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As filed with the Securities and Exchange Commission on April 28,1995
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Registration No. 33-71158
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
___________
Post-Effective Amendment No. 3
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
___________
Amendment No. 5 X
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(Check appropriate box or boxes)
--------------------------------
LINCOLN NATIONAL EQUITY-INCOME FUND, INC.
(Exact name of registrant as specified in charter)
1300 South Clinton Street
Fort Wayne, Indiana 46802
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code (219)455-2000
Jack D. Hunter, Esq.
200 East Berry Street
Fort Wayne, Indiana 46802
(Name and Address of Agent for Service)
Fiscal year-end: December 31
The Registrant has registered an indefinite amount of securities under the
Securities Act of 1933 pursuant to Rule 24f-2 of the Investment Company Act of
1940. Pursuant to Rule 24f-2 (b) (2), the Registrant filed a Rule 24f-2 Notice
for the last fiscal year (1994) on February 21, 1995.
It is proposed that this filing will become effective:
____ immediately upon filing pursuant to paragraph (b)
x
____ on 4/29/95 pursuant to paragraph (b)
____ 60 days after filing pursuant to paragraph (a) (b)
____ on _________ pursuant to paragraph (a) (1)
____ 75 days after filing pursuant to paragraph (a) (2)
____ on _________ pursuant to paragraph (a) (2) of Rule 485.
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LINCOLN NATIONAL EQUITY-INCOME FUND, INC.
CONTENTS OF
POST-EFFECTIVE AMENDMENT NO. 3 TO THE
REGISTRATION STATEMENT
on Form N-1A
This Amendment consists of the following papers and documents:
Facing Sheet
Contents Sheet
Cross-reference Sheet
Part A-
Prospectus
Part B-
Statement of Additional Information
Part C-
Items 24 through 32.
Signatures.
Exhibit Index.
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LINCOLN NATIONAL EQUITY-INCOME FUND, INC.
CROSS REFERENCE SHEET
[as required by Rule 481(a)]
Item Number - Part A Location in Prospectus
- -------------------- ----------------------
1. Cover Page Preface
2. Synopsis Not Applicable
3. Condensed Financial Preface
Information
4. General Description of Description of the Fund; Investment Policies
Registrant and Techniques; Investment Restrictions;
Strategic Portfolio Transactions (Prospectus
and Appendix); Special Risk Factors
5. Management of the Fund Description of the Fund; Investment Policies
and Techniques; Management of the funds
(Appendix)
5A. Management's Discussion Management Discussion of Fund Performance
of Fund Performance (Appendix)
6. Capital Stock and Other Description of Shares; Sales and Redemption
Securities of Shares; General Securities Information;
Distribution and Federal Income Tax
Considerations (All in Appendix)
7. Purchase of Securities Net Asset Value; Purchase of Securities
Being Offered Being Offered; Sale and Redemption of Shares
(All in Appendix)
8. Redemption or Repurchase Sale and Redemption of Shares (Appendix)
9. Legal Proceedings Not Applicable
Location in Statement of
Item Number - Part B Additional Information
- -------------------- ------------------------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information Not Applicable
and History
13. Investment Objectives Investment Restrictions; Investment Policies
and Policies and Techniques (continued) (Appendix);
Strategic Portfolio Transactions (Appendix)
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LNEI - CROSS REFERENCE SHEET (Continued)
14. Management of the Directors and Officers (Appendix)
Fund
15. Control Persons and See "Management of the Funds" and
Principal "Description of Shares" in the Prospectus
Appendix
16. Investment Advisory Investment Advisor and Sub-Advisor;
and Other Services Custodian; Independent Auditors (All in
Appendix)
17. Brokerage Allocation Portfolio Transactions and Brokerage
18. Capital Stock and Not Applicable
Other Securities
19. Purchase, Redemption and Purchase of Securities Being Offered; Sale
Pricing of Securities and Redemption of Shares; and Net Asset
Being Offered Value; all in the Prospectus Appendix
20. Tax Status Taxes
21. Underwriters Not Applicable
22. Calculation of Not Applicable (See the SAI for the
Performance Data Variable Annuity Account on Form N-4.)
23. Financial Statements Financial Statements
<PAGE>
PREFACE TO THE MULTI FUND(R) PROSPECTUSES
THESE PAGES ARE PART OF THE PROSPECTUS FOR EACH OF THE FOLLOWING FUNDS:
Lincoln National Aggressive Growth Fund, Inc.
Lincoln National Bond Fund, Inc.
Lincoln National Capital Appreciation Fund, Inc.
Lincoln National Equity-Income Fund, Inc.
Lincoln National Global Asset Allocation Fund, Inc.
Lincoln National Growth and Income Fund, Inc.
Lincoln National International Fund, Inc.
Lincoln National Managed Fund, Inc.
Lincoln National Money Market Fund, Inc.
Lincoln National Social Awareness Fund, Inc.
Lincoln National Special Opportunities Fund, Inc.
Shares of all the Funds are sold to Lincoln National Life Insurance Company
(Lincoln Life) for allocation to our Variable Annuity Account C (the Variable
Annuity Account [VAA]) to fund Variable Annuity Contracts and for allocation to
our Variable Life Account K to fund Variable Life Insurance Contracts. Shares of
the Bond, Growth and Income, Managed, Money Market, and Special Opportunities
Funds are sold to Lincoln Life for allocation to our Variable Life Account D to
fund Variable Life Insurance Contracts. Shares of the Growth and Income Fund and
Special Opportunities Fund are sold to Lincoln Life for allocation to our
Variable Life Account G to fund Variable Life Insurance Contracts. Each of these
Variable Life and Annuity Accounts may be referred to as a Variable Account. For
each Fund listed above, see Description of the Fund in its Prospectus, for a
statement of that Fund's investment objective. We refer to each of these funds
individually as a Fund; collectively, the Funds.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (SEC) NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THESE PROSPECTUSES. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
These Prospectuses set forth concisely the information about each Fund that you
ought to know before investing. Please read and keep this Prospectus booklet for
future reference.
A separate Statement of Additional Information (SAI) for each Fund has been
filed with the SEC. By this reference, each SAI, dated April 29, 1995, is
incorporated into the Prospectus of the Fund with which it is registered. A free
copy will be provided upon request. Either write Kim Oakman, Lincoln National
Life Insurance Co., P.O. Box 2340, Fort Wayne, Indiana 46801 or call
1-800-348-1212, Ext. 4912.
The Financial Highlights of each Fund contain per-share data calculated on the
basis of a share outstanding throughout the period, together with financial
ratios and other supplemental data. The highlights are incorporated by reference
to the Fund's 1994 Annual Report (see pages 45-47 of the Report). A copy of the
Annual report will be provided on request and without charge. Please write or
call Eric Jones, Lincoln National Life Insurance Company, P.O. Box 2340, Fort
Wayne, Indiana 46801; telephone: 1-800-348-1212, Ext. 6536.
NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THESE
PROSPECTUSES, IN CONNECTION WITH THE OFFERS CONTAINED IN THEM. IF ANY ARE GIVEN
OR MADE, THE INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE FUND(S) IN QUESTION. THESE PROSPECTUSES DO NOT CONSTITUTE
OFFERS BY THE FUNDS TO SELL, OR SOLICITATIONS OF ANY OFFERS TO BUY, ANY OF THE
SECURITIES OFFERED BY THEM IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL FOR THE FUNDS TO MAKE THOSE OFFERS.
Prospectuses dated April 29, 1995
21
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DIRECTORY FOR THE FUND PROSPECTUSES
<TABLE>
<CAPTION>
Subject Page
- ----------------------------------------------------
<S> <C>
PREFACE 21
DESCRIPTION OF THE FUND
Aggressive Growth Fund 23
Bond Fund 29
Capital Appreciation Fund 33
Equity-Income Fund 37
Global Asset Allocation Fund 41
Growth and Income Fund 45
International Fund 47
Managed Fund 51
Money Market Fund 55
Social Awareness Fund 57
Special Opportunities Fund 59
____________________________________________________
INVESTMENT POLICIES TECHNIQUES
<S> <C>
Aggressive Growth Fund 23
Bond Fund 29
Capital Appreciation Fund 33
Equity-Income Fund 37
Global Asset Allocation Fund 41
Growth and Income Fund 45
International Fund 47
Managed Fund 51
Money Market Fund 55
Social Awareness Fund 57
Special Opportunities Fund 59
____________________________________________________
INVESTMENT RESTRICTIONS
<S> <C>
Aggressive Growth Fund 26
Bond Fund 30
Capital Appreciation Fund 35
Equity-Income Fund 39
Global Asset Allocation Fund 43
Growth and Income Fund 45
International Fund 49
Managed Fund 52
Money Market Fund 56
Social Awareness Fund 58
Special Opportunities Fund 60
____________________________________________________
Subject Page
- -----------------------------------------------------
SPECIAL RISK FACTORS
<S> <C>
Aggressive Growth Fund 26
Capital Appreciation Fund 35
Equity-Income Fund 39
______________________________________________________
STRATEGIC PORTFOLIO TRANSACTIONS
<S> <C>
Aggressive Growth Fund 26
Bond Fund 31
Capital Appreciation Fund 36
Equity-Income Fund 40
Global Asset Allocation Fund 43
Growth and Income Fund 46
International Fund 49
Managed Fund 53
Money Market Fund 56
Social Awareness Fund 58
Special Opportunities Fund 60
____________________________________________________
<CAPTION>
APPENDIX - CONTAINS IMPORTANT
INFORMATION FOR ALL FUNDS
<S> <C>
Net asset value 63
Management of the funds 63
Purchase of securities being offered 65
Sale and redemption of shares 66
Distributions and federal income tax
considerations 66
Management discussion of fund performance 66
Description of shares 66
Strategic portfolio transactions-
additional information 67
Foreign investments 69
General information 70
Statement of Additional Information
table of contents - eleven underlying funds 71
</TABLE>
22
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Lincoln National Equity-Income Fund, Inc.
Description of the fund
The Equity-Income Fund (Fund) was incorporated in Maryland on July 9, 1993. It
is a diversified open-end management investment company whose investment
objective is to seek reasonable income by investing primarily in income-
producing equity securities. In choosing these securities, the Fund will also
consider the potential for capital appreciation. The Fund pursues its objective
through the policies described in Investment Policies and Techniques. The
principal risks of this Fund are those normally associated with investing in the
common stock of a broad range of companies, including but not limited to the
fact that shares will fluctuate in value. In addition, high-yielding, lower-
quality securities held by the Fund present higher risks of untimely interest
and principal payments, defaults, and price volatility than do higher-quality
securities, and may present problems of liquidity and valuation. These and other
risks are discussed under Special Risk Factors. There is no assurance that the
objective of the Fund will be achieved.
The Fund's investment objective and certain investment policies are fundamental
and cannot be changed without the affirmative vote of a majority of the
outstanding voting securities of the Fund. See General information in the
Appendix. All other investment policies are not fundamental, and may be changed
by a majority vote of the Board of Directors.
Fund management expects securities selection for the Fund to closely parallel
that of an existing Fidelity retail fund, the Fidelity Equity-Income Fund, which
has a similar objective. However, there cannot be a precise correlation, and
performance of the Fund is not expected to be the same as the performance of the
corresponding retail fund. Selection criteria for portfolio securities and the
relative weightings of the selections can differ based on asset size, timing,
cash flow, expenses and other factors. Portfolio selections will be made by the
Sub-Advisor, Fidelity Management Trust Company (the Sub-Advisor), which is an
affiliate of Fidelity Management & Research Company (Fidelity), which manages
the Fidelity Equity-Income Fund.
Portfolio manager
The portfolio manager for the Fund is Stephen R. Petersen, Senior Vice-President
of Fidelity Management Trust Company, the Sub-Advisor. Petersen also serves as
portfolio manager for several separate institutional accounts of the Sub-Advisor
as well as for the Fidelity Equity-Income Fund. This mutual fund is advised by
Fidelity Management & Research Company, an affiliate of the Sub-Advisor.
Petersen holds undergraduate and Master's degrees from the University of
Wisconsin.
Investment policies and techniques
The Fund's goal, through investing in income-producing equity securities, is to
achieve a yield which exceeds the composite yield on the securities comprising
the Standard & Poor's 500 Composite Stock Price Index. However, the Fund will
also consider the potential for capital appreciation.
Normally, the Fund will invest at least 65% of total assets in income-producing
common or preferred stock and debt convertible into common stock. The remainder
of the Fund's assets will tend to be invested in debt obligations. It is
expected that the Fund will invest, as is consistent with the objective, in
securities of varying quality, but it is not intended that the Fund will invest
in securities of companies without proven earnings or credit.
Since capital appreciation is only a secondary consideration for the Fund, the
Fund's total return should not be expected to be comparable to funds that have
capital appreciation as a primary objective. The Fund may be appropriate for you
if you can afford to ride out changes in the stock market, because it invests
primarily in common and preferred stock and debt convertible into common stock.
The Fund can also make temporary investments in securities such as investment-
grade bonds, high-quality preferred stocks and short-term notes, for defensive
purposes when market conditions warrant.
The Fund may invest in bonds rated in the lowest category of investment grade
debt (i.e., BBB-rated bonds). These bonds may have speculative characteristics,
and changes in economic conditions or other circumstances are more likely to
lead to a weakened ability of the issuer of such bonds to make principal and
interest payments than is the case with higher grade bonds. In addition, the
Fund may invest in high-yielding, lower-rated debt securities (junk bonds) which
are subject to greater risk than investments in higher quality securities. For a
further discussion of lower-rated securities, please see Special Risk
Factors.
The Fund may engage in short-term trading when consistent with its objective. A
security may be sold and another of comparable quality simultaneously purchased
37
<PAGE>
to take advantage of what the Sub-Advisor believes to be a temporary disparity
in the normal yield relationship of the two securities. The Sub-Advisor buys and
sells securities for the Fund after considering a company's ability to repay,
future business conditions, interest rate levels and the availability of new
investments or higher relative yields.
The Fund is authorized to invest in the following:
Credit enhancement agreements
Loans and other direct debt instruments
Warrants
Mortgage-backed securities
Stripped mortgage-backed securities
Asset-backed securities
Money market securities
Commercial paper
Certificates of deposit
Bankers' acceptances
Time deposits
U.S. Government obligations
Variable or floating rate instruments
Corporate obligations
Indexed securities
Zero coupon bonds
A brief description of these securities and other important information can be
found in the SAI. The Fund is not limited to just these securities, however, and
may purchase other types of securities and enter into other types of
transactions if they are consistent with the Fund's objective and policies. The
following paragraphs provide brief descriptions of some of the other securities
in which the Fund may invest.
Short sales
The Fund may enter into short sales with respect to stocks underlying its
convertible security holdings. These transactions may help to hedge against the
effect of stock price declines, but may result in losses if a convertible
security's price does not track the price of its underlying equity. Convertible
securities hedged with short sales are not currently expected to exceed 15% of
the Fund's total assets under normal conditions.
Illiquid investments
The Fund may invest up to 10% of its assets in illiquid investments. Under the
supervision of the Board of Directors, the Sub-Advisor determines the liquidity
of the Fund's investments. The absence of a trading market can make it difficult
to determine a market value for illiquid investments. Disposing of illiquid
investments may involve time-consuming negotiation and legal expenses, and it
may be difficult or impossible for the Fund to sell them promptly at an
acceptable price.
Restricted securities
The Fund may also purchase securities which cannot be sold to the public without
registration under the Securities Act of 1933 (restricted securities). Unless
registered for sale, these securities can only be sold in privately negotiated
transactions or pursuant to an exemption from registration.
Foreign investments
The Fund may invest up to 20% of its net assets in foreign securities, defined
as those which are denominated in a foreign currency and not publicly traded in
the United States. The 20% may be invested in just one country or in several
countries. The Fund may have an additional 15% of its net assets invested in
securities of issuers located in any one of the following countries: Australia,
Canada, France, Japan, the United Kingdom, or Germany.
Investing outside the United States involves different opportunities and
different risks from U.S. investments. The Sub-Advisor believes that it may be
possible to obtain significant returns from a combination of foreign investments
and U.S. investments, and to achieve increased diversification in comparison to
a portfolio invested solely in U.S. securities. By including international
investments in your investment portfolio, you may gain increased diversification
by combining securities from various countries and geographic areas that offer
different investment opportunities and are affected by different economic
trends. At the same time, these opportunities and trends involve risks that may
not be encountered in U.S. investments. See Foreign investments in the Appendix
for a discussion of these risks, and the SAI for a discussion of how the Fund
intends to handle them.
The Fund may invest a portion of its assets in developing countries, or in
countries with new or developing capital markets; for example, nations in
Eastern Europe. The considerations noted above are generally intensified for
these investments. These countries may have relatively unstable governments,
economies based on only a few industries, and securities markets that trade a
small number of securities. Securities of issuers located in these countries
tend to have volatile prices and may offer significant potential for loss as
well as gain.
The value of the Fund's foreign investments, and the value of dividends and
interest earned by the Fund, may be significantly affected by changes in
currency exchange rates. Some foreign currency values may be volatile, and there
is the possibility of governmental controls on currency exchange or governmental
intervention in currency markets, which could adversely affect the Fund. The
Sub-Advisor may attempt to manage currency exchange rate risks, but there is no
assurance that the Sub-Advisor will do so at an appropriate time or that the
Sub-Advisor will be able to predict exchange rates accurately. If the
Sub-Advisor increases the Fund's exposure to a foreign currency, and that
currency's value falls, the Sub-Advisor's currency management may result in
increased losses to the Fund. If the Sub-Advisor hedges the Fund's exposure to a
foreign currency, and that currency's value rises, the Fund will lose the
opportunity to participate in the currency's appreciation.
38
<PAGE>
Borrowing
The Fund may borrow money only from banks and will not purchase securities when
the amount borrowed exceeds 5% 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.
Portfolio turnover
The frequency of portfolio transactions-the Fund's portfolio turnover rate-will
vary from year to year depending on market conditions. It is estimated that the
Fund's portfolio turnover rate will not exceed 100%. (A rate of portfolio
turnover of 100% would occur if all of the Fund's portfolio were replaced in a
period of one year.) Because a higher turnover rate increases transaction costs
and may have certain tax consequences, the Sub-Advisor carefully weighs the
anticipated benefits of short-term investment against these consequences. The
Fund's turnover rate for 1994 was 33.40%.
Investment restrictions
The following summarizes the Fund's principal investment limitations. The
following limitations (except Item 3) and the policies discussed previously are
considered at the time of purchase; the sale of securities is not required in
the event of a subsequent change in circumstances:
1. The Fund will not purchase a security if, as a result, with respect to 75%
of its total assets: (a) more than 5% of its total assets would be invested
in the securities of any single issuer; (b) it would hold more than 10% of
the outstanding voting securities of any issuer; or (c) more than 25% of
its total assets would be invested in a particular industry. Limitations
(a) through (c) do not apply to U.S. Government obligations;
2. A. The Fund may engage in repurchase agreements and
B. no more than 10% of the Fund's assets may be invested in illiquid
securities;
3. The Fund may borrow money or engage in reverse repurchase agreements for
temporary or emergency purposes but not in an amount exceeding 25% of its
net assets; and/or
4. The Fund may temporarily lend any security or make any other loan provided
that not more than 33 1/3% of the Fund's total assets would be lent to
other parties.
Except for Items 1(a), 1(b), 1(c) and 4, the policies described in this
prospectus are not fundamental, and can be changed at any time without your
consent. See General information in the Appendix for a discussion of fundamental
policies.
Additional investment restrictions can be found in the SAI.
Diversification
The Fund qualifies as a diversified investment company under the 1940 Act. As a
fundamental policy, a diversified fund may not purchase a security of any issuer
(except cash items and U.S. Government securities) if a) it would cause the Fund
to own more than 10% of the outstanding voting securities of that issuer or b)
if it would cause the Fund's holdings of that issuer to amount to more than 5%
of the Fund's total assets (as applied to 75% of the Fund's total assets). It
may invest up to 25% of its total assets in the securities of one issuer. The
Fund does not anticipate concentrating its holdings in so few issuers unless the
Sub-Advisor believes a security has the potential for substantial income
production consistent with the Fund's policies and goals. The Fund does intend
to take advantage of the ability to invest more than 5% of its total assets in
the securities of one issuer. To the extent that it does so, its exposure to
credit risks and/or market risks associated with that issuer increases.
Special risk factors
Lower-rated debt instruments
Lower-rated debt securities are usually defined as securities rated Ba or lower
by Moody's Investors Service or BB or lower by Standard and Poor's Corporation.
Lower-rated debt securities are considered speculative and involve greater risk
of loss than higher-rated debt securities, and are more sensitive to changes in
the issuer's capacity to pay. This is an aggressive approach to income
investing.
The 1980s saw a dramatic increase in the use of lower-rated debt securities to
finance highly leveraged acquisitions and restructurings. Past experience may
not provide an accurate indication of the future performance of lower-rated debt
securities, especially during periods of economic recession. In fact, from 1989
to 1991, the percentage of lower-rated debt securities that defaulted rose
significantly above prior levels.
Lower-rated debt securities may be traded thinly, which can adversely affect the
prices at which these securities can be sold and can result in high transaction
costs. If market quotations are not available, lower-rated debt securities will
be valued in accordance with standards set by the Board of Directors, including
the use of outside pricing services. Judgment plays a greater role in valuing
lower-rated debt securities than securities for which more extensive quotations
and last sale information are available. Adverse publicity and changing investor
perceptions may affect the ability of outside pricing
39
<PAGE>
services to value lower-rated debt securities, and the Fund's ability to dispose
of these securities.
The market prices of lower-rated debt securities may decline significantly in
periods of general economic difficulty which may follow periods of rising
interest rates. During an economic downturn or a prolonged period of rising
interest rates, the ability of issuers of lower-rated debt to service their
payment obligations, meet projected goals, or obtain additional financing may be
impaired.
The Fund may choose, at its expense or in conjunction with others, to pursue
litigation or otherwise to exercise its rights as a security holder to seek to
protect the interests of security holders if it determines this to be in the
interest of the Fund's shareholders.
The considerations discussed previously for lower-rated debt securities also
apply to lower-quality, unrated debt instruments of all types, including loans
and other direct indebtedness of businesses with poor credit standing. Unrated
debt instruments are not necessarily of lower quality than rated instruments,
but they may not be attractive to as many buyers. The Fund relies more on the
Sub-Advisor's credit analysis when investing in debt instruments that are
unrated.
Please refer to the SAI for a discussion of Moody's Investors Service and
Standard and Poor's Corporation ratings.
Strategic portfolio transactions
The portfolio manager (PM) for the Fund has considerable discretion in the
selection of appropriate Fund investments. In the exercise of that discretion,
the PM may, at any given time, invest a portion of the Fund's assets in one or
more strategic portfolio transactions which we define as derivative transactions
and cash enhancement transactions.
For your convenience, in the Appendix, we have included a basic discussion of
these special financial arrangement transactions and some of the risks
associated with them. Note also that the SAI booklet for the 11 Funds contains
definitions of the more commonly used derivative transactions, technical
explanations of how these transactions will be used, and the limits on their
use. You should consult your financial counselor if you have specific questions.
THE EQUITY-INCOME FUND IS AUTHORIZED: a) for derivative transactions, to: buy
and sell put and call options; buy and sell futures contracts; engage in forward
contracts; engage in interest rate swaps, currency swaps, and other types of
swap agreements such as caps, collars, and floors.
The Fund will not hedge more than 25% of its total assets by selling futures,
buying puts, and writing calls under normal conditions. In addition, the Fund
will not buy futures or write puts whose underlying value exceeds 25% of its
total assets, and the Fund will not buy calls with a value exceeding 5% of its
total assets.
b) for cash enhancement transactions, to: lend portfolio securities; engage in
repurchase and reverse repurchase transactions. Collateral will be continually
maintained at no less than 102% of the value of the loaned securities or of the
repurchase price, as applicable.
40
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APPENDIX - CONTAINS
IMPORTANT INFORMATION FOR
ALL FUNDS
This Appendix constitutes part of the Prospectuses of Lincoln National
Aggressive Growth Fund, Inc. (Aggressive Growth Fund), Lincoln National Bond
Fund, Inc. (Bond Fund), Lincoln National Capital Appreciation Fund, Inc.
(Capital Appreciation Fund), Lincoln National Equity-Income Fund, Inc. (Equity-
Income Fund), Lincoln National Global Asset Allocation Fund, Inc. (Global Asset
Allocation Fund), Lincoln National Growth and Income Fund, Inc. (Growth and
Income Fund), Lincoln National International Fund, Inc. (International Fund),
Lincoln National Managed Fund, Inc. (Managed Fund), Lincoln National Money
Market Fund, Inc. (Money Market Fund), Lincoln National Social Awareness Fund,
Inc. (Social Awareness Fund), and Lincoln National Special Opportunities Fund,
Inc. (Special Opportunities Fund). Unless otherwise indicated, the following
information applies to each Fund.
NET ASSET VALUE
Each Fund's net asset value per share is determined as of close of business
(currently 4:00 p.m., New York Time) on the New York Stock Exchange (NYSE) on
each day it is open for trading. The net asset value per share for all Funds
except the Money Market Fund is determined by adding the values of all
securities and other assets, subtracting liabilities (including dividends
payable) and dividing by the number of shares outstanding. Debt securities and
other assets of the Fund, other than equity securities, for which market
quotations are readily available, are valued at their bid quotations.
When market quotations are not readily available, debt securities and other
assets are valued at their fair value as determined in good faith. This
valuation is made by or under the authority of the Fund's Board of Directors
and it may include the use of valuations furnished by outside sources, including
pricing services which utilize electronic data processing techniques for valuing
normal institutional-size trading units of debt securities. The value of equity
securities is based on the last sale prices of those securities on national
securities exchanges or, in the absence of recorded sales, at the average of
readily available closing bid and asked prices on exchanges or over-the-counter.
In the absence of readily available closing bid and asked prices, equity
securities will be valued at fair value.
Short-term investments. For Funds (other than the Money Market Fund) that trade
in short-term investments which mature in less than 60 days, these instruments
are valued at amortized cost; if these securities are acquired with a remaining
maturity of 61 days or more, the cost for purposes of valuation is deemed to be
the value on the sixty-first day prior to maturity.
Options trading. For those Funds engaging in options trading, Fund investments
underlying call options will be valued as described previously. Options are
valued at the last sale price or, if there has been no sale that day, at the
mean of the last bid and asked price on the principal exchange where the option
is traded, as of the close of trading on the NYSE. The Fund's net asset value
will be increased or decreased by the difference between the premiums received
on writing options and the cost of liquidating those positions measured by the
closing price of those options on the exchange where traded.
Foreign securities. For Funds investing in foreign securities, the value of a
foreign portfolio security held by a Fund is determined based upon its closing
price or upon the mean of the closing bid and asked prices on the foreign
exchange or market on which it is traded and in the currency of that market, as
of the close of the appropriate exchange. As of the close of business on the
NYSE, that Fund's portfolio securities which are quoted in foreign currencies
are converted into their U.S. dollar equivalents at the prevailing market rates,
as computed by the Custodian of the Fund's assets.
However, trading on foreign exchanges may take place on dates or at times of day
when the NYSE is not open; conversely, overseas trading may not take place on
dates or at times of day when the NYSE is open. Any of these circumstances could
affect the net asset value of Fund shares on days when the investor has no
access to the Fund. There are more detailed explanations of these circumstances
in the SAI for the various Funds. See the Preface to the Prospectus booklet for
information about how to obtain a copy of the SAI booklet.
Money Market Fund. The net asset value per share of the Money Market Fund is
determined by the amortized cost method of valuation, pursuant to Rule 2a-7 (the
Rule) of the 1940 Act. Under the Rule, the Fund's net asset value under the
amortized cost method must fairly reflect the value calculated under a
market-based valuation method. The Board of Directors of the Fund has put in
force procedures to assist Fund management and the Investment Advisor in
complying with the requirements of the Rule. In 1991, an amendment imposed
specific standards for the maturity, quality, and diversification of portfolio
securities. It also revised and expanded the duties of the Money Market Fund's
management and its Board of Directors. The Fund's procedures have been amended
in accordance with those requirements.
MANAGEMENT OF THE FUNDS
The business and affairs of each Fund are managed under the direction of its
Board of Directors. The Board has the power to amend the Bylaws of each Fund, to
declare and pay dividends, and to exercise all the powers of the Fund except
those granted to the shareholder. Lincoln Life is the sole shareholder of each
Fund.
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<PAGE>
INVESTMENT ADIVSOR. Lincoln National Investment Management Company (LNIMC) is
the Investment Advisor to the Funds and is headquartered at 200 East Berry
Street, Fort Wayne, Indiana 46802. LNIMC (the Advisor) is registered with the
Securities and Exchange Commission (the Commission) [SEC] as an Investment
Advisor and has acted as an Investment Advisor to mutual funds for over 40
years. The Advisor also acts as Investment Advisor to Lincoln National
Convertible Securities Fund, Inc., and Lincoln National Income Fund, Inc.,
closed-end investment companies as well as Lincoln Advisor Funds, Inc., an open-
end series.
The Advisor is a wholly-owned subsidiary of Lincoln National Corporation (LNC),
a publicly-held insurance holding company organized under Indiana law. Through
its subsidiaries, LNC provides life insurance and annuities, property-casualty
insurance, reinsurance, and financial services.
Under Advisory Agreements described in the Prospectus for the Variable Account,
the Advisor provides portfolio management and investment advice to the Funds and
administers their other affairs, subject to the supervision of each Fund's Board
of Directors.
As compensation for its services to each Fund, the Advisor is paid an Investment
Advisory Fee at an annual rate based on the average daily net asset value of
each Fund, as shown in the following chart:
<TABLE>
<CAPTION>
First Next In excess of
Fund $200 million..... $200 million.... $400 million
...Of average daily net asset value
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth .75 of 1% .70 of 1% .65 of 1%
Capital Appreciation .80 of 1 .80 of 1 .80 of 1
Equity-Income .95 of 1 .95 of 1 .95 of 1
Global Asset Allocation .75 of 1 .70 of 1 .68 of 1
International .90 of 1 .75 of 1 .60 of 1
All other Funds .48 of 1 .40 of 1 .30 of 1
</TABLE>
The Advisory fees for the Capital Appreciation, Equity-Income, and International
Funds reflect the more extensive services and increased expense associated with
portfolios of securities issued outside the United States.
- --------------------------------------------------------------------------------
FUND EXPENSES (see accompanying text below)
<TABLE>
<CAPTION>
1994 ration of the Advisor's 1994 ratio of total expenses
compensation to average to average net assets
Fund net assets operational fund
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Aggressive Growth* .75% 1.11%
Bond .47 .50
Capital Appreciation* .80 1.18
Equity-Income* .94 1.26
Global Asset Allocation .75 1.06
Growth and Income .35 .37
International .87 1.24
Managed .42 .44
Money Market .48 .52
Social Awareness .48 .53
Special Opportunities .45 .48
</TABLE>
Expenses specifically assumed by each Fund include:
compensation and expenses of Directors of the Fund who are not interested
persons of the Fund as defined in the 1940 Act; registration, filing, and other
fees in connection with filings with regulatory authorities, including the costs
of printing and mailing registration statements and updated prospectuses
provided to current Contract Owners; fees and expenses of independent auditors;
the expenses of printing and mailing proxy statements and shareholders reports;
custodian and transfer agent charges; brokerage commissions and securities and
options transaction costs incurred by the Fund; taxes and corporate fees; legal
fees incurred in connection with the affairs of the Fund (other than legal
services provided by personnel of the Advisor or its affiliated companies); the
fees of any trade association of which the Fund is a member; and expenses of
shareholder and Director meetings. The Aggressive Growth, Capital Appreciation,
and Equity-Income Funds (new in 1994) will bear their full share of Fund
expenses beginning in 1995. For 1994 Lincoln Life paid some of the expenses of
these Funds, as follows: $30,814 for Aggressive Growth; $15,544 for Capital
Appreciation; and $30,814 for Equity-Income.
*These ratios are based on less than a full year's experience.
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<PAGE>
SUB-ADVISORS. As Advisor, LNIMC is primarily responsible for investment
decisions affecting each of the Funds. However, LNIMC has entered into
Sub-Advisory agreements with several professional investment management firms.
These firms provide some or substantially all of the investment advisory
services required by the Funds, including day-to-day investment management of
those Fund's portfolios. Each Sub-Advisor makes investment decisions for its
respective Fund in accordance with that Fund's investment objectives and places
orders on behalf of that Fund to effect those decisions. See the following
tables for more information about the Sub-Advisors and their fees:
<TABLE>
<CAPTION>
Date of
Fund Sub-advisor agreement Annual fee rate based on average daily net asset value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive 12/20/93 .50 of 1% of the first $150 million
Growth Lynch & Mayer .35 of 1% of the excess over $150 million
Capital
Appreciation Janus 1/1/94 .60 of 1% of the first $100 million
.55 of 1% of the excess over $100 million
Equity-Income Fidelity 12/20/93 .75 of 1%
Global Asset the greater of (a) $40,000; or (b) .47 of 1% of the
Allocation Putnam 6/8/87 first $200 million; .42 of 1% of the next $200 million;
and .40 of 1% of any excess over $400 million
International Clay Finlay 11/19/90 .665 of 1% of the first $50 million; 475 of 1% of the next
$50 million; and .250 of 1% of any excess over $100 million
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Annual fee rate based on market value of securities held
Date of in the portfolio of each respective client fund at the close
Fund Sub-advisor agreement of business on the last trading day of each calendar quarter
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Growth and
Income Vantage 8/21/85 .20 of 1%
Managed Vantage 8/21/85 .20 of 1%
(stock portfolio only)
Social
Awareness Vantage 4/30/88 .20 of 1%
Special
Opportunities Vantage 8/21/85 .20 of 1%
</TABLE>
No additional compensation from the assets of the Funds will be assessed as a
result of the Sub-Advisory agreements; the Sub-Advisors are paid by LNIMC.
(There is no Sub-Advisor for the Bond and Money market Funds.)
SERVICE MARKS. The service mark for the Funds and the name Lincoln National
have been adopted by the Funds with the permission of LNC, and their continued
use is subject to the right of LNC to withdraw this permission in the event the
Advisor should not be the Investment Advisor of the Funds.
In the Prospectus and sales literature, the name Fidelity Investments will be
used with the Equity-Income Fund, Janus with the Capital Appreciation Fund, and
Putnam with the Global Asset Allocation Fund. The continued use of these names
is subject to the right of the respective Sub-Advisor to withdraw its permission
in the event it ceases to be the Sub-Advisor to the particular Fund it advises.
PURCHASE OF SECURITIES BEING OFFERED
Shares of the Funds' common stock ($.01 par value) will be sold to Lincoln Life
for allocation to the Variable Annuity Account (VAA), which has been established
for the purpose of funding Variable Annuity Contracts; shares in the Funds will
also be sold to Lincoln Life for allocation to one or more of the Variable Life
Accounts, which have been established for the purpose of funding variable life
insurance contracts. Shares of each Fund are sold and redeemed at their net
asset value determined daily. See Sale and redemption of shares. Also see Net
asset Value. The Funds' shares are sold to Lincoln Life for the Variable
Accounts on a no-load basis-that is; without the imposition of a sales charge.
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<PAGE>
SALES AND REDEMPTION OF SHARES
The shares of each Fund are sold and redeemed by the Fund at their net asset
value next determined after receipt of a purchase or redemption order in
acceptable form. The value of shares redeemed may be more or less than original
cost, depending upon the market value of the portfolio securities at the time of
redemption. Payment for shares redeemed will be made within seven days after the
redemption request is received in proper form by the Fund's. However, the right
to redeem Fund shares may be suspended or payment postponed for any period
during which (1) trading on the NYSE is restricted as determined by the
Commission, or the NYSE is closed for other than weekends and holidays; (2) an
emergency exists, as determined by the Commission, as a result of which (a)
disposal by each Fund of securities owned by it is not reasonably practicable,
or (b) it is not reasonably practicable for Fund to determine fairly the value
of its net assets; or (3) the Commission by order so permits for the position
of shareholders of the Funds.
DISTRIBUTION AND FEDERAL INCOME TAX CONSIDERATIONS
Each Fund's policy is to distribute, at least once a year, substantially all of
its net investment income. Net realized capital gains may only be disturbed
annually, These distributions, when paid to Lincoln Life for the Variable
Accounts, will be reinvested automatically in additional shares of that Fund,
at its net asset value.
Each Fund intends to qualify had has elected to be taxed as a regulated
investment company under the provisions of Subchapter M of the Internal Revenue
Code of 1986, as amended (the Code). If a Fund qualifies as a regulated
investment companies which distribute substantially all of their net income
(both ordinary income and capital gain) from Federal income tax and the four
percent nondeductible Federal Excise tax, the Funds will be relieved of those
taxes on the amounts dis distributed. See the SAI for more complete discussion.
Since the sole shareholder of the Funds is Lincoln Life, there is no discussion
here about the Federal income tax consequences at the shareholder level. For
information concerning the Federal income tax consequences to holders of
annuity or life insurance contracts, see the Prospectus for the Variable Account
at the front of this booklet.
INTERNAL REVENUE SERVICE (IRS) LIMITATIONS
As a condition of maintaining the tax-deferred status of variable contracts,
the Funds intend to comply with the diversification requirements currently
imposed by the IRS on separate accounts of insurance companies. More specific
information is contained in the prospectus for the Variable Account.
MANAGEMENT DISCUSSION OF FUND PERFORMANCE
In the Annual Report for the Funds, the portfolio manager for each Fund's
discusses that Fund's performance for the previous fiscal year and the factors
which affected that performance. We will send you a copy of the Annual Report
free upon request.
DESCRIPTION OF SHARES
The authorized capital stock of each Fund consists of 50 million shares of
common stock (100 million for the Growth and Income Fund), $.01 par value. As
of April 1, 1995, each Fund had the following number of shares issued and
outstanding:
<TABLE>
<CAPTION>
<S> <C>
Aggressive Growth Fund 7,879,088
Bond Fund 19,132,892
Capital Appreciation Fund 6,755,630
Equity-Income Fund 9,950,564
Global Asset Allocation Fund 18,158,185
Growth and Income Fund 55,124,560
International Fund 26,075,406
Managed Fund 35,857,439
Money Market Fund 8,297,560
Social Awareness Fund 10,652,462
Special Opportunities Fund 16,019,752
</TABLE>
Fund Shares will owned by Lincoln Life and will be held by it the Variable
Accounts. As stated in the Prospectuses for the Variable Accounts, Lincoln
Life provides to Contract Owners of the Variable Accounts the right to direct
the voting of Fund shares at shareholder meetings, to the extent provided by
law. However, if the 1940 Act or any regulation under it should change, and
as a result Lincoln Life determines it is permitted to vote Fund shares in its
own right, it may elect to do so.
All the shares of each Fund are of the same class with equal rights and
privileges. Each full share is entitled to one vote and fractional share is
entitled to a proportionate fractional vote, on all matters subjected to a
vote of the shareholder. All shares, full and fractional, participate
proportionately in any dividends and capital gains distributions and, in the
event of liquidation, in that Fund's net assets remaining after satisfaction
of outstanding liabilities.
When issued, each share is fully-paid and non-assessable and shareholders have
no preemptive or conversion
66
<PAGE>
rights. Fund shares have non-cumulative voting rights, which means that holders
of more than 50% of the shares voting for the election of directors can elect
100% of the directors if they choose to do so. In that event the holders of the
remaining shares so voting will not be able to elect any directors. Shares may
be redeemed as set forth under Sale and redemption of shares.
The Bylaws of the Funds allow them, in proper cases, to dispense with their
annual meetings of the shareholder. Generally, this may be done as long as: (1)
a majority of the Directors then in office have at some point been elected by
shareholder and, if any vacancy is filled by vote of the Board of Directors,
then immediately after filling the vacancy at least two thirds of the Directors
shall have been elected by the shareholder; (2) there is no change in the
independent auditor of the Funds; (3) there is no material change to the
investment advisory and/or sub-advisory agreements; and (4) a shareholder vote
is not required with respect to a distribution agreement. In adopting this
procedure for dispensing with annual meetings that are a formality, the
Directors of the Funds have undertaken to comply with the requirement of
Section 16(c)) of the 1940 Act. That Section protects Contract Owners by
providing a procedure by which they may require management to convene a meeting
of the shareholder to vote on removal of one or more Directors. The Directors
also have agreed to facilitate communication among Contract Owners for the
purpose of calling those meetings. Further information about these procedures
is available from Fund management.
STRATEGIC PORTFOLIO TRANSACTIONS-ADDITIONAL INFORMATION
Because of their different investment objective and portfolio management
philosophies many of the Funds engage to varying degrees in strategic portfolio
transactions, in order to preserve or enhance the value of their assets. These
can be generally identified as either derivative transactions or cash
enhancement transactions. Derivative transactions are recognized by the
investment community as an acceptable way to increase a Fund's overall value
(or, depending on the condition of the securities markets, at least to slow its
decrease). Cash enhancement transactions are designed to make some extra money
for the Fund when it has excess cash, or help a Fund obtain some cash for
temporary purposes when needed. SEE THE PROSPECTUS FOR EACH FUND FOR A LISTING
OF THE KINDS OF TRANSACTIONS IN WHICH EACH FUND MAY ENGAGE.
1. DERIVATIVE TRANSACTIONS
A. Introduction
A derivative transaction is a financial agreement the value of which is
dependent upon the values of one or more underlying assets or upon the
values of one more indices of assets values. The following types are
currently in fairly common use in the investmnent community, although
not every Fund will use all of them:
1. Equity contracts: stock options and indexed options; equity swaps;
stock index futures and options on futures; swaptions;
2. Interest rate contracts: interest rate futures and options on them;
forward rate agreements (FRAs): interest rate swaps and their related
transactions (e.g., caps, floors, collars and corridors); and/or
3. Currency derivative contracts: currency forward contracts; currency
options; currency futures; currency swaps; cross-currency interest
rate swaps.
SIMPLIFIED DEFINITIONS FOR THESE TRANSACTIONS ARE PROVIDED IN THE SAI APPENDIX.
Although they may be structured in complex combinations, derivative
transactions in which the Funds engage generally fall into two broad
categories: options contracts or forward contracts. The combined forms are
constantly evolving. In fact, variations on the types listed previously may
come into use after the date of these Prospectuses. Therefore, where the
Prospectus for a particular Fund discloses the intent of that Fund to engage in
any of the types listed, that Fund hereby reserves the right to engage in
related variations on those transactions.
The Funds intend to engage in derivative transactions only defensively.
Examples of this defensive use might be: to hedge against a perceived decrease
in a Fund's asset value; to control transaction costs associated with market
timing (e.g., by using futures on an unleveraged basis); and to lock in
returns, spreads, or currency exchange rates in anticipation of future cash
market transactions.
There is no discussion here of asset-backed or mortgage backed securities
(such as collateralized mortgage obligations, structured notes, inverse
floaters, principal only or interest-only securities, etc.). See the Prospectus
and SAI for the Capital Appreciation and Equity-Income Funds, which are
authorized to engage in this kind of trading.
B. Risk factors commonly associated with derivative transactions.
There are certain risks associated with derivatives, and some
derivatives involve more of these risks than others. We briefly
describe the most common ones here; however, this is not an exhaustive
list. Consult your financial counselor if you have additional
questions.
67
<PAGE>
CREDIT RISK is the possibility that a counterparty to a transaction will
fail to perform according to the terms and conditions of the transaction,
causing the holder of the claim to suffer a loss.
CROSS-CURRENCY SETTLEMENT RISK (or Herstatt risk) is related to the
settlement of foreign exchange contracts. It arises when one of the
counterparties to a contract pays out one currency prior to receiving
payment of the other. Herstatt risk arises because the hours of operation
of domestic interbank fund transfer systems often do not overlap due to
time zone differences. In the interval between the time one
counterparty(ies) receive payment in the others, those awaiting payment
are exposed to credit risk and market risk.
LEGAL RISK is the chance that a derivative transaction, which involves
highly complex financial arrangements, will be unenforceable in particular
jurisdictions or against a financially troubled entity; or will be subject
to regualtion from unanticipated sources.
MARKET LIQUIDITY RISK is the risk that a fund will unable to control its
losses if a liquid secondary market for a financial instrument does not
exist. It is often considered as the risk that a (negotiable or
assignable) financial instrument cannot be sold quickly and at a price
close to its fundmental value.
MARKET RISK is the risk of a change in the price of a financial
instrument, which may depend on the price of an underlying area asset.
OPERATING RISK is the potential of unexpected loss from inadequate
internal controls or procedures; human error; system (including data
processing system) failure; or employee dishonesty.
SETTLEMENT RISK between two counterparties is the possibility that a
counterparty to whom a firm has made a delivery of assets or money
defaults before the amounts due or assets have been received; or the risk
that technical difficulties interrupt delivery or settlement even if the
counterparties are able to perform. In the latter case, payment is likely
to be delayed but recoverable.
SYSTEMIC RISK is the uncertainty that a disruption (at a firm, in a market
segment, to a settlement system, etc.) might cause widespread difficulties
at other firms, in other market segments, or in the financial system as a
whole.
SPECIAL NOTE FOR OPTIONS AND FUTURES TRANSACTIONS: Gains and losses on
options and futures transactions depend on the portfolio manager's ability
to correctly predict the direction of stock prices and interest rates, and
other economic factors. Options and futures trading may fail as hedging
techniques in cases where the price movement of the securities underlying
the options and futures do not follow the price movements of the portfolio
securities subject to the hedge. The loss from investing in futures
transactions is potentially unlimited.
SOME OF THESE RISKS MAY BE PRESENT IN EACH TYPE OF TRANSACTION, WHILE
OTHERS MAY PERTAIN ONLY TO CERTAIN ONES. These risks are discussed here
only briefly. Before you invest in a particular Fund, please consult your
financial counselor if you have questions about the risks associated with
that Fund's use of derivatives.
C. Varying usage of derivative transactions
Subject to the terms of the Prospectus and SAI for each Fund, that Fund's
portfolio manager decides which types of derivative transactions to
employ, at which times and under what circumstances. For a description of
the limits, risk factors and circumstances under which derivative
transactions will be used by each Fund, refer to the SAI booklet.
D. Increased government scrutiny
Derivative transactions are coming under increased scrutiny by Congress
and industry regulators (such as the SEC and the Office of the Comptroller
of the Currency), and by self-regulatory agencies (such as the NASD).
Should legislation or regulatory initiatives be enacted resulting in
additional restrictive requirements for derivative transactions, we
reserve the right to make all necessary changes in the Contracts and/or
the Registration Statements for the Funds to comply with those
requirements.
2. CASH ENHANCEMENT TRANSACTIONS
Cash enhancement transactions also involve certain risks to the Fund. They
are discused more fully in the SAI.
A. Lending of portfolio securities
Any Fund authorized to do so may make secured loans of its portfolio
securities, in order to realize additional income. The loans are limited
to a maximum of a stipulated amount of the Fund's total assets. As a
matter of policy, securities loans are made to broker/dealers under
agreements requiring that the loans be continuously secured by collateral
in cash or short-term debt obligations at least equal at all times to
102% of the value of the securties lent.
The borrower pays the Fund an amount equal to any dividends or interest
received on securities lent. The Fund retains all or a portion of the
interest received on securities lent. The Fund also retains all or a
portion of the interest received on investment of the cash collateral, or
receives a fee from the borrower.
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<PAGE>
With respect to the loaned securities, voting rights or rights to consent
pass to the borrower. However, the Fund retains the right to call in the
loans and have the loaned securities returned at any time with reasonable
notice. This is important when issuers of the securities ask holders of those
securities-including the Fund-to vote or consent on matters which could
materially affect the holders' investment. The Fund may also call in the
loaned securities in order to sell them. None of the Funds' portfolio
securities will be loaned to LNIMC, to any Sub-Advisor, or to any of their
respective affiliates. The Fund may pay reasonable finder's fees to persons
unaffiliated with it in connection with the arrangement of the loans.
B. Repurchase (Repo) and reverse repurchase (Reverse Repo) transactions
1. Repos. From time to time, the Funds may enter into Repo transactions. In a
typical Repo transaction, the Fund involved buys U.S. Government or other
money market securities from a financial institution (such as a bank,
broker, or savings and loan association). At the same time, as part of the
arrangement, the Fund obtains an agreement from the seller to repurchase
those same securities form the Fund at a specified price on a fixed future
date.
The repurchase date is normally not more than seven days from the date of
purchase. Keeping the term under seven days is significant, because the
SEC considers Repo Agreements with maturities of more than seven days to
be illiquid assets of the Fund, and the Funds have strict limitations on
the percentage of their respective assets which may be illiquid.
2. Reverse repos. A Fund may also be authorized to enter into Reverse Repo
transactions. This simply means the Fund is on the reverse side of a Repo
transaction. That is, the Fund is the Seller of some of its portfolio
securities, subject to buying them back at a set price and date.
Authorized Funds will engage in Reverse Repos for temporary purposes, such
as for obtaining cash to fund redemptions; or for the purpose of
increasing the income of the Fund by investing the cash proceeds at a
higher rate than the cost of the agreement. Entering into a reverse repo
transaction is considered to be the borrowing of money by the Fund. Funds
authorized to engage in Repos as buyers are not necessarily authorized to
do Reverse Repos.
FOREIGN INVESTMENTS
There are certain risks involved in investing in foreign securities, including
those resulting from fluctuations in currency exchange rates; devaluation of
currencies; political or economic developments including the possible imposition
of currency exchange blockages or other foreign governmental laws or
restrictions; reduced availability of public information concerning issuers; and
the fact that foreign companies are not generally subject to uniform accounting,
auditing, and financial reporting standards or to other regulatory practices and
requirements comparable to those applicable to domestic companies. With respect
to certain foreign countries, there is also the possibility of expropriation,
nationalization, confiscatory taxation, and limitations on the use or removal of
cash or other assets of a Fund, including the withholding of interest payments
or dividends.
In addition, while the volume of transactions effected on foreign stock
exchanges has increased in recent years, in most cases it remains appreciably
below that of the NYSE. Accordingly, a Fund's foreign investments may be less
liquid and their prices may be more volatile than comparable investments in
securities of U.S. companies. Moreover, the settlement periods for foreign
securities, which are often longer than those for securities of U.S. issuers,
may affect portfolio liquidity. The Funds will incur costs in converting foreign
currencies into U.S. dollars. Custody charges are generally higher for foreign
securities. In buying and selling securities on foreign exchanges, a Fund
normally pays fixed commissions that are generally higher than the negotiated
commissions charged in the United States. In addition, there is generally less
governmental supervision and regulation of securities exchanges, brokers and
issuers in foreign countries that in the United States. There may be difficulty
in enforcing legal rights outside the United States. For example, in the event
of default on any foreign debt obligations, it may be more difficult or
impossible for the Fund or to enforce a judgment against the issuers of these
securities. The Advisor or Sub-Advisor will take all these factors into
consideration in managing a Fund's foreign investments.
Certain state insurance regulations impose additional restrictions on the extent
to which a Fund may invest in foreign securities. See the SAI.
The share price of a Fund that invests in foreign securities will reflect the
movements of both the prices of the portfolio securities and the currencies in
which those securities are denominated. Depending on the extent of a Fund's
investments abroad, changes in a Fund's share price may have a low correlation
with movements in the U.S. markets. Because most of the foreign securities in
which the Fund invests will be denominated in foreign currencies, or otherwise
will have values that depend on the performance of foreign currencies relative
to the U.S. dollar, the relative strength of the U.S. dollar may be an important
factor in the performance of the Fund.
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<PAGE>
FOREIGN CURRENCIES
When an Advisor or Sub-Advisor believes that a currency in which a portfolio
security or securities is denominated may suffer a decline against the U.S.
dollar, it may hedge that risk by entering into a forward contract to sell an
amount of foreign currency approximating the value of some or all of the
portfolio securities denominated in that foreign currency.
Because foreign securities generally are denominated and pay dividends or
interest in foreign currencies, and a Fund may hold various foreign currencies,
the value of the net assets of that Fund as measured in U.S. dollars will be
affected favorably or unfavorably by changes in exchange rates. Generally,
currency exchange transactions will be conducted on a spot (i.e., cash) basis at
the spot rate prevailing in the currency exchange market. The cost of currency
exchange transactions will generally be the difference between the bid and offer
spot rate of the currency being purchased or sold.
Investors should be aware that exchange rate movements can be significant and
can endure for long periods of time. In order to protect against uncertainty in
the level of future foreign currency exchange rates, a Fund's Advisor or Sub-
Advisor may attempt to manage exchange rate risk through active currency
management, including the use of certain foreign currency hedging transactions.
For example, it may hedge some or all of its investments denominated in a
foreign currency against a decline in the value of that currency relative to the
U.S. dollar by entering into contracts to exchange that currency for U.S.
dollars (not exceeding the value of the Fund's assets denominated in that
currency), or by participating in options or futures contracts with respect to
that currency. If the Advisor or Sub-Advisor believes that a particular currency
may decline relative to the U.S. dollar, the Fund may also enter into contracts
to sell that currency (up to the value of the Fund's assets denominated in that
currency) in exchange for another currency that the Advisor or Sub-Advisor
expects to remain stable or to appreciate relative to the U.S. dollar. This
technique is known as currency cross-hedging. Refer to the Prospectus for each
Fund to determine which Funds may engage in these transactions.
These strategies minimize the effect of currency appreciation as well as
depreciation, but do not protect against a decline in the underlying value of
the hedged security. In addition, these strategies may reduce or eliminate the
opportunity to profit from increases in the value of the original currency and
may adversely impact the Fund's performance if the Advisor or Sub-Advisor's
projection of future exchange rates is inaccurate. See Strategic portfolio
transactions.
GENERAL INFORMATION
Your inquiries should be directed to Lincoln National Life Insurance Co., at
P.O. Box 2348, Fort Wayne, Indiana 46801; or, you may call 1-800-348-1212.
The Funds will issue unaudited semi-annual reports showing current investments
in each Fund and other information and annual financial statements audited by
their independent auditors.
Under the 1940 Act a fundamental policy of a fund may not be changed without the
affirmative vote of a majority of the fund's outstanding shares.
As used in this Prospectus, the term majority of the Fund's outstanding shares
means the vote of: (1) 67% or more of each Fund's shares present at a meeting,
if the holders of more than 50% of the outstanding shares of each Fund are
present or represented by proxy, or (2) more than 50% of each Fund's outstanding
shares, whichever is less.
These Prospectuses do not contain all the information included in their
Registration Statements filed with the Commission. The Registration Statements,
including the exhibits filed with them, may be examined at the office of the
Commission in Washington, D.C. Statements contained in the Prospectuses about
the contents of any Contract or other document referred to in them are not
necessarily complete. In each instance, reference is made to the copy of that
Contract or other document filed as an exhibit to the Registration Statement of
which the particular Prospectus forms a part, and each statement is qualified in
all respects by that reference.
The use of Funds by both variable annuity and variable life insurance separate
accounts is known as mixed funding. Due to differences in redemption rates, tax
treatment, or other considerations, the interests of Contract Owners under the
Variable Life Accounts may conflict with those of Contract Owners under the
Variable Annuity Account, in those cases where mixed funding occurs. The Board
of Directors of each Fund will monitor for any material conflicts and determine
what action, if any, should be taken.
Should any conflict arise which requires that a substantial amount of assets be
withdrawn from any of the Funds, orderly portfolio management could be
disrupted, to the detriment of those Contract Owners still investing in that
Fund. Also, if that Fund believes that any portfolio has become so large as to
materially impair investment performance, then the Fund will examine other
investment options.
Lincoln Life performs the dividend and transfer functions for the Funds.
70
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
LINCOLN NATIONAL EQUITY-INCOME FUND, INC.
This Statement of Additional Information should be read in conjunction with the
Prospectus of Lincoln National Equity-Income Fund, Inc. (the Fund) dated April
29, 1995. You may obtain a copy of the Fund's Prospectus on request and without
charge. Please write Kim Oakman, The Lincoln National Life Insurance Company,
P.O. Box 2340, Fort Wayne, Indiana 46801 or call 1-800-348-1212, Extension 4912.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS.
The date of this Statement of Additional Information is April 29, 1995.
TABLE OF CONTENTS
Page
Investment Objective
Investment Policies and Limitations (Restrictions)
Investment Techniques
Portfolio Transactions and Brokerage
Determination of Net Asset Value
Appendix
Investment Advisor and Sub-Advisor
Directors and Officers
Investment Policies and Techniques (continued)
Custodian
Independent Auditors
Financial Statements
Bond Ratings
Commercial Paper Ratings
U.S. Government Obligations
Taxes
State Requirements
Derivative Transactions-Definitions
------------
INVESTMENT OBJECTIVE
The Fund's investment objective is to obtain reasonable income by investing
primarily in income-producing equity securities. The Fund's investment
objective and certain investment policies are fundamental and cannot be changed
without the affirmative vote of a majority of the outstanding voting securities
of the Fund. See "General Information" in the Appendix to the Prospectus.
There can be no assurance that the objective of the Fund will be achieved.
The Fund seeks to achieve its objective by actively managing income-producing
common and preferred stock and debt convertible into common stock. In choosing
securities, the Fund will also consider the potential for capital appreciation.
The Fund's goal is to achieve a yield which exceeds the composite yield on the
securities comprising the Standard & Poor's 500 Composite Stock Price Index.
INVESTMENT POLICIES AND LIMITATIONS (RESTRICTIONS)
The following policies and limitations supplement those set forth in the
Prospectus. Unless otherwise noted, whenever an investment policy or limitation
states a maximum percentage of the Fund's assets that may be invested in any
security or other asset, or sets forth a policy regarding quality standards,
such standard or percentage limitation will be determined immediately after and
as a result of the Fund's acquisition of such security or other asset.
Accordingly, any subsequent change in values, net assets, or other circumstances
will not be considered when
<PAGE>
determining whether the investment complies with the Fund's investment policies
and limitations.
The Fund's fundamental investment policies and limitations cannot be changed
without approval by a "majority of the outstanding voting securities" of the
Fund. However, except for the fundamental investment limitations set forth
below, the investment policies and limitations described in this Statement of
Additional Information are not fundamental and may be changed without
shareholder approval.
The following are the Fund's fundamental investment limitations. The Fund may
not:
(1) with respect to 75% of the Fund's total assets, purchase the securities of
any issuer (other than securities issued or guaranteed by the U.S.
Government or any of its agencies or instrumentalities) if, as a result, (a)
more than 5% of the Fund's total assets would be invested in the securities
of that issuer, or (b) the Fund would hold more than 10% of the outstanding
voting securities of that issuer;
(2) issue senior securities, except as permitted under the Investment Company
Act of 1940, as amended (the "1940 Act");
(3) borrow money, except that the Fund (i) may borrow money for temporary or
emergency purposes (not for leveraging or investment or (ii) engage in
reverse repurchase agreements, provided that (i) and (ii) in combination
(borrowings) do not exceed 33 1/3% of its total assets (including the amount
borrowed) less liabilities (other than borrowings). Any borrowings that come
to exceed 33 1/3% of the value of the Fund's total assets by reason of a
decline in net assets will be reduced within three days (exclusive of
Sundays and holidays) to the extent necessary to comply with the 33 1/3%
limitation;
(4) underwrite securities issued by others, except to the extent that the Fund
may be considered an underwriter within the meaning of the Securities Act of
1933 in the disposition of restricted securities;
(5) purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. Government or any of its agencies or
instrumentalities) if, as a result, more than 25% of its total assets would
be invested in the securities of companies whose principal business
activities are in the same industry;
(6) purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent the Fund from
investing in securities or other instruments backed by real estate or
securities of companies engaged in the real estate business);
(7) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
Fund from purchasing or selling options and futures contracts for from
investing in securities or other instruments backed by physical
commodities); or
<PAGE>
(8) lend any security or make any other loan if, as a result, more than 33 1/3%
of its total assets would be lent to other parties, but this limitation does
not apply to purchases of debt securities or to repurchase agreements.
The following investment limitations for the Fund are not fundamental and
may be changed without shareholder notification:
(i) The Fund does not currently intend to sell securities short, unless
it owns or has the right to obtain securities equivalent in kind and
amount to the securities sold short, and provided that transactions
in futures contracts and options are not deemed to constitute selling
securities short.
(ii) The Fund does not currently intend to purchase securities on margin,
except that the Fund may obtain such short-term credits as are
necessary for the clearance of transactions, and provided that margin
payments in connection with futures contracts and options on futures
contracts shall not constitute purchasing securities on margin.
(iii) The Fund may borrow money only (a) from a bank or (b) by engaging in
reverse repurchase agreements with any party (reverse repurchase
agreements are treated as borrowings for purposes of fundamental
investment limitation (3)). The Fund will not borrow money in excess
of 25% of net assets so long as this limitation is required for
certification by certain state insurance departments. Any borrowings
that come to exceed this amount will be reduced within seven days
(not including Sundays and holidays) to the extent necessary to
comply with the 25% limitation. The Fund will not purchase any
security while borrowings representing more than 5% of its total
assets are outstanding.
(iv) The Fund does not currently intend to purchase any security if, as a
result, more than 10% of the Fund's net assets would be invested in
securities that are deemed to be illiquid because they are subject to
legal or contractual restrictions on resale or because they cannot be
sold or disposed of in the ordinary course of business at
approximately the prices at which they are valued.
(v) The Fund does not currently intend to lend assets other than
securities to other parties, except by acquiring loans, loan
participants, or other forms of direct debt instruments and, in
connection therewith, assuming any associated unfunded commitments of
the sellers. (This limitation does not apply to purchases of debt
securities or to repurchase agreements.)
(vi) The Fund does not currently intend to (a) purchase securities of
other investment companies, except in the open market where no
commission except the ordinary broker's commission is paid, or (b)
purchase or retain securities issued by other open-end investment
companies. Limitations (a) and (b) do not apply to securities
received
<PAGE>
as dividends, through offers of exchange, or as a result of a
reorganization, consolidation, or merger. (Due to certain state
insurance regulations, the Fund does not currently intend to purchase
the securities of other investment companies.)
(vii) The Fund does not currently intend to invest in oil, gas, or other
mineral exploration or development programs or leases.
For the Fund's limitations on futures and options transactions, see
"Limitations on Futures and Options Transactions" below. For the Fund's
limitations on short sales, see "Short Sales" below.
In accordance with the Fund's fundamental investment policies, there are no
limitations on the percentage of the Fund's assets which may be invested in
any one type of instrument. Nor are there limitations (except those imposed
by certain state insurance regulations) on the percentage of the Fund's
assets which may be invested in any foreign country. However, in order to
comply with diversification requirements under Section 817(h) of the
Internal Revenue Code of 1986, as amended, in connection with Fidelity
Management Trust Company serving as sub-adviser, the Fund has agreed to
certain non-fundamental limitations. Please refer to the prospectus for the
Variable Annuity Account for more information.
INVESTMENT TECHNIQUES
The following paragraphs provide a brief description of securities in which
the Fund may invest and transactions it may make. The Fund is not limited by
this discussion, however, and may purchase other types of securities and
enter into other types of transactions if they are consistent with the
Fund's investment objectives and policies.
Fund management expects securities selection for the Fund to closely
parallel that for an existing Fidelity retail fund, the Fidelity Equity-
Income Fund, which has a similar investment objective. However, there cannot
be a precise correlation, and performance of the Fund is not expect to be
the same as the performance of the corresponding retail fund. Selection
criteria for portfolio securities and the relative weightings of the
selections can differ based on asset size, timing, cash flow, expenses and
other factors. Portfolio selections will be made by Fund's Sub-Advisor,
Fidelity Management Trust Company (the "Sub-Advisor"), which is an affiliate
of Fidelity Management & Research Company ("Fidelity"), which manages the
Fidelity Equity-Income Fund.
AFFILIATED BANK TRANSACTIONS. Pursuant to exemptive orders issued by the
Securities and Exchange Commission (SEC), the Fund may engage in
transactions with banks that are, or may be considered to be, "affiliated
persons" of the Fund under the 1940 Act. Such transactions may be entered
into only pursuant to procedures established and periodically reviewed by
the Board of
<PAGE>
Directors. These transactions may include repurchase agreements with
custodian banks; purchases, as principal, of short-term obligations of, and
repurchase agreements with, the 50 largest U.S. banks (measured by
deposits); transactions in municipal securities; and transactions in U.S.
Government securities with affiliated banks that are primary dealers in
these securities.
FUND'S RIGHTS AS A SHAREHOLDER. The Fund does not intend to direct or
administer the day-to-day operations of any company. The fund, however, may
exercise its rights as a shareholder and may communicate its views on
important matters of policy to management, the Board of Directors, and
shareholders of a company when the Sub-Adviser determines that such matters
could have a significant effect on the value of the Fund's investment in
the company. The activities that the Fund may engage in, either
individually or in conjunction with others, may include, among others,
supporting or opposing proposed changes in a company's corporate structure
or business activities; seeking changes in a company's directors or
management; seeking changes in a company's direction or policies; seeking
the sale or reorganization of the company or a portion of its assets; or
supporting or opposing third party takeover efforts. This area of corporate
activity is increasingly prone to litigation and it is possible that the
Fund could be involved in lawsuits related to such activities. The Sub-
Adviser will monitor such activities with a view to mitigating, to the
extent possible, the risk of litigation against the Fund and the risk of
actual liability if the Fund is involved in litigation. No guarantee can be
made, however, that litigation against the Fund will not be undertaken or
liabilities incurred.
PERMITTED INSTRUMENTS:
Money Market refers to the marketplace where short-term, high grade debt
securities are traded, and includes U.S. Government obligations, commercial
paper, certificates of deposit and bankers' acceptances, time deposits and
short-term corporate obligations. Money market instruments may carry fixed
rates of return or have variable or floating interest rates.
Commercial Paper represents short-term obligations issued by banks, broker-
dealers, corporations and other entities for purposes such as financing
their current operations.
Certificates of Deposit represent a commercial bank's obligations to repay
funds deposited with it earning specified rates of interest over given
periods.
Banker's Acceptances are obligations of a bank to pay a draft which has
been drawn on it by a customer. These obligations are backed by large banks
and usually backed by goods in international trade.
<PAGE>
Time Deposits are non-negotiable deposits in a banking institution earning
a specified interest rate over a given period of time.
U.S. Government Obligations are debt securities issued or guaranteed as to
principal and interest by the U.S. Treasury or by an agency or
instrumentality of the U.S. Government. Not all U.S. Government obligations
are backed by the full faith and credit of the United States. For example,
securities issued by the Federal Farm Credit Bank or by the Federal
National Mortgage Association are supported by the agency's right to borrow
money from the U.S. Treasury under certain circumstances. Securities issued
by the Federal Home Loan Bank are supported only by the credit of the
agency. There is no guarantee that the government will support these types
of securities, and therefore they involve more risk than other government
obligations.
Variable or Floating Rate Instruments (including notes purchased directly
from issuers) bear variable or floating interest rates and may carry rights
that permit holders to demand full payment from the issuers or certain
financial intermediaries. Floating rate securities have interest rates that
change whenever there is a change in a designated market-based interest
rate, while variable rate instruments provide for a specified periodic
adjustment in the interest rate. These formulas are designed to result in a
market value for the instrument that approximates its par value.
Credit Enhancement Agreements may be purchased simultaneously with a money
market instrument for guaranteeing and/or interest and may e considered
with the instrument for purposes of determining the quality of the
instruments. The irrevocable note repurchase agreements or letters of
credit issued by banks and guarantees provided by creditworthy
institutions. The Fund will purchase these agreements to enhance the
creditworthiness of instruments when the Sub-Adviser (through yield and
credit analysis) feels it is in the Fund's best interest.
Corporate Obligations are bonds and notes issued by corporations and other
business organizations in order to finance their long-term credit needs.
Loans and Other Direct Debt Instruments are interests in amounts owed by a
corporate, governmental or other borrower to another party. They may
represent amounts owed to lenders or lending syndicates (loans and loan
participations), to suppliers of goods or services (trade claims or other
receivables), or to other parties. Direct debt instruments purchased by the
Fund may have a maturity of any number of days or years, may be secured or
unsecured, and may be of any credit quality. Direct debt instruments
involve the risk of loss in case of default or insolvency of the borrower.
Direct debt instruments may offer less legal protection to the Fund in the
event of fraud or misrepresentation. In addition, loan participations
involve a
<PAGE>
risk of insolvency of the lending bank or other financial intermediary.
Direct debt instruments also may include standby financing commitments that
obligate the Fund to supply additional cash to the borrower on demand at a
time when the Fund would not have otherwise done so, even if the borrower's
condition makes it unlikely that the amount ever will be repaid.
Mortgage-Backed Securities. Mortgage-backed securities are securities
issued by government and non-government entities such as banks, mortgage
lenders, or other financial institutions. A mortgage-backed security may be
an obligation of the issuer backed by a mortgage or pool of mortgages or a
direct interest in an underlying pool of mortgages. Some mortgage-backed
securities, such as collateralized mortgage obligations or CMOs, make
payments of both principal and interest at a variety of intervals; others
make semiannual interest payments at a predetermined rate and repay
principal at maturity (like a typical bond). Mortgage-backed securities are
based on different types of mortgages, including those on commercial real
estate or residential properties. Other types of mortgage-backed securities
will likely be developed in the future, and the Fund may invest in them if
the Sub-Adviser determines they are consistent with the Fund's investment
objective and policies.
The value of mortgage-backed securities may change due to shifts in the
market's perception of issuers. In addition, regulatory or tax changes may
adversely affect the mortgage securities market as a whole. Non-government
mortgage-backed securities may offer higher yields than those issued by
government entities, but also may be subject to greater price changes than
government issues. Mortgage-backed securities are subject to prepayment
risk. Prepayment, which occurs when unscheduled or early payments are made
on the underlying mortgages, may shorten the effective maturities of these
securities and may lower their total returns.
Stripped Mortgage-Backed Securities are created when a U.S. Government
agency or a financial institution separates the interest and principal
components of a mortgage-backed security and sells them as individual
securities. The holder of the "principal-only" security (PO) receives the
principal payments made by the underlying mortgage-backed security, while
the holder of the "interest-only" security (IO) receives interest payments
from the same underlying security.
The prices of stripped mortgage-backed securities may be particularly
affected by changes in interest rates. As interest rates fall, prepayment
rates tend to increase, which tends to reduce prices of IOs and increase
prices of POs. Rising interest rates can have the opposite effect.
<PAGE>
Asset-Backed Securities consist of undivided fractional interests in pools
of consumer loans (unrealted to mortgage loans) held in a trust. Payments
of principal and interest are passed through to certificate holders and are
typically suppported by some form of credit enhancement, such as a letter
of credit, surety bond, limited guaranty, or senior/subordination. The
degree of credit enhancement varies, but generallly amounts to only a
fraction of the asset-backed security's par value until exhausted. Asset-
backed securities are ultimately dependent upon payment of consumer loans
by individuals, and the certificate holder generally has no recourse to the
entity that originated the loans. The underlying loans are subject to
prepayments which shorten the securities' weighted average life and may
lower their return. (as prepayments flow through at par, total returns
would be affecteed by the prepayments; if a security were trading at a
premium, its total return would be lowered by prepayments, and if a
security were trading at a discount, its total return would be increased by
prepayments.) If the credit enhancement is exchausted, certificate holders
may experience losses or delays in payment if the required payments of
principal and interest are not made to the trust with respect to the
underlying loans. The value of these securities also may change because of
changes in the market's perception of the creditworthiness of the servicing
agent for the loan pool, the originator of the loans, or the financial
institution providing the credit enhancement.
The Sub-Advisor believes that CMOs, asset-backed securities and mortgage-
backed securities are readily marketable based on the size of the market
and the number of trades transacted each day.
Zero Coupon Bonds do not make interest payments; instead, they are sold at
a deep discount from their face value and are redeemed at face value when
they mature. Because zero coupon bonds do not pay current income, their
prices can be very volatile when interest rates change. In calculating its
daily dividend, the Fund takes into account as income a portion of the
difference between a zero coupon bond's purchase price and its face value.
A broker-dealer creates a derivative zero by separating the interest and
principal components of a U.S. Treasury security and selling them as two
individual securities. CATS (Certificates of Accrual on Treasury
Securities), TIGRs (Treasury Investment Growth Receipts), and TRs (Treasury
Receipts) are examples of derivative zeros.
The Federal Reserve Bank creates STRIPS (Separate Trading of Registered
Interest and Principal of Securities) by separating the interest and
principal componenets of an outstanding U.S. Treasury bond and selling them
as individual securities. Bonds issued by the Resolution Funding
Corporation (REFCORP) and the Financing Corporation (FICO) can also be
separated in this fashion. Original issue zeros are zero coupon securities
<PAGE>
originally issued by the U.S. Government, a government agency, or a
corporation in zero coupon form.
REPURCHASE AGREEMENTS. The Fund may also make short-term investments in
repurchase agreements. A repurchase agreement typically involves the
purchase by the Fund of securities (U.S. Government or other money market
securities) from a financial institution such as a bank, broker or savings
and loan association, coupled with an agreement by the seller to repurchase
the same securities form the Fund at the specified price and at a fixed
time in the future, usually not more than seven days from the date of
purchase. The difference between the purchase price to the Fund and the
resale price to the seller represents the interest earned by the Fund which
is unrelated to the coupon rate or maturity of the purchased security. If
the seller defaults, the Fund may incur a loss if the value of the
collateral securing the repurchase agreement declines, or the Fund may
incur disposition costs in connection with liquidating the collateral. If
bankruptcy proceedings are commenced with respect to the seller,
realization upon the collateral by the Fund may be delayed or limited and a
loss may be incurred if the collateral securing the repurchase agreement
declines in value during the bankruptcy proceedings. However, repurchase
agreements will be made only with brokers or dealers deemed by the Board of
Directors to be creditworthy; they will be fully collateralized; and the
collateral for each transaction will be in the actual or constructive
possession of the Fund during the term of the transaction, as provided in
the agreement. Repurchase agreements with a duration of more than seven
days are considered illiquid securities and are subject to the limit stated
above.In a repurchase agreement, the Fund purchases a security and
simultaneously commits to resell that security to the seller at an agreed
upon price on an agreed upon date within a number of days (usually not more
than seven) from the date of purchase. The resale price reflects the
purchase price plus an agreed upon incremental amount that is unrelated to
the coupon rate or maturity of the purchased security. A repurchase
agreement involves the obligation of the seller to pay the agreed upon
price, which obligation is in effect secured by the value (at least equal
to the amount of the agreed upon resale price and marked-to-market daily)
of the underlying security. The Fund may engage in a repurchase agreement
with respect to any security in which it is authorized to invest. While it
does not presently appear possible to eliminate all risks from these
transactions (particularly the possibility of a decline in the market value
of the underlying securities, as well as delays and costs to the Fund in
the event of bankruptcy of the seller), it is the policy of the Fund to
limit repurchase agreements to those parties whose creditworthiness has
been reviewed and found satisfactory by the Adviser or Sub-Adviser. In
addition, the Fund currently intends to invest only in repurchase
agreements collateralized by U.S. Government securities.
<PAGE>
Pursuant to an Exemptive Order issued by the SEC, the Fund, along with
other registered investment companies having management contracts with the
Sub-Adviser or an affiliate thereof, may invest in a pool of one or more
large overnight repurchase agreements. The repurchase agreements'
underlying securities are U.S. Government securities in which the Fund is
permitted to invest.
REVERSE REPURCHASE AGREEMENTS. Reverse repurchase agreements are
transactions when the Fund temporarily transfers possession of a portfolio
instrument to another party, such as a bank or broker-dealer, in return for
cash. At the same time, the Fund agrees to repurchase the instrument in an
agreed-upon price and time. The Fund expects that it will engage in reverse
repurchase agreements for temporary purposes such as to fund redemptions or
when it is able to invest the cash so acquired at a rate higher than the
cost of the agreement, which would increase the income earned by the Fund.
Reverse repurchase agreements may increase the risk of fluctuation in the
market value of assets or in its yield.In a reverse repurchase agreement,
the Fund sells a fund instrument to another party, such as a bank or
broker-dealer, in return for cash and agrees to repurchase the instrument
at a particular price and time. While a reverse repurchase agreement is
outstanding, the Fund will maintain appropriate liquid assets in a
segregated custodial account to cover its obligation under the agreement.
The Fund will enter into reverse repurchase agreements only with parties
whose creditworthiness has been reviewed and found satisfactory by the
Board of Directors. Such transactions may increase fluctuations in the
market value of the Fund's assets and may be viewed as a form of leverage.
SECURITIES LENDING. The Fund may from time to time lend securities from its
portfolio to brokers, dealers and financial institutions and receive
collateral from the borrower, in the form of cash (which may be invested in
short-term securities), U.S. Government obligations or certificates of
deposit. Such collateral will be maintained at all times in an amount equal
to at least 100% of the current market value of the loaned securities, and
will be in the actual or constructive possession of the Fund during the
term of the loan. The Fund will retain the incidents of ownership of the
loaned securities and will be entitled to the interest or dividends payable
on the loaned securities. In addition, the Fund will receive interest on
the amount of the loan. The loans will be terminable by the Fund at any
time and will not be made to any affiliates of the Fund or the Adviser or
Sub-Adviser. The Fund may pay reasonable finder's fees to persons
unaffiliated with it in connection with the arrangement of the loans.
As with any extensions of credit, there are risks of delay in recovery and,
in some cases, even loss of rights in the collateral or the loaned
securities should the borrower of securities fail financially. However,
loans of portfolio securities will be made only to firms deemed by the
Board of
<PAGE>
Directors to be creditworthy. As a fundamental policy, the Fund will not lend
securities, if, as a result, more than 25% of its total assets would be lent to
other parties.
ILLIQUID INVESTMENTS, in which the Fund may invest up to 10% of its total
assets, are investments that cannot be sold or disposed of in the ordinary
course of business at approximately the prices at which they are valued. Under
the supervision of the Board of Directors, the Sub-Adviser determines the
liquidity of the Fund's investments and, through reports from the Sub-Adviser
may consider various factors, including (1) the frequency of trades and
quotations, (2) the number of dealers and prospective purchasers in the
marketplace, (3) dealer undertakings to make a market, (4) the nature of the
security (including any demand or tender features), and (5) the nature of the
marketplace for trades (including the ability to assign or offset the Fund's
rights and obligations relating to the investment).
Investments currently considered by the Fund to be illiquid include repurchase
agreements not entitling the holder to payment of principal and interest within
seven days, loans and other direct debt instruments, over-the-counter options,
non-government stripped fixed-rate mortgage-backed securities, and restricted
securities, government-stripped fixed-rate mortgage-backed securities, and sway
agreements determined by the Sub-Adviser to be illiquid. However, with respect
to over-the-counter options the Fund writes, all or a portion of the value of
the underlying instrument may be illiquid depending on the assets held to cover
the option and the nature and terms of any agreement the Fund may have to close
out the option before expiration.
In the absence of market quotations, illiquid investments are valued at fair
value as determined in good faith by a committee appointed by the Board of
Directors of the Fund. If through a change in values, net assets, or other
circumstances, the Fund were in a position where more than 10% of net assets
were invested in illiquid securities, it would seek to take appropriate steps to
protect liquidity.
RESTRICTED SECURITIES generally can be sold in privately negotiated
transactions, pursuant to an exemption from registration under the Securities
Act of 1933, or in a registered public offering. Where registration is
required, the Fund may be obligated to pay all or part of the registration
expense and a considerable period may elapse between the time it decides to seek
registration and the time the Fund may be permitted to sell a security under an
effective registration statement. If, during such a period, adverse market
conditions were to develop, the Fund might obtain a less favorable price than
prevailed when it decided to seek registration of the security.
<PAGE>
SWAP AGREEMENTS. As one way of managing its exposure to different types of
investments, the Fund may enter into interest rate swaps, currency swaps, and
other types of swap agreements such as caps, collars, and floors. In a typical
interest rate swap, one party agrees to make regular payments equal to a
floating interest rate multiplied by a "notional principal amount," in return
for payments equal to a fixed rate multiplied by the same amount, for a
specified period of time. If a swap agreement provides for payments in
different currencies, the parties might agree to exchange the notional principal
amount as well. Swaps may also depend on other prices or rates, such as the
value of an index or mortgage prepayment rates.
In a typical cap or floor agreement, one party agrees to make payments only
under specified circumstances, usually in return for payment of a fee by the
other party. For example, the buyer of an interest rate cap obtains the right
to receive payments to the extent that a specified interest rate exceeds an
agreed-upon level, while the seller of an interest rate floor is obligated to
make payments to the extent that a specified interest rate falls below an
agreed-upon level. An interest rate collar combines elements of buying a cap
and selling a floor.
Swap agreements will tend to shift the Fund's investment exposure from one type
of investment to another. For example, if the Fund agreed to exchange payments
in dollars for payments in foreign currency, the swap agreement would tend to
decrease the Fund's exposure to U.S. interest rates and increase its exposure to
foreign currency and interest rates. Caps and floors have an effect similar to
buying or writing options. Depending on how they are used, swap agreements may
increase or decrease the overall volatility of the Fund's investments and its
share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on the
Fund's performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. The Fund may also suffer losses
if it is unable to terminate outstanding swap agreements or reduce its exposure
through offsetting transactions.
Swap agreements can be individually negotiated and structured to include
exposure to a variety of different types of investments or market factors.
Depending on their structure, swap agreements may increase or decrease the
Fund's exposure to long or short-term interest rates (in the U.S. or abroad),
foreign currency values, mortgage securities, corporate borrowing rates, or
other factors such as security prices or inflation rates. Swap agreements can
take many different forms and are known by a variety of names. The Fund is not
limited to any particular form
<PAGE>
of swap agreement if the Sub-Adviser determines it is consistent with the Fund's
investment objective and policies.
The most significant factor in the performance of swap agreements is the change
in the specific interest rate, currency, or other factors that determine the
amounts of payments due to and from the Fund. If a swap agreement calls for
payments by the Fund, it must be prepared to make such payments when due. In
addition, if the counterparty's creditworthiness declined, the value of a swap
agreement would be likely to decline, potentially resulting in losses. The Fund
expects to be able to eliminate its exposure under swap agreements either by
assignment or other disposition, or by entering into an offsetting swap
agreement with the same party or a similarly creditworthy party.
The Fund will maintain appropriate liquid assets in a segregated custodial
account to cover its current obligations under swap agreements. If the Fund
enters into a swap agreement on a net basis, it will segregate assets with a
daily value at least equal to the excess, if any, of its accrued obligations
under the swap agreement over the accrued amount it is entitled to receive under
the agreement. If the Fund enters into a swap agreement on other than a net
basis, it will segregate assets with a value equal to the full amount of its
accrued obligations under the agreement.
INDEXED SECURITIES. The fund may purchase securities whose prices are indexed
to the prices of other securities, securities indices, currencies, precious
metals or other commodities, or other financial indicators. Indexed securities
typically, but not always, are debt securities or deposits whose value at
maturity or coupon rate is determined by reference to a specific instrument or
statistic. Gold-indexed securities, for example, typically provide for a
maturity value that depends on the price of gold, resulting in a security whose
price tends to rise and fall together with gold prices. Currency-indexed
securities typically are short-term to intermediate-term debt securities whose
maturity values or interest rates are determined by reference to the values of
one or more specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed
securities may be positively or negatively indexed; that is, their maturity
value may increase when the specified currency value increases, resulting in a
security that performs similarly to a foreign-denominated instrument, or their
maturity value may decline when foreign currencies increase, resulting in a
security whose price characteristics are similar to a put on the underlying
currency. Currency-indexed securities may also have prices that depend on the
values of a number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument
<PAGE>
to which they are indexed, and may also be influenced by interest rate changes
in the U.S. and abroad. At the same time, indexed securities are subject to
the credit risks associated with the issuer of the security, and their values
may decline substantially if the issuer's creditworthiness deteriorates. Recent
issuers of indexed securities have included banks, corporations, and certain
U.S. Government agencies.
WARRANTS. Warrants are securities that give the Fund the right to purchase
equity securities from the issuer at a specific price (the strike price) for a
limited period of time. The strike price of warrants typically is much lower
than the current market price of the underlying securities, yet they are subject
to similar price fluctuations. As a result, warrants may be more volatile
investments than the underlying securities and may offer greater potential for
capital appreciation as well as capital loss.
Warrants do not entitle a holder to dividends or voting rights with respect to
the underlying securities and do not represent any rights in the assets of the
issuing company. Also, the value of the warrant does not necessarily change
with the value of the underlying securities and a warrant ceases to have value
if it is not exercised prior to the expiration date. These factors can make
warrants more speculative than other types of investments.
LOANS AND OTHER DIRECT DEBT INSTRUMENTS. Direct debt instruments are interests
in amounts owed by a corporate, governmental, or other borrower to lenders or
lending syndicates (loans and loan participations), to suppliers of goods or
services (trade claims or other receivables), or to other parties. Direct debt
instruments are subject to the Fund's policies regarding the quality of debt
securities.
Purchasers of loans and other forms of direct indebtedness depend primarily upon
the creditworthiness of the borrower for payment of principal and interest.
Direct debt instruments may not be rated by any nationally recognized rating
service. If the Fund does not receive scheduled interest or principal payments
on such indebtedness, the Fund's share price and yield could be adversely
affected. Loans that are fully secured offer the Fund more protections than an
unsecured loan in the event of non-payment of scheduled interest or principal.
However, there is no assurance that the liquidation of collateral from a secured
loan would satisfy the borrower's obligation, or that the collateral can be
liquidated. Indebtedness of borrowers whose creditworthiness is poor involves
substantially greater risks, and may be highly speculative. Borrowers that are
in bankruptcy or restructuring may never pay off their indebtedness, or may pay
only a small fraction of the amount owed. Direct indebtedness of developing
countries will also involve a risk that the governmental entities responsible
for the repayment of the debt may be unable, or unwilling, to pay interest and
repay principal when due.
<PAGE>
Investments in loans through direct assignment of a financial institution's
interests with respect to a loan may involve additional risks to the Fund.
For example, if a loan is foreclosed, the Fund could become part owner of
any collateral, and would bear the costs and liabilities associated with
owning and disposing of the collateral. In addition, it is conceivable
that under emerging legal theories of lender liability, the Fund could be
held liable as a co-lender. Direct debt instruments may also involve a
risk of insolvency of the lending bank or other intermediary. Direct debt
instruments that are not in the form of securities may offer less legal
protection to the Fund in the event of fraud or misrepresentation. In the
absence of definitive regulatory guidance, the Fund relies on the Sub-
Adviser's research in an attempt to avoid situations where fraud or
misrepresentation could adversely affect the Fund.
A loan is often administered by a bank or other financial institution that
acts as agent for all holders. The agent administers the terms of the
loan, as specified in the loan agreement. Unless, under the terms of the
loan or other indebtedness, the Fund has direct recourse against the
borrower, it may have to rely on the agent to apply appropriate credit
remedies against a borrower. If assets held by the agent for the benefit
of the Fund were determined to be subject to the claims of the agent's
general creditors, the Fund might incur certain costs and delays in
realizing payment on the loan or loan participation and could suffer a loss
of principal or interest.
Direct indebtedness purchased by the Fund may include letters of credit,
revolving credit facilities, or other standby financing commitments
obligating the Fund to pay additional cash on demand. These commitments may
have the effect of requiring the Fund to increase its investment in a
borrower at a time when it would not otherwise have done so, even if the
company's condition makes it unlikely that the amount will ever be repaid.
The Fund will set aside appropriate liquid assets in a segregated custodial
account to cover its potential obligations under standby financing
commitments.
The Fund limits the amount of total assets that it will invest in any one
issuer or in issuers within the same industry (see limitations (1) and (5)
for the Fund). For purposes of these limitations, the Fund generally will
treat the borrower as the "issuer" of indebtedness held by the Fund. In
the case of loan participants where a bank or other lending institution
serves as financial intermediary between the Fund and the borrower, if the
participation does not shift to the Fund the direct debtor-creditor
relationship with the borrower, SEC interpretations require the Fund, in
appropriate circumstances, to treat both the lending bank or other lending
institution and the borrower as "issuers" for the purposes of determining
whether the Fund has invested more than 5% of its total assets in a single
issuer.
<PAGE>
Treating a financial intermediary as an issuer of indebtedness may restrict
the Fund's ability to invest in indebtedness related to a single financial
intermediary, or a group of intermediaries engaged in the same industry,
even if the underlying borrowers represent many different companies and
industries.
FOREIGN INVESTMENTS. Foreign investments can involve significant risks in
addition to the risks inherent in U.S. investments. The value of
securities denominated in or indexed to foreign currencies, and of
dividends and interest from such securities, can change significantly when
foreign currencies strengthen or weaken relative to the U.S. dollar.
Foreign securities markets generally have less trading volume and less
liquidity than U.S. markets, and prices on some foreign markets can be
highly volatile. Many foreign countries lack uniform accounting and
disclosure standards comparable to those applicable to U.S. companies, and
it may be more difficult to obtain reliable information regarding an
issuer's financial condition and operations. In addition, the costs of
foreign investing, including withholding taxes, brokerage commissions, and
custodial costs, are generally higher than for U.S. investments.
Foreign markets may offer less protection to investors than U.S. markets.
Foreign issuers, brokers, and securities markets may be subject to less
government supervision. Foreign security trading practices, including
those involving the release of assets in advance of payment, may involve
increased risks in the event of a failed trade or the insolvency of a
broker-dealer, and may involve substantial delays. It may also be
difficult to enforce legal rights in foreign countries.
Investing abroad also involves different political and economic risks.
Foreign investments may be affected by actions of foreign governments
adverse to the interests of U. S. investors, including the possibility of
expropriation or nationalization of assets, confiscatory taxation,
restrictions on U.S. investment or on the ability to repatriate assets or
convert currency into U.S. dollars, or other government intervention.
There may be a greater possibility of default by foreign governments or
foreign government-sponsored enterprises. Investments in foreign countries
also involve a risk of local political, economic, or social instability,
military action or unrest, or adverse diplomatic developments. There is no
assurance that the Sub-Adviser will be able to anticipate these potential
events or counter their effects.
The considerations noted above generally are intensified for investments in
developing countries. Developing countries may have relatively unstable
governments, economies based on only a few industries, and securities
markets that trade a small number of securities.
The Fund may invest a portion of its assets in developing countries, or in
countries with new or developing capital
<PAGE>
markets; for example, nations in Eastern Europe. The considerations noted
above are generally intensified for these investments. These countries may
have relatively unstable governments, econimies based on only a few
industries, and securities markets that trade a small number of securities.
Securities of issuers located int hse countries tend to have volatile
prices and mayoffer significant potential for loss as well as gain.
American Depositary Receipts and European Depositary Receipts (ADRs and
EDRs) are certificates evidencing ownership of shares of a foreign-based
issuer held in trust by a bank or similar financial institution. Designed
for use in U.S. and European securities markets, respectively, ADRs and
EDRs are alternatives to the purchase of the underlying securities in their
national markets and currencies.
FOREIGN CURRENCY TRANSACTIONS. The Fund may conduct foreign currency
transactions on a spot (i.e., cash) basis or by entering into forward
contracts to purchase or sell foreign currencies at a future date and
price. The Fund will convert currency on a spot basis from time to time,
and investors should be aware of the costs of currency conversion.
Although foreign exchange dealers generally do not charge a fee for
conversion, they do realize a profit based on the difference between the
prices at which they are buying and selling various currencies. Thus, a
dealer may offer to sell a foreign currency to the Fund at one rate, while
offering a lesser rate of exchange should the Fund desire to resell that
currency to the dealer. Forward contracts are generally traded in an
interbank market conducted directly between currency traders (usually large
commercial banks) and their customers. The parties to a forward contract
may agree to offset or terminate the contract before its maturity, or may
hold the contract to maturity and complete the contemplated currency
exchange.
The Fund may use currency forward contracts for any purpose consistent with
its investment objective. The following discussion summarizes some, but
not all, of the possible currency management strategies involving forward
contracts that could be used by the Fund. The Fund may also use options
and futures contracts relating to foreign currencies for the same purposes.
When the Fund agrees to buy or sell a security denominated in a foreign
currency, it may desire to "lock in" the U.S. dollar price of the security.
By entering into a forward contract for the purchase or sale, for a fixed
amount of U.S. dollars, of the amount of foreign currency involved in the
underlying security transaction, the Fund will be able to protect itself
against an adverse change in foreign currency values between the date the
security is purchased or sold and the date on which payment is made or
received. This technique is sometimes referred to as a
<PAGE>
"settlement hedge" or "transaction hedge." The Fund may also enter into
forward contracts to purchase or sell a foreign currency in anticipation of
future purchases or sales of securities denominated in foreign currency,
even if the specific investments have not yet been selected by the Sub-
Adviser.
The Fund may also use forward contracts to hedge against a decline in the
value of existing investments denominated in foreign currency. For
example, if the Fund owned securities denominated in pounds sterling, the
Fund could enter into a forward contract to sell pounds sterling in return
for U.S. dollars to hedge against possible declines in the pound's value.
Such a hedge, sometimes referred to as a "position hedge," would tend to
offset both positive and negative currency fluctuations, but would not
offset changes in security values caused by other factors. The Fund could
also hedge the position by selling another currency expected to perform
similarly to the pound sterling--for example, by entering into a forward
contract to sell Deutschemarks or European Currency Units in return for
U.S. dollars. They type of hedge, sometimes referred to as a "proxy
hedge," could offer advantages in terms of cost, yield or efficiency, but
generally will not hedge currency exposure as effectively as a simple hedge
into U.S. dollars. Proxy hedges may result in losses if the currency used
to hedge does not perform similarly to the currency in which the hedged
securities are denominated.
The Fund may enter into forward contracts to shift its investment exposure
from one currency into another currency that is expected to perform better
relative to the U.S. dollar. For example, if the Fund held investments
denominated in Deutschemarks, the Fund could enter into forward contracts
to sell Deutschemarks and purchase Swiss Francs. This type of strategy,
sometimes known as a "cross-hedge," will tend to reduce or eliminate
exposure to the currency that is sold, and increase exposure to the
currency that is purchased, much as if the Fund had sold a security
denominated in one currency and purchased an equivalent security
denominated in another. Cross-hedges protect against losses resulting from
a decline in the hedged currency, but will cause the Fund to assume the
risk of fluctuations in the value of the currency it purchases.
Under certain conditions, SEC guidelines require mutual funds to set aside
appropriate liquid assets in a segregated custodial account to cover
currency forward contracts. As required by SEC guidelines, the Fund will
segregate assets to cover currency forward contracts, if any, whose purpose
is essentially speculative. The Fund will not segregate assets to cover
forward contracts entered into for hedging purposes, including settlement
hedges, position hedges, and proxy hedges.
Successful use of currency forward contracts will depend on the Sub-
Adviser's skill in analyzing and predicting currency values. Forward
contracts may substantially change the Fund's investment
<PAGE>
exposure to changes in currency exchange rates, and could result in losses
to the Fund if currencies do not perform as the Sub-Adviser anticipates.
For example, if a currency's value rose at a time when the Sub-Adviser had
hedge the Fund by selling that currency in exchange for dollars, the Fund
would be unable to participate in the currency's appreciation. If the Sub-
Adviser hedges currency exposure through proxy hedges, the Fund could
realize currency losses from the hedge and the security position at the
same time if the two currencies do not move in tandem. Similarly, if the
Sub-Adviser increases the Fund's exposure to a foreign currency, and that
currency's value declines, the Fund will realize a loss. There is no
assurance that the Sub-Adviser's use of currency forward contracts will be
advantageous to the Fund or that they will hedge at an appropriate time.
The policies described in this section are non-fundamental policies of the
Fund.
Options and Futures Contracts are a way for the Fund to manage its exposure
to changing interest rates, security prices, and currency exchange rates.
Some options and futures strategies, including selling futures, buying
puts, and writing calls, tend to hedge the Fund's investments against price
fluctuations. Other strategies, including buying futures, writing puts, and
buying calls, tend to increase market exposure. Options and futures may be
combined with each other or with forward contracts in order to adjust the
risk and return characteristics of the overall strategy. The Fund may
invest in options and futures based on any type of security, index, or
currency, including options and futures traded on foreign exchanges and
options not traded on exchanges.
Options and futures can be volatile investments, and involve certain risks.
If the Sub-Adviser applies a nedge at an inappropriate time or judges
market conditions incorrectly, options and futures strategies may lower the
Fund's return. The Fund could also experience losses if the prices of its
options and futures positions were poorly correlated with its other
investments, or if it could not close out its positions because of an
illiquid secondary market.
The Fund will not hedge more than 25% of its total assets by selling
futures, buying puts, and writing calls under normal conditions. In
addition, the Fund will not buy futures or write puts whose underlying
value exceeds 25% of its total assets, and the Fund will not buy calls with
a value exceeding 5% of its total assets.
LIMITATIONS ON FUTURES AND OPTIONS TRANSACTIONS. The Fund has filed a
notice of eligibility for exclusion from the definition of the term
"commodity pool operator" with the Commodity Futures Trading Commission
(CFTC) and the National Futures Association, which regulate trading in the
futures markets. The Fund intends
<PAGE>
to comply with Section 4.5 of the regulations under the Commodity Exchange
Act, which limits the extent to which the Fund can commit assets to initial
margin deposits and option premiums.
(a) The Fund will use futures contracts and related options solely for
bona fide hedging purposes within the meaning of CFTC regulations,
provided that the Fund may hold long positions in futures contracts
and related options that do not fall within the definition of bona
fide hedging transactions if the positions are used as part of a Fund
management strategy and are incidental to the Fund's activities in
the cash market, and the underlying commodity value of the positions
at all times will not exceed the sum of (i) cash or money market
instruments set aside in an identifiable manner, plus margin
deposits, (ii) cash proceeds from existing investments due in 30
days, and (iii) accrued profits on the positions held by a futures
commission merchant; and
(b) The Fund will not enter into any futures contract or option on a
futures contract if, as a result, the sum of initial margin deposits
on futures contracts and related options and premiums paid for
options on futures contracts the Fund has purchased, after taking
into account unrealized profits and losses on such contracts, would
exceed 5% of the Fund's total assets.
In addition, the Fund will not: (a) sell futures contracts, purchase put
options, or write call options if, as a result, more than 25% of the Fund's
total assets would be hedged with futures and options under normal
conditions; (b) purchase futures contracts or write put options if, as a
result, the Fund's total obligations upon settlement or exercise of
purchased futures contracts and written put options would exceed 25% of its
total assets; or (c) purchase call options if, as a result, the current
value of option premiums for call options purchased by the Fund would
exceed 5% of the Fund's 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.
FUTURES CONTRACTS. When the Fund purchases a futures contract, it agrees to
purchase a specified underlying instrument at a specified future date. When
the Fund sells a futures contract, it agrees to sell the underlying
instrument at a specified future date. The price at which the purchase and
sale will take place is fixed when the Fund enters into the contract. Some
currently available futures contracts are based on specific securities,
such as U.S. Treasury bonds or notes, and some are based on indices of
securities prices, such as the Standard & Poor's 500 Composite Stock Price
Index (S&P 500)and the Bond Buyer Index of municipal bonds. Futures can be
held until their delivery dates, or can be closed out before then if a
liquid secondary market is available.
<PAGE>
The value of a futures contract tends to increase and decrease in tandem
with the value of its underlying instrument. Therefore, purchasing futures
contracts will tend to increase the Fund's exposure to positive and
negative price fluctuations in the underlying instrument, much as if it had
purchased the underlying instrument directly. When the Fund sells a futures
contract, by contrast, the value of its futures position will tend to move
in a direction contrary to the market. Selling futures contracts,
therefore, will tend to offset both positive and negative market price
changes, much as if the underlying instrument had been sold.
FUTURES MARGIN PAYMENTS. The purchaser or seller of a futures contract is
not required to deliver of pay for the underlying instrument unless the
contract is held until the delivery date. However, both the purchaser and
seller are required to deposit "initial margin" with a futures broker,
known as a futures commission merchant (FCM), when the contract is entered
into. Initial margin deposits are typically equal to a percentage of the
contract's value. If the value of either party's position declines, that
party will be required to make additional "variation margin" payments to
settle the change in value on a daily basis. The party that has a gain may
be entitled to receive all or a portion of this amount. Initial and
variation margin payments do not constitute purchasing securities on margin
for purposes of the Fund's investment limitations. In the event of the
bankruptcy of an FCM that holds margin on behalf of the Fund, the Fund may
be entitled to return of margin owed to it only in proportion to the amount
received by the FCM's other customers, potentially resulting in losses to
the Fund.
PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, the Fund
obtains the right (but not the obligation) to sell the option's underlying
instrument at a fixed strike price. In return for this right, the Fund pays
the current market price for the option (known as the option premium).
Options have various types of underlying instruments, including specific
securities, indices of securities prices, and futures contracts. The Fund
may terminate its position in a put option it has purchased by allowing it
to expire or by exercising the option. If the option is allowed to expire,
the Fund will lose the entire premium it paid. If the Fund exercises the
option, it completes the sale of the underlying instrument at the strike
price. The Fund may also terminate a put option position by closing it out
in the secondary market at its current price, if a liquid secondary market
exists.
The buyer of a typical put option can expect to realize a gain if security
prices fall substantially. However, if the underlying instrument's price
does not fall enough to offset the cost of purchasing the option, a put
buyer can expect to suffer a loss
<PAGE>
(limited to the amount of the premium paid, plus related transaction
costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's stake
price. A call buyer typically attempts to participate in potential price
increases of the underlying instrument with risk limited to the cost of the
option if security prices fall. At the same time, the buyer can expect to
suffer a loss if security prices do not rise sufficiently to offset the
cost of the option.
WRITING PUT AND CALL OPTIONS. When the Fund writes a put option, it takes
the opposite side of the transaction from the option's purchaser. In return
for receipt of the premium, the Fund assumes the obligation to pay the
strike price for the option's underlying instrument if the other party to
the option chooses to exercise it. When writing an option on a futures
contract the Fund will be required to make margin payments to an FCM as
described above for futures contracts. The Fund may seek to terminate its
position in a put option it writes before exercise by closing out the
option in the secondary market at its current price. If the secondary
market is not liquid for a put option the Fund has written, however, the
Fund must continue to be prepared to pay the strike price while the option
is outstanding, regardless of price changes, and must continue to set aside
assets to cover its position.
If security prices rise, a put writer would generally expect to profit,
although its gain would be limited to the amount of the premium it
received. If security prices remain the same over time, it is likely that
the writer will also profit, because it should be able to close out the
option at a lower price. If security prices fall, the put writer would
expect to suffer a loss. This loss should be less than the loss from
purchasing the underlying instrument directly, however, because the premium
received for writing the option should mitigate the effects of the decline.
Writing a call option obligates the Fund to sell or deliver the option's
underlying instrument, in return for the strike price, upon exercise of the
option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if prices remain the same to fall. Through receipt of the option
premium, a call writer mitigates the effects of a price decline. At the
same time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is
greater, a call writer gives up some ability to participate in security
price increases.
COMBINED POSITIONS. The Fund may purchase and write options in combination
with each other, or in combination with futures or
<PAGE>
forward contracts, to adjust the risk and return characteristics of the
overall position. For example, the Fund may purchase a put option and write
a call option on the same underlying instrument, in order to construct a
combined position whose risk and return characteristics are similar to
selling a futures contract. Another possible combined position would
involve writing a call option at one strike price and buying a call option
at a lower price, in order to reduce the risk of the written call option in
the event of a substantial price increase. Because combined options
positions involve multiple trades, they result in higher transaction costs
and may be more difficult to open and close out.
CORRELATION OF PRICE CHANGES. Because there are a limited number of types
of exchange-traded options and futures contracts, it is likely that the
standardized contracts available will not match the Fund's current or
anticipated investments exactly. The Fund may invest in options and futures
contracts based on securities with different issuers, maturities, or other
characteristics from the securities in which it typically invests, which
involves a risk that the options or futures position will not track the
performance of the Fund's other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match the Fund's
investments well. Options and futures prices are affected by such factors
as current and anticipated short-term interest rates, changes in the
volatility of the underlying instrument, and the time remaining until
expiration of the contract, which may not affect security prices the same
way. Imperfect correlation may also result from differing levels of demand
in the options and futures markets and the securities markets, from
structural differences in how options and futures and securities are
traded, or from imposition of daily price fluctuation limits or trading
halts. The Fund may purchase or sell options and futures contracts with a
greater or lesser value than the securities it wishes to hedge or intends
to purchase in order to attempt to compensate for differences in volatility
between the contract and the securities, although this may not be
successful in all cases. If price changes in the Fund's options or futures
positions are poorly correlated with its other investments, the positions
may fail to produce anticipated gains or result in losses that are not
offset by gains in other investments.
LIQUIDITY OF OPTIONS AND FUTURES CONTRACTS. There is no assurance that a
liquid secondary market will exist for any particular options or futures
contract at any particular time. Options may have relatively low trading
volume and liquidity if their strike prices are not close to the underlying
instrument's current price. In addition, exchanges may establish daily
price fluctuation limits for options and futures contracts, and may
<PAGE>
halt trading if a contract's price moves upward or downward more than the
limit in a given day. On volatile trading days when the price fluctuation
limit is reached or a trading half is imposed, it may be impossible for the
Fund to enter into new positions or close out existing positions. If the
secondary market for a contract is not liquid because of price fluctuation
limits or otherwise, it could prevent prompt liquidation of unfavorable
positions, and potentially could require the Fund to continue to hold a
position until delivery or expiration regardless of changes in its value.
As a result, the Fund's access to other assets held to cover its options or
futures positions could also be impaired.
OTC OPTIONS. Unlike exchange-traded options, which are standardized with
respect to the underlying instrument, expiration date, contract size, and
strike price, the terms of over-the-counter options (options not traded on
exchanges) generally are established through negotiation with the other
party to the option contract. While this type of arrangement allows the
Fund greater flexibility tailor an option to its needs, OTC options
generally involve greater credit risk than exchange-traded options, which
are guaranteed by the clearing organization of the exchanges where they are
traded.
OPTIONS AND FUTURES RELATING TO FOREIGN CURRENCIES. Currency futures
contracts are similar to forward currency exchange contracts, except that
they are traded on exchanges (and have margin requirements) and are
standardized as to contract size and deliver date. Most currency futures
contracts call for payment or delivery in U.S. dollars. The underlying
instrument of a currency option may be a foreign currency, which generally
is purchased or delivered in exchange for U.S. dollars, or may be a futures
contract. The purchaser of a currency call obtains the right to purchase
the underlying currency, and the purchaser of a currency put obtains the
right to sell the underlying currency.
The uses and risks of currency options and futures are similar to options
and futures relating to securities or indices, as discussed above. The
Fund may purchase and sell currency futures and may purchase and write
currency options to increase or decrease its exposure to different foreign
currencies. The Fund may also purchase and write currency options in
conjunction with each other or with currency futures or forward contracts.
Currency futures and options values can be expected to correlate with
exchange rates, but may not reflect other factors that affect the value of
the Fund's investments. A currency hedge, for example, should protect a
Yen-denominated creditworthiness. Because the value of the Fund's foreign-
denominated investments changes in response to many factors other than
exchange rates, it may not be possible to match the amount of currency
options and futures to the value of the Fund's investments exactly over
time.
ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS. The Fund will comply
with guidelines established by the Securities and Exchange
<PAGE>
Commission with respect to coverage of options and futures strategies by
mutual funds, and if the guidelines so require will set aside appropriate
liquid assets in a segregated custodial account in the amount prescribed.
Securities held in a segregated account cannot be sold while the futures or
option strategy is outstanding, unless they are replaced with other
suitable assets. As a result, there is a possibility that segregation of a
large percentage of the Fund's assets could impede portfolio management or
the Fund's ability to meet redemption requests or other current
obligations.
SHORT SALES. The Fund may enter into short sales with respect to stocks
underlying its convertible security holdings. For example, if the Sub-
Adviser anticipates a decline in the price of the stock underlying a
convertible security the Fund holds, it may sell the stock short. If the
stock price subsequently declines, the proceeds of the short sale could be
expected to offset all or a portion of the effect of the stock's decline on
the value of the convertible security. If it does not, the Fund could
suffer a loss. The Fund currently intends to hedge no more than 15% of its
total assets with short sales on equity securities underlying its
convertible security holdings under normal circumstances.
When the Fund enters into a short sale, it will be required to set aside
securities equivalent in kind and amount to those sold short (or securities
convertible or exchangeable into such securities) and will be required to
continue to hold them while the short sale is outstanding. The Fund will
incur transaction costs, including interest expense, in connection with
opening, maintaining, and closing short sales.
LOWER-RATED DEBT INSTRUMENTS
Lower-rated debt securities are usually defined as securities rated Ba or
lower by Moody's or BB or lower by S&P. Lower-rated debt securities are
considered speculative and involve greater risk of loss than higher-rated
debt securities, and are more sensitive to changes in the issuer's capacity
to pay. This is an aggressive approach to income investing.
The 1980s saw a dramatic increase in the use of lower-rated debt securities
to finance highly leveraged acquisitions and restructurings. Past
experience may not provide an accurate indication of the future performance
of lower-rated debt securities, especially during periods of economic
recession. In fact, from 1989 to 1991, the percentage of lower-rated debt
securities that defaulted rose significantly above prior levels.
Lower-rated debt securities may be thinly traded, which can adversely
affect the prices at which these securities can be sold and can result in
high transaction costs. If market quotations
<PAGE>
are not available, lower-rated debt securities will be valued in accordance
with standards set by the Board of Directors, including the use of outside
pricing services. Judgment plays a greater role in valuing lower-rated
debt securities than securities for which more extensive quotations and
last sale information are available. Adverse publicity and changing
investor perceptions may affect the ability of outside pricing services to
value lower-rated debt securities, and the Fund's ability to dispose of
these securities.
The market prices of lower-rated debt securities may decline significantly
in periods of general economic difficulty which may follow periods of
rising interest rates. During an economic downturn or a prolonged period
of rising interest rates, the ability of issuers of lower-rated debt to
service their payment obligations, meet projected goals, or obtain
additional financing may be impaired.
The Fund may choose, at its expense or in conjunction with others, to
pursue litigation or otherwise to exercise its rights as a security holder
to seek to protect the interests of security holders if it determines this
to be in the interest of the Fund's shareholders.
The considerations discussed above for lower-rated debt securities also
apply to lower-quality, unrated debt instruments of all types, including
loans and other direct indebtedness of businesses with poor credit
standing. Unrated debt instruments are not necessarily of lower quality
than rated instruments, but they may not be attractive to as many buyers.
The Fund relies more on the Sub-Adviser's credit analysis when investing in
debt instruments that are unrated.
Please refer to the Appendix for a discussion of Moody's and S&P ratings.
PORTFOLIO TRANSACTIONS AND BROKERAGE
All orders for the purchase or sale of Fund securities are placed on behalf
of the Fund by the Sub-Adviser (either directly or through affiliated
advisers or sub-advisers) pursuant to authority contained in the Fund's
Sub-Advisory Agreement. The Sub-Adviser may also be responsible for the
placement of transaction orders for other investment companies and accounts
for which it or its affiliates act as investment adviser or sub-adviser.
Money market securities purchased and sold by the Fund generally will be
traded on a net basis (i.e., without commission). In selecting broker-
dealers, subject to applicable limitations of the federal securities laws,
the Sub-Adviser will consider various relevant factors, including, but not
limited to, the size and type of the transaction; the nature and character
of the markets for the security to be purchased or sold; the execution
efficiency, settlement capability and financial condition of the broker-
dealer firm; the broker-dealer's
<PAGE>
execution services rendered on a continuing basis; and the reasonableness
of any commissions. Commissions for foreign investments traded on foreign
exchanges will generally be higher than for U.S. investments and may not be
subject to negotiation.
The Fund may execute portfolio transactions with broker-dealers who provide
research and execution services to the Fund and/or other accounts over
which the Sub-Adviser or its affiliates exercise investment discretion.
Such services may include advice concerning the value of securities; the
advisability of investing in, purchasing or selling securities; the
availability of securities or the purchasers or sellers of securities;
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, fund strategy and performance of accounts; and
effecting securities transactions and performing functions incidental
thereto (such as clearance and settlement). The Sub-Adviser maintains a
listing of broker-dealers who provide such services on a regular basis.
However, as many transactions on behalf of the Fund's money market
securities are placed with dealers (including broker-dealers on the list)
without regard to the furnishing of such services, it is not possible to
estimate the proportion of such transactions directed to such dealers
solely because such services were provided. The selection of such broker-
dealers is generally made by the Sub-Adviser (to the extent possible
consistent with execution considerations) in accordance with a ranking of
broker-dealers determined periodically by the Sub-Adviser's investment
staff based upon the quality of research and execution services provided.
The receipt of research from broker-dealers that execute transactions on
behalf of the Fund may be useful to the Sub-Adviser in rendering investment
management services to the Fund and/or other clients, and conversely, such
information provided by broker-dealers who have executed transaction orders
on behalf of other Sub-Adviser clients may be useful to the Sub-Adviser in
carrying out its obligations to the Fund. The receipt of such research has
not reduced the Sub-Adviser's normal independent research activities;
however, it enables the Sub-Adviser to avoid additional expenses that could
be incurred if the Sub-Adviser tried to develop comparable information
through its own efforts.
Subject to applicable limitations of the federal securities laws, broker
dealers may receive commissions for agency transactions that are in excess
of the amount of commissions charged by other broker dealers in recognition
of their research and/or execution services. In order to cause the Fund to
pay such higher commissions, the Sub-Adviser must determine in good faith
that such commissions are reasonable in relation to the value of the
brokerage and research services provided by such executing broker-dealers
viewed in terms of a particular transaction or the Sub-Adviser's overall
responsibilities to the Fund and its other clients. In reaching this
determination, the Sub-Adviser will
<PAGE>
not attempt to place a specific dollar value on the brokerage and research
services provided or to determine what portion of the compensation should
be related to those services.
The Sub-Adviser is authorized to use research services provided by and to
place portfolio transactions with brokerage firms that have provided
assistance in the distribution of shares of the Fund or shares of other
Fidelity funds to the extent permitted by law. The Sub-Adviser may use
research services provided by and place agency transactions with Fidelity
Brokerage Services, Inc. (FBSI) and Fidelity Brokerage Services, Ltd.
(FBSL), subsidiaries of FMR Corp., if the commissions are fair, reasonable,
and comparable to commissions charged by non-affiliated, qualified
brokerage firms for similar services. Prior to September 4, 1992, FBSL
operated under the name Fidelity Portfolio Services, Ltd. (FPSL) as a
wholly owned subsidiary of Fidelity International Limited (FIL). Edward C.
Johnson 3d is Chairman of FIL. Mr. Johnson 3d, together with various
trusts for the benefit of Johnson family members, owns directly or
indirectly more than 25% of the voting common stock of FIL.
The Fund's Board of Directors periodically reviews the Sub-Adviser's
performance of its responsibilities in connection with the placement of
fund transactions on behalf of the Fund and reviews the commissions, if
any, paid by the Fund over representative periods of time to determine if
they are reasonable in relation to the benefits to the Fund.
BROKERAGE COMMISSIONS. Of the commissions paid to brokerage firms which
provided research services, the providing of such services is not
necessarily a factor in the placement of all business with such firms. The
Fund pays both commissions and spreads in connection with the placement of
fund transactions.
From time to time the Fund's Directors will review whether the recapture
for the benefit of the Fund of some portion of the brokerage commissions or
similar fees paid by the Fund on fund transactions is legally permissible
and advisable. The Fund seeks to recapture soliciting broker-dealer fees
paid by the Fund on fund transactions is legally permissible and advisable.
The Fund seeks to recapture soliciting broker-dealer fees on the tender of
portfolio securities, but at present no other recapture arrangements are in
effect. The Directors intend to continue to review whether recapture
opportunities are available and are legally permissible and, if so, to
determine in the exercise of their business judgment whether it would be
advisable for the Fund to seek such recapture.
Although the Sub-Adviser or its affiliates also manage other funds,
investment decisions for the Fund are made independently from those of
other funds managed by Sub-Adviser or accounts managed by affiliates of the
Sub-Adviser. It sometimes happens that the same security is held in the
portfolio of more than one of these funds or accounts. Simultaneous
transactions are
<PAGE>
inevitable when several funds are managed by the same investment advisor,
particularly when the same security is suitable for the investment
objective of more than one fund.
When two or more funds, or portfolios, are simultaneously engaged in the
purchase or sale of the same security, the prices and amounts are allocated
in accordance with a formula considered by the officers of the funds or
portfolios involved to be equitable to each fund or portfolio. In some
cases this system could have a detrimental effect on the price or volume of
the security as far as the Fund is concerned. In other cases, however, the
ability of the fund or portfolio to participate in volume transactions will
produce better executions and prices for the Fund. It is the current
opinion of the Board of Directors that the desirability of retaining the
Sub-Adviser as sub-investment adviser to the Fund outweighs any
disadvantages that may be said to exist from exposure to simultaneous
transactions.
DETERMINATION OF NET ASSET VALUE
The Fund's securities are appraised by various methods depending on the
market or exchange on which they trade. Securities traded on the New York
Stock Exchange (NYSE) or the American Stock Exchange are appraised at the
last sale price, or if no sale has occurred, at the closing bid price.
Securities traded on other exchanges are appraised, to the extent possible,
in the same manner. Securities and other assets for which exchange
quotations are not readily available are valued using closing over-the-
counter bid prices, if available, or at their fair value as determined in
good faith under consistently applied procedures generally supervised by
the Board of Directors. Short-term securities are valued either at
amortized cost or at original cost plus accrued interest, both of which
approximate their current value. Securities pricing services may be
utilized by the Fund.
The Fund is open for business and it NAV is calculated each day the NYSE is
open for trading. The NYSE has designated the following holiday closings
for 1995: President's Day, February 20; Good Friday, April 14; Memorial
Day, May 29; Independence Day, July 4; Labor Day, September 4; Thanksgiving
Day, November 23; and Christmas Day, December 25. It may also be closed on
other days. Although the Directors expect the same holiday schedule to be
observed in the future, the NYSE may modify its holiday schedule at any
time. On any day that the NYSE closes early, the right is reserved to
advance the time on that day by which purchase and redemption orders must
be received. To the extent that the Fund's securities are traded in other
markets on days when the NYSE is closed, the Fund's NAV may be affected on
days when investors do not have access to the Fund to purchase or redeem
shares.
<PAGE>
If, in the opinion of the Directors, conditions exist that make cash
payment undesirable, redemption payments may be made in whole or in part in
securities or other property, valued for this purpose as they are valued in
computing the NAV of the Fund. Shareholders receiving any such securities
or other property on redemption will incur any costs of selling a domestic
or foreign security as well as the associated inconveniences.
<PAGE>
APPENDIX
(NOTE: THIS IS UNIFORM INFORMATION FOR THE ELEVEN FUNDS. SEE EACH FUND'S
SAI FOR INFORMATION SPECIFIC TO THAT FUND.)
THIS APPENDIX CONSTITUTES PART OF THE STATEMENTS OF ADDITIONAL INFORMATION OF
LINCOLN NATIONAL AGGRESSIVE GROWTH FUND, INC. (AGGRESSIVE GROWTH FUND), LINCOLN
NATIONAL BOND FUND, INC. (BOND FUND), LINCOLN NATIONAL CAPITAL APPRECIATION
FUND, INC. (CAPITAL APPRECIATION FUND), LINCOLN NATIONAL EQUITY-INCOME FUND,
INC. (EQUITY-INCOME FUND), LINCOLN NATIONAL GLOBAL ASSET ALLOCATION FUND, INC.
(GLOBAL ASSET ALLOCATION FUND), LINCOLN NATIONAL GROWTH AND INCOME FUND, INC.
(GROWTH AND INCOME FUND), LINCOLN NATIONAL INTERNATIONAL FUND, INC.
(INTERNATIONAL FUND), LINCOLN NATIONAL MANAGED FUND, INC. (MANAGED FUND),
LINCOLN NATIONAL MONEY MARKET FUND, INC. (MONEY MARKET FUND), LINCOLN NATIONAL
SOCIAL AWARENESS FUND, INC. (SOCIAL AWARENESS FUND), AND LINCOLN NATIONAL
SPECIAL OPPORTUNITIES FUND, INC. (SPECIAL OPPORTUNITIES FUND), UNLESS OTHERWISE
INDICATED, THE FOLLOWING INFORMATION APPLIES TO EACH FUND.
INVESTMENT ADVISOR AND SUB-ADVISOR
Lincoln National Investment Management Company (LNIMC) is the investment Advisor
to the funds and is headquartered at 200 E. Berry Street, Fort Wayne, Indiana
46802. LNIMC (the Advisor) is a wholly-owned subsidiary of Lincoln National
Corporation (LNC), a publicly-held insurance holding company organized under
Indiana law. Through its subsidiaries, LNC provides, on a national basis, life
insurance and annuities, property-casualty insurance, reinsurance, and financial
services. LNIMC is registered with the Securities and Exchange Commission (the
Commission) as an investment Advisor and has acted as an investment Advisor to
mutual funds for over 40 years. The Advisor also acts an investment Advisor
to Lincoln National Income Fund, Inc. (a closed-end investment company whose
investment objective is to provide a high level of current income from interest
of fixed-income securities); and Lincoln National Convertible Securities Fund,
Inc. (a closed-end investment company whose investment objective is a high level
of total return on its assets through a combination of capital appreciation and
current income), Lincoln Advisor Funds, Inc. (a retail mutual fund complex) and
to other clients.
Under Advisory Agreements with the Funds, the Advisor provides portfolio
management and investment advice to the Funds and administers its other affairs,
subject to the supervision of the Funds' Board of Directors. The Advisor, at its
expense, will provide office space to the Funds and all necessary office
facilities, equipment and personnel, and will make its officers and employees
available to the Funds as appropriate. In addition, the Advisor will pay all
expenses incurred by it or by the Funds in connection with the management of
each Fund's assets or the administration of its affairs, other than those
assumed by the Funds, as described below. Lincoln Life has paid the
organizational expenses of all the funds. The rates of compensation to the
Advisor and the Sub-Advisor are set forth in the Appendix to the
Prospectus.
During the last three years, the Advisor received the following amounts for
investment Advisor services:
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- -----------
<S> <C> <C> <C>
Aggressive Growth Fund $ 232,000 $ N/A $ N/A
Bond Fund 999,397 978,266 754,618
Capital Appreciation Fund 211,773 N/A N/A
Equity-Income Fund 348,255 N/A N/A
Global Asset Allocation Fund 1,381,059 901,004 643,332
Growth and Income Fund 3,896,902 3,293,315 2,537,432
International Fund 2,262,664 759,801 307,100
Managed Fund 1,919,150 1,756,544 1,403,073
Money Market Fund 404,441 449,374 570,352
Social Awareness Fund 736,602 542,142 331,256
Special opportunities Fund 1,351,374 1,052,967 733,475
</TABLE>
Expenses specifically assumed by the Funds include: compensation and expenses
of directors of the Funds who are not "interested persons" of the Funds as
defined in the Investment Company Act of 1940 (the Act);
<PAGE>
registration, filing and other fees in connection with filings with regulatory
authorities, including the costs of printing and mailing registration statements
and updated prospectuses provided to current stockholders; fees and expenses of
independent auditors; the expenses of printing and mailing proxy statement and
stockholder reports; custodian charges; brokerage commissions and securities
transaction costs incurred by the funds; taxes and corporate fees; legal fees
incurred in connection with the affairs of the Funds (other than legal services
provided by personnel of the Advisor or its affiliated companies); the fees of
any trade association of which the Funds are members: and expenses of
stockholder and director meetings.
If total expenses of the Funds (excluding taxes, interest, portfolio brokerage
commissions and fees, and expenses of an extraordinary and non-recurring nature,
but including the investment Advisory fee) exceed 1 1/2% per annum of the
average daily net assets of each Fund (2% for the International Fund), the
Advisor will pay such excess by offsetting it against the Advisory fee. If such
offset is insufficient to cover the excess, any balance remaining will be paid
directly by the Advisor to each Fund.
The current Advisory Agreements between the Advisor and the Funds will remain in
effect from year to year if approved annually by: (1) the Board of Directors of
each Fund or by the vote of a majority of the outstanding voting securities of
each Fund, and (2) a vote of a majority of the directors who are not "interested
persons" of the Funds or the Advisor, cast in person at a meeting called for the
purpose of voting on such approval. The Advisory Agreement may be terminated
without penalty at any time, on 60 days' written notice by: (1) the Board of
Directors of each Fund, (2) vote of majority of the outstanding voting
securities of each Fund or (3) the Advisor. The Advisory Agreement terminates
automatically in the event of assignment.
In like manner, the current Sub-Advisory Agreements will remain in effect from
year to year if approved annually by the Board of Directors of the applicable
Funds or by the vote of a majority of the outstanding voting securities of those
Funds. The Sub-Advisory Agreements may be terminated without penalty at any
time, on 60 days' written notice, by: (1) the Board of Directors of the
applicable fund, (2) vote of the majority of the outstanding voting securities
of the applicable Fund, (3) the Sub-Advisor, or (4) the Advisor. The Sub-
Advisory Agreements terminate automatically in the event of assignment.
DIRECTORS AND OFFICERS
The directors and executive officers of each Fund and their principal
occupations during the past five years are as follows:
<TABLE>
<CAPTION>
NAME AND BUSINESS POSITIONS WITH FUND PRINCIPAL OCCUPATION
ADDRESS DURING PAST FIVE YEARS
- ----------------- ------------------- ----------------------
<S> <C> <C>
*Kelly D. Clevenger Chairman of the Vice President, Lincoln National
1300 S. Clinton Street Board Life Insurance Company
Fort Wayne, Indiana 46802 President and
Director
John B. Borsch, Jr. Director Retired, formerly Associate Vice
1776 Sherwood Road President-Investments, Northwestern
Des Planes, IL 60016 University
Nancy L. Frisby, CPA Director Regional Vice President/Chief
Financial Officer (formerly Vice-President
700 Broadway -Finance; Regional Controller of
Fort Wayne, IN 46802 Finance) , St. Joseph Medical Center,
Fort Wayne, Indiana
*Barbara S. Kowalczyk Director Executive Vice President,, Lincoln
1300 S. Clinton National Investment Management
Street Fort Wayne, Company (formerly, Senior Vice
IN 46802 President, The Lincoln National
Life Insurance Company
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NAME AND BUSINESS POSITIONS WITH FUND PRINCIPAL OCCUPATION
ADDRESS DURING PAST FIVE YEARS
- ----------------- ------------------- ----------------------
<S> <C> <C>
Stanley R. Nelson Director Executive in Residence
420 Delaware St., S.E. Program in Health
Minneapolis, MN 55455 Services Administration,
University of Minnesota,
Minneapolis, Minnesota,
(formerly President, Henry
Ford Health Care
Corporation, Detroit,
Michigan)
* Max A. Roesler Vice President and Vice President and
1300 S. Clinton Street Treasurer Treasurer, The Lincoln
Fort Wayne, Indiana 46808 National Life Insurance
Company; Vice President and
Treasurer, Lincoln National
Corporation
* Cynthia A. Rose Assistant Secretary Assistant Secretary,
200 East Berry Street Lincoln National
Fort Wayne, IN 46802 Corporation; Assistant
Secretary, The Lincoln
National Life Insurance
Company
</TABLE>
* "Interested persons" of the Funds, as defined in the Act.
Directors' fees of $250 per meeting are paid by each Fund to each director who
is not an "interested person" of the Fund.
INVESTMENT POLICIES AND TECHNIQUES (CONTINUED)
OPTIONS AND FINANCIAL FUTURES TRADING
This discussion relates to the Bond, Growth, Managed, Social Awareness, and
Special Opportunities Funds. Neither the International Fund nor the Money Market
Fund has sought the authority to engage either in options or in futures trading.
(NOTE: The Aggressive Growth, Capital Appreciation, Equity-Income and Global
Asset Allocation Funds have their own respective discussions of the Strategic
Portfolio Transactions in which they may engage).
OPTIONS TRADING
The Fund may purchase or write (sell) options on financial instruments as a
means of achieving additional return or hedging the value of the Fund's
portfolio. The Fund may not write put or covered call options in an amount
exceeding 30% of the value of its total assets. The Fund would invest in options
in standard contracts which may be quoted on NASDAQ, or on national securities
exchanges. Currently options are traded on numerous securities and indices
including, without limitation, the S & P 100 Index, the S&P 500 Index, and the
NYSE Beta Index.
A) In General. Put and call options are generally short-term contracts with
durations of nine months or less. The Investment Advisor will generally write
covered call options when it anticipates declines in the market value of the
portfolio securities and the premiums received may offset to some extent the
decline in the Fund's net asset value. On the other hand, writing put options is
a useful portfolio investment strategy when the Fund has cash or other reserves
and it intends to purchase securities but expects prices to decline.
Generally, the risk to the Fund in writing options is that the Investment
Advisor's assumption about the price trend of the underlying security may prove
inaccurate. If, as a result, the Fund wrote a put, expecting the price of a
security to increase, and it decreased, or if the Fund wrote a call, expecting
the price to decrease but it increased, the Fund could suffer a loss if the
premium received in each case did not equal the difference between the exercise
price and the market price.
B) Call Options. The Fund may write only call options which are "covered,"
meaning that the Fund either owns the underlying security or has an absolute and
immediate right to acquire that security, without additional cash consideration,
upon conversion or exchange of other securities currently held in its portfolio.
In addition, the Fund will not, prior to the expiration of a call option, permit
the call to become uncovered. If the Fund writes a call option, the purchaser of
the option has the right to buy (and the Fund has the obligation to sell) the
underlying security at the exercise price throughout the term of the option. The
amount paid to the Fund by the purchaser of the option is the "premium." The
Fund's obligation to deliver the
<PAGE>
underlying security against payment of the exercise price would terminate either
upon expiration of the option or earlier if the Fund were to effect a "closing
purchase transaction" through the purchase of an equivalent option on an
exchange. The Fund would not be able to effect a closing purchase transaction
after it had received notice of exercise.
In order to write a call option, the Fund is required to deposit in escrow the
underlying security or other assets in accordance with the rules of The Options
Clearing Corporation and the various exchanges. The Fund may not purchase call
options except in connection with a closing purchase transaction. It is possible
that the cost of effecting a closing purchase transaction may be greater than
the premium received by the Fund for writing the option.
Generally, the investment Advisor (the Advisor) intends to write listed covered
calls during periods when it anticipates declines in the market valued of
portfolio securities and the premiums received (not of transaction costs) may
offset to some extent the decline in the Fund's net asset value occasioned by
such declines in market value. The Advisor will generally not write listed
covered call options when it anticipates that the market value of the Fund's
portfolio securities will increase.
If the Advisor decides that at a price higher than the current value a portfolio
security would be overvalued and should be sold, the Fund may write an option on
the security at that price. Should the security subsequently reach that price
and the option be exercised, the Fund would, in effect, have increased the
selling price of that security, which it would have sold at that price in any
event, by the amount of the premium. In the event the market price of the
security declined and the option were not exercised, the premium would offset
all or some portion of that decline. It is possible, of coarse, that the price
of the security could increase beyond the exercise price; in that event, the
Fund would forego the opportunity to sell the security at that higher price.
In addition, call options may be used as part of a different strategy in
connection with sales of portfolio securities. If, in the judgement of the
Advisor, the market price of a security is overvalued and it should be sold, the
Fund may elect to write a call with an exercise price substantially below the
current market price. So long as the value of the underlying security remains
above the exercise price during the term of the option, the option will be
exercised, and the Fund will be required to sell the security at the exercise
price. If the sum of the premium and the exercise price exceeds the market price
of the security at the time the call is written, the Fund would, in effect, have
increased the selling price of the security. The Fund would not write a call
under these circumstances if the sum of the premium and the exercise price were
less than the current market price of the security.
In summary, a principal reason for writing calls on a securities portfolio is to
attempt to realize, through receipt of premium income, a greater return than
would be earned on the securities alone. A covered call writer, such as the
Fund, which owns the underlying security has, in return for the premium, given
up the opportunity for profit from a price increase in the underlying security
above the exercise price, but has retained the risk of loss should the price of
the security decline. Unlike one who owns securities not subject to a call, the
Fund as a call writer may be required to hold such securities until the
expiration of the call option or until the Fund engages in a closing purchase
transaction at a price that may be below the prevailing market.
C) Put Options. The Fund may also write put options. If the Fund writes a put
option, it is obligated to purchase a given security at a specified price at any
time during the term of the option. The rules regarding the writing of put
options are generally comparable to those described above with respect to call
options.
Writing put options is a useful portfolio investment strategy when the Fund has
cash or other reserves available for investment as a result of sales of Fund
shares or because the Advisor believes a more defensive and less fully invested
position is desirable in light of market conditions. If the Fund wishes to
invest its cash or reserves in a particular security at a price lower than
current market value, it may write a put option on that security at an exercise
price which reflects the lower price it is willing to pay. The buyer of the put
option generally will not exercise the option unless the market price of the
underlying security declines to a price near or below the exercise price. If the
Fund writes a put option, the price of the underlying security declines and the
option is exercised, the premium, net of transaction charges, will reduce the
purchase price paid by the Fund for the security. Of course, the price of the
security may continue to decline after exercise of the put options, in which
event the Fund would have foregone an opportunity to purchase the security at a
lower price, or the option might never be exercised.
If, prior to the exercise of a put, the Advisor determines that it no longer
wishes to invest in the security on
<PAGE>
which the put has been written, the Fund may be able to effect a closing
purchase transaction on an exchange by purchasing a put of the same series as
the one which it has previously written. The cost of effecting a closing
purchase transaction may be greater than the premium received on writing the put
option, and there is no guarantee that a closing purchase transaction can be
effected. The Fund may purchase put options only in connection with a closing
transaction.
As with the writer of a call, a put writer generally hopes to realize premium
income. The risk position of the Fund as a put writer is similar to that of a
covered call writer which owns the underlying securities. Like the covered call
writer (who must bear the risk of his position in the underlying security), the
Fund as a put writer stands to incur a loss if and to the extent the price of
the underlying security falls below the exercise price plus premium.
At the time a put option is written, the Fund will be required to extablish, and
will maintain until the put is exercised or has expired, a segregated account
with its custodian consisting of cash or short-term U.S. government securities
equal in value to the amount which the Fund will be obligated to pay upon
exercise of the put. Principal factors affecting the market value of a put or
call option include supply and demand, interest rates, the current market price
and price volatility of the underlying security and the time remaining until the
expiration date. In addition, there is no assurance that the Fund will be able
to effect a closing transaction at a favorable price. If the Fund cannot enter
into such a transaction, it may be required to hold a security that it might
otherwise have sold, in which case it would continue to be a market risk on the
security. If a substantial number of covered options written by the Fund are
exercised, the Fund's rate or portfolio turnover could exceed historic levels.
This could result in higher transaction costs, including brokerage commissions.
The Fund will pay brokerage commissions in connection with the writing and
purchasing of option to close out previously written options. Such brokerage
commissions are normally higher than those applicable to purchases and sales of
portfolio securities.
FUTURES CONTRACTS AND OPTIONS THEREON
A. In General. Generally, the Fund may buy and sell financial futures
contracts ("futures contracts") and related options thereon solely for hedging
purposes. The Fund may sell a futures contract or purchase a put option on that
futures contract to protect the value of the Fund's portfolio in the event the
Investment Advisor anticipates declining security prices. Similarly, if security
prices are expected to rise, the Fund may purchase a futures contract or a call
option thereon. (For certain limited purposes, as explained below, the Fund is
also authorized to buy futures contracts on an unleveraged basis and not as an
anticipatory hedge.)
The Fund will not invest in futures contracts and options thereon if immediately
thereafter the amount committed to margins plus the amount paid or option
premiums exceeds 5% of the Fund's total assets. In addition the Fund will not
hedge more than one-third of its net assets.
B. Futures Contracts. The Fund may purchase and sell financial futures
contracts ("futures contracts") as a hedge against fluctuations in the value of
securities which are held in the Fund's portfolio or which the Fund intends to
purchase. The Fund will engage in such transactions consistent with the Fund's
investment objective. Currently, futures contracts are available on Treasury
bills, notes, and bonds.
There are a number of reasons why entering into futures contracts for hedging
purposes can be beneficial to the Fund. First, futures markets may be more
liquid than the corresponding cash markets on the underlying securities. Such
enhanced liquidity results from the standardization of the futures contracts and
the large transaction volumes. Greater liquidity permits a portfolio manager to
effect a desired hedge both more quickly and in greater volume than would be
possible in the cash market. Second, a desired sale and subsequent purchase can
generally be accomplished in the futures market for a fraction of the
transaction costs that might be incurred in the cash market.
The purpose of selling a futures contract is to protect the Fund's portfolio
from fluctuation in asset value resulting from stock price changes. Selling a
futures contract has an effect similar to selling a portion of the Fund's
portfolio securities. If stock prices were to decline, the value of the Fund's
futures contracts would increase, thereby keeping the net asset value of the
Fund from declining as much as it otherwise might have. In this way, selling
futures contracts acts as a hedge against the effects of declining stock prices.
However, an increase in the value of portfolio securities tends to be offset by
a decrease in the value of corresponding futures contracts.
Similarly, when stock prices are expected to rise, futures contracts may be
purchased to hedge against anticipated subsequent purchases of portfolio
securities at higher prices. By buying futures, the Fund could
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effectively hedge against an increase in the price of the securities it intends
to purchase at a later date in order to permit the purchase to be effected in an
orderly manner. At the time, the futures contracts could be liquidated at a
profit if stock prices had increased as expected, and the Fund's cash position
could be used to purchase securities.
When a purchase or sale of a futures contract occurs, a deposit of high-quality,
liquid securities called "initial margin" is made by both buyer and seller with
a custodian for the benefit of the broker. Unlike other types of margin, a
futures margin account does not involve any loan or borrowing but is merely a
good faith deposit that must be maintained in a minimum amount of cash or U.S.
Treasury bills. All futures positions, both long and short, are marked-to-market
daily, with cash payments called "variation margin" being made by buyers and
sellers to the custodian, and passed through to the sellers and buyers, to
reflect daily changes in the contract values.
Most futures contracts are typically cancelled or closed out before the
scheduled settlement date. The closing is accomplished by purchasing (or
selling) an identical futures contract to offset a short (or long) position.
Such an offsetting transaction cancels the contractual obligations established
by the original futures transaction. Other financial futures contracts call for
cash settlements rather than delivery of securities.
If the price of an offsetting futures transaction varies from the price of the
original futures transaction, the hedger will realize a gain or loss
corresponding to the difference. That gain or loss will tend to offset the
unrealized loss or gain on the hedged securities position, but may not always or
completely do so.
The Fund will not enter into any futures contract if, immediately thereafter,
the aggregate initial margin for all existing futures contracts and options
thereon and for premiums paid for related options would exceed 5% of the Fund's
total assets. The Fund will not purchase or sell futures contracts or related
options of immediately thereafter more than one-third of its net assets would be
hedged.
C. Risks and Limitations Involved in Futures Hedging. There are a number of
risks associated with futures hedging. Changes in the price of a futures
contract generally parallel but do not necessarily equal changes in the prices
of the securities being hedged. The risk of imperfect correlation increases as
the composition of the Fund's securities portfolio diverges from the securities
that are the subject of the futures contract. Because the change in the price
of the futures contract may be more or less than the change in the prices of the
underlying securities, even a correct forecast of stock price changes may not
result in a successful hedging transaction. Another risk is that the Investment
Advisor could be incorrect in its expectation as to the direction or extent of
various market trends or the time period within which the trends are to take
place.
The Fund intends to purchase and sell futures contracts only on exchanges where
there appears to be a market in such futures sufficiently active to accommodate
the volume of its trading activity. There can be no assurance that a liquid
market will always exist for any particular contract at any particular time.
Accordingly, there can be no assurance that it will always be possible to close
a futures position when such closing is desired, in the event of adverse price
movements, the Fund would continue to be required to make daily cash payments of
variation margin. However, in the event futures contracts have been sold to
hedge portfolio securities, such securities will not be sold until the
offsetting futures contracts can be executed. Similarly, in the event futures
have been bought to hedge anticipated securities purchases, such purchases will
not be executed until the offsetting futures contracts can be sold.
Successful use of futures contracts by the Fund is also subject to the ability
of the Investment Advisor to predict correctly movements in the direction of
interest rates and other factors affecting markets for securities. For example,
if the Fund has hedged against the possibility of an increase in interest rates
that would adversely affect the price of securities in its portfolio and prices
of such securities increase instead, the Fund will lose part or all of the
increased value of its securities because it will have offsetting losses in its
futures positions. In addition, in such situations, if the Fund has insufficient
cash to meet daily variation margin requirements, it may have to sell securities
to meet such requirements. Such sale of securities may be, but will not
necessarily be, at increased prices that reflect the rising market. The Fund may
have to sell securities at a time when it is disadvantageous to do so. Where
futures are purchased to hedge against a possible increase in the price of
securities before the Fund is able to invest its cash in an orderly fashion, it
is possible that the market may decline instead; if the Fund is able to invest
its cash in an orderly fashion, it is possible that the market may decline
instead; if the Fund then concludes not to invest in securities at that time
because of concern as to possible further market decline or for other reasons,
the Fund will realize a loss on the futures contract that is not offset by a
reduction in the price of the securities purchased.
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The selling of futures contracts by the Fund and use of related transactions in
options on futures contracts (discussed below) are subject to position limits,
which are affected by the activities of the Investment Advisor.
The hours of trading of futures contracts may not conform to the hours during
which the Fund may trade equity securities. To the extent that the futures
markets close before the equity securities markets, significant price and rate
movements can take place in the equity securities markets that cannot be
reflected in the futures markets.
Pursuant to Rule 4.5 under the Commodity Exchange Act, investment companies
registered under the Investment Company Act of 1940, as amended (the "Investment
Company Act"), are exempted from the definition of "commodity pool operator" in
the Commodity Exchange Act, subject to compliance with certain conditions. The
exemption is conditioned upon a requirement that all of the investment company's
commodity futures transactions constitute bona fide hedging transactions (except
on an unleveraged basis, as described in E. below). With respect to long
positions assumed by the Fund, the Fund will segregate with its custodian, an
amount of cash and other assets permitted by Commodity Futures Trading
Commission (CFTC) regulations equal to the market value of the futures contracts
and thereby insure that the use of futures contracts is unleveraged. The Fund
will use futures in a manner consistent with these requirements.
D. Options on Futures Contracts. The Fund only intends to engage in options on
futures contracts for bona fide hedging purposes in compliance with CFTC
regulations. An option on a futures contract gives the purchaser the right, but
not the obligations, to assume a position in a futures contract (which position
may be a long or short position) at a specified exercise price at any time
during the option exercise period. The writer of the option is required upon
exercise to assume an offsetting futures position (which position may be a long
or short position). Upon exercise of the option, the assumption of offsetting
futures positions by the writer and holder of the option will be accompanied by
delivery of the accumulated balance in the writer's futures margin account that
represents the amount by which the market price of the futures contract, at
exercise, exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract.
The holder or writer of an option may terminate its position by selling or
purchasing an option of the same series. There is no guarantee that such closing
transactions can be effected.
The Fund will be required to deposit initial and variation margin with respect
to put and call options on futures contracts written by it pursuant to the
Fund's futures commissions merchants' requirements similar to those applicable
to the futures contracts themselves, described above.
E. Risks of Futures Transactions. The Fund's successful use of futures
contracts and options thereon depends upon the ability of its Investment Advisor
to predict movements in the stock market and other factors affecting markets
for securities and upon the degree of correlation between the prices of the
futures contracts and the prices of the securities being hedged. As a result,
even a correct forecast of stock price changes may not result in a successful
hedging transaction. Although futures contracts and options thereon may limit
the Fund's exposure to loss, they may also limit the Fund's potential for
capital gains. For example, if the Fund has hedged against the possibility of
decrease in stock prices which would adversely affect the price of
securities in its portfolio and prices of such securities increase instead, the
Fund will lose part or all of the benefit of the increased value of its
securities because it will have offsetting losses in its futures positions.
Although the Fund will enter into futures contracts only where there appears to
be a liquid market, there can be no assurance that such liquidity will always
exist.
F. The Fund also is authorized, subject to the limitations set out in the
Prospectus, to purchase futures contracts on an unleveraged basis, when not
intended as an anticipatory hedge. When a contract is purchased on this basis
the investment company establishes a segregated account, composed of cash and/or
cash equivalents, equal to the total value of the contract (less margin on
deposit). As with other futures trading, these purchases must not be for
speculative purposes.
The ability to engage in these purchases on an unleveraged basis can
significantly decrease transaction costs to the Funds in certain instances. For
example, if an inordinately large deposit should occur on a single day, the
sheer volume of securities purchases required for that day may place the Fund at
a market disadvantage by requiring it to purchase particular securities in such
volume that its own buying activity could cause prices to increase. In
addition, if this deposit had involved 'market-timing' and as a result there
subsequently were an oversized withdrawal, the Fund could again suffer market
disadvantage, this time because the volume of sales could, for the same reason,
force prices of particular securities to decrease. The Fund, by buying a
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futures contract (followed by the appropriate closing transaction) instead of
purchasing securities could achieve considerable savings in transaction costs
without departing from Fund objectives. Furthermore, as stated in (B.) above,
price changes in a futures contract generally parallel price changes in the
securities that the Fund might otherwise have purchased. Thus, purchase of a
futures contract on an unleveraged basis allows the Fund to comply with its
objective while at the same time achieving these lower transaction costs.
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LENDING OF PORTFOLIO SECURITIES
As described in the Prospectus, the Funds may from time to time lend securities
from their portfolios to brokers, dealers and financial institutions and receive
collateral from the borrower, in the form of cash (which may be invested in
short-term securities), U.S. government obligations or certificates of deposit.
Such collateral will be maintained at all times in an amount equal to at least
100% of the current market value of the loaned securities, and and will be in
the actual or constructive possession of the particular Fund during the term of
the loan. The Fund will maintain the incidents of ownership of the loaned
securities and will continue to be entitled to the interest or dividends payable
on the loaned securities. In addition, the Fund will receive interest on the
amount of the loan. The loans will be terminable by the Fund at any time and
will not be made to any affiliates of the Fund or the Adviser. The Fund may pay
reasonable finder's fees to persons unaffiliated with it in connection with the
arrangement of the loans.
As with any extensions of credit, there are risks of delay in recovery and, in
some cases, even loss of rights in the collateral or the loaned securities
should the borrower of securities fail financially. However, loans of portfolio
securities will be made only to firms deemed by the Adviser to be
creditworthy.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
The Funds may make short-term investments in repurchase agreements. A repurchase
agreement typically involves the purchase by the Fund of securities (U.S.
government or other money market securities) from a financial institution such
as a bank, broker or savings and loan association, coupled with an agreement by
the seller to repurchase the same securities from the Fund at the specified
price and at a fixed time in the future, usually not more than seven days from
the date of purchase. The difference between the purchase price to the Fund and
the resale price to the seller represents the interest earned by the Fund which
is unrelated to the coupon rate or the maturity of the purchased security. If
the seller defaults, the Fund may incur a loss if the value of the collateral
securing the repurchase agreement declines, or the Fund may incur disposition
costs in connection with liquidating the collateral. If bankruptcy proceedings
are commenced with respect to the seller, realization upon the collateral by the
Fund may be delayed or limited and a loss may be incurred if the collateral
securing the repurchase agreement declines in value during the bankruptcy
proceedings. The Board of Directors of the Fund will evaluate the
creditworthiness of all entities, including banks and broker-dealers, with which
they propose to enter into repurchase agreements. These transactions will be
fully collateralized; and the collateral for each transaction will be in the
actual or constructive possession of the particular Fund during the terms of the
transaction, as provided in the agreement.
In a reverse repurchase agreement, the Fund involved sells a portfolio security
to another party, such as a bank or broker-dealer, in return for cash and agrees
to repurchase the instrument at a particular price and time. While a reverse
repurchase agreement is outstanding, the Fund will maintain cash and appropriate
liquid assets in a segregated custodial account to cover its obligation under
the agreement. The Fund will enter into reverse repurchase agreements only with
parties that the Advisor or Sub-Advisor deems creditworthy. Reverse repurchase
agreements are considered to be borrowing transactions, and thus are subject to
the Fund's limitation to borrowing. Not every Fund is authorized to enter into
reverse repurchase agreements.
CUSTODIAN
All securities, cash and other similar assets of the Bond, Growth and Income,
Managed, Money Market, Social Awareness and Special Opportunities Funds are
currently held in custody by Bankers Trust Company, 14 Wall Street, 4th Floor,
New York, New York 10005. Bankers Trust agreed to act as custodian for each Fund
pursuant to a Custodian Agreement dated June 17, 1985 (March 10, 1986 for the
Social Awareness Fund). These six Funds expect to change custodian to Chase
Manhattan Bank, New York, New York, in mid-1995.
All securities, cash and other similar assets of the Aggressive Growth, Capital
Appreciation, Equity-Income, Global Asset Allocation (formerly Putnam Master)
and International Funds are held in custody by State Street Bank and Trust
Company, 225 Franklin Street, Boston, Massachusetts 02110. State Street agreed
to act as custodian for these Funds pursuant to Custodian Contracts effective
July 21, 1987 for the Global Asset Allocation Fund, April 29, 1991 for the
International Fund, and December 6, 1993 for the other three funds.
Under these Agreements, the respective custodians shall (1) receive and disburse
money; (2) receive and hold securities; (3) transfer, exchange, or deliver
securities; (4) present for payment coupons and other income items, collect
interest and cash dividends received, hold stock dividends, etc.; (5) cause
escrow and deposit
<PAGE>
receipts to be executed; (6) register securities; and (7) deliver to the Funds
proxies, proxy statements, etc.
INDEPENDENT AUDITORS
Each Fund's Board of Directors has engaged Ernst & Young LLP, 2300 Fort Wayne
National Bank Building, Fort Wayne, Indiana 46802, to be the independent
auditors for the Fund. In addition to the audit of the 1994 financial statements
of the Funds, other services provided include review and consultation connected
with filings of annual reports and registration statements with the Securities
and Exchange Commission; consultation on financial accounting and reporting
matters; and meetings with the Audit Committee.
FINANCIAL STATEMENTS
The financial statements for the Funds are incorporated by reference to the
Funds' 1994 Annual Report (see Pages 34-47 for all Funds; and Page 10,
Aggressive Growth Fund; Pages 11-12, Bond Fund; Pages 13-14, Capital
Appreciation Fund; Pages 14-16, Equity-Income Fund; Pages 24-30, Global Asset
Allocation Fund; Pages 17-18, Growth and Income Fund; Pages 18-20, International
Fund; Pages 20-23, Managed Fund; Page 23, Money Market Fund; Pages 30-31, Social
Awareness Fund; and Pages 31-33, Special Opportunities Fund). We will provide a
copy of the Annual Report on request and without charge. Please write or call
Eric Jones, The Lincoln National Life Insurance Company, P.O. Box 2340, Fort
Wayne, Indiana 46801; telephone: 1-800-1212, Extension 6536.
BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
Aaa--Bonds which are rated Aaa are judged to be of the best quality and carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment some time in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments are
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca--Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
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STANDARD & POOR'S CORPORATION
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA--Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas these bonds normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay principal and interest than
for bonds in the A category and higher.
BB-B-CCC-CC--Bonds rated BB,B,CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
COMMERCIAL PAPER RATINGS
MOODY'S INVESTORS SERVICE, INC.
Moody's Commercial Paper ratings are opinions of the ability of issuers to repay
punctually promissory obligations not having an original maturity in excess of
nine months. Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Prime 1--Highest Quality; Prime 2--Higher Quality; Prime 3--High Quality. (The
Fund will not invest in commercial paper rated Prime 3).
STANDARD & POOR'S CORPORATION
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. The Fund will invest in commercial paper rated in the "A" Categories,
as follows:
A Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
the designation 1, 2, and 3 to indicate the relative degree of safety. (The Fund
will not invest in commercial paper rated A-3).
A--1 This designation indicates that the degree of safety regarding timely
payment is very strong.
A--2 Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not overwhelming as for issues
designated A-1.
U.S. GOVERNMENT OBLIGATIONS
Securities issued or guaranteed as to principal and interest by the U.S.
government include a variety of Treasury securities, which differ only in their
interest rates, maturities and times of issuance. Treasury bills have a maturity
of one year or less. Treasury notes have maturities of one to seven years and
Treasury bonds generally have a maturity of greater than five years.
Various agencies of the U.S. government issue obligations. Some of these
securities are supported by the full faith and credit of the U.S. Treasury (for
example those issued by Export-Import Bank of the United States, Farmers Home
Administration, Federal Housing Administration, Government National Mortgage
association, Maritime Administration, Small Business Administration and The
Tennessee Valley Authority). Obligations of instrumentalities of the U.S.
government are supported by the right of the issuer to borrow from the Treasury
(for example, those issued by Federal Farm Credit Banks, Federal Home Loan Bank,
Federal Home Loan Mortgage Corporation, Federal Intermediate Credit Banks,
Federal Land Bank and the U.S. Postal Service).
<PAGE>
Obligations supported by the credit of the instrumentality include securities
issued by government sponsored corporations whose stock is publicly held (for
example, the Federal National Mortgage Association, and the Student Loan
Marketing Association).
TAXES
Each Fund intends to qualify and has elected to be taxed as a "regulated
investment company" under certain provisions of the Internal Revenue Code of
1986, as amended (the "Code"). If a Fund qualifies as a "regulated investment
company" and complies with the provisions of the Code relieving regulated
investment companies which distribute substantially all of their net income
(both net ordinary income and net capital gain) from Federal income tax, it will
be relieved from such tax on the part of its net ordinary income and net
realized capital gain which it distributes to its shareholders. To qualify for
treatment as a "regulated investment company," each Fund must, among other
things, derive in each taxable year at least 90 percent of its gross income from
dividends, interest, payments with respect to securities loans, and gains from
the sale or other disposition of stock or securities or foreign currencies
(subject to the authority of the Secretary of the Treasury to exclude foreign
currency gains which are not directly related to the Fund's principal business
of investing in stock or securities or options and futures with respect to such
stock or securities), or other income (including but not limited to gains from
options, futures, or forward contracts) derived with respect to its investing in
such stock, securities, or currencies. In addition to qualify as a "regulated
investment company" each Fund must derive less than 30% of its gross income from
the sale or other disposition of securities held for less than three months. In
order to meet these requirements, a Fund may be required to defer disposing of
certain futures contracts and underlying securities beyond the time when it
might otherwise be advantageous to do so. Specifically, these requirements may
limit a Fund's ability to (a) sell securities held for less than three months;
(b) effect closing transactions on futures contracts entered into less than
three months previously; (c) enter into futures contracts for a period of less
than three months; and (d) enter into futures contracts on securities held for
less than the long-term capital gains holding period. Further, for purposes of
the 30% test, increases (and decreases) in the value of positions that are part
of a "designated hedge" (as defined in the Code) are netted.
The Federal tax laws impose a four percent nondeductible excise tax on each
regulated investment company with respect to an amount, if any, by which such
company does not meet distribution requirements specified in such tax laws,
unless certain exceptions apply. Each Fund intends to comply with such
distribution requirements or qualify under one or more exceptions, and thus does
not except to incur the four percent nondeductible excise tax.
Since the sole shareholder of each Fund will be LNL, no discussion is stated
herein as to Federal income tax consequences at the shareholder level.
The discussion of Federal income tax considerations in the Prospectus, in
conjunction with the foregoing, is a general and abbreviated summary of the
applicable provisions of the Code and Treasury Regulations currently in effect
as interpreted by the Courts and the Internal Revenue Service. These
interpretations can be changed at any time. The above discussion covers only
Federal tax considerations with respect to the Fund. State and local taxes vary.
STATE REQUIREMENTS
The California Department of Insurance has established the following Guidelines
for an underlying portfolio of a Separate Account. The Funds intend to comply
with these Guidelines:
BORROWING
The borrowing limits for any variable contract separate account portfolio are
(1) 10% of net asset value when borrowing for any general purpose and (2) 25% of
net asset value when borrowing as a temporary measure to facilitate redemptions.
Net asset value of a portfolio is the market value of all investments or assets
owned less outstanding liabilities of the portfolio at the time that any new or
additional borrowing is undertaken.
FOREIGN INVESTMENTS--DIVERSIFICATION
The foreign country diversification guidelines to be followed by the Funds are
as follows:
1. A Portfolio will be invested in a minimum of five different foreign
countries at all times. However, this
<PAGE>
minimum is reduced to four when foreign country investments comprise less than
80% of the Portfolio's net asset value; to three when less than 60% of such
value; to two when less than 40%; and to one when less than 20%.
2. Except as set forth in items 3 and 4 below, a Portfolio will have no more
than 20% of its net asset value invested in securities of issuers located in any
one country.
3. A Portfolio may have an additional 15% of its value invested in securities
of issuers located in any one of the following countries: Australia, Canada,
France, Japan, the United Kingdom or West Germany.
4. A Portfolio's investments in United States issuers are not subject to the
foreign country diversification guidelines.
DERIVATIVE TRANSACTIONS - DEFINITIONS
The Prospectus for each Fund and the uniform Appendix for the Prospectus booklet
discuss the type of Derivative Transactions in which the Funds may engage and
the risks typically associated with many Derivative transactions. Here are some
definitions for the derivatives listed in the Appendix:
OPTION: a contract which gives the Fund the right, but not the obligation,
to buy or sell specified securities at a fixed price before or at a designated
future date. If the Contract allows the Fund to buy securities, it is a call
option; if to sell, it is a put option. It is common practice in options
trading to terminate an outstanding option contract by entering into an
offsetting transaction known as a 'closing transaction;, as a result of which
the Fund would either pay out or receive a cash settlement. This is discuss
below.
CURRENCY OPTION: Discussed below.
FIXED INCOME OPTION: one based on a fixed-income security, such as a
corporate or government bond.
INDEXED OPTION: one based on the value of an index which measures the
fluctuating value of a 'basket' of pre-selected securities.
STOCK (EQUITY) OPTION: one based on the shares of stock of a particular
company.
OPTION ON A FUTURES CONTRACT: Discussed below.
SWAP: a financial transaction in which the Fund and another party agree to
exchange streams of payments at periodic intervals under a predetermined set of
occurrences related to the price, level, performance or value of one or more
underlying securities, and pegged to a reference amount known as the 'notional
amount'. A swap is normally used to change the market risk associated with a
loan or bond borrowing from one interest rate base (fixed term or floating rate)
or currency of one denomination to another.
EQUITY SWAP: one which allows the Fund to exchange the rate of return
(or some portion of the rate) on its portfolio stocks (an individual
share, a basket or index) for the rate of return on another equity or
non-equity investment.
INTEREST RATE SWAP: one in which the Fund and another party exchange
different types of interest payment streams, pegged to an underlying
notional principal amount. The three main types of interest rate swaps
are coupon swaps (fixed rate to floating rate in the same currency);
basis swaps (one floating rate index to another floating rate index in
the same currency); and cross-currency interest rate swaps (fixed rate
in one currency to floating rate in another).
RELATED TRANSACTIONS TO INTEREST RATE SWAPS:
a. CAP: A contract for which the buyer pays a fee, or premium, to
obtain protection against a rise in a particular interest rate
above a certain level. For example, an interest rate cap may cover
a specified principal amount of a loan over a designated time
period, such as a calendar quarter. If the covered interest rate
rises above the rate ceiling, the seller of the rate cap pays the
purchaser an amount of money equal to the average rate
differential times the principal amount times one-quarter.
b. FLOOR: a contract in which the seller agrees to pay to the
purchaser, in return for the
<PAGE>
payment of a premium, the difference between current interest rates
and an agreed (strike) rate times the notional amount, should
interest rates fall below the agreed level (the 'floor'). A floor
contract has the effect of a string of interest rate guarantees.
c. COLLAR: an agreement to simultaneously purchase a cap and sell
a floor, in order to maintain interest rates within a defined range.
The premium income from the sale of the floor reduces or offsets the
cost of buying the cap.
d. CORRIDOR: an agreement to buy a cap at one interest rate and
sell a cap at a higher rate.
SWAPTION: an option to enter into, extend, or cancel a swap.
FUTURES CONTRACT: a contract which commits the Fund to buy or sell a specified
amount of a financial instrument at a fixed price on a fixed date in the future.
Futures contracts are normally traded on an exchange and their terms are
standardized, which makes it easier to buy and sell them.
INTEREST RATE FUTURES (AND OPTIONS ON THEM): futures contracts pegged to
U.S. and foreign fixed-income securities, debt indices and reference
rates.
STOCK INDEX FUTURES. futures contracts based on an index of pre-selected
stocks, with prices based on a composite of the changes to the prices of
the individual securities in the index (e.g., S&P 500).
OPTION ON A FUTURES CONTRACT: an option taken on a futures position.
FORWARD CONTRACT: an over-the-counter, individually-tailored futures contract.
FORWARD RATE AGREEMENT (FRA): a contract in which the Fund and another
party agree on the interest rate to be paid on a notional deposit of
specified maturity at a specific future time. Normally, no exchange of
principal is involved; the difference between the contracted rate and the
prevailing rate is settled in cash.
CURRENCY CONTRACT: a contract entered into for the purpose of reducing or
eliminating an anticipated rise or drop in currency exchange rates over time.
CURRENCY FUTURES: futures contracts on foreign currencies. Used to hedge
the purchase or sale of foreign securities.
CURRENCY OPTION: an option taken on foreign currency.
CURRENCY SWAP; a swap involving the exchange of cash flows and principal
in one currency for those in another, with an agreement to reverse the
principal swap at a future date.
CROSS-CURRENCY INTEREST RATE SWAP: a swap involving the exchange of
streams of interest rate payments (but not necessarily principal payments)
in different currencies and often on different interest bases (e.g., fixed
Deutsche Mark against floating dollar, but also fixed Deutsche Mark
against fixed dollar).
CURRENCY FORWARD CONTRACT: a contract to 'lock in' a currency rate at a
future date, to eliminate risk of currency fluctuation when the time comes
to convert from one currency to another.
<PAGE>
PART C - OTHER INFORMATION
Item 24. Financial Statements and Exhibits
a) Financial Statements:
(1) Part A.
------
The financial highlights of Lincoln National Equity-Income Fund,
Inc. (the Fund) for the years ended December 31, 1994 and 1993
are incorporated by reference to Pages 45-47 of the Fund's 1994
Annual Report.
Part B.
------
The following financial statements of the Fund are incorporated
by reference to Pages 14-16, 34-44 and 47 of the Fund's 1994
Annual Report:
- Statement of Net Assets -- December 31, 1994
- Statement of Operations -- Year Ended December 31, 1994
- Statements of Changes in Net Assets -- Years Ended December
31, 1994 and 1993
- Notes to Funancial Statements -- December 31, 1994
In total, only pages 14-16 and 34-47 of the Fund's 1994 Annual
Report are incorporated by reference into this Registration
Statement. No other pages of that Report are incorporated by
reference.
(2) Schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the related instructions, are
inapplicable, or the required information is included in the
financial statements, and therefore have been omitted.
b) Exhibits:
11 - Consent of Ernst & Young LLP, Independent Auditors
17 - Memorandum Concerning Books and Records (2/16/95)
<PAGE>
Item 25. Persons Controlled by or Under Common Control with Registrant
See "Management of the Fund," "Purchase of Securities Being
Offered," and "Description of Shares" in the Prospectus forming
Part A of this Registration Statement and "Investment Adviser and
Sub-Adviser" in the Statement of Additional Information forming
Part B of this Registration Statement. As of the date of this
Post-Effective Amendment to the Registration Statement, The
Lincoln National Life Insurance Company (LNL), for its Variable
Annuity Account C and its Variable Life, Account K, is the sole
shareholder in the Fund.
Item 26. Number of Holders of Securities
As of April 1, 1995, there was one record holder of common stock,
$.01 par value per share.
Item 27. See prior filings
Item 28. Business and Other Connections of Investment Adviser
See "Management of the Fund" in the Prospectus and "Investment
Adviser and Sub-Adviser" in the Statement of Additional
Information.
As of April 4, 1995, the officers and/or directors of the
investment adviser held the following positions:
<PAGE>
<TABLE>
<CAPTION>
Position, Other Substantial Business
Investment Profession, Vocation or
Name Adviser Employment; Address
---- ---------- --------------------------
<S> <C> <C>
David A. Berry Vice President Vice President, Lincoln Advisor
Funds, Inc., Lincoln National
Income Fund, Inc. and Lincoln
National Convertible Securities
Fund, Inc., 200 East Berry
Street, Fort Wayne, Indiana
46802
JoAnn E. Becker Vice President 200 East Berry Street, Fort
Wayne, Indiana 46802
Dennis A. Blume Senior Vice President Senior Vice President and
(formerly Executive Director, Lincoln National
Vice President) Realty Corporation; Vice
and Director President, Lincoln Advisor
Funds, Inc., 200 East Berry
Street, Fort Wayne, Indiana
46802
Anne E. Bookwalter Vice President 200 East Berry Street, Fort
Wayne, Indiana 46805
Philip C. Byrde Vice President 200 East Berry Street, Fort
Wayne, Indiana 46802
Steven R. Brody Executive Vice Director, Lincoln National
President (formerly Realty Corporation; Vice
Senior Vice President) President, The Lincoln
and Assistant Treasurer National Life Insurance Company,
and Lincoln Advisor Funds, Inc.,
200 East Berry Street, Fort
Wayne, Indiana 46802
Patrick R. Chasey Vice President 200 East Berry Street, Fort
Wayne, Indiana 46802
Garrett W. Cooper Vice President 200 East Berry Street, Fort
Wayne, Indiana 46802
David C. Fischer Vice President 200 East Berry Street, Fort
Wayne, Indiana 46802
Luc N. Girard Vice President 200 East Berry Street, Fort
Wayne, Indiana 46802
Donald P. Groover Vice President 200 East Berry Street, Fort
Wayne, Indiana 46802
William N. Holm, Jr. Vice President 200 East Berry Street, Fort
Wayne, Indiana 46802
Jennifer C. Hom Vice President 200 East Berry Street, Fort
Wayne, Indiana, 46802
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Position, Other Substantial Business
Investment Profession, Vocation or
Name Adviser Employment; Address
- ------------------------------ -------------- --------------------------------
<S> <C> <C>
John A. Kellogg Vice President Vice President, Lincoln National
Realty Corporation, 200 East
Berry Street, Fort Wayne,
Indiana 46802
Timothy H. Kilfoil Vice President 200 East Berry Street, Fort
Wayne, Indiana 46802
Lawrence T. Kissko Senior Vice President Vice President and Director, Lincoln
National Realty Corporation; Vice President,
The Lincoln National Life Insurance
Company, 200 East Berry Street,
Fort Wayne, Indiana 46802
Walter M. Korinke Vice President 200 East Berry Street, Fort Wayne,
Indiana 46802
Lawrence M. Lee Vice President Vice President, Lincoln National
(formerly Second Realty Corporation, 200 East
Vice President) Berry Street, Fort Wayne, Indiana 46802
Thomas A. McAvity, Jr. Vice President 200 East Berry Street, Fort
Wayne, Indiana 46802
H. Thomas McMeekin President and Senior Vice President, Lincoln
Director (formerly National Corporation, 200 East
Executive Vice Berry Street, Fort Wayne,
President, and Senior Indiana 46802
Vice President)
John David Moore Vice President 200 East Berry Street, Fort
Wayne, Indiana 46802
Oliver H. G. Nichols Senior Vice President Senior Vice President Lincoln
National Realty Corporation, 200
East Berry Street, Fort Wayne,
Indiana 46802
David C. Patch Vice President 200 East Berry Street, Fort Wayne, Indiana
46802
Joseph T. Pusateri Vice President Vice President, Lincoln National
Realty Corporation, 200 East
Berry Street, Fort Wayne,
Indiana 46802
Gregory E. Reed Vice President 200 East Berry Street, Fort Wayne,
Indiana 46802
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Position, Other Substantial Business
Investment Profession, Vocation or
Name Adviser Employment; Address
---- --------- --------------------------
<S> <C> <C>
Max A. Roesler Executive Vice Vice President and Treasurer, Lincoln National Aggressive Growth Fund, Inc.,
President and Treasurer Lincoln National Bond Fund, Inc.; Lincoln National Capital Appreciation Fund,
Inc.; Lincoln National Corporation; Lincoln National Equity-Income Fund, Inc.;
Lincoln National Growth Fund, Inc.; Lincoln National International Fund, Inc.;
The Lincoln National Life Insurance Company; Lincoln National Managed Fund, Inc.;
Lincoln National Money Market Fund, Inc.; Lincoln National Special Opportunities
Fund, Inc.; Lincoln National Variable Annuity Funds A and B; Lincoln National
Putnam Master Fund, Inc.; and Lincoln National Social Awareness Fund, Inc., 1300
South Clinton Street, Fort Wayne, Indiana 46802
Bill L. Sanders Vice President Vice President, The Lincoln National Life Insurance Company, 200 East Berry
Street, Fort Wayne, Indiana, 46802
Roy D. Shimer Vice President 200 East Berry Street, Fort Wayne, Indiana, 46802
Gerald M. Weiss Vice President 200 East Berry Street, Fort Wayne, Indiana, 46802
(formerly Second
Vice President)
C. Suzanne Womack Secretary Vice President and Assistant Secretary, Lincoln National Corporation and The
Lincoln National Life Insurance Company; Secretary, Lincoln Advisor Funds, Inc.;
Lincoln National Aggressive Growth Fund, Inc.; Lincoln National Capital
Appreciation Fund, Inc.; Lincoln National Equity-Income Fund, Inc.; Lincoln
National Growth Fund, Inc.; Lincoln National International Fund, Inc.; Lincoln
National Managed Fund, Inc.; Lincoln National Money Market Fund, Inc.; Lincoln
National Putnam Master Fund; Lincoln National Social Awareness Fund, Inc.;
Lincoln National Special Opportunities Fund, Inc.; Lincoln National Variable
Annuity Fund A; Lincoln National Variable Annuity Fund B, 200 East Berry Street,
Fort Wayne, Indiana 46802
</TABLE>
<PAGE>
Item 29. Principal Underwriters
Not applicable.
Item 30. Location of Accounts and Records
See Exhibit 17.
Item 31. Management Services
Not applicable.
Item 32. Undertakings
Registrant furnishes the following undertakings pursuant to
the Securities Act of 1933 (the "Act"):
(a) See prior filings.
(b) See prior filings.
(c) See prior filings.
(d) The registrant undertakes to provide, without charge, a
copy of the Fund's most recent Annual Report to any recipient
of its prospectus who requests it.
<PAGE>
SIGNATURES
a) Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Amendment to the Registration Statement
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Fort Wayne, and State of Indiana, on
the 28th day of April, 1995.
LINCOLN NATIONAL
EQUITY-INCOME FUND, INC.
By /S/KELLY D. CLEVENGER
---------------------------
Kelly D. Clevenger
Chairman of the Board and President
b) Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/S/KELLY D. CLEVENGER Chairman of the Board __4/28/95__
- -------------------------- and President
Kelly D. Clevenger (Principal Executive
Officer)
*/S/JOHN B. BORSCH, JR. Director __4/28/95__
- --------------------------
John B. Borsch, Jr.
*/S/STANLEY R. NELSON Director __4/28/95__
- --------------------------
Stanley R. Nelson
*/S/BARBARA J. KOWALCZYK Director __4/28/95__
- --------------------------
Barbara J. Kowalczyk
*/S/NANCY L. FRISBY Director __4/28/95__
- --------------------------
Nancy L. Frisby
*/S/LANTZ M. MINTCH Chief Accounting Officer __4/28/95__
- -------------------------- (Principal Accounting Officer)
Lantz M. Mintch
*/S/MAX A. ROESLER Vice President and Treasurer __4/28/95__
- -------------------------- (Principal Financial Officer)
Max A. Roesler
*By /S/JEREMY SACHS, pursuant to a Power of Attorney granted in the
--------------- initial Registration Statement.
Jeremy Sachs
<PAGE>
Exhibit Index to Form N-1A
--------------------------
Exhibit Number Description
- -------------- -----------
11 Consent of Ernst & Young LLP,
Independent Auditors
17 Memorandum Concerning Books
and Records
<PAGE>
EXHIBIT 11
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Independent Auditors"
in the Registration Statement (Form N-1A No. 33-71158) and related Statement of
Additional Information of Lincoln National Equity-Income Fund, Inc. dated
April 29, 1995 and to the incorporation by reference therein of our report dated
January 24, 1995, with respect to the financial statements of Lincoln National
Equity-Income Fund, Inc. included in its Annual Report for the year ended
December 31, 1994, included as item 24(a) to this registration statement.
/s/ Ernst & Young LLP
Fort Wayne, Indiana
April 24, 1995
<PAGE>
BOOKS AND RECORDS
LINCOLN NATIONAL EQUITY-INCOME FUND, INC.
RULES UNDER SECTION 31 OF THE INVESTMENT COMPANY ACT OF 1940
Records to Be Maintained by Registered Investment Companies, Certain
Majority-Owned Subsidiaries Thereof, and Other Persons Having
Transactions with Registered Investment Companies.
Reg. 270.31a-1. (a) Every registered investment company, and every
underwriter, broker, dealer, or investment advisor which is a majority-owned
subsidiary of such a company, shall maintain and keep current the accounts,
books, and other documents relating to its business which constitute the record
forming the basis for financial statements required to be filed pursuant to
Section 30 of the Investment Company Act of 1940 and of the auditor's
certificates relating thereto.
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
Annual Reports Controllers Eric Jones Permanently, the first two
To Shareholders years in an easily accessible
place
Semi-Annual Controllers Eric Jones Permanently, the first two
Reports years in an easily accessible
place
Form N-SAR Controllers Eric Jones Permanently, the first two
years in an easily accessible
place
(b) Every registered investment company shall maintain and keep current the
following books, accounts, and other documents:
Type of Record
(1) Journals (or other records of original entry) containing an itemized daily
record in detail of all purchases and sales of securities (including sales and
redemptions of its own securities), all receipts and deliveries of securities
(including certificate numbers if such detail is not recorded by custodian or
transfer agent), all receipts and disbursements of cash and all other debits and
credits. Such records shall show for each such transaction the name and quantity
of securities, the unit and aggregate purchase or sale price, commission paid,
the market on which effected, the trade date, the settlement date, and the name
of the person through or from whom purchased or received or to whom sold or
delivered.
Purchases and Sales Journals
- ----------------------------
Daily reports State Street Mutual Funds Permanently, the first two
of securities Bank and Division years in an easily accessible
transactions Trust place
Company
<PAGE>
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
Portfolio Securities
- --------------------
Equity State Street Mutual Funds Permanently, the first two
Notifications Bank and Division years in an easily accessible
Trust place
Company
Receipts and Deliveries of Securities (shares)
- ----------------------------------------------
Not Applicable.
Portfolio Securities
- --------------------
Debit and State Street Mutual Funds Permanently, the first two
Credit Advices Bank and Division years in an easily accessible
from Bankers Trust place
Company
Receipts and Disbursements of Cash and other Debits and Credits
- ---------------------------------------------------------------
Investment State Street Mutual Funds Permanently, the first two
Journal Bank and Division years in an easily accessible
Trust place
Company
Daily Journals State Street Mutual Funds Permanently, the first two
Journals Bank and Division years in an easily accessible
Trust place
Company
(2) General and auxiliary ledgers (or other record) reflecting all asset,
liability, reserve, capital, income and expense accounts, including:
(i) Separate ledger accounts (or other records) reflecting the
following:
(a) Securities in transfer;
(b) Securities in physical possession;
(c) Securities borrowed and securities loaned;
(d) Monies borrowed and monies loaned (together with a
record of the collateral therefore and substitutions in
such collateral);
(e) Dividends and interest received;
(f) Dividends receivable and interest accrued.
Instructions. (a) and (b) shall be stated in terms of securities quantities
only; (c) and (d) shall be stated in dollar amounts and securities quantities as
appropriate; (e) and (f) shall be stated in dollar amounts only.
General Ledger
- --------------
General Ledger State Street Mutual Funds Permanently, the first two
Bank and Division years in an easily accessible
Trust place
Company
<PAGE>
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
Securities in Transfer
- ----------------------
Filing consisting State Mutual Funds Permanently, the first two
of bank advices, Street Bank Division years in an easily accessible
confirmations, and Trust place
amd Notification Company
of Securities
Transaction
Securities in Physical Possession
- ---------------------------------
Securities State Mutual Funds Permanently, the first two
Ledger Street Bank Division years in an easily accessible
and Trust place
Company
Portfolio State Mutual Funds Permanently, the first two
Listings Street Bank Division years in an easily accessible
and Trust place
Company
Securities Borrowed and Loaned
- ------------------------------
Their files State Mutual Funds Permanently, the first two
Street Bank Division years in an easily accessible
and Trust place
Company
Monies Borrowed and Loaned
- --------------------------
Not Applicable.
Dividends and Interest Received
- -------------------------------
Interest File State Mutual Funds Permanently, the first two
Accrual Street Bank Division years in an easily accessible
Activity and Trust place
Journal Company
Dividend Master State Mutual Funds Permanently, the first two
File Display Street Bank Division years in an easily accessible
and Trust place
Company
Dividends Receivable and Interest Accrued
- -----------------------------------------
Investment State Mutual Funds Permanently, the first two
Journal Street Bank Division years in an easily accessible
and Trust place
Company
Dividend Master State Mutual Funds Permanently, the first two
File Display Street Bank Division years in an easily accessible
and Trust place
Company
Interest File State Mutual Funds Permanently, the first two
Accrual Street Bank Division years in an easily accessible
Activity and Trust place
Journal Company
<PAGE>
(ii) Separate ledger accounts (or other records) for each portfolio security,
showing (as of trade dates), (a) the quantity and unit and aggregate price for
each purchase, sale, receipt, and delivery of securities and commodities for
such accounts, and (b) all other debits and credits for such accounts.
Securities positions and money balances in such ledger accounts (or other
records) shall be brought forward periodically but not less frequently than at
the end of fiscal quarters. Any portfolio security, the salability of which is
conditioned, shall be so noted. A memorandum record shall be available setting
forth, with respect to each portfolio security accounts, the amount and
declaration, ex-dividend, and payment dates of each dividend declared thereon.
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
Ledger Account for each portfolio Security
- ------------------------------------------
Inventory State Mutual Funds Permanently, the first two
(on line) Street Bank Division years in an easily accessible
and Trust place
Company
(iii) Separate ledger accounts (or other records) for each broker-dealer, bank
or other person with or through which transactions in portfolio securities are
affected, showing each purchase or sale of securities with or through such
persons, including details as to the date of the purchase or sale, the quantity
and unit and aggregate prices of such securities, and the commissions or other
compensation paid to such persons. Purchases or sales effected during the same
day at the same price may be aggregated.
Broker-Dealer State Mutual Funds Permanently, the first two
Ledger Street Bank Division years in an easily accessible
and Trust place
Company
(iv) Separate ledger accounts (or other records), which may be maintained by a
transfer agent or registrar, showing for each shareholder of record of the
investment company the number of shares of capital stock of the company held,
in respect of share accumulation accounts (arising from periodic investment
plans, dividend reinvestment plans, deposit of issued shares by the owner
thereof, etc.), details shall be available as to the dates and number of shares
of each accumulation, and except with respect to already issued shares deposited
by the owner thereof, prices of each such accumulation.
Shareholder Accounts
- --------------------
LNL - only State Mutual Funds Permanently, the first two
shareholder Street Bank Division years in an easily accessible
and Trust place
Company
(3) A securities record or ledger reflecting separately for each portfolio
security as of trade date all "long" and "short" positions carried by the
investment company for its own account and showing the location of all
securities long and the off-setting position of all securities short. The record
called for by this paragraph shall not be required in circumstances under which
all portfolio securities are maintained by a bank or banks or a member or
members of a national securities exchange as custodian under a custody agreement
or as agent for such custodian.
<PAGE>
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
Securities Position Record
- --------------------------
Maintained by State Mutual Funds Permanently, the first two
Custodian of Street Bank Division years in an easily accessible
Securities and Trust place
Company
(4) Corporate charters, certificates of incorporation or trust agreements, and
bylaws, and minute books of stockholders' and directors' or trustees' meetings;
and minute books of directors' or trustees' committee and advisory board or
advisory committee meetings.
Corporate Documents
- -------------------
Corporate Executive- Sue Womack Permanently, the first two
charter, cer- Corp. Secy. years in an easily accessible
tificate of place
incorporation.
Bylaws and Corp. Secy. Sue Womack
minute books.
(5) A record of each brokerage order given by or in behalf of the investment
company for, or in connection with, the purchase or sale of securities, whether
executed or unexecuted. Such record shall include the name of the broker, the
terms and conditions of the order and of any modification or cancellation
thereof, the time of entry or cancellation, the price at which executed, and the
time of receipt of report of execution. The record shall indicate the name of
the person who placed the order in behalf of the investment company.
Order Tickets
- -------------
Sales Order or State Mutual Funds Six years, the first two
Purchase Order Street Bank Division years in an easily accessible
and Trust place
Company
Notification State Mutual Funds Six years, the first two
Form (From Street Bank Division years in an easily accessible
AOS Trading and Trust place
System) Company
(6) A record of all other portfolio purchase or sales showing details comparable
to those prescribed in paragraph 5 above.
Short-Term Investments
- ----------------------
Notification State Mutual Funds Six years, the first two
Form (From Street Bank Division years in an easily accessible
AOS S-T and Trust place
System) Company
Bank Advice State Mutual Funds Six years, the first two
and Issuer Street Bank Division years in an easily accessible
Confirmation and Trust place
Company
<PAGE>
(7) A record of all puts, calls, spreads, straddles, and other options in which
the investment company has any direct or indirect interest or which the
investment company has granted or guaranteed; and a record of any contractual
commitments to purchase, sell, receive or deliver securities or other property
(but not including open orders placed with broker-dealers for the purchase or
sale of securities, which may be cancelled by the company on notices without
penalty or cost of any kind); containing at least an identification of the
security, the number of units involved, the option price, the date of maturity,
the date of issuance, and the person to whom issued.
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
Record of Puts, Calls, Spreads, Etc.
- ------------------------------------
Not Applicable.
(8) A record of the proof of money balances in all ledger accounts (except
shareholder accounts), in the form of trial balances. Such trial balances shall
be prepared currently at least once a month.
Trial Balance
- -------------
General Ledger State Mutual Funds Permanently, the first two
Street Bank Division years in an easily accessible
and Trust place
Company
(9) A record for each fiscal quarter, which shall be completed within 10 days
after the end of such quarter, showing specifically the basis or bases upon
which the allocation of orders for the purchase and sale of portfolio securities
to named brokers or dealers and the division of brokerage commissions or other
compensation on such purchase and sale orders among named persons were made
during such quarter. The record shall indicate the consideration given to (a)
sales of shares of the investment company by brokers or dealers, (b) the
supplying of services or benefits by brokers or dealers to the investment
company, its investment advisor or principal underwriter or any persons
affiliated therewith, and (c) any other considerations other than the technical
qualifications of the brokers and the dealers as such. The record shall show the
nature of their services or benefits made available, and shall describe in
detail the application of any general or specific formula or other determinant
used in arriving at such allocation of purchase and sales orders and such
division of brokerage commissions or other compensation. The record shall also
include the identities of the person responsible for the determination of such
allocation and such division of brokerage commissions or other compensation.
Brokerage State Mutual Funds Six Years, the first two
Allocation Street Bank Division/Nate years in an easily accessible
Report and Trust Wagley place
Company/Sec.
Compliance
(10) A record in the form of an appropriate memorandum identifying the person or
persons, committees, or groups authorizing the purchase or sale of portfolio
securities. Where an authorization is made by a committee or group, a record
shall be kept in the names of its members who participated in the authorization.
There shall be retained a part of the record required by this paragraph any
memorandum, recommendation, or instruction supporting or authorizing the
purchase or sale of portfolio securities. The requirements of this paragraph are
applicable to the extent they are not met by compliance with the requirements of
paragraph 4 of this Rule 31a1(b).
<PAGE>
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
Trading State Mutual Funds Six years, the first two
Authorization Street Bank Division years in an easily accessible
and Trust place
Company
Advisory Law Diane Mierau Six years, the first two
Agreements Division years in an easily accessible
place
(11) Files of all advisory material received from the investment advisor, any
advisory board or advisory committee, or any other persons from whom the
investment company accepts investment advice publications distributed generally.
Not Applicable.
(12) The term "other records" as used in the expressions "journals (or other
records of original entry)" and "ledger accounts (or other records)" shall be
construed to include, where appropriate, copies of voucher checks,
confirmations, or similar documents which reflect the information required by
the applicable rule or rules in appropriate sequence and in permanent form,
including similar records developed by the use of automatic data processing
systems.
Correspondence Product Jon Geist Six years, the first two
Admin. Nancy Alford years in an easily accessible
Product Pat Wiltshire place
Management
Pricing Sheets State Mutual Funds Permanently, the first two
Street Bank Division years in an easily accessible
and Trust place
Company
Bank State- State Mutual Funds Six years, the first two
ments, Can- Street Bank Division years in an easily accessible
celled Checks and Trust place
and Cash Company
Reconciliations
February 15, 1995
