LINCOLN NATIONAL AGGRESSIVE GROWTH
PROSPECTUS
(This is incorporated by reference to Post Effective Amendment #3
filed 4/28/95.)
LINCOLN NATIONAL AGGRESSIVE GROWTH
APPENDIX
(This is incorporated by reference to Post Effective Amendment #3
filed 4/28/95.)
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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.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS.
The date of this Statement of Additional Information is April 29,
1995.
(Includes revisions effective August 1, 1995.)
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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
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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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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 has
filed 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:
Normally the Fund expects to use futures contracts and
related options solely for bona fide hedging purposes, as that
term is defined in CFTC regulations. However, in addition, the
Fund may take positions in futures contracts and related options
which do not come with the CFTC definition, as long as the
aggregate initial margin and premiums required to establish those
positions does not exceed five percent of the net asset value of
the Fund (after taking into account unrealized profits and
unrealized losses on any such contracts into which it has
entered).
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 or other permitted
transactions within the meaning of the regulations of the CFTC.
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.
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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
investmments 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>
LINCOLN NATIONAL AGGRESSIVE GROWTH
APPENDIX SAI
(This is incorporated by reference to Post Effective Amendment #3
filed 4/28/95.)
