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LINCOLN NATIONAL
AGGRESSIVE GROWTH FUND, INC.
SUMMARY DESCRIPTION OF THE FUND
The investment objective of the Aggressive Growth Fund (fund) is to maximize the
value of your shares (capital appreciation). The fund pursues this objective by
buying and holding (investing in) a diversified group of domestic equity
securities (stocks) of small and medium-sized companies: companies traded on
U.S. securities markets with market capitalizations, at the time of purchase,
equivalent to those of companies included in the Russell Midcap Growth Index. As
of December 31, 1998, this index included companies with market capitalizations
between $100 million and $28 billion. However, the fund primarily will purchase
companies with market capitalizations between $1 billion and $10 billion.
The fund's main investment strategy is to invest in stocks of companies believed
either:
- - to have earnings expected to grow faster than similar-sized companies or
- - to be undervalued in the market relative to other companies in an industry.
This investment strategy places little importance on dividend income.
The main investment risks of choosing to invest your contract assets in the fund
are as follows:
- - the value of the fund's shares will fluctuate, and you could lose money;
- - the value of the fund's stock investments -- and, therefore, the value of the
fund's shares -- will fluctuate independently of large company stock prices
and the broad stock market indices, such as the Standard & Poor's 500
Composite Stock Index (S&P 500); and
- - investing in the stocks of small and medium-sized, less mature, lesser-known
companies involves greater risks than those normally associated with investing
in the stocks of larger, more mature, well-known companies, including greater
and more rapid fluctuations in the value of these stocks, and, therefore, the
fund's shares.
The following information provides some indication of the risks of choosing to
invest your contract assets in the fund. The information shows:
- - changes in the fund's performance from year to year and
- - how the fund's average annual returns for one year and the fund's lifetime
compare with those of a broad measure of market performance.
Please note that the past performance of the fund is not necessarily an
indication of how the fund will perform in the future. Further, the returns
shown do not reflect variable contract expenses. If reflected the returns shown
would be lower.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
ANNUAL TOTAL RETURNS
<S> <C>
Year Annual Total Return
1994 -9.37%
1995 34.15%
1996 17.02%
1997 23.09%
1998 -6.20%
</TABLE>
During the periods shown in the above chart, the fund's highest return for a
quarter occurred in the third quarter of 1997 at: 19.49%
The fund's lowest return for a quarter occurred in the third quarter of 1998 at:
(-25.90)%
AVERAGE ANNUAL TOTAL RETURN
(FOR PERIODS ENDED 12/31/98)
<TABLE>
<CAPTION>
PERIOD BACK AGG. GROWTH S&P 400*
<S> <C> <C>
- -------------------------------------------------------------------
1 year (-6.2)% 19.1%
5 year N/A N/A
10 year N/A N/A
Lifetime** 10.44% 18.84%
</TABLE>
* The S&P Midcap 400 is the Standard & Poor's Composite Index of 400 stocks, a
widely recognized unmanaged index of common stock prices of medium-sized
companies.
** The fund's lifetime began January 3, 1994. Lifetime index performance,
however, began January 1, 1994.
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INVESTMENT STRATEGIES
The investment objective of the fund is to maximize capital appreciation (as
measured by the change in the value of the fund's shares over time).
The fund pursues its objective by investing in a diversified group of domestic
stocks primarily of small and medium-sized companies: companies traded on U.S.
securities markets with market capitalizations, at the time of purchase,
equivalent to those of companies included in the Russell Midcap Growth Index.
(This index is an unmanaged index of common stock prices of companies with
greater-than-average growth orientation. Of the 1,000 largest U.S. companies,
this index includes only the 800 smallest companies.) As of December 31, 1998,
this index included companies with market capitalizations between $100 million
and $28 billion. However, the fund will primarily purchase companies with market
capitalizations between $1 billion and $10 billion. (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. As a point of
reference, as of December 31, 1998, the average market capitalization of the S&P
500, a broad based market index representative of larger, typically more
financially stable companies, was $87 billion.)
The fund seeks to invest in companies believed either:
- - to have earnings expected to grow faster than similar-sized companies, or
- - to be undervalued in the market relative to the companies' industry peers.
The companies sought typically have:
- - high quality management,
- - a leading or dominant position in a product, and/or
- - a relatively high rate of return on invested capital.
When selecting investments, the fund places little importance on the expected
dividend income. The fund will consider stock investments to be possible sell
candidates when the fundamental reason for a company's expected acceleration of
earnings fails to materialize.
The fund expects its annual portfolio turnover rate to be between 85% and 135%
in any year. (For example, the fund would have a rate of portfolio turnover of
100%, if the fund replaced all of its investments in one year.) Market
conditions could result in a greater degree of market activity and a portfolio
turnover rate as high as 160%. High turnover could result in additional
brokerage commissions to be paid by the fund. This would increase fund expenses.
The fund's portfolio turnover was 102.33% in 1998 and 105.07% in 1997.
Effective May 1, 1999, Putnam Investment Management, Inc. became the new
sub-advisor to the fund. Putnam expects to restructure the fund's portfolio by
replacing approximately 77% of the securities held by the fund. As a result, the
fund's portfolio turnover rate for 1999 is expected to be higher than the normal
range. Accordingly, this restructuring could negatively impact the fund's
performance as a result of increased fund brokerage commissions as well as other
transaction costs and losses associated with liquidating certain securities.
OTHER STRATEGIES
The fund may invest 100% of its assets in money market instruments and hold a
portion of its assets in cash for liquidity purposes, as a temporary defensive
strategy. The fund may use this temporary defensive strategy when market
conditions limit the fund's ability to use its other investment strategies to
identify and obtain suitable investments. The fund, in doing so, would not be
pursuing its investment objective. The fund also may hold cash or money market
instruments while seeking appropriate investments.
The fund also uses other investment strategies, to a lesser degree, to pursue
its investment objective. These other strategies include investing in foreign
stocks that are publicly traded in the U.S. markets. The fund's SAI describes
these other investment strategies and the risks they involve.
RISKS OF INVESTMENT STRATEGIES
Investing in stocks involves the risk that the value of the stocks purchased
will fluctuate. These fluctuations could occur for a single company, an
industry, a sector of the economy, or the stock market as a whole. These
fluctuations could cause the value of the fund's stock investments -- and,
therefore, the value of the fund's shares held under your contract -- to
fluctuate in value, and you could lose money.
Investing in stocks of smaller and medium-sized, less mature, lesser-known
companies involves greater risks than those normally associated with larger,
more mature, well-known companies. The fund runs a risk of increased and more
rapid fluctuations in the value of its stock investments. This is due to the
greater business risks of small size and limited product lines, markets,
distribution channels, and financial and managerial resources. Historically, the
price of small and medium capitalization stocks and stocks of recently organized
companies have fluctuated more than the larger capitalization stocks included in
the S&P 500. One reason is
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<PAGE>
that smaller and medium-sized companies have less certain prospects for growth,
a lower degree of liquidity in the markets for their stocks, and greater
sensitivity to changing economic conditions.
Additionally, the prices of small and medium-sized company stocks may fluctuate
independently of larger company stock prices. Small and medium-sized company
stocks may decline in price as large company stock prices rise, or rise in price
as large company stock prices decline. Many independent factors lead to this
result, such as the current and anticipated global economic environment and
current and anticipated direction of interest rates in the United States, for
example. Slower economic conditions or increasing interest rates may have been
reasons historically for declining values in small and medium capitalization
companies. The stock of companies with small and medium stock market
capitalizations may trade less frequently and in limited volume. Therefore, you
should expect that the net asset value of the fund's shares may fluctuate more
than broad stock market indices such as the S&P 500, and may fluctuate
independently from those indices.
You may consider choosing the fund for investing some portion of your overall
contract assets (1) if you are seeking the possibility of maximum capital
appreciation without regard for dividend income and (2) as long as you are
comfortable with the additional risks of investing in securities of smaller and
medium-sized, less mature, lesser-known companies.
INVESTMENT ADVISER AND PORTFOLIO MANAGER
The fund's investment adviser is Lincoln Investment Management, Inc. (Lincoln
Investment). You can find information about Lincoln Investment in the General
Prospectus Disclosure under "Management of the funds -- Investment adviser."
Lincoln Investment is responsible for overall management of the fund's
securities investments. This includes monitoring the fund's sub-advisor, Putnam
Investment Management, Inc. (Putnam). Putnam's address is One Post Office
Square, Boston, MA 02109.
Putnam is responsible for the day-to-day management of the fund's securities
investments. Putnam, founded in 1937, manages in excess of $300 billion on
behalf of institutions and individuals through separately-managed accounts,
pooled funds, and mutual funds. Putnam manages the fund on a team basis. This
mid-cap management team is headed by Eric M. Wetlaufer, CFA, Managing Director
and Chief Investment Officer of Putnam's MidCap Growth Equity Group. Mr.
Wetlaufer has been with Putnam since 1997 and has 14 years of investment
experience. He is a graduate of Wesleyan University.
Putnam assumed portfolio management responsibility for the fund on May 1, 1999
by replacing the fund's previous sub-advisor. The switch to Putnam will not
result in any material change to the fund's investment policies and techniques.
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LINCOLN NATIONAL
AGGRESSIVE GROWTH FUND, INC.
DESCRIPTION OF THE FUND
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's investment
objective and certain investment restrictions are fundamental and cannot be
changed without the affirmative vote of a majority of the outstanding voting
securities of the fund. The fund may change its non-fundamental investment
policies without prior shareholder approval. See "Investment restrictions."
There can be no assurance that the objective of the fund will be achieved.
References to advisor in this SAI include both Lincoln Investment Management,
Inc. (Lincoln Investment) and until May 1, 1999 Lynch & Mayer, Inc., and Putnam
Investment Management, Inc. thereafter unless the context otherwise indicates.
ADDITIONAL INVESTMENT STRATEGIES AND RISKS
The Prospectus discusses the fund's principal investment strategies used to
pursue the fund's investment objective and the risks of those strategies. The
following discussion describes other investment strategies that the fund may use
as market conditions warrant, and notes the risks associated with these other
investment strategies. (Italicized terms that are not defined herein are defined
in the fund's Prospectus.)
As general matter, the fund will invest mainly in common stocks of small and
medium-sized companies. The fund also may invest up to 35% of the value of its
assets in convertible bonds; convertible preferred stock and warrants to
purchase common stock; futures contracts; and options contracts.
The fund also may invest in the following types of instruments or use the
following investment strategies:
CONVERTIBLE SECURITIES
The fund may invest in securities that either have warrants or rights attached,
or are otherwise convertible. A convertible security is typically a fixed-income
security (a bond or preferred stock) that may be converted at a stated price
within a specified period of time into a specified number of shares of common
stock of the same or a different issuer. Convertible securities are generally
senior to common stocks in a corporation's capital structure but are usually
subordinate to similar non-convertible securities. Convertible securities
provide a fixed-income stream which is generally higher in yield than the income
that can be derived from a common stock, but lower than that afforded by a
similar non-convertible security. Because it can be converted into common stock,
frequently a convertible security will allow its holder to take advantage of
increases in the market price of that common stock. In general, the market value
of a convertible security is at least the higher of its investment value (that
is, its value as a fixed-income security) or its conversion value (that is, its
value upon conversion into its underlying common stock). While no securities
investment is without some risk, investments in convertible securities generally
entail less risk than investments in the common stock of the same issuer.
U.S. GOVERNMENT SECURITIES
The fund may also invest in securities of the U.S. Government. Securities
guaranteed by the U.S. Government include: (1) direct obligations of the U.S.
Treasury (such as Treasury bills, notes and bonds) and (2) federal agency
obligations guaranteed as to principal and interest by the U.S. Treasury [such
as Government National Mortgage Association (GNMA) certificates and Federal
Housing Administration (FHA) debentures]. These securities are of the highest
possible credit quality, because the payment of principal and interest is
unconditionally guaranteed by the U.S. Government. They are subject to
variations in market value due to fluctuations in interest rates, but, if held
to maturity are deemed to be free of credit risk for the life of the investment.
Securities issued by U.S. Government instrumentalities and certain federal
agencies are neither direct obligations of, nor are they guaranteed by, the U.S.
Treasury. However, they do generally involve federal sponsorship in one way or
another. Some are backed by specific types of collateral. Some are supported by
the issuer's right to borrow from the U.S. Treasury. Some are supported by the
discretionary authority of the U.S. Treasury to purchase certain obligations of
the issuer. Others are supported only by the credit of the issuing government
agency or instrumentality. These agencies and instrumentalities include, but are
not limited to, Federal Land Banks, Farmers Home Administration, Central
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<PAGE>
Bank for Cooperatives, Federal Intermediate Credit Banks and Federal Home Loan
Banks. There is no guarantee that the government will support these types of
securities, and therefore they may involve more risk than other government
obligations.
U.S. Government securities may be acquired by the fund in the form of
separately-traded principal and interest segments of selected securities issued
or guaranteed by the U.S. Treasury. These segments are traded independently
under the Separate Trading of Registered Interest and Principal Securities
(STRIPS) program. Under the STRIPS program, the principal and interest parts are
individually numbered and separately issued by the U.S. Treasury at the request
of depository financial institutions, which then trade the parts independently.
Obligations of the Resolution Funding Corp. are similarly divided into principal
and interest parts and maintained on the book entry records of the Federal
Reserve Banks.
The fund may also invest in custodial receipts that evidence ownership of future
interest payments, principal payments, or both, on certain U.S. Treasury notes
or bonds in connection with programs sponsored by banks and brokerage firms.
Such notes and bonds are held in custody by a bank on behalf of the owners of
the receipts. These custodial receipts are known by various names, including
Treasury Receipts (TRs), Treasury Interest Guarantee Receipts (TIGRs), and
Certificates of Accrual on Treasury Securities (CATS) and may not be deemed U.S.
Government securities.
The fund may invest occasionally in collective investment vehicles, the assets
of which consist principally of U.S. Government securities or other assets
substantially collateralized or supported by such securities, such as government
trust certificates.
In general, the U.S. Government securities in which the fund invests do not have
as high a yield as do more speculative securities not supported by the U.S.
Government or its agencies or instrumentalities.
MONEY MARKET INSTRUMENTS
The fund may invest in money market instruments without limit for temporary or
defensive purposes. These are shorter-term debt securities generally maturing in
one year or less. They include:
1. Commercial paper (short-term notes up to nine months duration issued by
corporations or government bodies);
2. Commercial bank obligations (certificates of deposit, interest-bearing time
deposits), bankers' acceptances (time drafts on a commercial bank where the
bank accepts an irrevocable obligation to pay at maturity), and documented
discount notes (corporate promissory discount notes accompanied by a
commercial bank guarantee to pay at maturity);
3. Corporate bonds and notes (corporate obligations that mature, or that may be
redeemed, in one year or less); and/or
4. Savings association obligations (certificates of deposit issued by mutual
savings banks or savings and loan associations).
Even though certain floating or variable rate obligations (securities which have
a coupon rate that changes at least annually and generally more frequently) have
maturities in excess of one year, they are also considered to be short-term debt
securities.
SPECIAL SITUATIONS
At times, the fund may invest in certain securities under special situations. A
special situation arises when, in the advisor's or sub-advisor's opinion, the
securities of a particular company will be recognized and will appreciate in
value due to a specific development at that company. Developments creating a
special situation might include a new product or process, a management change, a
technological breakthrough or another event considered significant. Investment
in special situations may carry an additional risk of loss in the event that the
anticipated development does not occur or does not attract the expected
attention.
The fund may invest in the securities of companies issuers which have been in
continuous operation for less than three years, or have capitalizations of less
than $250 million at the time of purchase. Securities of these companies may
have limited liquidity which can result in their being priced lower than they
may be otherwise. Investments in unseasoned or smaller companies are more
speculative and involve greater risk than do investments in companies with
established operating records or that are larger.
FOREIGN INVESTMENTS
The fund may invest up to 15% of its assets in securities of foreign issuers.
For these purposes, foreign corporate securities are stocks of companies
organized, or having a majority of their assets, or earning a majority of their
operating income, in a country outside of the U.S. Securities of foreign issuers
made trade on U.S. or foreign markets.
Foreign investing involves risks that differ from investing in U.S. markets. One
important risk is that of fluctuation in currency exchange rates. When the
advisor or
AG-2
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sub-advisor believes that a currency in which a portfolio security or securities
is denominated may suffer a decline against the U.S. dollar, it may hedge that
risk. It does so by entering into a forward contract to sell an amount of
foreign currency approximating the value of some or all of the portfolio
securities denominated in that foreign currency.
For a discussion of other risks inherent in foreign investing, and how the funds
intend to handle them, see "Foreign investments" in the General SAI Disclosure
for the 11 funds.
WHEN-ISSUED SECURITIES AND FIRM COMMITMENT AGREEMENTS
The fund may purchase securities on a delayed delivery or when-issued basis and
enter into firm commitment agreements (transactions where the payment obligation
and interest rate are fixed at the time of the transaction but the settlement is
delayed). The transactions may involve either corporate or government
securities. The fund, as purchaser, assumes the risk of any decline in value of
the security beginning on the date of the agreement or purchase. The fund may
invest in when-issued securities in order to take advantage of securities that
may be especially under or over valued when trading on a when-issued basis. 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.
The fund will segregate liquid assets such as cash, U.S. Government securities,
or other appropriate high grade debt obligations in an amount sufficient to meet
its payment obligations in these transactions. Although these transactions will
not be entered into for leveraging purposes, to the extent the fund's aggregate
commitments under these transactions exceed its holdings of cash and securities
that do not fluctuate in value (such as money market instruments), the fund
temporarily will be in a leveraged position (i.e., it will have an amount
greater than its net assets subject to market risk). 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.
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 advisor and sub-advisor to manage it might be affected in the
event its commitments to purchase when-issued securities ever exceeded 25% of
the value of its total 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.
Should market values of the fund's portfolio securities decline while the fund
is in a leveraged position, greater depreciation of its net assets would likely
occur than if it were not in such a position. The fund will not borrow money to
settle these transactions. Instead, it will liquidate other portfolio securities
in advance of settlement, if necessary, to generate additional cash to meet its
obligations.
SECTOR INVESTING
The fund may concentrate its investments in specific sectors of the economy. The
fund, however, will never invest more than 25% of its total assets in any single
industry within a sector of the economy. Sectors investments also will be
limited to the greater of twice the percentage weighting in any one sector when
compared to its representation in the fund's stock market index benchmark or 25%
of the fund's total assets. The risk of sector investing is that adverse
conditions affecting one sector in which the fund has concentrated its
investments could cause the value of the fund's shares and investments to
fluctuate or decline independently of the performance of the economy or the
stock markets in general.
BORROWING
The fund may borrow money for temporary or emergency purposes in amounts not
exceeding 25% of its total assets. If the fund borrows money, its share price
may be subject to greater fluctuation until the amount borrowed is paid off.
Purchasing securities when the fund has borrowed money may involve an element of
leverage. It will not purchase additional securities when the amount borrowed
exceeds 5% of its total assets.
ILLIQUID INVESTMENTS
Up to 15% of the fund's assets may be invested in securities or other
investments that are not readily marketable, including these:
1. Repurchase agreements with maturities greater than seven calendar days;
2. Time deposits maturing in more than seven calendar days;
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3. To the extent a liquid secondary market does not exist for such instruments,
futures contracts and options on futures;
4. Certain over-the-counter options; loans and other direct debt instruments;
certain restricted securities and government-stripped fixed-rate mortgage
backed securities; and/or
5. Certain Rule 144A restricted securities (Rule 144A securities for which a
dealer or institutional market exists will not generally be considered
illiquid).
Illiquid securities may be difficult to sell under certain market conditions,
which could expose the fund to losses if these securities must be sold quickly
in adverse markets. 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.
DEBT SECURITIES, INCLUDING JUNK BONDS
The fund may invest up to 15% of its assets in debt securities, including junk
bonds. The fund has no pre-established minimum quality standards and may invest
in debt securities of any quality, including lower-rated bonds and junk bonds
that may offer higher yields because of the greater risk involved in those
investments. Debt securities rated at the time of purchase below investment
grade by the primary rating agencies (bonds rated Ba or lower by Moody's
Investors Service and BB or lower by Standard & Poor's Corp., or their
equivalents from other nationally recognized rating agencies, or if unrated, are
judged by the fund to be of comparable quality) constitute lower-rated
securities. See the General SAI Disclosure for a description of these ratings.
Lower-rated debt 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. 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 debt securities may be less active than that for
higher-rated debt 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, legislative and regulatory
developments, 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 debt securities, the
advisor's and/or sub-advisor'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 advisor and/or sub-advisor, if any, will attempt
to identify those issuers of high-yielding debt securities whose financial
condition is adequate to meet future obligations, has improved, or is expected
to improve in the future. The advisor's and/or sub-advisor's analysis focuses on
relative values based on such factors as interest or dividend coverage, asset
coverage, earnings prospects, and the experience and managerial strength of the
issuer. There can be no assurance that such analysis will prove accurate.
The market value of debt securities typically varies inversely to changes in
prevailing interest rates. You should recognize that, in periods of declining
interest rates, the value of debt securities will tend to be somewhat higher
than prevailing market rates. In periods of rising interest rates, the value of
those securities may be somewhat lower. These fluctuations in the value of debt
securities may cause the value of the fund's shares to fluctuate in value.
STRATEGIC PORTFOLIO TRANSACTIONS
The fund may invest in one or more strategic portfolio transactions which we
define as derivative transactions and cash enhancement transactions. For your
convenience, in the General SAI Disclosure for the 11 funds we have included a
basic discussion of these special financial arrangement transactions and some of
the risks associated with them. The General SAI Disclosure for the 11 funds
contains definitions of the more commonly used derivative transactions,
technical explanations of how these transactions will be used and the limits on
their use. You should consult your financial counselor if you have specific
questions.
THE AGGRESSIVE GROWTH FUND IS AUTHORIZED:
a) for derivative transactions, to: buy and sell exchange-traded and
over-the-counter put and call
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options on stock and stock indices, on fixed-income (interest rate)
securities; on equity and fixed-income indices and on other financial
transactions; buy and sell futures contracts and options on futures
contracts; engage in swaps, caps, floors, collars and similar interest-rate
transactions; enter into currency forward contracts, currency futures,
currency swaps, options on currencies and options on currency futures.
b) for cash enhancement transactions, to: lend portfolio securities and engage
in repurchase transactions. Collateral will be continually maintained at no
less than 102% of the value of the loaned securities or of the repurchase
price, as applicable.
The fund may use 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 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; to enhance potential
gain; 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 advisor's or sub-advisor's ability to predict pertinent
market movements, which cannot be assured. Additional information relating to
the risks of certain financial instruments or strategies is set forth below.
RISK OF 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. If the writer
of an option wishes to terminate the obligation, it may effect a closing
purchase transaction. Similarly, an investor who is the holder of an option may
liquidate its position by effecting a closing sale transaction. There is no
guarantee that either a closing purchase or a closing sale transaction can be
effected. 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.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (1) there may be insufficient trading interest in certain options;
(2) restrictions may be imposed by an exchange on opening transactions or
closing transactions, or both; (3) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (4) 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 (5) 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 "Risks of foreign currency options" for a discussion of the additional risks
of foreign currency option contracts.
AG-5
<PAGE>
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.
If the fund has written an option on an industry or market segment index, it
will 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 value 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.
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.
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 (OTC) OPTIONS AND LIQUID SECURITIES
The fund will engage in OTC options transactions only with primary dealers that
have been specifically approved by the Board of Directors. 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 certain no-action letters published
by the Securities and Exchange Commission staff (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 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.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS
Normally the fund expects to use futures contracts and related options solely
for bona fide hedging purposes, as that term is defined in Commodity Futures
Trading Commission (CFTC) regulations. However, in addition, the fund may take
positions in futures contracts and
AG-6
<PAGE>
related options which do not come within the CFTC definition, as long as the
aggregate initial margin and premiums required to establish those positions does
not exceed 5% of the net assets of the fund (after taking into account
unrealized profits and unrealized losses on any such contracts into which it has
entered).
The fund will not (1) 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; (2) 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 (3) 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.
In addition, the value of all futures contracts sold will not exceed the total
market value of the fund.
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 advisor or sub-advisor to correctly predict movements in the direction of
interest rates or changes in market conditions. These predictions involve skills
and techniques that may be different from those involved in the management of
the portfolio being hedged. In addition, there can be no assurance that there
will be a correlation between movements in the price of the underlying index or
securities and movements in the price of the securities which are the subject of
the hedge. A decision of whether, when and how to hedge involves the exercise of
skill and judgment, and even a well-conceived hedge may be unsuccessful to some
degree because of market behavior or unexpected trends in interest rates.
RISKS OF 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. The fund also may enter into forward foreign currency exchange
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. Additionally, when the advisor and/or sub-advisor believe 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 also may use currency forward contracts to manage currency
risks and to facilitate transactions in foreign securities. The fund will not
segregate assets to cover forward contracts.
Successful use of forward currency contracts will depend on the advisor's and/or
sub-advisor'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 advisor and/or sub-advisor anticipate. For example, if a
currency's value rose at a time when the advisor and/or sub-advisor had hedged
by selling that currency in exchange for dollars, the fund would be unable to
participate in the currency's appreciation. If the advisor and/or sub-advisor
hedge 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 advisor and/or sub-advisor
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.
RISKS OF FOREIGN CURRENCY OPTIONS
The fund may purchase U.S. exchange-listed call and put options on foreign
currencies. 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
AG-7
<PAGE>
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
The fund may lend securities from its portfolio to brokers, dealers and other
financial organizations. The fund may not lend its portfolio securities to
Lincoln Life or its affiliates unless it has applied for and received specific
authority from the Commission. Such loans, if and when made, may not exceed
one-third of its total assets. 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.
REPURCHASE AGREEMENTS
The fund may engage in repurchase agreement transactions. See the General SAI
Disclosure for the 11 funds for a description of repurchase agreements and the
risks they involve.
INVESTMENT RESTRICTIONS
The fund has adopted policies and investment restrictions. The investment
restrictions may not be changed without a majority vote of its outstanding
shares, and are considered fundamental. Such majority is defined in the 1940 Act
as the vote of the lesser of (1) 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 (2) 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.
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;
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 (a) deposited
as collateral for the obligation to replace securities borrowed to effect
short sales and (b) 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 total 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
AG-8
<PAGE>
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; or
9. Issue senior securities, except as permitted under the Investment Company
Act of 1940, as amended (1940 Act).
The following restrictions are non-fundamental and may be changed by a vote of
the fund's Board of Directors. The fund does not presently intend to:
10. 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;
11. Make investments for the purpose of exercising control or management.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The advisor and sub-advisor 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 advisor includes the
sub-advisor. 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 advisor currently provides investment advice to a number of other clients.
See "Management of the fund" in the General Prospectus Disclosure to the
Prospectus. It will be the practice of the advisor to allocate purchase and sale
transactions among the fund and others whose assets it manages in such manner as
it deems equitable. In making such allocations, major factors to be considered
are investment objectives, the relative size of portfolio holdings of the same
or comparable securities, the availability of cash for investment, the size of
investment commitments generally held and the opinions of the persons
responsible for managing the portfolios of the fund and other client accounts.
Securities of the same issuer may be purchased, held, or sold at the same time
by the fund or other accounts or companies for which the advisor provides
investment advice (including affiliates of the advisor). On occasions when the
advisor deems the purchase or sale of a security to be in the best interest of
the fund, as well as the other clients of the advisor, the advisor, to the
extent permitted by applicable laws and regulations, may aggregate such
securities to be sold or purchased for the fund with those to be sold or
purchased for other clients in order to obtain best execution and lower
brokerage commissions, if any. In such event, allocation of the securities so
purchased or sold, as well as the expenses incurred in the transaction, will be
made by the advisor in the manner it considers to be equitable and consistent
with its fiduciary obligations to all such clients, including the fund. In some
instances, the procedures may impact the price and size of the position
obtainable for the fund. Fund securities are not purchased from or sold to the
advisor or any affiliated person (as defined in the 1940 Act) of the advisor.
In connection with effecting portfolio transactions, primary consideration will
be given to securing most favorable price and efficient execution. Within the
framework of this policy, the reasonableness of commission or other transaction
costs is a major factor in the selection of brokers and is considered together
with other relevant factors, including financial responsibility, research and
investment information and other services provided by such brokers. 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 advisor
may determine in good faith that the amount of such higher transaction costs is
reasonable in relation to the value of the brokerage and research services
provided. The Board of Directors of the fund will review regularly the
reasonableness of commission and other transaction costs incurred by the fund in
the light of facts and circumstances deemed relevant from time to time, and, in
that connection, will receive reports from the advisor and published data
concerning transaction costs incurred by institutional investors generally. The
nature of the research services provided to the advisor by brokerage firms
varies from time to time but generally includes current and historical financial
data concerning particular companies and their securities; information and
analysis concerning
AG-9
<PAGE>
securities markets and economic and industry matters; and technical and
statistical studies and data dealing with various investment opportunities,
risks and trends, all of which the advisor regards as a useful supplement to its
own internal research capabilities. The advisor may from time to time direct
trades to brokers which have provided specific brokerage or research services
for the benefit of the advisor's clients; in addition the advisor may allocate
trades among brokers that generally provide superior brokerage and research
services. Due to changes in personnel, the prior subadvisor to the fund was
unable to provide the total dollar value of transactions directed to these
brokers or the commissions paid in connection with these transactions for 1998
without unreasonable effort or expense. Research services furnished by brokers
are used for the benefit of some or all of the advisor's clients and not solely
or necessarily for the benefit of the fund. The advisor believes that the value
of research services received is not determinable and does not significantly
reduce its expenses. The fund does not reduce its fee to the advisor by any
amount that might be attributable to the value of such services. The aggregate
amount of brokerage commissions paid by the fund during 1998 was $955,852, for
1997 it was $677,335, and for 1996 it was $332,924.
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 advisor. An exchange
may order the liquidations of positions found to be in excess of these limits,
and it may impose certain other sanctions. As of the date of this SAI, these
limits (which are subject to change) are 2,000 options (200,000 shares) in each
class of puts or calls.
Under the sub-advisory agreement between the advisor and the sub-advisor, the
sub-advisor may perform some, or substantially all, of the investment advisory
services required by the fund, even though the advisor remains primarily
responsible for investment decisions affecting the fund. The sub-advisor will
follow the same procedures and policies which are followed by the advisor as
described previously. The sub-advisor currently provides investment advice to a
number of other clients.
AG-10
<PAGE>
THIS PAGE WAS INTENTIONALLY LEFT BLANK.
AG-11
<PAGE>
PREFACE TO THE LINCOLN NATIONAL FUNDS PROSPECTUSES
THE PREFACE AND DIRECTORY ARE PART OF THE PROSPECTUS FOR EACH OF THE FOLLOWING
FUNDS:
Lincoln National Aggressive Growth Fund, Inc. (Aggressive Growth)
Lincoln National Bond Fund, Inc. (Bond)
Lincoln National Capital Appreciation Fund, Inc. (Capital Appreciation)
Lincoln National Equity-Income Fund, Inc. (Equity Income)
Lincoln National Global Asset Allocation Fund, Inc. (Global Asset Allocation)
Lincoln National Growth and Income Fund, Inc. (Growth and Income)
Lincoln National International Fund, Inc. (International)
Lincoln National Managed Fund, Inc. (Managed)
Lincoln National Money Market Fund, Inc. (Money Market)
Lincoln National Social Awareness Fund, Inc. (Social Awareness)
Lincoln National Special Opportunities Fund, Inc. (Special Opportunities)
Each fund has its own Prospectus that describes the fund and its investment
objective. We refer to each of the funds as a fund and to all of the funds
together as the funds.
Each fund sells its shares only to Lincoln National Life Insurance Co. and its
affiliates (Lincoln Life). Lincoln Life holds the shares in its separate
accounts to support variable annuity contracts and variable life insurance
contracts (contracts). We refer to a separate account as a variable account.
Each variable account has its own prospectus that describes the account and the
contracts it supports. You choose the fund or funds in which a variable account
invests your contract assets. In effect, you invest indirectly in the fund(s)
that you choose under your contract.
Each fund Prospectus discusses the information about the fund that you ought to
know before choosing to invest your contract assets in one or more of the funds.
You can find information unique to each fund in that fund's Prospectus. You can
find information common to all funds in the General Prospectus Disclosure
following the individual fund Prospectuses.
The Securities and Exchange Commission (SEC) has not approved or disapproved
these securities or determined if these prospectuses are truthful or complete.
Any representation to the contrary is a criminal offense.
We have not authorized any dealer, salesperson, or any other person to give any
information, or to make any representation, other than what these Prospectuses
state. These Prospectuses do not offer to sell fund shares, or seek offers to
buy fund shares, where it would be unlawful.
Prospectuses dated May 1, 1999
P/D-1
<PAGE>
DIRECTORY FOR THE FUND PROSPECTUS
<TABLE>
<CAPTION>
SUBJECT PAGE
<S> <C>
- ----------------------------------------------------
PREFACE
SUMMARY DESCRIPTION OF THE FUND
Aggressive Growth AG-1
Bond B-1
Capital Appreciation CA-1
Equity-Income EI-1
Global Asset Allocation GAA-1
Growth and Income GI-1
International I-1
Managed M-1
Money Market MM-1
Social Awareness SA-1
Special Opportunities SO-1
- ----------------------------------------------------
FEE TABLE
Aggressive Growth GPD-2
Bond GPD-2
Capital Appreciation GPD-2
Equity-Income GPD-2
Global Asset Allocation GPD-2
Growth and Income GPD-2
International GPD-2
Managed GPD-2
Money Market GPD-2
Social Awareness GPD-2
Special Opportunities GPD-2
- ----------------------------------------------------
INVESTMENT STRATEGIES
Aggressive Growth AG-2
Bond B-2
Capital Appreciation CA-1
Equity-Income EI-2
Global Asset Allocation GAA-2
Growth and Income GI-1
International I-2
Managed M-2
Money Market MM-1
Social Awareness SA-2
Special Opportunities SO-1
<CAPTION>
SUBJECT PAGE
- ----------------------------------------------------
<S> <C>
RISKS OF INVESTMENT STRATEGIES
Aggressive Growth AG-2
Bond B-3
Capital Appreciation CA-2
Equity-Income EI-2
Global Asset Allocation GAA-4
Growth and Income GI-2
International I-3
Managed M-4
Money Market MM-2
Social Awareness SA-3
Special Opportunities SO-2
- ----------------------------------------------------
INVESTMENT ADVISER AND PORTFOLIO MANAGER
Aggressive Growth AG-3
Bond B-4
Capital Appreciation CA-3
Equity-Income EI-4
Global Asset Allocation GAA-6
Growth and Income GI-2
International I-4
Managed M-6
Money Market MM-2
Social Awareness SA-3
Special Opportunities SO-3
- ----------------------------------------------------
GENERAL PROSPECTUS DISCLOSURE --
IMPORTANT ADDITIONAL INFORMATION
Net asset value GPD-1
Management of the funds GPD-1
Purchase and redemption of fund shares GPD-2
Distributions and federal income tax
considerations GPD-3
Management discussion of fund performance GPD-3
Financial highlights GPD-4
General Information GPD-5
Preparing for year 2000 GPD-6
</TABLE>
P/D-2
<PAGE>
GENERAL PROSPECTUS DISCLOSURE -- IMPORTANT ADDITIONAL INFORMATION
This General Prospectus Disclosure is part of the Prospectus of:
Lincoln National Aggressive Growth Fund, Inc.
(Aggressive Growth)
Lincoln National Bond Fund, Inc. (Bond)
Lincoln National Capital Appreciation Fund, Inc.
(Capital Appreciation)
Lincoln National Equity-Income Fund, Inc.
(Equity-Income)
Lincoln National Global Asset Allocation Fund, Inc. (Global Asset Allocation)
Lincoln National Growth and Income Fund, Inc. (Growth and Income)
Lincoln National International Fund, Inc. (International)
Lincoln National Managed Fund, Inc. (Managed)
Lincoln National Money Market Fund, Inc.
(Money Market)
Lincoln National Social Awareness Fund, Inc.
(Social Awareness)
Lincoln National Special Opportunities Fund, Inc.
(Special Opportunities)
The following information applies to each fund, unless otherwise indicated.
NET ASSET VALUE
Each fund determines its net asset value per share (NAV) as of close of business
(currently 4:00 p.m., New York time) on the New York Stock Exchange (NYSE) on
each day the NYSE is open for trading. Each fund, except the Money Market Fund,
determines its nav by:
- - adding the values of all securities investments and other assets,
- - subtracting liabilities (including dividends payable), and
- - dividing by the number of shares outstanding.
NYSE's most recent announcement states that, as of the date of this prospectus,
the NYSE will be closed on New Year's Day, Martin Luther King Day, President's
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day,
and Christmas Day. NYSE may also be closed on other days. The NYSE may modify
its holiday schedule at any time.
A fund's securities may be traded in other markets on days when the NYSE is
closed. Therefore, the fund's NAV may fluctuate on days when you do not have
access to the fund to purchase or redeem shares.
Each fund (other than for the Money Market Fund) values its securities
investments as follows:
- - equity securities, at their last sale prices on national securities exchanges
or over-the-counter, or, in the absence of recorded sales, at the average of
readily available closing bid and asked prices on exchanges or
over-the-counter;
- - debt securities, at the price established by an independent pricing service,
which is believed to reflect the fair value of these securities; and
- - equity securities, debt securities and other assets for which market
quotations are not readily available, fair value as determined in good faith
under the authority of each fund's Board of Directors.
MONEY MARKET FUND. The Money Market Fund determines its NAV by the amortized
cost method of valuation provided by SEC Rule 2a-7 under the Investment Company
Act of 1940. Under the Rule, the fund's nav must fairly reflect market value.
See the General SAI Disclosure for the methodology that a fund (other than for
the Money Market Fund) uses to value short-term investments, options, futures
and options on futures, and foreign securities.
MANAGEMENT OF THE FUNDS
Each fund's business and affairs are managed under the direction of its Board of
Directors. The Board has the power to amend the bylaws of each fund, to declare
and pay dividends, and to exercise all the powers of the fund except those
granted to the shareholders.
INVESTMENT ADVISOR. Lincoln Investment Management, Inc. (Lincoln Investment or
advisor) is the investment advisor to each fund. Its headquarters are at 200
East Berry Street, Fort Wayne, Indiana 46802.
The advisor has registered with the SEC as an investment advisor and acted as an
investment advisor to mutual Funds for over 40 years. The advisor also acts as
(1) investment advisor to Lincoln National Convertible Securities Fund, Inc. and
Lincoln National Income Fund, Inc., closed-end investment companies, and (2)
sub-adviser to two of the series of Delaware Group Adviser Funds, Inc., an
open-end series investment company.
The advisor is a wholly-owned subsidiary of Lincoln National Corp. (LNC), a
publicly-held insurance holding
GPD-1
<PAGE>
company organized under Indiana law. LNC, through its subsidiaries, provides
life insurance and annuities, property-casualty insurance, reinsurance and
financial services.
Directors, officers and employees of the advisor and each fund may engage in
personal securities transactions, subject to restrictions and procedures of the
Code of Ethics adopted by the advisor and each fund. The restrictions and
procedures include substantially all of the recommendations of the Advisory
Group of the Investment Company Institute and comply with SEC rules and
regulations.
The advisor, either directly or through a sub-advisor, provides portfolio
management and investment advice to each fund and administers each fund's other
affairs, subject to the supervision of each fund's Board of Directors.
Some of the funds using sub-advisors have names, investment objectives and
investment policies that are very similar to certain publicly available mutual
funds that are managed by these same sub-advisors. These funds will not have the
same performance as those publicly available mutual funds. Different performance
will result from many factors, including, but not limited to, different cash
flows into and out of the funds, different fees, and different sizes.
Each fund pays the advisor a monthly fee for the advisor's services. The annual
rate of the fee is based on the average daily net asset value of each fund, as
shown in the following chart:
<TABLE>
<CAPTION>
FUND ...OF AVERAGE DAILY NET ASSET VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C>
Aggressive Growth .75 of 1% of the first $200 million; .70 of 1% of the next $200
million; .65 of 1% of the excess over $400 million
Capital Appreciation .75 of 1% of the first $500 million; .70 of 1% of the excess over
$500 million
Equity-Income .75 of 1% of the first $500 million; .70 of 1% of the excess over
$500 million
Global Asset Allocation .75 of 1% of the first $200 million; .70 of 1% of the next $200
million; and .68 of 1% of the excess over $400 million
International .90 of 1% of the first $200 million; .75 of 1% of the next $200
million; and .60 of 1% in excess over $400 million
All other funds .48 of 1% of the first $200 million; .40 of 1% of the next $200
million; and .30 of 1% in excess over $400 million
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 ADVISORY FEES
FUND 1998 RATIO OF THE ADVISOR'S COMPENSATION TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------------------------------------------
<S> <C>
Aggressive Growth .73%
Bond .44
Capital Appreciation .75
Equity-Income .72
Global Asset Allocation .72
Growth & Income .31
International .79
Managed .36
Money Market .48
Social Awareness .34
Special Opportunities .36
</TABLE>
- --------------------------------------------------------------------------------
PURCHASE AND REDEMPTION OF FUND SHARES
Each fund sells its shares of common stock only to Lincoln Life. Lincoln Life
holds the fund shares in separate accounts (variable accounts) that support
various Lincoln Life variable annuity contracts and variable life insurance
contracts.
Each fund sells and redeems its shares, without charge, at their nav next
determined after Lincoln Life receives a purchase or redemption request.
However, each fund redeems its shares held by Lincoln Life for its own account
at the nav next determined after the fund receives the redemption request. The
value of shares redeemed may be more or less than original cost, depending on
the market value of a fund's securities investments at the time of redemption.
The fund normally pays for shares redeemed within seven days after Lincoln Life
receives the redemption request. However, a fund may suspend redemption or
postpone payment for any period when:
- - the NYSE closes for other than weekends and holidays;
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<PAGE>
- - the SEC restricts trading on the NYSE;
- - the SEC determines that an emergency exists, so that a fund's (1) disposal of
investment securities, or (2) determination of net asset value, is not
reasonably practicable; or
- - The SEC permits, by order, for the protection of fund shareholders.
DISTRIBUTIONS AND FEDERAL INCOME TAX CONSIDERATIONS
Each fund's policy is to distribute substantially all of its net investment
income and net realized capital gains each year. A fund may distribute net
realized capital gains only once a year. Each fund pays these distributions to
Lincoln Life for the variable accounts. The variable accounts automatically
reinvest the distributions in additional fund shares at no charge.
Each fund has elected to be taxed as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the Code). The
Code relieves a regulated investment company from certain Federal income tax and
excise tax, if the company distributes substantially all of its net investment
income and net realized capital gains. See the SAI for a more complete
discussion.
Each fund must meet asset diversification requirements under Section 817(h) of
the Code and the related regulation of the United States Treasury Department.
Each fund intends to comply with these diversification requirements.
The sole shareholder of the funds is Lincoln Life. Consequently, this Appendix
does not discuss the federal income tax consequences at the shareholder level.
For information concerning the federal income tax consequences to owners of
variable annuity contracts or variable life insurance contracts (contract
owners), including the failure of a fund to meet the diversification
requirements discussed above, see the Prospectus for the variable account.
MANAGEMENT DISCUSSION OF FUND PERFORMANCE
Each fund's Annual Report includes the portfolio manager's discussion of the
fund's performance for the previous fiscal year and the factors affecting the
performance. Each fund will send you a free copy of its Annual Report on
request.
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<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the financial
performance of the funds for the past 5 years, or, if shorter, the period of the
fund's operations. Certain information reflects financial results for a single
fund share. The total returns in the table represent the rate that an investor
would have earned or lost on an investment in the fund (assuming reinvestment of
all dividends and distributions). This information has been audited by Ernst &
Young LLP, independent auditors, whose report, along with each fund's financial
statements, are included in the annual report, which is available upon request.
<TABLE>
<CAPTION>
INCOME (LOSS) FROM LESS DIVIDENDS
INVESTMENT OPERATIONS FROM:
RATIO
NET OF
REALIZED RATIO NET
NET AND OF INVESTMENT NET
ASSET UNREALIZED NET EXPENSES INCOME ASSETS
VALUE NET GAIN TOTAL NET ASSET TO TO AT END
BEGINNING INVESTMENT (LOSS) FROM NET REALIZED VALUE AVERAGE AVERAGE PORTFOLIO OF
PERIOD OF INCOME ON INVESTMENT INVESTMENT GAIN ON TOTAL END OF TOTAL NET NET TURNOVER PERIOD
ENDED PERIOD (LOSS)(2) INVESTMENTS OPERATIONS INCOME INVESTMENTS DIVIDENDS PERIOD RETURN(3) ASSETS ASSETS RATE (000'S)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Lincoln National Aggressive Growth Fund, Inc.
12/31/98 $16.385 0.001 (0.810) (0.809) (0.023) (2.186) (2.209) $13.367 (6.20%) 0.81% 0.01% 102.33% $335,366
12/31/97 $13.980 0.023 3.055 3.078 -- (0.673) (0.673) $16.385 23.09% 0.81% 0.16% 105.07% $342,763
12/31/96 $12.183 0.004 1.989 1.993 (0.004) (0.192) (0.196) $13.980 17.02% 0.82% 0.03% 77.51% $242,609
12/31/95 $ 9.048 0.007 3.135 3.142 (0.007) -- (0.007) $12.183 34.15% 0.94% 0.06% 85.82% $138,471
12/31/94(1) $10.000 0.019 (0.952) (0.933) (0.019) -- (0.019) $ 9.048 (9.37%) 1.11% 0.21% 100.31% $60,697
Lincoln National Bond Fund, Inc.
12/31/98 $12.861 0.662 0.494 1.156 (1.328) -- (1.328) $12.689 9.56% 0.52% 5.90% 51.33% $363,808
12/31/97 $11.766 0.785 0.310 1.095 -- -- -- $12.861 9.30% 0.53% 6.45% 56.16% $280,383
12/31/96 $12.247 0.767 (0.481) 0.286 (0.767) -- (0.767) $11.766 2.31% 0.51% 6.56% 142.19% $253,328
12/31/95 $10.941 0.803 1.306 2.109 (0.803) -- (0.803) $12.247 18.95% 0.49% 6.90% 139.61% $250,816
12/31/94 $12.693 0.741 (1.233) (0.492) (0.741) (0.519) (1.260) $10.941 (4.18%) 0.50% 6.40% 213.26% $195,010
Lincoln National Capital Appreciation Fund, Inc.
12/31/98 $17.530 (0.003) 6.127 6.124 (0.050) (1.832) (1.882) $21.772 37.96% 0.83% (0.01%) 77.99% $770,736
12/31/97 $14.504 0.050 3.510 3.560 -- (0.534) (0.534) $17.530 25.29% 0.89% 0.35% 137.07% $451,036
12/31/96 $12.916 0.135 2.051 2.186 (0.135) (0.463) (0.598) $14.504 18.02% 0.93% 0.99% 92.73% $267,242
12/31/95 $10.152 0.116 2.764 2.880 (0.116) -- (0.116) $12.916 28.69% 1.07% 1.00% 195.63% $127,936
12/31/94(1) $10.000 0.134 0.152 0.286 (0.134) -- (0.134) $10.152 2.71% 1.18% 1.33% 185.28% $52,904
Lincoln National Equity-Income Fund, Inc.
12/31/98 $20.118 0.282 2.204 2.486 (0.460) (0.429) (0.889) $21.715 12.73% 0.79% 1.40% 29.04% $991,977
12/31/97 $15.780 0.229 4.511 4.740 -- (0.402) (0.402) $20.118 30.67% 1.02% 1.46% 17.81% $811,070
12/31/96 $13.507 0.288 2.451 2.739 (0.288) (0.178) (0.466) $15.780 19.81% 1.08% 1.99% 22.17% $457,153
12/31/95 $10.335 0.275 3.218 3.493 (0.275) (0.046) (0.321) $13.507 34.74% 1.15% 2.27% 27.81% $238,771
12/31/94(1) $10.000 0.258 0.335 0.593 (0.258) -- (0.258) $10.335 5.65% 1.26% 2.48% 33.40% $78,861
Lincoln National Global Asset Allocation Fund, Inc.
12/31/98 $15.628 0.357 1.585 1.942 (0.589) (1.222) (1.811) $15.759 13.50% 0.91% 2.36% 133.84% $490,154
12/31/97 $14.226 0.383 2.205 2.588 -- (1.186) (1.186) $15.628 19.47% 0.89% 2.77% 178.40% $438,090
12/31/96 $13.391 0.392 1.522 1.914 (0.392) (0.687) (1.079) $14.226 15.04% 1.00% 2.93% 167.33% $316,051
12/31/95 $11.144 0.412 2.247 2.659 (0.412) -- (0.412) $13.391 23.95% 0.92% 3.36% 146.49% $248,772
12/31/94 $12.502 0.349 (0.702) (0.353) (0.349) (0.656) (1.005) $11.144 (1.82%) 1.06% 3.07% 134.33% $195,697
Lincoln National Growth and Income Fund, Inc.
12/31/98 $41.949 0.607 7.371 7.978 (1.164) (2.475) (3.639) $46.288 20.33% 0.35% 1.44% 33.55% $4,263,557
12/31/97 $33.110 0.649 9.331 9.980 -- (1.141) (1.141) $41.949 30.93% 0.35% 1.79% 32.09% $3,540,862
12/31/96 $29.756 0.683 4.943 5.626 (0.683) (1.589) (2.272) $33.110 18.76% 0.36% 2.23% 46.70% $2,465,224
12/31/95 $23.297 0.701 7.680 8.381 (0.701) (1.221) (1.922) $29.756 38.81% 0.35% 2.64% 51.76% $1,833,450
12/31/94 $24.693 0.668 (0.428) 0.240 (0.668) (0.968) (1.636) $23.297 1.32% 0.37% 2.85% 76.34% $1,161,324
Lincoln National International Fund, Inc.
12/31/98 $14.673 0.253 1.838 2.091 (0.189) (0.593) (0.782) $15.982 14.65% 0.93% 1.63% 123.11% $501,654
12/31/97 $14.556 0.066 0.771 0.837 -- (0.720) (0.720) $14.673 6.00% 0.93% 0.44% 77.58% $466,229
12/31/96 $13.398 0.071 1.244 1.315 (0.071) (0.086) (0.157) $14.556 9.52% 1.19% 0.51% 68.67% $440,375
12/31/95 $13.027 0.069 0.892 0.961 (0.069) (0.521) (0.590) $13.398 8.89% 1.27% 0.59% 63.15% $358,391
12/31/94 $12.642 0.033 0.385 0.418 (0.033) -- (0.033) $13.027 3.28% 1.24% 0.25% 52.78% $316,350
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
INCOME (LOSS) FROM LESS DIVIDENDS
INVESTMENT OPERATIONS FROM:
RATIO
NET OF
REALIZED RATIO NET
NET AND OF INVESTMENT NET
ASSET UNREALIZED NET EXPENSES INCOME ASSETS
VALUE NET GAIN TOTAL NET ASSET TO TO AT END
BEGINNING INVESTMENT (LOSS) FROM NET REALIZED VALUE AVERAGE AVERAGE PORTFOLIO OF
PERIOD OF INCOME ON INVESTMENT INVESTMENT GAIN ON TOTAL END OF TOTAL NET NET TURNOVER PERIOD
ENDED PERIOD (LOSS)(2) INVESTMENTS OPERATIONS INCOME INVESTMENTS DIVIDENDS PERIOD RETURN(3) ASSETS ASSETS RATE (000'S)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Lincoln National Managed Fund, Inc.
12/31/98 $19.304 0.599 1.632 2.231 (1.162) (1.402) (2.564) $18.971 12.72% 0.42% 3.31% 57.36% $965,486
12/31/97 $16.266 0.661 2.811 3.472 -- (0.434) (0.434) $19.304 21.82% 0.42% 3.77% 53.40% $850,646
12/31/96 $15.895 0.628 1.291 1.919 (0.628) (0.920) (1.548) $16.266 12.05% 0.43% 4.05% 108.86% $675,740
12/31/95 $12.783 0.623 3.132 3.755 (0.623) (0.020) (0.643) $15.895 29.29% 0.43% 4.37% 112.52% $589,165
12/31/94 $14.152 0.628 (0.814) (0.186) (0.628) (0.555) (1.183) $12.783 (1.84%) 0.44% 4.45% 160.79% $442,140
</TABLE>
GPD-5
<PAGE>
<TABLE>
<CAPTION>
INCOME (LOSS) FROM RATIO
NET OF
REALIZED RATIO NET
NET AND OF INVESTMENT NET
ASSET INVESTMENT OPERATIONS UNREALIZED LESS DIVIDENDS NET EXPENSES INCOME ASSETS
VALUE NET GAIN TOTAL FROM: NET ASSET TO TO AT END
BEGINNING INVESTMENT (LOSS) FROM NET REALIZED VALUE AVERAGE AVERAGE PORTFOLIO OF
PERIOD OF INCOME ON INVESTMENT INVESTMENT GAIN ON TOTAL END OF TOTAL NET NET TURNOVER PERIOD
ENDED PERIOD (LOSS)(2) INVESTMENTS OPERATIONS INCOME INVESTMENTS DIVIDENDS PERIOD RETURN(3) ASSETS ASSETS RATE (000'S)
- --------------------------------------------------------------------------------------------------------------------------------
Lincoln National Money Market Fund, Inc.
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/98 $10.000 0.497 N/A 0.497 (0.497 ) N/A (0.497) $10.000 5.10 % 0.58 % 4.97 % N/A $137,062
12/31/97 $10.000 0.501 N/A 0.501 (0.501) N/A (0.501) $10.000 5.13% 0.59% 5.01% N/A $89,227
12/31/96 $10.000 0.505 N/A 0.505 (0.505) N/A (0.505) $10.000 5.07% 0.57% 5.07% N/A $90,358
12/31/95 $10.000 0.570 N/A 0.570 (0.570) N/A (0.570) $10.000 5.67% 0.52% 5.67% N/A $75,319
12/31/94 $10.000 0.381 N/A 0.381 (0.381) N/A (0.381) $10.000 3.82% 0.52% 3.82% N/A $77,177
Lincoln National Social Awareness Fund, Inc.
12/31/98 $35.657 0.367 6.414 6.781 (0.672) (1.483) (2.155) $40.283 19.89% 0.38% 1.10% 37.55% $1,868,231
12/31/97 $27.316 0.364 9.447 9.811 -- (1.470) (1.470) $35.657 37.53% 0.41% 1.37% 34.84% $1,255,494
12/31/96 $22.590 0.389 5.748 6.137 (0.389) (1.022) (1.411) $27.316 28.94% 0.46% 1.58% 45.90% $636,595
12/31/95 $16.642 0.432 6.491 6.923 (0.432) (0.543) (0.975) $22.590 42.83% 0.50% 2.21% 54.02% $297,983
12/31/94 $17.915 0.377 (0.461) (0.084) (0.377) (0.812) (1.189) $16.642 0.19% 0.53% 2.22% 64.97% $163,514
Lincoln National Special Opportunities Fund, Inc.
12/31/98 $35.056 0.470 1.795 2.265 (0.862) (3.043) (3.905) $33.416 6.79% 0.42% 1.44% 76.27% $917,796
12/31/97 $29.423 0.477 7.293 7.770 -- (2.137) (2.137) $35.056 28.15% 0.42% 1.57% 73.74% $872,822
12/31/96 $27.383 0.548 3.867 4.415 (0.548) (1.827) (2.375) $29.423 16.51% 0.44% 2.00% 88.17% $648,592
12/31/95 $22.164 0.616 6.131 6.747 (0.616) (0.912) (1.528) $27.383 31.86% 0.45% 2.39% 90.12% $505,755
12/31/94 $24.478 0.565 (0.942) (0.377) (0.565) (1.372) (1.937) $22.164 (1.00%) 0.48% 2.49% 74.63% $318,417
</TABLE>
(1) The per share data, total return, ratios and portfolio turnover are
calculated for the period from commencement of investment activity on
January 3, 1994 through December 31, 1994. Accordingly, the total return,
ratios, and portfolio turnover have NOT been calculated on an annualized
basis.
(2) Per share information for the Capital Appreciation, Equity-Income, Global
Asset Allocation, and International funds for the year ended December 31,
1998 was based on the average shares outstanding method.
(3) Total return percentages in this table are calculated on the basis
prescribed by the Securities and Exchange Commission. These percentages are
based on the underlying mutual fund shares.
GENERAL INFORMATION
You should direct any inquiry to Lincoln National Life Insurance Co., at P.O.
Box 2340, Fort Wayne, Indiana 46801, or, call 1-800-4LINCOLN (454-6265).
Each fund will issue:
- - unaudited semiannual reports showing current investments and other
information; and
- - annual financial statements audited by the fund's independent auditors.
These Prospectuses do not contain all the information included in the
Registration Statements that the funds have filed with the SEC. You may examine
the Registration Statements, including exhibits, at the SEC in Washington, D.C.
Statements made in the Prospectuses about any variable annuity contract,
variable life insurance contract, or other document referred to in a contract,
are not necessarily complete. In each instance, we refer you to the copy of that
CONTRACT or other document filed as an exhibit to the related Registration
Statement. We qualify each statement in all respects by that reference.
The use of a fund by both annuity and life insurance variable accounts is called
mixed funding. Due to differences in redemption rates, tax treatment, or other
considerations, the interests of contract owners under the variable life
accounts may conflict with those of contract owners under the variable annuity
accounts. Violation of the federal tax laws by one variable account investing in
a fund could cause the contracts funded through another variable account to lose
their tax-deferred status, unless remedial action were taken. The Board of
Directors of each fund will monitor for any material conflicts and determine
what action, if any, the fund or a variable account should take.
A conflict could arise that requires a variable account to redeem a substantial
amount of assets from any of the funds. The redemption could disrupt orderly
portfolio management to the detriment of those contract owners still investing
in that fund. Also, that fund could determine that it has become so large that
its size materially impairs investment performance. The fund would then examine
its options.
Lincoln Life performs the dividend and transfer functions for each fund.
PREPARING FOR YEAR 2000
Many existing computer programs use only two digits in the date field to
identify the year. If left uncorrected these programs, which were designed and
developed without considering the impact of the upcoming change in the century,
could fail to operate or could produce
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<PAGE>
erroneous results when processing dates after December 31, 1999. For example,
for a bond with a stated maturity date of July 1, 2000, a computer program could
read and store the maturity date as July 1, 1900. This problem is known by many
names, such as the "Year 2000 Problem", "Y2K", and the "Millenium Bug".
The Year 2000 Problem affects virtually all computer programs worldwide. It can
cause a computer system to suddenly stop operating. It can also result in a
computer corrupting vital company records, and the problem could go undetected
for a long time. The updating of fund-related computer systems is the
responsibility of Lincoln Life as part of its own year 2000 updating process.
Delaware Service Company Inc. (Delaware), which provides substantially all of
the accounting and valuation services for the funds, is responsible for updating
all its computer systems (including those which serve the funds) to accommodate
the year 2000. If Y2K problems with computer programs affecting the funds are
left unchecked they can cause such problems as share transfer errors; accounting
errors; improper instructions to the securities custodian of a fund; and
erroneous net asset values. In a worst-case scenario, this could result in a
material disruption of the operations of the funds, Lincoln Life and/or
Delaware.
However, these companies are wholly owned by Lincoln National Corporation (LNC),
which has had Year 2000 processes in place since 1996. LNC projects aggregate
expenditures in excess of $92 million for its Y2K efforts through the year 2000.
Both Lincoln Life and Delaware have dedicated Year 2000 teams and steering
committees that are answerable to their counterparts in LNC.
In light of the potential problems discussed above, Lincoln Life, as part of its
Year 2000 updating process, has assumed responsibility for correcting all
high-priority Information Technology (IT) systems which service the funds.
Delaware for its part is responsible for updating all its high-priority IT
systems to support these vital services. The Year 2000 effort, for both IT and
non-IT systems, is organized into four phases:
- - awareness-raising and inventory of all assets (including third-party agent and
vendor relationships)
- - assessment and high-level planning and strategy
- - remediation of affected systems and equipment; and
- - testing to verify Year 2000 readiness.
Both companies are currently on schedule to have their high-priority IT systems
(including those which support the funds) remediated and tested to demonstrate
readiness by June 30, 1999. During the third and fourth quarters of 1999,
additional testing of the environment will continue. Both companies are
currently on schedule to have their high-priority non-IT systems (elevators,
heating and ventilation, security systems, etc.) remediated and tested by
October 31, 1999.
The work on Year 2000 issues has not suffered significant delays; however, some
uncertainty remains. Specific factors that give rise to this uncertainty include
(but are certainly not limited to) a possible loss of technical resources to
perform the work; failure to identify all susceptible systems; and
non-compliance by third parties whose systems and operations impact Lincoln
Life. In a report dated February 26, 1999, entitled, INVESTIGATING THE IMPACT OF
THE YEAR 2000 TECHNOLOGY PROBLEM, S. Prt 106-10, the U.S. Senate Special
Committee on the Year 2000 Technology Problem expressed its concern that
"Financial services firms...are particularly vulnerable to...the risk that a
material customer or business partner will fail, as a result of the computer
problems, to meet its obligations".
One important source of uncertainty is the extent to which the key trading
partners of Lincoln Life and of Delaware will be successful in their own
remediation and testing efforts. Lincoln Life and Delaware have been monitoring
the progress of their trading partners; however, the efforts of these partners
are beyond our control.
Lincoln Life and Delaware expect to have completed their necessary remediation
and testing efforts prior to December 31, 1999. However, given the nature and
complexity of the problem, there can be no guarantee by either company that
there will not be significant computer problems after December 31, 1999.
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THIS PAGE WAS INTENTIONALLY LEFT BLANK.
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<PAGE>
You can find additional information in each fund's Statement of Additional
Information (SAI), which is on file with the SEC. Each fund incorporates its
SAI, dated May 1, 1999, into its Prospectus. Each fund will provide a free copy
of its SAI on request.
You can find still further information about each fund's investments in the
fund's annual and semi-annual reports to shareholders. The Annual Report
discusses the market conditions and investment strategies that significantly
affected that fund's performance (except the Money Market Fund) during its last
fiscal year. Each fund will provide a free copy of its Annual and Semi-Annual
Report on request.
For an SAI or Report, either write Lincoln National Life Insurance Co., P.O. Box
2340, Fort Wayne, Indiana 46801, or call 1-800-4LINCOLN (454-6265). Also call
this number to request other information about a fund, or to make inquiries.
You can review and copy information about the funds (including the SAIs) at the
SEC's Public Reference Room in Washington, D.C. You can get information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. You
can also get reports and other information about the funds on the SEC's Internet
site at http:// www.sec.gov. You can get copies of this information by writing
the SEC Public Reference Section, Washington, D.C. 20549-6009, and paying a
duplicating fee.
Fund Investment Company Act File Numbers:
<TABLE>
<S> <C> <C>
LINCOLN NATIONAL AGGRESSIVE GROWTH FUND, INC.: 33-70742; 811-8090
LINCOLN NATIONAL BOND FUND, INC.: 2-80746; 811-3210
LINCOLN NATIONAL CAPITAL APPRECIATION FUND, INC.: 33-70272; 811-8074
LINCOLN NATIONAL EQUITY-INCOME FUND, INC.: 33-71158; 811-8126
LINCOLN NATIONAL GLOBAL ASSET ALLOCATION FUND, INC.: 33-13530; 811-5115
LINCOLN NATIONAL GROWTH AND INCOME FUND, INC.: 2-80741; 811-3211
LINCOLN NATIONAL INTERNATIONAL FUND, INC.: 33-38335; 811-6233
LINCOLN NATIONAL MANAGED FUND, INC.: 2-82276; 811-3683
LINCOLN NATIONAL MONEY MARKET FUND, INC.: 2-80743; 811-3212
LINCOLN NATIONAL SOCIAL AWARENESS FUND, INC.: 33-19896; 811-5464
LINCOLN NATIONAL SPECIAL OPPORTUNITIES FUND, INC.: 2-80731; 811-3291
</TABLE>
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<PAGE>
PREFACE TO THE MULTI FUND-REGISTERED TRADEMARK- STATEMENTS OF ADDITIONAL
INFORMATION
THE PREFACE AND TABLE OF CONTENTS ARE PART OF THE STATEMENT OF ADDITIONAL
INFORMATION (SAI) FOR EACH OF THE FOLLOWING FUNDS:
Lincoln National Aggressive Growth Fund, Inc. (Aggressive Growth)
Lincoln National Bond Fund, Inc. (Bond)
Lincoln National Capital Appreciation Fund, Inc. (Capital Appreciation)
Lincoln National Equity-Income Fund, Inc. (Equity-Income)
Lincoln National Global Asset Allocation Fund, Inc. (Global Asset Allocation)
Lincoln National Growth and Income Fund, Inc. (Growth and Income)
Lincoln National International Fund, Inc. (International)
Lincoln National Managed Fund, Inc. (Managed)
Lincoln National Money Market Fund, Inc. (Money Market)
Lincoln National Social Awareness Fund, Inc. (Social Awareness)
Lincoln National Special Opportunities Fund, Inc. (Special Opportunities)
Each fund has its own SAI that provides more information about that fund. For
each fund's SAI, the fund's audited financial statements and the report of Ernst
& Young LLP, Independent Auditors, are incorporated by reference to each fund's
1998 Annual Report. A fund's SAI should be read in conjunction with the
Prospectus of that fund dated May 1, 1999. You may obtain a copy of any fund's
Annual Report or Prospectus on request and without charge. Please write Lincoln
National Life Insurance Co., P.O. Box 2340, Fort Wayne, Indiana 46801 or call
1-800-4LINCOLN (454-6265).
A fund's SAI is not a Prospectus.
The date of each fund's SAI is May 1, 1999.
<PAGE>
TABLE OF CONTENTS FOR THE FUND SAIS
<TABLE>
<CAPTION>
SUBJECT PAGE
<S> <C>
- --------------------------------------------------------
PREFACE
DESCRIPTION OF THE FUND
Aggressive Growth
Bond
Capital Appreciation
Equity-Income
Global Asset Allocation
Growth and Income
International
Managed
Money Market
Social Awareness
Special Opportunities
- --------------------------------------------------------
ADDITIONAL INVESTMENT STRATEGIES AND RISKS
Aggressive Growth
Bond
Capital Appreciation
Equity-Income
Global Asset Allocation
Growth and Income
International
Managed
Money Market
Social Awareness
Special Opportunities
- --------------------------------------------------------
STRATEGIC PORTFOLIO TRANSACTIONS
Aggressive Growth
Bond
Capital Appreciation
Equity-Income
Global Asset Allocation
Growth and Income
International
Managed
Money Market
Social Awareness
Special Opportunities
<CAPTION>
SUBJECT PAGE
- --------------------------------------------------------
<S> <C>
INVESTMENT RESTRICTIONS
Aggressive Growth
Bond
Capital Appreciation
Equity-Income
Global Asset Allocation
Growth and Income
International
Managed
Money Market
Social Awareness
Special Opportunities
- --------------------------------------------------------
PORTFOLIO TRANSACTIONS AND BROKERAGE
Aggressive Growth
Bond
Capital Appreciation
Equity-Income
Global Asset Allocation
Growth and Income
International
Managed
Money Market
Social Awareness
Special Opportunities
- --------------------------------------------------------
GENERAL SAI DISCLOSURE -- IMPORTANT
ADDITIONAL INFORMATION
Investment advisor and sub-advisor
Directors and officers
Fund expenses
Description of shares
Strategic portfolio transactions --
additional information
Foreign investments
Valuation of portfolio securities
Custodian
Independent auditors
Financial statements
Bond and commercial paper ratings
Taxes
Derivative transactions -- definitions
</TABLE>
<PAGE>
GENERAL SAI DISCLOSURE
(Note: this is uniform information for the 11 Funds. See each Fund's SAI for
information specific to that Fund.)
THIS GENERAL SAI DISCLOSURE CONSTITUTES PART OF THE SAIS OF LINCOLN NATIONAL
AGGRESSIVE GROWTH FUND, INC. (AGGRESSIVE GROWTH), LINCOLN NATIONAL BOND FUND,
INC. (BOND), LINCOLN NATIONAL CAPITAL APPRECIATION FUND, INC. (CAPITAL
APPRECIATION), LINCOLN NATIONAL EQUITY-INCOME FUND, INC. (EQUITY-INCOME),
LINCOLN NATIONAL GLOBAL ASSET ALLOCATION FUND, INC. (GLOBAL ASSET ALLOCATION),
LINCOLN NATIONAL GROWTH AND INCOME FUND, INC. (GROWTH AND INCOME), LINCOLN
NATIONAL INTERNATIONAL FUND, INC. (INTERNATIONAL), LINCOLN NATIONAL MANAGED
FUND, INC. (MANAGED), LINCOLN NATIONAL MONEY MARKET FUND, INC. (MONEY MARKET),
LINCOLN NATIONAL SOCIAL AWARENESS FUND, INC. (SOCIAL AWARENESS), AND LINCOLN
NATIONAL SPECIAL OPPORTUNITIES FUND, INC. (SPECIAL OPPORTUNITIES). UNLESS
OTHERWISE INDICATED, THE FOLLOWING INFORMATION APPLIES TO EACH FUND.
INVESTMENT ADVISOR AND SUB-ADVISOR
Lincoln Investment Management, Inc. (Lincoln Investment or advisor) is the
investment advisor to the funds and is headquartered at 200 E. Berry Street,
Fort Wayne, Indiana 46802. Lincoln Investment is a subsidiary of Lincoln
National Investments, Inc., which is a wholly-owned subsidiary of Lincoln
National Corp. (LNC), a publicly-held insurance holding company organized under
Indiana law. Through its subsidiaries, LNC provides, on a national basis,
insurance and financial services. Lincoln Investment is registered with the
Securities and Exchange Commission (SEC) as an investment advisor and has acted
as an investment advisor to mutual funds for over 40 years. The advisor also
acts as investment advisor to Lincoln National Income Fund, Inc. (a closed-end
investment company whose investment objective is to provide a high level of
current income from interest on fixed-income securities) and Lincoln National
Convertible Securities Fund, Inc. (a closed-end investment company whose
investment objective is a high level of total return on its assets through a
combination of capital appreciation and current income) and to other clients,
and also acts as sub-adviser to two of the series of Delaware Group Adviser
Funds, Inc. (the Corporate Income Fund and the Federal Bond Fund of that retail
mutual fund complex).
Under an Advisory Agreement with each fund, the advisor provides portfolio
management and investment advice to the funds and administers its other affairs,
subject to the supervision of the fund's Board of Directors. The advisor, at its
expense, will provide office space to the funds and all necessary office
facilities, equipment and personnel and will make its officers and employees
available to the funds as appropriate. In addition, the advisor will pay all
expenses incurred by it or by the funds in connection with the management of
each fund's assets or the administration of its affairs, other than those
assumed by the funds, as described in the General Prospectus Disclosure. Lincoln
Life has paid the organizational expenses of all the funds. The rates of
compensation to the advisor is set forth in the General Prospectus Disclosure to
the Prospectus.
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth Fund $ 2,476,022 $2,109,952 $1,428,803
Bond Fund 1,421,361 1,221,295 1,188,030
Capital Appreciation Fund 4,265,160 2,940,632 1,549,656
Equity-Income Fund 6,639,317 6,053,404 3,303,336
Global Asset Allocation Fund 3,320,142 2,808,358 2,072,722
Growth and Income Fund 12,112,568 9,714,765 7,063,276
International Fund 3,837,594 3,741,563 3,319,701
Managed Fund 3,283,079 2,873,786 2,480,524
Money Market Fund 517,294 451,243 417,468
Social Awareness Fund 5,287,914 3,355,544 1,877,030
Special Opportunities Fund 3,248,791 2,824,015 2,274,229
</TABLE>
A-1
<PAGE>
During the last three years, the advisor received the amounts, as mentioned
above, for investment advisory services. If total expenses of the
funds(excluding taxes, interest, portfolio brokerage commissions and fees, and
expenses of an extraordinary and non-recurring nature, but including the
investment advisory fee) exceed 1 1/2% per annum of the average daily net assets
of each fund (2% for the International Fund), the advisor will pay such excess
by offsetting it against the advisory fee. If such offset is insufficient to
cover the excess, any balance remaining will be paid directly by the advisor to
each fund.
SUB-ADVISORS. As advisor, Lincoln Investment is primarily responsible for
investment decisions affecting each of the funds. However, Lincoln Investment
has entered into sub-advisory agreements with several professional investment
management firms. These firms provide some or substantially all of the
investment advisory services required by a number of the funds, including
day-to-day investment management of those funds' portfolios. Each sub-advisor
makes investment decisions for its respective fund in accordance with that
fund's investment objectives and places orders on behalf of that fund to effect
those decisions. See the following tables for more information about the
sub-advisors and their fees:
<TABLE>
<CAPTION>
ANNUAL FEE RATE BASED ON
FUND SUB-ADVISOR AVERAGE DAILY NET ASSET VALUE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Aggressive Growth Putnam Currently .50 of 1% of the first $150 million
One Post Office Square .35 of 1% of the excess over $150 million; upon
Boston, MA 02109 shareholder approval fees will be .50 of 1% of
the first $250 million, .45 of 1% of the excess
over $250 million
Capital Appreciation Janus .55 of 1% of the first $100 million .50 of 1% of
100 Fillmore Street the next $400 million; and .45 of 1% of the
Denver, CO 80206 excess over $500 million
Equity-Income Fidelity Trust .48 of 1%
82 Devonshire Street
Boston, MA 02108
Global Asset Allocation Putnam The greater of (a) $40,000; or (b) .47 of 1% of
One Post Office Square the first $200 million; .42 of 1% of the next
Boston, MA 02109 $200 million; and .40 of 1% of any excess over
$400 million
International Delaware International .50 of 1% of the first $200 million; .40 of 1%
Advisers Ltd. of the next $200 million; and .35 of 1% of any
80 Cheapside, excess over $400 million
London, England
EC2V 6EE
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FEE RATE BASED ON MARKET
VALUE OF SECURITIES HELD IN THE
PORTFOLIO OF EACH RESPECTIVE CLIENT
FUND AT THE CLOSE OF BUSINESS ON THE
FUND SUB-ADVISOR LAST TRADING DAY OF EACH CALENDAR QUARTER
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Growth and Income Vantage .20 of 1%
630 5th Avenue
New York, NY 10111
Managed Vantage .20 of 1%
(stock portfolio only)
Social Awareness Vantage .20 of 1%
Special Opportunities Vantage .20 of 1%
</TABLE>
A-2
<PAGE>
Kansas City Southern Industries, Inc. ("KCSI") owns approximately 83% of the
outstanding voting stock of Janus, most of which it acquired in 1984. KCSI is a
publicly traded holding company whose primary subsidiaries are engaged in
transportation, information processing and financial services. Thomas H. Bailey,
President and Chairman of the Board of Janus, owns approximately 12% of its
voting stock and, by agreement with KCSI, selects a majority of Janus' Board.
FMR Corp., organized in 1972, is the ultimate parent company of Fidelity Trust.
The voting common stock of FMR Corp. is divided into two classes. Class B is
held predominantly by members of the Edward C. Johnson 3d family and is entitled
to 49% of the vote on any matter acted upon by the voting common stock. Class A
is held predominately by non-Johnson family member employees of FMR Corp. and
its affiliates and is entitled to 51% of the vote on any such matter. The
Johnson family group and all other Class B shareholders have entered into a
shareholders' voting agreement under which all Class B shares will be voted in
accordance with the majority vote of Class B shares. Under the 1940 Act, control
of a company is presumed where one individual or group of individuals owns more
than 25% of the voting stock of that company. Therefore, through their ownership
of voting common stock and the execution of the shareholders' voting agreement,
members of the Johnson family may be deemed, under the 1940 Act, to form a
controlling group with respect to FMR Corp.
Putnam is a majority-owned subsidiary of Marsh & McLennan Companies, a
diversified firm offering insurance and reinsurance broking, consulting, and
investment management services. Putnam, however, operates independently of its
parent.
During the last three years each sub-advisor received the following amounts for
investment sub-advisory services. Lincoln Investment, not the fund, pays all
sub-advisory fees owed.
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth Fund $1,450,345 $1,229,800 $ 893,059
Bond Fund N/A N/A N/A
Capital Appreciation Fund 2,840,385 2,072,388 1,117,383
Equity-Income Fund 5,248,803 4,781,931 2,612,405
Global Asset Allocation Fund 2,000,284 1,724,369 1,284,185
Growth and Income Fund 7,502,197 6,155,225 4,440,325
International Fund 1,233,752 1,503,294 1,326,484
Managed Fund 1,116,901 974,080 820,633
Money Market Fund N/A N/A N/A
Social Awareness Fund 2,992,902 1,901,560 923,516
Special Opportunities Fund 1,775,700 1,519,961 1,168,134
</TABLE>
SERVICE MARKS. The service mark for the funds and the name Lincoln National have
been adopted by the funds with the permission of LNC, and their continued use is
subject to the right of LNC to withdraw this permission in the event the advisor
should not be the investment advisor of the funds.
In the Prospectus and sales literature, the name Fidelity Investments will be
used with the Equity-Income Fund, Janus with the Capital Appreciation Fund and
Putnam with the Aggressive Growth and Global Asset Allocation Funds. The
continued use of these names is subject to the right of the respective
sub-advisor to withdraw its permission in the event it ceases to be the
sub-advisor to the particular fund it advises.
A-3
<PAGE>
DIRECTORS AND OFFICERS
The directors and executive officers of each fund, their business addresses,
positions with fund, age and their principal occupations during the past five
years are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
* KELLY D. CLEVENGER Vice President, Lincoln National Life Insurance Co.
Chairman of the Board,
President and Director, age
46
1300 S. Clinton Street
Fort Wayne, IN 46802
- -----------------------------------------------------------------------------------------------------------------
JOHN B. BORSCH, JR. Retired, formerly Associate Vice President--Investments, Northwestern
Director, age 65 University
1776 Sherwood Road
Des Plaines, IL 60016
- -----------------------------------------------------------------------------------------------------------------
NANCY L. FRISBY, CPA Formerly: Regional Vice President/Chief Financial Officer (formerly
Director, age 57 Vice President--Finance; Regional Controller of Finance), St. Joseph
900 N.W. 17th Street, Medical Center, Fort Wayne, Indiana
Miami, FL 33136 Now: Chief Financial Officer, Bascom Palmer Eye Institute, University
of Miami School of Medicine, (eff. 1998)
- -----------------------------------------------------------------------------------------------------------------
* BARBARA S. KOWALCZYK Senior Vice President and Director, Corporate Planning and Development,
Director, age 47 Lincoln National Management Corporation; Director, Lincoln Life and
200 East Berry Street Annuity Company of New York (formerly Executive Vice President, Lincoln
Fort Wayne, IN 46802 Investment Management, Inc.)
- -----------------------------------------------------------------------------------------------------------------
KENNETH G. STELLA President, Indiana Hospital and Health Association
Director, age 55
One America Square
Indianapolis, IN 46282
- -----------------------------------------------------------------------------------------------------------------
JANET C. CHRZAN Vice President and Treasurer, Lincoln National Corp. (formerly Vice
Treasurer, age 50 President and General Auditor)
200 East Berry Street
Fort Wayne, IN 46802
- -----------------------------------------------------------------------------------------------------------------
CYNTHIA A. ROSE Secretary, Lincoln National Life Insurance Co.
Secretary, age 44 Secretary and Assistant Vice President (eff. 1/1/99)
200 East Berry Street
Fort Wayne, IN 46802
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
* Interested persons of the funds, as defined in the 1940 Act.
A-4
<PAGE>
<TABLE>
<S> <C> <C>
COMPENSATION TABLE
- ----------------------------------------------------------------------------------------------------
AGGREGATE COMPENSATION TOTAL COMPENSATION FROM FUND
NAME OF PERSON, POSITION FROM EACH FUND* AND FUND COMPLEX
- ----------------------------------------------------------------------------------------------------
JOHN B. BORSCH, JR. $16,394
Director $1,488
- ----------------------------------------------------------------------------------------------------
NANCY L. FRISBY 15,851
Director 1,439
- ----------------------------------------------------------------------------------------------------
KENNETH G. STELLA 16,800
Director 1,400
- ----------------------------------------------------------------------------------------------------
</TABLE>
* Directors fees of $350 per meeting, plus expenses to attend the meetings, are
paid by each fund to each director who is not an interested person of the funds.
FUND EXPENSES
Expenses other than investment advisory fees specifically assumed by each fund
include: compensation and expenses of Directors of the fund who are not
interested persons of the fund as defined in the 1940 Act; registration, filing,
printing, and other fees in connection with filings with regulatory authorities,
including the costs of printing and mailing updated Prospectuses and SAIs
provided to current contract owners; fees and expenses of independent auditors;
the expenses of printing and mailing proxy statements and shareholder reports;
custodian and transfer agent charges; brokerage commissions and securities and
options transaction costs incurred by the fund; taxes and corporate fees; fees
for accounting, valuation and related services; legal fees incurred in
connection with the affairs of the fund (other than legal services provided by
personnel of the advisor or its affiliated companies); the fees of any trade
association of which the fund is a member; and expenses of shareholder and
Director meetings.
DESCRIPTION OF SHARES
The authorized capital stock of each fund consists of shares of common stock,
$0.01 par value. Fund shares will be owned by Lincoln Life and will be held by
it in the variable accounts. As sole shareholder of each fund, Lincoln Life may
be deemed to be a control person as that term is defined under the 1940 Act.
However, as stated in the Prospectuses for the variable accounts, Lincoln Life
provides to contract owners of the variable accounts the right to direct the
voting of fund shares at shareholder meetings, to the extent provided by law.
Lincoln Life will vote for or against any proposition, or will abstain from
voting, any fund shares attributable to a contract for which no timely voting
instructions are received, and any fund shares held by Lincoln Life for its own
account, in proportion to the voting instructions that it received with respect
to all contracts participating in that fund. However, if the 1940 Act or any
regulation under it should change, and as a result Lincoln Life determines it is
permitted to vote fund shares in its own right, it may elect to do so.
All the shares of each fund are of the same class with equal rights and
privileges. Each full share is entitled to one vote and each fractional share is
entitled to a proportionate fractional vote, on all matters subjected to a vote
of the shareholder. All shares, full and fractional, participate proportionately
in any dividends and capital gains distributions and, in the event of
liquidation, in that fund's net assets remaining after satisfaction of
outstanding liabilities.
When issued, each share is fully-paid and non-assessable and the shareholder has
no preemptive or conversion rights. Fund shares have non-cumulative voting
rights, which means that holders of more than 50% of the shares voting for the
election of directors can elect 100% of the directors if they choose to do so.
In that event the holders of the remaining shares so voting will not be able to
elect any directors. Shares may be redeemed as set forth under Sale and
redemption of shares.
The Bylaws of the funds allow them, in proper cases, to dispense with their
annual meetings of the shareholder. Generally, this may be done as long as: (1)
a majority of the Directors then in office have at some point been elected by
the shareholder and, if any vacancy is filled by vote of the Board of Directors,
then immediately after filling the vacancy at least two thirds of the Directors
shall have been elected by the shareholder; (2) there is no change in the
independent auditor of the funds; (3) there is no material change to the
investment advisory and/or sub-advisory agreements and/or fundamental policies;
and (4) a shareholder vote is not required with respect to a distribution
agreement. In
A-5
<PAGE>
adopting this procedure for dispensing with annual meetings that are a
formality, the Directors of the funds have undertaken to comply with the
requirements of Section 16(c) of the 1940 Act. That Section protects contract
owners by providing a procedure by which they may require management to convene
a meeting of the shareholder to vote on removal of one or more Directors. The
Directors also have agreed to facilitate communication among contract owners for
the purpose of calling those meetings. Further information about these
procedures is available from fund management.
STRATEGIC PORTFOLIO TRANSACTIONS-ADDITIONAL INFORMATION
Because of their different investment objectives and portfolio management
philosophies many of the funds engage to varying degrees in strategic portfolio
transactions, in order to preserve or enhance the value of their assets. These
can be generally identified as either derivative transactions or cash
enhancement transactions. Derivative transactions are recognized by the
investment community as an acceptable way to seek to increase the fund's overall
value (or, depending on the condition of the securities markets, at least to
slow its decrease). Cash enhancement transactions are designed to make some
extra money for the fund when it has excess cash, or to help the fund obtain
some cash for temporary purposes when needed. See the Prospectus for each fund
for a listing of the kinds of transactions in which each fund may engage.
1. DERIVATIVE TRANSACTIONS
A. Introduction
A derivative transaction is a financial agreement the value of which is
dependent upon the values of one or more underlying assets or upon the
values of one or more indices of asset values. The following types are
currently in fairly common use in the investment community, although not
every fund will use all of them:
1. Equity contracts: stock options and indexed options; equity swaps;
stock index futures and options on futures; swaptions;
2. Interest rate contracts: interest rate futures and options on them;
forward rate agreements (FRAs); interest rate swaps and their
related transactions (e.g., caps, floors, collars and corridors);
and/or
3. Currency derivative contracts: currency forward contracts; currency
options; currency futures; currency swaps; cross-currency interest
rate swaps.
SIMPLIFIED DEFINITIONS FOR THESE TRANSACTIONS ARE PROVIDED AT THE END OF THIS
GENERAL SAI DISCLOSURE.
Although they may be structured in complex combinations, derivative transactions
in which the funds engage generally fall into two broad categories: options
contracts or forward contracts. The combined forms are constantly evolving. In
fact, variations on the types listed previously may come into use after the date
of these SAIs. Therefore, where a particular fund discloses the intent of that
fund to engage in any of the types listed, that fund hereby reserves the right
to engage in related variations on those transactions.
The funds intend to engage in derivative transactions only defensively, unless a
fund's Prospectus or SAI states otherwise. Examples of this defensive use might
be: to hedge against a perceived decrease in a fund's asset value; to control
transaction costs associated with market timing (e.g., by using futures on an
unleveraged basis); and to lock in returns, spreads, or currency exchange rates
in anticipation of future cash market transactions.
There is no discussion here of asset-backed or mortgage-backed securities, or
securities such as collateralized mortgage obligations, structured notes,
inverse floaters, principal-only or interest-only securities, etc. For a
description of these securities see the Prospectus or SAI for the funds that are
authorized to engage in this kind of trading.
B. Risk factors commonly associated with derivative transactions.
There are certain risks associated with derivatives, and some derivatives
involve more of these risks than others. We briefly describe the most
common ones here; however, this is not an exhaustive list. Consult your
financial counselor if you have additional questions.
CREDIT RISK is the possibility that a counterparty to a transaction will
fail to perform according to the terms and conditions of the transaction,
causing the holder of the claim to suffer a loss.
CROSS-CURRENCY SETTLEMENT RISK (or Herstatt risk) is related to the
settlement of foreign exchange contracts. It arises when one of the
counterparties to a contract pays out one currency prior to receiving
payment of the other. Herstatt risk arises because the hours of operation
of domestic interbank fund transfer systems often do not overlap due to
time zone differences. In the interval between the time one counterparty
has received payment in one
A-6
<PAGE>
indicated currency and the time the other counterparty(ies) receive
payment in the others, those awaiting payment are exposed to credit risk
and market risk.
LEGAL RISK is the chance that a derivative transaction, which involves
highly complex financial arrangements, will be unenforceable in
particular jurisdictions or against a financially troubled entity; or
will be subject to regulation from unanticipated sources.
MARKET LIQUIDITY RISK is the risk that a fund will be unable to control
its losses if a liquid secondary market for a financial instrument does
not exist. It is often considered as the risk that a (negotiable or
assignable) financial instrument cannot be sold quickly and at a price
close to its fundamental value.
MARKET RISK is the risk of a change in the price of a financial
instrument, which may depend on the price of an underlying asset.
OPERATING RISK is the potential of unexpected loss from inadequate
internal controls or procedures; human error; system (including data
processing system) failure; or employee dishonesty.
SETTLEMENT RISK between two counterparties is the possibility that a
counterparty to whom a firm has made a delivery of assets or money
defaults before the amounts due or assets have been received; or the risk
that technical difficulties interrupt delivery or settlement even if the
counterparties are able to perform. In the latter case, payment is likely
to be delayed but recoverable.
SYSTEMIC RISK is the uncertainty that a disruption (at a firm, in a
market segment, to a settlement system, etc.) might cause widespread
difficulties at other firms, in other market segments, or in the
financial system as a whole.
SPECIAL NOTE FOR OPTIONS AND FUTURES TRANSACTIONS: Gains and losses on
options and futures transactions depend on the portfolio manager's
ability to correctly predict the direction of stock prices and interest
rates, and other economic factors. Options and futures trading may fail
as hedging techniques in cases where the price movements of the
securities underlying the options and futures do not follow the price
movements of the portfolio securities subject to the hedge. The loss from
investing in futures transactions is potentially unlimited.
SOME OF THESE RISKS MAY BE PRESENT IN EACH TYPE OF TRANSACTION, WHILE
OTHERS MAY PERTAIN ONLY TO CERTAIN ONES. These risks are discussed here
only briefly. Before you invest in a particular fund, please consult your
financial counselor if you have questions about the risks associated with
that fund's use of derivatives.
C. Varying usage of derivative transactions
Subject to the terms of the Prospectus and SAI for each fund, that fund's
portfolio manager decides which types of derivative transactions to
employ, at which times and under what circumstances. For a description of
the limits, risk factors and circumstances under which derivative
transactions will be used by each fund, refer to the SAI booklet.
D. Increased government scrutiny
Derivative transactions are coming under increased scrutiny by Congress
and industry regulators (such as the SEC and the Office of the
Comptroller of the Currency), and by self-regulatory agencies (such as
the NASD). Should legislation or regulatory initiatives be enacted
resulting in additional restrictive requirements for derivative
transactions, Lincoln Life and the funds reserve the right to make all
necessary changes in the contracts and the Registration Statements for
the funds, respectively, to comply with those requirements.
2. CASH ENHANCEMENT TRANSACTIONS
Cash enhancement transactions also involve certain risks to the fund. They are
discussed more fully in the SAI.
A. Lending of portfolio securities
Any fund authorized to do so may make secured loans of its portfolio
securities in order to realize additional income. The loans are limited
to a maximum of a stipulated amount of the fund's total assets. As a
matter of policy, securities loans are made to broker/dealers under
agreements requiring that the loans be continuously secured by collateral
in cash or short-term debt obligations at least equal at all times to
102% of the value of the securities lent.
The borrower pays the fund an amount equal to any dividends or interest
received on securities lent. The fund retains all or a portion of the
interest received on securities lent. The fund also retains all or a
portion of the interest received on investment of the cash collateral, or
receives a fee from the borrower.
With respect to the loaned securities, voting rights or rights to consent
pass to the borrower.
A-7
<PAGE>
However, the fund retains the right to call in the loans and have the
loaned securities returned at any time with reasonable notice. This is
important when issuers of the securities ask holders of those
securities--including the fund--to vote or consent on matters which could
materially affect the holders' investment. The fund may also call in the
loaned securities in order to sell them. None of the fund's portfolio
securities will be loaned to Lincoln Investment, to any sub-advisor, or
to any of their respective affiliates. The fund may pay reasonable
finder's fees to persons unaffiliated with it in connection with the
arrangement of the loans.
B. Repurchase (Repo) and reverse repurchase (Reverse Repo) transactions
1. REPOS. From time to time, the funds may enter into Repo
transactions. In a typical Repo transaction, the fund involved buys
U.S. Government or other money market securities from a financial
institution (such as a bank, broker, or savings and loan
association). At the same time, as part of the arrangement, the fund
obtains an agreement from the seller to repurchase those same
securities from the fund at a specified price on a fixed future
date.
The repurchase date is normally not more than seven days from the
date of purchase. Repurchase agreements maturing in more than seven
days will be considered illiquid and subject to the fund's
restriction on illiquid securities.
2. REVERSE REPOS. A fund may also be authorized to enter into Reverse
Repo transactions. This simply means the fund is on the reverse side
of a Repo transaction. That is, the fund is the Seller of some of
its portfolio securities, subject to buying them back at a set price
and date.
Authorized funds will engage in Reverse Repos for temporary purposes,
such as for obtaining cash to fund redemptions; or for the purpose of
increasing the income of the fund by investing the cash proceeds at a
higher rate than the cost of the agreement. Entering into a reverse
repo transaction is considered to be the borrowing of money by the
fund. Funds authorized to engage in Repos as buyers are not
necessarily authorized to do Reverse Repos.
RISKS OF OPTIONS AND FINANCIAL FUTURES TRADING
This discussion relates to all funds except the International Fund and the Money
Market Fund. (Note: The SAIs for Aggressive Growth, Capital Appreciation,
Equity-Income and Global Asset Allocation Funds provide additional disclosures
concerning the types and risks of the strategic portfolio transactions in which
they may engage.)
OPTIONS TRADING
The fund may purchase or write (sell) options on financial instruments as a
means of achieving additional return or hedging the value of the fund's
portfolio. The fund may not purchase or write put or covered call options in an
aggregate cost exceeding 30% of the value of its total assets. The fund would
invest in options in standard contracts which may be quoted on NASDAQ, or on
national securities exchanges. Currently options are traded on numerous
securities and indices including, without limitation, the Standard and Poor's
100 Index (S&P 100), the Standard and Poor's 500 Index (S&P 500), and the NYSE
Beta Index.
Put and call options are generally short-term contracts with durations of nine
months or less. The investment advisor will generally write covered call options
when it anticipates declines in the market value of the portfolio securities and
the premiums received may offset to some extent the decline in the fund's net
asset value. On the other hand, writing put options may be a useful portfolio
investment strategy when the fund has cash or other reserves and it intends to
purchase securities but expects prices to increase.
Generally, the risk to the fund in writing options is that the investment
advisor's assumption about the price trend of the underlying security may prove
inaccurate. If the fund wrote a put, expecting the price of a security to
increase, and it decreases, or if the fund wrote a call, expecting the price to
decrease but it increased, the fund could suffer a loss if the premium received
in each case did not equal the difference between the exercise price and the
market price.
As with the writer of a call, a put writer generally hopes to realize premium
income. The risk position of the fund as a put writer is similar to that of a
covered call writer which owns the underlying securities. Like the covered call
writer (who must bear the risk of the position in the underlying security), the
fund as a put writer stands to incur a loss if and to the extent the price of
the underlying security falls below the exercise price plus premium.
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Principal factors affecting the market value of a put or call option include
supply and demand, interest rates, the current market price and price volatility
of the underlying security and the time remaining until the expiration date. In
addition, there is no assurance that the fund will be able to effect a closing
transaction at a favorable price. If the fund cannot enter into such a
transaction, it may be required to hold a security that it might otherwise have
sold, in which case it would continue to be at market risk on the security. If a
substantial number of covered options written by the fund are exercised, the
fund's rate of portfolio turnover could exceed historic levels. This could
result in higher transaction costs, including brokerage commissions. The fund
will pay brokerage commissions in connection with the writing and purchasing of
options to close out previously written options. Such brokerage commissions are
normally higher than those applicable to purchases and sales of portfolio
securities.
FUTURES CONTRACTS AND OPTIONS THEREON
The fund may buy and sell financial futures contracts (futures contracts) and
related options thereon solely for hedging purposes. The fund may sell a futures
contract or purchase a put option on that futures contract to protect the value
of the fund's portfolio in the event the investment advisor anticipates
declining security prices. Similarly, if security prices are expected to rise,
the fund may purchase a futures contract or a call option thereon.
The fund may purchase and sell financial futures contracts (futures contracts)
as a hedge against fluctuations in the value of securities which are held in the
fund's portfolio or which the fund intends to purchase. The fund will engage in
such transactions consistent with the fund's investment objective. For certain
limited purposes, the fund may also be authorized to buy futures contracts on an
unleveraged basis and not as an anticipatory hedge. Currently, futures contracts
are available on Treasury bills, notes, and bonds as well as interest-rate and
stock market indexes.
The Bond, Growth and Income, Managed, Social Awareness, and Special
Opportunities funds may only purchase futures and related options thereon for
hedging purposes. The Aggressive Growth, Capital Appreciation, Equity-Income,
and Global Asset Allocation funds may purchase futures and related options for
both hedging and non-hedging purposes, but subject to the limits described in
each fund's SAI. The funds will not purchase or sell futures contracts or
related options if immediately thereafter more than 1/3 of its net assets would
be hedged.
There are a number of risks associated with futures hedging. Changes in the
price of a futures contract generally parallel but do not necessarily equal
changes in the prices of the securities being hedged. The risk of imperfect
correlation increases as the composition of the fund's securities portfolio
diverges from the securities that are the subject of the futures contract.
Because the change in the price of the futures contract may be more or less than
the change in the prices of the underlying securities, even a correct forecast
of price changes may not result in a successful hedging transaction. Another
risk is that the investment advisor could be incorrect in its expectation as to
the direction or extent of various market trends or the time period within which
the trends are to take place.
The fund intends to purchase and sell futures contracts only on exchanges where
there appears to be a market in such futures sufficiently active to accommodate
the volume of its trading activity. This investment policy does not apply to the
Capital Appreciation, Global Asset Allocation, and Equity-Income funds. There
can be no assurance that a liquid market will always exist for any particular
contract at any particular time. Accordingly, there can be no assurance that it
will always be possible to close a futures position when such closing is desired
and, in the event of adverse price movements, the fund would continue to be
required to make daily cash payments of variation margin. However, in the event
futures contracts have been sold to hedge portfolio securities, such securities
will not be sold until the offsetting futures contracts can be executed.
Similarly, in the event futures have been bought to hedge anticipated securities
purchases, such purchases will not be executed until the offsetting futures
contracts can be sold.
Successful use of futures contracts by the fund is also subject to the ability
of the investment advisor to predict correctly movements in the direction of
interest rates and other factors affecting markets for securities. For example,
if the fund has hedged against the possibility of an increase in interest rates
that would adversely affect the price of securities in its portfolio and prices
of such securities increase instead, the fund will lose part or all of the
benefit of the increased value of its securities because it will have offsetting
losses in its futures positions. In addition, in such situations, if the fund
has insufficient cash to meet daily variation margin requirements, it may have
to sell securities to meet such requirements. Such sale of securities may be,
but will not necessarily be, at increased prices that reflect the rising market.
The fund may have to sell securities at a time when it is disadvantageous to do
so. Where futures are purchased to hedge against a possible increase in the
price of securities before the fund is able to invest its cash in an orderly
fashion, it is possible that the market may decline instead; if the fund then
concludes not to invest in securities at that time
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because of concern as to possible further market decline or for other reasons,
the fund will realize a loss on the futures contract that is not offset by a
reduction in the price of the securities purchased.
The selling of futures contracts by the fund and use of related transactions in
options on futures contracts are subject to position limits, which are affected
by the activities of the investment advisor.
The hours of trading of futures contracts may not conform to the hours during
which the fund may trade securities. To the extent that the futures markets
close before the securities markets, significant price and rate movements can
take place in the securities markets that cannot be reflected in the futures
markets.
The fund's successful use of futures contracts and options thereon depends upon
the ability of its investment advisor to predict movements in the securities
markets and other factors affecting markets for securities and upon the degree
of correlation between the prices of the futures contracts and the prices of the
securities being hedged. As a result, even a correct forecast of price changes
may not result in a successful hedging transaction. Although futures contracts
and options thereon may limit the fund's exposure to loss, they may also limit
the fund's potential for capital gains. For example, if the fund has hedged
against the possibility of decrease in prices which would adversely affect the
price of securities in its portfolio and prices of such securities increase
instead, the fund will lose part or all of the benefit of the increased value of
its securities because it will have offsetting losses in its futures positions.
Although the fund will enter into futures contracts only where there appears to
be a liquid market, there can be no assurance that such liquidity will always
exist.
LENDING OF PORTFOLIO SECURITIES
The funds may from time to time lend securities from their portfolios to
brokers, dealers and financial institutions and receive collateral from the
borrower, in the form of cash (which may be invested in short-term securities),
U.S. Government obligations or certificates of deposit. Such collateral will be
maintained at all times in an amount equal to at least 102% of the current
market value of the loaned securities, and will be in the actual or constructive
possession of the particular fund during the term of the loan. The fund will
maintain the incidents of ownership of the loaned securities and will continue
to be entitled to the interest or dividends payable on the loaned securities. In
addition, the fund will receive interest on the amount of the loan. The loans
will be terminable by the fund at any time and will not be made to any
affiliates of the fund or the advisor. The fund may pay reasonable finder's fees
to persons unaffiliated with it in connection with the arrangement of the loans.
As with any extensions of credit, there are risks of delay in recovery and, in
some cases, even loss of rights in the collateral or the loaned securities
should the borrower of securities fail financially. However, loans of portfolio
securities will be made to firms deemed by the advisor to be creditworthy.
RISKS OF REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
The funds may make short-term investments in repurchase agreements. The
difference between the purchase price to the fund and the resale price to the
seller represents the interest earned by the fund which is unrelated to the
coupon rate or maturity of the purchased security. If the seller defaults, the
fund may incur a loss if the value of the collateral securing the repurchase
agreement declines, or the fund may incur disposition costs in connection with
liquidating the collateral. If bankruptcy proceedings are commenced with respect
to the seller, realization upon the collateral by the fund may be delayed or
limited and a loss may be incurred if the collateral securing the repurchase
agreement declines in value during the bankruptcy proceedings. The Board of
Directors of the funds or its delegate will evaluate the creditworthiness of all
entities, including banks and broker-dealers, with which they propose to enter
into repurchase agreements. These transactions will be fully collateralized; and
the collateral for each transaction will be in the actual or constructive
possession of the particular fund during the terms of the transaction, as
provided in the agreement.
Similarly, the fund will enter into reverse repurchase agreements only with
parties that the advisor or sub-advisor deems creditworthy. While a reverse
repurchase agreement is outstanding, the funds will maintain cash and
appropriate liquid assets in a segregated custodial account to cover its
obligation under the agreement.
FOREIGN INVESTMENTS
There are certain risks involved in investing in foreign securities, including
those resulting from fluctuations in currency exchange rates; devaluation of
currencies; political or economic developments including the possible imposition
of currency exchange blockages, bars preventing the removal of assets, or other
foreign governmental laws or restrictions; reduced availability of public
information concerning issuers; and the fact that
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foreign companies are not generally subject to uniform accounting, auditing, and
financial reporting standards or to other regulatory practices and requirements
comparable to those applicable to domestic companies. With respect to certain
foreign countries, there is also the possibility of expropriation,
nationalization, confiscatory taxation, and limitations on the use or removal of
cash or other assets of a fund, including the withholding of interest payments
or dividends. These risks may be particularly great in so-called developing or
undeveloped countries, sometimes referred to as Emerging Markets.
In addition, while the volume of transactions effected on foreign stock
exchanges has increased in recent years, in most cases it remains appreciably
below that of the NYSE. Accordingly, a fund's foreign investments may be less
liquid and their prices may be more volatile than comparable investments in
securities of U.S. companies. Moreover, the settlement periods for foreign
securities, which are often longer than those for securities of U.S. issuers,
may affect portfolio liquidity. The funds will incur costs in converting foreign
currencies into U.S. dollars. Custody charges are generally higher for foreign
securities. In buying and selling securities on foreign exchanges, a fund
normally pays fixed commissions that are generally higher than the negotiated
commissions charged in the U.S. In addition, there is generally less
governmental supervision and regulation of securities exchanges, brokers and
issuers in foreign countries than in the U.S. There may be difficulty in
enforcing legal rights outside the U.S. For example, in the event of default on
any foreign debt obligations, it may be more difficult or impossible for the
fund to obtain or to enforce a judgment against the issuers of these securities.
The advisor or sub-advisor will take all these factors into consideration in
managing a fund's foreign investments.
The share price of a fund that invests in foreign securities will reflect the
movements of both the prices of the portfolio securities and the currencies in
which those securities are denominated. Depending on the extent of a fund's
investments abroad, changes in a fund's share price may have a low correlation
with movements in the U.S. markets. Because most of the foreign securities in
which the fund invests will be denominated in foreign currencies, or otherwise
will have values that depend on the performance of foreign currencies relative
to the U.S. dollar, the relative strength of the U.S. dollar may be an important
factor in the performance of the fund.
FOREIGN CURRENCIES
When an advisor or sub-advisor believes that a currency in which a portfolio
security or securities is denominated or exposed may suffer a decline against
the U.S. dollar, it may hedge that risk by entering into a forward contract to
sell an amount of foreign currency approximating the value of some or all of the
portfolio securities denominated in or exposed to that foreign currency.
Because foreign securities generally are denominated and pay dividends or
interest in foreign currencies, and a fund may hold various foreign currencies,
the value of the net assets of that fund as measured in U.S. dollars will be
affected favorably or unfavorably by changes in exchange rates. Generally,
currency exchange transactions will be conducted on a spot (i.e., cash) basis at
the spot rate prevailing in the currency exchange market. The cost of currency
exchange transactions will generally be the difference between the bid and offer
spot rate of the currency being purchased or sold. Some foreign currency values
may be volatile, and there is the possibility of government controls on currency
exchange or governmental intervention in currency markets which could adversely
affect the fund.
Investors should be aware that exchange rate movements can be significant and
can endure for long periods of time. In order to protect against uncertainty in
the level of future foreign currency exchange rates, a fund's advisor or
sub-advisor may attempt to manage exchange rate risk through active currency
management, including the use of certain foreign currency hedging transactions.
For example, it may hedge some or all of its investments denominated in a
foreign currency against a decline in the value of that currency relative to the
U.S. dollar by entering into contracts to exchange that currency for U.S.
dollars (not exceeding the value of the fund's assets denominated in or exposed
to that currency), or by participating in options or futures contracts with
respect to that currency. If the advisor or sub-advisor believes that a
particular currency may decline relative to the U.S. dollar, the fund may also
enter into contracts to sell that currency (up to the value of the fund's assets
denominated in or exposed to that currency) in exchange for another currency
that the advisor or sub-advisor expects to remain stable or to appreciate
relative to the U.S. dollar. This technique is known as currency cross-hedging.
Refer to the Prospectus for each fund to determine which funds may engage in
these transactions.
These strategies are intended to minimize the effect of currency appreciation as
well as depreciation, but do not protect against a decline in the underlying
value of the hedged security. In addition, these strategies may reduce or
eliminate the opportunity to profit from increases in the value of the original
currency and may adversely impact the fund's performance if the advisor or
sub-advisor's projection of future exchange rates is inaccurate. See Strategic
portfolio transactions.
Additionally, as of January 1, 1999, several European countries began
participating in the European Economic and Monetary Union, which established a
common
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European currency for participating countries. This currency is commonly known
as the "Euro." Each participating country is currently phasing in use of the
Euro for major financial transactions. In addition, each participating country
will begin using the Euro for currency transactions beginning July 1, 2002.
Additional European countries may elect to participate. Funds investing in
securities of participating countries could be adversely affected if the
computer systems used by their major service providers are not properly prepared
to handle both the implementation of this single currency and the prospect of
the adoption of the Euro by additional countries in the future.
VALUATION OF PORTFOLIO SECURITIES
SHORT-TERM INVESTMENTS. For funds (other than the Money Market Fund) that own
short-term investments which mature in less than 60 days, these instruments are
valued at amortized cost. Such securities acquired with a remaining maturity of
61 days or more are valued at their fair value until the sixty-first day prior
to maturity; thereafter, their cost for valuation purposes is deemed to be their
fair value on such sixty-first day.
OPTIONS TRADING. For those funds engaging in options trading, fund investments
underlying call options will be valued as described previously. Options are
valued at the last sale price or, if there has been no sale that day, at the
mean of the last bid and asked price on the principal exchange where the option
is traded, as of the close of trading on the NYSE. The fund's net asset value
will be increased or decreased by the difference between the premiums received
on writing options and the cost of liquidating those positions measured by the
closing price of those options on the exchange where traded.
FUTURES CONTRACTS AND OPTIONS THEREON. For those funds buying and selling
futures contracts and related options thereon, the futures contracts and options
are valued at their daily settlement price.
FOREIGN SECURITIES. For funds investing in foreign securities, the value of a
foreign portfolio security held by a fund is determined based upon its closing
price or upon the mean of the closing bid and asked prices on the foreign
exchange or market on which it is traded and in the currency of that market, as
of the close of the appropriate exchange. As of the close of business on the
NYSE, that fund's portfolio securities which are quoted in foreign currencies
are converted into their U.S. dollar equivalents at the prevailing market rates,
as computed by the custodian of the fund's assets.
However, trading on foreign exchanges may take place on dates or at times of day
when the NYSE is not open; conversely, overseas trading may not take place on
dates or at times of day when the NYSE is open. Any of these circumstances could
affect the net asset value of fund shares on days when the investor has no
access to the fund. There are more detailed explanations of these circumstances
in the SAI for the various funds. See the Preface to this Prospectus booklet for
information about how to obtain a copy of the SAI booklet for the 11 funds.
CUSTODIAN
All securities, cash and other similar assets of the Bond, Growth and Income,
Managed, Money Market, Social Awareness and Special Opportunities funds are
currently held in custody by The Chase Manhattan Bank, N.A., 4 Chase MetroTech
Center, Brooklyn, NY 11245. Chase Manhattan agreed to act as custodian for each
fund pursuant to a Custodian Agreement dated March 30, 1998.
All securities, cash and other similar assets of the Aggressive Growth, Capital
Appreciation, Equity-Income, Global Asset Allocation and International Funds are
held in custody by State Street Bank and Trust Co., 225 Franklin Street, Boston,
Massachusetts 02110. State Street agreed to act as custodian for these funds
pursuant to Custodian Contracts effective July 21, 1987 for the Global Asset
Allocation fund, April 29, 1991 for the International fund, and December 6, 1993
for the other three funds.
Under these Agreements, the respective custodians shall (1) receive and disburse
money; (2) receive and hold securities; (3) transfer, exchange, or deliver
securities; (4) present for payment coupons and other income items, collect
interest and cash dividends received, hold stock dividends, etc.; (5) cause
escrow and deposit receipts to be executed; (6) register securities; and (7)
deliver to the funds proxies, proxy statements, etc.
INDEPENDENT AUDITORS
Each fund's Board of Directors has engaged Ernst & Young LLP, Two Commerce
Square, Suite 4000, 2001 Market Street, Philadelphia, PA 19103, to be the
independent auditors for the fund. In addition to the audit of the 1998
financial statements of the funds, other services provided include review and
consultation connected with filings of annual reports and registration
statements with the Securities and Exchange Commission (SEC); consultation on
financial accounting and reporting matters; and meetings with the Audit
Committee.
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FINANCIAL STATEMENTS
The audited financial statements and the reports of Ernst & Young LLP,
Independent Auditors, for the funds are incorporated by reference to each fund's
1998 Annual Report. We will provide a copy of each fund's Annual Report on
request and without charge. Either write Lincoln National Life Insurance Co.,
P.O. Box 2340, Fort Wayne, Indiana 46801 or call: 1-800-4LINCOLN (452-6265).
BOND AND COMMERCIAL PAPER RATINGS
Certain of the funds' investment policies and restrictions include references to
bond and commercial paper ratings. The following is a discussion of the rating
categories of Moody's Investors Service, Inc. and Standard & Poor's Corp.
MOODY'S INVESTORS SERVICE, INC.
Aaa -- Bonds which are rated Aaa are judged to be of the best quality and carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa -- Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
STANDARD & POOR'S CORP.
AAA -- This is the highest rating assigned by Standard & Poor's Corp. to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA -- Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
A -- Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas these bonds normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest than for
bonds in the A category and higher.
BB-B-CCC-CC -- Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and C the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
MOODY'S INVESTORS SERVICE, INC.
Moody's Commercial Paper ratings are opinions of the ability of issuers to repay
punctually promissory obligations not having an original maturity in excess of
nine
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months. Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Prime 1 -- Highest Quality;
Prime 2 -- Higher Quality;
Prime 3 -- High Quality.
(The funds will not invest in commercial paper rated Prime 3).
STANDARD & POOR'S CORP.
A Standard & Poor's Corp. commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. The fund will invest in commercial paper rated in the A Categories, as
follows:
A -- Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
the designation 1, 2, and 3 to indicate the relative degree of safety. (The
funds will not invest in commercial paper rated A-3).
A -- 1 this designation indicates that the degree of safety regarding timely
payment is very strong.
A -- 2 Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not overwhelming as for issues
designated A-1.
U.S. GOVERNMENT OBLIGATIONS
Securities issued or guaranteed as to principal and interest by the U.S.
Government include a variety of Treasury securities, which differ only in their
interest rates, maturities and times of issuance. Treasury bills have a maturity
of one year or less. Treasury notes have maturities of two to ten years and
Treasury bonds generally have a maturity of greater than ten years.
Various agencies of the U.S. Government issue obligations. Some of these
securities are supported by the full faith and credit of the U.S. Treasury (for
example those issued by Export-Import Bank of the United States, Farmers Home
Administration, Federal Housing Administration, Government National Mortgage
Association, Maritime Administration, Small Business Administration and The
Tennessee Valley Authority).
Obligations of instrumentalities of the U.S. Government are supported by the
right of the issuer to borrow from the Treasury (for example, those issued by
Federal Farm Credit Banks, Federal Home Loan Bank, Federal Home Loan Mortgage
Corp., Federal Intermediate Credit Banks, Federal Land Bank and the U.S. Postal
Service). Obligations supported by the credit of the instrumentality include
securities issued by government-sponsored corporations whose stock is publicly
held (for example, the Federal National Mortgage Association, and the Student
Loan Marketing Association). There is no guarantee that the government will
support these types of securities, and therefore they may involve more risk than
other government obligations.
TAXES
Each fund intends to qualify and has elected to be taxed as a regulated
investment company under certain provisions of the Internal Revenue Code of
1986, as amended (the Code). If a fund qualifies as a regulated investment
company and complies with the provisions of the Code relieving regulated
investment companies which distribute substantially all of their net income
(both net ordinary income and net capital gain) from federal income tax, it will
be relieved from such tax on the part of its net ordinary income and net
realized capital gain which it distributes to its shareholders. To qualify for
treatment as a regulated investment company, each fund must, among other things,
derive in each taxable year at least 90% of its gross income from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stock or securities or foreign currencies (subject to the
authority of the Secretary of the Treasury to exclude foreign currency gains
which are not directly related to the fund's principal business of investing in
stock or securities or options and futures with respect to such stock or
securities), or other income (including but not limited to gains from options,
futures, or forward contracts) derived with respect to its investing in such
stocks, securities, or currencies.
The federal tax laws impose a 4% nondeductible excise tax on each regulated
investment company with respect to an amount, if any, by which such company does
not meet distribution requirements specified in such tax laws, unless certain
exceptions apply. Each fund intends to comply with such distribution
requirements or qualify under one or more exceptions, and thus does not expect
to incur the 4% nondeductible excise tax.
Since the sole shareholder of each fund will be Lincoln Life, no discussion is
stated herein as to the federal income tax consequences at the shareholder
level.
The discussion of federal income tax considerations in the Prospectus, in
conjunction with the foregoing, is a general and abbreviated summary of the
applicable provisions of the Code and Treasury Regulations currently in effect
as interpreted by the Courts and the Internal Revenue Service (IRS). These
interpretations can be changed at any time. The above discussion covers only
federal tax considerations with respect to the fund. State and local taxes vary.
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DERIVATIVE TRANSACTIONS-DEFINITIONS
The SAI for each fund and this uniform Appendix discuss the type of derivative
transactions in which the funds may engage and the risks typically associated
with many derivative transactions. Here are some definitions for the derivatives
listed in the Appendix:
OPTION. A contract which gives the fund the right, but not the obligation, to
buy or sell specified securities at a fixed price before or at a designated
future date. If the contract allows the fund to buy securities, it is a call
option; if to sell, it is a put option. It is common practice in options trading
to terminate an outstanding option contract by entering into an offsetting
transaction known as a closing transaction; as a result of which the fund would
either pay out or receive a cash settlement. This is discussed below.
CURRENCY OPTION. Discussed later.
FIXED INCOME OPTION. One based on a fixed-income security, such as a corporate
or government bond.
INDEX OPTION. One based on the value of an index which measures the fluctuating
value of a basket of pre-selected securities.
STOCK (EQUITY) OPTION. One based on the shares of stock of a particular company.
OPTION ON A FUTURES CONTRACT. Discussed later.
SWAP. A financial transaction in which the fund and another party agree to
exchange streams of payments at periodic intervals under a predetermined set of
occurrences related to the price level, performance or value of one or more
underlying securities, and pegged to a reference amount known as the notional
amount. A swap is normally used to change the market risk associated with a loan
or bond borrowing from one interest rate base (fixed term or floating rate) or
currency of one denomination to another.
EQUITY SWAP. One which allows the fund to exchange the rate of return (or some
portion of the rate) on its portfolio stocks (an individual share, a basket or
index) for the rate of return on another equity or non-equity investment.
INTEREST RATE SWAP. One in which the fund and another party exchange different
types of interest payment streams, pegged to an underlying notional principal
amount. The three main types of interest rate swaps are coupon swaps (fixed rate
to floating rate in the same currency); basis swaps (one floating rate index to
another floating rate index in the same currency); and cross-currency interest
rate swaps (fixed rate in one currency to floating rate in another).
RELATED TRANSACTIONS TO INTEREST RATE SWAPS:
a. Cap. A contract for which the buyer pays a fee, or premium, to obtain
protection against a rise in a particular interest rate above a certain
level. For example, an interest rate cap may cover a specified principal
amount of a loan over a designated time period, such as a calendar quarter.
If the covered interest rate rises above the rate ceiling, the seller of the
rate cap pays the purchaser an amount of money equal to the average rate
differential times the principal amount times one-quarter.
b. Floor. A contract in which the seller agrees to pay to the purchaser, in
return for the payment of a premium, the difference between current interest
rates and an agreed (strike) rate times the notional amount, should interest
rates fall below the agreed level (the floor). A floor contract has the
effect of a string of interest rate guarantees.
c. Collar. An arrangement to simultaneously purchase a cap and sell a floor, in
order to maintain interest rates within a defined range. The premium income
from the sale of the floor reduces or offsets the cost of buying the cap.
d. Corridor. An agreement to buy a cap at one interest rate and sell a cap at a
higher rate.
SWAPTION. An option to enter into, extend, or cancel a swap.
FUTURES CONTRACT. A contract which commits the fund to buy or sell a specified
amount of a financial instrument at a fixed price on a fixed date in the future.
Futures contracts are normally traded on an exchange and their terms are
standardized, which makes it easier to buy and sell them.
INTEREST RATE FUTURES (AND OPTIONS ON THEM). Futures contracts pegged to U.S.
and foreign fixed-income securities, debt indices and reference rates.
STOCK INDEX FUTURES. Futures contracts based on an index of pre-selected stocks,
with prices based on a composite of the changes to the prices of the individual
securities in the index (e.g., S&P 500).
OPTION ON A FUTURES CONTRACT. An option taken on a futures position.
FORWARD CONTRACT. An over-the-counter, individually-tailored futures contract.
FORWARD RATE AGREEMENT (FRA). A contract in which the fund and another party
agree on the interest rate to be paid on a notional deposit of specified
maturity at a specific future time. Normally, no exchange of principal is
involved; the difference between the contracted rate and the prevailing rate is
settled in cash.
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CURRENCY CONTRACT. A contract entered into for the purpose of reducing or
eliminating an anticipated rise or drop in currency exchange rates over time.
CURRENCY FUTURES. Futures contracts on foreign currencies. Used to hedge the
purchase or sale of foreign securities.
CURRENCY OPTION. An option taken on foreign currency.
CURRENCY SWAP. A swap involving the exchange of cash flows and principal in one
currency for those in another, with an agreement to reverse the principal swap
at a future date.
CROSS-CURRENCY INTEREST RATE SWAP. A swap involving the exchange of streams of
interest rate payments (but not necessarily principal payments) in different
currencies and often on different interest bases (e.g., fixed Deutsche Mark
against floating dollar, but also fixed Deutsche Mark against fixed dollar).
FORWARD CURRENCY CONTRACT. A contract to lock in a currency exchange rate at a
future date, to eliminate risk of currency fluctuation when the time comes to
convert from one currency to another.
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