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PROSPECTUS AND APPENDIX
This document is incorporated by reference to Post-Effective Amendment No. 3,
Registration Number 33-70742 filed on Form N-1A on April 30, 1995.
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STATEMENT OF ADDITIONAL INFORMATION
LINCOLN NATIONAL AGGRESSIVE GROWTH FUND, INC.
This Statement of Additional Information should be read in conjunction with the
Prospectus of Lincoln National Aggressive Growth Fund, Inc. (the "Fund") dated
April 29, 1995. You may obtain a copy of the Fund's Prospectus on request and
without charge. Please write Kim Oakman, The Lincoln National Life Insurance
Company, P.O. Box 2340, Fort Wayne, Indiana 46801 or call 1-800-348-1212,
Extension 4912.
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THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS.
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The date of this Statement of Additional Information is April 29, 1995.
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TABLE OF CONTENTS
Page
Investment Objective 2
Investment Policies and Techniques 2
Investment Restrictions 8
Portfolio Transactions and Brokerage 9
Determination of Net Asset Value 10
Appendix
Investment Advisor and Sub-Advisor A-1
Directors and Officers A-2
Custodian A-2
Investment Policies and Techniques (continued) A-6
Options, Futures, Securities Lending, Repurchase and
Reverse Repurchase Agreements
Independent Auditors A-7
Financial Statements A-7
Bond Ratings A-7
Commercial Paper Ratings A-8
U.S. Government Obligations A-8
Taxes A-8
State Requirements A-9
Derivative Transactions - Definitions A-9
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INVESTMENT OBJECTIVE
Lincoln National Aggressive Growth Fund, Inc. (the "Fund") was incorporated in
Maryland in 1993 as an open-end diversified management investment company whose
investment objective is to maximize capital appreciation. The Fund pursues its
investment objective by investing in a diversified portfolio of equity
securities of small and medium-sized companies with favorable growth prospects.
The Fund invests primarily in companies with market capitalizations of between
250 million and 5 billion at the time of purchase. A company's market
capitalization is calculated by multiplying the total number of shares of its
common stock outstanding by the market price of the stock.
The principal risks of this Fund are those associated with investing in smaller,
lesser-known companies. Such companies involve greater risks than investing in
larger, more mature, better known issuers, including increasing the possibility
of portfolio price volatility. Additional risks are discussed under "Risk
Factors," in the Prospectus.
The Fund's investment objective is fundamental and cannot be changed without the
affirmative vote of a majority of the outstanding voting securities of the Fund.
See "General Information," in the Appendix to the Prospectus. There can be no
assurance that the objective of the Fund will be achieved.
INVESTMENT POLICIES AND TECHNIQUES
The Prospectus discusses the investment policies and techniques used to pursue
the Fund's investment objective. The following discussion supplements the
description of the investment policies and techniques in the Prospectus.
Capitalized terms that are not defined herein are defined in the Fund's
Prospectus.
Lower-rated securities are often considered speculative and involve
significantly higher risk of default on the payment of principal and interest or
are more likely to experience significant price fluctuation due to changes in
the issuer's creditworthiness. Market prices of these securities may fluctuate
more than higher-rated debt securities and may decline significantly in periods
of general economic difficulty which may follow periods of rising interest
rates. While the market for lower-rated high-yield corporate debt securities has
been in existence for many years and has weathered previous economic downturns,
the market in recent years has
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TABLE OF CONTENTS
Page
Investment Objective
Investment Policies and Techniques
Investment Restrictions
Portfolio Transactions and Brokerage
Determination of Net Asset Value
Appendix
Investment Advisor and Sub-Advisor
Directors and Officers
Custodian
Investment Policies and Techniques (continued)
Independent Auditors
Financial Statements
Bond Ratings
Commercial Paper Ratings
U.S. Government Obligations
Taxes
State Requirements
Derivative Transactions - Definitions
____________
INVESTMENT OBJECTIVE
Lincoln National Aggressive Growth Fund, Inc. (the "Fund") was incorporated in
Maryland in 1993 as an open-end diversified management investment company whose
investment objective is to maximize capital appreciation. The Fund pursues its
investment objective by investing in a diversified portfolio of equity
securities of small and medium-sized companies with favorable growth prospects.
The Fund invests primarily in companies with market capitalizations of between
250 million and 5 billion at the time of purchase. A company's market
capitalization is calculated by multiplying the total number of shares of its
common stock outstanding by the market price of the stock.
The principal risks of this Fund are those associated with investing in smaller,
lesser-known companies. Such companies involve greater risks than investing in
larger, more mature, better known issuers, including increasing the possibility
of portfolio price volatility. Additional risks are discussed under "Risk
Factors," in the Prospectus.
The Fund's investment objective is fundamental and cannot be changed without the
affirmative vote of a majority of the outstanding voting securities of the Fund.
See "General Information," in the Appendix to the Prospectus. There can be no
assurance that the objective of the Fund will be achieved.
INVESTMENT POLICIES AND TECHNIQUES
The Prospectus discusses the investment policies and techniques used to pursue
the Fund's investment objective. The following discussion supplements the
description of the investment policies and techniques in the Prospectus.
Capitalized terms that are not defined herein are defined in the Fund's
Prospectus.
Lower-rated securities are often considered speculative and involve
significantly higher risk of default on the payment of principal and interest or
are more likely to experience significant price fluctuation due to changes in
the issuer's creditworthiness. Market prices of these securities may fluctuate
more than higher-rated debt securities and may decline significantly in periods
of general economic difficulty which may follow periods of rising interest
rates. While the market for lower-rated high-yield corporate debt securities has
been in existence for many years and has weathered previous economic downturns,
the market in recent years has
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experienced a dramatic increase in the large-scale use of such securities to
fund highly leveraged corporate acquisitions and restructurings. Accordingly,
past experience may not provide an accurate indication of future performance of
the high yield bond market, especially during periods of economic recession.
The market for lower-rated securities may be less active than that for higher-
rated securities, which can adversely affect the prices at which these
securities can be sold. If market quotations are not available, these securities
will be valued in accordance with procedures established by the Board of
Directors, including the use of outside pricing services. Judgment plays a
greater role in valuing lower-rated corporate debt securities than is the case
for securities for which more external sources for quotations and last-sale
information are available. Adverse publicity and changing investor perceptions
may affect the ability of outside pricing services used by the Fund to value its
portfolio securities and the Fund's ability to dispose of these lower-rated debt
securities.
Since the risk of default is higher for lower-rated securities, the Adviser's
and/or Sub-Adviser's research and credit analysis is an integral part of
managing any securities of this type held by the Fund. In considering
investments for the Fund, the Adviser and/or Sub-Adviser, if any, will attempt
to identify those issuers of high-yielding securities whose financial condition
is adequate to meet future obligations, has improved, or is expected to improve
in the future. The Adviser's and/or Sub-Adviser's analysis focuses on relative
values based on such factors as interest or dividend coverage, asset coverage,
earnings prospects, and the experience and managerial strength of the issuer.
There can be no assurance that such analysis will prove accurate.
The Fund may choose, at its expense or in conjunction with others, to pursue
litigation or otherwise exercise its rights as security holder to seek to
protect the interests of security holders if it determines this to be in the
best interest of shareholders.
STRATEGIC TRANSACTIONS
General. The Fund may, but is not required to, utilize various other investment
strategies described in the prospectus under Strategic Portfolio Transactions to
hedge various market risks (such as interest rates, currency exchange rates, and
broad or specific equity or fixed-income market movements), to manage the
effective maturity or duration of fixed-income securities in its portfolio or to
enhance potential gain. Such strategies are generally accepted as modern
portfolio management and are regularly utilized by many mutual funds and other
institutional investors. Techniques and instruments may change over time as new
instruments and strategies are developed or regulatory changes occur. In the
course of pursuing these investment strategies, the Fund may purchase the
contracts described in the prospectus. Strategic Portfolio Transactions may be
used to attempt to protect against possible changes in the market value of
securities held in or to be purchased for the Fund resulting from securities
markets or currency exchange rate fluctuations; to protect the Fund's unrealized
gains in the value of its portfolio securities; to facilitate the sale of such
securities for investment purposes; to manage the effective maturity or duration
of fixed-income securities; or to establish a position in the derivatives
markets as a temporary substitute for purchasing or selling particular
securities. Any or all of these investment techniques may be used at any time
and there is no particular strategy that dictates the use of one technique
rather than another, as use of any Strategic Transaction is a function of
numerous variables including market conditions. The ability of the Fund to
utilize these Strategic Transactions successfully will depend on the Adviser's
or Subadviser's ability to predict pertinent market movements, which cannot be
assured. The Fund will comply with applicable regulatory requirements when
implementing these strategies, techniques and instruments. Strategic
Transactions involving financial futures and options thereon will be purchased,
sold or entered into only for a bona fide hedging, risk management or portfolio
management purposes and not for speculative purposes. Additional information
relating to certain financial instruments or strategies is set forth below. In
addition, see "Special Risks of Strategic Transactions" below for a discussion
of certain risks.
Limitations on Futures and Options Transactions. The Fund intends to file a
notice of eligibility for exclusion
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from the definition of the term "commodity pool operator" with the Commodity
Futures Trading Commission ("CFTC") and the National Futures Association, which
regulates trading in the futures markets, before engaging in any purchases or
sales of futures contracts or options on futures contracts. Pursuant to Section
4.5 of the regulations under the Commodity Exchange Act, each notice of
eligibility will include the following representations:
a) The Fund will use futures contracts and related options solely for bona fide
hedging purposes within the meaning of the definition of bona fide hedging
transactions if the positions are used as part of a portfolio management
strategy and are incidental to the Fund's activities in the cash market, and the
underlying commodity value of the positions at all times will not exceed the sum
of (i) cash or money market instruments set aside in an identifiable manner,
plus margin deposits, (ii) cash proceeds from existing investments due in 30
days and (iii) accrued profits on the positions held by a futures commission
merchant; and
b) The Fund will not enter into any futures contract or option on a futures
contract if, as a result, the sum of initial margin deposits on futures
contracts and related options and premiums paid for options on futures contracts
the Fund has purchased, after taking into account unrealized profits and losses
on such contracts, would exceed 5% of its total assets.
In addition to the above limitations, the Fund will not (a) sell futures
contracts, purchase put options or write call options if, as a result, more than
25% of its total assets would be hedged with futures and options under normal
conditions; (b) purchase futures contracts or write put options if, as a result,
its total obligations upon settlement or exercise of purchased futures contracts
and written put options would exceed 25% of its total assets; or (c) purchase
call options if, as a result, the current value of option premiums for call
options purchased by it would exceed 5% of its total assets. These limitations
do not apply to options attached to or acquired or traded together with their
underlying securities, and do not apply to securities that incorporate features
similar to options.
The limitations on the Fund's investments in futures contracts and options, and
the Fund's policies regarding futures contracts and options discussed elsewhere
are not fundamental policies and may be changed as regulatory agencies permit.
OPTIONS ON CURRENCIES AND SECURITIES
The Fund may purchase and sell (write) put and call options on securities,
although the present intent is to write only covered call options. These covered
call options must remain covered so long as the Fund is obligated as a writer. A
call option written by the Fund is "covered" if the Fund owns the security
underlying the option or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional cash
consideration held in a segregated account by the Fund's Custodian) upon
conversion or exchange of other securities held in its portfolio. A call option
is also covered if the Fund holds on a share-for-share basis a call on the same
security as the call written where the exercise price of the call held is equal
to or less than the exercise price of the call written or greater than the
exercise price of the call written if the difference is maintained by the Fund
in cash, treasury bills or other high grade, short-term debt obligations in a
segregated account with the Fund's Custodian. The premium paid by the purchaser
of an option will reflect, among other things, the relationship of the exercise
price to the market price and volatility of the underlying security, the
remaining term of the option, supply and demand and interest rates.
If the writer of an option wishes to terminate the obligation, it 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 it has been notified
of the exercise of an option. Similarly, 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 purchased. There is no
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guarantee that either a closing purchase or a closing sale transaction can be
effected. To secure the obligation to deliver the underlying security in the
case of a call option, the writer of the option (whether an exchange-traded
option or a NASDAQ option) is required to pledge for the benefit of the broker
the underlying security or other assets in accordance with the rules of The
Options Clearing Corporation (OCC), the Chicago Board of Trade and the Chicago
Mercantile Exchange, institutions which interpose themselves between buyers and
sellers of options. Technically, each of these institutions assumes the other
side of every purchase and sale transaction on an exchange and, by doing so,
guarantees the transaction.
An option position may be closed out only on an exchange, board of trade or
other trading facility which provides a secondary market for an option of the
same series. Although the Fund will generally purchase or write only those
options for which there appears to be an active secondary market, there is no
assurance that a liquid secondary market on an exchange or other trading
facility will exist for any particular option, or at any particular time, and
for some options no secondary market on an exchange or otherwise may exist. In
such event it might not be possible to effect closing transactions in particular
options, with the result that the Fund would have to exercise its options in
order to realize any profit and would incur brokerage commissions upon the
exercise of call options and upon the subsequent disposition of underlying
securities acquired through the exercise of call options or upon the purchase of
underlying securities for the exercise of put options. If the Fund as a covered
call option writer is unable to effect a closing purchase transaction in a
secondary market, it will not be able to sell the underlying security until the
option expires or it delivers the underlying security upon exercise.
Reasons for the absence of a liquid secondary market on an exchange include the
following (i) there may be insufficient trading interest in certain options,
(ii) restrictions may be imposed by an exchange on opening transactions or
closing transactions, or both, (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange, (e.g., the facilities of an exchange
or a clearing corporation may not at all times be adequate to handle current
trading volume); or (vi) one or more exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market on that exchange (or in the class or series of options) would
cease to exist, although outstanding options on that exchange that had been
issued by a clearing corporation as a result of trades in that exchange would
continue to be exercisable in accordance with their terms. There is no assurance
that higher than anticipated trading activity or other unforeseen events might
not, at times, render certain of the facilities of any of the clearing
corporations inadequate, and thereby result in the institution by an exchange of
special procedures which may interfere with the timely execution of customers'
orders. However, the OCC, based on forecasts provided by the U.S. exchanges,
believes that its facilities are adequate to handle the volume of reasonably
anticipated options transactions, and such exchanges have advised such clearing
corporation that they believe their facilities will also be adequate to handle
reasonably anticipated volume.
See "Foreign Currency Options" below, for a discussion of the additional
features (including the risks thereon) of foreign currency option contracts.
OPTIONS ON STOCK INDICES
Options on stock indices are similar to options on stock except that, rather
than the right to take or make delivery of stock at a specified price an option
on a stock index gives the holder the right to receive, upon exercise of the
option, an amount of cash if the closing level of the stock index upon which the
option is based is greater than, in the case of a call, or less than, in the
case of a put, the exercise price of the option. This amount of cash is equal to
such difference between the closing price of the index and the exercise price of
the option expressed in dollars times a specified multiple (the "multiplier").
The writer of the option is obligated, in return for the premium received, to
make delivery of this amount. Unlike stock options, all settlements are in cash.
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The multiplier for an index option performs a function similar to the unit of
trading for a stock option. It determines the total dollar value per contract of
each point in the difference between the exercise price of an option and the
current level of the underlying index. A multiplier of 100 means that a one-
point difference will yield 100. Options on different indices may have different
multipliers.
Except as described below, the Fund will write call options on indices only if
on such date it holds a portfolio of securities at least equal to the value of
the index times the multiplier times the number of contracts. When the Fund
writes a call option on a broadly-based stock market index, it will segregate or
put into escrow with the Custodian, or pledge to a broker as collateral for the
option, cash, cash equivalents or at least one "qualified security" with a
market value at the time the option is written of not less than 100% of the
current index value times the multiplier times the number of contracts. The Fund
will write call options on broadly-based stock market indices only if at the
time of writing it holds a diversified portfolio of stocks.
If the Fund has written an option on an industry or market segment index, it
will so segregate or put into escrow with its Custodian or pledge to a broker as
collateral for the option, at least ten "qualified securities," which are stocks
of an issuer in such industry or market segment, with a market value at the time
the option is written of not less than 100% of the current index times the
multiplier times the number of contracts. Such stocks will include stocks which
represent at least 50% of the Fund holdings in that industry or market segment.
No individual security will represent more than 15% of the amount so segregated,
pledged or escrowed in the case of broadly-based stock market index options or
25% of such amount in the case of industry or market segment index options.
If at the close of business, the market value of such qualified securities so
segregated, escrowed or pledged falls below 100% of the current index value
times the multiplier times the number of contracts, the Fund will segregate,
escrow or pledge an amount in cash Treasury bills or other high grade short-term
debt obligations equal in value to the difference. In addition, when the Fund
writes a call on an index which is in-the-money at the time the call is written,
it will segregate with its Custodian or pledge to the broker as collateral,
cash, U.S. Government or other high grade short-term debt obligations equal in
value to the amount by which the call is in-the-money times the multiplier times
the number of contracts. Any amount segregated pursuant to the foregoing
sentence may be applied to the Fund's obligation to segregate additional amounts
in the event that the market value of the qualified securities falls below 100%
of the current index value times the multiplier times the number of contracts.
However, if the Fund holds a call on the same index as the call written where
the exercise price of the call held is equal to or less than the exercise price
of the call written or greater than the exercise price of the call written if
the difference is maintained by the Fund in cash, Treasury bills or other high
grade short-term debt obligations in a segregated account with the Fund's
Custodian, it will not be subject to the requirements described in this
paragraph.
RISKS OF OPTIONS ON STOCK INDICES. Index prices may be distorted if trading of
certain securities included in the index is interrupted. Trading in the index
options also may be interrupted in certain circumstances, such as if trading
were halted in a substantial number of securities included in the index. If this
occurred, the Fund would not be able to close out options which it had purchased
or written and, if restrictions on exercise were imposed, may be unable to
exercise an option it holds, which could result in substantial losses to the
Fund. It is the Fund's policy to purchase or write options only on indices which
include a number of securities sufficient to minimize the likelihood of a
trading halt in the index.
SPECIAL RISKS OF WRITING CALLS ON STOCK INDICES. Unless the Fund has other
liquid assets which are sufficient to satisfy the exercise of a call, it would
be required to liquidate portfolio securities in order to satisfy the exercise.
Because an exercise must be settled within hours after receiving the notice of
exercise, if the Fund fails to anticipate an exercise it may have to borrow from
a bank (in amounts not exceeding 20% of the value of its total assets) pending
settlement of the sale of securities in its portfolio and would incur interest
charges thereon.
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When the Fund has written a call, there is also a risk that the market may
decline between the time it has a call exercised against it, at a price which is
fixed as of the closing level of the index on the date of exercise, and the time
it is able to sell securities in its portfolio. As with stock options, the Fund
will not learn that an index option has been exercised until the day following
the exercise date. Unlike a call on stock where the Fund would be able to
deliver the underlying securities in settlement, the Fund may have to sell part
of its portfolio in order to make settlement in cash and the price of such
securities might decline before they can be sold. This timing risk makes certain
strategies involving more than one option substantially more risky with index
options than with stock options. For example, even if an index call which the
Fund has written is "covered" by an index call held by the Portfolio with the
same strike price, the Fund will bear the risk that the level of the index may
decline between the close of trading on the date the exercise notice is filed
with the cleaning corporation and the close of trading on the date the Fund
exercises the call it holds or the time the Fund sells the call, which in either
case would occur no earlier than the day following the day the exercise notice
was filed.
OVER-THE-COUNTER OPTIONS AND LIQUID SECURITIES. As indicated in the Prospectus
the Fund may deal in over-the-counter (OTC) options. The position of the staff
of the Commission is that purchased OTC options and the assets used as "cover"
for written OTC options are illiquid securities. The Fund, the Investment
Adviser, and the Sub-Advisers disagree with this position and have found the
dealers with which they engage in OTC options transactions generally agreeable
to and capable of entering into closing transactions. As also indicated in the
Prospectus, the Fund has adopted procedures for engaging in OTC options for the
purpose of reducing any potential adverse impact of such transactions upon the
liquidity of its portfolio.
As part of these procedures the Fund will engage in OTC options transactions
only with primary dealers that have been specifically approved by the Board of
Directors of the Fund. The Fund and the Investment Adviser and/or Sub-Adviser
believe that the approved dealers should be agreeable and able to enter into
closing transactions if necessary and, therefore, present minimal credit risks
to the Fund. The Fund anticipates entering into written agreements with those
dealers to whom it may sell OTC options, pursuant to which it would have the
absolute right to repurchase the OTC options from such dealers at any time at a
price determined pursuant to a formula set forth in certain no-action letters
published by the Commission staff. The Fund will not engage in OTC options
transactions if the amount invested by it in OTC options plus, with respect to
OTC options written by it, the amounts required to be treated as illiquid
pursuant to the terms of such letters (and the value of the assets used as cover
with respect to OTC option sales which are not within the scope of such
letters), plus the amount invested by the Fund in illiquid securities, would
exceed 15% of its total assets. OTC options on securities other than U.S.
Government securities may not be within the scope of such letters and,
accordingly, the amount invested by the Fund in OTC options on such other
securities and the value of the assets used as cover with respect to OTC option
sales regarding such non-U.S. Government securities will be treated as illiquid
and subject to the 15% limitation on assets that may be invested in illiquid
securities. See "Illiquid Investments" below.
FUTURES CONTRACTS AND OPTIONS THEREON.
A futures contract is an agreement in which the writer (or seller) of the
contract agrees to deliver to the buyer an amount of cash or securities equal to
a specific dollar amount times the difference between the value of a specific
fixed-income security or index at the close of the last trading day of the
contract and the price at which the agreement is made. No physical delivery of
the underlying securities is made. When the futures contract is entered into,
each party deposits with a broker or in a segregated custodial account
approximately 5% of the contract amount, called the "initial margin." Subsequent
payments to and from the broker, called "variation margin," will be made on a
daily basis as the price of the underlying security or index fluctuates, making
the long and short positions in the fixtures contracts more or less valuable, a
process known as "marking-to-market." In the case of options on futures
contracts, the holder of the option pays a premium and receives the right, upon
exercise of the option at a specified price during the option period, to assume
a position in the futures contract (a long position if the option is a call and
a short position if the option is a put).
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If the option is exercised by the holder before the last trading day during the
option period, the option writer delivers to the option holder cash in an amount
equal to the difference between the option exercise price and the closing level
of the relevant security or index on the date the option expires.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS. There are several risks in
connection with the use of futures contracts as a hedging device. Successful use
of futures contracts is subject to the ability of the Investment Adviser or Sub-
Adviser to correctly predict movements in the direction of interest rates or
changes in market conditions. These predictions involve skills and techniques
that may be different from those involved in the management of the portfolio
being hedged. In addition, there can be no assurance that there will be a
correlation between movements in the price of the underlying index or securities
and movements in the price of the securities which are the subject of the hedge.
A decision of whether, when and how to hedge involves the exercise of skill and
judgment, and even a well-conceived hedge may be unsuccessful to some degree
because of market behavior or unexpected trends in interest rates.
Although the Fund will purchase or sell futures contracts only on exchanges
where there appears to be an adequate secondary market, there is no assurance
that a liquid secondary market on an exchange will exist for any particular
contract or at any particular time. Accordingly, there can be no assurance that
it will be possible, at any particular time, to close a fixtures position. In
the event the Fund could not close a fixtures position and the value of such
position declined, the Fund would be required to continue to make daily cash
payments of variation margin. However, in the event futures contracts have been
used to hedge portfolio securities, such securities will partially or completely
offset losses on the futures contract. However, there is no guarantee that the
price movements of the securities will, in fact, correlate with the price
movements in the futures contract and thus provide an offset to losses on a
futures contract.
Under regulations of the Commodity Exchange Act, investment companies registered
under the 1940 Act are exempted from the definition of "commodity pool
operator," subject to compliance with certain conditions. The exemption is
conditioned upon a requirement that all of the investment company's futures
transactions constitute bona fide hedging transactions within the meaning of the
regulations of the CFTC.
With respect to long positions assumed by the Fund, it will segregate with its
Custodian an amount of cash, government securities or liquid, high-grade debt
securities so that the amount so segregated plus the amount of initial and
variation margin held in the account of its broker equals the market value of
the futures contracts and thereby insures that the use of futures contracts is
unleveraged.
The hours of trading of futures contracts may not conform to the hours during
which the Fund may trade the underlying securities. To the extent that the
futures markets close before the securities markets, significant price and rate
movements can take place in the securities markets that cannot be reflected in
the futures market.
FOREIGN CURRENCY TRANSACTIONS.
The Fund may hold foreign currency deposits from time to time and may convert
dollars and foreign currencies in the foreign exchange markets. Currency
conversion involves dealer spreads and other costs, although commissions usually
are not charged. Currencies may be exchanged on a spot (i.e., cash) basis, or by
entering into forward contracts to purchase or sell foreign currencies at a
future date and price. Forward contracts generally are traded in an interbank
market conducted directly between currency traders (usually large commercial
banks) and their customers. The parties to a forward contract may agree to
offset or terminate the contract before its maturity, or may hold the contract
to maturity and complete the contemplated currency exchange.
FOREIGN CURRENCY CONVERSION. Although foreign exchange dealers do not charge a
fee for currency conversion, they do realize a profit based on the difference
(the "spread") between prices at which they are
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buying and selling various currencies. Thus, a dealer may offer to sell a
foreign currency to the Fund at one rate, while offering a lesser rate of
exchange should the Fund desire to resell that currency to the dealer.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Fund may enter into these
contracts to protect the value of its portfolio against future changes in the
level of currency exchange rates. The Fund's dealings in forward contracts will
be limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is the purchase or sale of forward contracts with
respect to specific receivables or payables of the Fund generally arising in
connection with the purchase or sale of its portfolio securities and accruals of
interest or dividends receivable and Fund expenses. Position hedging is the sale
of a foreign currency with respect to portfolio security positions denominated
or quoted in that currency. The Fund may not position hedge with respect to a
particular currency for an amount greater than the aggregate market value
(determined at the time of making any sale of a forward contract) of securities
held in its portfolio denominated or quoted in, or currently convertible into,
such currency.
When the Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, or when the Fund anticipates the receipt in a
foreign currency of dividends or interest payments on a security which it holds,
it may desire to "lock in" the U.S. dollar price of the security or the U.S.
dollar equivalent of such dividend or interest payment as the case may be. By
entering into a forward contract for a fixed amount of dollars for the purchase
or sale of the amount of foreign currency involved in the underlying
transactions, it will be able to protect itself against a possible loss
resulting from an adverse change in the relationship between the U.S. dollar and
the subject foreign currency during the period between the date on which the
security is purchased or sold, or on which the dividend or interest payment is
declared, and the date on which such payments are made or received.
Additionally, when the Investment Adviser and/or Sub-Adviser believes that the
currency of a particular foreign country may suffer a substantial decline
against the U.S. dollar, the Fund may enter into a forward contract for a fixed
amount of dollars, to sell the amount of foreign currency approximating the
value of some or all of the securities it holds denominated in such foreign
currency.
The Fund may use currency forward contracts to manage currency risks and to
facilitate transactions in foreign securities. The following discussion
summarizes the principal currency management strategies involving forward
contracts that could be used.
In connection with purchases and sales of securities denominated in foreign
currencies, the Fund may enter into currency forward contracts to fix a definite
price for the purchase or sale in advance of the trade's settlement date. This
technique is sometimes referred to as a "settlement hedge" or "transaction
hedge." The Investment Adviser and/or Sub-Adviser expect to enter into
settlement hedges in the normal course of managing foreign investments. The Fund
could also enter into forward contracts to purchase or sell a foreign currency
in anticipation of future purchases or sales of securities denominated in
foreign currency, even if the specific investments have not yet been selected by
the Investment Adviser and/or Sub-Adviser.
The Fund may also use forward contracts to hedge against a decline in the value
of existing investments denominated in foreign currency. For example, if it
owned securities denominated in pounds sterling, the Fund could enter into a
forward contract to sell pounds sterling in return for U.S. dollars to hedge
against possible declines in the pound's value. Such a hedge (sometimes referred
to as a "position hedge") would tend to offset both positive and negative
currency fluctuations, but would not offset changes in security values caused by
other factors. The Fund could also hedge the position by selling another
currency expected to perform similarly to the pound sterling--for example, by
entering into a forward contract to sell Deutschemarks or European Currency
Units in return for U.S. dollars. This type of hedge, sometimes referred to as a
"proxy hedge," could offer advantages in terms of cost, yield, or efficiency,
but generally will not hedge currency exposure as effectively as a simple hedge
into U.S. dollars. Proxy hedges may result in losses if the currency used to
hedge does not perform similarly to the currency in which the hedged securities
are denominated.
<PAGE>
Under certain conditions, Commission guidelines require investment companies to
set aside cash and appropriate liquid assets in a segregated custodian account
to cover currency forward contracts. As required by Commission guidelines, the
Fund will segregate assets to cover currency forward contracts, if any, whose
purpose is essentially speculative. The Fund will not segregate assets to cover
forward contracts, including settlement hedges, position hedges, and proxy
hedges. Successful use of forward currency contracts will depend on the
Investment Adviser's and/or Sub-Adviser's skill in analyzing and predicting
currency values. Forward contracts may substantially change the Fund's
investment exposure to changes in currency exchange rates, and could result in
losses to the Fund if currencies do not perform as the Investment Adviser and/or
Sub-Adviser anticipates. For example, if a currency's value rose at a time when
the Investment Adviser and/or Sub-Adviser had hedged by selling that currency in
exchange for dollars, the Fund would be unable to participate in the currency's
appreciation. If the Investment Adviser and/or Sub-Adviser hedges currency
exposure through proxy hedges, the Fund could realize currency losses from the
hedge and the security position at the same time if the two currencies do not
move in tandem. Similarly, if the Investment Adviser and/or Sub-Adviser
increases the Fund's exposure to a foreign currency, and that currency's value
declines, the Fund will realize a loss. There is no assurance that the use of
forward currency contracts will be advantageous to the Fund or that it will
hedge at an appropriate time.
FOREIGN CURRENCY OPTIONS. The Fund may purchase U.S. exchange-listed call and
put options on foreign currencies. Such options on foreign currencies operate
similarly to options on securities. Options on foreign currencies are affected
by all of those factors which influence foreign exchange rates and investments
generally.
The value of a foreign currency option is dependent upon the value of the
foreign currency and the U.S. dollar, and may have no relationship to the
investment merits of a foreign security. Because foreign currency transactions
occurring in the interbank market involve substantially larger amounts than
those that may be involved in the use of foreign currency options, investors may
be disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than 1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign currencies
and there is no regulatory requirement that quotations available through dealer
or other market sources be firm or revised on a timely basis. Available
quotation information is generally representative of very large transactions in
the interbank market and thus may not reflect relatively smaller transactions
(less than 1 million) where rates may be less favorable. The interbank market in
foreign currencies is a global, around-the-clock market. To the extent that the
U.S. options markets are closed while the markets for the underlying currencies
remain open, significant price and rate movements may take place in the
underlying markets that cannot be reflected in the options market.
LENDING OF PORTFOLIO SECURITIES
As discussed in the Prospectus, the Fund may lend securities from its portfolio
to brokers, dealers and other financial organizations. Such loans, if and when
made, may not exceed one-third of its total assets. The Fund may not lend its
portfolio securities to Lincoln National Corporation or its affiliates unless it
has applied for and received specific authority from the Commission. Loans of
securities will be collateralized by cash, letters of credit or securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
(U.S. Government securities), which will be maintained at all times in an amount
equal to at least 100% of the current market value of the loaned securities.
From time to time, the Fund may return a part of the interest earned rom the
investment of collateral received for securities loaned to the borrower and/or a
third party, which is unaffiliated with the Fund or with Lincoln National
Corporation, and which is acting as a "finder."
In lending its portfolio securities, the Fund can increase its income by
continuing to receive interest on the loaned securities as well as by either
investing the cash collateral in short-term instruments or obtaining yield
<PAGE>
in the form of interest paid by the borrower when government securities are used
as collateral. Requirements of the Commission, which may be subject to future
modifications, currently provide that the following conditions must be met
whenever portfolio securities are loaned: (a) the Fund must receive at least
100% cash collateral or equivalent securities from the borrower; (b) the
borrower must increase such collateral whenever the market value of the loaned
securities rises above the level of such collateral; (c) the Fund must be able
to terminate the loan at any time; (d) the Fund must receive reasonable interest
on the loan, as well as an amount equal to any dividends, interest or other
distributions on the loaned securities, and any increase in market value; (e)
the Fund may pay only reasonable custodian fees in connection with the loan; and
(f) voting rights on the loaned securities may pass to the borrower; however, if
a material event adversely affecting the investment occurs, the Fund's Board of
Directors must terminate the loan and regain the right to vote the securities.
The risks in lending portfolio securities, as with other extensions of secured
credit, consist of possible delay in receiving additional collateral or in the
recovery of the securities or possible loss of rights in the collateral should
the borrower fail financially.
WHEN-ISSUED SECURITIES.
As discussed in the Prospectus, the Fund may purchase securities on a "when-
issued" basis. When it agrees to purchase securities, the Custodian will set
aside cash or liquid portfolio securities equal to the amount of the commitment
in a separate account. Normally, the Custodian will set aside portfolio
securities to satisfy a purchase commitment. In such a case, the Fund may be
required subsequently to place additional assets in the separate account in
order to assure that the value of the account remains equal to the amount of the
Fund's commitment. It may be expected that the Fund's net assets will fluctuate
to a greater degree when it sets aside portfolio securities to cover such
purchase commitments than when it sets aside cash. The Fund does not intend to
purchase "when-issued" securities for speculative purposes but only in
furtherance of its investment objective. Because it will set aside cash or
liquid portfolio securities to satisfy its purchase commitments in the manner
described, the Fund's liquidity and the ability of the Investment Adviser and
Sub-Adviser to manage it might be affected in the event its commitments to
purchase when-issued securities ever exceeded 25% of the value of its assets.
When the Fund engages in "when-issued" transactions, it relies on the seller to
consummate the trade. Failure of the seller to do so may result in the Fund's
incurring a loss or missing the opportunity to obtain a price considered to be
advantageous.
ILLIQUID INVESTMENTS.
Illiquid investments are investments that cannot be sold or disposed of in the
ordinary course of business at approximately the prices at which they are valued
under the supervision of the Board of Directors. The Investment Adviser and/or
Sub-Adviser determine the liquidity of the Fund's investments and monitors
trading activity in illiquid investments. In determining the liquidity of
investments, the Investment Adviser and/or Sub-Adviser may consider various
factors including (1) the frequency of trades and quotations, (2) the number of
dealers and prospective purchasers in the marketplace (3) dealer undertakings to
make a market, (4) the nature of the security (including any demand or tender
features), and (5) the nature of the marketplace for trades (including the
ability to assign or offset the Fund's rights and obligations relating to the
investment). Investments currently considered to be illiquid include repurchase
agreements not entitling the non-government stripped fixed-rate mortgage-backed
securities, and certain restricted securities and government-stripped fixed-rate
mortgage backed securities determined by the Investment Adviser and/or Sub-
Adviser to be illiquid. Rule 144A securities for which a market exists will not
be considered illiquid securities. In the absence of market quotations, illiquid
investments are priced at fair value as determined in good faith by the Pricing
Committee of the Board of Directors.
REPURCHASE AGREEMENTS.
The Fund may additionally engage in repurchase agreement transactions. Under the
terms of a typical
<PAGE>
repurchase agreement, the Fund would acquire an underlying debt obligation for a
relatively short period (usually not more than one week) subject to an
obligation of the seller to repurchase, and the Fund to resell, the obligation
at an agreed-upon price and time, thereby determining the yield during the
Fund's holding period. This arrangement results in a fixed rate of return that
is not subject to market fluctuations during the Fund's holding period. The Fund
will enter into repurchase agreements with respect to their portfolio securities
with member banks of the Federal Reserve System or primary government securities
dealers recognized by the Federal Reserve Bank of New York. Under each
repurchase agreement, the selling institution will be required to maintain the
value of the securities subject to the repurchase agreement at not less than
their repurchase price, including accrued interest earned on the underlying
securities.
Repurchase agreements could involve certain risks in the event of default or
insolvency of the other party, including possible delays or restrictions upon
the Fund's ability to dispose of the underlying securities. The Investment
Adviser and/or Sub-Adviser, acting under the supervision of the Fund's Board of
Directors, review the creditworthiness of those banks and dealers with which the
Fund enter into repurchase agreements to evaluate these risks, and monitors on
an ongoing basis the value of the securities subject to repurchase agreements to
ensure that the collateral is maintained at the required level.
INVESTMENT RESTRICTIONS
The Fund has adopted policies and investment restrictions. The investment
restrictions numbered 1 through 8 below may not be changed without a majority
vote of its outstanding shares, and are considered fundamental. Such majority is
defined in the Act as the vote of the lesser of (i) 67% or more of the
outstanding voting securities present at a meeting, if the holders of more than
50% of the outstanding voting securities are present in person or by proxy, or
(ii) more than 50% of the outstanding voting securities. All percentage
limitations expressed in the following investment restrictions are measured
immediately after and giving effect to the relevant transaction. Investment
restrictions numbered 9 through 12 may be changed by the vote of a majority of
the Board of Directors.
The Fund may not:
1. Purchase any security (other than securities issued or guaranteed by the
U.S. Government or its agencies or instrumentalities) if, immediately after and
as a result of such investment (a) more than 5% of the value of its total assets
would be invested in securities of the issuer, except that, as to 25% of its
total assets, up to 10% of its total assets may be invested in securities issued
or guaranteed as to payment of interest and principal by a foreign government or
its agencies or instrumentalities or by a multinational agency, or (b) it would
hold more than 10% of the voting securities of the issuer, or (c) more than 25%
of the value of its assets would be invested in a single industry. Each of the
electric utility, natural gas distribution, natural gas pipeline, combined
electric and natural gas utility, and telephone industries shall be considered
as a separate industry for this purpose;
2. Buy or sell real estate or commodities or commodity contracts; however, it
may invest in debt securities secured by real estate or interests therein, or
issued by companies which invest in real estate or interests therein, including
real estate investment trusts, and may purchase or sell currencies (including
forward currency contracts) and financial futures contracts and options thereon;
3. Acquire securities subject to restrictions on disposition or securities for
which there is no readily available market, or enter into repurchase agreements
or purchase time deposits maturing in more than seven days, if, immediately
after and as a result, the value of such securities would exceed, in the
aggregate, 15% of its total assets;
<PAGE>
4. Engage in the business of underwriting securities of other issuers, except
to the extent that the disposal of an investment position may technically cause
the Fund to be considered an underwriter as that term is defined under the
Securities Act of 1933, as amended;
5. Make loans in an aggregate amount in excess of one-third of its total
assets, taken at the time any loan is made, provided that entering into certain
repurchase agreements and purchasing debt securities shall not be deemed loans
for the purposes of this restriction;
6. Make short sales of securities or maintain a short position if, when added
together more than 25% of the value of its net assets would be (i) deposited as
collateral for the obligation to replace securities borrowed to effect short
sales and (ii) allocated to segregated accounts in connection with short sales;
7. Borrow money, except from banks for temporary or emergency purposes not in
excess of one-third of the value of its assets;
8. Invest in securities of other investment companies except as may be acquired
as part of a merger, consolidation, reorganization or acquisition of assets and
except that it may invest up to 5% of its total assets in the securities of any
one investment company, but may not own more than 3% of the securities of any
investment company or invest more than 10% of its total assets in the securities
of other investment companies.
9. Invest in securities of any issuer if, to its knowledge, any officer or
director of the Fund or LNIMC or the Fund's Sub- Adviser owns more than 1/2 of
the 1% of the outstanding securities of such issuer, and such officers and
directors who own more than 1/2 of the 1% of the outstanding securities of such
issuer, own in the aggregate more than 5% of the outstanding securities of such
issuer;
10. Purchase any security if as a result it would then have more than 5% of its
total assets (determined at the time of investment) invested in securities of
companies (including predecessors) less than three years old;
11. Enter into repurchase agreements with maturities in excess of seven days if
such investment, together with other investments which are not readily
marketable, exceed 15% of its total assets. This restriction shall not apply to
securities eligible for resale to institutional buyers under Rule 144A of the
Securities Act of 1933;
12. Make investments for the purpose of exercising control or management.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser and Sub-Adviser are responsible for decisions to buy and sell
securities and other investments for the Fund, the selection of brokers, dealers
and futures commission merchants to effect the transactions, and the negotiation
of brokerage commissions, if any. In this section, the term "Adviser" includes
the Sub-Adviser. Purchases and sales of securities on a stock exchange are
effected through brokers who charge a commission for their services. Broker-
dealers may also receive commissions in connection with options and futures
transactions including the purchase and sale of underlying securities upon the
exercise of options. Orders may be directed to any broker or futures commission
merchant.
In the over-the-counter market, securities are generally traded on a "net" basis
with dealers acting as principal for their own accounts without a stated
commission, although the price of the security usually includes a profit to the
dealer. In underwritten offerings, securities are purchased at a fixed price
which includes an amount of compensation to the underwriter, generally referred
to as the underwriter's concession or discount. On occasion, certain money
market instruments may be purchased directly from an issuer, in which case no
commissions or discounts are paid.
The Adviser currently provides investment advice to a number of other clients.
See "Management of the
<PAGE>
Fund" in the Appendix to the Prospectus. It will be the practice of the Adviser
to allocate purchase and sale transactions among the Fund and others whose
assets it manages in such manner as it deems equitable. In making such
allocations, major factors to be considered are investment objectives, the
relative size of portfolio holdings of the same or comparable securities, the
availability of cash for investment, the size of investment commitments
generally held and the opinions of the persons responsible for managing the
portfolios of the Fund and other client accounts. Fund securities are not
purchased from or sold to the Adviser or any affiliated person (as defined in
the Act) of the Adviser.
In connection with effecting portfolio transactions, primary consideration will
be given to securing most favorable price and efficient execution. Within the
framework of this policy, the reasonableness of commission or other transaction
costs is a major factor in the selection of brokers and is considered together
with other relevant factors, including financial responsibility, research and
investment information and other services provided by such brokers. It is
expected that, as a result of such factors, commission rates charged by some
brokers may be greater than the amounts other brokers might charge. The Adviser
may determine in good faith that the amount of such higher transaction costs is
reasonable in relation to the value of the brokerage and research services
provided. The Board of Directors of the Fund will review regularly the
reasonableness of commission and other transaction costs incurred by the Fund in
the light of facts and circumstances deemed relevant from time to time, and, in
that connection, will receive reports from the Adviser and published data
concerning transaction costs incurred by institutional investors generally. The
nature of the research services provided to the Adviser by brokerage firms
varies from time to time but generally includes current and historical financial
data concerning particular companies and their securities; information and
analysis concerning securities markets and economic and industry matters; and
technical and statistical studies and data dealing with various investment
opportunities, risks and trends, all of which the Adviser regards as a useful
supplement to its own internal research capabilities. The Adviser may from time
to time direct trades to brokers which have provided specific brokerage or
research services for the benefit of the Adviser's clients; in addition the
Adviser may allocate trades among brokers that generally provide superior
brokerage and research services. Research services furnished by brokers are used
for the benefit of some or all of the Adviser's clients and not solely or
necessarily for the benefit of the Fund. The Adviser believes that the value of
research services received is not determinable and does not significantly reduce
its expenses. The Fund does not reduce its fee to the Adviser by any amount that
might be attributable to the value of such services.
If the Fund effects a closing purchase transaction with respect to an option
written by it, normally such transaction will be executed by the same broker-
dealer who executed the sale of the option. If a call written by the Fund is
exercised, normally the sale of the underlying securities will be executed by
the same broker-dealer who executed the sale of the call.
The writing of options by the Fund will be subject to limitations established by
each of the exchanges governing the maximum number of options in each class
which may be written by a single investor or group of investors acting in
concert, regardless of whether the options are written on the same or different
exchanges or are held or written in one or more accounts or through one or more
brokers. Thus, the number of options which the Fund may write may be affected by
options written by other investment advisory clients of the Adviser. An exchange
may order the liquidations of positions found to be in excess of these limits,
and it may impose certain other sanctions. As of the date of this Statement of
Additional Information, these limits (which are subject to change) are 2,000
options (200,000 shares) in each class of puts or calls.
DETERMINATION OF NET ASSET VALUE
A description of the days on which the Fund's net asset value per share will be
determined is given in the Prospectus. The New York Stock Exchange's most recent
announcement (which is subject to change) states that in 1995 it will be closed
on President's Day, February 20; Good Friday, April 14; Memorial Day, May 29;
<PAGE>
Independence Day, July 4; Labor Day, September 4; Thanksgiving Day, November 23;
and Christmas Day, December 25. It may also be closed on other days.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION APPENDIX
This document is incorporated by reference to Post-Effective Amendment No. 3,
Registration Number 33-70742 filed on Form N-1A on April 30, 1995.
