting at which directors are to be elected by ballot or
at which any question is to be so voted on shall, at the request of any
stockholder present or represented by proxy at the meeting and entitled to vote
at such election or on such question, appoint two inspectors of election. No
director or candidate for the office of director shall be appointed as such
inspector. Inspectors shall first take and subscribe an oath or affirmation
faithfully to execute the duties of inspectors at such meeting with strict
impartiality and according to the best of their ability, and shall take charge
of the polls and after the balloting shall make a certificate of the result of
the vote taken.
SECTION 8. RECORD DATE: The Board of Directors may close the stock
transfer books of the Corporation for a period not exceeding twenty days
preceding the date of any meeting of stockholders, or the date for the payment
of any dividend, or the date for the allotment of rights, or the date when any
change or conversion or exchange of stock shall go into effect. In lieu of
closing the stock transfer books,
<PAGE>
the Board of Directors may fix in advance a date, not exceeding ninety days and
not less than ten days preceding the date of any meeting of stockholders, and
not exceeding ninety days preceding the date for the payment of any dividend, or
the date for the allotment of rights, or the date when any change or conversion
or exchange of stock shall go into effect, or a date in connection with the
obtaining of any consent, as a record date for the determination of the
stockholders entitled to notice of, and to vote at any such meeting and at any
adjournment thereof, or entitled to receive payment of any such dividend, or to
receive any such allotment of rights, or to exercise the rights in respect of
any such change, conversion or exchange of stock, or to give such consent, and
in such case such stockholders, and only such stockholders, as shall be
stockholders of record on the date so fixed, shall be entitled to such notice
of, and to vote at, such meeting and any adjournment thereof, or to receive
payment of such dividend, or to receive such allotment of rights, or to exercise
such rights, or to give such consent, as the case may be, notwithstanding any
transfer of any stock on the books of the Corporation after any such record date
fixed as aforesaid.
SECTION 9. Informal Action by Stockholders: Any action required or
permitted to be taken at a meeting of stockholders may be taken without a
meeting if there are filed with the records of stockholders meetings: (a) a
unanimous written consent which sets forth the action and signed by each
stockholder entitled to vote on the matter; and (b) a written waiver of any
right to dissent signed by each stockholder entitled to notice of the meeting
but not entitled to vote at it.
ARTICLE II
BOARD OF DIRECTORS
SECTION 1. NUMBER, ELECTION AND TERM OF OFFICE:
The Board of Directors of the Corporation shall consist of not less than three
nor more than ten persons, none of whom need be stockholders of the Corporation.
The exact number of directors shall be determined by the Board of Directors from
time to time, as it sees fit, by vote of a majority of the whole Board. The
directors shall be elected by a majority of votes cast at a meeting at which a
quorum is present and shall hold office, except as otherwise provided in
SECTIONS 3 and 4 hereof, until their respective successors are elected and
qualify.
SECTION 2. QUORUM; REQUIRED VOTES: A majority of the whole Board, but in
no event fewer than two directors, shall constitute a quorum for the transaction
of business, but if at any meeting of the Board there shall be less than a
quorum present, a majority of the directors present may adjourn the meeting from
time to time, until a quorum shall have been obtained, when any business may be
transacted which
<PAGE>
might have been transacted at the 'meeting as first convened had there been a
quorum. No notice of an adjourned meeting of the directors other than an
announcement of the time and place thereof at the preceding meeting shall be
required. The acts of the majority of the directors present at any meeting at
which there is a quorum shall, except as otherwise provided by law, by the
Articles of Incorporation or by these Bylaws, be the acts of the Board.
SECTION 3. RESIGNATIONS: Any director may resign his office at any time
by delivering a written resignation to the Board of Directors, the President or
the Secretary. Unless otherwise specified therein, such resignation shall take
effect upon delivery and need not be accepted. A director who is an "interested
person," as defined in the Investment Company Act of 1940 shall resign as a
director of the Corporation upon the termination of his employment relationship
with the investment adviser or an affiliated corporation of the investment
adviser. The Board of Directors may, at its option, decline to accept the
resignation of a director who tenders his resignation under these circumstances.
SECTION 4. VACANCIES AND REMOVAL: (a) The Board of Directors, by vote of
a majority of the entire Board, may elect directors to fill vacancies in the
Board resulting from an increase in the number of directors. For vacancies
resulting from any other cause, except those caused by removal of a director
pursuant to Subsection (b) of this Section, the Board may fill the vacancies by
vote of a majority of the remaining directors. Directors so chosen shall hold
office until their respective successors are elected and qualify.
(b) The stockholders, at any meeting called for the purpose, may, with or
without cause, remove any director by the affirmative vote of two-thirds of
those outstanding shares of the Corporation which are entitled to be cast at
such meeting.
The stockholders may, at any meeting called for the purpose, fill the
vacancy in the Board thus caused, by the affirmative vote of a majority of the
votes cast at such meeting. A director so chosen shall hold office until the
expiration of the term of the director whom he shall have succeeded.
SECTION 5. PLACE, TIME AND NOTICE OF MEETINGS: Meetings of the Board of
Directors shall be held at such place, within or without the State of
Maryland, as may from. time to time be fixed by resolution of the Board or as
may be specified in the notice of any meeting. Regular meetings of the Board
of Directors shall be held at such times as may from time to time be fixed by
resolution of the Board, and special meetings may be held at any time upon
the call of a majority of the persons constituting the Board of Directors,
the Chairman of the Board, the President or the Secretary, by oral,
telephonic, telegraphic or written notice, duly served
<PAGE>
on, sent, mailed or given to each director at least twenty- four hours before
the meeting. The notice of any special meeting shall specify the purposes
thereof. Notice need not be given of regular meetings of the Board held at
times fixed by resolution of the Board. Meetings may be held at any time without
notice if all of the directors are present or if notice is waived in writing,
either before or after the meeting, by those not present.
SECTION 6. INFORMAL ACTION BY DIRECTORS: Any action required or permitted
to be taken at a meeting of the Board of Directors or of a committee of the
Board may be taken without a meeting if a unanimous written consent which sets
forth the action is signed by each member of the Board or committee and is filed
with the minutes of proceedings of the Board or committee.
SECTION 7. CONFERENCE TELEPHONE: Except when prohibited by law, members
of the Board of Directors or a committee of the Board of Directors may
participate in a meeting by means of a videoconference hookup, a conference
telephone or similar communications equipment if all persons participating in
the meeting can hear each other at the same time. Participation in a meeting by
these means constitutes presence in person at the meeting.
SECTION 8. PRESIDING OFFICER: Meetings of the Board of Directors shall be
presided over by the Chairman of the Board, or, if he is not present, by the
President or, if neither of the above is present, by a Vice President or, if
none of the above is present, by a chairman to be chosen at the meeting; and the
Secretary or, if he is not present, an Assistant Secretary or, if neither is
present, a secretary to be chosen at the meeting shall act as secretary of the
meeting.
SECTION 9. COMPENSATION: The directors, other than those who are
"interested persons" as defined in the Investment Company Act of 1940 shall
receive such fees or compensation for services to the Corporation (including
attendance at meetings of the Board or of committees designated by the Board
pursuant to Section 11 of this Article II) as may be fixed by the Board of
Directors.
SECTION 10. CONFLICTS OF INTEREST: Except as otherwise provided by law or
in the Articles of Incorporation, a director of the Corporation shall not, in
the absence of fraud, be disqualified by his office from dealing or contracting
with the Corporation either as a vendor, purchaser or otherwise, nor in the
absence of fraud. shall any transaction or contract of the Corporation be void
or voidable or affected by reason of the fact that any director, or any firm of
which any director is a member, or any corporation of which any director is an
officer, director or stockholder, is in any way interested in such transaction
or contract; provided, that at the meeting of the Board of Directors authorizing
or confirming said contract or transaction, the existence of an interest of such
director,
<PAGE>
firm or corporation is disclosed or made known and there is present a quorum of
the Board of Directors, and such contract or transaction is approved by a
majority of such quorum, which majority shall consist of directors not so
interested or connected. Nor shall any director be liable to account to the
Corporation for any profit realized by him from or through any such transaction
or contract of the corporation, ratified or approved as aforesaid, by reason of
the fact that he or any firm of which he is a member, or any corporation of
which he is an officer, director or shareholder, was interested in such
transaction or contract. Directors so interested may be counted when present at
meetings of the Board of Directors for the purpose of determining the existence
of a quorum. Any contract, transaction or act of the Corporation or of the
Board of Directors (whether or not approved or ratified as herein- above
provided) which shall be ratified by a majority in interest of a quorum of the
stockholders having voting power at any annual meeting or any special meeting
called for such purpose or approved in writing by a majority in interest of the
stockholders having voting power without a meeting shall, except as otherwise
provided by law, be as valid and as binding as though ratified by every
stockholder of the corporation.
SECTION 11. COMMITTEES: The Board of Directors may designate one or more
committees, each such committee to consist of two or more of the directors of
the Corporation, which, to the extent permitted by law and provided in said
resolution or resolutions, shall have and may exercise the powers of the Board
over the business and affairs of the Corporation, except no such committee shall
have the power to: (a) declare dividends or distributions on stock, (b) issue
stock except according to a general formula specified by the Board, (c)
recommend to the stockholders any action which requires stockholder approval,
(d) amend the articles of incorporation or the bylaws, or (e) approve any merger
or share exchange which does not require stockholder approval.
Such committee or committees shall have such name or names as may be
determined from time to time by resolution adopted by the Board of Directors. A
majority of the members of any such committee may determine its action and fix
the time and place of its meetings unless the Board of Directors shall otherwise
provide. The Board of Directors shall have power at any time to change the
membership of, to fill vacancies in, or to dissolve any such committee.
<PAGE>
ARTICLE III
OFFICERS
SECTION 1. ELECTED OFFICERS: The Board of Directors annually shall elect
a president, a secretary and a treasurer and may elect, from time to time, a
chairman of the board, one or more vice presidents of such classes as the Board
may determine, and any other officers and agents as it may deem proper. Any two
of the above-mentioned officers, except those of the president and a vice
president, may be held by the same person, but no officer shall execute,
acknowledge or verify any instrument in more than one capacity if such
instrument be required by law or by these Bylaws to be executed, acknowledged or
verified by any two or more officers. The Board of Directors may fill any
vacancy which occurs in any office.
SECTION 2. APPOINTED OFFICERS: The president may appoint, annually and
from time to time, such officers, including second and assistant vice
presidents, assistant secretaries and assistant treasurers, as he or she may
deem necessary.
SECTION 3. TERM OF OFFICE: The term of office of all officers shall be
one year or until their respective successors are chosen or until their earlier
resignation, death or removal. Any officer may be removed at any time by the
affirmative vote of a majority of the members of the Board then in office, if
the Board of Directors in its judgment finds that the best interests of the
Corporation will be thus served.
SECTION 4. POWERS: Subject to such limitations as the Board of Directors
or the president may from time to time prescribe, the officers of the
Corporation shall each have such powers and duties as generally appertain to
their respective offices, as well as such powers and duties as from time to time
may be conferred by the Board of Directors or the president. Any officer, agent
or employee of the Corporation may be required by the Board of Directors to give
bond for the faithful discharge of his duties, in such sum and of such character
as the Board may from time to time prescribe.
ARTICLE IV
CERTIFICATES OF STOCK
SECTION 1. CERTIFICATES: Unless otherwise authorized by the Board of
Directors, each stockholder of the Corporation shall be entitled to a
certificate or certificates, in such form as the Board of Directors may from
time to time prescribe, which shall represent and certify the number of whole
shares of stock of the Corporation owned by such stockholder. The certificates
for shares of stock of
<PAGE>
the Corporation shall bear the signature, either manual or facsimile, of the
chairman of the board, the president or a vice president and of the treasurer or
an assistant treasurer or the secretary or an assistant secretary, and shall be
sealed with the seal of the Corporation or bear a facsimile thereof, if the
Corporation has such a seal. The validity of any stock certificate shall not be
affected if any officer whose signature appears thereon ceases to be an officer
of the Corporation before such certificate is issued.
SECTION 2. TRANSFERS: The shares of stock of the Corporation shall be
transferable on the books of the Corporation by the holder thereof in person or
by a duly authorized attorney, upon surrender for cancellation of a certificate
or certificates for a like number of shares, with a duly executed assignment and
power of transfer endorsed thereon or attached thereto, or, if no certificate
has been issued to the holder in respect of shares of stock of the Corporation,
upon receipt of written instructions, signed by such holder, to transfer such
shares from the account maintained in the name of such holder by the Corporation
or its agent. Such proof of the authenticity of the signatures as the
Corporation or its agent may reasonably require shall be provided.
SECTION 3. LOST, STOLEN OR DESTROYED CERTIFICATES: No certificate for
shares of stock of the Corporation shall be issued in place of any
certificate alleged to have been lost, stolen, mutilated or destroyed except
upon production of such evidence of the loss, theft, mutilation or
destruction, and upon indemnification of the Corporation and its agents to
such extent and in such manner as the Board of Directors may from time to
time prescribe.
ARTICLE V
CORPORATE BOOKS
The books of the Corporation (except the original or a duplicate stock
ledger which shall be kept at the office of the Corporation located in Fort
Wayne, Indiana) may be kept within or outside the State of Maryland.
ARTICLE VI
SIGNATURES
Except as otherwise provided in these Bylaws or as the Board of Directors
may generally or in particular cases authorize the execution thereof in some
other manner, all deeds, leases, transfers, contracts, bonds, notes, checks,
drafts and other obligations made, accepted or endorsed by the Corporation and
all endorsements, assignments, transfers, stock powers or other instruments of
transfer of securities owned by or standing in the name of the Corporation shall
be signed or executed by the President or any Vice President or
<PAGE>
by any other officer or agent authorized to act in such matters, whether by law,
the Articles of Incorporation, these Bylaws, or any general or special
authorization of the Board of Directors. If the corporate seal is required, it
shall be affixed by the Secretary or an Assistant Secretary.
ARTICLE VII
FISCAL YEAR
The Corporation's fiscal year shall end on December 31 each year.
ARTICLE VIII
CORPORATE SEAL
The Board of Directors shall determine the need for, and if necessary the
form of, a corporate seal of the Corporation.
ARTICLE IX
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Corporation shall indemnify directors, officers, employees and agents
of the Corporation against judgments, fines, settlements and expenses to the
fullest extent authorized and in the manner permitted by applicable federal and
state law.
ARTICLE X
ADDITIONAL PROVISIONS
In any case where an officer or director of the Corporation or of any
investment adviser of the Corporation or a member of any committee of the
Corporation, is also an officer or director of another corporation and the
purchase or sale of the securities issued by such other corporation is under
consideration, the officer, director or committee member concerned will abstain
from participating in any decision made on behalf of the Corporation to purchase
or sell any securities issued by such other corporation.
<PAGE>
ARTICLE XI
AMENDMENTS
The Bylaws of the Corporation may be amended, added to, rescinded or
repealed at any meeting of the stockholders, or by vote of a majority of the
directors then in office at any meeting of the Board of Directors, provided
notice of the substance of the proposed change is contained in the notice of the
meeting or any waiver thereof; except that after the initial issue of any shares
of capital stock of the Corporation, the provisions of this Article XI may be
altered, amended or repealed only upon the affirmative vote of the holders of a
majority of all shares of capital stock of the Corporation outstanding and
entitled to vote on the record date.
<PAGE>
Exhibit 4
LINCOLN NATIONAL CAPITAL APPRECIATION FUND, INC.
(Incorporated under the laws of Maryland)
Common Stock, $.01 Par Value
THIS CERTIFIES THAT SPECIMEN IS THE OWNER OF _________________________________
SHARES of the Capital Stock of LINCOLN NATIONAL CAPITAL APPRECIATION FUND, INC.
TRANSFERABLE ONLY ON THE BOOKS OF THE CORPORATION BY THE HOLDER HEREOF IN PERSON
OR BY ATTORNEY UPON SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED.
IN WITNESS WHEREOF, THE SAID CORPORATION HAS CAUSED THIS CERTIFICATE TO BE
SIGNED BY ITS DULY AUTHORIZED OFFICERS AND SEALED WITH THE SEAL OF THE
CORPORATION, THIS ___________________________ DAY OF _________________________
A.D. 19__
- ----------------------------------- ----------------------------------------
Secretary President
<PAGE>
SUB-INVESTMENT MANAGEMENT AGREEMENT
This Sub-Investment Management Agreement (this "Agreement") is entered
into as of January 1, 1994 by and between Lincoln National Investment Management
Company, an Illinois corporation ("Investment Manager") and Janus Capital
Corporation, a Colorado corporation ("Sub-Investment Manager").
WHEREAS, Investment Manager has entered into an Investment Management
Agreement dated September 23, 1993 (the "Investment Management Agreement") with
Lincoln National Capital Appreciation Fund, Inc. (the "Fund"), to act as
Investment Manager to the Fund;
WHEREAS, the Investment Management Agreement provides that Investment
Manager may engage a sub-investment manager to furnish investment information
and advice to assist Investment Manager in carrying out its responsibilities
under the Investment Management Agreement;
WHEREAS, Investment Manager and the Fund desire to retain Sub-Investment
Manager to render investment advisory services to Investment Manager in the
manner and on the terms set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth in this Agreement, Investment Manager and Sub-Investment Manager agree
as follows:
1. Sub-Investment Management Services.
(a) Sub-Investment Manager shall, subject always to the control of
the Fund's Board of Directors and to the supervision of Investment Manager,
manage the investment and reinvestment of the assets of the Fund. Sub-Investment
Manager is authorized, in its discretion and without prior consultation with
Investment Manager, to buy, sell, lend, and otherwise trade in any stocks,
bonds, and other securities and investment instruments on behalf of the Fund.
Subject to the investment objectives, policies, and restrictions concerning the
Fund set forth in the Fund's registration statements under the Investment
Company Act of 1940, the Fund may be invested in such proportions of stocks,
bonds, other securities or investment instruments, or cash, as Sub-Investment
Manager shall determine. Sub-Investment Manager is responsible for compliance
with the provisions of Section 817(h) of the Internal Revenue Code of 1986, as
amended, applicable to the Fund.
(b) Sub-Investment Manager shall furnish Investment Manager monthly,
quarterly, and annual reports concerning transactions and performance of the
Fund in such form as may be mutually agreed upon, and agrees to review the Fund
and discuss the management of it. Sub-Investment Manager shall permit the
financial statements, books and records with respect to the Fund to be inspected
and audited by Investment Manager (and/or the independent accountants for
Investment Manager or the Fund) at all reasonable times during normal business
hours. Sub-Investment Manager shall also provide Investment Manager with such
other information and reports as may reasonably be requested by Investment
Manager from time to
<PAGE>
time.
(c) Sub-Investment Manager shall provide to Investment Manager a
copy of Sub-Investment Manager's Form ADV as filed with the Securities and
Exchange Commission and a list of persons who Sub-Investment Manager wishes to
have authorized to give written and/or oral instructions to the Custodian of the
Fund's assets.
2. Obligations of Investment Manager and the Fund.
(a) Investment Manager shall provide timely information to
Sub-Investment Manager regarding such matters as the cash requirements and cash
available for investment in the Fund, and all other information as may be
reasonably necessary for Sub-Investment Manager to perform its responsibilities
hereunder.
(b) Investment Manager has herewith furnished Sub-Investment Manager
a copy of the Fund's registration statement currently in effect and agrees
during the continuance of this Agreement to furnish Sub-Investment Manager
copies of any amendments or supplements thereto before or at the time the
amendments or supplements become effective. Investment Manager agrees to furnish
Sub-Investment Manager with minutes of meetings of the Board of Directors of the
Fund to the extent they may affect the duties of Investment Manager, a certified
copy of any financial statements or reports prepared for the Fund by certified
or independent public accountants, and with copies of any financial statements
or material reports made by the Fund to its shareholders or to any governmental
body or securities exchange, and any further materials or information which
Sub-Investment Manager may reasonably request to enable it to perform its
functions under this Agreement.
3. Custodian. Investment Manager shall provide Sub-Investment Manager with
a copy of the Fund's agreement with the Custodian (the "Custodian") designated
to hold the assets in the Fund and any modification thereto (the "Custody
Agreement") in advance. The Fund assets shall be maintained in the custody of
the Custodian identified in, and in accordance with the terms and conditions of,
the Custody Agreement. Sub-Investment Manager shall have no liability for the
acts or omissions of the Custodian which do not arise out of the acts or
omissions of Sub-Investment Manager. Any assets added to the Fund shall be
delivered directly to the Custodian.
4. Proprietary Rights. Investment Manager agrees and acknowledges that
Sub-Investment Manager is the sole owner of the name and mark "Janus" and that
all use of any designation composed in whole or part of Janus (a "Janus Mark")
under this Agreement shall inure to the benefit of Sub-Investment Manager.
Consequently, the use by Investment Manager on its own behalf or on behalf of
the Fund of any Janus Mark in any advertisement or sales literature or other
materials promoting the Fund shall be with the prior written consent of
Sub-Investment Manager. Investment Manager shall not, and Investment Manager
shall use its best efforts to cause the Fund not to, without the prior written
consent of Sub-Investment Manager, make representations regarding Sub-Investment
Manager in any disclosure document,
-2-
<PAGE>
advertisement or sales literature or other materials promoting the Fund. Upon
termination of this Agreement for any reason, Investment Manager shall cease,
and Investment Manager shall use its best efforts to cause the Fund to cease,
all use of any Janus Mark(s) as soon as reasonably practicable.
5. Expenses. Except for expenses that Sub-Investment Manager has
specifically assumed or agreed to pay, it shall not be responsible for the
expenses of the Fund or of Investment Manager. Expenses for which Sub-Investment
Manager shall not be responsible include, without limitation: (a) interest and
taxes; (b) brokerage commissions and other costs in connection with the purchase
or sale of securities or other investment instruments with respect to the Fund;
and (c) custodian fees and expenses. Any reimbursement of advisory fees required
by any expense limitation provision shall be the sole responsibility of
Investment Manager. Investment Manager and Sub-Investment Manager shall not be
considered as partners or participants in a joint venture. Sub-Investment
Manager will pay its own expenses for the services to be provided pursuant to
this Agreement to the extent not assumed by Investment Manager above, and will
not be obligated to pay any expenses of Investment Manager or the Fund.
6. Purchase and Sale of Assets. Absent instructions from Investment
Manager to the contrary, Sub-Investment Manager shall place all orders for the
purchase and sale of securities for the Fund with brokers or dealers selected by
Sub-Investment Manager which may include brokers or dealers affiliated with
Sub-Investment Manager. Purchase or sell orders for the Fund may be aggregated
with contemporaneous purchase or sell orders of other clients of Sub-Investment
Manager. Sub-Investment Manager shall use its best efforts to obtain execution
of Fund transactions at prices which are advantageous to the Fund and at
commission rates that are reasonable in relation to the benefits received.
However, Sub-Investment Manager may select brokers or dealers on the basis that
they provide brokerage, research, or other services or products to the Fund
and/or other accounts serviced by Sub-Investment Manager. Sub-Investment Manager
may pay a broker or dealer an amount of commission for effecting a securities
transaction in excess of the amount of commission or dealer spread another
broker or dealer would have charged for effecting that transaction if
Sub-Investment Manager determines in good faith that such amount of commission
was reasonable in relation to the value of the brokerage and research products
and/or services provided by such broker or dealer. This determination, with
respect to brokerage and research services or products, may be viewed in terms
of either that particular transaction or the overall responsibilities which
Sub-Investment Manager and its affiliates have with respect to the Fund and to
accounts over which they exercise investment discretion, and not all such
services or products may be used by Sub-Investment Manager in managing the Fund.
7. Compensation of Sub-Investment Manager. Investment Manager shall pay to
Sub-Investment Manager a monthly fee in accordance with the fee schedule
attached to this Agreement. Monthly fees shall be calculated by Investment
Manager based upon the average daily net assets of the Fund (including cash or
cash equivalents) for the preceding month for investment advisory services
rendered during that preceding month, and shall be payable to Sub-
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<PAGE>
Investment Manager by the fifteenth day of the succeeding month. The fee for the
first month during which Sub-Investment Manager shall render investment advisory
services under this Agreement shall be based upon the number of days the account
was open in that month. If this Agreement is terminated, the fee shall be based
upon the number of days the account was open during the month in which the
Agreement is terminated.
8. Non-Exclusivity. Investment Manager and the Fund agree that the
services of Sub-Investment Manager are not to be deemed exclusive and that
Sub-Investment Manager and its affiliates are free to act as investment manager
and provide other services to various investment companies and other managed
accounts. This Agreement shall not in any way limit or restrict Sub-Investment
Manager or any of its directors, officers, employees, or agents from buying,
selling, or trading any securities or other investment instruments for its or
their own account or for the account of others for whom it or they may be
acting, provided that such activities will not adversely affect or otherwise
impair the performance by Sub-Investment Manager of its duties and obligations
under this Agreement. Investment Manager and the Fund recognize and agree that
Sub-Investment Manager may provide advice to or take action with respect to
other clients, which advice or action, including the timing and nature of such
action, may differ from or be identical to advice given or action taken with
respect to the Fund. Sub-Investment Manager shall for all purposes herein be
deemed to be an independent contractor and shall, unless otherwise provided or
authorized, have no authority to act for or represent the Fund or Investment
Manager in any way or otherwise be deemed an agent of the Fund or Investment
Manager other than in furtherance of its duties and responsibilities as set
forth in this Agreement.
9. Liability.
(a) Except as may otherwise be provided by the Investment Company
Act of 1940 or federal securities laws, neither Sub-Investment Manager nor any
of its officers, directors, or employees shall be subject to any liability to
Investment Manager, the Fund, or any shareholder of the Fund for any error of
judgment or any loss arising out of any investment or other act or omission in
the course of, connected with, or arising out of any service to be rendered
under this Agreement, except by reason of willful misfeasance, bad faith, or
gross negligence in the performance of its duties or by reason of reckless
disregard of its obligations and duties under this Agreement. Investment Manager
and the Fund shall hold harmless and indemnify Sub-Investment Manager for any
loss, liability, cost, damage, or expense (including reasonable attorneys fees
and costs) arising from any claim or demand by any past or present shareholder
of the Fund, in their capacity as shareholder, that is not based upon or does
not arise from the investment advice and/or other services provided by
Sub-Investment Manager pursuant to this Agreement. Investment Manager
acknowledges and agrees that Sub-Investment Manager makes no representation or
warranty, express or implied, that any level of performance or investment
results will be achieved by the Fund or that the Fund will perform comparably
with any standard or index, including other clients of Sub-Investment Manager,
whether public or private.
-4-
<PAGE>
(b) Notwithstanding anything to the contrary in sub-Paragraph (a)
just above, Sub-Investment Manager agrees to indemnify the Fund, Investment
Manager, the Separate Account and the Lincoln National Life Insurance Company
(the "Lincoln Entities") for, and hold them harmless against, any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Sub-Investment Manager) or litigation (including
legal and other expenses) to which the Lincoln Entities, or any of them, may
become subject under any statute, at common law or otherwise, insofar as those
losses, claims, damages, liabilities or expenses (or actions in respect thereof)
or settlements arise as a result of any failure by the Sub-Investment Manager,
whether unintentional or in good faith or otherwise, to adequately diversify the
investment program of the Fund, pursuant to the requirements of Section 817(h)
of the Code, and the regulations issued thereunder (including, but not by way of
limitation, Reg. Sec. 1.817-5, March 2, 1989, 54 F.R. 8730), relating to the
diversification requirements for variable annuity, endowment, and life insurance
contracts.
10. Effect of Assignment. Termination of Investment Management Agreement,
and Amendment. This Agreement shall automatically terminate, without the payment
of any penalty, in the event of its assignment or in the event that the
Investment Management Agreement shall have terminated for any reason; and this
Agreement shall not be amended unless such amendment be approved at a meeting by
the affirmative vote of a majority of the outstanding shares of the Fund and by
the vote, cast in person at a meeting called for the purpose of voting on such
approval, of a majority of the Directors of the Fund who are not interested
persons of the Fund or of Investment Manager or of Sub-Investment Manager, and
with the approval of Sub-Investment Manager.
11. Effective Period. Termination. This Agreement shall become effective
upon its execution, and shall remain in full force and effect continuously
thereafter (unless terminated automatically as set forth in Section 10) until
terminated as follows:
(a) The Fund may at any time terminate this Agreement by giving not
less than 60 days' written notice delivered or mailed by registered mail,
postage prepaid, to Investment Manager and Sub-Investment Manager; or
(b) If (i) the Directors of the Fund or the shareholders by the
affirmative vote of a majority of the outstanding shares of the Fund and (ii) a
majority of the Directors who are not interested persons of the Fund or of
Investment Manager or of Sub-Investment Manager by vote cast in person at a
meeting called for the purpose of voting on such approval, do not specifically
approve at least annually the continuance of this Agreement, then this Agreement
shall automatically terminate at the close of business on the second anniversary
of its execution, or upon the expiration of one year from the effective date of
the last such continuance, whichever is later; provided, however, that if the
continuance of this Agreement is submitted to the shareholders of the Fund for
their approval and such shareholders fail to approve such continuance of this
Agreement as provided herein, Sub-Investment Manager may continue to serve
hereunder in a manner consistent with the Investment Company Act of 1940 and the
Rules and Regulations thereunder; or
-5-
<PAGE>
(c) Investment Manager may at any time terminate this Agreement by
giving not less than 60 days' written notice delivered or mailed by certified
mail, postage prepaid, to Sub-Investment Manager, and Sub-Investment Manager may
at any time terminate this Agreement by giving not less than 60 days' written
notice delivered or mailed by registered mail, postage prepaid, to Investment
Manager.
Action by the Fund under (a) above may be taken either (i) by vote
of a majority of its directors, or (ii) by the affirmative vote of a majority of
the outstanding shares of the Fund.
Termination of this Agreement pursuant to this Section 11 shall be
without the payment of any penalty.
12. Certain Definitions. For the purposes of this Agreement, the
"affirmative vote of a majority of the outstanding shares" means the affirmative
vote, at a duly called and held meeting of shareholders, (a) of the holders of
67% or more of the shares of the Fund present (in person or by proxy) and
entitled to vote at such meeting, if the holders of more than 50% of the
outstanding shares of the Fund entitled to vote at such meeting are present in
person or by proxy, or (b) of the holders of more than 50% of the outstanding
shares of the Fund entitled to vote at such meeting, whichever is less.
For the purposes of this Agreement, the terms "affiliated person,"
"control," "interested person" and "assignment" shall have their respective
meanings defined in the Investment Company Act of 1940 and the Rules and
Regulations thereunder, subject, however, to such exemptions as may be granted
by the Securities and Exchange Commission under said Act; the term "specifically
approve at least annually" shall be construed in a manner consistent with the
Investment Company Act of 1940 and the Rules and Regulations thereunder; and the
term "brokerage and research services" shall have the meaning given in the
Securities Exchange Act of 1934 and the Rules and Regulations thereunder.
13. Certain Information. Sub-Investment Manager shall promptly notify
Investment Manager in writing of the occurrence of any of the following events:
(a) Sub-Investment Manager shall have been served or otherwise have
notice of any action, suit, proceeding, inquiry or investigation, at law or in
equity, before or by any court, public board or body, involving the affairs of
the Fund;
(b) Any of Sub-Investment Manager's portfolio managers for the Fund
shall have changed.
14. General.
(a) Sub-Investment Manager may perform its services through any
employee, officer, or agent of Sub-Investment Manager, and Investment Manager
shall not be entitled to
-6-
<PAGE>
the advice, recommendation, or judgment of any specific person.
(b) If any term or provision or this Agreement or the application
thereof to any person or circumstances is held to be invalid or unenforceable to
any extent, the remainder of this Agreement or the application of such provision
to other persons or circumstances shall not be affected thereby and shall be
enforced to the greatest extent permitted by law.
(c) This Agreement shall be governed by and interpreted in
accordance with the laws of the State of Colorado exclusive of conflicts of
laws.
LINCOLN NATIONAL INVESTMENT
MANAGEMENT COMPANY
By: /s/ Barbara S. Kowalczyk
----------------------------------
Name: Barbara S. Kowalczyk
----------------------------
Title: Executive Vice President
----------------------------
JANUS CAPITAL CORPORATION
By: /s/ Stephen L. Stieneker
----------------------------------
Name: Stephen L. Stieneker
Title: Assistant Vice President
Accepted and Agreed to by:
LINCOLN NATIONAL CAPITAL
APPRECIATION FUND, INC.
By: /s/ Robert A. Nikels
-----------------------
Name: Robert A. Nikels
------------------
Title: President
-----------------
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<PAGE>
LINCOLN NATIONAL CAPITAL APPRECIATION FUND, INC.
ADVISORY AGREEMENT
This Agreement, made this 23rd day of September, 1993 between Lincoln
National Capital Appreciation Fund, Inc., a Maryland corporation (the "Fund"),
and Lincoln National Investment Management Company (the Adviser"),
WHEREAS, the Fund is to be an open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"); and
WHEREAS, the Fund desires to retain the Advisor to render investment
advisory and administrative services to the Fund, and the Adviser is willing to
render such services;
NOW, THEREFORE, in consideration of the premises and mutual promises
hereinafter set forth, the parties hereto agree as follows:
1. Appointment of Adviser. The Fund hereby amounts the Adviser to act as
investment adviser to the Fund and to administer its corporate affairs, subject
to the supervision of the Board of Directors of the Fund for the period and on
the terms set forth in this Agreement. The Adviser accepts such appointment and
agrees to render the services herein set forth, for the compensation herein
provided.
2. Investment Advisory Duties. Subject to the supervision of the Board of
Directors of the Fund, the Adviser shall manage the investment operations of the
Fund, subject to the following:
(a) The Adviser shall provide supervision of the Fund's investments,
furnish a continuous investment program for the Fund's portfolio,
determine from time to time what securities will purchased, retained
or sold by the Fund, and what portion of the assets will be invested
or held uninvested as cash;
(b) The Adviser shall use the same skill and care in the management of
the Fund's portfolio as it uses in the management of other accounts
for which it has investment responsibility;
(c) The Adviser, in the performance of its duties and obligations under
this Agreement, shall act in conformity with the Articles of
Incorporation, Bylaws and prospectus of the Fund and with the
instructions and directions of the Board of Directors of the Fund
and will conform to and comply with the requirements of the 1940 Act
and all other applicable federal and state laws and regulations;
(d) The Adviser shall determine the securities to be purchased or sold
by the Fund and will place orders pursuant to its
<PAGE>
determinations either directly with the issuer or with any broker
and/or dealer who specializes in the securities in which the Fund is
active, but shall in no event place such orders with any affiliated
person of the Adviser. In placing orders with brokers and/or dealers
the Adviser shall attempt to obtain the best price and the most
favorable execution of its orders, subject to such other
considerations as may be set forth in the then most recent
prospectus of the Fund;
(e) The Adviser shall maintain books and records with respect to the
Fund's securities transactions and shall render to the Fund's Board
of Directors such periodic and special reports as the Fund's Board
of Directors may reasonably request;
(f) The investment advisory services of the Adviser to the Fund under
this Agreement are not to be deemed exclusive, and the Adviser shall
be free to render similar services to others. In addition, it is
understood that the persons employed by the Adviser to assist in the
performance of its duties under this Agreement will not necessarily
devote their full time to such activity.
(g) For purposes of this Agreement, the term "prospectus" includes the
Statement of Additional Information for the Fund pursuant to the
requirements of the 1940 Act and regulations thereunder.
3. Administrative Functions. The Adviser will administer the Fund's
corporate affairs, subject to the overall supervision of the Board of Directors
of the Fund and, in connection therewith, shall furnish the Fund with office
space and all necessary office facilities, equipment and personnel, and shall
provide all necessary executive and other personnel (including certain of its
officers and employees) for managing the investments and affairs of the Fund.
The Fund delegates to the Adviser the authority to vote proxies of the companies
whose securities are held in the Fund's portfolio.
In connection with its administration of the affairs of the Fund, the
Adviser will bear all of the following expenses:
(i) The salaries and expenses of all personnel, except the fees and
expenses of directors who are not "interested persons" of the Fund,
as that term is defined in the 1940 Act;
(ii) All expenses incurred by the Adviser in connection with
administering the Fund's business other than those assumed by the
Fund herein; and
The Fund assumes and will pay the following expenses, except to the extent
incurred in connection with the organization of the Fund:
(a) The fee of the Adviser;
(b) The compensation and expenses of directors who are not "interested
persons" of the Fund;
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<PAGE>
(c) The fees and expenses of the custodian of the Fund's assets;
(d) The fees and expenses of independent accountants for the Fund;
(e) Brokerage commissions and securities transaction costs incurred by
the Fund, including any portion of such commissions attributable to
research and brokerage services as defined by Section 28(e) of the
Securities Exchange Act of 1934, as amended;
(f) All taxes and corporate fees payable by the Fund to federal, state
or other governmental agencies;
(g) The fees of any trade association of which the Fund may be a member;
(h) The cost of stock certificates representing shares of the Fund;
(i) The fees and expenses involved in registering and maintaining
registrations of the Fund and its shares with the Securities and
Exchange Commission (the "Commission"), and qualifying its shares
under state securities laws, including the preparation and printing
of the Fund's registration statements and updated prospectuses
provided to current stockholders;
(j) Expenses of stockholders' and directors' meetings and of preparing
and printing proxy material and mailing reports to stockholders;
(k) The charges and expenses of outside legal counsel for the Fund,
including legal services rendered in connection with the Fund's
corporate existence, corporate and financial structure and relations
with its stockholders, registrations and qualifications of
securities and litigation; and
(l) Expenses of any extraordinary nature (including litigation and
indemnification expenses) which are not incurred in the ordinary
course of the Fund's business.
4. Contractual Services. The Adviser may contract with other entities to
assist it in rendering services described in this Agreement; provided, however,
that the Adviser will continue to be contractually bound with respect to the
performance of its duties and obligations as set forth herein.
5. Books and Records. The Adviser shall keep the Fund's books and records
required to be maintained by it pursuant to paragraph 2 hereof. The Adviser
agrees that all records which it maintains for the Fund are the property of the
Fund and it will surrender promptly to the Fund any of such records upon the
Fund's request. The Adviser further agrees to preserve for the periods
prescribed by Rule 31a-2 of the Commission under the 1940 Act any such records
as are required to be maintained by Rule 31a-1 of the Commission under the 1940
Act. (See also paragraph 13, Right to Audit.)
-3-
<PAGE>
6. Compensation. The Fund shall pay the Adviser, as full compensation for
all services rendered and all facilities and personnel furnished hereunder, a
monthly fee at the annual rate of .80 of 1% of the average daily net asset value
of the Fund during the fiscal year, computed in the manner used for the
determination of the offering price of shares of the Fund. The fee for each
month shall be payable to the Adviser not later than the tenth day of the
following month.
7. Reimbursement of Expenses. If, in any fiscal year, the total of the
Fund's expenses (including the fee payable pursuant to paragraph 6 hereof, but
excluding taxes, interest, brokerage commissions relating to the purchase or
sale of portfolio securities and extraordinary non-recurring expenses) exceeds
1-1/2% of the average daily net asset value of the Fund, computed in the manner
above described, the Adviser will pay such excess. For purposes of this
paragraph, the term "fiscal year" shall include the portion of any fiscal year
which shall have elapsed at the date of termination of this Agreement, and the
expense limitation shall be that part of 1-1/2% proportioned to the portion of a
full fiscal year elapsed.
8. Limitation of Liability. The Adviser shall not be liable for any error
of judgment or mistake of law or fact or for any loss suffered by the Fund in
connection with the matters in which this Agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on its part in
the performance of its duties or from reckless disregard of its obligations and
duties under this Agreement.
9. Duration and Termination. This Agreement, unless sooner terminated as
provided herein, shall continue until the earlier of one year from the effective
date of the Fund's Registration Statement or the date of the first annual or
special meeting of the stockholders of the Fund, and, if approved by a majority
of the Fund's outstanding voting securities (as defined in the 1940 Act),
thereafter shall continue automatically for periods of one calendar year so long
as such continuance is specifically approved at least annually (a) by the vote
of a majority of the Fund's outstanding voting securities or by the Fund's Board
of Directors, and (b) by the vote of a majority of those members of the Board of
Directors of the Fund who are not parties to this Agreement or interested
persons (as defined in the 1940 Act) of any such party, cast in person at a
meeting called for the purpose of voting on such approval; provided, however,
that this Agreement may be terminated by the Fund at any time, without the
payment of any penalty, by vote of a majority of the entire Board of Directors
of the Fund or by vote of a majority of the Fund's outstanding voting securities
on 60 days' written notice to the Adviser, or by the Adviser at any time,
without the payment of any penalty, on 90 days' written notice to the Fund. This
Agreement will automatically and immediately terminate in the event of its
"assignment" (as defined in the 1940 Act).
10. Amendment of Agreement. This Agreement may be amended by mutual
consent, but the consent of the Fund must be approved (a) by vote of a majority
of those members of the Board of Directors of the Fund who are not "interested
persons" of any party to this Agreement, cast in person at a meeting called for
the purpose of voting on such amendment, and (b) by vote
-4-
<PAGE>
of a majority of the Fund's outstanding voting securities, provided, however,
that compliance with subparagraph (b) of this paragraph 10 shall not be required
in order to amend this Agreement to lower the Adviser's compensation under
paragraph 6 hereof.
12. Dispute Resolution. Prior to proceeding to trial over any dispute
arising out of or relating to this agreement the parties shall attempt in good
faith to resolve the dispute by the following means:
(a) Negotiation. Either party may give the other party written notice of
any dispute not resolved in the normal course of business. Within
twenty (20) days after delivery of that notice, executives from the
parties who have authority to settle the controversy shall meet at a
mutually acceptable time and place, and thereafter as often as they
reasonably deem necessary, to exchange relevant information and to
attempt to resolve the dispute. If the matter has not been resolved
within 120 days of the disputing party's notice, or if the parties
fail to meet within the twenty (20) days, either party may initiate
a minitrial of the controversy or claim as provided in Paragraph b.
If a negotiator intends to be accompanied at a meeting by an
attorney, the other negotiator shall be given at least three (3)
working days' notice of such intention and may also be accompanied
by an attorney.
(b) Minitrial. If the dispute has not been resolved by negotiation as
provided herein, the parties shall endeavor to settle the dispute by
minitrial under the then current Center For Public Resources ("CPR")
Model Minitrial Procedure, assisted by a neutral third party who
will be selected by the disputing parties from the CPR Panels of
Neutrals. If the parties encounter difficulty in agreeing on a
neutral, they will seek the assistance of CPR in the selection
process.
(c) Extension of Deadlines. By mutual agreement any or all of the
deadlines set forth in this Section 12 may be extended by mutual
agreement of the disputing parties.
(d) Confidentiality. All negotiations pursuant to this Section 12 are
confidential and shall be treated as compromise and settlement
negotiations for purposes of the Federal Rules of Evidence and
applicable State Rules of Evidence.
(e) No Waiver. Nothing in this Section 12 shall be construed to
constitute a waiver of any right provided by the Investment Advisors
Act of 1940 to any party to this agreement.
13. Right to Audit. The Adviser shall permit employees or legal
representatives of the Fund (including independent auditors), at the Fund's
discretion, to audit the books and records of Adviser which relate to
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<PAGE>
transactions which are the subject of this agreement. For purposes of this
agreement, "books and records" shall be deemed to include, but not by way of
limitation, all records processed or managed through electronic data processing,
such as E-mail, on-line files and any data in storage. Any audit will be
conducted during normal business hours of the Adviser and on the Adviser's
premises. Adviser agrees to provide to the Fund, without charge, reasonable
access to its facilities and personnel during the conduct of an audit. Adviser
may charge a reasonable fee for photocopying and other out-of-pocket costs
associated with an audit conducted under this paragraph. The Adviser may not
charge for salaries of Adviser's personnel who participate in the audit.
IN WITNESS WHEREOF, the parties hereto have caused this instrument, in two
counterparts (each of which shall be deemed an original), to be executed by
their officers designated below as of the day and year first above written.
Lincoln National Capital Appreciation
Fund, Inc.
By /s/ Robert A. Nikels
------------------------------
Robert A. Nikels, President
ATTEST:
/s/ Cynthia A. Rose
- ----------------------------
Assistant Secretary
Lincoln National Investment
Management Company
By /s/ Jon A Boscia
------------------------------
Jon A Boscia, President
ATTEST:
/s/ Cynthia A. Rose
- ----------------------------
Assistant Secretary
-6-
<PAGE>
AMENDMENT
(Effective May 1, 1998)
to the
ADVISORY AGREEMENT
(effective date September 23, 1993)
between
LINCOLN INVESTMENT MANAGEMENT COMPANY
(FORMERLY: LINCOLN NATIONAL INVESTMENT MANAGEMENT COMPANY)
and
LINCOLN NATIONAL CAPITAL APPRECIATION FUND, INC.
Paragraph 6 of the Agreement relating to investment management for Lincoln
National Capital Appreciation Fund, Inc. is hereby amended to substitute the
following sentence for the first sentence of the paragraph:
"The Fund shall pay the Adviser, as full compensation for all
services rendered and all facilities and personnel furnished
hereunder, a monthly fee at the annual rate of .75 of 1% on the
first $500 million of the average daily net asset value of the Fund
in each fiscal year, and .70 of 1% for all amounts in excess of $500
million during that fiscal year, computed in the manner used for the
determination of the offering price of shares of the Fund"
LINCOLN INVESTMENT MANAGEMENT
COMPANY
By /s/ H. Thomas McMeekin
---------------------------
H. Thomas McMeekin
LINCOLN NATIONAL CAPITAL
APPRECIATION FUND, INC.
By: /s/ Kelly D Clevenger
---------------------------
Kelly D Clevenger
<PAGE>
ATTACHMENT
to the
Sub-Investment Management Agreement
dated January 1, 1994
between
LINCOLN NATIONAL INVESTMENT MANAGEMENT COMPANY
and
JANUS CAPITAL CORPORATION
Investment Manager shall pay to Sub-Investment Manager a monthly fee,
calculated pursuant to Section 7 of the Agreement, as follows:
0.60% of the first $100,000,000 of average daily net assets of the Fund;
and 0.55% of any excess over $100,000,000.
<PAGE>
CUSTODIAN CONTRACT
Between
LINCOLN NATIONAL CAPITAL APPRECIATION FUND, INC.
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
1. Employment of Custodian and property to be Held By It ............... 1
2. Duties of the Custodian with Respect to Property of
the Fund Held by the Custodian in the United States ................. 2
2.1 Holding Securities ........................................... 2
2.2 Delivery of Securities ....................................... 3
2.3 Registration of Securities ................................... 7
2.4 Bank Accounts ................................................ 8
2.5 Availability of Federal Funds ................................ 9
2.6 Collection of Income ......................................... 9
2.7 Payment of Fund Monies ....................................... 10
2.8 Liability for Payment in Advance of
Receipt of Securities Purchased .............................. 13
2.9 Appointment of Agents ........................................ 13
2.10 Deposit of Securities in Securities System ................... 14
2.10A Fund Assets Held in the Custodian's Direct
Paper system ................................................. 17
2.11 Segregated Account ........................................... 18
2.12 Ownership Certificates for Tax Purposes ...................... 20
2.13 Proxies ...................................................... 20
2.14 Communications Relating to Fund
Portfolio Securities ......................................... 20
2.15 Reports to Fund by Independent Public
Accountants .................................................. 21
3. Duties of the Custodian with Respect to Property of
the Fund Held Outside of the United States .......................... 22
3.1 Appointment of Foreign Sub-Custodians ........................ 22
3.2 Assets to be Held ............................................ 22
3.3 Foreign Securities Depositories .............................. 23
3.4 Agreements with Foreign Banking Institutions ................. 23
3.5 Access of Independent Accountants of the Fund ................ 24
3.6 Reports by Custodian ......................................... 24
3.7 Transactions in Foreign Custody Account ...................... 25
3.8 Liability of Foreign Sub-Custodians .......................... 25
3.9 Liability of Custodian ....................................... 26
3.10 Reimbursement for Advances ................................... 27
3.11 Monitoring Responsibilities .................................. 28
3.12 Branches of U.S. Banks ....................................... 28
3.13 Tax Law ...................................................... 29
4. Payments for Repurchases or Redemptions and Sales
of Shares of the Fund ............................................... 30
5. Proper Instructions ................................................. 31
6. Actions Permitted Without Express Authority ......................... 31
<PAGE>
7. Evidence of Authority ............................................... 32
8. Duties of Custodian with Respect to the Books of
Account and Calculations of Net Asset Value and
Net Income 33
9. Records ............................................................. 33
10. Opinion of Fund's Independent Accountant ............................ 34
11. Compensation of Custodian ........................................... 34
12. Responsibility of Custodian ......................................... 34
13. Effective Period, Termination and Amendment ......................... 36
14. Successor Custodian ................................................. 38
15. Interpretive and Additional Provisions .............................. 39
16. Massachusetts Law to Apply .......................................... 40
17. Prior Contracts ..................................................... 40
18. Shareholder Communications Election ................................. 40
<PAGE>
CUSTODIAN CONTRACT
This Contract between Lincoln National Capital Appreciation Fund, Inc., a
corporation organized and existing under the laws of Maryland, having its
principal place of business at 1300 South Clinton Street, Fort Wayne, Indiana,
hereinafter called the "Fund", and State Street Bank and Trust Company, a
Massachusetts trust company, having its principal place of business at 225
Franklin Street, Boston, Massachusetts, 02110, hereinafter called the
"Custodian",
WITNESSETH: That in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
The Fund hereby employs the Custodian as the custodian of its assets,
including securities it desires to be held in places within the United States
("domestic securities") and securities it desires to be held outside the United
States ("foreign securities") pursuant to the provisions of the Articles of
Incorporation. The Fund agrees to deliver to the Custodian all securities and
cash owned by it, and all payments of income, payments of principal or capital
distributions received by it with respect to all securities owned by the Fund
from time to time, and the cash consideration received by it for such new or
treasury shares of capital stock, $.0l par value, ("Shares") of the Fund as may
be issued or sold from time to time. The Custodian shall not be responsible for
any property of the Fund held or received by the Fund and not delivered to the
Custodian.
<PAGE>
Upon receipt of "Proper Instructions" (within the meaning of Article 5),
the Custodian shall from time to time employ one or more sub-custodians located
in the United States, but only in accordance with an applicable vote by the
Board of Directors of the Fund, and provided that the Custodian shall have no
more or less responsibility or liability to the Fund on account of any actions
or omissions of any sub-custodian so employed than any such sub-custodian has
to the Custodian. The Custodian may employ as sub-custodians for the Fund's
securities and other assets the foreign banking institutions and foreign
securities depositories designated in Schedule "A" hereto but only in accordance
with the provisions of Article 3.
2. Duties of the Custodian with Respect to Property of the Fund Held By the
Custodian in the United States
2.1 Holding Securities. The Custodian shall hold and physically segregate for
the account of the Fund all non-cash property, to be held by it in the
United States, including all domestic securities owned by the Fund, other
than (a) securities which are maintained pursuant to Section 2.10 in a
clearing agency which acts as a securities depository or in a book-entry
system authorized by the U.S. Department of the Treasury, collectively
referred to herein as "Securities System" and (b) commercial paper of an
issuer for which State Street Bank and Trust Company acts as issuing and
paying agent ("Direct Paper") which is deposited and/or maintained in the
Direct Paper System of the Custodian pursuant to Section 2.10A.
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<PAGE>
2.2 Delivery of Securities. The Custodian shall release and deliver domestic
securities owned by the Fund held by the Custodian or in a Securities
System account of the Custodian or in the Custodian's Direct Paper
book-entry system account ("Direct Paper System Account") only upon
receipt of Proper Instructions, which may be continuing instructions when
deemed appropriate by the parties, and only in the following cases:
1) Upon sale of such securities for the account of the Fund and
receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Fund;
3) In the case of a sale effected through a Securities System, in
accordance with the provisions of Section 2.10 hereof;
4) To the depository agent in connection with tender or other
similar offers for portfolio securities of the Fund;
5) To the issuer thereof or its agent when such securities are
called, redeemed, retired or otherwise become payable;
provided that, in any such case, the cash or other
consideration is to be delivered to the Custodian;
6) To the issuer thereof, or its agent, for transfer into the
name of the Fund or into
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<PAGE>
the name of any nominee or nominees of the Custodian or into
the name or nominee name of any agent appointed pursuant to
Section 2.9 or into the name or nominee name of any
sub-custodian appointed pursuant to Article 1; or for exchange
for a different number of bonds, certificates or other
evidence representing the same aggregate face amount or number
of units; provided that, in any such case, the new securities
are to be delivered to the Custodian;
7) Upon the sale of such securities for the account of the Fund,
to the broker or its clearing agent, against a receipt, for
examination in accordance with "street delivery" custom;
provided that in any such case, the Custodian shall have no
responsibility or liability for any loss arising from the
delivery of such securities prior to receiving payment for
such securities except as may arise from the Custodian's own
negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or
readjustment of the securities of the issuer
-4-
<PAGE>
of such securities, or pursuant to provisions for conversion
contained in such securities, or pursuant to any deposit
agreement; provided that, in any such case, the new securities
and cash, if any, are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities; provided that,
in any such case, the new securities and cash, if any, are to
be delivered to the Custodian;
10) For delivery in connection with any loans of securities made
by the Fund, but only against receipt of adequate collateral
as agreed upon from time to time by the Custodian and the
Fund, which may be in the form of cash or obligations issued
by the United States government, its agencies or
instrumentalities, except that in connection with any loans
for which collateral is to be credited to the Custodian's
account in the book-entry system authorized by the U.S.
Department of the Treasury, the Custodian will not be held
liable or responsible for
-5-
<PAGE>
the delivery of securities owned by the Fund prior to the
receipt of such collateral;
11) For delivery as security in connection with any borrowings by
the Fund requiring a pledge of assets by the Fund, but only
against receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian and a broker-dealer
registered under the Securities Exchange Act of 1934 (the
"Exchange Act") and a member of The National Association of
Securities Dealers, Inc. ("NASD"), relating to compliance with
the rules of The Options Clearing Corporation and of any
registered national securities exchange, or of any similar
organization or organizations, regarding escrow or other
arrangements in connection with transactions by the Fund;
13) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian, and a Futures
Commission Merchant registered under the Commodity Exchange
Act, relating to compliance with the rules of the Commodity
Futures Trading Commission and/or any Contract Market, or any
similar organization or organizations,
-6-
<PAGE>
regarding account deposits in connection with transactions by
the Fund;
14) Upon receipt of instructions from the transfer agent
("Transfer Agent") for the Fund, for delivery to such Transfer
Agent or to the holders of shares in connection with
distributions in kind, as may be described from time to time
in the Fund's currently effective prospectus and statement of
additional information ("prospectus"), in satisfaction of
requests by holders of Shares for repurchase or redemption;
and
15) For any other proper corporate purpose, but only upon receipt
of, in addition to Proper Instructions, a certified copy of a
resolution of the Board of Directors or of the Executive
Committee signed by an officer of the Fund and certified by
the Secretary or an Assistant Secretary, specifying the
securities to be delivered, setting forth the purpose for
which such delivery is to be made, declaring such purpose to
be a proper corporate purpose, and naming the person or
persons to whom delivery of such securities shall be made.
2.3 Registration of Securities. Domestic securities held by the Custodian
(other than bearer securities) shall be
-7-
<PAGE>
registered in the name of the Fund or in the name of any nominee of the
Fund or of any nominee of the Custodian which nominee shall be assigned
exclusively to the Fund, unless the Fund has authorized in writing the
appointment of a nominee to be used in common with other registered
investment companies having the same investment adviser as the Fund, or in
the name or nominee name of any agent appointed pursuant to Section 2.9 or
in the name or nominee name of any sub-custodian appointed pursuant to
Article 1. All securities accepted by the Custodian on behalf of the Fund
under the terms of this Contract shall be in "street name" or other good
delivery form. If, however, the Fund directs the Custodian to maintain
securities in "street name", the Custodian shall utilize its best efforts
only to timely collect income due the Fund on such securities and to
notify the Fund on a best efforts basis only of relevant corporate actions
including, without limitation, pendency of calls, maturities, tender or
exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
account or accounts in the United States in the name of the Fund, subject
only to draft or order by the Custodian acting pursuant to the terms of
this Contract, and shall hold in such account or accounts, subject to the
provisions hereof, all cash received by it from or for the account of the
Fund, other than cash maintained by the Fund in a bank account established
and
-8-
<PAGE>
used in accordance with Rule 17f-3 under the Investment Company Act of
1940. Funds held by the Custodian for the Fund may be deposited by it to
its credit as Custodian in the Banking Department of the Custodian or in
such other banks or trust companies as it may in its discretion deem
necessary or desirable; provided, however, that every such bank or trust
company shall be qualified to act as a custodian under the Investment
Company Act of 1940 and that each such bank or trust company and the funds
to be deposited with each such bank or trust company shall be approved by
vote of a majority of the Board of Directors of the Fund. Such funds shall
be deposited by the Custodian in its capacity as Custodian and shall be
withdrawable by the Custodian only in that capacity.
2.5 Availability of Federal Funds. Upon mutual agreement between the Fund and
the Custodian, the Custodian shall, upon the receipt of Proper
Instructions, make federal funds available to the Fund as of specified
times agreed upon from time to time by the Fund and the Custodian in the
amount of checks received in payment for Shares of the Fund which are
deposited into the Fund's account.
2.6 Collection of Income. Subject to the provisions of Section 2.3, the
Custodian shall collect on a timely basis all income and other payments
with respect to United States registered securities held hereunder to
which the Fund shall be entitled either by law or pursuant to custom in
the securities business, and shall
-9-
<PAGE>
collect on a timely basis all income and other payments with respect to
United States bearer securities if, on the date of payment by the issuer,
such securities are held by the Custodian or its agent thereof and shall
credit such income, as collected, to the Fund's custodian account. Without
limiting the generality of the foregoing, the Custodian shall detach and
present for payment all coupons and other income items requiring
presentation as and when they become due and shall collect interest when
due on securities held hereunder. Income due the Fund on United States
securities loaned pursuant to the provisions of Section 2.2 (10) shall be
the responsibility of the Fund. The Custodian will have no duty or
responsibility in connection therewith, other than to provide the Fund
with such information or data as may be necessary to assist the Fund in
arranging for the timely delivery to the Custodian of the income to which
the Fund is properly entitled.
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions, which may be
continuing instructions when deemed appropriate by the parties, the
Custodian shall pay out monies of the Fund in the following cases only:
1) Upon the purchase of domestic securities, options, futures
contracts or options on futures contracts for the account of
the Fund but only (a) against the delivery of such securities,
or evidence of title to such
-10-
<PAGE>
options, futures contracts or options on futures contracts, to
the Custodian (or any bank, banking firm or trust company
doing business in the United States or abroad which is
qualified under the Investment Company Act of 1940, as
amended, to act as a custodian and has been designated by the
Custodian as its agent for this purpose) registered in the
name of the Fund or in the name of a nominee of the Custodian
referred to in Section 2.3 hereof or in proper form for
transfer; (b) in the case of a purchase effected through a
Securities System, in accordance with the conditions set
forth in Section 2.10 hereof; (c) in the case of a purchase
involving the Direct Paper System, in accordance with the
conditions set forth in Section 2.10A; (d) in the case of
repurchase agreements entered into between the Fund and the
Custodian, or another bank, or a broker-dealer which is a
member of NASD, (i) against delivery of the securities either
in certificate form or through an entry crediting the
Custodian's account at the Federal Reserve Bank with such
securities or (ii) against delivery of the receipt evidencing
purchase by the Fund of securities owned by the Custodian
along with
-11-
<PAGE>
written evidence of the agreement by the Custodian to
repurchase such securities from the Fund or (e) for transfer
to a time deposit account of the Fund in any bank, whether
domestic or foreign; such transfer may be effected prior to
receipt of a confirmation from a broker and/or the applicable
bank pursuant to Proper Instructions from the Fund as defined
in Article 5;
2) In connection with conversion, exchange or surrender of
securities owned by the Fund as set forth in Section 2.2
hereof;
3) For the redemption or repurchase of Shares issued by the Fund
as set forth in Article 4 hereof;
4) For the payment of any expense or liability incurred by the
Fund, including but not limited to the following payments for
the account of the Fund: interest, taxes, management,
accounting, transfer agent and legal fees, and operating
expenses of the Fund whether or not such expenses are to be in
whole or part capitalized or treated as deferred expenses;
5) For the payment of any dividends declared pursuant to the
governing documents of the Fund;
-12-
<PAGE>
6) For payment of the amount of dividends received in respect of
securities sold short;
7) For any other proper purpose, but only upon receipt of, in
addition to Proper Instructions, a certified copy of a
resolution of the Board of Directors or of the Executive
Committee of the Fund signed by an officer of the Fund and
certified by its Secretary or an Assistant Secretary,
specifying the amount of such payment, setting forth the
purpose for which such payment is to be made, declaring such
purpose to be a proper purpose, and naming the person or
persons to whom such payment is to be made.
2.8 Liability for Payment in Advance of Receipt of Securities Purchased.
Except as specifically stated otherwise in this Contract, in any and every
case where payment for purchase of domestic securities for the account of
the Fund is made by the Custodian in advance of receipt of the securities
purchased in the absence of specific written instructions from the Fund to
so pay in advance, the Custodian shall be absolutely liable to the Fund
for such securities to the same extent as if the securities had been
received by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or trust
company which is itself
-13-
<PAGE>
qualified under the Investment Company Act of 1940, as amended, to act as
a custodian, as its agent to carry out such of the provisions of this
Article 2 as the Custodian may from time to time direct; provided,
however, that the appointment of any agent shall not relieve the Custodian
of its responsibilities or liabilities hereunder.
2.10 Deposit of Securities in Securities Systems. The Custodian may deposit
and/or maintain domestic securities owned by the Fund in a clearing agency
registered with the Securities and Exchange Commission under Section 17A
of the Securities Exchange Act of 1934, which acts as a securities
depository, or in the book-entry system authorized by the U.S. Department
of the Treasury and certain federal agencies, collectively referred to
herein as "Securities System" in accordance with applicable Federal
Reserve Board and Securities and Exchange Commission rules and
regulations, if any, and subject to the following provisions:
1) The Custodian may keep domestic securities of the Fund in a
Securities System provided that such securities are
represented in an account ("Account") of the Custodian in the
Securities System which shall not include any assets of the
Custodian other than assets held as a fiduciary, custodian or
otherwise for customers;
-14-
<PAGE>
2) The records of the Custodian with respect to domestic
securities of the Fund which are maintained in a Securities
System shall identify by book-entry those securities belonging
to the Fund;
3) The Custodian shall pay for domestic securities purchased for
the account of the Fund upon (i) receipt of advice from the
Securities System that such securities have been transferred
to the Account, and (ii) the making of an entry on the records
of the Custodian to reflect such payment and transfer for the
account of the Fund. The Custodian shall transfer domestic
securities sold for the account of the Fund upon (i) receipt
of advice from the Securities System that payment for such
securities has been transferred to the Account, and (ii) the
making of an entry on the records of the Custodian to reflect
such transfer and payment for the account of the Fund. Copies
of all advices from the Securities System of transfers of
domestic securities for the account of the Fund shall identify
the Fund, be maintained for the Fund by the Custodian and be
provided to the Fund at its request. Upon request, the
Custodian shall furnish the
-15-
<PAGE>
Fund confirmation of each transfer to or from the account of
the Fund in the form of a written advice or notice and shall
furnish to the Fund copies of daily transaction sheets
reflecting each day's transactions in the Securities System
for the account of the Fund.
4) The Custodian shall provide the Fund with any report obtained
by the Custodian on the Securities System's accounting system,
internal accounting control and procedures for safeguarding
domestic securities deposited in the Securities System;
5) The Custodian shall have received the initial or annual
certificate, as the case may be, required by Article 13
hereof;
6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for any loss or damage
to the Fund resulting from use of the Securities System by
reason of any negligence, misfeasance or misconduct of the
Custodian or any of its agents or of any of its or their
employees or from failure of the Custodian or any such agent
to enforce effectively such rights as it may have against the
Securities System; at the election of the Fund, it shall be
entitled to be subrogated to the rights of
-16-
<PAGE>
the Custodian with respect to any claim against the Securities
System or any other person which the Custodian may have as a
consequence of any such loss or damage if and to the extent
that the Fund has not been made whole for any such loss or
damage.
2.10A Fund Assets Held in the Custodian's Direct Paper System
The Custodian may deposit and/or maintain securities owned by the Fund in
the Direct Paper System of the Custodian subject to the following
provisions:
1) No transaction relating to securities in the Direct Paper
System will be effected in the absence of Proper Instructions;
2) The Custodian may keep securities of the Fund in the Direct
Paper System only if such securities are represented in an
account ("Account") of the Custodian in the Direct Paper
System which shall not include any assets of the Custodian
other than assets held as a fiduciary, custodian or otherwise
for customers;
3) The records of the Custodian with respect to securities of the
Fund which are maintained in the Direct Paper System shall
identify by book-entry those securities belonging to the Fund;
-17-
<PAGE>
4) The Custodian shall pay for securities purchased for the
account of the Fund upon the making of an entry on the records
of the Custodian to reflect such payment and transfer of
securities to the account of the Fund. The Custodian shall
transfer securities sold for the account of the Fund upon the
making of an entry on the records of the Custodian to reflect
such transfer and receipt of payment for the account of the
Fund;
5) The Custodian shall furnish the Fund confirmation of each
transfer to or from the account of the Fund, in the form of a
written advice or notice, of Direct Paper on the next business
day following such transfer and shall furnish to the Fund
copies of daily transaction sheets reflecting each day's
transaction in the Securities System for the account of the
Fund;
6) The Custodian shall provide the Fund with any report on its
system of internal accounting control as the Fund may
reasonably request from time to time;
2.11 Segregated Account. The Custodian shall upon receipt of Proper
Instructions establish and maintain a segregated account or accounts for
and on behalf of the Fund, into
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which account or accounts may be transferred cash and/or securities,
including securities maintained in an account by the Custodian pursuant to
Section 2.10 hereof, (i) in accordance with the provisions of any
agreement among the Fund, the Custodian and a broker-dealer registered
under the Exchange Act and a member of the NASD (or any futures commission
merchant registered under the Commodity Exchange Act), relating to
compliance with the rules of The Options Clearing Corporation and of any
registered national securities exchange (or the Commodity Futures Trading
Commission or any registered contract market), or of any similar
organization or organizations, regarding escrow or other arrangements in
connection with transactions by the Fund, (ii) for purposes of segregating
cash or government securities in connection with options purchased, sold
or written by the Fund or commodity futures contracts or options thereon
purchased or sold by the Fund, (iii) for the purposes of compliance by the
Fund with the procedures required by Investment Company Act Release No.
10666; or any subsequent release or releases of the Securities and
Exchange Commission relating to the maintenance of segregated accounts by
registered investment companies and (iv) for other proper corporate
purposes, but only in the case of clause (iv), upon receipt of, in
addition to Proper Instructions, a certified copy of a resolution of the
Board of Directors or of the Executive Committee signed by an officer of
the
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<PAGE>
Fund and certified by the Secretary or an Assistant Secretary, setting
forth the purpose or purposes of such segregated account and declaring
such purposes to be proper corporate purposes.
2.12 Ownership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and state
tax purposes in connection with receipt of income or other payments with
respect to domestic securities of the Fund held by it and in connection
with transfers of such securities.
2.13 Proxies. The Custodian shall, with respect to the domestic securities held
hereunder, cause to be promptly executed by the registered holder of such
securities, if the securities are registered otherwise than in the name of
the Fund or a nominee of the Fund, all proxies, without indication of the
manner in which such proxies. are to be voted, and shall promptly deliver
to the Fund such proxies, all proxy soliciting materials and all notices
relating to such securities.
2.14 Communications Relating to Fund Portfolio Securities
Subject to the provisions of Section 2.3, the Custodian shall transmit
promptly to the Fund all written information (including, without
limitation, pendency of calls and maturities of domestic securities and
expirations of rights in connection therewith and notices of exercise of
call and put options written by the Fund and the maturity of futures
contracts purchased or sold
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<PAGE>
by the Fund) received by the Custodian from issuers of the domestic
securities being held for the Fund. With respect to tender or exchange
offers, the Custodian shall transmit promptly to the Fund all written
information received by the Custodian from issuers of the domestic
securities whose tender or exchange is sought and from the party (or his
agents) making the tender or exchange offer. If the Fund desires to take
action with respect to any tender offer, exchange offer or any other
similar transaction, the Fund shall notify the Custodian at least three
business days prior to the date on which the Custodian is to take such
action.
2.15 Reports to Fund by Independent Public Accountants
The Custodian shall provide the Fund, at such times as the Fund may
reasonably require, with reports by independent public accountants on the
accounting system, internal accounting control and procedures for
safeguarding securities, futures contracts and options on futures
contracts, including domestic securities deposited and/or maintained in a
Securities System, relating to the services provided by the Custodian
under this Contract; such reports shall be of sufficient scope and in
sufficient detail, as may reasonably be required by the Fund to provide
reasonable assurance that any material inadequacies would be disclosed by
such examination, and, if there are no such inadequacies, the reports
shall so state.
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<PAGE>
3. Duties of the Custodian with Respect to Property of the Fund Held Outside
of the United States
3.1 Appointment of Foreign Sub-Custodians
The Fund hereby authorizes and instructs the Custodian to employ as
sub-custodians for the Fund's securities and other assets maintained
outside the United States the foreign banking institutions and foreign
securities depositories designated on Schedule A hereto ("foreign
sub-custodians"). Upon receipt of "Proper Instructions", as defined in
Section 5 of this Contract, together with a certified resolution of the
Fund's Board of Directors, the Custodian and the Fund may agree to amend
Schedule A hereto from time to time to designate additional foreign
banking institutions and foreign securities depositories to act as
sub-custodian. Upon receipt of Proper Instructions, the Fund may instruct
the Custodian to cease the employment of any one or more such
sub-custodians for maintaining custody of the Fund's assets.
3.2 Assets to be Held. The Custodian shall limit the securities and other
assets maintained in the custody of the foreign sub-custodians to: (a)
"foreign securities", as defined in paragraph (c)(l) of Rule 17f-5 under
the Investment Company Act of 1940, and (b) cash and cash equivalents in
such amounts as the Custodian or the Fund may determine to be reasonably
necessary to effect the Fund's foreign securities transactions. The
Custodian
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<PAGE>
shall identify on its books as belonging to the Fund, the foreign
securities of the Fund held by each foreign sub-custodian.
3.3 Foreign Securities Depositories. Except as may otherwise be agreed upon in
writing by the Custodian and the Fund, assets of the Fund shall be
maintained in foreign securities depositories only through arrangements
implemented by the foreign banking institutions serving as sub-custodians
pursuant to the terms hereof. Where possible, such arrangements shall
include entry into agreements containing the provisions set forth in
Section 3.4 hereof.
3.4 Agreements with Foreign Banking Institutions. Each agreement with a
foreign banking institution shall be substantially in the form set forth
in Exhibit 1 hereto and shall provide that: (a) the Fund's assets will not
be subject to any right, charge, security interest, lien or claim of any
kind in favor of the foreign banking institution or its creditors or
agent, except a claim of payment for their safe custody or administration;
(b) beneficial ownership of the Fund's assets will be freely transferable
without the payment of money or value other than for custody or
administration; (c) adequate records will be maintained identifying the
assets as belonging to the Fund; (d) officers of or auditors employed by,
or other representatives of the Custodian, including to the extent
permitted under applicable law the independent
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<PAGE>
public accountants for the Fund, will be given access to the books and
records of the foreign banking institution relating to its actions under
its agreement with the Custodian; and (e) assets of the Fund held by the
foreign sub-custodian will be subject only to the instructions of the
Custodian or its agents.
3.5 Access of Independent Accountants of the Fund. Upon request of the Fund,
the Custodian will use its best efforts to arrange for the independent
accountants of the Fund to be afforded access to the books and records of
any foreign banking institution employed as a foreign sub-custodian
insofar as such books and records relate to the performance of such
foreign banking institution under its agreement with the Custodian.
3.6 Reports by Custodian. The Custodian will supply to the Fund from time to
time, as mutually agreed upon, statements in respect of the securities and
other assets of the Fund held by foreign sub-custodians, including but not
limited to an identification of entities having possession of the Fund's
securities and other assets and advices or notifications of any transfers
of securities to or from each custodial account maintained by a foreign
banking institution for the Custodian on behalf of the Fund indicating, as
to securities acquired for the Fund, the identity of the entity having
physical possession of such securities.
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<PAGE>
3.7 Transactions in Foreign Custody Account
(a) Except as otherwise provided in paragraph (b) of this Section 3.7, the
provision of Sections 2.2 and 2.7 of this Contract shall apply, mutatis
mutandis, to the foreign securities of the Fund held outside the United
States by foreign sub-custodians.
(b) Notwithstanding any provision of this Contract to the contrary,
settlement and payment for securities received for the account of the Fund
and delivery of securities maintained for the account of the Fund may be
effected in accordance with the customary established securities trading
or securities processing practices and procedures in the jurisdiction or
market in which the transaction occurs, including, without limitation,
delivering securities to the purchaser thereof or to a dealer therefor (or
an agent for such purchaser or dealer) against a receipt with the
expectation of receiving later payment for such securities from such
purchaser or dealer,
(c) Securities maintained in the custody of a foreign sub-custodian may be
maintained in the name of such entity's nominee to the same extent as set
forth in Section 2.3 of this Contract, and the Fund agrees to hold any
such nominee harmless from any liability as a holder of record of such
securities.
3.8 Liability of Foreign Sub-Custodians. Each agreement pursuant to which the
Custodian employs a foreign banking institution as a foreign sub-custodian
shall require the
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institution to exercise reasonable care in the performance of its duties
and to indemnify, and hold harmless, the Custodian and each Fund from and
against any loss, damage, cost, expense, liability or claim arising out of
or in connection with the institution's performance of such obligations.
At the election of the Fund, it shall be entitled to be subrogated to the
rights of the Custodian with respect to any claims against a foreign
banking institution as a consequence of any such loss, damage, cost,
expense, liability or claim if and to the extent that the Fund has not
been made whole for any such loss, damage, cost, expense, liability or
claim.
3.9 Liability of Custodian. The Custodian shall be liable for the acts or
omissions of a foreign banking institution to the same extent as set forth
with respect to sub-custodians generally in this Contract and, regardless
of whether assets are maintained in the custody of a foreign banking
institution, a foreign securities depository or a branch of a U.S. bank as
contemplated by paragraph 3.12 hereof, the Custodian shall not be liable
for any loss, damage, cost, expense, liability or claim resulting from
nationalization, expropriation, currency restrictions, or acts of war or
terrorism or any loss where the sub-custodian has otherwise exercised
reasonable care. Notwithstanding the foregoing provisions of this
paragraph 3.9, in delegating custody duties to State Street London Ltd.,
the Custodian
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shall not be relieved of any responsibility to the Fund for any loss due
to such delegation, except such loss as may result from (a) political risk
(including, but not limited to, exchange control restrictions,
confiscation, expropriation, nationalization, insurrection, civil strife
or armed hostilities) or (b) other losses (excluding a bankruptcy or
insolvency of State Street London Ltd. not caused by political risk) due
to Acts of God, nuclear incident or other losses under circumstances where
the Custodian and State Street London Ltd. have exercised reasonable care.
3.10 Reimbursement for Advances. If the Fund requires the Custodian to advance
cash or securities for any purpose including the purchase or sale of
foreign exchange or of contracts for foreign exchange, or in the event
that the Custodian or its nominee shall incur or be assessed any taxes,
charges, expenses, assessments, claims or liabilities in connection with
the performance of this Contract, except such as may arise from its or its
nominee's own negligent action, negligent failure to act or willful
misconduct, any property at any time held for. the account of the Fund
shall be security therefor and should the Fund fail to repay the Custodian
promptly, the Custodian shall be entitled to utilize available cash and to
dispose of the Fund assets to the extent necessary to obtain
reimbursement.
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3.11 Monitoring Responsibilities. The Custodian shall furnish annually to the
Fund, during the month of June, information concerning the foreign
sub-custodians employed by the Custodian. Such information shall be
similar in kind and scope to that furnished to the Fund in connection with
the initial approval of this Contract. In addition, the Custodian will
promptly inform the Fund in the event that the Custodian learns of a
material adverse change in the financial condition of a foreign
sub-custodian or any material loss of the assets of the Fund or in the
case of any foreign sub-custodian not the subject of an exemptive order
from the Securities and Exchange Commission is notified by such foreign
sub-custodian that there appears to be a substantial likelihood that its
shareholders' equity will decline below $200 million (U.S. dollars or the
equivalent thereof) or that its shareholders' equity has declined below
$200 million (in each case computed in accordance with generally accepted
U.S. accounting principles).
3.12 Branches of U.S. Banks
(a) Except as otherwise set forth in this Contract, the provisions hereof
shall not apply where the custody of the Fund assets are maintained in a
foreign branch of a banking institution which is a "bank" as defined by
Section 2(a)(5) of the Investment Company Act of 1940 meeting the
qualification set forth in Section 26(a) of said Act. The appointment of
any such branch as a
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sub-custodian shall be governed by paragraph 1 of this Contract.
(b) Cash held for the Fund in the United Kingdom shall be maintained in an
interest bearing account established for the Fund with the Custodian's
London branch, which account shall be subject to the direction of the
Custodian, State Street London Ltd. or both.
3.13 Tax Law
The Custodian shall have no responsibility or liability for any
obligations now or hereafter imposed on the Fund or the Custodian as
custodian of the Fund by the tax law of the United States of America or
any state or political subdivision thereof. It shall be the responsibility
of the Fund to notify the Custodian of the obligations imposed on the Fund
or the Custodian as custodian of the Fund by the tax law of jurisdictions
other than those mentioned in the above sentence, including responsibility
for withholding and other taxes, assessments or other governmental
charges, certifications and governmental reporting. The sole
responsibility of the Custodian with regard to such tax law shall be to
use reasonable efforts to assist the Fund with respect to any claim for
exemption or refund under the tax law of jurisdictions for which the Fund
has provided such information.
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<PAGE>
4. Payments for Repurchases or Redemptions and Sales of Shares of the Fund
From such funds as may be available for the purpose but subject to the
limitations of the Articles of Incorporation and any applicable votes of the
Board of Directors of the Fund pursuant thereto, the Custodian shall, upon
receipt of instructions from the Transfer Agent, make funds available for
payment to holders of Shares who have delivered to the Transfer Agent a request
for redemption or repurchase of their Shares. In connection with the redemption
or repurchase of Shares of the Fund, the Custodian is authorized upon receipt of
instructions from the Transfer Agent to wire funds to or through a commercial
bank designated by the redeeming shareholders. In connection with the redemption
or repurchase of Shares of the Fund, the Custodian shall honor checks drawn on
the Custodian by a holder of Shares, which checks have been furnished by the
Fund to the. holder of Shares, when presented to the Custodian in accordance
with such procedures and controls as are mutually agreed upon from time to time
between the Fund and the Custodian.
The Custodian shall receive from the distributor for the Fund's Shares or
from the Transfer Agent of the Fund and deposit into the Fund's account such
payments as are received for Shares of the Fund issued or sold from time to time
by the Fund. The Custodian will provide timely notification to the Fund and the
Transfer Agent of any receipt by it of payments for Shares of the Fund.
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<PAGE>
5. Proper Instructions
Proper Instructions as used herein means a writing signed or initialled by
one or more person or persons as the Board of Directors shall have from time to
time authorized. Each such writing shall set forth the specific transaction or
type of transaction involved, including a specific statement of the purpose for
which such action is requested. Oral instructions will be considered Proper
Instructions if the Custodian reasonably believes them to have been given by a
person authorized to give such instructions with respect to the transaction
involved. The Fund shall cause all oral instructions to be confirmed in writing.
Upon receipt of a certificate of the Secretary or an Assistant Secretary as to
the authorization by the Board of Directors of the Fund accompanied by a
detailed description of procedures approved by the Board of Directors, Proper
Instructions may include communications effected directly between
electro-mechanical or electronic devices provided that the Board of Directors
and the Custodian are satisfied that such procedures afford adequate safeguards
for the Fund's assets. For purposes of this Section, Proper Instructions shall
include instructions received by the Custodian pursuant to any three-party
agreement which requires a segregated asset account in accordance with Section
2.11.
6. Actions Permitted without Express Authority
The Custodian may in its discretion, without express authority from the
Fund:
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<PAGE>
1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under this Contract,
provided that all such payments shall be accounted for to the Fund;
2) surrender securities in temporary form for securities in definitive
form;
3) endorse for collection, in the name of the Fund, checks, drafts and
other negotiable instruments; and
4) in general, attend to all non-discretionary details in connection with
the sale, exchange, substitution, purchase, transfer and other dealings with the
securities and property of the Fund except as otherwise directed by the Board of
Directors of the Fund.
7. Evidence of Authority
The Custodian shall be protected in acting upon any instructions, notice,
request, consent, certificate or other instrument or paper believed by it to be
genuine and to have been properly executed by or on behalf of the Fund. The
Custodian may receive and accept a certified copy of a vote of the Board of
Directors of the Fund as conclusive evidence (a) of the authority of any person
to act in accordance with such vote or (b) of any determination or of any action
by the Board of Directors pursuant to the Articles of Incorporation as described
in such vote, and such vote may be considered as in full force and effect until
receipt by the Custodian of written notice to the contrary.
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<PAGE>
8. Duties of Custodian with Respect to the Books of Account and Calculation
of Net Asset Value and Net Income
The Custodian shall cooperate with and supply necessary information to the
entity or entities appointed by the Board of Directors of the Fund to keep the
books of account of the Fund and/or compute the net asset value per share of the
outstanding shares of the Fund or, if directed in writing to do so by the Fund,
shall itself keep such books of account and/or compute such net asset value per
share. If so directed, the Custodian shall also calculate daily the net income
of the Fund as described in the Fund's currently effective prospectus and shall
advise the Fund and the Transfer Agent daily of the total amounts of such net
income and, if instructed in writing by an officer of the Fund to do so, shall
advise the Transfer Agent periodically of the division of such net income among
its various components. The calculations of the net asset value per share and
the daily income of the Fund shall be made at the time or times described from
time to time in the Fund's currently effective prospectus.
9. Records
The Custodian shall create and maintain all records relating to its
activities and obligations under this Contract in such manner as will meet the
obligations of the Fund under the Investment Company Act of 1940, with
particular attention to Section 31 thereof and Rules 31a-1 and 31a-2 thereunder.
All such records shall be the property of the Fund and shall at all times during
the regular business hours of the Custodian be open for inspection by duly
authorized officers, employees or agents
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<PAGE>
of the Fund and employees and agents of the Securities and Exchange Commission.
The Custodian shall, at the Fund's request, supply the Fund with a tabulation of
securities owned by the Fund and held by the Custodian and shall, when requested
to do so by the Fund and for such compensation as shall be agreed upon between
the Fund and the Custodian, include certificate numbers in such tabulations.
10. Opinion of Fund's Independent Accountant
The Custodian shall take all reasonable action, as the Fund may from time
to time request, to obtain from year to year favorable opinions from the Fund's
independent accountants with respect to its activities hereunder in connection
with the preparation of the Fund's Form N-1A, and Form N-SAR or other annual
reports to the Securities and Exchange Commission and with respect to any other
requirements of such Commission.
11. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between the
Fund and the Custodian.
12. Responsibility of Custodian
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party
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<PAGE>
or parties, including any futures commission merchant acting pursuant to the
terms of a three-party futures or options agreement. The Custodian shall be
held to the exercise of reasonable care in carrying out the provisions of this
Contract, but shall be kept indemnified by and shall be without liability to the
Fund for any action taken or omitted by it in good faith without negligence. It
shall be entitled to rely on and may act upon advice of counsel (who may be
counsel for the Fund) on all matters, and shall be without liability for any
action reasonably taken or omitted pursuant to such advice.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution appointed pursuant to the provisions of Article 3 to the
same extent as set forth in Article 1 hereof with respect to sub-custodians
located in the United States (except as specifically provided in Article 3.9)
and, regardless of whether assets are maintained in the custody of a foreign
banking institution, a foreign securities depository or a branch of a U.S. bank
as contemplated by paragraph 3.12 hereof, the Custodian shall not be liable for
any loss, damage, cost, expense, liability or claim resulting from, or caused
by, the direction of or authorization by the Fund to maintain custody or any
securities or cash of the Fund in a foreign country including, but not limited
to, losses resulting from nationalization, expropriation, currency
restrictions, or acts of war or terrorism.
If the Fund requires the Custodian to take any action with respect to
securities, which action involves the payment of
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<PAGE>
money or which action may, in the opinion of the Custodian, result in the
Custodian or its nominee assigned to the Fund being liable for the payment of
money or incurring liability of some other form, the Fund, as a prerequisite to
requiring the Custodian to take such action, shall provide indemnity to the
Custodian in an amount and form satisfactory to it.
If the Fund requires the Custodian, its affiliates, subsidiaries or
agents, to advance cash or securities for any purpose (including but not limited
to securities settlements, foreign exchange contracts and assumed settlement) or
in the event that the Custodian or its nominee shall incur or be assessed any
taxes, charges, expenses, assessments, claims or liabilities in connection with
the performance of this Contract, except such as may arise from its or its
nominee's own negligent action, negligent failure to act or willful misconduct,
any property at any time held for the account of the Fund shall be security
therefor and should the Fund fail to repay the Custodian promptly, the
Custodian shall be entitled to utilize available cash and to dispose of the Fund
assets to the extent necessary to obtain reimbursement.
13. Effective Period. Termination and Amendment
This Contract shall become effective as of its execution, shall continue
in full force and effect until terminated as hereinafter provided, may be
amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not
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<PAGE>
sooner than thirty (30) days after the date of such delivery or mailing;
provided, however that the Custodian shall not act under Section 2.10 hereof in
the absence of receipt of an initial certificate of the Secretary or an
Assistant Secretary that the Board of Directors of the Fund has approved the
initial use of a particular Securities System and the receipt of an annual
certificate of the Secretary or an Assistant Secretary that the Board of
Directors has reviewed the use by the Fund of such Securities System, as
required in each case by Rule 17f-4 under the Investment Company Act of 1940,
as amended and that the Custodian shall not act under Section 2.10A hereof in
the absence of receipt of an initial certificate of the Secretary or an
Assistant Secretary that the Board of Directors has approved the initial use of
the Direct Paper System and the receipt of an annual certificate of the
Secretary or an Assistant Secretary that the Board of Directors has reviewed the
use by the Fund of the Direct Paper System; provided further, however, that the
Fund shall not amend or terminate this Contract in contravention of any
applicable federal or state regulations, or any provision of the Articles of
Incorporation, and further provided, that the Fund may at any time by action of
its Board of Directors (i) substitute another bank or trust company for the
Custodian by giving notice as described above to the Custodian, or (ii)
immediately terminate this Contract in the event of the appointment of a
conservator or receiver for the Custodian by the Comptroller of the Currency or
upon the happening of a like event at the direction of an appropriate regulatory
agency or court of competent jurisdiction.
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<PAGE>
Upon termination of the Contract, the Fund shall pay to the Custodian such
compensation as may be due as of the date of such termination and shall likewise
reimburse the Custodian for its costs, expenses and disbursements.
14. Successor Custodian
If a successor custodian shall be appointed by the Board of Directors of
the Fund, the Custodian shall, upon termination, deliver to such successor
custodian at the office of the Custodian, duly endorsed and in the form for
transfer, all securities then held by it hereunder and shall transfer to an
account of the successor custodian all of the Fund's securities held in a
Securities System.
If no such successor custodian shall be appointed, the Custodian shall, in
like manner, upon receipt of a certified copy of a vote of the Board of
Directors of the Fund, deliver at the office of the Custodian and transfer such
securities, funds and other properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Directors shall have been delivered to
the Custodian on or before the date when such termination shall become
effective, then the Custodian shall have the right to deliver to a bank or trust
company, which is a "bank" as defined in the Investment Company Act of 1940,
doing business in Boston, Massachusetts, of its own selection, having an
aggregate capital, surplus, and undivided profits, as shown by its last
published report, of not less than $25,000,000, all securities, funds and other
properties held by
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<PAGE>
the Custodian and all instruments held by the Custodian relative thereto and all
other property held by it under this Contract and to transfer to an account of
such successor custodian all of the Fund's securities held in any Securities
System. Thereafter, such bank or trust company shall be the successor of the
Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Directors to appoint a successor custodian, the Custodian shall be
entitled to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other properties and
the provisions of this Contract relating to the duties and obligations of the
Custodian shall remain in full force and effect.
15. Interpretive and Additional Provisions
In connection with the operation of this Contract, the Custodian and the
Fund may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint opinion be
consistent with the general tenor of this Contract. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall be
annexed hereto, provided that no such interpretive or additional provisions
shall contravene any applicable federal or state regulations or any provision of
the Articles of Incorporation of the Fund. No interpretive or
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<PAGE>
additional provisions made as provided in the preceding sentence shall be deemed
to be an amendment of this Contract.
16. Massachusetts Law to Apply
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of the Commonwealth of Massachusetts.
17. Prior Contracts
This Contract supersedes and terminates, as of the date hereof, all prior
contracts between the Fund and the Custodian relating to the custody of the
Fund's assets.
18. Shareholder Communications Election
Securities and Exchange Commission Rule 14b-2 requires banks which hold
securities for the account of customers to respond to requests by issuers of
securities for the names, addresses and holdings of beneficial owners of
securities of that issuer held by the bank unless the beneficial owner has
expressly objected to disclosure of this information. In order to comply with
the rule, the Custodian needs the Fund to indicate whether it authorizes the
Custodian to provide the Fund's name, address, and share position to requesting
companies whose securities the Fund owns. If the Fund tells the Custodian "no",
the Custodian will not provide this information to requesting companies. If the
Fund tells the Custodian "yes" or does not check either "yes" or "no" below, the
Custodian is required by the rule to treat the Fund as consenting to disclosure
of this information for all securities owned by the Fund or any funds or
accounts established by the Fund. For the Fund's protection, the Rule prohibits
the
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<PAGE>
requesting company from using the Fund's name and address for any purpose other
than corporate communications. Please indicate below whether the Fund consents
or objects by checking one of the alternatives below.
YES [ ] The Custodian is authorized to release the Fund's name,
address, and share positions.
NO [ ] The Custodian is not authorized to release the Fund's name,
address, and share positions.
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the sixth day of December, 1993.
ATTEST LINCOLN NATIONAL CAPITAL APPRECIATION
FUND, INC.
/s/ C. Suzanne Womack By /s/ Robert A. Nikels
- ------------------------------ -------------------------------------
ATTEST STATE STREET BANK AND TRUST COMPANY
/s/ [ILLEGIBLE] By /s/ [ILLEGIBLE]
- ------------------------------ -------------------------------------
Assistant Secretary Executive Vice President
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<PAGE>
Schedule A
The following foreign banking institutions and foreign securities
depositories have been approved by the Board of Directors of Lincoln National
Capital Appreciation Fund, Inc. for use as sub-custodians for the Fund's
securities and other assets:
(Insert banks and securities depositories)
Certified:
- ---------------------------------
Fund's Authorized Officer
Date:____________________________
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<PAGE>
AGREEMENT TO PURCHASE SHARES
The Lincoln National Life Insurance Company ("LNL"), on its behalf and on
behalf of Lincoln National Variable Annuity Account C (the "Variable Account"),
and Lincoln National Capital Appreciation Fund, Inc. (the "Fund") hereby agree
that shares of the Fund shall be made available to serve as an underlying
investment medium for variable annuity contracts to be offered by LNL through
the Variable Account subject to the following provisions:
1. LNL represents and warrants that it is an insurance company duly
organized and existing in good standing under Indiana law and that it has
legally and validly established the Variable Account as permitted under Indiana
law and has registered the Variable Account as permitted under Indiana law and
has registered the Variable Account as a unit investment trust in accordance
with the provisions of the Investment Company Act of 1940, as amended (the
"1940 Act"), to serve as a segregated investment account for certain variable
annuity contracts (the "Contracts"). LNL further represents and warrants that
the Contracts will be registered under the Securities Act of 1933, as amended
(the "1933 Act"), and the Contracts will be issued and sold in compliance with
all applicable federal and state laws. The Contracts will provide for the
allocation of net amounts received by LNL thereunder to separate divisions of
the Variable Account designated as "sub-accounts" for investment in the shares
of registered investment companies selected by LNL ("underlying funds"). The
Fund will be an underlying fund for one of the sub-accounts.
2. Fund shares may be purchased and redeemed by LNL in accordance
<PAGE>
with the provisions of the then current prospectus of the Fund. The Fund
anticipates that it will make its shares available indefinitely for purchase by
LNL hereunder, but the Fund reserves the right to suspend or terminate sales of
its shares hereunder at any time or times when its Board of Directors makes a
good faith determination that further sales would be to the detriment of current
holders of Fund shares. Payment for Fund shares shall be made by LNL within
five days after placement of the order for Fund shares. The Fund reserves the
right to delay issuance or transfer of Fund shares and/or to delay the accrual
and/or declaration of dividends in accordance with any policy set forth in its
then current prospectus with respect to such shares until any payment check has
cleared. If payment is not received by the Fund or an agent of the Fund within
the five day period, the Fund may, without notice, cancel the order and require
LNL to promptly reimburse the Fund for any loss suffered by the Fund resulting
from such failure to make timely payment. The Fund represents and warrants that
Fund shares sold hereunder shall be registered under the 1933 Act and duly
authorized for issuance in accordance with Maryland law.
3. LNL and its agents shall make no representation concerning the Fund or
Fund shares except those contained in the then current prospectus of the Fund or
in current printed sales literature of the Fund, or as otherwise approved by the
Fund in writing.
4. Administrative services to owners of and participants under Contracts
shall be the responsibility of LNL and shall not be the responsibility of the
Fund. The Fund will furnish LNL copies of its proxy material, reports to
stockholders and other communications to stockholders in such quantities as LNL
shall reasonably require for distribution to owners of or participants under the
Contracts and LNL will distribute these materials to such owners or participants
as required. LNL will vote
<PAGE>
Fund shares, to the extent required by law, in accordance with instructions
received from Contract owners. LNL will vote Fund shares for which no
instructions have been received in the same proportion as Fund shares for which
instructions have been received from Contract owners. LNL and persons under its
control will in no way recommend action in connection with the solicitation of
proxies for Fund shares held in the Variable Account.
5. The Fund shall amend the Registration Statement for its shares under
the 1933 Act and the 1940 Act from time to time as required in order to effect
the continuous offering of its shares and shall provide LNL with as many copies
of its current prospectus as LNL may reasonably request.
6. This Agreement may be terminated as to the issuance of Fund shares as
follows:
(a) at the option of LNL or the Fund upon 90 days' written notice to
the other party;
(b) at the option of LNL if Fund shares are not available for any
reason to meet the requirements of the Contracts as determined by
LNL; or
(c) at the option of the Fund upon institution of any proceedings
against LNL relating to the Variable Account or the issuance and
sale of the Contracts, by the National Association of Securities
Dealers, Inc., the Securities and Exchange Commission, the
Indiana Insurance Commissioner or any other regulatory body.
7. (a) LNL agrees to Fund and each of its directors of the Fund, as
defined in the "Indemnified Parties") against liabilities (including amounts the
written consent of LNL) or indemnify and hold harmless the who is not an
"interested person" 1940 Act (collectively, the any losses, claims, damages,
paid in settlement
<PAGE>
thereof with expenses or actions with respect thereto to which such Indemnified
Parties may become subject, under the federal securities laws or otherwise,
insofar as such losses, claims, damages, liabilities or expenses (or actions in
respect thereof) or settlements
(i) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the
Registration Statement or prospectus of the Variable Account or
contained in the Contracts or sales literature (or any amendment
or supplement to any of the foregoing), or arise out of or are
based upon the omission or the alleged omission to state therein
a material fact required to be stated therein or necessary to
make the statements therein not misleading, provided that this
agreement to indemnify shall not apply as to an Indemnified Party
if such statement or omission or such alleged statement or
omission was made in reliance upon and in conformity with written
information furnished to LNL by such Indemnified Party expressly
for use in the Registration Statement or prospectus for the
Variable Account or the Contracts or sales literature (or any
amendment or supplement);
(ii) arise out of or as a result of conduct, statements, or
representations (other than statements or representations
contained in the prospectus of the Fund and sales literature not
supplied by LNL) of LNL or persons under its control, with
respect to the sale and distribution of the Contracts, or
(iii) arise as a result of any failure by LNL to provide the services
and furnish the materials set forth in paragraph four hereof.
LNL will reimburse any legal or other expenses reasonably incurred by the
Indemnified Parties in connection with investigating or defending any such loss,
claim, damage, liability or action. This indemnity agreement is in addition to
any liability which LNL may otherwise have.
(b) Promptly after receipt by any of the Indemnified Parties of
notice of the commencement of any action, or the making of any claim for which
indemnity may apply under this paragraph, the Indemnified Parties will, if a
claim in respect thereof is to be made against LNL, notify LNL of the
commencement thereof; but the
<PAGE>
omission so to notify LNL will not relieve LNL from any liability which it may
have to the Indemnified Parties otherwise than under this Agreement. In case
any such action is brought against the Indemnified Parties, and LNL is notified
of the commencement thereof, LNL will be entitled to participate therein and to
assume the defense thereof, with counsel satisfactory to the party named in the
action, and after notice from LNL to such party of LNL's election to assume the
defense thereof, LNL will not be liable to such party under this Agreement for
any legal or other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
8. (a) The parties shall in good faith attempt to resolve any dispute
arising out of or relating to this agreement promptly by negotiations between
executives who have authority to settle the controversy. Either party may give
the other party written notice of any dispute not resolved in the normal course
of business. Within 20 days after delivery of that notice, executives of both
parties shall meet at a mutually acceptable time and place, and thereafter as
often as they reasonably deem necessary, to exchange relevant information and to
attempt to resolve the dispute. If the matter has not been resolved within 60
days of the disputing party's notice, or if the parties fail to meet within 20
days, either party may initiate mediation of the controversy or claim as
provided in sub-paragraph (b) above. If a negotiator intends to be accompanied
at a meeting by an attorney, the other negotiator shall be given at least three
working days' notice of that intention and may also be accompanied by an
attorney.
(b) If the dispute has not been resolved by negotiation as provided
herein, the parties shall endeavor to settle the dispute by mediation under the
then current Center for Public Resources ("CPR") Model Procedure for Mediation
of Business Disputes. The neutral third party will be selected from the CPR
Panels of
<PAGE>
Neutrals. If the parties encounter difficulty in agreeing on a neutral, they
will seek the assistance of CPR in the selection process. All negotiations
pursuant to subparagraphs (a) and (b) of this paragraph 8 are confidential and
shall be treated as compromise and settlement negotiations for purposes of the
Federal Rules of Evidence and state rules of evidence.
(c) Any dispute arising out of or relating to this contract or the
breach, termination or validity thereof, which has not been resolved by
non-binding procedures as provided in sub-paragraphs (a) or (b) herein within 60
days of the initiation of those procedures shall be finally settled by
arbitration conducted expeditiously in accordance with the CPR Rules for
Non-Administered Arbitration of Business Disputes by a sole arbitrator;
provided, however, that if one party has requested the other party to
participate in a non-binding procedure and the other has failed to participate,
the requesting party may initiate arbitration before expiration of the 60-day
period set out just above. If within 45 days of the commencement of the process
to select an arbitrator the parties cannot agree upon the arbitrator, then he or
she will be selected from the CPR Panels of Neutrals. The arbitration shall be
governed by the United States Arbitration Act, 9 U.S.C. Sec. 1-16, and judgment
upon the award rendered by the Arbitrator may be entered by any court having
jurisdiction thereof. The place of arbitration shall be Fort Wayne, Indiana.
The Arbitrator is not empowered to award damages in excess of compensatory
damages.
Executed and agreed to this 13th day of September, 1993.
THE LINCOLN NATIONAL LIFE
INSURANCE COMPANY
By ____________________________
Robert A. Anker, President
LINCOLN NATIONAL CAPITAL
APPRECIATION FUND, INC.
By ____________________________
Robert A. Nikels, President
<PAGE>
ADDENDUM
(effective November 1, 1994)
to the
AGREEMENT to PURCHASE SHARES
(effective September 23, 1993)
between
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY and
LINCOLN NATIONAL CAPITAL APPRECIATION FUND, INC.
The Agreement is hereby supplemented to include a new paragraph 9, which reads
as follows:
"9. a) LNL shall own and control all the pertinent records pertaining to
the operation of Variable Account C under this Agreement; and b) LNL, during
normal business hours, shall have the right to inspect, audit and copy all
records pertaining to performance by the Fund of services for LNL under this
Agreement."
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
By: Robert A. Nikels
LINCOLN NATIONAL CAPITAL APPRECIATION FUND, INC.
By: Kelly D. Clevenger
<PAGE>
TRADENAME AGREEMENT
THIS AGREEMENT, made this 13th day of September, 1993, between Lincoln
National Corporation ("LNC") and Lincoln National Capital Appreciation Fund,
Inc. (the "Fund").
W I T N E S S E T H:
LNC, an Indiana corporation, holds diversified interests, primarily in
insurance and related financial service companies. Various subsidiary and
affiliated corporations organized or acquired by LNC use the words "Lincoln
National" in their names and business, and these words when used by a company
associated with LNC have a recognized business acceptance and identity
throughout the United States and in foreign countries. The right to use the
words "Lincoln National" as a part of the corporate name and business is an
asset of LNC, and it is entitled to protect its valuable property right against
improper use by others.
Lincoln National Investment Management Company, a subsidiary of LNC, has
agreed to act as investment adviser to the Fund. LNC believes that it is in its
best interests to agree to make the words "Lincoln National" available for use
by the Fund so long as the Fund has in effect an investment advisory contract
with Lincoln National Investment Management Company.
Accordingly, in consideration of the premises and for other good and
valuable consideration, the parties hereto agree as follows:
1. The use of the words "Lincoln National" as a part of the corporate name
and business of the Fund is subject to consent of LNC, which consent is
hereby granted upon the conditions and terms set forth herein.
2. The Fund is authorized to use the words "Lincoln National" in its
corporate name and business only while the Fund is a party to an
investment advisory contract with Lincoln National Investment Management
Company and for a period not exceeding ninety (90) days following the
termination of any such contract. In the event that the Fund ceases to be
a party to an investment advisory contract with Lincoln National
Investment Management Company, the Fund shall promptly take such steps as
may be necessary to change its corporate name and business practices so as
to eliminate the words "Lincoln National" or any name that, in the opinion
of LNC, is confusingly similar or indicates an affiliation with LNC or any
of its subsidiaries and affiliates.
3. The use of the words "Lincoln National" by the Fund shall not prevent LNC
or any of its subsidiaries or affiliates, or any of their respective
successors or assigns, from using or permitting the use of the words
"Lincoln National" alone or with any other word or words by or in
connection with any other entity or business, whether or not the same
directly or indirectly competes or conflicts with the Fund or its business
in any manner.
4. (a) The parties shall in good faith attempt to resolve any dispute arising
out of or relating to this agreement promptly by negotiations between
executives who have authority to settle the controversy. Either party may
give the other party written notice of any dispute not resolved in the
normal course of business. Within 20 days after delivery of that notice,
executives of both parties shall meet at a mutually acceptable time and
place, and thereafter as often as they reasonably deem necessary, to
exchange relevant information and to
<PAGE>
attempt to resolve the dispute. If the matter has not been resolved within
60 days of the disputing party's notice, or if the parties fail to meet
within 20 days, either party may initiate mediation of the controversy. If
a negotiator intends to be accompanied at a meeting by an attorney, the
other negotiator shall be given at least three working days' notice of
that intention and may also be accompanied by an attorney.
(b) If the dispute has not been resolved by negotiation as provided
herein, the parties shall endeavor to settle the dispute by mediation
under the then current Center for Public Resources ("CPR") Model Procedure
for Mediation of Business Disputes. The neutral third party will be
selected from the CPR Panels of Neutrals. If the parties encounter
difficulty in agreeing on a neutral, they will seek the assistance of CPR
in the selection process. All negotiations pursuant to sub-paragraphs (a)
and (b) of this paragraph 4 are confidential and shall be treated as
compromise and settlement negotiations for purposes of the Federal Rules
of Evidence and state rules of evidence.
(c) Any dispute arising out of or relating to this agreement or the
breach, termination or validity thereof, which has not been resolved by
non-binding procedures as provided in sub-paragraphs (a) or (b) herein
within 60 days of the initiation of those procedures shall be finally
settled by arbitration conducted expeditiously in accordance with the CPR
Rules for Non-Administered Arbitration of Business Disputes by a sole
arbitrator; provided, however, that if one party has requested the other
party to participate in a non-binding procedure and the other has failed
to participate, the requesting party may initiate arbitration before
expiration of the 60-day period set out just above. If within 45 days of
the commencement of the process to select an arbitrator the parties cannot
agree upon the arbitrator, then he or she will be selected from the CPR
Panels of Neutrals. The arbitration shall be governed by the United States
Arbitration Act, 9 U.S.C. Sec. 1-16, and judgment upon the award rendered
by the Arbitrator may be entered by any court having jurisdiction thereof.
The place of arbitration shall be Fort Wayne, Indiana. The Arbitrator is
not empowered to award damages in excess of compensatory damages.
IN WITNESS WHEREOF, LNC and the Fund have caused this Agreement to be
executed by their duly authorized officers upon the day aforesaid.
Attest: LINCOLN NATIONAL CORPORATION
/s/ C. Suzanne Womack By: /s/ Robert A. Anker
- ------------------------------ ------------------------------
Robert A. Anker
Secretary President
- ------------------------------ ------------------------------
(Title) (Title)
Attest: LINCOLN NATIONAL CAPITAL
APPRECIATION FUND, INC.
/s/ C. Suzanne Womack By: /s/ Robert A. Anker
- ------------------------------ ------------------------------
Robert A. Anker
Secretary President
- ------------------------------ ------------------------------
(Title) (Title)
<PAGE>
AMENDED AND RESTATED TRADENAME AGREEMENT
THIS amended and restated AGREEMENT is made this 13th day of September,
1993, between Lincoln National Corporation ("LNC") and Lincoln National Capital
Appreciation Fund, Inc. (the "Fund"). Its terms supersede those of any prior
agreement.
W I T N E S S E T H:
LNC, an Indiana corporation, holds diversified interests, primarily in
insurance and related financial service companies. Various subsidiary and
affiliated corporations organized or acquired by LNC use the words "Lincoln
National" in their names and business, and these words when used by a company
associated with LNC have a recognized business acceptance and identity
throughout the United States and in foreign countries. The right to use the
words "Lincoln National" as a part of the corporate name and business is an
asset of LNC, and it is entitled to protect its valuable property right against
improper use by others.
Lincoln National Investment Management Company, a subsidiary of LNC, has
agreed to act as investment adviser to the Fund. LNC believes that it is in its
best interests to agree to make the words "Lincoln National" available for use
by the Fund so long as the Fund has in effect an investment advisory contract
with Lincoln National Investment Management Company.
Accordingly, in consideration of the premises and for other good and
valuable consideration, the parties hereto agree as follows:
1. The use of the words "Lincoln National" as a part of the corporate name
and business of the Fund is subject to consent of LNC, which consent is
hereby granted upon the conditions and terms set forth herein.
2. The Fund is authorized to use the words "Lincoln National" in its
corporate name and business only while the Fund is a party to an
investment advisory contract with Lincoln National Investment Management
Company and for a period not exceeding ninety (90) days following the
termination of any such contract. In the event that the Fund ceases to be
a party to an investment advisory contract with Lincoln National
Investment Management Company, the Fund shall promptly take such steps as
may be necessary to change its corporate name and business practices so as
to eliminate the words "Lincoln National" or any name that, in the opinion
of LNC, is confusingly similar or indicates an affiliation with LNC or any
of its subsidiaries and affiliates.
3. The use of the words "Lincoln National" by the Fund shall not prevent LNC
or any of its subsidiaries or affiliates, or
<PAGE>
any of their respective successors or assigns, from using or permitting
the use of the words "Lincoln National" alone or with any other word or
words by or in connection with any other entity or business, whether or
not the same directly or indirectly competes or conflicts with the Fund or
its business in any manner.
IN WITNESS WHEREOF, LNC and the Fund have caused this Agreement to be
executed by their duly authorized officers upon the day aforesaid.
Attest: LINCOLN NATIONAL CORPORATION
/s/ C. Suzanne Womack By: /s/ Robert A. Anker
- ------------------------------- -------------------------------
C. Suzanne Womack Robert A. Anker
Secretary President
- ------------------------------- -------------------------------
(Title) (Title)
Attest: LINCOLN NATIONAL CAPITAL
APPRECIATION FUND, INC.
/s/ C. Suzanne Womack By: /s/ Robert A. Nikels
- ------------------------------- -------------------------------
C. Suzanne Womack Robert A. Nikels
Secretary President
- ------------------------------- -------------------------------
(Title) (Title)
<PAGE>
[LETTERHEAD OF LINCOLN NATIONAL CORPORATION]
(219) 455-3018
January 14, 1994
SECURITIES AND EXCHANGE COMMISSION
450 Fifth Street, NW
Washington, DC 20549
Re: Lincoln National Capital Appreciation Fund, Inc.
(File No. 33-70272)
Shares of Common Stock, $.O1 par value
Ladies and Gentlemen:
As counsel for Lincoln National Capital Appreciation Fund, Inc., a
Maryland corporation (the "Fund"), I have examined the proceedings taken and
being taken for the registration by the Fund on Form N-1A of an indefinite
number of shares of its Common Stock, $.01 par value.
I have examined all instruments, documents and records which, in my
opinion, were necessary to examine for the purpose of rendering this opinion.
Based upon such examination, I am of the opinion that the above-described shares
of Common Stock will be, if and when issued by the Fund in the manner and upon
the terms set forth in said Registration Statement, validly authorized and
issued, fully paid and non-assessable.
I hereby consent to the filing of this opinion as an Exhibit to Form N-1A.
Very truly yours,
/s/ Jeremy Sachs
Jeremy Sachs
Assistant General Counsel
<PAGE>
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Financial Statements"
in the Statement of Additional Information and to the incorporation by reference
in this Post-Effective Amendment No. 5 to the Registration Statement (Form N-1A)
(No. 33-70272) of Lincoln National Capital Appreciation Fund, Inc. of our report
dated February 4, 1998, included in the Multi Fund Variable Annuity Annual
Report 1997.
Philadelphia, Pennsylvania
April 14, 1998
<PAGE>
Jon A. Boscia
Executive Vice President & Chief Investment Officer
- ------------------------------------------------------------------------------
1300 South Clinton Street [LOGO] LINCOLN NATIONAL
P.O. Box 7816 LIFE INSURANCE CO.
Fort Wayne. Indiana 46801-7816 ----------------------------
219-455-4878 A part of LINCOLN NATIONAL CORPORATION
Fax: 219-455-1475
Exhibit No. 13(b)
INVESTMENT LETTER
September 24, 1993
Lincoln National Capital Appreciation Fund, Inc.
1300 South Clinton Street
Fort Wayne, Indiana 46802
Ladies and Gentlemen:
This will advise you that in consideration of your issuance to the
undersigned of 11,000 shares of Common Stock (the Stock) $.01 par value of
Lincoln National Capital Appreciation Fund, Inc. (the Fund) for an aggregate
purchase price of $110,000, Lincoln National Variable Annuity (Account C)
represents and warrants that the Stock will be held by Account C for its own
account, for investment and not with a view to distribution.
Account C understands that the Stock being issued to it has not been
registered under the Securities Act of 1933, as amended (the Act), and agrees
that the Stock may not be sold or transferred except pursuant to an effective
Registration Statement under the Act or unless exemption from such registration
is available under the Act with respect to such proposed sale or transfer.
In order to insure compliance with the Act, Account C agrees that the Fund
may, if it desires, refuse to transfer the Stock unless:
(i) a Registration Statement under the Act is then in effect with
respect to such Stock; or
(ii) an opinion has been obtained from counsel for the Fund to the effect
that an exemption from registration under the Act is available with
respect to the proposed transfer and that no such registration is
required; or
(iii) a no-action letter has been obtained with respect to such transfer
from the staff of the Securities and Exchange Commission.
<PAGE>
Lincoln National Capital Appreciation Fund, Inc.
September 24, 1993
Page 2
Account C further agrees that a legend briefly describing the restrictions
set forth in this letter may be placed on the stock certificate, if any,
delivered to Account C.
Very truly yours,
LINCOLN NATIONAL VARIABLE
ANNUITY ACCOUNT C
By: THE LINCOLN NATIONAL LIFE
INSURANCE COMPANY
By: /s/ Jon A. Boscia,
-------------------------
Jon A. Boscia,
Executive Vice President
<PAGE>
POWER OF ATTORNEY
Each person whose signature appears following paragraph b) under
"SIGNATURES" below hereby constitutes and appoints John L. Steinkamp, Jeremy
Sachs and C. Suzanne Womack, and each of them, his or her true and lawful
attorneys-in-fact in his name, place and stead, in any and all capacities, to
sign any and all amendments to this Registration Statement and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission under the Securities Act of 1933 and the
Investment Company Act of 1940.
SIGNATURES
a) Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Fort Wayne, and State of Indiana, on the ___ day of
__________, 1993.
LINCOLN NATIONAL
CAPITAL APPRECIATION FUND, INC.
By ______________________________
Robert A. Nikels, Chairman of
the Board and President
b) Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
Chairman of the Board,
- ------------------------- President and Director -----------
Robert A. Nikels (Principal Executive
Officer)
/s/ John B. Borsch, Jr. Director 10/6/93
- ------------------------- -----------
John B. Borsch, Jr.
Director
- ------------------------- -----------
Stanley R. Nelson
Director
- ------------------------- -----------
Jon A. Boscia
Director
- ------------------------- -----------
Nancy L. Frisby
Chief Accounting Officer
- ------------------------- (Principal Accounting -----------
Lantz H. Mintch Officer)
Vice President and
- ------------------------- Treasurer (Principal -----------
Max A. Roesler Financial Officer)
<PAGE>
POWER OF ATTORNEY
Each person whose signature appears following paragraph b) under
"SIGNATURES" below hereby constitutes and appoints John L. Steinkamp, Jeremy
Sachs and C. Suzanne Womack, and each of them, his or her true and lawful
attorneys-in-fact in his name, place and stead, in any and all capacities, to
sign any and all amendments to this Registration Statement and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission under the Securities Act of 1933 and the
Investment Company Act of 1940.
SIGNATURES
a) Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Fort Wayne, and State of Indiana, on the ___ day of
_____________, 1993.
LINCOLN NATIONAL
CAPITAL APPRECIATION FUND, INC.
By ______________________________
Robert A. Nikels, Chairman of
the Board and President
b) Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
Chairman of the Board,
- ------------------------- President and Director -----------
Robert A. Nikels (Principal Executive
Officer)
Director
- ------------------------- -----------
John B. Borsch, Jr.
Director
- ------------------------- -----------
Stanley R. Nelson
Director
- ------------------------- -----------
Jon A. Boscia
/s/ Nancy L. Frisby Director 10/6/93
- ------------------------- -----------
Nancy L. Frisby
Chief Accounting Officer
- ------------------------- (Principal Accounting -----------
Lantz H. Mintch Officer)
Vice President and
- ------------------------- Treasurer (Principal -----------
Max A. Roesler Financial Officer)
<PAGE>
Power of Attorney
LET IT BE KNOWN that I, Barbara S. Kowalczyk, hereby revoke all Powers of
Attorney authorizing any person to act as attorney-in-fact relative to Lincoln
National Capital Appreciation Fund, Inc. which were previously executed by me
and appoint Jeremy Sachs, John L. Steinkamp and C. Suzanne Womack, jointly and
severally, my attorneys-in-fact, with power of substitution, for me in any and
all capacities, to sign any and all amendments to the Registration Statement for
Lincoln National Capital Appreciation Fund, Inc. and to file such amendments,
with exhibits and other documents, with the Securities and Exchange Commission,
hereby ratifying all that each attorney-in-fact may do or cause to be done by
virtue of this power.
/s/ Barbara S. Kowalczyk
--------------------------
Barbara S. Kowalczyk
STATE OF INDIANA )
) SS:
COUNTY OF ALLEN )
Subscribed and sworn to before me
this 20th day of December, 1993.
/s/ Mary L. Lung
----------------------------
Notary Public
Commission Expires: 12-20-97
<PAGE>
ORGANIZATIONAL CHART OF THE
LINCOLN NATIONAL INSURANCE HOLDING COMPANY SYSTEM
All the members of the holding company system are corporations, with
the exception of, Delaware Distributors, L.P and Founders CBO, L.P.
--------------------------------
| |
| Lincoln National Corporation |
| Indiana - Holding Company |
--------------------------------
| --------------------------------------------
|--| City Financial Planners, Ltd. |
| | 100% - Englad/Wales - Distribution of life|
| | assurance & pension products |
| --------------------------------------------
| -------------------------------
|--| The Insurers' Fund, Inc. # |
| | 100% - Maryland - Inactive |
| -------------------------------
| ------------------------------------------------
|--| LNC Administrative Services Corporation |
| | 100% - Indiana - Third Party Administrator |
| ------------------------------------------------
| ------------------------------------------------
|--| Lincoln Funds Corporation |
| | 100% - Delaware - Intermediate Holding Company |
| ------------------------------------------------
| ---------------------------------------------------
|--|Lincoln National Financial Institutions Group, Inc.|
| |(fka The Richard Leahy Corporation) |
| | 100% - Indiana - Insurance Agency |
| ---------------------------------------------------
| | ---------------------------------
| |--| The Financial Alternative, Inc. |
| | | 100% - Utah- Insurance Agency |
| | ---------------------------------
| | ---------------------------------------
| |--| Financial Alternative Resources, Inc. |
| | | 100% - Kansas - Insurance Agency |
| | ---------------------------------------
| | -----------------------------------------
| |--| Financial Choices, Inc. |
| | | 100% - Pennsylvania - Insurance Agency |
| | -----------------------------------------
| | -----------------------------------------------
| | | Financial Investment Services, Inc. |
| |--| (formerly Financial Services Department, Inc.)|
| | | 100% - Indiana - Insurance Agency |
| | -----------------------------------------------
| | -----------------------------------------
| | | Financial Investments, Inc. |
| |--| (formerly Insurance Alternatives, Inc.) |
| | | 100% - Indiana - Insurance Agency |
| | -----------------------------------------
| | -------------------------------------------
| |--| The Financial Resources Department, Inc. |
| | | 100% - Michigan - Insurance Agency |
| | -------------------------------------------
| | -----------------------------------------
| |--| Investment Alternatives, Inc. |
| | | 100% - Pennsylvania - Insurance Agency |
| | -----------------------------------------
| | --------------------------------------
| |--| The Investment Center, Inc. |
| | | 100% - Tennessee - Insurance Agency |
| | --------------------------------------
| | --------------------------------------
| |--| The Investment Group, Inc. |
| | | 100% - New Jersey - Insurance Agency |
| | --------------------------------------
<PAGE>
-------------------------------
| |
| Lincoln National Corporation |
| Indiana - Holding Company |
-------------------------------
| ---------------------------------------------------
|--|Lincoln National Financial Institutions Group, Inc.|
| |(fka The Richard Leahy Corporation) |
| | 100% - Indiana - Insurance Agency |
| ---------------------------------------------------
| | ------------------------------------
| |--| Personal Financial Resources, Inc. |
| | | 100% - Arizona - Insurance Agency |
| | ------------------------------------
| | ----------------------------------------
| |--| Personal Investment Services, Inc. |
| | 100% - Pennsylvania - Insurance Agency |
| ----------------------------------------
| -------------------------------------------
|--| LincAm Properties, Inc. |
| | 50% - Delaware - Real Estate Investment |
| -------------------------------------------
|
| ----------------------------------------------
| | Lincoln Financial Group, Inc. |
|--| (formerly Lincoln National Sales Corporation)|
| | 100% - Indiana - Insurance Agency |
| ----------------------------------------------
| | ----------------------------------------
| |--| Lincoln Financial Advisors Corporation |
| | | (formerly LNC Equity Sales Corporation)|
| | | 100% - Indiana - Broker-Dealer |
| | ----------------------------------------
| | -------------------------------------------------------------
| | |Corporate agencies: Lincoln Financial Group, Inc. ("LFG") |
| |--|has subsidiaries of which LFG owns from 80%-100% of the |
| | |common stock (see Attachment #1). These subsidiaries serve |
| | |as the corporate agency offices for the marketing and |
| | |servicing of products of The Lincoln National Life Insurance |
| | |Company. Each subsidiary's assets are less than 1% of the |
| | |total assets of the ultimate controlling person. |
| | -------------------------------------------------------------
| |
| | ------------------------------------------------
| |--| Professional Financial Planning, Inc. |
| | 100% - Indiana - Financial Planning Services |
| ------------------------------------------------
| ---------------------------------------
|--| Lincoln Life Improved Housing, Inc. |
| | 100% - Indiana |
| ---------------------------------------
|
| -----------------------------------------------
|--| Lincoln National (China) Inc. |
| | 100% - Indiana - China Representative Office |
| -----------------------------------------------
|
| -----------------------------------------------
|--| Lincoln National (India) Inc. |
| | 100% - Indiana - India Representative Office |
| -----------------------------------------------
| ---------------------------------------------
|--| Lincoln National Intermediaries, Inc. |
| | 100% - Indiana - Reinsurance Intermediary |
| ---------------------------------------------
| --------------------------------------------------
|__| Lincoln National Investments, Inc. |
| | (fka Lincoln National Investment Companies, Inc.)|
| | 100% - Indiana - Holding Company |
| --------------------------------------------------
| | --------------------------------------------
| |--| Lincoln National Investment Companies, Inc.|
| | |(fka Lincoln National Investments, Inc.) |
| | | 100% - Indiana - Holding Company |
| | --------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
<S><C>
-------------------------------
| |
| Lincoln National Corporation |
| Indiana - Holding Company |
-------------------------------
| --------------------------------------------------
|__| Lincoln National Investments, Inc. |
| | (fka Lincoln National Investment Companies, Inc.)|
| | 100% - Indiana - Holding Company |
| --------------------------------------------------
| | --------------------------------------------
| |--| Lincoln National Investment Companies, Inc.|
| | |(fka Lincoln National Investments, Inc.) |
| | | 100% - Indiana - Holding Company |
| | --------------------------------------------
| | | ----------------------------------
| | |--|Delaware Management Holdings, Inc.|
| | | | 100% - Delaware - Holding Company|
| | | ----------------------------------
| | | | -----------------------------------
| | | |--| DMH Corp. |
| | | | 100% - Delaware - Holding Company |
| | | -----------------------------------
| | | | ----------------------------------------
| | | |--| Delaware International Advisers Ltd. |
| | | | | 81.1% - England - Investment Advisor |
| | | | ----------------------------------------
| | | | --------------------------------------
| | | |--| Delaware Management Trust Company |
| | | | | 100% - Pennsylvania - Trust Service |
| | | | --------------------------------------
| | | | ------------------------------------------------
| | | |--| Delaware International Holdings, Ltd. |
| | | | | 100% - Bermuda - Investment Advisor |
| | | | ------------------------------------------------
| | | | | | --------------------------------------
| | | | | --| Delaware International Advisers, Ltd.|
| | | | | | 18.9% - England - Investment Advisor |
| | | | | --------------------------------------
| | | | -------------------------------------------------
| | | |--| Delvoy, Inc. |
| | | | | 100% - Minnesota - Holding Company |
| | | | -------------------------------------------------
| | | | ---------------------------------------
| | | | |--| Delaware Management Company, Inc. |
| | | | | | 100% - Delaware - Investment Advisor |
| | | | | ---------------------------------------
| | | | | | -------------------------------------------------------
| | | | | |--| Delaware Distributors, L.P. |
| | | | | | | 98%-Delaware-MutualFund Distributor & Broker/Dealer |
| | | | | | | 1% Equity-Delaware Capital Management, Inc. |
| | | | | | | 1% Equity-Delaware Distributors, Inc. |
| | | | | | | |
| | | | | | -------------------------------------------------------
| | | | | | ------------------------------------
| | | | | |--| Founders Holdings, Inc. |
| | | | | | | 100% - Delaware - General Partner |
| | | | | | ------------------------------------
| | | | | | | -----------------------------------------
| | | | | | | | Founders CBO, L.P. |
| | | | | | --| 1% - Delaware - Investment Partnership |
| | | | | | | 99% held by outside investors |
| | | | | | -----------------------------------------
| | | | | | | ------------------------------------------
| | | | | | --|Founders CBO Corporation |
| | | | | | |100%-Delaware-Co-Issuer with Founders CBO |
------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S><C>
--------------------------------
| |
| Lincoln National Corporation |
| Indiana - Holding Company |
--------------------------------
| --------------------------------------------------
|--| Lincoln National Investments, Inc. |
| | (fka Lincoln National Investment Companies, Inc.)|
| | 100% - Indiana - Holding Company |
| --------------------------------------------------
| | --------------------------------------------
| |--| Lincoln National Investment Companies, Inc.|
| | |(fka Lincoln National Investments, Inc.) |
| | | 100% - Indiana - Holding Company |
| | --------------------------------------------
| | | ----------------------------------
| | |--|Delaware Management Holdings, Inc.|
| | | | 100% - Delaware - Holding Company|
| | | ----------------------------------
| | | | -----------------------------------
| | | |--| DMH Corp. |
| | | | 100% - Delaware - Holding Company |
| | | -----------------------------------
| | | | -------------------------------------
| | | |--| Delvoy, Inc. |
| | | | | 100% - Minnesota - Holding Company |
| | | | -------------------------------------
| | | | | ------------------------------------
| | | | |---| Delaware Distributors, Inc. |
| | | | | | 100% - Delaware - General Partner |
| | | | | ------------------------------------
| | | | | | ------------------------------------------------------
| | | | | |--| Delaware Distributors, L.P. |
| | | | | | 98%-Delaware-Mutual Fund Distributor & Broker/Dealer |
| | | | | | 1% Equity-Delaware Capital Management, Inc. |
| | | | | | 1% Equity-Delaware Distributors, Inc. |
| | | | | ------------------------------------------------------
| | | | | -----------------------------------------------
| | | | |---| Delaware Capital Management, Inc. |
| | | | | |(formerly Delaware Investment Counselors, Inc.)|
| | | | | | 100% - Delaware - Investment Advisor |
| | | | | -----------------------------------------------
| | | | | | -------------------------------------------------------
| | | | | |-- | Delaware Distributors, L.P. |
| | | | | | | 98%-Delaware-Mutual Fund Distributor & Broker/Dealer |
| | | | | | |1% Equity-Delaware Capital Management, Inc. |
| | | | | | | 1% Equity-Delaware Distributors, Inc. |
| | | | | | -------------------------------------------------------
| | | | | -----------------------------------------------------
| | | | |---| Delaware Service Company, Inc. |
| | | | | | 100%-Delaware-Shareholder Services & Transfer Agent |
| | | | | -----------------------------------------------------
| | | | | -----------------------------------------------------
| | | | |---| Delaware Investment & Retirement Services, Inc. |
| | | | | 100% - Delaware - Registered Transfer Agent |
| | | | -----------------------------------------------------
| | | -----------------------------------------
| | |--| Lynch & Mayer, Inc. |
| | | | 100% - Indiana - Investment Adviser |
| | | -----------------------------------------
| | | | -----------------------------------------
| | | |--| Lynch & Mayer Asia, Inc. |
| | | | | 100% - Delaware - Investment Management |
| | | | -----------------------------------------
| | | | ----------------------------------------
| | | |--| Lynch & Mayer Securities Corp. |
| | | | 100% - Delaware - Securities Broker |
| | | ----------------------------------------
| | | ----------------------------------------------------
| | | | Vantage Global Advisors, Inc. |
| | |--| (formerly Modern Portfolio Theory Associates, Inc.)|
| | | | 100% - Delaware - Investment Adviser |
| | | ----------------------------------------------------
</TABLE>
<PAGE>
--------------------------------
| |
| Lincoln National Corporation |
| Indiana - Holding Company |
--------------------------------
| --------------------------------------------------
|--| Lincoln National Investments, Inc. |
| | (fka Lincoln National Investment Companies, Inc.)|
| | 100% - Indiana - Holding Company |
| --------------------------------------------------
| | -----------------------------------------------------------
| | | Lincoln Investment Management, Inc. |
| |--| (formerly Lincoln National Investment Management Company) |
| | | 100% - Illinois - Mutual Fund Manager and |
| | | Registered Investment Adviser |
| -----------------------------------------------------------
| -----------------------------------------------
|--| The Lincoln National Life Insurance Company |
| | 100% - Indiana |
| -----------------------------------------------
| | --------------------------------------------------
| |--| AnnuityNet, Inc. |
| | | 100% - Indiana - Distribution of annuity products|
| | --------------------------------------------------
| | -------------------------------------------
| |--| Cigna Associates, Inc. |
| | | 100% - Connecticut - Insurance Agency |
| | -------------------------------------------
| | | ----------------------------------------------------------
| | |--| Cigna Associates of Massachusetts, Inc. |
| | | | 100% - Massachusetts - Insurance Agency |
| | ----------------------------------------------------------
| | -------------------------------------------
| |--|Cigna Financial Advisors, Inc. |
| | | 100% - Connecticut - Broker Dealer |
| | -------------------------------------------
| | -------------------------------------------
| |--| First Penn-Pacific Life Insurance Company |
| | | 100% - Indiana |
| | -------------------------------------------
| | -----------------------------------------------
| |--| Lincoln Life & Annuity Company of New York |
| | | 100% - New York |
| | -----------------------------------------------
| |
| | ------------------------------------------------
| |--| Lincoln National Aggressive Growth Fund, Inc. |
| | | 100% - Maryland - Mutual Fund |
| | ------------------------------------------------
| | -----------------------------------
| |--| Lincoln National Bond Fund, Inc. |
| | | 100% - Maryland - Mutual Fund |
| | -----------------------------------
| | --------------------------------------------------
| |--| Lincoln National Capital Appreciation Fund, Inc. |
| | | 100% - Maryland - Mutual Fund |
| | --------------------------------------------------
| | --------------------------------------------
| |--| Lincoln National Equity-Income Fund, Inc. |
| | | 100% - Maryland - Mutual Fund |
| | --------------------------------------------
| | ------------------------------------------------------
| | | Lincoln National Global Asset Allocation Fund, Inc. |
| |--| (formerly Lincoln National Putnam Master Fund, Inc.) |
| | | 100% - Maryland - Mutual Fund |
| | ------------------------------------------------------
| | ------------------------------------------------
| | | Lincoln National Growth and Income Fund, Inc. |
| |--| (formerly Lincoln National Growth Fund, Inc.) |
| | | 100% - Maryland - Mutual Fund |
| | ------------------------------------------------
<PAGE>
--------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
--------------------------------
| -----------------------------------------------
|--| The Lincoln National Life Insurance Company |
| | 100% - Indiana |
| -----------------------------------------------
| | --------------------------------------------------------
| |--| Lincoln National Health & Casualty Insurance Company |
| | | 100% - Indiana |
| --------------------------------------------------------
| | -----------------------------------------------
| |--| Lincoln Re, S.A. |
| | | 1% Argentina - General Business Corp |
| | | (Remaining 99% owned by Lincoln National |
| | | Reassurance Company) |
| -----------------------------------------------
| -------------------------------------------
| |--| Lincoln National International Fund, Inc. |
| | | 100% - Maryland - Mutual Fund |
| | | -------------------------------------------
| | ---------------------------------------
| |--| Lincoln National Managed Fund, Inc. |
| | | 100% - Maryland - Mutual Fund |
| | ---------------------------------------
| | --------------------------------------------
| |--| Lincoln National Money Market Fund, Inc. |
| | | 100% - Maryland - Mutual Fund |
| | --------------------------------------------
| | -----------------------------------------------
| |--| Lincoln National Social Awareness Fund, Inc. |
| | | 100% - Maryland - Mutual Fund |
| | -----------------------------------------------
| | -----------------------------------------------------
| |--| Lincoln National Special Opportunities Fund, Inc. |
| | | 100% - Maryland - Mutual Fund |
| | -----------------------------------------------------
| | ------------------------------------------------------
| |--| Lincoln National Reassurance Company |
| | 100% - Indiana - Life Insurance |
| ------------------------------------------------------
| | -----------------------------------------------
| |--| Lincoln Re, S.A. |
| | | 99% Argentina - General Business Corp |
| | | (Remaining 1% owned by Lincoln National Health|
| | | & Casualty Insurance Company) |
| | -----------------------------------------------
| | -----------------------------------------------
| |--| Special Pooled Risk Administrators, Inc. |
| | 100% - New Jersey - Catastrophe Reinsurance |
| | Pool Administrator |
| -----------------------------------------------
| ---------------------------------------------------------
|--| Lincoln National Management Services, Inc. |
| | 100% - Indiana - Underwriting and Management Services |
| ---------------------------------------------------------
| ---------------------------------------
|--| Lincoln National Realty Corporation |
| | 100% - Indiana - Real Estate |
| ---------------------------------------
| -----------------------------------------------------------
|--| Lincoln National Reinsurance Company (Barbados) Limited |
| | 100% - Barbados |
| -----------------------------------------------------------
|
| ----------------------------------------------
|--| Lincoln National Reinsurance Company Limited |
| | (formerly Heritage Reinsurance, Ltd.) |
| | 100% ** - Bermuda |
| ----------------------------------------------
| | -------------------------------------------------------
| |--| Lincoln European Reinsurance S.A. |
| | | 79% - Belgium |
| | | (Remaining 21% owned by Lincoln National Underwriting |
| | | Services, Ltd. |
| | -------------------------------------------------------
<PAGE>
--------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
--------------------------------
| ----------------------------------------------
|--| Lincoln National Reinsurance Company Limited |
| | (formerly Heritage Reinsurance, Ltd.) |
| | 100% ** - Bermuda |
| ----------------------------------------------
| | ---------------------------------------------------------
| | | Lincoln National Underwriting Services, Ltd. |
| |--| 90% - England/Wales - Life/Accident/Health Underwriter |
| | | (Remaining 10% owned by Old Fort Ins. Co. Ltd.) |
| | ---------------------------------------------------------
| | | ------------------------------------------------------
| | |--| Lincoln European Reinsurance S.A. |
| | | | 21% - Belgium |
| | | |(Remaining 79% owned by Lincoln National Reinsurance |
| | | | Company Limited |
| | | ------------------------------------------------------
| | --------------------------------------------------------
| | | Servicios de Evaluacion de Riesgos, S. de R.L. de C.V. |
| |--| 51% - Mexico - Reinsurance Underwriter |
| | | (Remaining 49% owned by Lincoln National Corp.) |
| | --------------------------------------------------------
| ---------------------------------------------
|--| Lincoln National Risk Management, Inc. |
| | 100% - Indiana - Risk Management Services |
| ---------------------------------------------
| ------------------------------------------------
|--| Lincoln National Structured Settlement, Inc. |
| | 100% - New Jersey |
| ------------------------------------------------
| -----------------------------------------
|--| Lincoln National (UK) PLC |
| | 100% - England/Wales - Holding Company |
| -----------------------------------------
| | -------------------------------------------------------
| |--| Allied Westminster & Company Limited |
| | | (formerly One Olympic Way Financial Services Limited) |
| | | 100% - England/Wales - Sales Services |
| | -------------------------------------------------------
| | -----------------------------------
| |--|Cannon Fund Managers Limited |
| | | 100% - England/Wales - Inactive |
| | -----------------------------------
| | --------------------------------------------------------
| |--| Culverin Property Services Limited |
| | | 100% - England/Wales - Property Development Services |
| | --------------------------------------------------------
| | ---------------------------------------------------------
| |--| HUTM Limited |
| | | 100% - England/Wales - Unit Trust Management (Inactive) |
| | ---------------------------------------------------------
| |
| | --------------------------------------------
| |--| ILI Supplies Limited |
| | | 100% - England/Wales - Computer Leasing |
| | --------------------------------------------
| | ------------------------------------------------
| |--| Lincoln Financial Advisers Limited |
| | | (formerly: Laurentian Financial Advisers Ltd.) |
| | | 100% - England/Wales - Sales Company |
| | ------------------------------------------------
| |
| | --------------------------------------------------
| |--| Lincoln Financial Group PLC |
| | | (formerly: Laurentian Financial Group PLC) |
| | | 100% - England/Wales - Holding Company |
| | --------------------------------------------------
| | | ----------------------------------------------------
| | |--| Lincoln Unit Trust Management Limited |
| | | |(formerly: Laurentian Unit Trust Management Limited)|
| | | | 100% - England/Wales - Unit Trust Management |
| | | ----------------------------------------------------
| | | | --------------------------------------------------
| | | |--| LUTM Nominees Limited |
| | | | | 100% - England/Wales - Nominee Services (Dormat) |
| | | | --------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
<S><C>
--------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
--------------------------------
| -----------------------------------------
|--| Lincoln National (UK) PLC |
| | 100% - England/Wales - Holding Company |
| -----------------------------------------
| | --------------------------------------------------
| |--| Lincoln Financial Group PLC |
| | | (formerly: Laurentian Financial Group PLC) |
| | | 100% - England/Wales - Holding Company |
| | --------------------------------------------------
| | | ---------------------------------------
| | |--| Lincoln Milldon Limited |
| | | |(formerly: Laurentian Milldon Limited) |
| | | | 100% - England/Wales - Sales Company |
| | | ---------------------------------------
| | | -----------------------------------------------------------
| | |--| Laurtrust Limited |
| | | | 100% - England/Wales - Pension Scheme Trustee (Inactive) |
| | | -----------------------------------------------------------
| | | --------------------------------------------------
| | |--| Lincoln Management Services Limited |
| | | |(formerly: Laurentian Management Services Limited)|
| | | | 100% - England/Wales - Management Services |
| | | --------------------------------------------------
| | | | ------------------------------------------------
| | | |--|Laurit Limited |
| | | | |100% - England/Wales - Data Processing Systems |
| | | | ------------------------------------------------
| | --------------------------------------------------------
| |--| Liberty Life Pension Trustee Company Limited |
| | | 100% - England/Wales - Corporate Pension Fund (Dormat) |
| | --------------------------------------------------------
| | ----------------------------------------------------------
| |--| LN Management Limited |
| | | 100% - England/Wales - Administrative Services (Dormat) |
| | ----------------------------------------------------------
| | | -----------------------------------
| | |--| UK Mortgage Securities Limited |
| | | 100% - England/Wales - Inactive |
| | -----------------------------------
| | ------------------------------------------
| |--| Liberty Press Limited |
| | | 100% - England/Wales - Printing Services |
| ------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S><C>
--------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
--------------------------------
| -----------------------------------------
|--| Lincoln National (UK) PLC |
| | 100% - England/Wales - Holding Company |
| -----------------------------------------
| | ----------------------------------------------
| |--| Lincoln General Insurance Co. Ltd. |
| | | 100% - Accident & Health Insurance |
| | ----------------------------------------------
| | --------------------------------------------
| |--|Lincoln Assurance Limited |
| | | 100% ** - England/Wales - Life Assurance |
| | --------------------------------------------
| | | |
| | | | ---------------------------------------------
| | | |--|Barnwood Property Group Limited |
| | | | |100% - England/Wales - Property Management Co|
| | | | ---------------------------------------------
| | | | | ------------------------------------------
| | | | |--| Barnwood Developments Limited |
| | | | | | 100% England/Wales - Property Development|
| | | | | ------------------------------------------
| | | | |
| | | | | --------------------------------------------
| | | | |--| Barnwood Properties Limited |
| | | | | | 100% - England/Wales - Property Investment |
| | | | --------------------------------------------
| | | | -----------------------------------------------------
| | | |--|IMPCO Properties G.B. Ltd. |
| | | | |100% - England/Wales - Property Investment (Inactive)|
| | | | -----------------------------------------------------
| | | | ----------------------------------------------------
| | | |--| Lincoln Insurance Services Limited |
| | | | 100% - Holding Company |
| | | ----------------------------------------------------
| | | | ---------------------------------
| | | |--| British National Life Sales Ltd.|
| | | | | 100% - Inactive |
| | | | ---------------------------------
| | | |
| | | | ----------------------------------------------------------
| | | |--| BNL Trustees Limited |
| | | | | 100% - England/Wales - Corporate Pension Fund (Inactive) |
| | | | ----------------------------------------------------------
| | | | -------------------------------------
| | | |--| Chapel Ash Financial Services Ltd. |
| | | | | 100% - Direct Insurance Sales |
| | | | -------------------------------------
| | | | --------------------------
| | | |--| P.N. Kemp-Gee & Co. Ltd. |
| | | | | 100% - Inactive |
--------------------------
</TABLE>
<PAGE>
--------------------------------
| |
| Lincoln National Corporation |
| Indiana - Holding Company |
--------------------------------
|
| -----------------------------------------
|--| Lincoln National (UK) PLC |
| | 100% - England/Wales - Holding Company |
| -----------------------------------------
| | ----------------------------------------------
| |--| Lincoln Unit Trust Managers Limited |
| | | 100% - England/Wales - Investment Management |
| | ----------------------------------------------
| | ----------------------------------------------------------
| |--| LIV Limited (formerly Lincoln Investment Management Ltd.)|
| | | 100% - England/Wales - Investment Management Services |
| | ----------------------------------------------------------
| | | -----------------------------------------------
| | |--| CL CR Management Ltd. |
| | | 50% - England/Wales - Administrative Services |
| | -----------------------------------------------
| | -----------------------------------------------------------
| |--| Lincoln Independent Limited |
| | |(formerly: Laurentian Independent Financial Planning Ltd.) |
| | | 100% - England/Wales - Independent Financial Adviser |
| | -----------------------------------------------------------
| | ----------------------------------------------
| |--| Lincoln Investment Management Limited |
| | |(formerly: Laurentian Fund Management Ltd.) |
| | | 100% - England/Wales - Investment Management |
| | ----------------------------------------------
| | ------------------------------------------
| |--| LN Securities Limited |
| | | 100% - England/Wales - Nominee Company |
| | ------------------------------------------
| |
| | ---------------------------------------------
| |--| Niloda Limited |
| | | 100% - England/Wales - Investment Company |
| | ---------------------------------------------
| |
| | --------------------------------------------------
| |--| Lincoln National Training Services Limited |
| | | 100% - England/Wales - Training Company |
| | --------------------------------------------------
| | -------------------------------------------------
| |--| Lincoln Pension Trustees Limited |
| | | 100% - England/Wales - Corporate Pension Fund |
| | -------------------------------------------------
| |
| | --------------------------------------------------
| |--| Lincoln National (Jersey) Limited |
| | | 100% - England/Wales - Dormat |
| | --------------------------------------------------
| |
| | -------------------------------------------------
| |--| Lincoln National (Guernsey) Limited |
| | | 100% - England/Wales - Dormat |
| | -------------------------------------------------
| |
| | -------------------------------------------------
| |--| Lincoln SBP Trustee Limited |
| | 100% - England/Wales |
--------------------------------------------------
<PAGE>
--------------------------------
| |
| Lincoln National Corporation |
| Indiana - Holding Company |
--------------------------------
| -------------------------------------------------
| | Linsco Reinsurance Company |
|--| (formerly Lincoln National Reinsurance Company) |
| | 100% - Indiana - Property/Casualty |
| -------------------------------------------------
|
| ------------------------------------
|--| Old Fort Insurance Company, Ltd. |
| | 100% ** - Bermuda |
| ------------------------------------
| | --------------------------------------------------------
| | | Lincoln National Underwriting Services, Ltd. |
| |--| 10% - England/Wales - Life/Accident/Health Underwriter |
| | | (Remaining 90% owned by Lincoln Natl. Reinsurance Co.) |
| | --------------------------------------------------------
| | ---------------------------------------------------
| | | Solutions Holdings, Inc. |
| |--| 100% - Delaware - General Business Corporation |
| | ---------------------------------------------------
| | | ----------------------------------------
| | |--|Solutions Reinsurance Limited |
| | | 100% - Bermuda - Class III Insurance Co|
| ----------------------------------------
| ----------------------------------------------------------
| | Seguros Serfin Lincoln, S.A. |
|--| 49% - Mexico - Insurance |
| ----------------------------------------------------------
| ----------------------------------------------------------
| | Servicios de Evaluacion de Riesgos, S. de R.L. de C.V. |
|--| 49% - Mexico - Reinsurance Underwriter |
| | (Remaining 51% owned by Lincoln Natl. Reinsurance Co.) |
| ----------------------------------------------------------
| --------------------------------------------
|--| Underwriters & Management Services, Inc. |
| 100% - Indiana - Underwriting Services |
--------------------------------------------
FOOTNOTES:
* The funds contributed by the Underwriters were, and continue to be subject
to trust agreements between American States Insurance Company, the grantor,
and each Underwriter, as trustee.
** Except for director-qualifying shares
# Lincoln National Corporation has subscribed for and paid for 100 shares of
Common Stock (with a par value of $1.00 per share) at a price of $10 per
share, as part of the organizing of the fund. As such stock is further
sold, the ownership of voting securities by Lincoln National Corporation
will decline and fluctuate.
<PAGE>
ATTACHMENT #1
LINCOLN FINANCIAL GROUP, INC.
CORPORATE AGENCY SUBSIDIARIES
1) Lincoln Financial Group, Inc. (AL)
2) Lincoln Southwest Financial Group, Inc. (Phoenix, AZ)
3) Lincoln Financial and Insurance Services Corporation (Walnut Creek, CA)
3a) California Fringe Benefit and Insurance Marketing Corporation
DBA/California Fringe Benefit Company (Walnut Creek, CA)
4) Colorado-Lincoln Financial Group, Inc. (Denver, CO)
5) Lincoln National Financial Services, Inc. (Lake Worth, FL)
6) CMP Financial Services, Inc. (Chicago, IL)
7) Lincoln Financial Group of Northern Indiana, Inc. (Fort Wayne, IN)
8) Financial Planning Partners, Ltd. (Mission, KS)
9) The Lincoln National Financial Group of Louisiana, Inc. (Shreveport, LA)
10) Benefits Marketing Group, Inc. (D.C. & Chevy Chase, MD)
11) Lincoln Financial Services and Insurance Brokerage of New England, Inc
(formerly: Lincoln National of New England Insurance Agency, Inc.)
(Worcester, MA)
12) Lincoln Financial Group of Michigan, Inc. (Troy, MI)
12a) Financial Consultants of Michigan, Inc. (Troy, MI)
13) Lincoln Financial Group of Missouri, Inc. (formerly: John J. Moore &
Associates, Inc.) (St. Louis, MO)
14) Beardslee & Associates, Inc. (Clifton, NJ)
15) Lincoln Financial Group, Inc. (formerly: Resources/Financial, Inc.
(Albuquerque, NM)
16) Lincoln Cascades, Inc. (Portland, OR)
17) Lincoln Financial Group, Inc. (Salt Lake City, (UT)
<PAGE>
Summary of Changes to Organizational Chart:
JANUARY 1, 1995-DECEMBER 31, 1995
SEPTEMBER 1995
a. Lincoln National (Jersey) Limited was incorporated on September 18,
1995. Company is dormat and was formed for tax reasons per Barbara
Benoit, Assistant Corporate Secretary at Lincoln UK.
JANUARY 1, 1996-DECEMBER 1, 1996
MARCH 1996
a. Delaware Investment Counselors, Inc. changed its name to Delaware
Capital Management, Inc. effective March 29, 1996.
AUGUST 1996
a. Lincoln National (Gernsey) Limited was incorporated on August 9, 1996;
company is dormat and was formed for tax reasons.
SEPTEMBER 1996
a. Morgan Financial Group, Inc. changed its name to Lincoln National
Sales Corporation of Maryland effective September 23, 1996.
OCTOBER 1996
a. Addition of Lincoln National (India) Inc., incorporated as an Indiana
corporation on October 17, 1996.
NOVEMBER 1996
a. Lincoln National SBP Trustee Limited was bought "off the shelf" and
was incorporated on November 26, 1996; it was formed to act ast
Trustee for Lincoln Staff Benefits Plan.
DECEMBER 1996
a. Addition of Lincoln National Investments, Inc., incorporated as an
Indiana corporation on December 12, 1996.
JANUARY 1, 1997-DECEMBER 31, 1997
JANUARY 1997
a. Delaware Management Holdings, Inc., Lynch & Mayer, Inc. and Vantage
Global Advisors, Inc. were transferred via capital contribution to
Lincoln National Investments, Inc. effective January 2, 1997.
b. Lincoln National Investments, Inc. changed its name to Lincoln
National Investment Companies, Inc. effective January 24, 1997.
c. Lincoln National Investment Companies, Inc. changed its named to
Lincoln National Investments, Inc. effective January 24, 1997.
<PAGE>
JANUARY 1997 CON'T
d. The following Lincoln National (UK) subsidiaries changed their name
effective January 1, 1997: Lincoln Financial Group PLC (formerly
Laurentian Financial Group PLC); Lincoln Milldon Limited (formerly
Laurentian Milldon Limited); Lincoln Management Services Limited
(formerly Laurentian Management Services Limited).
FEBRUARY 1997
a. Removal of Lincoln National Financial Group of Philadelphia, Inc.
which was dissolved effective February 25, 1997.
MARCH 1997
a. Removal of Lincoln Financial Services, Inc. which was dissolved
effective March 4, 1997.
APRIL 1997
a. Acquisition of Dougherty Financial Group, Inc. on April 30, 1997.
Company then changed its name to Delvoy, Inc. The acquisition
included the mutual fund group of companies as part of the Voyager
acquisition. The following companies all then were moved under the
newly formed holding company, Delvoy, Inc. effective April 30, 1997:
Delaware Management Company, Inc., Delaware Distributors, Inc.,
Delaware Capital Management, Inc., Delaware Service Company, Inc. and
Delaware Investment & Retirement Services, Inc.
b. Acquisition of Voyager Fund Managers, Inc. and Voyager Fund
Distributors, Inc. on April 30, 1997; merger is scheduled for May 31,
1997 for Voyager Fund Managers, Inc. into Delaware Management Company,
Inc. and Voyager Fund Distributors, Inc. is to merge into Delaware
Distributors, L.P.
c. Removal of Aseguradora InverLincoln, S.A. Compania de Seguros y
Reaseguros, Grupo Financiero InverMexico. Stock was sold to Grupo
Financiero InverMexico effective April 18, 1997.
MAY 1997
a. Name change of The Richard Leahy Corporation to Lincoln National
Financial Institutions Group, Inc. effective May 6, 1997.
b. Voyager Fund Managers, Inc. merged into Delaware Management Company,
Inc. effective May 30, 1997 at 10:00 p.m. with Delaware Management
Company, Inc. surviving.
c. On May 31, 1997 at 2:00 a.m., Voyager Fund Distributors, Inc. merged
into a newly formed company Voyager Fund Distributors (Delaware),
Inc., incorporated as a Delaware corporation on May 23, 1997. Voyager
Fund Distributors (Delaware), Inc. then merged into Delaware
Distributors, L.P. effective May 31, 1997 at 2:01 a.m. Delaware
Distributors, L.P. survived.
JUNE 1997
a. Removal of Lincoln National Sales Corporation of Maryland -- company
dissolved June 13, 1997.
b. Addition of Lincoln Funds Corporation, incorporated as a Delaware
corporation on June 10, 1997 at 2:00 p.m.
<PAGE>
c. Addition of Lincoln Re, S.A., incorporated as an Argentina company on
June 30, 1997.
JULY 1997
a. LNC Equity Sales Corporation changed its name to Lincoln Financial
Advisors Corporation effective July 1, 1997.
b. Addition of Solutions Holdings, Inc., incorporated as a Delaware
corporation on July 27, 1997.
SEPTEMBER 1997
a. Addition of Solutions Reinsurance Limited, incorporated as a Bermuda
corporation on September 29, 1997.
OCTOBER 1997
a. Removal of the following companies: American States Financial
Corporation, American States Insurance Company, American Economy
Insurance Company, American States Insurance Company of Texas,
American States Life Insurance Company, American States Lloyds
Insurance Company, American States Preferred Insurance Company, City
Insurance Agency, Inc. And Insurance Company of Illinois -- all were
sold 10-1-97 to SAFECO Corporation.
b. Liberty Life Assurance Limited was sold to Liberty International
Holdings PLC effective 10-6-97.
c. Addition of Seguros Serfin Lincoln, S.A., acquired by LNC on 10-15-97.
DECEMBER 1997
a. Addition of City Financial Planners, Ltd. as a result of its
acquisition by Lincoln National Corporation on December 22, 1997.
This company will distribute life assurance and pension products of
Lincoln Assurance Limited.
JANUARY 1998
a. Addition of Cigna Associates, Inc., Cigna Financial Advisors, Inc. and
Cigna Associates of Massachusetts, Inc., acquired by The Lincoln
National Life Insurance Company on January 1, 1998. Cigna Associates
of Massachusetts is 100% owned by Cigna Associates, Inc.
b. Removal of Lincoln National Mezzanine Corporation and Lincoln National
Mezzanine Fund, L.P. Lincoln National Mezzanine Corporation was
dissolved on January 12, 1998 and Lincoln National Mezzanine Fund,
L.P. was cancelled January 12, 1998.
c. Corporate organizational changes took place in the UK group of
companies on January 21, 1998: Lincoln Insurance Services Limited and
its subsidiaries were moved from Lincoln National (UK) PLC to Lincoln
Assurance Limited; Lincoln General Insurance Co. Ltd. was moved from
Lincoln Insurance Services Limited to Lincoln National (UK) PLC.
d. Addition of AnnuityNet, Inc., incorporated as an Indiana corporation
on January 16, 1998 and a wholly-owned subsidiary of The Lincoln
National Life Insurance Company.
<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 F&RM Eric Jones Permanently, the first two
To Shareholders years in an easily accessible
place
Semi-Annual F&RM Eric Jones Permanently, the first two
Reports years in an easily accessible
place
Form N-SAR F&RM 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 Delaware Fund Accounting Permanently, the first two
of securities years in an easily accessible
transactions place
PORTFOLIO SECURITIES
Equity Delaware Fund Accounting Permanently, the first two
Notifications years in an easily accessible
place
<PAGE>
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
RECEIPTS AND DELIVERIES OF SECURITIES (SHARES)
Not Applicable.
PORTFOLIO SECURITIES
Debit and Delaware Fund Accounting Permanently, the first two
Credit Advices years in an easily accessible
from Bankers and Trust place
RECEIPTS AND DISBURSEMENTS OF CASH AND OTHER DEBITS AND CREDITS
Investment Delaware Fund Accounting Permanently, the first two
Journal years in an easily accessible
place
Daily Journals Delaware Fund Accounting Permanently, the first two
years in an easily accessible
place
(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 Delaware Fund Accounting Permanently, the first two
years in an easily accessible
place
SECURITIES IN TRANSFER
File consisting State Mutual Funds Permanently, the first two
of bank advices, Street Division years in an easily accessible
confirmations, Bank and place
and Notification Trust
of Securities Company
Transaction
<PAGE>
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
SECURITIES IN PHYSICAL POSSESSION
Securities State Mutual Funds Permanently, the first two
Ledger Street Division years in an easily accessible
Bank and place
Trust
Company
Portfolio State Mutual Funds Permanently, the first two
Listings Street Division years in an easily accessible
Bank and place
Trust
Company
SECURITIES BORROWED AND LOANED
Their files State Mutual Funds Permanently, the first two
Street Division years in an easily accessible
Bank and place
Trust
Company
MONIES BORROWED AND LOANED
Not Applicable.
DIVIDENDS AND INTEREST RECEIVED
Interest File Delaware Fund Accounting Permanently, the first two
Accrual years in an easily accessible
Activity place
Journal
Dividend Master Delaware Fund Accounting Permanently, the first two
File Display years in an easily accessible
place
DIVIDENDS RECEIVABLE AND INTEREST ACCRUED
Investment Delaware Fund Accounting Permanently, the first two
Journal years in an easily accessible
place
Dividend Master Delaware Fund Accounting Permanently, the first two
File Display years in an easily accessible
place
Interest File Delaware Fund Accounting Permanently, the first two
Accrual years in an easily accessible
Activity place
Journal
(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 Delaware Fund Accounting Permanently, the first two
(on line) years in an easily accessible
place
(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 Delaware Fund Accounting Permanently, the first two
Ledger years in an easily accessible
place
(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 F&RM Eric Jones Permanently, the first two
shareholder years in an easily accessible
place
(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 to 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 Division years in an easily accessible
Securities Bank and place
Trust
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 Janus Mutual Funds Six years, the first two
Purchase Order Capital Division years in an easily accessible
place
Notification State Mutual Funds Six years, the first two
From (From Street Bank Division years in an easily accessible
AOS Trading and Trust place
System) 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 Street Bank Division years in an easily accessible
AOS S-T and Trust place
System) Company
Bank Advice Delaware Fund Accounting Six years, the first two
and Issuer years in an easily accessible
Confirmation place
(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.
Trade Delaware Fund Accounting Six Years.
Notification
(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 Delaware Fund Accounting Permanently, the first two
years in an easily accessible
place
(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 identifies of the person responsible for the determination of such
allocation and such division of brokerage commissions or other compensation.
Brokerage Janus Mutual Funds Six Years, the first two
Allocation Capital Division years in an easily accessible
Report place
(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 Janus Mutual Funds Six years, the first two
Authorization Capital Division years in an easily accessible
place
Advisory Law Janet Lindenburg Six years, the first two
Agreements Division Jeremy Sachs 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 Nancy Alford Six years, the first two
Admin. years in an easily accessible
Product place
Management
Pricing Sheets Delware Fund Accounting Permanently, the first two
years in an easily accessible
place
Bank State- Delaware Fund Accounting Six years, the first two
ments, Can- years in an easily accessible
celled Checks place
and Cash
Reconcilia-
tions
March 12, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FUND
ANNUAL REPORT DATED 12/31/97 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000913362
<NAME> CAPITAL APPRECIATION FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 388,859,980
<INVESTMENTS-AT-VALUE> 453,256,183
<RECEIVABLES> 3,498,723
<ASSETS-OTHER> 1,079,485
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 457,834,391
<PAYABLE-FOR-SECURITIES> 6,346,680
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 452,044
<TOTAL-LIABILITIES> 6,798,724
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 337,902,984
<SHARES-COMMON-STOCK> 25,728,647
<SHARES-COMMON-PRIOR> 18,424,975
<ACCUMULATED-NII-CURRENT> 1,290,717
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 47,580,432
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 64,261,534
<NET-ASSETS> 451,035,667
<DIVIDEND-INCOME> 3,589,886
<INTEREST-INCOME> 1,056,314
<OTHER-INCOME> (95,324)
<EXPENSES-NET> (3,260,159)
<NET-INVESTMENT-INCOME> 1,290,717
<REALIZED-GAINS-CURRENT> 47,580,432
<APPREC-INCREASE-CURRENT> 28,947,184
<NET-CHANGE-FROM-OPS> 77,818,333
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (10,296,305)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6,645,666
<NUMBER-OF-SHARES-REDEEMED> (178,409)
<SHARES-REINVESTED> 836,415
<NET-CHANGE-IN-ASSETS> 183,793,810
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 10,296,305
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,940,632
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,260,159
<AVERAGE-NET-ASSETS> 366,234,880
<PER-SHARE-NAV-BEGIN> 14.504
<PER-SHARE-NII> 0.050
<PER-SHARE-GAIN-APPREC> 3.510
<PER-SHARE-DIVIDEND> 0.000
<PER-SHARE-DISTRIBUTIONS> (0.534)
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 17.530
<EXPENSE-RATIO> 0.89
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
