<PAGE>
As filed with the Securities and Exchange Commission on April 14, 1997
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Registration No. 33-71158
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
__________________________________
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
___________
Post-Effective Amendment No. 5
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
___________
Amendment No. 7 X
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(Check appropriate box or boxes)
__________________________________
LINCOLN NATIONAL 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)
Copies of all communications to
Freedman, Levy, Kroll & Simonds
1050 Connecticut Avenue, N.W.,
Suite 825
Washington, D.C. 20036
Attention: Gary O. Cohen, Esq.
Bruce Rosenblum, Esq.
Fiscal year-end: December 31
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) (1), the Registrant filed a Rule 24f-2 Notice
for the last fiscal year (1996) on February 28, 1997.
It is proposed that this filing will become effective:
____ immediately upon filing pursuant to paragraph (b)
x on May 1, 1997 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.
<PAGE>
LINCOLN NATIONAL EQUITY-INCOME FUND, INC.
CONTENTS OF
POST-EFFECTIVE AMENDMENT NO. 5 AND AMENDMENT NO. 7 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
Exhibits
<PAGE>
Exhibit Index.
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
<PAGE>
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)
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
PAGES 21 AND 22 ARE PART OF THE PROSPECTUS FOR EACH OF THE FOLLOWING FUNDS:
Lincoln National Aggressive Growth Fund, Inc. (AG)
Lincoln National Bond Fund, Inc. (B)
Lincoln National Capital Appreciation Fund, Inc. (CA)
Lincoln National Equity-Income Fund, Inc. (E-I)
Lincoln National Global Asset Allocation Fund, Inc. (GAA)
Lincoln National Growth and Income Fund, Inc. (GI)
Lincoln National International Fund, Inc. (I)
Lincoln National Managed Fund, Inc. (M)
Lincoln National Money Market Fund, Inc. (MM)
Lincoln National Social Awareness Fund, Inc. (SA)
Lincoln National Special Opportunities Fund, Inc. (SO)
Preface/Directory
Shares of all the funds are sold to Lincoln National Life Insurance Co.
(Lincoln Life) for allocation to its Variable Annuity Account C (the variable
annuity account [VAA]) to fund variable annuity contracts and for allocation to
its Variable Life Account K to fund variable life insurance contracts.
To fund its variable life contracts, Variable Life Account D buys shares of the
Bond, Growth and Income, Managed, Money Market and Special Opportunities Funds.
To fund its variable life contracts, Variable Life Account G buys shares of the
Growth and Income and Special Opportunities Funds.
Each of these Variable Life and Annuity Accounts may be referred to as a
variable account. For each fund listed above, see Description of the fund in
its Prospectus for a statement of that fund's investment objective. Each of
these funds is referred to individually as a fund; collectively, as the funds.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (SEC) NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THESE PROSPECTUSES. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
These Prospectuses set forth concisely the information about each fund that you
ought to know before investing. Please read and keep this Prospectus booklet
for future reference.
A separate Statement of Additional Information (SAI) for each fund has been
filed with the SEC. By this reference, each SAI, dated May 1, 1997, is
incorporated into the Prospectus of the fund with which it is registered. A
free copy will be provided upon request. Either write Lincoln National Life
Insurance Co., P.O. Box 2340, Fort Wayne, Indiana 46801 or call 1-800-4LINCOLN
(454-6265).
The Financial Highlights table of each fund contains per-share data calculated
on the basis of a share outstanding throughout the period, together with
financial ratios and other supplemental data. The Financial Highlights table is
incorporated by reference to the fund's 1996 Annual Report. A copy of the
Annual Report will be provided on request and without charge. Either write
Lincoln National Life Insurance Co., P.O. Box 2340, Fort Wayne, Indiana 46801
or call 1-800-4LINCOLN (454-6265).
NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THESE
PROSPECTUSES, IN CONNECTION WITH THE OFFERS CONTAINED IN THEM. IF ANY ARE GIVEN
OR MADE, THE INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE FUND(S) IN QUESTION. THESE PROSPECTUSES DO NOT
CONSTITUTE OFFERS BY THE FUNDS TO SELL, OR SOLICITATIONS OF ANY OFFERS TO BUY,
ANY OF THE SECURITIES OFFERED BY THEM IN ANY JURISDICTION TO ANY PERSON TO WHOM
IT IS UNLAWFUL FOR THE FUNDS TO MAKE THOSE OFFERS.
Prospectuses dated May 1, 1997
F-1
<PAGE>
DIRECTORY FOR THE FUND PROSPECTUSES
Preface/Directory
<TABLE>
<CAPTION>
Subject Page
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<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 47
International Fund 49
Managed Fund 53
Money Market Fund 57
Social Awareness Fund 59
Special Opportunities Fund 61
- ----------------------------------------
INVESTMENT POLICIES AND TECHNIQUES
Aggressive Growth Fund 23
Bond Fund 29
Capital Appreciation Fund 33
Equity-Income Fund 37
Global Asset Allocation Fund 41
Growth and Income Fund 47
International Fund 49
Managed Fund 53
Money Market Fund 57
Social Awareness Fund 59
Special Opportunities Fund 61
- ----------------------------------------
INVESTMENT RESTRICTIONS
Aggressive Growth Fund 26
Bond Fund 30
Capital Appreciation Fund 35
Equity-Income Fund 39
Global Asset Allocation Fund 44
Growth and Income Fund 47
International Fund 51
Managed Fund 54
Money Market Fund 58
Social Awareness Fund 60
Special Opportunities Fund 62
</TABLE>
<TABLE>
<CAPTION>
Subject Page
- -------------------------------------------------------------
<S> <C>
STRATEGIC PORTFOLIO TRANSACTIONS
Aggressive Growth Fund 26
Bond Fund 31
Capital Appreciation Fund 36
Equity-Income Fund 39
Global Asset Allocation Fund 45
Growth and Income Fund 48
International Fund 51
Managed Fund 55
Money Market Fund 58
Social Awareness Fund 60
Special Opportunities Fund 63
- -------------------------------------------------------------
APPENDIX - CONTAINS IMPORTANT INFORMATION FOR ALL FUNDS
Net asset value 65
Management of the funds 65
Purchase of securities being offered 67
Sale and redemption of shares 68
Distributions and federal income tax considerations 68
Management discussion of fund performance 68
Description of shares 68
Strategic portfolio transactions-Additional information 69
Foreign investments 71
General information 72
Statement of Additional Information
Table of contents - 11 underlying funds 73
</TABLE>
F-2
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LINCOLN NATIONAL
EQUITY-INCOME FUND, INC.
Equity- Income
DESCRIPTION OF THE FUND
The Equity-Income Fund (fund) was incorporated in Maryland in 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 po-
tential 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 se-
curities held by the fund present higher risks of untimely interest and prin-
cipal payments, defaults, and price volatility than do higher-quality securi-
ties, 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 fundamen-
tal and cannot be changed without the affirmative vote of a majority of the
outstanding voting securities of the fund. See General information in the Ap-
pendix. 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 Fidelity Management Trust Co. (the sub-advisor), an affiliate of Fi-
delity Management & Research Co. (Fidelity), which manages the Fidelity Equi-
ty-Income Fund.
PORTFOLIO MANAGER
The portfolio manager for the fund is Stephen R. Petersen, Senior Vice-Presi-
dent of Fidelity Management Trust Co., a wholly owned subsidiary of FMR Corp.
Petersen also serves as portfolio manager for several separate institutional
accounts of the sub-advisor as well as for the Fidelity Equity-Income Fund
since August 1993, the Fidelity Balanced Fund since March 1996, and the Fidel-
ity VIP Equity-Income Fund since January 1997. These mutual funds are advised
by Fidelity.
Petersen holds undergraduate and Master's degrees from the University of Wis-
consin.
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 com-
prising the Standard & Poor's 500 Index (S&P 500). However, the fund will also
consider the potential for capital appreciation.
Normally, the fund will invest at least 65% of total assets in income-produc-
ing common or preferred stock and debt convertible into common stock. The re-
mainder 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 in-
vest 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 in-
vests primarily in common and preferred stock and debt convertible into common
stock. The fund can also make temporary investments in securities such as in-
vestment-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 characteris-
tics, 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 prin-
cipal and interest payments than is the case with higher grade bonds. In addi-
tion, 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.
F-17
<PAGE>
Equity
Income
The fund may engage in short-term trading when consistent with its objective.
A security may be sold and another of comparable quality simultaneously pur-
chased 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-ad-
visor 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.
In addition to its primary emphasis on income-producing securities as de-
scribed above, the fund may invest in the following types of securities:
Credit enhancement agreements
Loans and other direct debt instruments
Warrants
Mortgaged-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. Other than the fund's fundamental investment policies and
the limitations set forth in the prospectus, SAI Appendix and this SAI, there
are no limits on the percentage of the fund's assets which may be invested in
any one type of instrument. 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 secu-
rities in which the fund may invest.
SHORT SALES
The fund may enter into short sales with respect to stocks underlying its con-
vertible 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. Convert-
ible 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 net assets in illiquid investments. Under
the supervision of the Board of Directors, the sub-advisor determines the li-
quidity 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 ex-
penses, 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 with-
out registration under the Securities Act of 1933 (restricted securities). Un-
less registered for sale, these securities can only be sold in privately nego-
tiated transactions or pursuant to an exemption from registration. As a re-
sult, these securities may also be considered illiquid investments, and would
be subject to the limitations for such investments described above.
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 sev-
eral 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: Aus-
tralia, Canada, France, Japan, the United Kingdom or Germany.
Investing outside the United States involves different opportunities and dif-
ferent risks from U.S. investments. The fund may invest a portion of its as-
sets in developing countries, or in countries with new or developing capital
markets; for example, nations in Eastern Europe. The risks noted above are
generally intensified for these investments. These countries may have rela-
tively unstable governments, economies based on only a few industries and se-
curities markets that trade a small number of securities. Securities of is-
suers located in these countries tend to have volatile prices and may offer
significant potential for loss as well as gain. 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.
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; however, the fund may only borrow money
for temporary or emergency purposes, and not for the purpose of leveraging the
fund's assets. See the fund's SAI for additional information regarding limita-
tions on the fund's ability to borrow money by engaging in reverse repurchase
transactions.
F-18
<PAGE>
Equity-
Income
SPECIAL RISK FACTORS
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 Corp.
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 in-
come 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 de-
faulted 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 trans-
action costs. If market quotations are not available, lower-rated debt securi-
ties will be valued in accordance with standards set by the Board of Direc-
tors, including the use of outside pricing services. Judgment plays a greater
role in valuing lower-rated debt securities than securities for which more ex-
tensive 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 dis-
pose 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 in-
terest rates. During an economic downturn or a prolonged period of rising in-
terest rates, the ability of issuers of lower-rated debt to service their pay-
ment 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 Corp. ratings.
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 port-
folio turnover of 100% would occur if all of the fund's portfolio were re-
placed in a period of one year.) Because a higher turnover rate increases
transaction costs and may have certain tax consequences, the sub-advisor care-
fully weighs the anticipated benefits of short-term investment against these
consequences. During 1996 the fund's portfolio turnover was 22.17% and in 1995
it was 27.81%.
INVESTMENT RESTRICTIONS
The following summarizes the fund's principal investment limitations. The fol-
lowing 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. No more than 10% of the fund's net assets may be invested in illiquid secu-
rities;
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 Pro-
spectus are not fundamental, and can be changed at any time without your con-
sent. 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 Investment
Company Act of 1940 (1940 Act). As a fundamental policy, a diversified fund
may not purchase a security of any issuer (except cash items and U.S. Govern-
ment securities) if, as applied to 75%
F-19
<PAGE>
Equity-
Income
of the fund's total assets, 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. 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 is-
suers unless the sub-advisor believes a security has the potential for substan-
tial 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 to-
tal 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 in-
creases.
STRATEGIC PORTFOLIO TRANSACTIONS
The portfolio manager for the fund has considerable discretion in the selection
of appropriate fund investments. In the exercise of that discretion, the port-
folio manager may, at any given time, invest a portion of the fund's assets in
one or more strategic portfolio transactions which we define as derivative
transactions and cash enhancement transactions.
For your convenience, in the Appendix, we have included a basic discussion of
these special financial arrangement transactions and some of the risks associ-
ated with them. Note also that the SAI booklet for the 11 funds contains defi-
nitions of the more commonly used derivative transactions, technical explana-
tions 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, col-
lars, 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, if such
loans of securities do not exceed one-third of the fund's total assets, and en-
gage in repurchase and reverse repurchase transactions. Collateral will be con-
tinually maintained at no less than 102% of the value of the loaned securities
or of the repurchase price, as applicable.
F-20
<PAGE>
Appendix
APPENDIX - CONTAINS IMPORTANT INFORMATION FOR ALL FUNDS
This Appendix constitutes part of the Prospectuses of Lincoln National Aggres-
sive Growth Fund, Inc. (Aggressive Growth Fund), Lincoln National Bond Fund,
Inc. (Bond Fund), Lincoln National Capital Appreciation Fund, Inc. (Capital Ap-
preciation Fund), Lincoln National Equity-Income Fund, Inc. (Equity-Income
Fund), Lincoln National Global Asset Allocation Fund, Inc. (Global Asset Allo-
cation 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 ap-
plies 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 securi-
ties and other assets, subtracting liabilities (including dividends payable)
and dividing by the number of shares outstanding. Debt securities and other as-
sets 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 as-
sets are valued at their fair value as determined in good faith. This valuation
is made by or under the authority of each fund's Board of Directors and it may
include the use of valuations furnished by outside sources, including pricing
services which utilize electronic data processing techniques for valuing normal
institutional-size trading units of debt securities. The value of equity secu-
rities is based on the last sale prices of those securities on national securi-
ties exchanges or over-the-counter, or in the absence of recorded sales, at the
average of readily available closing bid and asked prices on exchanges or over-
the-counter. In the absence of readily available closing bid and asked prices,
equity securities will be valued at fair value. See the SAI Appendix for a dis-
cussion of the methodology utilized to value short-term investments (other than
for the Money Market Fund), options, futures and options thereon, and foreign
securities.
MONEY MARKET FUND. The net asset value per share of the Money Market Fund is
determined by the amortized cost method of valuation, under Rule 2a-7, as
amended (the Rule) under the Investment Company Act of 1940 (1940 Act). Under
the Rule, the fund's net asset value using the amortized cost method must
fairly reflect market value. The Board of Directors of the fund has established
procedures to assist fund management and the investment advisor in complying
with the requirements of the Rule, which imposes specific standards for the ma-
turity, quality and diversification of portfolio securities. The Rule also as-
signs certain specific duties to fund management and the Board.
MANAGEMENT OF THE FUNDS
The business and affairs of each fund are managed under the direction of its
Board of Directors. The Board has the power to amend the bylaws of each fund,
to declare and pay dividends and to exercise all the powers of the fund except
those granted to the shareholder. Lincoln Life is the sole shareholder of each
fund.
INVESTMENT ADVISOR. Lincoln Investment is the investment advisor to the funds
and is headquartered at 200 East Berry Street, Fort Wayne, Indiana 46802. Lin-
coln Investment (the advisor) is registered with the Securities and Exchange
Commission (the Commission or SEC) as an investment advisor and has acted as an
investment advisor to mutual funds for over 40 years. The advisor also acts as
investment advisor to Lincoln National Convertible Securities Fund, Inc., and
Lincoln National Income Fund, Inc., closed-end investment companies, and also
acts as sub-adviser to two of the series of Delaware Group Adviser Funds, Inc.,
an open-end series investment company.
The advisor is a wholly-owned subsidiary of Lincoln National Corp. (LNC), a
publicly-held insurance holding company organized under Indiana law. Through
its subsidiaries, LNC provides life insurance and annuities, property-casualty
insurance, reinsurance and financial services. Directors, officers and employ-
ees of the advisor and each fund are permitted to engage in personal securities
transactions subject to restrictions and procedures set forth in the Code of
Ethics adopted by the advisor and each fund. Such restrictions and procedures
include substantially all of the recommendations of the Advisory Group of the
Investment Company Institute and comply with SEC rules and regulations.
Under advisory agreements described in the Prospectus for the variable account,
the advisor provides portfolio management and investment advice to the funds
and administers their other affairs, subject to the supervision of each fund's
Board of Directors.
As compensation for its services to each fund, the advisor is paid a monthly
investment advisory fee at an annual rate based on the average daily net asset
value of each fund, as shown in the following chart:
F-45
<PAGE>
Appendix
<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, Equi-
ty-Income, and International
funds reflect the more ex-
tensive services and in-
creased expense associated
with portfolios of securi-
ties issued outside the
United States.
- --------------------------------------------------------------------------------
FUND EXPENSES (see accompanying text below)
<TABLE>
<CAPTION>
1996 ratio of the advisor's
compensation to average 1996 ratio of total expenses
Fund net assets to average net assets
- ---------------------------------------------------------------------------------
<S> <C> <C>
Aggressive Growth .75% .82%
Bond .46 .51
Capital Appreciation .80 .93
Equity-Income .95 1.08
Global Asset Allocation .73 1.00
Growth and Income .33 .36
International .82 1.19
Managed .39 .43
Money Market .48 .57
Social Awareness .42 .46
Special Opportunities .40 .44
</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, printing, and other fees in connection
with filings with regulatory authorities, including the costs of printing and
mailing updated Prospectuses and SAIs provided to current contract owners; fees
and expenses of independent auditors; the expenses of printing and mailing
proxy statements and shareholder reports; custodian and transfer agent charges;
brokerage commissions and securities and options transaction costs incurred by
the fund; taxes and corporate fees; fees for accounting, valuation and related
services; legal fees incurred in connection with the affairs of the fund (other
than legal services provided by personnel of the advisor or its affiliated com-
panies); the fees of any trade association of which the fund is a member; and
expenses of shareholder and Director meetings.
SUB-ADVISORS. As advisor, Lincoln Investment is primarily responsible for in-
vestment decisions affecting each of the funds. However, Lincoln Investment has
entered into sub-advisory agreements with several professional investment man-
agement firms. These firms provide some or substantially all of the investment
advisory services required by a number of the funds, including day-to-day in-
vestment management of those funds' portfolios. Each sub-advisor makes invest-
ment decisions for its respective fund in accordance with that fund's invest-
ment objectives and places orders on behalf of that fund to effect those deci-
sions. See the following tables for more information about the sub-advisors and
their fees:
F-46
<PAGE>
Appendix
<TABLE>
<CAPTION>
Date of
Fund Sub-advisor agreement Annual fee rate based on average daily net asset value
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Lynch & Mayer 12/20/93 .50 of 1% of the first $150 million .35 of 1% of the
Growth 520 Madison Avenue excess over $150 million
New York, NY 10022
Capital Janus 1/1/94 .60 of 1% of the first $100 million .55 of 1% of the
Appreciation 100 Fillmore Street excess over $100 million
Denver, CO 80206
Equity- Fidelity 12/20/93 .75 of 1%
Income 82 Devonshire Street
Boston, MA 02108
Global Asset Putnam 6/8/87 the greater of (a) $40,000; or (b) .47 of 1% of the
Allocation One Post Office Square first $200 million; .42 of 1% of the next $200 million;
Boston, MA 02104 and .40 of 1% of any excess over $400 million
International Clay Finlay 8/29/96 .665 of 1% of the first $50 million; .475 of 1% of the
200 Park Avenue next $50 million; and .250 of 1% of any
New York, NY 10166 excess over $100 million
- --------------------------------------------------------------------------------
<CAPTION>
Annual fee rate based on market value of securities
held in the portfolio of each respective client fund at
Date of the close of business on the last trading day of each
Fund Sub-advisor agreement calendar quarter
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Growth and Vantage 8/21/85 .20 of 1%
Income 630 5th Avenue
New York, NY 10111
Managed Vantage 8/21/85 .20 of 1%
(stock portfolio only)
Social
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 Lincoln In-
vestment. (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 permis-
sion in the event it ceases to be the sub-advisor to the particular fund it ad-
vises.
PURCHASE OF SECURITIES BEING OFFERED
Shares of the funds' common stock ($0.01 par value) will be sold to Lincoln
Life for allocation to the variable annuity account (VAA), which has been es-
tablished for the purpose of funding variable annuity contracts; shares in the
funds will also be sold to Lincoln Life for allocation to one or more of the
variable life accounts, which have been established for the purpose of funding
variable life insurance contracts. Shares of each fund are sold and redeemed at
their net asset value per share determined daily. See Sale and redemption of
shares. Also see Net asset value. The funds' shares are sold to Lincoln Life
for the variable accounts on a no-load basis - that is, without the imposition
of a sales charge.
F-47
<PAGE>
Appendix
SALE AND REDEMPTION OF SHARES
The shares of each fund are sold and redeemed by the fund at their net asset
value per share next determined after receipt by Lincoln Life of a purchase or
redemption order in acceptable form. Redemption of fund shares held by Lincoln
Life for its own account will be effected at the fund's net asset value per
share next determined after receipt of the redemption request by the fund. The
value of shares redeemed may be more or less than original cost, depending upon
the market value of the portfolio securities at the time of redemption. Payment
for shares redeemed will be made within seven days after the redemption request
is received in proper form by the funds. However, the right to redeem fund
shares may be suspended or payment postponed for any period during which (1)
trading on the NYSE is restricted as determined by the Commission, or the NYSE
is closed for other than weekends and holidays; (2) an emergency exists, as de-
termined 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 reasona-
bly practicable for each fund to determine fairly the value of its net assets;
or (3) the Commission by order so permits for the protection of shareholders of
the funds.
DISTRIBUTION AND FEDERAL INCOME TAX CONSIDERATIONS
Each fund's policy is to distribute, at least once a year, substantially all of
its net investment income. Net realized capital gains may only be distributed
annually. These distributions, when paid to Lincoln Life for the variable ac-
counts, will be reinvested automatically in additional shares of that fund, at
its net asset value per share.
Each fund intends to qualify and has elected to be taxed as a regulated invest-
ment company under the provisions of Subchapter M of the Internal Revenue Code
of 1986, as amended (the code). If a fund qualifies as a regulated investment
company and complies with the provisions of the code relieving regulated in-
vestment companies which distribute substantially all of their net income (both
ordinary income and capital gain) from Federal income tax and the 4% nondeduct-
ible Federal excise tax, the funds will be relieved of those taxes on the
amounts distributed. See the SAI for a more complete discussion.
Each fund is subject to asset diversification requirements under Section 817(h)
of the code and the related regulation that the United States Treasury Depart-
ment has adopted. Each fund intends to comply with these diversification re-
quirements.
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 annu-
ity or life insurance contracts, including the failure of a fund to comply with
the diversification requirements discussed above, see the Prospectus for the
variable account at the front of this booklet.
MANAGEMENT DISCUSSION OF FUND PERFORMANCE
In the Annual Report for the funds, the portfolio manager for each fund dis-
cusses 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 com-
mon stock (150 million for the Growth and Income Fund and 100 million each for
the Equity-Income Fund, International Fund and Managed Fund), $0.01 par value.
As of April 1, 1997, each fund had the following number of shares issued and
outstanding:
<TABLE>
<S> <C>
Aggressive Growth 19,033,638
Bond 22,323,906
Capital Appreciation 21,172,476
Equity-Income 32,730,897
Global Asset Allocation 25,529,165
Growth and Income 79,849,479
International 31,897,933
Managed 44,089,292
Money Market 9,655,455
Social Awareness 27,849,619
Special Opportunities 24,121,470
</TABLE>
Fund shares will be owned by Lincoln Life and will be held by it in the vari-
able accounts. As sole shareholder of each fund, Lincoln Life may be deemed to
be a control person as that term is defined under the 1940 Act. However, as
stated in the Prospectuses for the variable accounts, Lincoln Life provides to
contractowners of the variable accounts the right to direct the voting of fund
shares at shareholder meetings, to the extent provided by law. Lincoln Life
will vote for or against any proposition, or will abstain from voting, any fund
shares attributable to a contract for which no timely voting instructions are
received, and any fund shares held by Lincoln Life for its own account, in pro-
portion to the voting instructions
F-48
<PAGE>
Appendix
that it received with respect to all contracts participating in that fund. How-
ever, 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 privi-
leges. Each full share is entitled to one vote and each fractional share is en-
titled to a proportionate fractional vote, on all matters subjected to a vote
of the shareholder. All shares, full and fractional, participate proportion-
ately in any dividends and capital gains distributions and, in the event of
liquidation, in that fund's net assets remaining after satisfaction of out-
standing liabilities.
When issued, each share is fully-paid and non-assessable and the shareholder
has no preemptive or conversion rights. Fund shares have non-cumulative voting
rights, which means that holders of more than 50% of the shares voting for the
election of directors can elect 100% of the directors if they choose to do so.
In that event the holders of the remaining shares so voting will not be able to
elect any directors. Shares may be redeemed as set forth under Sale and redemp-
tion of shares.
The Bylaws of the funds allow them, in proper cases, to dispense with their an-
nual meetings of the shareholder. Generally, this may be done as long as: (1) a
majority of the Directors then in office have at some point been elected by the
shareholder and, if any vacancy is filled by vote of the Board of Directors,
then immediately after filling the vacancy at least two thirds of the Directors
shall have been elected by the shareholder; (2) there is no change in the inde-
pendent auditor of the funds; (3) there is no material change to the investment
advisory and/or sub-advisory agreements and/or fundamental policies; and (4) a
shareholder vote is not required with respect to a distribution agreement. In
adopting this procedure for dispensing with annual meetings that are a formali-
ty, the Directors of the funds have undertaken to comply with the requirements
of Section 16(c) of the 1940 Act. That Section protects contract owners by pro-
viding 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 avail-
able from fund management.
STRATEGIC PORTFOLIO TRANSACTIONS-ADDITIONAL INFORMATION
Because of their different investment objectives and portfolio management phi-
losophies 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 enhance-
ment transactions. Derivative transactions are recognized by the investment
community as an acceptable way to seek to increase the fund's overall value
(or, depending on the condition of the securities markets, at least to slow its
decrease). Cash enhancement transactions are designed to make some extra money
for the fund when it has excess cash, or to help the fund obtain some cash for
temporary purposes when needed. See the Prospectus for each fund for a listing
of the kinds of transactions in which each fund may engage.
1. DERIVATIVE TRANSACTIONS
A. Introduction
A derivative transaction is a financial agreement the value of which is de-
pendent upon the values of one or more underlying assets or upon the values
of one or more indices of asset values. The following types are currently in
fairly common use in the investment community, although not every fund will
use all of them:
1. Equity contracts: stock options and indexed options; equity swaps; stock
index futures and options on futures; swaptions;
2. Interest rate contracts: interest rate futures and options on them; for-
ward rate agreements (FRAs); interest rate swaps and their related trans-
actions (e.g., caps, floors, collars and corridors); and/or
3. Currency derivative contracts: currency forward contracts; currency op-
tions; 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 transac-
tions in which the funds engage generally fall into two broad categories: op-
tions contracts or forward contracts. The combined forms are constantly evolv-
ing. In fact, variations on the types listed previously may come into use after
the date of these Prospectuses. Therefore, where the Prospectus for a particu-
lar fund discloses the intent of that fund to engage in any of the types list-
ed, that fund hereby reserves the right to engage in related variations on
those transactions.
The funds intend to engage in derivative transactions only defensively. Exam-
ples 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.
F-49
<PAGE>
Appendix
There is no discussion here of asset-backed or mortgage-backed securities (such
as collateralized mortgage obligations, structured notes, inverse floaters,
principal-only or interest-only securities, etc.). See the Prospectus and SAI
for the Capital Appreciation and Equity-Income funds, which are authorized to
engage in this kind of trading.
B. Risk factors commonly associated with derivative transactions.
There are certain risks associated with derivatives, and some derivatives
involve more of these risks than others. We briefly describe the most common
ones here; however, this is not an exhaustive list. Consult your financial
counselor if you have additional questions.
CREDIT RISK is the possibility that a counterparty to a transaction will
fail to perform according to the terms and conditions of the transaction,
causing the holder of the claim to suffer a loss.
CROSS-CURRENCY SETTLEMENT RISK (or Herstatt risk) is related to the settle-
ment of foreign exchange contracts. It arises when one of the counterparties
to a contract pays out one currency prior to receiving payment of the other.
Herstatt risk arises because the hours of operation of domestic interbank
fund transfer systems often do not overlap due to time zone differences. In
the interval between the time one counterparty has received payment in one
indicated currency and the time the other counterparty(ies) receive payment
in the others, those awaiting payment are exposed to credit risk and market
risk.
LEGAL RISK is the chance that a derivative transaction, which involves
highly complex financial arrangements, will be unenforceable in particular
jurisdictions or against a financially troubled entity; or will be subject
to regulation from unanticipated sources.
MARKET LIQUIDITY RISK is the risk that a fund will be unable to control its
losses if a liquid secondary market for a financial instrument does not ex-
ist. 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 fun-
damental value.
MARKET RISK is the risk of a change in the price of a financial instrument,
which may depend on the price of an underlying asset.
OPERATING RISK is the potential of unexpected loss from inadequate internal
controls or procedures; human error; system (including data processing sys-
tem) 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 tech-
nical 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 op-
tions and futures transactions depend on the portfolio manager's ability to
correctly predict the direction of stock prices and interest rates, and
other economic factors. Options and futures trading may fail as hedging
techniques in cases where the price movements of the securities underlying
the options and futures do not follow the price movements of the portfolio
securities subject to the hedge. The loss from investing in futures transac-
tions 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 brief-
ly. 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 lim-
its, 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 re-
strictive requirements for derivative transactions, Lincoln Life and the
funds reserve the right to make all necessary changes in the contracts and
the Registration Statements for the funds, respectively, to comply with
those requirements.
2. CASH ENHANCEMENT TRANSACTIONS
Cash enhancement transactions also involve certain risks to the fund. They
are discussed more fully in the SAI.
F-50
<PAGE>
Appendix
A. Lending of portfolio securities
Any fund authorized to do so may make secured loans of its portfolio securi-
ties, in order to realize additional income. The loans are limited to a max-
imum of a stipulated amount of the fund's total assets. As a matter of poli-
cy, 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 se-
curities lent.
The borrower pays the fund an amount equal to any dividends or interest re-
ceived on securities lent. The fund retains all or a portion of the interest
received on securities lent. The fund also retains all or a portion of the
interest received on investment of the cash collateral, or receives a fee
from the borrower.
With respect to the loaned securities, voting rights or rights to consent
pass to the borrower. However, the fund retains the right to call in the
loans and have the loaned securities returned at any time with reasonable
notice. This is important when issuers of the securities ask holders of
those securities - including the fund - to vote or consent on matters which
could materially affect the holders' investment. The fund may also call in
the loaned securities in order to sell them. None of the funds' portfolio
securities will be loaned to Lincoln Investment, to any sub-advisor, or to
any of their respective affiliates. The fund may pay reasonable finder's
fees to persons unaffiliated with it in connection with the arrangement of
the loans.
B. Repurchase (Repo) and reverse repurchase (Reverse Repo) transactions
1. Repos. From time to time, the funds may enter into Repo transactions. In
a typical Repo transaction, the fund involved buys U.S. Government or
other money market securities from a financial institution (such as a
bank, broker, or savings and loan association). At the same time, as part
of the arrangement, the fund obtains an agreement from the seller to re-
purchase those same securities from the fund at a specified price on a
fixed future date.
The repurchase date is normally not more than seven days from the date of
purchase. 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 se-
curities, 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 increas-
ing 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 imposi-
tion of currency exchange blockages or other foreign governmental laws or re-
strictions; reduced availability of public information concerning issuers; and
the fact that foreign companies are not generally subject to uniform account-
ing, auditing, and financial reporting standards or to other regulatory prac-
tices and requirements comparable to those applicable to domestic companies.
With respect to certain foreign countries, there is also the possibility of ex-
propriation, nationalization, confiscatory taxation, and limitations on the use
or removal of cash or other assets of a fund, including the withholding of in-
terest payments or dividends. These risks may be particularly great in so-
called developing or undeveloped countries, sometimes referred to as Emerging
Markets.
In addition, while the volume of transactions effected on foreign stock ex-
changes has increased in recent years, in most cases it remains appreciably be-
low 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 se-
curities of U.S. companies. Moreover, the settlement periods for foreign secu-
rities, 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 nor-
mally pays fixed commissions that are generally higher than the negotiated com-
missions 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 diffi-
F-51
<PAGE>
Appendix
cult or impossible for the fund to obtain or to enforce a judgment against the
issuers of these securities. The advisor or sub-advisor will take all these
factors into consideration in managing a fund's foreign investments.
Certain state insurance regulations impose additional restrictions on the ex-
tent 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 in-
vestments 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 impor-
tant factor in the performance of the fund.
FOREIGN CURRENCIES
When an advisor or sub-advisor believes that a currency in which a portfolio
security or securities is denominated or exposed may suffer a decline against
the U.S. dollar, it may hedge that risk by entering into a forward contract to
sell an amount of foreign currency approximating the value of some or all of
the portfolio securities denominated in or exposed to that foreign currency.
Because foreign securities generally are denominated and pay dividends or in-
terest 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, cur-
rency 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 of-
fer spot rate of the currency being purchased or sold. Some foreign currency
values may be volatile, and there is the possibility of government controls on
currency exchange or governmental intervention in currency markets which could
adversely affect the fund.
Investors should be aware that exchange rate movements can be significant and
can endure for long periods of time. In order to protect against uncertainty in
the level of future foreign currency exchange rates, a fund's advisor or sub-
advisor may attempt to manage exchange rate risk through active currency man-
agement, including the use of certain foreign currency hedging transactions.
For example, it may hedge some or all of its investments denominated in a for-
eign 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. dol-
lars (not exceeding the value of the fund's assets denominated in or exposed to
that currency), or by participating in options or futures contracts with re-
spect to that currency. If the advisor or sub-advisor believes that a particu-
lar 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 de-
nominated in or exposed to that currency) in exchange for another currency that
the advisor or sub-advisor expects to remain stable or to appreciate relative
to the U.S. dollar. This technique is known as currency cross-hedging. Refer to
the Prospectus for each fund to determine which funds may engage in these
transactions.
These strategies are intended to minimize the effect of currency appreciation
as well as depreciation, but do not protect against a decline in the underlying
value of the hedged security. In addition, these strategies may reduce or elim-
inate 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 2340, Fort Wayne, Indiana 46801; or, you may call 1-800-4LINCOLN (454-
6265).
The funds will issue unaudited semiannual reports showing current investments
in each fund and other information; and annual financial statements audited by
their independent auditors.
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 outstand-
ing shares, whichever is less.
These Prospectuses do not contain all the information included in their Regis-
tration Statements filed with the Commission. The Registration Statements, in-
cluding the exhibits filed with them, may be examined at the office of the Com-
mission in Washington, D.C. Statements contained in the Prospectuses about the
contents of any contract or other document referred to in them are not neces-
sarily complete. In each instance, reference is made to the copy of that con-
tract or other document filed as an exhibit to the Registration Statement of
which the particular Prospectus forms a part, and
F-52
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Appendix
each statement is qualified in all respects by that reference.
The use of funds by both variable annuity and variable life insurance separate
accounts is known as mixed funding. Due to differences in redemption rates, tax
treatment, or other considerations, the interests of contract owners under the
variable life accounts may conflict with those of contract owners under the
variable annuity account, in those cases where mixed funding occurs. For exam-
ple, violation of the federal tax laws by one variable account investing in the
funds could cause the contracts and Policies funded through another variable
account to lose their tax-deferred status, unless remedial action were taken.
The Board of Directors of each fund will monitor for any material conflicts and
determine what action, if any, should be taken.
Should any conflict arise which requires that a substantial amount of assets be
withdrawn from any of the funds, orderly portfolio management could be
disrupted, to the detriment of those contract owners still investing in that
fund. Also, if that fund believes that any portfolio has become so large as to
materially impair investment performance, then the fund will examine other
investment options.
Lincoln Life performs the dividend and transfer functions for the funds.
F-53
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Equity- Income
LINCOLN NATIONAL
EQUITY-INCOME FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
This SAI should be read in conjunction with the Prospectus of Lincoln National
Equity-Income Fund, Inc. (fund) dated May 1, 1997. You may obtain a copy of
the fund's Prospectus on request and without charge. Please write Lincoln
National Life Insurance Co., P.O. Box 2340, Fort Wayne, Indiana 46801 or call
1-800-4LINCOLN (454-6265).
TABLE OF CONTENTS
<TABLE>
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<S> <C>
INVESTMENT OBJECTIVES E1- 2
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INVESTMENT POLICIES AND LIMITATIONS
(RESTRICTIONS) E1- 2
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INVESTMENT TECHNIQUES E1- 3
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PORTFOLIO TRANSACTIONS AND BROKERAGE E1-16
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DETERMINATION OF NET ASSET VALUE E1-17
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APPENDIX
Investment advisor and sub-advisor A- 1
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Directors and officers A- 3
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Investment policies and techniques (continued): options, futures,
securities valuation, securities lending, repurchase and reverse
repurchase agreements A- 4
</TABLE>
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<TABLE>
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<S> <C>
Custodian A- 9
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Independent auditors A- 9
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Financial statements A- 9
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Bond and commercial paper ratings A- 9
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U.S. Government obligations A-11
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Taxes A-11
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State requirements A-12
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Derivative transactions-definitions A-13
</TABLE>
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THIS SAI IS NOT A PROSPECTUS.
The date of this SAI is May 1, 1997.
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Equity-
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INVESTMENT OBJECTIVES
The fund's investment objective is to obtain reasonable income by investing
primarily in income-producing equity securities. The fund's investment objec-
tive 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 Index (S&P 500).
References to advisor in this SAI include both Lincoln Investment Management,
Inc. (Lincoln Investment) and Fidelity Management Trust Co.
INVESTMENT POLICIES AND LIMITATIONS (RESTRICTIONS)
The following policies and limitations supplement those set forth in the Pro-
spectus. 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. Accord-
ingly, any subsequent change in values, net assets or other circumstances will
not be considered when 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 following fundamental investment limitations, the
investment policies and limitations described in this SAI 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. Govern-
ment 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 (1940 Act);
3. borrow money, except that the fund (a)may borrow money for temporary or
emergency purposes (not for leveraging or investment) or (b)engage in re-
verse repurchase agreements, provided that (a)and (b)in combination
(borrowings) do not exceed 25% of its total assets (including the amount
borrowed) less liabilities (other than borrowings). Any borrowings that
come to exceed 25% 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 Sun-
days and holidays) to the extent necessary to comply with the 25% limita-
tion;
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 instrumentali-
ties) 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 secu-
rities of companies engaged in the real estate business);
7. purchase or sell physical commodities unless acquired as a result of owner-
ship of securities or other instruments (but this shall not prevent the
fund from purchasing or selling options and futures contracts or from in-
vesting in securities or other instruments backed by physical commodities);
or
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.
1. 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.
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Equity-
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2. 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 consti-
tute purchasing securities on margin.
3. 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 neces-
sary to comply with the 25% limitation. The fund will not purchase any se-
curity while borrowings representing more than 5% of its total assets are
outstanding.
4. The fund does not currently intend to purchase any security if, as a re-
sult, more than 10% of the fund's net assets would be invested in securi-
ties that are deemed to be illiquid because they are subject to legal or
contractual restrictions on resale or because they cannot be sold or dis-
posed of in the ordinary course of business at approximately the prices at
which they are valued.
5. The fund does not currently intend to lend assets other than securities to
other parties, except by acquiring loans, loan participations, 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.)
6. The fund does not currently intend to (a)purchase securities of other in-
vestment companies, except in the open market where no commission except
the ordinary broker's commission is paid, or (b)purchase or retain securi-
ties issued by other open-end investment companies. Limitations (a)and
(b)do not apply to securities received as dividends, through offers of ex-
change, 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.)
7. 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.
Other than the fund's fundamental investment policies and the limitations set
forth in the prospectus, SAI Appendix and this SAI, there are no limits on the
percentage of the fund's assets which may be invested in any one type of in-
strument. Nor are there limitations (except those imposed by certain state in-
surance regulations) on the percentage of the fund's assets which may be in-
vested 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 Co. serving as sub-advi-
sor, the fund has agreed to certain non-fundamental limitations. Please refer
to the Prospectus for the VAA 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
objective 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 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 fund's sub-advisor, Fidelity Management Trust Co., which is an
affiliate of Fidelity Management & Research Co. (Fidelity), which manages the
Fidelity Equity-Income Fund.
AFFILIATED BANK TRANSACTIONS. Pursuant to exemptive orders issued by the Secu-
rities 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 un-
der the 1940 Act. Such transactions may be entered into only pursuant to proce-
dures established and periodically reviewed by the Board of 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 securi-
ties; 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 adminis-
ter 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
EI-3
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Equity-
Income
Board of Directors and shareholders of a company when the sub-advisor deter-
mines 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 reor-
ganization 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 law-
suits related to such activities. The sub-advisor 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 secu-
rities 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.
BANKERS' 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 usu-
ally backed by goods in international trade.
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. These securities are described more fully in the SAI
Appendix.
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 in-
termediaries. 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 instru-
ment that approximates its par value.
CREDIT ENHANCEMENT AGREEMENTS may be purchased simultaneously with a money mar-
ket instrument for guaranteeing principal and/or interest and may be considered
with the instrument for purposes of determining the quality of the instruments.
These include irrevocable note repurchase agreements or letters of credit is-
sued by banks and guarantees provided by creditworthy institutions. The fund
will purchase these agreements to enhance the creditworthiness of instruments
when the sub-advisor (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 cor-
porate, 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 matu-
rity 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 ad-
dition, loan participations involve a 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 col-
lateralized 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 mort-
gage-backed securities will likely be developed in the future, and the fund may
invest in them if the sub-advisor determines they are
EI-4
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consistent with the fund's investment objective and policies.
The value of mortgage-backed securities may change due to shifts in the mar-
ket's perception of issuers. In addition, regulatory or tax changes may ad-
versely affect the mortgage securities market as a whole. Non-government mort-
gage-backed securities may offer higher yields than those issued by government
entities, but also may be subject to greater price changes than government is-
sues. 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. Additionally, mortgage-backed securities are also
subject to maturity extension risk. This is the risk that in a period of rising
interest rates, prepayments may occur at a slower than expected rate, which may
cause these securities to fluctuate more widely in response to changes in in-
terest rates.
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 se-
curity (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. Ris-
ing interest rates can have the opposite effect.
ASSET-BACKED SECURITIES consist of undivided fractional interests in pools of
consumer loans (unrelated to mortgage loans) held in a trust. Payments of prin-
cipal and interest are passed through to certificate holders and are typically
supported by some form of credit enhancement, such as a letter of credit,
surety bond, limited guaranty or senior/subordination. The degree of credit en-
hancement varies, but generally amounts to only a fraction of the asset-backed
security's par value until exhausted. Asset-backed securities are ultimately
dependent upon payment of consumer loans by individuals, and the certificate
holder generally has no recourse to the entity that originated the loans. The
underlying loans are subject to prepayments which shorten the securities'
weighted average life and may lower their return. (As prepayments flow through
at par, total returns would be affected by the prepayments; if a security were
trading at a premium, its total return would be lowered by prepayments, and if
a security were trading at a discount, its total return would be increased by
prepayments.) Additionally, asset-backed securities are also subject to matu-
rity extension risk. This is the risk that in a period of rising interest
rates, prepayments may occur at a slower than expected rate, which may cause
these securities to fluctuate more widely in response to changes in interest
rates. If the credit enhancement is exhausted, certificate holders may experi-
ence losses or delays in payment if the required payments of principal and in-
terest 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 origina-
tor of the loans, or the financial institution providing the credit enhance-
ment.
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 num-
ber 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 prin-
cipal components of a U.S. Treasury security and selling them as two individual
securities. Certificates of Accrual on Treasury Securities (CATS), Treasury In-
vestment Growth Receipts (TIGRs) and Treasury Receipts (TRs) are examples of
derivative zeros.
The Federal Reserve Bank creates Separate Trading of Registered Interest and
Principal of Securities (STRIPS) by separating the interest and principal com-
ponents of an outstanding U.S. Treasury bond and selling them as individual se-
curities. Bonds issued by the Resolution Funding Corp. (REFCORP) and the Fi-
nancing Corp. (FICO) can also be separated in this fashion. Original issue ze-
ros are zero coupon securities originally issued by the U.S. Government, a gov-
ernment agency or a corporation in zero coupon form.
REPURCHASE AGREEMENTS. The fund may also make short-term investments in repur-
chase 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 pur-
chase price to the fund and the resale price to the seller represents the in-
terest earned by the fund which is unrelated to the coupon rate or maturity of
the purchased security. If the seller de-
EI-5
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Equity-
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faults, 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 con-
nection with liquidating the collateral. If bankruptcy proceedings are com-
menced 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 or its delegate to be creditworthy; they will be
fully collateralized; and the collateral for each transaction will be in the
actual or constructive possession of the fund during the term of the transac-
tion, as provided in the agreement. The fund currently intends to invest only
in repurchase agreements collateralized by U.S. Government securities. Repur-
chase agreements with a duration of more than seven days are considered illiq-
uid securities and are subject to the limit stated above. The fund may engage
in a repurchase agreement with respect to any security in which it is autho-
rized to invest.
Pursuant to an Exemptive Order issued by the SEC, the fund, along with other
registered investment companies having management contracts with the sub-advi-
sor or an affiliate thereof, may invest in a pool of one or more large over-
night 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 an-
other 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 in-
crease 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 repur-
chase 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 Di-
rectors. 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 se-
curities), U.S. Government obligations or certificates of deposit. Such collat-
eral will be maintained at all times in an amount equal to at least 102% of the
current market value of the loaned securities, and will be in the actual or
constructive possession of the fund during the term of the loan. The fund will
retain the incidents of ownership of the loaned securities and will be entitled
to the interest or dividends payable on the loaned securities. In addition, the
fund will receive interest on the amount of the loan. The loans will be termi-
nable by the fund at any time and will not be made to any affiliates of the
fund or the advisor or sub-advisor. The fund may pay reasonable finder's fees
to persons unaffiliated with it in connection with the arrangement of the
loans.
As with any extensions of credit, there are risks of delay in recovery and, in
some cases, even loss of rights in the collateral or the loaned securities
should the borrower of securities fail financially. However, loans of portfolio
securities will be made only to firms deemed by the Board of Directors to be
creditworthy. As a fundamental policy, the fund will not lend securities if, as
a result, more than 33 1/3% of its total assets would be lent to other parties.
ILLIQUID INVESTMENTS are investments that cannot be sold or disposed of in the
ordinary course of business at approximately the prices at which they are val-
ued. Under the supervision of the Board of Directors, the sub-advisor deter-
mines the liquidity of the fund's investments and, through reports from the
sub-advisor, the Board monitors investments in illiquid instruments. In deter-
mining the liquidity of the fund's investments, the sub-advisor may consider
various factors, including but not limited to (1) the frequency of trades and
quotations, (2) the number of dealers and prospective purchasers in the market-
place, (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 market-
place for trades (including the ability to assign, swap 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 swap
agreements determined by the sub-advisor 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.
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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 Di-
rectors of the fund. If through a change in values, net assets, or other cir-
cumstances, 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 transac-
tions, 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 con-
siderable 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.
SWAP AGREEMENTS. As one way of managing its exposure to different types of in-
vestments, 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 float-
ing interest rate multiplied by a notional principal amount, in return for pay-
ments equal to a fixed rate multiplied by the same amount, for a specified pe-
riod of time. If a swap agreement provides for payments in different curren-
cies, 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 un-
der 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 re-
sult, 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 expo-
sure to a variety of different types of investments or market factors. Depend-
ing on their structure, swap agreements may increase or decrease the fund's ex-
posure to long or short-term interest rates (in the U.S. or abroad), foreign
currency values, mortgage securities, corporate borrowing rates, or other fac-
tors 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 of swap agreement if the sub-advisor determines it is con-
sistent 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 agree-
ment with the same party or a similarly creditworthy party.
The fund will maintain appropriate liquid assets in a segregated custodial ac-
count to cover its current obligations under swap agreements. If the fund en-
ters into a 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 matu-
rity or coupon rate is determined by reference to a specific instrument or sta-
tistic. Gold-indexed securities, for example, typically provide for a maturity
value that depends on the
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price of gold, resulting in a security whose price tends to rise and fall to-
gether with gold prices. Currency-indexed securities typically are short-term
to intermediate-term debt securities whose maturity values interest rates are
determined by reference to the values of one or more specified foreign curren-
cies, and may offer higher yields than U.S. dollar-denominated securities of
equivalent issuers. Currency-indexed securities may be positively or nega-
tively 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 for-
eign 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 for-
eign currencies relative to each other.
The performance of indexed securities depends to a great extent on the perfor-
mance of the security, currency, or other instrument to which they are in-
dexed, 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 sub-
stantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S. Govern-
ment agencies.
WARRANTS. Warrants are securities that give the fund the right to purchase eq-
uity 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 sub-
ject 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 before the expiration date. These factors can make war-
rants 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 inter-
est. 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 ad-
versely 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 col-
lateral can be liquidated. Indebtedness of borrowers whose creditworthiness is
poor involves substantially greater risks, and may be highly speculative. Bor-
rowers that are in bankruptcy or restructuring may never pay off their indebt-
edness, or may pay only a small fraction of the amount owed. Direct indebted-
ness of developing countries will also involve a risk that the governmental
entities responsible for the repayment of the debt may be unable, or unwill-
ing, to pay interest and repay principal when due.
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 col-
lateral, and would bear the costs and liabilities associated with owning and
disposing of the collateral. In addition, it is conceivable that under emerg-
ing 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-advisor'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 participa-
tion and could suffer a loss of principal or interest.
Direct indebtedness purchased by the fund may include letters of credit, re-
volving credit facilities or other standby financing commitments obligating
the fund to pay additional cash on demand. These commitments may have the ef-
fect 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
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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 is-
suer or in issuers within the same industry (see fundamental 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. Treating a financial interme-
diary 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 in-
termediaries 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 ad-
dition to the risks inherent in U.S. investments. The value of securities de-
nominated 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 applica-
ble to U.S. companies, and it may be more difficult to obtain reliable infor-
mation regarding an issuer's financial condition and operations. In addition,
the costs of foreign investing, including withholding taxes, brokerage commis-
sions and custodial costs, are generally higher than for U.S. investments.
Foreign markets may offer less protection to investors than U.S. markets. For-
eign issuers, brokers, and securities markets may be subject to less govern-
ment supervision. Foreign security trading practices, including those involv-
ing 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 na-
tionalization of assets, confiscatory taxation, restrictions on U.S. invest-
ment or on the ability to repatriate assets or convert currency into U.S. dol-
lars 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, eco-
nomic or social instability, military action or unrest or adverse diplomatic
developments. There is no assurance that the sub-advisor will be able to an-
ticipate these potential events or counter their effects.
The considerations noted previously 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 in foreign securities that impose restrictions on transfer
within the United States or to U.S. persons. Although securities subject to
transfer restrictions may be marketable abroad, they may be less liquid than
foreign securities of the same class that are not subject to such restric-
tions.
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 transac-
tions 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 var-
ious 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 de-
sire 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 ex-
change.
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 con-
tracts 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 cur-
rency, it may desire to lock in the
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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 pay-
ment is made or received. This technique is sometimes referred to as a settle-
ment hedge or transaction hedge. The fund may also enter into forward con-
tracts to purchase or sell a foreign currency in anticipation of future pur-
chases or sales of securities denominated in foreign currency, even if the
specific investments have not yet been selected by the sub-advisor.
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 nega-
tive currency fluctuations, but would not offset changes in security values
caused by other factors. The fund could also hedge the position by selling an-
other currency expected to perform similarly to the pound sterling--for exam-
ple, by entering into a forward contract to sell Deutschemarks or European
Currency Units in return for U.S. dollars.This type of hedge, sometimes re-
ferred 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 denomi-
nated 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 cur-
rency 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 pur-
chased 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 ap-
propriate liquid assets in a segregated custodial account to cover currency
forward contracts. As required by SEC guidelines, the fund will segregate as-
sets to cover currency forward contracts, if any, whose purpose is essentially
speculative. The fund will not segregate assets to cover forward contracts en-
tered into for hedging purposes, including settlement hedges, position hedges
and proxy hedges.
Successful use of currency forward contracts will depend on the sub-advisor's
skill in analyzing and predicting currency values. Forward contracts may sub-
stantially change the fund's investment exposure to changes in currency ex-
change rates, and could result in losses to the fund if currencies do not per-
form as the sub-advisor anticipates. For example, if a currency's value rose
at a time when the sub-advisor had hedged 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-advisor 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 tan-
dem. Similarly, if the sub-advisor increases the fund's exposure to a foreign
currency, and that currency's value declines, the fund will realize a loss.
There is no assurance that the sub-advisor'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 fluctua-
tions. 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 re-
turn characteristics of the overall strategy. The fund may invest in options
and futures based on any type of security, index, or currency, including op-
tions and futures traded on foreign exchanges and options not traded on ex-
changes.
Options and futures can be volatile investments, and involve certain risks. If
the sub-advisor applies a hedge at an inappropriate time or judges market con-
ditions incorrectly, options and futures strategies may lower the 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.
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 to comply with Section 4.5 of the regulations under the Commodity Ex-
change Act, which limits the ex-
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tent 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 inci-
dental to the fund's activities in the cash market, and the underlying com-
modity value of the positions at all times will not exceed the sum of (1)
cash or money market instruments set aside in an identifiable manner, plus
margin deposits, (2) cash proceeds from existing investments due in 30
days, and (3) 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 con-
tracts 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 op-
tions 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 avail-
able 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 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 sec-
ondary market is available.
The value of a futures contract tends to increase and decrease in tandem with
the value of its underlying instrument. Therefore, purchasing futures con-
tracts 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 under-
lying instrument had been sold.
FUTURES MARGIN PAYMENTS. The purchaser or seller of a futures contract is not
required to deliver or pay for the underlying instrument unless the contract
is held until the delivery date. However, both the 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 pur-
chasing securities on margin for purposes of the fund's investment limita-
tions. 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 pro-
portion to the amount received by the FCM's other customers, potentially re-
sulting 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 vari-
ous 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 pre-
mium 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 (limited to the amount of the premium paid, plus re-
lated 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 strike price.
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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 secu-
rity 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, al-
though 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 instru-
ment 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 un-
derlying instrument, in return for the strike price, upon exercise of the op-
tion. 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 or fall. Through receipt of the option pre-
mium, 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 instru-
ment 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 forward contracts, to ad-
just 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 under-
lying instrument, in order to construct a combined position whose risk and re-
turn characteristics are similar to selling a futures contract. Another possi-
ble 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 com-
bined options positions involve multiple trades, they result in higher trans-
action 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 standard-
ized contracts available will not match the fund's current or anticipated in-
vestments 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 under-
lying instruments, even if the underlying instruments match the fund's invest-
ments 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 fluctua-
tion 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 differ-
ences 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 posi-
tions 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 liq-
uid secondary market will exist for any particular options or futures contract
at any particular time. Options may have relatively low trading volume and li-
quidity 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 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 halt 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
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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.
OVER THE COUNTER (OTC) OPTIONS. Unlike exchange-traded options, which are
standardized with respect to the underlying instrument, expiration date, con-
tract size and strike price, the terms of OTC 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 to 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 delivery date. Most currency futures contracts call for pay-
ment or delivery in U.S. dollars. The underlying instrument of a currency op-
tion 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 previously. The fund
may purchase and sell currency futures and may purchase and write currency op-
tions 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 op-
tions values can be expected to correlate with exchange rates, but may not re-
flect other factors that affect the value of the fund's investments. A cur-
rency hedge, for example, should protect a Yen-denominated security from a de-
cline in the Yen, but will not protect the fund against a price decline re-
sulting from deterioration in the issuer's creditworthiness. Because the value
of the fund's foreign-denominated investments changes in response to many fac-
tors 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 SEC 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 segrega-
tion of a large percentage of the fund's assets could impede portfolio manage-
ment or the fund's ability to meet redemption requests or other current obli-
gations.
SHORT SALES. The fund may enter into short sales with respect to stocks under-
lying its convertible security holdings. For example, if the sub-advisor an-
ticipates a decline in the price of the stock underlying a convertible secu-
rity the fund holds, it may sell the stock short. If the stock price subse-
quently 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 con-
vertible security. 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 secu-
rities equivalent in kind and amount to those sold short (or securities con-
vertible or exchangeable into such securities) and will be required to con-
tinue 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 Standard & Poor's Corp. 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 is-
suer'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 de-
faulted 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 trans-
action costs. If market quotations are not available, lower-rated debt securi-
ties will be valued in accordance with standards set by the Board of Direc-
tors, including the use of outside pricing services. Judgment plays a greater
role in valuing lower-rated debt securities than securities for which more ex-
tensive 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 secu-
EI-13
<PAGE>
Equity-
Income
rities, 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 in-
terest rates. During an economic downturn or a prolonged period of rising in-
terest rates, the ability of issuers of lower-rated debt to service their pay-
ment 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 Appendix for a discussion of Moody's and Standard & Poor's
Corp. ratings.
PORTFOLIO TRANSACTIONS AND
BROKERAGE
All orders for the purchase or sale of fund securities are placed on behalf of
the fund by the advisor (either directly or through affiliated advisors or
sub-advisors) pursuant to authority contained in the fund's advisory agree-
ment. The advisor may also be responsible for the placement of transaction or-
ders for other investment companies and accounts for which it or its affili-
ates act as advisor or sub-advisor. Money market securities purchased and sold
by the fund generally will be traded on a net basis (i.e., without commis-
sion). In selecting broker-dealers, subject to applicable limitations of the
federal securities laws, the advisor will consider various relevant factors,
including, but not limited to, the size and type of the transaction; the na-
ture 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 execution services rendered on a con-
tinuing basis; and the reasonableness of any commissions. Commissions for for-
eign 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 advisor or its affiliates exercise investment discretion. Such services
may include advice concerning the value of securities; the advisability of in-
vesting 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 settle-
ment). The advisor maintains a listing of broker-dealers who provide such ser-
vices on a regular basis. However, as many transactions on behalf of the
fund's money market securities are placed with dealers (including broker-deal-
ers 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 bro-
ker-dealers is generally made by the advisor (to the extent possible consis-
tent with execution considerations) in accordance with a ranking of broker-
dealers determined periodically by the advisor's investment staff based upon
the quality of research and execution services provided.
The receipt of research from broker-dealers that execute transactions on be-
half of the fund may be useful to the advisor in rendering investment manage-
ment services to the fund and/or other clients, and conversely, such informa-
tion provided by broker-dealers who have executed transaction orders on behalf
of other advisor clients may be useful to the advisor in carrying out its ob-
ligations to the fund. The receipt of such research has not reduced the advi-
sor's normal independent research activities; however, it enables the advisor
to avoid additional expenses that could be incurred if the advisor tried to
develop comparable information through its own efforts.
Subject to applicable limitations of the federal securities laws, broker deal-
ers 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 advisor must determine in good faith that such commis-
sions are reasonable in relation to the value of the brokerage and research
services provided by such executing broker-dealers viewed in terms of a par-
ticular transaction or the advisor's overall responsibilities to the fund and
its other clients. In reaching this determination, the advisor will not at-
tempt 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 advisor 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 advisor may use research services provided by
and place agency
EI-14
<PAGE>
Equity-
Income
transactions with Fidelity Brokerage Services, Inc. (FBSI) and Fidelity Broker-
age 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. Before September 4, 1992, FBSL
operated under the name Fidelity Portfolio Services, Ltd. (FPSL) as a 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 advisor'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 pro-
vided 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.
The aggregate amount of brokerage commissions paid by the fund during 1996 was
$304,769, for 1995 it was $197,960 and for 1994 it was $103,726.
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 advis-
able. 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 opportuni-
ties 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 advisor or its affiliates also manage other funds, investment de-
cisions for the fund are made independently from those of other funds managed
by sub-advisor or accounts managed by affiliates of the sub-advisor. It some-
times happens that the same security is held in the portfolio of more than one
of these funds or accounts. Simultaneous transactions are inevitable when sev-
eral funds are managed by the same investment advisor, particularly when the
same security is suitable for the investment objective of more than one fund.
Securities of the same issuer may be purchased, held, or sold at the same time
by the fund or other accounts or companies for which the advisor provides in-
vestment advice (including affiliates of the advisor). On occasions when the
advisor deems the purchase or sale of a security to be in the best interest of
the fund, as well as the other clients of the advisor, the advisor, to the ex-
tent permitted by applicable laws and regulations, may aggregate such securi-
ties to be sold or purchased for the fund with those to be sold or purchased
for other clients in order to obtain best execution and lower brokerage commis-
sions, if any. In such event, allocation of the securities so purchased or
sold, as well as the expenses incurred in the transaction, will be made by the
advisor in the manner it considers to be equitable and consistent with its fi-
duciary obligations to all such clients, including the fund. In some instances,
the procedures may impact the price and size of the position obtainable for the
fund.
Under the sub-advisory agreement between the advisor and the sub-advisor, the
sub-advisor may perform some, or substantially all, of the investment advisory
services required by the fund, even though the advisor remains primarily re-
sponsible for investment decisions affecting the fund. The sub-advisor will
follow the same procedures and policies which are followed by the advisor as
described previously. The sub-advisor currently provides investment advice to a
number of other clients.
DETERMINATION OF NET ASSET VALUE
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 Ex-
change (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 securi-
ties are valued either at amortized cost or at original cost plus accrued in-
terest, both of which approximate their current value. Securities pricing serv-
ices may be utilized by the fund.
The fund is open for business and its NAV is calculated each day the NYSE is
open for trading. The NYSE has designated the following holiday closings for
1997: New Year's Day, President's Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day, and Christmas Day. It may also be closed on
other days. Although the Directors expect the same holiday schedule to be ob-
served in the future, the NYSE may modify its holiday schedule at any time. To
the extent that the fund's securities are traded in other markets on days when
the NYSE is closed, the fund's NAV may be affected on days when investors do
not have access to the fund to purchase or redeem shares.
EI-15
<PAGE>
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EI-16
<PAGE>
Appendix
APPENDIX
(Note: This is uniform information for the 11 Funds. See each Fund's SAI for
information specific to that Fund.)
THIS APPENDIX CONSTITUTES PART OF THE SAIS OF LINCOLN NATIONAL AGGRESSIVE
GROWTH FUND, INC. (AGGRESSIVE GROWTH FUND), LINCOLN NATIONAL BOND FUND, INC.
(BOND FUND), LINCOLN NATIONAL CAPITAL APPRECIATION FUND, INC. (CAPITAL APPRECI-
ATION 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 NA-
TIONAL 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 AP-
PLIES TO EACH FUND.
INVESTMENT ADVISOR AND SUB-ADVISOR
Lincoln Investment Management, Inc. (Lincoln Investment) is the investment ad-
visor to the funds and is headquartered at 200 E. Berry Street, Fort Wayne, In-
diana 46802. Lincoln Investment (the advisor) is a subsidiary of Lincoln Na-
tional Corp. (LNC), a publicly-held insurance holding company organized under
Indiana law. Through its subsidiaries, LNC provides, on a national basis, in-
surance and financial services. Lincoln Investment is registered with the Secu-
rities and Exchange Commission (SEC) as an investment advisor and has acted as
an investment advisor to mutual funds for over 40 years. The advisor also acts
as investment advisor to Lincoln National Income Fund, Inc. (a closed-end in-
vestment company whose investment objective is to provide a high level of cur-
rent income from interest on fixed-income securities) and Lincoln National Con-
vertible Securities Fund, Inc. (a closed-end investment company whose invest-
ment objective is a high level of total return on its assets through a combina-
tion of capital appreciation and current income) and to other clients, and also
acts as sub-adviser to two of the series of Delaware Group Adviser Funds, Inc.
(the Corporate Income Fund and the Federal Bond Fund of that retail mutual fund
complex).
Under Advisory Agreements with the funds, the advisor provides portfolio man-
agement 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 as-
sumed by the funds, as described in the Appendix to the Prospectus. Lincoln
Life has paid the organizational expenses of all the funds. The rates of com-
pensation to the advisor and the sub-advisors are set forth in the Appendix to
the Prospectus.
During the last three years, the advisor received the following amounts for in-
vestment advisory services:
<TABLE>
<CAPTION>
1996 1995 1994
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggressive Growth Fund $1,428,803 $ 725,544 $ 232,000
Bond Fund 1,188,030 1,061,701 999,397
Capital Appreciation Fund 1,549,656 726,011 211,773
Equity-Income Fund 3,303,336 1,457,623 348,255
Global Asset Allocation Fund 2,072,722 1,570,876 1,381,059
Growth and Income Fund 7,063,276 5,077,981 3,896,902
International Fund 3,319,701 2,770,197 2,262,664
Managed Fund 2,480,524 2,120,656 1,919,150
Money Market Fund 417,468 385,019 404,441
Social Awareness Fund 1,877,030 1,048,366 736,602
Special Opportunities Fund 2,274,229 1,809,514 1,351,374
</TABLE>
A-1
<PAGE>
Appendix
If total expenses of the funds (excluding taxes, interest, portfolio brokerage
commissions and fees, and expenses of an extraordinary and non-recurring na-
ture, 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 ad-
visor 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 inter-
ested 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 ter-
minated without penalty at any time, on 60 days' written notice by: (1) the
Board of Directors of each fund, (2) vote of a majority of the outstanding vot-
ing securities of each fund or (3) the advisor. The advisory agreement termi-
nates automatically in the event of assignment.
In like manner, the current sub-advisory agreement will remain in effect from
year to year if approved annually by the Board of Directors of the applicable
funds or by the vote of a majority of the outstanding voting securities of
those funds. The sub-advisory agreements may be terminated without penalty at
any time, on 60 days' written notice, by: (1) the Board of Directors of the ap-
plicable 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.
A-2
<PAGE>
Appendix
DIRECTORS AND OFFICERS
The directors and executive officers of each fund, their business addresses,
positions with fund, age and their principal occupations during the past five
years are as follows:
- --------------------------------------------------------------------------------
<TABLE>
<C> <S>
* KELLY D. CLEVENGER Vice President, Lincoln National Life Insurance Co.
Chairman of the Board,
President and
Director, age 44
1300 S. Clinton Street
Fort Wayne, IN 46802
- -------------------------------------------------------------------------------
JOHN B. BORSCH, JR. Retired, formerly Associate Vice President--
Director, age 63 Investments, Northwestern University
1776 Sherwood Road
Des Plaines, IL 60016
- -------------------------------------------------------------------------------
NANCY L. FRISBY, CPA Regional Vice President/Chief Financial Officer
Director, age 55 (formerly Vice President--Finance; Regional
700 Broadway Controller of Finance), St. Joseph Medical Center,
Fort Wayne, IN 46802 Fort Wayne, Indiana
- -------------------------------------------------------------------------------
* BARBARA S. KOWALCZYK Senior Vice President and Director, Corporate
Director, age 45 Planning and Development, Lincoln National
1300 S. Clinton St. Corporation; Director, Lincoln Life and Annuity
Fort Wayne, IN 46802 Company of New York (formerly Executive Vice
President, Lincoln Investment Management, Inc.)
- -------------------------------------------------------------------------------
STANLEY R. NELSON Executive in Residence Program in Health Services
Director, age 70 Administration, University of Minnesota, Minneapolis,
420 Delaware St., S.E. Minnesota (formerly President, Henry Ford Health Care
Minneapolis, MN 55455 Corp., Detroit, Michigan)
- -------------------------------------------------------------------------------
* JANET C. WHITNEY Vice President and Treasurer, Lincoln National Corp.
Treasurer, age 48 (formerly Vice President and General Auditor)
200 East Berry Street
Fort Wayne, IN 46802
- -------------------------------------------------------------------------------
* CYNTHIA A. ROSE Assistant Secretary, Lincoln National Life Insurance
Secretary, age 42 Co.
200 East Berry Street
Fort Wayne, IN 46802
</TABLE>
- --------------------------------------------------------------------------------
* Interested persons of the funds, as defined in the 1940 Act. Directors' fees
of $250 per meeting are paid by each fund to each director who is not an inter-
ested person of the fund. During 1996, each fund paid $1,250 in director's fees
to each such director, plus out of pocket expenses to attend meetings. During
1996, the fund complex paid each of these directors aggregate fees of $13,750.
A-3
<PAGE>
Appendix
INVESTMENT POLICIES AND TECHNIQUES
OPTIONS AND FINANCIAL FUTURES TRADING
This discussion relates to the Bond, Growth and Income, Managed, Social Aware-
ness 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 port-
folio. The fund may not purchase or write put or covered call options in an
aggregate cost exceeding 30% of the value of its total assets. The fund would
invest in options in standard contracts which may be quoted on NASDAQ, or on
national securities exchanges. Currently options are traded on numerous secu-
rities and indices including, without limitation, the Standard and Poor's 100
Index (S&P 100), the Standard and Poor's 500 Index (S&P 500), and the NYSE
Beta Index.
A. In General. Put and call options are generally short-term contracts with
durations of nine months or less. The investment advisor will generally
write covered call options when it anticipates declines in the market
value of the portfolio securities and the premiums received may offset to
some extent the decline in the fund's net asset value. On the other hand,
writing put options may be a useful portfolio investment strategy when the
fund has cash or other reserves and it intends to purchase securities but
expects prices to increase.
Generally, the risk to the fund in writing options is that the investment ad-
visor's assumption about the price trend of the underlying security may prove
inaccurate. If the fund wrote a put, expecting the price of a security to in-
crease, and it decreases, or if the fund wrote a call, expecting the price to
decrease but it increased, the fund could suffer a loss if the premium re-
ceived 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 abso-
lute and immediate right to acquire that security, without additional cash
consideration, upon conversion or exchange of other securities currently
held in its portfolio. In addition, the fund will not, before the expira-
tion of a call option, permit the call to become uncovered. If the fund
writes a call option, the purchaser of the option has the right to buy
(and the fund has the obligation to sell) the underlying security at the
exercise price throughout the term of the option. The amount paid to the
fund by the purchaser of the option is the premium. The fund's obligation
to deliver the underlying security against payment of the exercise price
would terminate either upon expiration of the option or earlier if the
fund were to effect a closing purchase transaction through the purchase of
an equivalent option on an exchange. The fund would not be able to effect
a closing purchase transaction after it had received notice of exercise.
In order to write a call option, the fund is required to deposit in escrow the
underlying security or other assets in accordance with the rules of The Op-
tions Clearing Corp. (OCC) and the various exchanges. The fund may not pur-
chase 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 cov-
ered calls during periods when it anticipates declines in the market values of
portfolio securities and the premiums received (net of transaction costs) may
offset to some extent the decline in the fund's net asset value occasioned by
such declines in market value. The advisor will generally not write listed
covered call options when it anticipates that the market value of the fund's
portfolio securities will increase.
If the advisor decides that at a price higher than the current value a portfo-
lio security would be overvalued and should be sold, the fund may write a call
option on the security at that price. Should the security subsequently reach
that price and the option be exercised, the fund would, in effect, have in-
creased the selling price of that security, which it would have sold at that
price in any event, by the amount of the premium. In the event the market
price of the security declined and the option were not exercised, the premium
would offset all or some portion of that decline. It is possible, of course,
that the price of the security could increase beyond the exercise price; in
that event, the fund would forego the opportunity to sell the security at that
higher price.
In addition, call options may be used as part of a different strategy in con-
nection with sales of portfolio securities. If, in the judgment of the advi-
sor, 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 ex-
ercised, 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
A-4
<PAGE>
Appendix
of the security at the time the call is written, the fund would, in effect,
have increased the selling price of the security. The fund would not write a
call under these circumstances if the sum of the premium and the exercise price
were less than the current market price of the security.
In summary, a principal reason for writing calls on a securities portfolio is
to attempt to realize, through the receipt of premium income, a greater return
than would be earned on the securities alone. A covered call writer, such as
the fund, which owns the underlying security has, in return for the premium,
given up the opportunity for profit from a price increase in the underlying se-
curity 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 pur-
chase 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 re-
spect to call options.
Writing put options may be a useful portfolio investment strategy when the fund
has cash or other reserves available for investment as a result of sales of
fund shares or because the advisor believes a more defensive and less fully in-
vested 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 secu-
rity at a lower price, or the option might never be exercised.
If, before the exercise of a put, the advisor determines that it no longer
wishes to invest in the security on which the put has been written, the fund
may be able to effect a closing purchase transaction on an exchange by purchas-
ing 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 pre-
mium received on writing the put option, and there is no guarantee that a clos-
ing purchase transaction can be effected. The fund may purchase put options
only in connection with a closing transaction.
As with the writer of a call, a put writer generally hopes to realize premium
income. The risk position of the fund as a put writer is similar to that of a
covered call writer which owns the underlying securities. Like the covered call
writer (who must bear the risk of the position in the underlying security), the
fund as a put writer stands to incur a loss if and to the extent the price of
the underlying security falls below the exercise price plus premium.
At the time a put option is written, the fund will be required to establish,
and will maintain until the put is exercised or has expired, a segregated ac-
count with its custodian consisting of cash or short-term U.S. Government secu-
rities equal in value to the amount which the fund will be obligated to pay
upon exercise of the put. Principal factors affecting the market value of a put
or call option include supply and demand, interest rates, the current market
price and price volatility of the underlying security and the time remaining
until the expiration date. In addition, there is no assurance that the fund
will be able to effect a closing transaction at a favorable price. If the fund
cannot enter into such a transaction, it may be required to hold a security
that it might otherwise have sold, in which case it would continue to be at
market risk on the security. If a substantial number of covered options written
by the fund are exercised, the fund's rate of portfolio turnover could exceed
historic levels. This could result in higher transaction costs, including bro-
kerage commissions. The fund will pay brokerage commissions in connection with
the writing and purchasing of options to close out previously written options.
Such brokerage commissions are normally higher than those applicable to pur-
chases and sales of portfolio securities.
FUTURES CONTRACTS AND OPTIONS THEREON
A. In General. The fund may buy and sell financial futures contracts (futures
contracts) and related options thereon solely for hedging purposes. The fund
may sell a futures contract or purchase a put option on that futures con-
tract to protect the value of the fund's portfolio in the event the invest-
ment advisor anticipates declining security prices. Similarly, if security
prices are expected to rise, the fund may purchase a futures contract or a
call option thereon. (For certain limited purposes, as explained later, the
fund is also authorized to buy futures contracts on an unleveraged basis and
not as an anticipatory hedge.)
The fund will not invest in futures contracts and options thereon if immedi-
ately thereafter the amount committed to margins plus the amount paid or option
premiums exceeds 5% of the fund's total assets. In addition the fund will not
hedge more than 1/3 of its net assets.
A-5
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Appendix
B. Futures contracts. The fund may purchase and sell financial futures con-
tracts (futures contracts) as a hedge against fluctuations in the value of
securities which are held in the fund's portfolio or which the fund intends
to purchase. The fund will engage in such transactions consistent with the
fund's investment objective. Currently, futures contracts are available on
Treasury bills, notes, and bonds as well as interest-rate and stock market
indexes.
There are a number of reasons why entering into futures contracts for hedging
purposes can be beneficial to the fund. First, futures markets may be more liq-
uid than the corresponding cash markets on the underlying securities. Such en-
hanced 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 transac-
tion costs that might be incurred in the cash market.
The purpose of selling a futures contract is to protect the fund's portfolio
from fluctuation in asset value resulting from security price changes. Selling
a futures contract has an effect similar to selling a portion of the fund's
portfolio securities. If security prices were to decline, the value of the
fund's futures contracts would increase, thereby keeping the net asset value of
the fund from declining as much as it otherwise might have. In this way, sell-
ing futures contracts acts as a hedge against the effects of declining prices.
However, an increase in the value of portfolio securities tends to be offset by
a decrease in the value of corresponding futures contracts.
Similarly, when security prices are expected to rise, futures contracts may be
purchased to hedge against anticipated subsequent purchases of portfolio secu-
rities at higher prices. By buying futures, the fund could effectively hedge
against an increase in the price of the securities it intends to purchase at a
later date in order to permit the purchase to be effected in an orderly manner.
At that time, the futures contracts could be liquidated at a profit if prices
had increased as expected, and the fund's cash position could be used to pur-
chase securities.
When a purchase or sale of a futures contract occurs, a deposit of high-quali-
ty, 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-mar-
ket 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 re-
flect daily changes in the contract values.
Most futures contracts are typically canceled or closed out before the sched-
uled settlement date. The closing is accomplished by purchasing (or selling) an
identical futures contract to offset a short (or long) position. Such an off-
setting 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 corre-
sponding to the difference. That gain or loss will tend to offset the realized
loss or gain on the hedged securities position, but may not always or com-
pletely do so.
The fund will not enter into any futures contract if, immediately thereafter,
the aggregate initial margin for all existing futures contracts and options
thereon and for premiums paid for related options would exceed 5% of the fund's
total assets. The fund will not purchase or sell futures contracts or related
options if immediately thereafter more than 1/3 of its net assets would be
hedged.
C.Risks and limitations involved in futures hedging. There are a number of
risks associated with futures hedging. Changes in the price of a futures con-
tract 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 secu-
rities that are the subject of the futures contract. Because the change in
the price of the futures contract may be more or less than the change in the
prices of the underlying securities, even a correct forecast of price changes
may not result in a successful hedging transaction. Another risk is that the
investment advisor could be incorrect in its expectation as to the direction
or extent of various market trends or the time period within which the trends
are to take place.
The fund intends to purchase and sell futures contracts only on exchanges where
there appears to be a market in such futures sufficiently active to accommodate
the volume of its trading activity. There can be no assurance that a liquid
market will always exist for any particular contract at any particular time.
Accordingly, there can be no assurance that it will always be possible to close
a futures position when such closing is desired and, in the event of adverse
price movements, the fund would continue to be required to make daily cash pay-
ments 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.
A-6
<PAGE>
Appendix
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 ben-
efit 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 mar-
ket. 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 or-
derly fashion, it is possible that the market may decline instead; if the fund
then concludes not to invest in securities at that time because of concern as
to possible further market decline or for other reasons, the fund will realize
a loss on the futures contract that is not offset by a reduction in the price
of the securities purchased.
The selling of futures contracts by the fund and use of related transactions in
options on futures contracts (discussed later) are subject to position limits,
which are affected by the activities of the investment advisor.
The hours of trading of futures contracts may not conform to the hours during
which the fund may trade securities. To the extent that the futures markets
close before the securities markets, significant price and rate movements can
take place in the securities markets that cannot be reflected in the futures
markets.
Pursuant to Rule 4.5 under the Commodity Exchange Act, investment companies
registered under the 1940 Act are exempted from the definition of commodity
pool operator in the Commodity Exchange Act, subject to compliance with certain
conditions. The exemption is conditioned upon a requirement that all of the in-
vestment company's commodity futures transactions constitute bona fide hedging
transactions (except on an unleveraged basis, as described in (F.) With respect
to long positions assumed by the fund, the fund will segregate with its custo-
dian an amount of cash and other assets permitted by Commodity Futures Trading
Commission (CFTC) regulations equal to the market value of the futures con-
tracts and thereby insure that the use of futures contracts is unleveraged. The
fund will use futures in a manner consistent with these requirements.
D. Options on futures contracts. The fund only intends to engage in options on
futures contracts for bona fide hedging purposes in compliance with CFTC
regulations. An option on a futures contract gives the purchaser the right,
but not the obligation, to assume a position in a futures contract (which
position may be a long or short position) at a specified exercise price at
any time during the option exercise period. The writer of the option is re-
quired upon exercise to assume an offsetting futures position (which posi-
tion may be a long or short position). Upon exercise of the option, the as-
sumption of offsetting futures positions by the writer and holder of the op-
tion will be accompanied by delivery of the accumulated balance in the writ-
er'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 pur-
chasing an option of the same series. There is no guarantee that such closing
transactions can be effected.
The fund will be required to deposit initial and variation margin with respect
to put and call options on futures contracts written by it pursuant to the
fund's futures commissions merchants' requirements similar to those applicable
to the futures contracts themselves, described previously.
E. Risks of futures transactions. The fund's successful use of futures con-
tracts and options thereon depends upon the ability of its investment advi-
sor to predict movements in the securities markets and other factors affect-
ing markets for securities and upon the degree of correlation between the
prices of the futures contracts and the prices of the securities being
hedged. As a result, even a correct forecast of price changes may not result
in a successful hedging transaction. Although futures contracts and options
thereon may limit the fund's exposure to loss, they may also limit the
fund's potential for capital gains. For example, if the fund has hedged
against the possibility of decrease in prices which would adversely affect
the price of securities in its portfolio and prices of such securities in-
crease instead, the fund will lose part or all of the benefit of the in-
creased 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 Pro-
spectus, to purchase futures contracts on an unleveraged basis, when not in-
tended 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 mar-
gin on deposit). As with
A-7
<PAGE>
Appendix
other futures trading, these purchases must not be for speculative purposes.
The ability to engage in these purchases on an unleveraged basis can signifi-
cantly decrease transaction costs to the funds in certain instances. For exam-
ple, 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 addi-
tion, if this deposit had involved market-timing' and as a result there subse-
quently were an oversized withdrawal, the fund could again suffer market disad-
vantage, this time because the volume of sales could, for the same reason,
force prices of particular securities to decrease. The fund, by buying a
futures contract (followed by the appropriate closing transaction) instead of
purchasing securities could achieve considerable savings in transaction costs
without departing from fund objectives. Furthermore, as stated in (C.), price
changes in a futures contract generally parallel price changes in the securi-
ties that the fund might otherwise have purchased. Thus, purchase of a futures
contract on an unleveraged basis allows the fund to comply with its objective
while at the same time achieving these lower transaction costs.
VALUATION OF PORTFOLIO SECURITIES
SHORT-TERM INVESTMENTS. For funds (other than the Money Market Fund) that own
short-term investments which mature in less than 60 days, these instruments are
valued at amortized cost. Such securities acquired with a remaining maturity of
61 days or more are valued at their fair value until the sixty-first day prior
to maturity; thereafter, their cost for valuation purposes is deemed to be
their fair value on such sixty-first day.
OPTIONS TRADING. For those funds engaging in options trading, fund investments
underlying call options will be valued as described previously. Options are
valued at the last sale price or, if there has been no sale that day, at the
mean of the last bid and asked price on the principal exchange where the option
is traded, as of the close of trading on the NYSE. The fund's net asset value
will be increased or decreased by the difference between the premiums received
on writing options and the cost of liquidating those positions measured by the
closing price of those options on the exchange where traded.
FUTURES CONTRACTS AND OPTIONS THEREON. For those funds buying and selling
futures contracts and related options thereon, the futures contracts and op-
tions are valued at their daily settlement price.
FOREIGN SECURITIES. For funds investing in foreign securities, the value of a
foreign portfolio security held by a fund is determined based upon its closing
price or upon the mean of the closing bid and asked prices on the foreign ex-
change 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 circum-
stances in the SAI for the various funds. See the Preface to this Prospectus
booklet for information about how to obtain a copy of the SAI booklet.
LENDING OF PORTFOLIO SECURITIES
As described in the Prospectus, the funds may from time to time lend securities
from their portfolios to brokers, dealers and financial institutions and re-
ceive collateral from the borrower, in the form of cash (which may be invested
in short-term securities), U.S. Government obligations or certificates of de-
posit. Such collateral will be maintained at all times in an amount equal to at
least 102% of the current market value of the loaned securities, and will be in
the actual or constructive possession of the particular fund during the term of
the loan. The fund will maintain the incidents of ownership of the loaned secu-
rities and will continue to be entitled to the interest or dividends payable on
the loaned securities. In addition, the fund will receive interest on the
amount of the loan. The loans will be terminable by the fund at any time and
will not be made to any affiliates of the fund or the advisor. The fund may pay
reasonable finder's fees to persons unaffiliated with it in connection with the
arrangement of the loans.
As with any extensions of credit, there are risks of delay in recovery and, in
some cases, even loss of rights in the collateral or the loaned securities
should the borrower of securities fail financially. However, loans of portfolio
securities will be made to firms deemed by the advisor to be creditworthy.
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<PAGE>
Appendix
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
The funds may make short-term investments in repurchase agreements. A repur-
chase agreement typically involves the purchase by the fund of securities (U.S.
Government or other money market securities) from a financial institution such
as a bank, broker-dealer or savings and loan association, coupled with an
agreement by the seller to repurchase the same securities from the fund at the
specified price and at a fixed time in the future, usually not more than seven
days from the date of purchase. The difference between the purchase price to
the fund and the resale price to the seller represents the interest earned by
the fund which is unrelated to the coupon rate or maturity of the purchased se-
curity. 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 col-
lateral 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 bank-
ruptcy proceedings. The Board of Directors of the funds or its delegate will
evaluate the creditworthiness of all entities, including banks and broker-deal-
ers, with which they propose to enter into repurchase agreements. These trans-
actions 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 re-
verse repurchase agreement is outstanding, the funds will maintain cash and ap-
propriate liquid assets in a segregated custodial account to cover its obliga-
tion under the agreement. The fund will enter into reverse repurchase agree-
ments only with parties that the advisor or sub-advisor deems creditworthy. Re-
verse repurchase agreements are considered to be borrowing transactions, and
thus are subject to the fund's limitation on borrowing. Not every fund is au-
thorized 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 Co., 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). It is anticipated that in the future the custodian for
each of these funds will be changed to The Chase Manhattan Bank, N.A., 4 Chase
MetroTech Center, Brooklyn, New York, 11245. This change is not expected to re-
sult in any material variation in the custodial services currently provided to
these funds.
All securities, cash and other similar assets of the Aggressive Growth, Capital
Appreciation, Equity-Income, Global Asset Allocation and International Funds
are held in custody by State Street Bank and Trust Co., 225 Franklin Street,
Boston, Massachusetts 02110. State Street agreed to act as custodian for these
funds pursuant to Custodian Contracts effective July 21, 1987 for the Global
Asset Allocation Fund, April 29, 1991 for the International Fund, and December
6, 1993 for the other three funds.
Under these Agreements, the respective custodians shall (1) receive and dis-
burse money; (2) receive and hold securities; (3) transfer, exchange, or de-
liver securities; (4) present for payment coupons and other income items, col-
lect interest and cash dividends received, hold stock dividends, etc.; (5)
cause escrow and deposit receipts to be executed; (6) register securities; and
(7) deliver to the funds proxies, proxy statements, etc.
INDEPENDENT AUDITORS
Each fund's Board of Directors has engaged Ernst & Young LLP, 2300 Fort Wayne
National Bank Building, Fort Wayne, Indiana 46802, to be the independent audi-
tors for the fund. In addition to the audit of the 1996 financial statements of
the funds, other services provided include review and consultation connected
with filings of annual reports and registration statements with the Securities
and Exchange Commission (SEC); consultation on financial accounting and report-
ing matters; and meetings with the Audit Committee.
FINANCIAL STATEMENTS
The financial statements for the funds are incorporated by reference to the
funds' 1996 Annual Report. We will provide a copy of the Annual Report on re-
quest and without charge. Either write Lincoln National Life Insurance Co.,
P.O. Box 2340, Fort Wayne, Indiana 46801 or call: 1-800-4LINCOLN (452-6265).
BOND AND COMMERCIAL PAPER RATINGS
Certain of the funds' investment policies and restrictions include references
to bond and commercial paper ratings. The following is a discussion of the rat-
ing cate -
A-9
<PAGE>
Appendix
gories of Moody's Investors Service, Inc. and Standard & Poor's Corp.
MOODY'S INVESTORS SERVICE, INC.
Aaa -- Bonds which are rated Aaa are judged to be of the best quality and carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be visu-
alized 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 stan-
dards. 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 protec-
tive elements may be of greater amplitude or there may be other elements pres-
ent which make the long-term risks appear somewhat larger than in Aaa securi-
ties.
A -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa -- Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position charac-
terizes 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 shortcom-
ings.
STANDARD & POOR'S CORP.
AAA -- This is the highest rating assigned by Standard & Poor's Corp. to a debt
obligation and indicates an extremely strong capacity to pay principal and in-
terest.
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, al-
though 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 prin-
cipal 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 pre-
dominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indi-
cates the lowest degree of speculation and C the highest degree of speculation.
While such bonds will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to adverse
conditions.
MOODY'S INVESTORS SERVICE, INC.
Moody's Commercial Paper ratings are opinions of the ability of issuers to re-
pay 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 is-
suers:
Prime 1 -- Highest Quality;
Prime 2 -- Higher Quality;
Prime 3 -- High Quality.
(The fund will not invest in commercial paper rated Prime 3).
STANDARD & POOR'S CORP.
A Standard & Poor's Corp. commercial paper rating is a current assessment of
the likelihood of timely payment of debt having an original maturity of no more
than 365 days. The fund will invest in commercial paper rated in the A Catego-
ries, as follows:
A Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined
with the designation 1, 2, and 3 to indicate the relative degree of safety.
(The fund will not invest in commercial paper rated A-3).
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<PAGE>
Appendix
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. Gov-
ernment include a variety of Treasury securities, which differ only in their
interest rates, maturities and times of issuance. Treasury bills have a matu-
rity of one year or less. Treasury notes have maturities of two to ten years
and Treasury bonds generally have a maturity of greater than ten years.
Various agencies of the U.S. Government issue obligations. Some of these secu-
rities are supported by the full faith and credit of the U.S. Treasury (for ex-
ample those issued by Export-Import Bank of the United States, Farmers Home Ad-
ministration, Federal Housing Administration, Government National Mortgage As-
sociation, Maritime Administration, Small Business Administration and The Ten-
nessee Valley Authority).
Obligations of instrumentalities of the U.S. Government are supported by the
right of the issuer to borrow from the Treasury (for example, those issued by
Federal Farm Credit Banks, Federal Home Loan Bank, Federal Home Loan Mortgage
Corp., Federal Intermediate Credit Banks, Federal Land Bank and the U.S. Postal
Service). Obligations supported by the credit of the instrumentality include
securities issued by government-sponsored corporations whose stock is publicly
held (for example, the Federal National Mortgage Association, and the Student
Loan Marketing Association). There is no guarantee that the government will
support these types of securities, and therefore they may involve more risk
than other government obligations.
TAXES
Each fund intends to qualify and has elected to be taxed as a regulated invest-
ment 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 compa-
nies 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 regu-
lated investment company, each fund must, among other things, derive in each
taxable year at least 90% of its gross income from dividends, interest, pay-
ments with respect to securities loans and gains from the sale or other dispo-
sition 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 for-
ward contracts) derived with respect to its investing in such stocks, securi-
ties, 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 oth-
erwise 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) ef-
fect 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 4% nondeductible excise tax on each regulated in-
vestment 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 require-
ments or qualify under one or more exceptions, and thus does not expect to in-
cur the 4% nondeductible excise tax.
Since the sole shareholder of each fund will be Lincoln Life, no discussion is
stated herein as to the Federal income tax consequences at the shareholder lev-
el.
The discussion of Federal income tax considerations in the Prospectus, in con-
junction with the foregoing, is a general and abbreviated summary of the appli-
cable provisions of the code and Treasury Regulations currently in effect as
interpreted by the Courts and the Internal Revenue Service (IRS). These inter-
pretations can be changed at any time. The above discussion covers only Federal
tax considerations with respect to the fund. State and local taxes vary.
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<PAGE>
Appendix
STATE REQUIREMENTS
The California Department of Insurance has established the following guidelines
for an underlying portfolio of a variable account. The funds intend to comply
with these guidelines:
BORROWING
The borrowing limit for any fund is 33 1/3 percent of total assets. Entering
into a reverse repurchase agreement shall be considered "borrowing" as that
term is used herein.
FOREIGN INVESTMENTS -- DIVERSIFICATION
The diversification guidelines to be followed by international and global funds
are as follows:
a. An international fund or a global fund is sufficiently diversified if it is
invested in a minimum of three different countries at all times, and has
invested no more than 50 percent of total assets in any one second-tier
country and no more than 25 percent of total assets in any one third-tier
country. First-tier countries are: Germany, the United Kingdom, Japan, the
United States, France, Canada, and Australia. Second-tier countries are all
countries not in the first or third tier. Third-tier countries are coun-
tries identified as "emerging" or "developing" by the International Bank
for Reconstruction and Development ("World Bank") or International Finance
Corporation.
b. A regional fund is sufficiently diversified if it is invested in a minimum
of three countries. The name of the fund must accurately describe the fund.
c. The name of a single country fund must accurately describe the fund.
d. An index fund must substantially mirror the index.
DERIVATIVE TRANSACTIONS-DEFINITIONS
The Prospectus for each fund and the uniform Appendix for the Prospectus book-
let 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 fu-
ture date. If the contract allows the fund to buy securities, it is a call op-
tion; if to sell, it is a put option. It is common practice in options trading
to terminate an outstanding option contract by entering into an offsetting
transaction known as a closing transaction; as a result of which the fund would
either pay out or receive a cash settlement. This is discussed below.
CURRENCY OPTION. Discussed later.
FIXED INCOME OPTION. One based on a fixed-income security, such as a corporate
or government bond.
INDEX OPTION. One based on the value of an index which measures the fluctuating
value of a basket of pre-selected securities.
STOCK (EQUITY) OPTION. One based on the shares of stock of a particular compa-
ny.
OPTION ON A FUTURES CONTRACT. Discussed later.
SWAP. A financial transaction in which the fund and another party agree to ex-
change 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 in-
dex 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 pro-
tection 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 differ-
ential times the principal amount times one-quarter.
b. Floor. A contract in which the seller agrees to pay to the purchaser, in re-
turn for the payment of a premium, the difference between current interest
rates and an agreed (strike) rate times the notional amount, should interest
rates fall below the agreed
A-12
<PAGE>
Appendix
level (the floor). A floor contract has the effect of a string of interest
rate guarantees.
c. Collar. An arrangement to simultaneously purchase a cap and sell a floor, in
order to maintain interest rates within a defined range. The premium income
from the sale of the floor reduces or offsets the cost of buying the cap.
d. Corridor. An agreement to buy a cap at one interest rate and sell a cap at a
higher rate.
SWAPTION. An option to enter into, extend, or cancel a swap.
FUTURES CONTRACT. A contract which commits the fund to buy or sell a specified
amount of a financial instrument at a fixed price on a fixed date in the fu-
ture. 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 matu-
rity 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 elim-
inating an anticipated rise or drop in currency exchange rates over time.
CURRENCY FUTURES. Futures contracts on foreign currencies. Used to hedge the
purchase or sale of foreign securities.
CURRENCY OPTION. An option taken on foreign currency.
CURRENCY SWAP. A swap involving the exchange of cash flows and principal in one
currency for those in another, with an agreement to reverse the principal swap
at a future date.
CROSS-CURRENCY INTEREST RATE SWAP. A swap involving the exchange of streams of
interest rate payments (but not necessarily principal payments) in different
currencies and often on different interest bases (e.g., fixed Deutsche Mark
against floating dollar, but also fixed Deutsche Mark against fixed dollar).
FORWARD CURRENCY CONTRACT. A contract to lock in a currency exchange rate at a
future date, to eliminate risk of currency fluctuation when the time comes to
convert from one currency to another.
A-13
<PAGE>
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A-14
<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, 1996, 1995,
1994, 1993 are incorporated by reference to Pages 53-54 of the
Fund's 1996 Annual Report.
Part B.
------
The following financial statements of the Fund are incorporated
by reference to Pages 16-20, 42-52 and 55 of the Fund's 1995
Annual Report:
- Statement of Net Assets -- December 31, 1996
- Statement of Operations -- Year Ended December 31, 1996
- Statements of Changes in Net Assets -- Years Ended December
31, 1996 and 1995
- Notes to Funancial Statements -- December 31, 1996
In total, only pages 16-20 and 42-55 of the Fund's 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
<PAGE>
accounting regulations of the Securities and Exchange
Commission are not required under the related instructions,
are inapplicable, or the required information is included in
the financial statements, and therefore have been omitted.
b) Exhibits:
1 - Articles Supplementary
5 - Sub-Advisory Agreement between Lincoln National Investment
Company and Fidelity Management Trust Company dated December
20, 1993
6 - Specimen Agents Contract
8 - Custody Fee Schedule
9(d)- Services Agreement between Lincoln National Life
Insurance Company, Delaware Management Holding
Companies, Inc. and Delaware Services Company Inc.
dated August 15, 1996
11 - Consent of Ernst & Young LLP, Independent Auditors
17(a)- Financial Data Schedule
19 - Memorandum Concerning Books and Records
We have no changes to report to Exhibits 2-5, 7, 10 and 12-16.
These exhibits are incorporated by reference to the
Registration Statement (File No. 33-71158) including all
amendments and/or post-effective amendments.
Item 25. Persons Controlled by or Under Common Control with Registrant
See "Management of the Fund," "Purchase of Securities Being
Offered," and "Description of Shares" in the Prospectus forming
Part A of this Registration Statement and "Investment Adviser and
Sub-Adviser" in the Statement of Additional Information forming
Part B of this Registration Statement. As of the date of this
Post-Effective Amendment to the Registration Statement, The
Lincoln National Life Insurance Company (Lincoln Life), for its
Variable Annuity Account C and its Variable Life Account K, is
the sole shareholder in the Fund.
No persons are controlled by the Registrant. A diagram of all
persons under common control with the Registrant is filed as
Exhibit 15(a) to the Form N-4 Registrant Statement filed by
Lincoln National Variable Annuity Account C (File No. 33-25990),
and is incorporated by reference into this Registration
Statement.
Item 26. Number of Holders of Securities
As of April 1, 1997, there was one record holder of common stock,
$.01 par value per share.
Item 27. See prior filings
<PAGE>
Item 28. Business and Other Connections of Investment Adviser
Information pertaining to any business and other connections of
Registrant's investment adviser, Lincoln Investment, is hereby
incorporated by reference from the section captioned "Management
of the Fund" in the Prospectus forming Part A of this
Registration Statement, the section captioned "Investment Adviser
and Sub-Adviser" in the Statement of Additional Information
forming Part B of this Registration Statement, and Item 7 of Part
II of Lincoln Investment's Form ADV filed separately with the
Commission (File No. 801-5098). Information pertaining to any
business and other connections of Registrant's sub-investment
adviser, Fidelity Management Trust Co. ("Fidelity") is
incorporated by reference from the section of the Prospectus
captioned "Management of the Fund," the section of the Statement
of Additional Information captioned "Investment Adviser and Sub-
Adviser," and Item 7 of Part II Fidelity's Form ADV filed
separately with the Commission (File No. 801-7884).
The other businesses, professions, vocations, and employment of a
substantial nature, during the past two years, of the directors
and officers of Lincoln Investment and Fidelity are hereby
incorporated by reference, respectively, from Schedules A and D
of Lincoln Investment's Form ADV and from Schedules A and D of
Fidelity's Form ADV.
As of February 5, 1997, 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 National
Income Fund, Inc. and Lincoln
National Convertible Securities
Fund, Inc., Second Vice
President, Lincoln Life & Annuity
Company of New York, 200 East
Berry Street Fort Wayne, Indiana
46802
JoAnn E. Becker Vice President 200 East Berry Street, Fort
Wayne, Indiana 46802
Dennis A. Blume Senior Vice President 200 East Berry Street,
(formerly Executive Fort Wayne, Indiana 46802
Vice President) and
Director
Anne E. Bookwalter Vice President 200 East Berry Street, Fort
Wayne, Indiana 46802
Philip C. Byrde Vice President 200 East Berry Street, Fort
Wayne, Indiana 46802
Steven R. Brody Senior Vice President President and Director, Lincoln
and Director (formerly National Realty Corporation;
Executive Vice Vice President, The Lincoln
President) 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 Vice President, Lincoln National
Income Fund, Inc.,
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 Vice President and Director,
Lincoln National Mezzanine Corporation,
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 Vice President Vice President and Director,
(Formerly Senior Lincoln National Realty
Vice President) 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,
Vice President) 200 East Berry Street,
Fort Wayne, Indiana, 46802
Harold F. McElraft Jr. Vice President Vice President and Chief
Financial Officer, Lincoln
National Investment Companies,
Inc; Vice President and
Treasurer, Lincoln National
Income Fund, Inc., Lincoln
National Convertible Securities
Fund, Inc.,
200 East Berry Street,
Fort Wayne Indiana 46802
H. Thomas McMeekin President and President and Director, Lincoln National
Director (formerly Convertible Securities Fund, Inc., Lincoln
Executive Vice National Income Fund, Inc.; President,
President, and Senior Chief Executive Officer and Director,
Vice President) Lincoln National Mezzanine Corporation;
Executive Vice President and Chief
Investment Officer, Lincoln National
Corporation; Director, Delaware Management
Holdings, Inc., Lincoln National (China) Inc.,
Lincoln National (India) Inc., Lincoln National
Investment Companies, Inc., Lincoln National
Realty Corporation, Lynch & Mayer, Inc., Vantage
Global Advisors, Lincoln National Life Insurance
Company,
200 East Berry Street,
Fort Wayne, Indiana 46802
Marybeth Montgomery Vice President Second Vice President,
Lincoln National Realty
Corporation,
200 East Berry Street,
Fort Wayne, Indiana 46802
John David Moore Vice President 200 East Berry Street,
Fort Wayne, Indiana, 46802
Oliver H. G. Nichols Senior Vice President Vice President, Lincoln
National Realty Corporation,
Lincoln National Life Insurance Company
1300 South Clinton 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 Second Vice President,
Lincoln Life & Annuity Company of
New York,
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>
Bill L. Sanders Vice President
Roy D. Shimer Assistant Vice President 200 East Berry Street, Fort
(formerly Vice President) Wayne, Indiana 46802
Milton W. Shuey Vice President Vice President, Lincoln
Investment Management, Inc.,
200 East Berry Street, Fort
Wayne, Indiana 46802
Gerald M. Weiss Vice President 200 East Berry Street, Fort
(formerly Second Wayne, Indiana 46802
Vice President)
Janet C. Whitney Vice President and Vice President and Treasurer,
Treasurer The Financial Alternative, Inc.
Financial Alternative Resources, Inc.
Financial Choices, Inc.
Financial Investment Services, Inc.
Financial Investment Inc.
The Financial Resources Department
Investment Alternatives, Inc.
The Investment Center, Inc.
The Investment Group, Inc.
The Richard Leahy Corporation
Lincoln Financial Group, Inc.
Lincoln Life Improved Housing, Inc.
LNC Administrative Services Corporation
LNC Equity Sales Corporation
Lincoln National Aggressive Growth Fund, Inc.
Lincoln National Bond Fund, Inc.
Lincoln National Capital Appreciation Fund, Inc.
Lincoln National (China) Inc.
Lincoln National Corporation
Lincoln National Equity-Income Fund, Inc.
Lincoln National Global Asset Allocation Fund, Inc.
Lincoln National Growth and Income Fund, Inc.
Lincoln National Health & Casualty Insurance Company
Lincoln National (India) Inc.
Lincoln National Intermediaries, Inc.
Lincoln National International Fund, Inc.
The Lincoln National Life Insurance Company
Lincoln National Managed Fund, Inc.
Lincoln National Management Services, Inc.
Lincoln National Mezzanine Corporation
Lincoln National Money Market Fund, Inc.
Lincoln National Realty Corporation
Lincoln National Reassurance Company
Lincoln National Reinsurance Company (Barbados) Limited
Lincoln National Reinsurance Company Limited
Lincoln National Risk Management, Inc.
Lincoln National Social Awareness Fund, Inc.
Lincoln National Special Opportunities Fund, Inc.
Lincoln National Structured Settlement, Inc.
Lincoln National Variable Annuity Fund A
Old Fort Insurance Company, Ltd.
Personal Financial Resources, Inc.
Special Pooled Risk Administrators, Inc.
Underwriters & Management Services, Inc.
Treasurer and Assistant Secretary,
Lincoln National Foundation, Inc.
Treasurer,
Lincoln National Investment Companies, Inc.
Lincoln National Underwriting Services, Ltd.
Professional Financial Planning, Inc.; Assistant Treasurer,
First Penn-Pacific Life Insurance Company,
200 East Berry Street,
Fort Wayne, Indiana 46802
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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Position, Other Substantial Business
Investment Profession, Vocation or
Name Adviser Employment; Address
---- ---------- --------------------------
<S> <C> <C>
C. Suzanne Womack (Con't) 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 19.
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
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Amendment to the Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly
caused this Amendment to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Fort Wayne, and State of Indiana, on the 14th
day of April, 1997.
LINCOLN NATIONAL
EQUITY INCOME FUND, INC.
By /s/ Kelly D. Clevenger
----------------------------
Kelly D. Clevenger
President
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
the Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Kelly D. Clevenger Chairman of the Board April 14, 1997
- ---------------------- and President
Kelly D. Clevenger (Principal Executive Officer)
* Director April 14, 1997
- ----------------------
John B. Borsch, Jr.
* Director April 14, 1997
- ----------------------
Stanley R. Nelson
* Director April 14, 1997
- ----------------------
Barbara S. Kowalczyk
* Director April 14, 1997
- ----------------------
Nancy L. Frisby
* Chief Accounting Officer April 14, 1997
- ---------------------- (Principal Accounting Officer)
Lantz Mintch
/s/ Janet C. Whitney Vice President and Treasurer April 14, 1997
- ---------------------- (Principal Financial Officer)
Janet C. Whitney
</TABLE>
*By /s/ Jeremy Sachs, pursuant to a Power of Attorney filed with the initial
------------------- filing of this Registration Statement.
Jeremy Sachs
<PAGE>
Exhibit Index to Form N-1A
--------------------------
Exhibit Number Description
- -------------- -----------
1 Articles Supplementary
5 Sub-Advisory Agreement between Lincoln National Investment
Management Company and Fidelity Management Trust Company dated
December 20, 1993
6 Specimen Agents Contract
8 Custody Fee Schedule
9(d) Services Agreement between Lincoln National Life Insurance
Company, Delaware Management Holding Companies, Inc. and
Delaware Services Company Inc. dated August 15, 1996
11 Consent of Ernst & Young LLP,
Independent Auditors
17(a) Financial Data Schedule
19 Memorandum Concerning Books
and Records
<PAGE>
LINCOLN NATIONAL EQUITY-INCOME FUND, INC.
ARTICLES SUPPLEMENTARY
To the State Department
of Assessments and Taxation
State of Maryland
FIRST: The name of the corporation (the "corporation") is LINCOLN NATIONAL
EQUITY-INCOME FUND, INC.
SECOND: In accordance with Maryland General Corporation Law, Section 2-
105(c), the Board of Directors of the corporation has, by resolution, authorized
an increase in the total number of shares of capital stock that the corporation
has authority to issue.
THIRD: Immediately before the increase, the total number of shares of stock
that the Corporation had authority to issue was 50,000,000 shares, with the par
value of $.01 per share, all of which were of a single class designated Common
Stock, such shares having an aggregate par value of $500,000.
After the increase, the total number of shares of stock that the
corporation shall have authority to issue is 100,000,000 shares, with the par
value of $.01 per share, all of which shall be of a single class designated
Common Stock, such shares having an aggregate par value of $1,000,000.
FOURTH: The Corporation is registered as an open-end management investment
company under the Investment Company Act of 1940.
IN WITNESS WHEREOF, Lincoln National Equity-Income Fund, Inc. has caused
these presents to be signed in its name and on its behalf by its President or
one of its Vice Presidents and attested by its Secretary or one of its Assistant
Secretaries on February 11, 1997.
ATTEST: LINCOLN NATIONAL EQUITY-INCOME
FUND, INC.
/s/ Cynthia A. Rose /s/ Kelly D. Clevenger
- -------------------------- -----------------------------
Cynthia A. Rose, Secretary Kelly D. Clevenger, President
THE UNDERSIGNED, Kelly D. Clevenger, President, of Lincoln National Equity-
Income Fund, Inc., who executed on behalf of said corporation, the foregoing
Articles Supplementary, of which this certificate is made a part, hereby
acknowledges, in the name and on behalf of said corporation, the foregoing
Articles Supplementary to be the corporate act of said corporation and further
certifies that, to the best of his knowledge, information and belief, the
matters and facts set forth therein with respect to the approval thereof are
true in all material respects, under the penalties of perjury.
/s/ Kelly D. Clevenger
------------------------------
Kelly D. Clevenger, President
<PAGE>
LINCOLN NATIONAL EQUITY-INCOME FUND, INC.
Board of Directors Meeting
February 11, 1997
RESOLVED, That the total number of shares of stock which the Corporation
shall have authority to issue be increased from 50,000,000 to 100,000,000
shares, with a par value of $.01 per share, all of which shall be of a single
class designated Common Stock, such shares having an aggregate par value of
$1,000,000.
RESOLVED FURTHER, That the officers of the Corporation are authorized and
directed to take any and all action which they deem necessary or appropriate to
effect this resolution, including executing and filing Articles Supplementary
pursuant to Maryland General Corporation Law, Section 2-208.1, and to take such
further action as may be necessary or appropriate as a result of filing said
Articles Supplementary.
<PAGE>
Exhibit 5
SUB-ADVISORY AGREEMENT
----------------------
Sub-Advisory Agreement executed as of December 20 , 1993, between LINCOLN
NATIONAL INVESTMENT MANAGEMENT COMPANY, an Illinois corporation (the "Adviser"),
and Fidelity Management Trust Company, a Massachusetts corporation (the "Sub-
Adviser").
Witnesseth:
That in consideration of the mutual covenants herein contained, it is
agreed as follows:
1. SERVICES TO BE RENDERED BY SUB-ADVISER TO THE FUND.
(a) Subject always to the control of the Directors of Lincoln National
Equity-Income Fund, Inc. (the "Fund"), a Maryland corporation, which
is an eligible investment fund for Lincoln National Variable Annuity
Account C (the "Separate Account" ), the sub-Adviser, at its expense,
will furnish continuously an investment program for the Fund which
shall at all times meet the diversification requirements of Section
817 (h) of the Internal Revenue Code of 1986, as amended (the "Code").
The Sub-Adviser will make investment decisions on behalf of the Fund
and place all orders for the purchase and sale of portfolio securities
in accordance with the provisions of the organizational documents and
By-laws of the Fund and the stated investment objective, policies and
restrictions of the Fund as set forth in the Fund's prospectus.
Adviser will provide the Sub-Adviser with copies of the organizational
documents of the Fund and with the Fund's prospectus, and any
amendments to those items as may occur from time to time. Sub-Adviser
will use its best efforts to safeguard and promote the welfare of the
Fund, and to comply with other policies which the Directors or the
Adviser may from time to time determine and communicate in writing to
the Sub-Adviser. The Sub-Adviser shall make its officers and employees
available to the Adviser from time to time, at such reasonable times
as the parties may agree, to review investment policies of the Fund
and to consult with the Adviser regarding the investment affairs of
the Fund.
Sub-Adviser understands and agrees that in addition to the Separate
Account, the Fund in the future may also be used as an eligible
investment fund for other variable annuity and/or variable life
insurance separate accounts.
(b) The Sub-Adviser, at its expense, will furnish (i) all necessary
investment and management facilities, including salaries of personnel,
required for it to execute its
<PAGE>
duties faithfully and (ii) administrative facilities, including
bookkeeping, clerical personnel and equipment necessary for the
efficient conduct of the investment affairs of the Fund (excluding
determination of net asset value per share and shareholder accounting
services).
As a particular service to be rendered by Sub-Adviser, but not by way
of limitation, Sub-Adviser shall vote proxies relating to the Fund's
portfolio securities.
(c) In the selection of brokers and dealers and the placing of orders for
the purchase and sale of portfolio investments for the Fund, the Sub-
Adviser shall use its best efforts to obtain for the Fund the most
favorable price and execution available, except to the extent it may
be permitted to pay higher brokerage commissions for brokerage and
research services as described below. In using its best efforts to
obtain for the Fund the most favorable price and execution available,
the Sub-Adviser, bearing in mind the Fund's best interests at all
times, shall consider all factors it deems relevant, including by way
of illustration: price; the size of the transaction; the nature of the
market for the security; the amount of the commission; the timing of
the transaction taking into account market prices and trends; the
reputation, experience and financial stability of the broker or dealer
involved; and the quality of service rendered by the broker or dealer
in other transactions. Subject to such policies as the Directors of
the Fund may determine, the Sub-Adviser shall not be deemed to have
acted unlawfully or to have breached any duty created by this
Agreement or otherwise solely by reason of its having caused the Fund
to pay a broker or dealer that provides brokerage and research
services to the Sub-Adviser an amount of commission for effecting a
portfolio investment transaction in excess of the amount of commission
another broker or dealer would have charged for effecting that
transaction, if the Sub-Adviser determines in good faith that such
amount of commission was reasonable in relation to the value of the
brokerage and research services provided by such broker or dealer,
viewed in terms of either that particular transaction of the Sub-
Adviser's over-all responsibilities with respect to the Fund and to
other clients of the Sub-Adviser as to which the Sub-Adviser exercises
investment discretion.
(d) The Sub-Adviser shall not be obligated to pay any expenses of or for
the Fund not expressly assumed by the Sub-Adviser pursuant to this
Section 1 other than as provided in Section 3.
2. OTHER AGREEMENTS, ETC.
It is understood that any of the shareholders, Directors, officers and
employees of the Fund may be a shareholder, director, officer or employee of, or
be otherwise interested in, the
-2-
<PAGE>
Sub-Adviser, and in any person controlled by or under common control with the
Sub-Adviser; and that the Sub-Adviser and any person controlled by or under
common control with the Sub-Adviser may have an interest in the Fund or the
Variable Annuity, or any other investment vehicle for which the Fund is an
eligible investment fund.
3. COMPENSATION TO BE PAID BY THE ADVISER TO THE SUB-ADVISER.
The Adviser will pay to the Sub-Adviser as compensation for the Sub-
Adviser's services rendered and for the expenses borne by the Sub-Adviser
pursuant to Section 1, a fee, computed and paid at the annual rate of: .75 of
l% of the average daily net assets of the Fund. Such fee shall be paid by the
Adviser, and not by the Fund, and without regard to any reduction in the fees
paid by the Fund to the Adviser under its management contract as a result of any
statutory or regulatory limitation on investment company expenses or voluntary
fee reduction assumed by the Adviser. Such fee shall be payable for each month
within ten (10) business days after the end of such month.
If the Sub-Adviser shall serve for less than the whole of a month, the
foregoing compensation shall be prorated.
4. ASSIGNMENT TERMINATES THIS AGREEMENT; AMENDMENTS OF THIS AGREEMENT.
This Agreement shall automatically terminate, without the payment of any
penalty, in the event of its assignment or in the event that the investment
advisory contract between the Adviser and the Fund shall have terminated for any
reason; and this Agreement shall not be amended unless such amendment be
approved at a meeting by the affirmative vote of a majority of the outstanding
shares of the Fund and by the vote, cast in person at a meeting called for the
purpose of voting on such approval, of a majority of the Directors of the Fund
who are not interested persons of the Fund or of the Adviser or of the Sub-
Adviser.
5. EFFECTIVE PERIOD AND TERMINATION OF THIS AGREEMENT.
This Agreement shall become effective upon its execution, and shall remain
in full force and effect continuously thereafter (unless terminated
automatically as set forth in Section 4) until terminated as follows:
(a) The Fund may at any time terminate this Agreement by not less than
sixty (60) days' written notice delivered or mailed by registered
mail, postage prepaid, to the Adviser and the sub-Adviser; or
(b) If (i) the Directors of the Fund or the shareholders by the
affirmative vote of a majority of the outstanding shares of the Fund
and (ii) a majority of the Directors who are not interested persons of
the Fund or of the Adviser or of the
-3-
<PAGE>
Sub-Adviser, by vote cast in person at a meeting called for the
purpose of voting on such approval, do not specifically approve at
least annually the continuance of this Agreement, then this Agreement
shall automatically terminate at the close of business on the second
anniversary of its execution, or upon the expiration of one year from
the effective date of the last such continuance, whichever is later;
provided, however, that if the continuance of this Agreement is
submitted to the shareholders of the Fund for their approval and such
shareholders fail to approve such continuance of this Agreement as
provided herein, the Sub-Adviser may continue to serve hereunder in a
manner consistent with the Investment Company Act of 1940 and the
Rules and Regulations thereunder; or
(c) The Adviser may at any time terminate this Agreement by not less than
ninety (90) days' written notice delivered or mailed by registered
mail, postage prepaid, to the Sub-Adviser, and the Sub-Adviser may at
any time terminate this Agreement by not less than ninety (90) days'
written notice delivered or mailed by registered mail, postage
prepaid, to the Adviser.
Action by the Fund under (a) above may be taken either (i) by vote of a
majority of its Directors, or (ii) by the affirmative vote of a majority of the
outstanding shares of the Fund.
Termination of this Agreement pursuant to this Section 5 shall be without
the payment of any penalty.
6. CERTAIN INFORMATION.
The Sub-Adviser shall promptly notify the Adviser in writing of the
occurrence of any of the following events:
(a) the Sub-Adviser shall fail to meet the definition of a "bank" under
the Investment Advisers Act of 1940, as amended from time to time, and
under the laws of any jurisdiction in which the Sub-Adviser is
required to be registered as a bank in order to perform its
obligations under this Agreement;
(b) the Sub-Adviser shall have been served or otherwise have notice of any
action, suit, proceeding, inquiry or investigation, at law or in
equity, before or by any court, public board or body, involving the
affairs of the Fund;
(c) the ownership of more than 51% .of the common stock of the Sub-Adviser
issued and outstanding as of the effective date of this Agreement will
be transferred; and
(d) the Chairman of the Board of Directors or the President of the Sub-
Adviser, or any of the Sub-Adviser's portfolio managers for the Fund
shall have changed.
-4-
<PAGE>
7. CERTAIN DEFINITIONS.
For the purposes of this Agreement, the "affirmative vote of a majority of
the outstanding shares" means the affirmative vote, at a duly called and held
meeting of shareholders, (a) of the holders of 67% or more of the shares of the
Fund present (in person or by proxy) and entitled to vote at such meeting, if
the holders of more than 50% of the outstanding shares of the Fund entitled to
vote at such meeting are present in person or by proxy, or (b) of the holders of
more than 50% of the outstanding shares of the Fund entitled to vote at such
meeting, whichever is less.
For the purposes of this Agreement, the terms "affiliated person,"
"control," "interested person" and "assignment" shall have their respective
meanings defined in the Investment Company Act of 1940 and the Rules and
Regulations thereunder, subject, however, to such exemptions as may be granted
by the Securities and Exchange Commission under said Act; the term "specifically
approve at least annually" shall be construed in a manner consistent with the
Investment Company Act of 1940 and the Rules and Regulations thereunder; and
the term "brokerage and research services" shall have the meaning given in the
Securities Exchange Act of 1934 and the Rules and Regulations thereunder.
8. NONLIABILITY OF SUB-ADVISER.
In the absence of willful misfeasance, bad faith or gross negligence on the
part of the Sub-Adviser, or reckless disregard of its obligations and duties
hereunder, the Sub-Adviser shall not be subject to any liability to the Fund or
to any shareholder of the Fund, for any act or omission in the course of, or
connected with, the rendering of services hereunder.
Sub-Adviser, its directors, officers or employees shall not be liable to
the Lincoln Entities defined in Section 9 for any loss suffered solely as a
consequence of any action or inaction of any custodian of the Fund in failing to
observe the instructions of the Sub-adviser.
9. EXCEPTIONS TO NON-LIABILITY.
Notwithstanding Section 8 above, Sub-Adviser agrees to indemnify the Fund,
the Adviser, the Separate Account and the Depositor of the Separate Account (the
"Lincoln Entities") for, and hold them harmless against, any and all losses,
claims, damages, liabilities (including amounts paid in settlement with the
written consent of the Sub-Adviser) and litigation (including legal and other
expenses) to which the Lincoln Entities, or any of them, may become subject
under any statute, at common law or otherwise, insofar as those losses, claims,
damages, liabilities or expenses (or actions in respect thereof) or settlements
arise as a result of any failure by the Sub-Adviser, whether unintentional or in
good faith or otherwise:
-5-
<PAGE>
(a) to adequately diversify the investment program of the Fund, pursuant
to the requirements of Section 817(h) of the Code, and the regulations
issued thereunder (including, but not by way of limitation, Reg. Sec.
1.817-5, March 2, 1989, 54 F.R. 8730), relating to the diversification
requirements for variable annuity, endowment, and life insurance
contracts; and
(b) to supply the Lincoln Entities, or any of them, with accurate
information by which they, or any of them, may properly calculate the
accumulation and/or annuity unit values, or provide other information
to the public, to its clients or prospects, or to any regulatory body,
all as may he mandated by law or required pursuant to the relevant
Prospectuses and Registration Statements for the Fund and for the
Separate Account and any other separate accounts it may serve.
10. USE OF SUB-ADVISER'S NAME.
Adviser will not use Sub-Adviser's name (nor that of any affiliate) in its
marketing or sales literature, without prior review and approval by Sub-Adviser,
which approval will not be unreasonably withheld or delayed.
11. RIGHT OF AUDIT.
The Sub-Adviser shall permit employees or legal representatives of the
Lincoln Entities (including independent auditors), or any of them, at the
Lincoln Entities' reasonable discretion, to audit the books and records
(including, but not by way of limitation, electronic data files, and E-mail,
whether on-line or in storage) of Sub-Adviser which relate to transactions which
are the subject of this agreement. Any audit will be conducted during normal
business hours of the Sub-Adviser and on the Sub-Adviser's premises. Sub-
Adviser agrees to provide to the Lincoln Entities, without charge, reasonable
access to its facilities and personnel during the conduct of an audit. Sub-
Adviser may charge a reasonable fee for photocopying and other out-of-pocket
costs associated with an audit conducted under this Section.
12. ALTERNATIVE RESOLUTION OF DISPUTES.
Prior to commencing litigation over any dispute arising out of or relating
to this agreement the parties shall attempt in good faith to resolve the dispute
by the following means:
(a) Negotiation. Any party may give the other party(ies) written notice of
any dispute not resolved in the normal course of business. Within
twenty (20) days after delivery of that notice, executives from those
parties involved in the dispute and who have authority to settle the
controversy shall meet at a mutually acceptable time and place, and
thereafter as often as they reasonably deem necessary, to exchange
relevant information and to attempt to resolve the dispute. If the
matter
-6-
<PAGE>
has not been resolved within 120 days of the disputing party's notice,
or if the parties fail to meet within the twenty (20) days, any of the
disputing parties may initiate a minitrial of the controversy or claim
as provided in Paragraph (b). If a negotiator intends to be
accompanied at a meeting by an attorney, the other negotiator(s)
shall be given at least three (3) working days' notice of that
intention and may also be accompanied by an attorney.
(b) Minitrial. If the dispute has not been resolved by negotiation as
provided herein, the disputing parties shall endeavor to settle the
dispute by minitrial under the then current Center For Public
Resources ("CPR") Model Minitrial Procedure, assisted by a neutral
third party who will be selected by the disputing parties from the CPR
Panels of Neutrals. If the disputing parties encounter difficulty in
agreeing on a neutral third party, they will seek the assistance of
CPR in the selection process.
(c) Extension of Deadlines. Any or all of the deadlines set forth in this
Section 12 may be extended by mutual agreement of the disputing
parties.
(d) Confidentiality. All negotiations pursuant to this Section 12 are
confidential and shall be treated as compromise and settlement
negotiations for purposes of the Federal Rules of Evidence and
applicable State Rules of Evidence.
(e) No Waiver. Nothing in this Section 12 shall be construed to
constitute a waiver of any right provided by the Investment Advisors
Act of 1940 to any party to this agreement.
13. CHOICE OF LAW.
This agreement shall be interpreted and construed in accordance with the
law of the State of Indiana.
IN WITNESS WHEREOF, LINCOLN NATIONAL INVESTMENT MANAGEMENT COMPANY and
FIDELITY MANAGEMENT TRUST COMPANY have each caused this Instrument to be signed
in duplicate on its behalf by its duly authorized representative, all as of the
day and year first above written.
LINCOLN NATIONAL INVESTMENT
MANAGEMENT COMPANY
By: /s/ Jon A. Boscia
-----------------------------------------
Printed Name: Jon A. Boscia
-------------------------------
-7-
<PAGE>
Title: President
--------------------------------------
FIDELITY MANAGEMENT TRUST COMPANY
By: /s/ John P. O'Reilly, Jr.
-----------------------------------
Printed Name: John P. O'Reilly, Jr.
-------------------------
Title: Sr. Vice President
--------------------------------
Accepted and agreed to
as of the day and year
first above written:
LINCOLN NATIONAL EQUITY-INCOME FUND, INC.
By: /s/ Kelly D. Clevenger
--------------------------------------
Printed Name: Kelly D. Clevenger
----------------------------
Title: Vice President
-----------------------------------
-8-
<PAGE>
SAMPLE COPY
SECTION A. AGENT CONTRACT -- GENERAL PROVISIONS
Effective ___________________, 19__ Lincoln National Life Insurance Company, LNC
Equity Sales Corporation and Lincoln National Health and Casualty Insurance
Company, all of Fort Wayne, Indiana, and any other Lincoln National companies
made a party to this contract by future supplement (hereinafter "Lincoln
National") appoint
________________________________________________________________________________
Name of Agent
of (or incorporated under the laws of __________________________________________
City, State or State
as an Agent or Corporate Agent and/or as a Registered Representative
(hereinafter "Agent").
The Agent shall solicit applications for Individual Life Insurance, Individual
Disability Insurance, Individual Long Term Care, Group Insurance, Annuities and
solicit subscriptions for securities offered by or through Lincoln National.
1. Limitations on Appointment
This contract authorizes the Agent to solicit applications for those contracts
or securities offered by the specific companies comprising Lincoln National only
while properly licensed by and/or registered with the appropriate governmental
agency or authority for that specific type of product or securities.
If the Agent is a corporation it is not authorized to solicit applications for
Individual Annuities or any subscriptions or applications for any products
registered as a security with the Securities and Exchange Commission (SEC). The
Agent must have a letter of authorization or authorization card from the
appropriate Lincoln National company for the particular type of security offered
before soliciting subscriptions or applications for any SEC registered product.
2. Limitations of Authority
The Agent agrees not to perform any of the following acts on behalf of Lincoln
National:
a. incur any indebtedness or liability;
b. make, alter or discharge contracts or make or alter any securities or any
prospectus or item of supplemental sales literature pertaining to any such
securities;
c. initiate any legal action in any matter pertaining to Lincoln National's
business without prior written consent of Lincoln National;
d. change rates quoted by Lincoln National;
e. extend the time for payment of any premium;
f. waive payment in cash;
g. guarantee dividends; or
h. receive or collect any monies for or on behalf of Lincoln National, except
the initial premium as allowed by Lincoln National's rules on insurance or
annuities solicited by the Agent necessary to put the policy in force.
The Agent hereby agrees not to perform any of the following acts:
i. submit to Lincoln National any application which Agent has not personally
reviewed and believes to be accurate and complete;
j. hold himself/herself/itself out as an Agent of Lincoln National in any
manner or for any other purpose than is expressly prescribed in this
contract;
k. violate any federal or state statute, rule or regulation thereunder or rule
of Lincoln National, respecting the sale of insurance, annuities or
securities;
Rev. (2/94)
Form 1185 - A-1
<PAGE>
Limitations of Authority (cont.)
l. withhold any monies or property of Lincoln National;
m. rebate or offer to rebate all or any part of a premium or deposit on an
insurance or annuity contract issued or to be issued by Lincoln National;
n. induce or endeavor to induce any policyholder of Lincoln National to
discontinue payment or premium or relinquish any policy or annuity contract
unless the policyholder's interests are better served;
o. within a period of 90 days after termination of the Agent's appointment,
induce or endeavor to induce any agent of Lincoln National to leave its
service;
p. use any information acquired while a Registered Representative or
Registered Principal in a manner adverse to the interests of Lincoln
National or of the organizations for which Equity Sales shall act as the
distributor of securities; or
q. use any form of advertising bearing Lincoln National's name, other than
that furnished by Lincoln National, in negotiations, solicitations or
advertising without such advertising being submitted to and approved by
Lincoln National. The term "advertising" includes all forms of
communication by any medium including, but not limited to, print, radio,
television, billboards, direct mail, booklets, leaflets, business cards and
stationery.
3. Relationship of Parties
The Agent agrees to be governed in the performance of his/her/its duties by the
terms and conditions of this contract, and by the rules established by Lincoln
National. The services performed by the Agent are performed pursuant to this
contract, and the contract provides that the individual will not be treated as
an employee with respect to those services for tax purposes. The Agent shall be
considered an independent contractor, except during periods of time when the
Agent is party to a Subsidy Agreement with Lincoln National. While an
independent contractor, the Agent reserves the right to exercise independent
judgment as to the time, place and manner of soliciting applications for
insurance, annuities and securities. No other provision of this contract nor any
rule or regulation of Lincoln National shall be construed to abridge this right
or create the relationship of employer and employee.
The Agent has no authority except as stated in this contract. No other authority
may be implied from the authority expressly granted.
4. Prior Contracts
Execution of this contract by the parties terminates all previous contracts held
by the Agent with Lincoln National.
5. Right to Withdraw
Lincoln National may at its discretion withdraw from the Agent the privilege of
writing a particular type of policy contract or security.
Lincoln National may withdraw from any territory without liability to the Agent.
6. Termination
The Agent or Lincoln National may terminate the Agent's appointment under this
contract, with or without cause, by notice set by ordinary mail to the last
known address of the other party. A resignation of the Agent tendered to any
one of the companies a party to this contract will be assumed to be a
termination of appointment with all companies a party to this contract unless
otherwise specified.
Upon termination, the Agent shall immediately deliver to Lincoln National, or
its representative, all rate manuals, policyholder record cards, application
forms, letters, written correspondence with policyholders and representatives of
Lincoln National, records, sales material, software, equipment and all other
supplies and materials connected with, authorized or printed by and belonging to
Lincoln National or any of its affiliates.
Termination of appointment as used in this contract shall mean termination of
authority either through cancellation of the appropriate license or registration
as required by this paragraph or through termination of this entire contract.
In the event of termination for misappropriation of funds, fraud, or for any
reason based on action prohibited by the criminal laws of this jurisdiction in
which the act is committed, all future commissions, including bonuses and
service fees, shall be forfeited by Agent. Conviction is not a prerequisite to
the forfeiture of commissions.
Rev. (11/96)
A-2 - Form 1185
<PAGE>
7. Solicitations of Applications for Variable Annuities and Subscriptions for
Securities
a. The Agent expressly agrees to become familiar with all provisions of federal
and state statutes, rules and regulations respecting the sale of annuities
and securities and, periodically, to review such provisions.
b. The Agent may solicit applications for variable annuity contracts only while
authorized to sell variable annuities in accordance with rules of Lincoln
National and the laws of the state or other jurisdiction in which the Agent
shall offer such contracts.
c. The Agent may solicit subscriptions for securities only while authorized to
sell securities in accordance with the laws of the state (or states) in
which the Agent will offer such securities.
d. The Agent may solicit applications for any product required to be registered
with the Securities and Exchange Commission, including variable annuities
and securities:
1) Only after meeting all the requirements necessary to become registered
with a self-regulatory association organized pursuant to Section 15(a)
of the Securities Exchange Act of 1934 of which Lincoln National is a
member; and
2) Only while registered as a "Registered Representative" or "Registered
Principal" of the Lincoln National company offering the registered
product; and
3) Only upon delivery to the offeree of a prospectus or offering circular
required by federal and/or state securities laws.
e. The Agent expressly agrees to comply with such other rules and regulations
as the Securities and Exchange Commission, any self-regulatory association
of which Lincoln National may become a member or Lincoln National may
establish at present or in the future under requirements of applicable
federal or state law dealing with variable annuities or securities. The
Agent agrees to submit to such supervision regarding the sales of variable
annuities or securities as may be necessary to insure compliance with this
contract. Such rules shall include, but not be limited to, the following:
1) The Agent shall adhere to high standards of commercial honor and just
and equitable principles of trade in the course of soliciting
applications for variable annuities or subscriptions for securities;
2) The Agent shall not use advertising media with regard to variable
annuities and securities or supplemental sales material other than those
approved by Lincoln National for such purposes;
3) The Agent shall not use supplemental sales material other than those
previously approved by Lincoln National.
f. The Agent shall fully explain the terms of any variable annuity or security
and shall not make any untrue statement or fail to state any material fact
to a prospective purchaser.
g. The Agent shall take steps to acquaint himself/herself/itself with
prospective customers, including such inquiries as may be necessary to
satisfy himself/herself/itself that the offering contemplated is not
unsuitable having in view the customer's resources, investment objectives
and other investments.
h. The Agent shall not make any agreement with any person for the repurchase or
resale of a variable annuity or security, nor shall he/she/it directly or
indirectly solicit, purchase or traffic in any variable annuity or security
nor resort to "twisting" or "switching" of securities of any other company
or of insurance policies.
8. Delivery of Policies or Annuity Contracts
The Agent shall not deliver any policy if changes have occurred in the health or
in any other factor affecting the insurability of the proposed insured at the
time of delivery and unless the first premium has been fully paid. Delivery of a
policy after 60 days or delivery of an annuity contract after 10 days from and
including the date of mailing by Lincoln National is not permitted unless the
time for delivery has been extended by Lincoln National. Lincoln National
reserves the right to charge to the Agent's commission account a late delivery
fee or cancellation fee for violation of this provision.
Rev. (2/94)
Form 1185 - A-3
<PAGE>
9. COMPENSATION
a. The basic compensation of the Agent shall be commissions payable at rates
set forth in Sections B, C, and D of this contract that are in effect at
the time of application for the policy. Such compensation shall be subject
to the terms and conditions of this contract, Lincoln National's Rate Book
and established rules of Lincoln National.
b. To be entitled to commissions the Agent's name must appear as Soliciting
Agent on the application for the policy or annuity contract and the policy
or annuity contract must have been fairly effected through the
instrumentality of said Agent. In the case of the sale of a security, the
Agent's name must appear as Registered Representative on the customer
account and the Agent must have personally effected the sale and taken the
application or subscription.
c. Commissions and/or service fees shall be paid to the Agent only after the
appropriate premium or deposit has been paid in cash and accepted by
Lincoln National.
d. No commission and/or service fee shall be payable on any premium paid in
advance until the due date of the premium so paid in advance, and then only
if Lincoln National retains such premium. No agent of record changes on
Group Insurance shall be made retroactively.
e. Lincoln National shall have the right, at its discretion, to change the
vesting provisions and rates in Sections B, C, and D of this contract in
any manner and at any time for (1) policies, contracts or certificates; (2)
increases on existing policies, contracts or certificates; (3) bonuses and
(4) securities. Lincoln National may establish commission rates for new
policies, annuity contracts or securities not scheduled in Sections B, C,
or D of this contract.
Any changes made under this provision will be made on a prospective basis.
Any notification of changes may be by usual interoffice communication
methods.
f. If Lincoln National returns a premium or deposit on a policy, annuity
contract or security, for any reason whatsoever, the Agent shall repay to
Lincoln National on demand any commission or service fee received on such
premium or deposit.
g. Commissions and/or service fees on conversions, replacements, increases and
step-rate premium increases, or exchanges shall be allowed in accordance
with the rules of Lincoln National in force when the conversion,
replacement, increase or exchange is effected.
h. Commissions and/or service fees on policies or annuity contracts reinstated
after 90 days from the due date of the first premium in default are payable
to the original Agent only if the policy or annuity contract is wholly
reinstated through the efforts of the original Agent.
10. After Death Commissions
If the Agent dies at a time when monies are payable under this contract, Lincoln
National will pay such monies, as they accrue, to the surviving spouse of the
Agent, and, at the death of said spouse, to the estate of said spouse. If the
Agent dies leaving no spouse surviving, any monies payable under this contract
shall be payable to the estate of the Agent.
11. Indebtedness of Agent
Lincoln National shall have a first lien on all commissions and other
compensation payable hereunder for any debt due from the Agent to Lincoln
National, to any of its affiliates, to any other person or corporation acting on
behalf of Lincoln National or any of its affiliates, or to any other company
party to a Marketing Agreement with the Lincoln National Sales Corporation.
Such debt shall include loans and advances made to the Agent and charges made to
the Agent's commission account. Such debt shall also include any actual
expenses incurred and paid by Lincoln National as a result of Agent's breach of
any of the terms in Section A, Paragraph 2 of this contract.
Lincoln National may at any time deduct from any monies payable under this
contract and any supplement and/or amendment hereto, any such debt or debts due
from the Agent, including interest on such debts. The lien shall not be
eliminated by the termination of the Agent's appointment under this contract.
This provision shall not be construed in any way to limit any indebtedness of
the Agent to the value of the commissions and other compensation payable under
this contract. In the event of termination of the Agent's appointment, the
unpaid balance of the Agent's indebtedness shall be immediately due and payable
without demand or notice.
Rev. (2/94)
A-4 - Form 1185
<PAGE>
12. Accounting
Lincoln National shall provide to the Agent, on a monthly or otherwise regular
basis, a statement setting forth commissions earned and payable to the Agent
along with an accounting of changes to the Agent's commission account. Lincoln
National reserves the right to establish a minimum balance which must be reached
before a statement and check will be provided.
13. Assignments, Modifications
No modifications or amendments of this contract nor any assignment of
commissions payable hereunder shall be valid unless approved in writing by an
authorized officer of Lincoln National.
14. Severability
If any provision of this agreement is found to be illegal or otherwise
unenforceable, the remainder of this agreement shall not be affected and shall
remain fully enforceable.
15. Forbearance
Forbearance or neglect of Lincoln National to insist upon performance of this
contract shall not constitute a waiver of its rights and privileges.
Rev. (2/94)
Form 1185 - A-5
<PAGE>
SAMPLE COPY
Lincoln National Individual
- ---------------- ----------
By:x By:x
-------------------------- --------------------------
Assistant Secretary Agent
------------------------------
Social Security Number
OR
Corporate Agent
---------------
------------------------------
Corporate Agent
By:x
--------------------------
President
------------------------------
Tax Identification Number
Executed in Duplicate
The undersigned RCEO, on behalf of his
marketing organization, or PPGA
guarantees payment of any debt due
Lincoln National by the Agent and waives
any requirement that Lincoln National
first attempt to collect from the Agent.
By:
-------------------------------
RCEO/PPGA
Rev. (2/94)
A-6 - Form 1185
<PAGE>
SECTION B. SPECIAL PROVISIONS BETWEEN LINCOLN NATIONAL LIFE INSURANCE COMPANY
("LNL") AND THE AGENT
1. Vesting
a. Individual Life, Disability Income, and Long Term Care
All first year and renewal commissions payable under these products are
fully vested.
b. Group Insurance
First year commissions on all group insurance products shall be fully
vested. Service fees shall be payable to the Agent, regardless of
termination of appointment, if at the time the appropriate premium is paid,
the Agent maintains, in the opinion of LNL, effective control over the
continuance of the policy in force.
c. Annuity Products
1) Annuity Contracts
There is no vesting of commissions. Commissions or service fees for
these contracts are payable only when contributions are received prior
to termination of the appointment of the Agent.
2) Pension Investment Group Annuity Contracts
There is no vesting of commissions. Commissions or service fees for
these contracts are payable only when contributions are received prior
to termination of the appointment of the Agent and subject to the
other provisions of this contract.
2. Death or Total Disability
a. Prior to Age 70
If the Agent dies or becomes and remains totally disabled prior to age 70,
the following shall be payable:
<TABLE>
<CAPTION>
<S> <C> <C>
1) Individual Life, Disability Income and All service fees and renewal commissions through the
Long Term Care Policies. 10th policy year.
2) Group Insurance. All first policy year commissions.
3) Annuity Contracts (except Legacy) All service fees through the 10th annuity contract or
certificate year.
4) Legacy Annuity Contracts All service fees through the 7th annuity contract or
certificate year.
5) Group Annuity Contracts issued by All first year commissions.
Pension Investment Department.
</TABLE>
b. At or After Age 70
If the Agent dies or becomes and remains totally disabled at or after age
70, the following service fees and commissions shall be payable:
<TABLE>
<CAPTION>
<S> <C> <C>
1) Individual Life, Disability Income and All service fees and renewal commissions through the
Long Term Care Policies. 10th policy year.
2) Group Insurance. All first policy year commissions.
3) Annuity Contracts All service fees through the 5th annuity contract or
certificate year.
4) Group Annuity Contracts issued by All first year commissions.
Pension Investment Department.
</TABLE>
The term "total disabled" as used in this provision shall mean the complete
inability of the Agent to engage in any or every occupation for a wage or
profit for which the Agent is or becomes reasonably qualified by training,
education or experience.
Rev. (10/95) Form 1185 - B-1
<PAGE>
3. Compensation
a. Individual Life, Disability Income and Long Term Care
1) Service Fees
No service fees shall be payable after termination of the Agent's
appointment, except as provided for in B(2)(a) or B(2)(b) above.
2) Universal Life
I. Commissions will be earned on any net increase by original Agent
only if the policy is increased through the efforts of original
Agent. A net increase is defined as an increase in "Specified
Amount" over the previous highest "Specified Amount." This
definition may vary by product.
II. No commissions will be paid on flat extras payable for less than
10 years.
III. There will be a pro rata charge back on first year policy
terminations or decreases to recover commissions.
IV. When more than half of the percent of premium charge shown on the
universal life policy schedule is either waived or matched by an
immediate credit to the policy value, no commission or service
fee is normally payable. If a commission or service fee is
allowed in accordance with the rules in force at the time the
premium is paid, the Agent shall repay to Lincoln National, on
demand, any commission or service fee received on such premium if
there is a withdrawal from, lapse of, or surrender of the
universal life policy within 5 years of receipt of such premium.
3) Commission Schedule
The Individual Life and Disability Income rates shall apply to
policies issued for not less than Lincoln National's established
minimum amount for the policy plan involved, except that with respect
to insurance policies other than Universal Life issued at ages over 65
(age 55 for Nonparticipating Pension Whole Life) the first year
commission shall not exceed in amount the first year commission for
the same policy plan and amount issued at age 65 (age 55 for
Nonparticipating Pension Whole Life).
Renewal commissions only shall be payable on Disability Income
policies for issue ages 61 and over.
Commissions on term riders will be as set forth in the commission
schedule, otherwise they will be paid at the rate prescribed for the
policy to which the rider is attached.
For conversion to Universal Life, exercised without evidence of
insurability, of any term insurance which was originally issued by a
company other than Lincoln National Life, the Commissionable Premium
rate will apply only to the first $1,000,000 of Specified Amount for
the Universal Life policy. The "Excess Premium" rate will be applied
to any premiums received in excess of the Commissionable Premium
corresponding to $1,000,000 of Specified Amount.
Rev. (10/95)
B-2 - Form 1185
<PAGE>
Pages B-3 through B-21, which represent the schedules of upfront compensation
for insurance products other than variable annuities have been omitted.
<PAGE>
Compensation (cont.)
c. Annuity Contracts - Old LNL annuities
1) Individual Fixed Annuity (IFA), Individual Variable Annuity (IVA),
Group Variable Annuity (GVA) - Except Variable Annuity Fund 3
For each sale of a periodic payment contract a commission of 3% shall
be paid on each deposit, excluding non-recurring lump sum deposits
(see 3 I and 3 II below), as it is received under the contract during
the first contract year. In second and subsequent contract years,
service fees of 3% shall be paid on each deposit as it is received
under the contract.
2) Group Variable Annuity Fund 3 Contracts (not applicable to Pension
Flexible Annuity Contract)
For periodic payment GVA Fund 3 contracts, a first year commission
shall be payable on the lesser of (i) the amount of annualized
contributions expected to be received in the first contract year and
expected to recur in subsequent contract years as stated on the
application, or (ii) $5,000 at the rates shown below:
<TABLE>
<CAPTION>
Age at Issue Rates
-------------------------------------
<S> <C>
55 & under 9%
56 8
57 7
58 6
59 5
60 4
61 & over 3
</TABLE>
3) Single Payment Contracts or Contributions
I. Variable Annuity Fund 3 (not applicable to the Pension Flexible
Annuity Contract)
For single payment deferred contracts or for single payment
contributions under periodic payment contracts (those
contributions which have been assessed a single payment load) a
commission of 2% of the amount of the single payment contribution
shall be paid. For single payment immediate contracts, a
commission of 1 1/2% of the amount of the single payment
contribution shall be paid.
II. Other Annuity Contracts
For single payment contracts or for single payment contributions
under periodic payment contracts (those contributions which have
been assessed a single payment load under the load contract or
which would be subject to a single payment surrender charge under
the no front-end load contract), a commission equal to 1% of the
single payment contribution shall be paid.
4) Cash Flow Commissions on GVA Fund 3 (not applicable to the Pension
Flexible Annuity Contract)
I. A level commission at the rates itemized below shall be payable
on the amount of contributions, excluding single payment
contributions, in any certificate or contract year which is in
excess of the amount of contributions on which the commission in
paragraph b II above was paid. The level commission will be paid
as contributions, in excess of the amount of contributions on
which the commission in paragraph b II above was paid, are
received and its rate will vary depending upon the load rate
(sales and administrative expense charge) actually being assessed
against those contributions according to the following:
<TABLE>
<CAPTION>
Load Rate Charged Commission Rate
-----------------------------------------
<S> <C>
5.25% 3.00%
4.25 2.40
3.75 2.10
3.25 1.85
2.75 1.60
2.25 1.35
</TABLE>
This level commission is payable only on contributions received
by Lincoln National prior to the termination of the appointment
of the Agent.
Rev. (1/94)
B-22 - Form 1185
<PAGE>
Compensation (cont.)
II. For contributions (other than single payment contributions) received
in any certificate or contract year up to the amount of contributions
on which the commission in paragraph b II was paid, a commission at
the rate of 1% of such contributions shall be payable as such
contributions are received. This cash flow commission is payable only
on contributions received by Lincoln National prior to the termination
of the appointment of the Agent.
III. If a certificate or contract is cancelled, the commissions paid shall
be charged back against the account of the Agent. If contributions
cease during the first two years a certificate or an unallocated-type
contract is in force, commissions paid under paragraph b II above
shall be charged back against the account of the Agent, and a
commission at the rate of 2% shall be payable on the amount of such
contributions actually received in addition to the 1% commission
already paid.
5) Pension Flexible Annuity Contract
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
Amount of Deposit
Received in Initial and Any Commission
Subsequent Contract Years
---------------------------------------------------------------------------
<S> <C> <C>
On the First $ 25,000 3.00%
---------------------------------------------------------------------------
On the Excess over 25,000
But not over 50,000 1.00
---------------------------------------------------------------------------
On the Excess over 50,000
But not over 100,000 .70
---------------------------------------------------------------------------
On the Excess over 100,000
But not over 500,000 .50
---------------------------------------------------------------------------
On the Excess over 500,000
But not over 1,000,000 .20
---------------------------------------------------------------------------
On the Excess over 1,000,000 .10
---------------------------------------------------------------------------
</TABLE>
6) Honeymoon Clause
Under all Fund A Contracts, excluding those used to fund Pension and Profit
Sharing Plans, and all Fund B Contracts, the surrender value of the fixed
portion of the contract or certificate is the greater of the fixed
accumulated value or the fixed gross contributions. If a contract or
certificate under such a contract is surrendered at a time when the fixed
gross contributions exceed the fixed accumulated value, one-half of the
excess of the fixed gross contributions over the fixed accumulated value
shall be charged back against the account of the Agent. This chargeback
shall be in addition to any other chargebacks provided for the contract.
7) Selling Agents
Where, in the judgment of Lincoln National, one or more agents has
performed extraordinary services in the procurement, solicitation and/or
servicing of a Group, Lincoln National may require other agents enrolling
participants thereunder to share a specified portion of the commissions
payable under this section with the agents who have performed such
services. Such agents shall be referred to as "selling agents."
8) Resumption of Contributions
If a new agent is involved in the resumption of contributions from paid-up,
terminated or cancelled Contracts, or after a participant changes
employers, Lincoln National reserves the right to pay a portion or all
future commissions/service fees to the new agent.
Rev.(2/94)
Form 1185 - B-23
<PAGE>
Compensation (cont.)
d. Annuity Contracts - New LNL annuities
1) Individual Variable Annuity (Multi-Fund) Contracts
I. Tax Sheltered {403(b)} and Deferred Compensation (457 plans only)
Markets
For each sale of a periodic payment Multi-Fund Contract in these
markets a commission shall be paid on the expected recurring
annualized premium (not to exceed $9,500) upon receipt of the
first periodic payment. In addition, a commission shall be paid
on each deposit as it is received under the contract during the
first contract year. In the second and subsequent contract years,
service fees shall be paid on deposits as received in each
contract year. The commission/service fee rates are:
<TABLE>
<CAPTION>
=======================================================================================
Cash Flow Cash Flow
Commission Rate On Rate on First Rate on Deposits in
Contract Annualized Premium $9,500 of Deposits Excess of $9,500 in
Issue Age Up to $9,500 In each Contract Year Each Contract Year
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
54 or Below 4% 2.25% 4%
---------------------------------------------------------------------------------------
55 or Above 0% 3.25% 4%
=======================================================================================
</TABLE>
II. All Other Markets
For each sale of a periodic payment Multi-Fund Contract a
commission of 4% shall be paid on each deposit as it is received
under the contract during the first contract year. In second and
subsequent contract years, service fees of 4% shall be paid on
each deposit as it is received under the contract.
2) Individual Fixed Annuity (IFA) Contracts
I. Tax Sheltered Annuity {403(b)} Market
For each sale of a periodic payment IFA Contract in this market a
commission shall be paid on the expected recurring annualized
premium (not to exceed $9,500) upon receipt of the first periodic
payment. In addition, a commission shall be paid on each deposit
as it is received under the contract during the first contract
year. In the second and subsequent contract years, service fees
shall be paid on deposits as received in each contract year. The
commission/service fee rates are:
<TABLE>
<CAPTION>
=======================================================================================
Cash Flow Cash Flow
Commission Rate On Rate on First Rate on Deposits in
Contract Annualized Premium $9,500 of Deposits Excess of $9,500 in
Issue Age Up to $9,500 In each Contract Year Each Contract Year
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
54 or Below 4% 1.50% 3%
---------------------------------------------------------------------------------------
55 or Above 0% 2.50% 3%
=======================================================================================
</TABLE>
II. All Other Markets
For each sale of a periodic payment IFA Contract a commission of
3% shall be paid on each deposit as it is received under the
contract during the first contract year. In second and subsequent
contract years, service fees of 3% shall be paid on each
deposit as it is received under the contract.
3) Group Fixed Annuity (GFA) Contracts
I. Deferred Compensation (457 plans only) Market
For each sale of a periodic payment GFA Contract in this market a
commission equal to 4% of the expected recurring annualized
premium (not to exceed $9,500) shall be paid upon the receipt of
the first periodic payment. In addition, a commission of 1.50%
shall be paid on each deposit up to $9,500 as it is received
under the contract during the first contract year and a
commission of 3% shall be paid on each deposit in excess of
$9,500 as it is received under the contract during the first
contract year. In the second and subsequent contract years,
service fees of 1.50% shall be paid on the first $9,500 of
deposits as received in each contract year and service fees of 3%
shall be paid on deposits in excess of $9,500 as received in each
contract year.
II. All Other Markets
For each sale of a periodic payment GFA contract commission of 3%
shall be paid on each deposit as it is received under the
contract during the first contract year. In second and subsequent
contract years, service fees of 3% shall be paid on each deposit
as it is received under the contract.
Rev. (2/94)
B-24 - Form 1185
<PAGE>
Compensation (cont.)
4) Group Fixed Annuity (GFA) Rolling Surrender Charge Contracts
I. Deferred Compensation Market
For each sale of a periodic payment GFA Rolling Surrender Charge
Contract commission of 2.25% shall be paid on each deposit as it
is received under the contract during the first contract year.
In second and subsequent contract years, service fees of 2.25%
shall be paid on each deposit as it is received under the
contract.
5) American Legacy Annuity Contracts
I. The American Legacy Individual Annuity Contracts (ALA-I) - Tax
Sheltered Annuity {403(b)} and Deferred Compensation (457 plans
only) Markets
For each sale of an ALA-I Contract in these markets, a
commission of 2.00% shall be paid on each deposit as it is
received under the Contract during the first contract year. In
the second and subsequent contract years, service fees of 2.00%
shall be paid on each deposit as it is received under the
Contract. Additional asset-based service fees equal to 0.25% on
an annual basis shall be paid quarterly in the second and
subsequent contract years on the value of all deposits which have
been in the Contract for fifteen months or more at the time of
payment.
II. The American Legacy Individual Annuity Contracts (ALA-I) - All
Other Markets
For each sale of an ALA-I Contract in these markets a commission
of 2.50% shall be paid on each deposit as it is received under
the Contract during the first contract year. In the second and
subsequent contract years, service fees of 2.50% shall be paid on
each deposit as it is received under the Contract. Additional
asset-based service fees equal to 0.25% on an annual basis shall
be paid quarterly in the second and subsequent contract years on
the value of all deposits which have been in the Contract for
fifteen months or more at the time of payment.
III. American Legacy-II Individual Annuity (ALA-II) Contracts
According to the following table, a commission shall be paid on
each deposit as it is received under the Contract:
<TABLE>
<CAPTION>
Annuitant's Age at Issue Commission Rate
----------------------------------------------
<S> <C>
80 or Below 3.00%
81 or Above 1.75%
</TABLE>
Additional asset-based service fees equal to 0.25% on all annual
basis shall be paid quarterly in the second and subsequent
contract years on the value of all deposits which have been in
the Contract for fifteen months or more at the time of payments.
IV. ALA-I and ALA-II Contracts
With respect to each contract year's purchase payments, an annual
2.24% (0.30% for American Legacy II) persistency bonus will be
paid on any "Increased Guaranteed Minimum Death Benefit" amount
as defined in the annuity Contract. The first bonus will be
payable at the time the guaranteed minimum death benefit is
adjusted, which will be on the seventh contract anniversary of
each such purchase payment. Subsequent bonus payments will be
made for the next seven years on each applicable contract
anniversary date, provided the Contract remains in effect.
The amount of each bonus payment will remain constant during the
period unless the "Increased Guaranteed Minimum Death Benefit"
amount is reduced due to withdrawals. Withdrawals are applied to
reduce the "Increased Guaranteed Minimum Death Benefit" amount on
a first-in first-out basis, so subsequent bonus payments would be
reduced accordingly. The persistency bonus will not be paid on
Contracts that have been annuitized.
V. American Legacy Group II (ALG-II) Annuity Contracts
For each sale of an AGL-II contract, a commission of 1.75% shall
be paid on each deposit as it is received under the Contract
during the first contract year. In the second and subsequent
contract years, service fees of 1.75% shall be paid on each
deposit as it is received under the Contract. Additional asset-
based service fees equal to 0.25% on an annual basis shall be
paid quarterly in second and subsequent contract years on the
value of all deposits which have been in the Contract for fifteen
months or more at the time of payment.
VI. American Legacy Retirement Investment Plan (AL-RIP) Annuity
Contracts
For each sale of an AL-RIP Contract, a commission of 1.80% shall
be paid on each deposit as it is received under the Contract
during the first contract year. In the second and third contract
years, a service fee of 1.20% shall be paid on each new deposit
as it is received under the Contract. An asset-based service fee
equal to 0.25% on an annual basis shall be paid quarterly in the
fourth and subsequent contract years on the value of all deposits
in the Contract at the time of payment.
Rev. (11/96)
Form 1185 - B-25
<PAGE>
Compensation (cont.)
6) Single Payment Contracts, Flexible Premium Contracts and Lump Sum
Deposits to Periodic Payment Contracts (A Lump Sum Deposit shall be
defined as a non-recurring amount in excess of the expected recurring
annualized premium which is clearly identified as a lump sum deposit
when submitted and which is submitted separately from the regular
salary reduction deposits.)
(a) Periodic Multi-Fund Contracts (MF-1) 4.00%
(b) Single/Flexible Premium Multi-Fund Contracts (MF-2) 4.00%
(c) Modified Single/Flexible Premium Multi-Fund
Contracts (MF-3) 3.00%
(d) Periodic Individual Fixed Annuity Contracts (IFA-1) 4.00%
(e) Single/Flexible Premium Individual Fixed Annuity
Contracts (IFA-2) 4.00%
(f) Modified Single/Flexible Premium Individual Fixed
Annuity Contracts (IFA-3) 3.00%
(g) Group Fixed Annuity Contracts 3.00%
(h) Single Premium Immediate Fixed Annuity Contracts 3.00%*
(i) Single Premium Immediate Variable Annuity Contracts
Non Life Contingent Option
3-10 Years Designated Period 1.50%*
11 + Years Designated Period 3.00%*
Life Contingent Option 3.00%*
For Lump Sum deposits to Periodic Payment Contracts {d(9)(a) and
d(9)(d)}, a 1% chargeback will apply on contracts annuitized within
the first twelve months after the lump sum is received. For Flexible
Premium Contracts {d(9)(b) and d(9)(e)}, a 1% chargeback will apply
to all purchase payments annuitized within twelve months after they
are deposited into the contract.
* Indicates standard commission paid on non-Lincoln National annuity
funds. The commission on contracts purchased with Lincoln National
annuity funds will depend on the duration of the existing Lincoln
National annuity contracts and the surrender charge schedule, if any,
in effect.
7) Chargebacks on Single Payment Contracts and Flexible Premium Contracts
The commissions shown in d(9)b-c and d(9)e-g, are subject to a
chargeback for contracts issued to annuitants age 81 and older. The
chargeback applies at the death of the annuitant according to the
following schedule:
<TABLE>
<CAPTION>
PRODUCT
=====================================================================
Death in d(9)b & d(9)e d(9)c & d(9)f d(9)g
Contract Year
---------------------------------------------------------------------
<S> <C> <C> <C>
1 4.00% 3.00% 3.00%
---------------------------------------------------------------------
2 4 00 3.00 3.00
---------------------------------------------------------------------
3 4.00 3.00 3.00
---------------------------------------------------------------------
4 2.00 2.00 1.50
---------------------------------------------------------------------
5 2.00 2.00 1.50
---------------------------------------------------------------------
6 or more 0 0 0
=====================================================================
</TABLE>
8) Selling Agents
Where, in the judgment of LNL, one or more agents has performed
extraordinary services in the procurement, solicitation and/or
servicing of a Group, LNL may require other agents enrolling
participants thereunder to share a specified portion of the
commissions payable under this section with the agents who have
performed such services. Such agents shall be referred to as "selling
agents." LNL may discontinue commissions and service fees to the
selling agent if in the judgment of LNL, the selling agent is no
longer actively servicing the Group.
Rev. (10/95)
B-26 - Form 1185
<PAGE>
Compensation (cont.)
12) Resumption of Contributions
If a new agent is involved in the resumption of contributions from
paid-up, terminated or cancelled contracts, or after a participant
changes employers, LNL reserves the right to pay a portion or all
future commissions/service fees to the new agent.
13) Service Fees
While this contract is in force, for each contract year subsequent to
the first in which the Agent continues to actively service the annuity
contract, the Agent will be eligible to receive service fees on annual
recurring deposits received in each contract year, except as indicated
in subsection d(6). LNL shall be the sole judge of whether the Agent
continues to actively service the annuity contract and is entitled to
receive service fees and commissions on the contract.
14) The Agent's commission account may be charged with any loss resulting
from the Agent's actions which are not in accordance with the client's
instructions. These actions would typically be failure to promptly
notify LNL of a change requested by the client or submitting incorrect
instructions.
15) With the prior notification to the Agent by LNL, the Agent may receive
compensation at rates different than those shown above. Submission of
business subsequent to such notification constitutes acceptance of the
commission modification.
Rev. (2/94)
Form 1185 - B-27
<PAGE>
Compensation (cont.)
e. Pension Investment Group Annuity Contracts
1) The following schedules show the basic commission rates applicable to
certain group annuity contracts. Where applicable, contract year shall
be as defined in the specific group annuity contract.
2) Contract Types
I. Lincoln Life Director(TM) Contract
Various commission schedules are available based on the level of
services provided and the fee structure contained in the specific
Lincoln Life Director(TM) contract. The schedule used with each
case will be subject to LNL's approval.
NET RATE ALLOCATED
------------------
Deposit Based
Commission
Schedule 1. 3%
Schedule 2. 2%
Asset Based
Commission
Schedule 3. .50%
Schedule 4. .25%
ALLOCATED
---------
<TABLE>
<CAPTION>
Deposit Based Asset Based Deposit Based Asset Based
Commission Commission Years 1 & 2 Years 3+
<S> <C> <C> <C> <C> <C> <C>
Schedule 3. 3% Schedule 7. 0.50% Schedule 10. 2% 0.25%
Schedule 4. 2% Schedule 8. 0.25% Schedule 11. 1%/1/ 0.25%/2/
Schedule 5. 1% Schedule 9. 0.00% Schedule 12. 1% 0.35%.
Schedule 6. 0%
</TABLE>
UNALLOCATED
-----------
<TABLE>
<CAPTION>
Deposit Based Asset Based Deposit Based Asset Based
Commission Commission Years 1 & 2 Years 3+
<S> <C> <C> <C> <C> <C> <C>
Schedule 13. 4% Schedule 18. 0.50% Schedule 21. 2% 0.25%
Schedule 14. 3% Schedule 19. 0.25% Schedule 22. 1%/1/ 0.25%/2/
Schedule 15. 2% Schedule 20. 0.00% Schedule 23. 1% 0.35%
Schedule 16. 1%
Schedule 17. 0%
</TABLE>
/1/ Deposit Based Year 1
/2/ Asset Based Years 2+
Rev. (4/96)
B-28 - Form 1185
<PAGE>
Compensation (cont.)
UNALLOCATED GRADED I
--------------------
<TABLE>
<S> <C> <C> <C>
DEPOSIT BASED
Schedule 24 $ 0 - $ 50,000 3.00%
50,000 - 100,000 2.00%
100,000 - 200,000 1.00%
200,000 - 500,000 0.50%
500,000 - 1,000,000 0.20%
OVER - 1,000,000 0.10%
ASSET BASED
Schedule 25 $ 0 - $ 250,000 0.50%
250,000 - 500,000 O.30%
500,000 - 1,000,000 0.25%
1,000,000 - 3,000,000 0.20%
3,000,000 - 5,000,000 0.15%
OVER - 5,000,000 0.10%
Schedule 26 No Commission.
UNALLOCATED GRADED II
---------------------
Minimum $1,000,000
First Year Deposit
DEPOSIT BASED
Schedule 27 $ 0 - $1,000,000 1.00%
OVER - 1,000,000 0.50%
ASSET BASED
Schedule 28 $ 0 - $1,000,000 0.40%
1,000,000 - 3,000,000 0.20%
3,000,000 - 5,000,000 0.15%
OVER - 5,000,000 0.10%
</TABLE>
For each of the above deposit based commission schedules, the applicable
schedule shall apply to the total deposits received during each contract
year. For each of the above asset based commission schedules the rates
shown are annual rates, and the applicable schedule shall apply to the
assets in the Lincoln Life Director(TM) contract during each contract year.
Rev. (10/95)
Form 1185 - B-29
<PAGE>
Compensation (cont.)
II. DC Manager
The Agent may elect to receive commissions under any one of the
following schedules:
Schedule 1 5% commission paid on first year deposits as they are
received. Asset-based service fees equal to .5% on an
annual basis shall be paid quarterly in the second and
subsequent contract years on the average assets in the
contract during the contract year.
Schedule 2 3% commission paid on all deposits as they are received.
Schedule 3 No commission.
III. Money Manager
Deposits Commission Rate
Deposit Based
$ 0 - $ 25,000 2.50%
25,000 - 50,000 1.00%
50,000 - 100,000 0.70%
100,000 - 500,000 0.50%
500,000 - 1,000,000 0.20%
OVER - 1,000,000 0.10%
The above schedule shall apply to the total deposits received during
each contract year.
IV. Money Manager II
Deposits Commission Rate
Deposit Based
$ 0 - $ 50,000 3.00%
50,000 - 100,000 2.00%
100,000 - 200,000 1.00%
200,000 - 500,000 0.50%
500,000 - 1,000,000 0.20%
1,000,000 - 2,000,000 0.10%
-------------------- ----
OVER - 2,000,000 0.00%
The above schedule shall apply to the total deposits received during
each contract year.
Rev. (10/95)
B-30 - Form 1185
<PAGE>
Compensation (cont.)
V. Target Funding, Target Plus, Money Builder, Target Return Annuity
Contract, Capital Funding Agreement, Focused Funding, Insured Funding
I, Insured Funding II, Insured Funding III, Insured Funding IV,
Earnings Plus and any contract made available in the future unless a
different schedule exists for a specific contract type.
Deposits Commission Rate
$ 0 - $ 5,000,000 0.20%
OVER - 5,000,000 0.10%
The above schedule shall be applied to the total deposits received
over the duration of each contract.
VI. Deposit Administration Group Annuity, Group Annuity Investment
Contract, Pension Annuity Investment Contract and Immediate
Participation Guarantee Contracts.
Contracts Eff. Contracts Eff.
Deposits After 7/1/78 Prior 7/1/78
Commission Rate Commission Rate
$ 0 - $ 50,000 1.30% 1.00%
50,000 - 100,000 0.40% 0.40%
100,000 - 500,000 0.40% 0.40%
500,000 - 1,000,000 0.20% 0.20%
1,000,000 - 2,000,000 0.10% 0.10%
2,000,000 - 5,000,000 0.05% 0.10%
OVER - 5,000,000 Refer to Home Office
The above schedule shall apply to the total deposits received during
each contract year.
3) While this contract is in force and while the Agent continues to actively
service the group annuity contract, the Agent shall be eligible to receive
commissions based on the appropriate schedule above. LNL may or may not
rely on instructions from a client, and LNL shall be the sole judge of
whether the Agent is entitled to receive commissions on the contract.
4) LNL has the right to not pay commissions on assets transferred from any
other product by LNL.
5) With the prior written approval of the Agent and LNL, the Agent may receive
commissions at rates different than those expressed in the above schedules.
If the amount payable is more than would be payable using the appropriate
schedules, the Agent must notify the owner of the contract in writing of
such fact before LNL shall agree to pay said commission. Further, LNL and
the Agent will agree in writing to waive the above schedule and state the
terms of the mutually agreed schedule.
6) LNL has the right to charge the Agent for any commissions paid on deposits
withdrawn within 90 days of the deposit date.
Rev. (10/95)
Form 1185 - B-31
<PAGE>
Compensation (cont.)
f. Production Bonus
The PRODUCTION BONUS for a given calendar year will be based on the
ELIGIBLE COMMISSIONS earned during that calendar year and will be paid
in a lump sum during the first quarter of the following year. The
agent must have an active contract with LNL at the time of payment to
receive a PRODUCTION BONUS.
ELIGIBLE COMMISSIONS earned in a given calendar year are the sum of
the first year commissions on the commission statements for the agent
for that calendar year and identified as Individual Products
(excluding Long Term Care, Moneyguard and Spectrum EG).
If the effective date of contract is prior to July 1 of the initial
calendar year, a prorated PRODUCTION BONUS will be calculated as
follows (the result of each step is the input for the next step):
(1.) Multiply the ELIGIBLE COMMISSIONS by 12;
(2.) Divide by the number of months contract was in force that
year;
(3.) Calculate the PRODUCTION BONUS using the formula given
below;
(4.) Multiply by the number of months used in (2);
(5.) Divide by 12.
If the effective date of contract is July 1, or later, of the initial
calendar year, no PRODUCTION BONUS will be calculated or paid for the
first initial calendar year. Instead, all ELIGIBLE COMMISSIONS earned
in the initial calendar year will be added to the ELIGIBLE COMMISSIONS
earned in the next calendar year and the sum will be used for the
first PRODUCTION BONUS calculation. The eligible commission level will
be the amount required for the first full calendar year.
If the agent is a Corporate agent containing more than one individual
holding an agent's contract with LNL, the PRODUCTION BONUS for the
agent is the sum of the PRODUCTION BONUSES calculated for the
individual members separately. That is, the PRODUCTION BONUS for each
individual member will be calculated using his/her ELIGIBLE
COMMISSIONS and the sum of the PRODUCTION BONUSES for all individual
members will be paid to the Corporate agent.
The PRODUCTION BONUS formula is:
----------------------------------------------------------------------
Eligible Commissions* Production Bonus
----------------------------------------------------------------------
$ 25,000 - 49,999 40% on excess over 20,000 + 4,450
----------------------------------------------------------------------
50,000 - 99,999 45% on excess over 50,000 + 16,450
----------------------------------------------------------------------
100,000 and over 50% on excess over 100,000 + 38,950
----------------------------------------------------------------------
* The Agent must have Eligible Commissions which equal or exceed the
minimum amount stated above for a given calendar year to be eligible
for a Production Bonus for that year. In addition, the agent must have
an affiliation with an RMO to be eligible for Production Bonus.
Rev. (10/95)
B-32 - Form 1185
<PAGE>
Compensation (cont.)
9. Persistency Bonus
There will be separate PERSISTENCY BONUSES for Individual Life business and
Personal and Business Disability Income business. For a given calendar year each
PERSISTENCY BONUS will be based on the ELIGIBLE ANNUALIZED INDIVIDUAL LIFE
PREMIUM or the ELIGIBLE ANNUALIZED DISABILITY PREMIUM, respectively, and paid
during the first quarter of the following year.
ELIGIBLE ANNUALIZED INDIVIDUAL LIFE PREMIUM for a given calendar year is the
sum, at the end of that year, of all annualized premium on Individual Life
business (excluding Universal Life, Single Premium Whole Life, Paid-Up Additions
Purchase Rider, Lincoln Life 10 Year Term and Lincoln Life Renewing Term.) then
in force, written under this contract and which was issued by LNL during the
second prior calendar year.
ELIGIBLE ANNUALIZED DISABILITY PREMIUM for a given calendar year is the sum, at
the end of that year, of all annualized premium on Personal and Business
Disability Income business (excluding Return of Premium Rider) then in force,
written under this contract and which was issued by LNL during the second prior
calendar year.
To receive either PERSISTENCY BONUS, the Agent must have an active career
agent's contract with LNL at the time of payment.
If the Agent is a Corporate Agent containing more than one individual holding a
Agent's contract with LNL, the PERSISTENCY BONUS for the Agent is the sum of the
PERSISTENCY BONUSES calculated for the individual members separately. That is,
the PERSISTENCY BONUSES of each individual member will be calculated using
his/her ELIGIBLE ANNUALIZED INDIVIDUAL LIFE PREMIUM and ELIGIBLE ANNUALIZED
DISABILlTY PREMIUM and the sum of the PERSISTENCY BONUSES for all individual
members will be paid to the Agent.
The PERSISTENCY BONUS for a given year for Individual Life business is
calculated by applying the following schedule to the ELIGIBLE ANNUALIZED
INDIVIDUAL LIFE PREMIUM.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Eligible Annualized Individual Persistency Bonus
Life Premium
- --------------------------------------------------------------------------------
<S> <C>
$ 0 - 9,999 0%
- --------------------------------------------------------------------------------
10,000 - 14,999 5% on excess over $10,000
- --------------------------------------------------------------------------------
15,000 - 24,999 10% on excess over 15,000 + $ 250
- --------------------------------------------------------------------------------
25,000 - 39,999 15% on excess over 25,000 + 1,250
- --------------------------------------------------------------------------------
40,000 - 59,999 20% on excess over 40,000 + 3,500
- --------------------------------------------------------------------------------
60,000 - 79,999 25% on excess over 60,000 + 7,500
- --------------------------------------------------------------------------------
80,000 - 99,999 30% on excess over 80,000 + 12,500
- --------------------------------------------------------------------------------
100,000 and over 35% on excess over 100,000 + 18,500
- --------------------------------------------------------------------------------
</TABLE>
The PERSISTENCY BONUS for a given year for Personal and Business Disability
Income business is calculated by applying the following schedule to the
ELIGIBLE ANNUALIZED DISABILITY PREMIUM.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Eligible Annualized Disability Persistency Bonus
Premium
- --------------------------------------------------------------------------------
<S> <C>
- --------------------------------------------------------------------------------
$ 0 - 9,999 0%
- --------------------------------------------------------------------------------
10,000 - 14,999 5% on excess over $ 10,000
- --------------------------------------------------------------------------------
15,000 - 24,999 10% on excess over 15,000 + $ 250
- --------------------------------------------------------------------------------
25,000 - 39,999 15% on excess over 25,000 + 1,250
- --------------------------------------------------------------------------------
40,000 - 59,999 20% on excess over 40,000 + 3,500
- --------------------------------------------------------------------------------
60,000 - 79,999 25% on excess over 60,000 + 7,500
- --------------------------------------------------------------------------------
80,000 - 99,999 30% on excess over 80,000 + 12,500
- --------------------------------------------------------------------------------
100,000 and over 35% on excess over 100,000 + 18,500
- --------------------------------------------------------------------------------
</TABLE>
Rev. (10/95)
Form 1185 - B-33
<PAGE>
SECTION C. SPECIAL PROVISIONS BETWEEN LNC EQUITY SALES CORPORATION ("EQUITY
SALES") AND THE AGENT
1. Vesting
There is no vesting of commissions payable by Equity Sales to the Agent. No
commissions or other amounts shall be payable to the Agent with respect to
securities issued pursuant to a payment received by Equity Sales later than
one day after termination of the Agent's registration with Equity Sales.
2. Payments on Existing Customer's Account
Each payment on an existing customer's account for purchase of securities
shall be deemed a new application under this contract. The Agent who
obtained the original application shall be entitled to commissions on
subsequent payments only so long as the account or customer is assigned to
the Agent and the Agent is an active Agent of Equity Sales within the
territory in which the applicant resides at the time such payment is made.
In the event the applicant's residence is not within the territory assigned
to the original Agent, or if the original Agent has terminated, or if the
customer or account is no longer assigned to the original Agent, the
commissions on such subsequent payment shall thereafter be paid in
accordance with the then applicable rules and policies of Equity Sales.
3. Commissions Payable
The commission on any security product or service offered by Equity Sales
shall be based on meeting certain minimum production requirements. These
requirements will be determined and communicated annually. Those agents who
meet the minimum requirement will receive fifty percent (50%) of the net
concession for that specific product or service. Those agents who do not
meet the minimum shall receive forty percent (40%) of the net concession
for that specific product or service.
4. Charges to Agent's Commission Account
a. Any remissions paid or credited to the Agent by Equity Sales may be
charged back to the Registered Representative to the extent that:
1) such commissions are attributable to the uncompleted portion of a
pre-authorized or predated check or draft plan or to a dishonored
check or draft or similar instrument, or to an uncompleted
military allotment or payroll deduction or similar plan for the
systematic purchase of securities;
or
2) Equity Sales must return its dealer concession to the issuer or
distributor of securities pursuant to any selling group agreement
or other legal requirement.
b. The Agent's commission account may be charged with any loss resulting
from a "customer fail" involving a customer account under the Agent's
management at the time of the "fail." For purposes of this provision
the term "customer fail" shall be the failure of a customer to follow
through on an oral commitment to pay for a purchase or deliver
securities in settlement of a sale within a period of time specified
by regulation, industry practice or policy of Equity Sales.
Rev. (11/96)
Form 1185 - C-1
<PAGE>
SECTION D. SPECIAL PROVISIONS BETWEEN LINCOLN NATIONAL HEALTH AND CASUALTY
INSURANCE COMPANY AND THE AGENT
1. Vesting
Commissions are payable without regards to termination of the Agent's
appointment.
Service fees are payable in accordance with the applicable schedule only if
at the time of payment the Agent maintains, in the opinion of LNH&C,
effective control over the continuance of the policy in force.
2. Death or Total Disability
First policy year commissions are payable regardless of age or disablement.
3. Compensation Payable
Commission payable is in accordance with all terms and conditions shown
under Section A and Section B 3 b - Group Insurance - of this contract.
Commissions or service fees with respect to increases in Health and
Casualty premium on an existing policy shall be payable to the agent of
record at the time of such increase, in accordance with the existing
practices of Lincoln National.
Rev. (2/94)
Form 1185 - D-1
<PAGE>
Exhibit 8
STATE STREET BANK AND TRUST COMPANY
CUSTODY FEE SCHEDULE
FOR
LINCOLN NATIONAL EQUITY-INCOME FUND, INC.
I. PORTFOLIO CUSTODY
Maintain custody of fund assets. Settle portfolio purchases and sales.
Report buy and sell fails. Determine and collect portfolio income. Make
cash disbursements and report cash transactions in local and base currency.
Monitor corporate actions. Report portfolio positions. Withhold foreign
taxes. File foreign tax reclaims.
The fee shown below is an annual charge, billed and payable monthly, based
on month end assets of the funds.
A. INTERNATIONAL ASSETS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Group A Group B Group C Group D Group E
Germany Australia Austria Botswana Argentina
Euroclear Canada Belgium Brazil Bangladesh
Japan Denmark Finland China Bolivia*
Italy Indonesia Czech Republic Chile
New Zealand Ireland Ecuador Colombia
South Africa Malaysia Egypt Cyprus
Switzerland Mexico Ghana Greece
U.K. Netherlands Israel Hungary
France Norway Kenya India
Hong Kong Philippines Luxembourg Jamaica*
Portugal Morocco Jordan
Singapore Sri Lanka Mauritius
Spain Taiwan Namibia
Sweden Trinidad & Tobago* Pakistan
Thailand Turkey Peru
Zambia Poland
Zimbabwe Slovakia*
South Korea
Tunisia*
Uruguay
Venezuela
</TABLE>
*Not 17F-5 at this time
<PAGE>
Holding Charges in Basis Points (Annual Fee)
--------------------------------------------
GROUP A GROUP B GROUP C GROUP D GROUP E
2.25 5.0 10.0 35.0 45.0
Transaction Charges
-------------------
GROUP A GROUP B GROUP C GROUP D GROUP E
$25 $25 $35 $100 $125
B. DOMESTIC ASSETS
Holding Charge in Basis Points (Annual Fee)
-------------------------------------------
Group Net Assets .25
Transaction Charges Standard
State Street Bank Repos or FX No Charge
DTC or Fed Book Entry $ 5.00
New York Physical Settlements $20.00
Physical Maturity Collections $ 8.00
PTC Purchase, Sale, Deposit or Withdrawal $ 9.00
Third Party FX $50.00
Option charge for each option written or closing
contract, per issue, per broker $25.00
Option expiration or exercised charge, per issue, per broker $15.00
Futures transaction -- no security movement $ 8.00
Other $20.00
II. SPECIAL SERVICES
Fees for activities of a non-recurring nature such as fund consolidations
or reorganizations, extraordinary security shipments and the preparation of
special reports will be subject to negotiation. Fees for Interchange
technology and applications specialized training, communication lines,
computer hardware and software, and other special items will be negotiated
separately.
<PAGE>
III. OUT-OF-POCKET EXPENSES
A billing for the recovery of applicable out-of-pocket expenses will be
made as of the end of each month. Out-of-pocket expenses include, but are
not limited to the following:
- Telephone - Transfer Fees
- Wire Charges ($5.25 in and $5 out) - Sub-custodian Charges
- Postage and Insurance - Price Waterhouse Audit Letter
- Courier Service - Federal Reserve Fee for Return
- Duplicating Check items over $2,500 (4.25 each)
- Legal Fees
- Supplies Related to Fund Records
IV. EARNINGS CREDIT
A balance credit equal to 75% of the 90-day Treasury Bill rate in effect
the last business day of each month will be applied to the Demand Deposit
Account balance, net of check redemption service overdrafts, on a prorated
basis against each fund's Custodian fees, excluding out-of-pocket expenses.
The balance credit will be cumulative and carried forward each month. Any
excess credit remaining at year-end (December 31) will not be carried
forward.
V. PAYMENT
The above fees will be charged against the fund's custodian checking
account five (5) days after the invoice is mailed to the fund's office.
LINCOLN NATIONAL AGGRESSIVE BANK STATE STREET
GROWTH FUND, INC. & TRUST COMPANY
By: /S/Walter W. Bonham, Jr. By: /S/Nancy Grady
Title: Assistant Treasurer Title: Vice President
Date 1/28/97 Date 1/16/97
- ---------------------------------------------------------------------------
<PAGE>
SERVICES AGREEMENT
------------------
(Exhibit B and Schedules Omitted)
THIS SERVICES AGREEMENT (the "Agreement") is made as of August 15, 1996, by
and among Delaware Management Holdings, Inc., a Delaware corporation
("Holdings"), Delaware Service Company, Inc., a Delaware corporation and a
wholly owned subsidiary of Holdings ("Delaware"), Lincoln National Life
Insurance Company, an Indiana insurance corporation ("Lincoln Life"), and each
of the investment companies listed in Exhibit A hereto, each a Maryland
corporation (together with any other investment company designated in accordance
with Section 5.1, the "Funds," or individually, a "Fund").
The parties hereto, in consideration of the mutual covenants hereinafter
expressed, agree as follows:
ARTICLE 1
DEFINITIONS
-----------
Section 1.1 Definitions. The following terms shall have the respective
meanings set forth in this Section 1.1 for all purposes of this Agreement except
where the application of such definitions is limited by reference in this
Section 1.1 to a specific Article of this Agreement (such definitions to be
equally applicable to both the singular and plural forms of the terms herein
defined):
"Acceptance Test" means a test, reasonably acceptable to Lincoln Life,
Delaware and the Funds, of the performance of the Value Calculation Services for
the Accounts included in the respective Phases, to be conducted in accordance
with Article 4.
"Accounting Services" means the services listed in the Cutover Schedule
with respect to the Accounts.
"Accounts" means the Funds and the Separate Accounts, collectively.
"Affiliate" means, with respect to any entity, any other entity
controlling, controlled by or under common control with such entity.
"Business Day" means a day on which the New York Stock Exchange is open for
trading.
"Calculation Losses" means any losses suffered by a Contractowner, Third
Party Administrator, Fund or Separate Account directly caused by an error in a
Net Asset Value or Unit Value, or by the delivery to Lincoln Life or any Fund of
a Net Asset Value or Unit Value after the applicable deadline provided for in
Section 2.1; provided, however, that such losses shall not include any
consequential damages.
<PAGE>
"Contractowner" means the present or former owner of an insurance or
annuity contract supported by a Separate Account, or any beneficiary or
annuitant thereof.
"Cutover Date," with respect to any Phase, means the date, which shall be a
Business Day, on which Delaware actually commences providing the Accounting
Services with respect to such Phase in accordance with Section 4.2. The planned
Cutover Date for each Phase is set forth in the Cutover Schedule.
"Cutover Schedule" means Schedule 1.1(a) hereto, which sets forth the
accounting services to be rendered pursuant to this Agreement and the planned
Cutover Dates, as such Schedule may be amended from time to time pursuant to
Section 16.1.
"Delaware" has the meaning set forth in the preamble to this Agreement.
"Delaware Affiliate" means Holdings and any entity that is directly or
indirectly controlled by Holdings.
"Fee Schedule" means Schedule 6.1 hereto, as such Schedule may be amended
from time to time pursuant to Section 16.1.
"Fund" has the meaning set forth in the preamble to this Agreement.
"Holdings" has the meaning set forth in the preamble to this Agreement.
"Lincoln Affiliate" means any Affiliate of Lincoln Life other than a
Delaware Affiliate.
"Lincoln Life" has the meaning set forth in the preamble to this Agreement.
"Net Asset Value" means the daily net asset value per share of the
respective Funds for each Business Day, all determined in accordance with the
terms of the Cutover Schedule and with any applicable prospectus or regulatory
requirement.
"Phase" means a set of Accounts comprising the Phase I Accounts, the Phase
II Accounts or the Phase III Accounts.
"Phase I Account" means an Account designated as such on the Cutover
Schedule.
"Phase II Account" means an Account designated as such on the Cutover
Schedule.
"Phase III Account" means an Account designated as such on the Cutover
Schedule.
"Renewal Term" means each successive one-year term occurring
<PAGE>
after the expiration of the initial term of this Agreement as described in
Section 11.1.
"Separate Account" means a separate account of Lincoln Life identified as
such on the Cutover Schedule, and any additional separate account or sub-account
of Lincoln Life or any Lincoln Affiliate (or of any other person if Lincoln Life
or any Lincoln Affiliate has administrative responsibilities with respect to
such separate account or sub-account pursuant to any reinsurance agreement or
otherwise) designated in accordance with Section 5.1.
"Test Period" means, with respect to each Phase, a period of time prior to
the Cutover Date for such Phase, commencing on the date specified by Delaware
pursuant to Section 4.1 and having a duration of three weeks or such longer
period as may be determined pursuant to Section 4.1.
"Third Party Administrator" means an administrator of insurance or annuity
contracts acting on behalf of Contractowners.
"Unit Value" means the daily unit value per unit of the respective Separate
Accounts or sub-accounts thereof for each Business Day, all determined in
accordance with the terms of the Cutover Schedule and with any applicable
prospectus or regulatory requirement.
"Value Calculation Services" means those Accounting Services consisting of
or incidental to the calculation and communication of Unit Values and Net Asset
Values in accordance with the terms of this Agreement.
ARTICLE 2
SCOPE OF SERVICES; CUTOVER
--------------------------
Section 2.1 Scope of Services. Delaware shall provide the Accounting
Services to each of the Funds and to Lincoln Life with respect to each of the
Separate Accounts, all in accordance with the terms of this Agreement. Without
limiting the generality of the foregoing, from and after the Cutover Date for
each respective Phase, Delaware, no later than 6:00 p.m. (New York City time) on
each Business Day, shall in accordance with the terms of this Agreement provide
to Lincoln Life and to the Funds the Value Calculation Services for each of the
Accounts included in such Phase. In the event of any error in the Value
Calculation Services, the parties hereto will follow the procedures set forth in
Schedule 2.1, without prejudice to any other rights described in this Agreement.
Section 2.2 Cutover Schedule. Delaware, Lincoln Life and the Funds shall
use their respective best efforts to cause the Cutover Date to occur no later
than (a) August 15, 1996, with respect to the Phase I Accounts, (b) October 31,
1996, with
<PAGE>
respect to the Phase II Accounts and (c) January 1, 1997 with respect to the
Phase III Accounts.
ARTICLE 3
LINCOLN LIFE'S SUPPORT OBLIGATIONS
----------------------------------
Section 3.1 Provision of Data. Lincoln Life shall use its best efforts to
provide or cause to be provided to Delaware the data identified in Schedule 3.1
during the periods and in accordance with the procedures identified in such
Schedule, it being understood that Delaware shall not be responsible for any
Calculation Losses or other claims, suits, hearings, actions, damages,
liabilities, fines, penalties, costs, losses or expenses, including reasonable
attorney's fees, which any party may sustain or incur, directly or indirectly,
in each case to the extent caused by or arising from Lincoln Life's failure to
provide such data in accordance with such Schedule 3.1.
Section 3.2 Data to Be Provided by Third Parties. With respect to each of
the mutual funds identified in Schedule 3.2 as an available investment of one or
more of the Separate Accounts (other than mutual funds managed by Lincoln Life
or Delaware or their respective Affiliates) and each third party service
provider identified in such Schedule, Lincoln Life shall direct each of the
managers of such funds or such service provider, as the case may be, to provide
or cause to be provided to Delaware the data identified in Schedule 3.2 in
accordance with the procedures and time deadlines identified in such Schedule.
Section 3.3 Information for Periods Prior to Cutover Date. Lincoln Life
will provide appropriate financial and other information with respect to the
Accounts to Delaware, and will cooperate with Delaware, in connection with the
preparation of data for 1996 annual reports to Contractowner and other elements
of the Accounting Services that relate to periods prior to the Cutover Dates for
the respective Accounts. In addition, Lincoln Life will provide to Delaware
appropriate financial and other information regarding the Accounts for periods
prior to 1996 to the extent relevant to the performance of the Accounting
Services for 1996 and subsequent periods.
ARTICLE 4
ACCEPTANCE TEST; CUTOVER DATE
-----------------------------
Section 4.1 Acceptance Testing. Delaware shall notify Lincoln Life of the
date, which shall be a Business Day, on which the Value Calculation Services for
each respective Phase will be ready for the commencement of the Acceptance Test
for such Phase. During the Test Period for each Phase, Delaware, Lincoln Life
and the Funds shall cooperate in performing the Acceptance Test for such Phase,
and Delaware and Lincoln Life, respectively, shall use its best efforts to
remedy any failure in the performance of the Value Calculation Services caused
by such party. In the event that, during the Test Period with respect to any
Phase,
<PAGE>
performance of the Value Calculation Services is suspended for such Phase in
order to effect such remedy or for any other reason, the Test Period for such
Phase shall be extended by the number of days of such suspension. Further, if
at the date that would otherwise be the end of the Test Period for any Phase
Delaware is not performing the Value Calculation Services with respect to such
Phase to the reasonable satisfaction of Lincoln Life, and Lincoln Life shall so
notify Delaware, the Test Period shall be extended until the date on which
Lincoln Life notifies Delaware that the Value Calculation Services are being
performed to the reasonable satisfaction of Lincoln Life. All references in this
Section 4.1 to the performance of the Value Calculation Services shall refer to
the performance thereof in a test mode.
Section 4.2 Cutover Date. With respect to each Phase, upon the
termination of the Test Period, Lincoln Life, the Funds and Delaware shall
execute a written acknowledgment in the form of Exhibit B hereto confirming such
termination and specifying the Cutover Date, which shall be the Business Day
immediately following the date of such termination unless Lincoln Life, the
Funds and Delaware shall agree upon a different date.
ARTICLE 5
NEW ACCOUNTS; NEW INVESTMENT MANAGERS
-------------------------------------
Section 5.1 Additional Accounts. Lincoln Life may from time to time
designate (i) one or more additional investment companies or separate accounts
to constitute Funds or Separate Accounts, as the case may be, for all purposes
of this Agreement, or (ii) one or more newly established sub-accounts of any
Separate Account. Such designation shall be:
(a) subject to Delaware's consent, which shall not be unreasonably
withheld; provided, that such consent shall be considered to be
unreasonably withheld if Delaware does not make reasonable
efforts to accept such new investment companies, separate
accounts and sub-accounts, which efforts shall include, but not
be limited to, reasonable consideration of the expansion of
Delaware's infrastructure to handle such new investment
companies, separate accounts and sub-accounts; and
(b) evidenced by a writing executed by Lincoln Life, Delaware and, if
applicable, each such investment company, setting forth the name
of such investment company, separate account or new sub-account,
the applicable rate under the Fee Schedule that shall apply to
the Accounting Services for such investment company, separate
account or new sub-account, the effective date of the designation
thereof as a Fund, Separate Account or new sub-account, and any
other matters the parties wish to include.
<PAGE>
Notwithstanding clause (b) of the preceding sentence, if Delaware's performance
of the Accounting Services for such additional Funds, Separate Accounts, or sub-
accounts of such Separate Accounts would, in Delaware's reasonable opinion,
result in higher costs than the costs Delaware incurs for providing the
Accounting Services to the current Accounts, then the affected parties hereto
shall negotiate in good faith an addendum to the Fee Schedule for such
additional Funds, Separate Accounts and sub-accounts and Delaware shall not be
deemed to have unreason ably withheld its consent under clause (b) of this
Section 5.1 until such addendum has been agreed to. Except as otherwise
specified in such writing, from and after such effective date, Delaware shall
provide to such Fund, or to Lincoln Life with respect to a Separate Account or
new sub-account, the same Accounting Services as are specified in the Cutover
Schedule with respect to the other Funds, Separate Accounts or sub-account of a
Separate Account, as the case may be.
Section 5.2 New Investment Managers. If new investment managers are added
to provide investment advisory services to any of the Accounts, and Delaware's
performance of the Accounting Services is, as a result thereof, significantly
more costly to Delaware, the affected parties shall negotiate in good faith an
addendum to the Fee Schedule for such Accounts.
ARTICLE 6
FEES
----
Section 6.1 Accrual of Fees. From and after the Cutover Date with respect
to each Phase, Lincoln Life shall pay fees for the Accounting Services for each
of the Separate Accounts included in such Phase, and each Fund included in such
Phase shall pay fees for the Accounting Services for such Fund, in each case at
the respective rates per annum determined in accordance with the Fee Schedule.
Fees accrued pursuant to this Section 6.1 shall be payable in arrears on a
monthly basis.
Section 6.2 Payment of Fees by Lincoln Life. Delaware shall submit to
Lincoln Life an invoice for each month for all of the fees payable pursuant to
Section 6.1 with respect to each of the Separate Accounts, which invoice shall
be itemized to show the portion of such fees allocable to each of the Separate
Accounts in accordance with the Fee Schedule. Subject to the terms of this
Agreement, invoices for such fees shall be payable within 30 days of receipt.
Section 6.3 Payment of Fees by the Funds. Delaware shall submit to
each Fund, with a copy to Lincoln Life, an invoice for each month for all of the
fees payable pursuant to Section 6.1 with respect to such Fund. Subject to the
terms of this Agreement, invoices for such fees shall be payable within 30 days
of receipt.
<PAGE>
ARTICLE 7
STANDARD OF CARE; INDEMNIFICATION
---------------------------------
Section 7.1 Standard of Care. Delaware shall provide the Accounting
Services with a level of care equal to or greater than the level of care at
which it performs similar functions for mutual funds that are sponsored or
managed by any Delaware Affiliate, and in any event, Delaware shall always
exercise reasonable care in performing the Accounting Services.
Section 7.2 Indemnification
(a) Indemnification by Lincoln Life. Lincoln Life shall indemnify,
defend and hold harmless Delaware and any Delaware Affiliate, and the directors,
officers and employees of the fore going (each individually, a "Delaware
Indemnified Party"), against any and all claims, suits, hearings, actions,
damages, liabilities, fines, penalties, costs, losses or expenses, including
reasonable attorney's fees, which any Delaware Indemnified Party may sustain or
incur, directly or indirectly, in each case to the extent caused by or arising
from (i) the negligence, recklessness or intentional misconduct of Lincoln Life
or any Lincoln Affiliate, or any director, officer or employee thereof, in the
performance of this Agreement; or (ii) the failure of Lincoln Life to comply
with the terms of this Agreement.
(b) Indemnification by Delaware. Subject to Section 3.1, Delaware
shall indemnify, defend and hold harmless Lincoln Life, the Lincoln Affiliates
and the Funds, and the directors, officers and employees of the foregoing (each
individually, a "Lincoln Indemnified Party") against any and all claims, suits,
hearings, actions, damages, liabilities, fines, penalties, costs, losses
(including but not limited to (a) Calculation Losses reimbursed by Lincoln Life
and (b) any market fluctuation losses incurred by Lincoln Life in effecting such
reimbursement) or expenses, including reasonable attorney's fees, which any
Lincoln Indemnified Party may sustain or incur, directly or indirectly, in each
case to the extent caused by or arising from (i) the negligence, recklessness or
intentional misconduct of Delaware or any Delaware Affiliate, or any director,
officer or employee thereof, in the performance of this Agreement; or (ii) the
failure of Delaware to comply with the terms of this Agreement.
(c) Procedures. Subject to the provisions of Section 7.2(d), promptly
after receipt by a Delaware Indemnified Party or a Lincoln Indemnified Party
(each, an "Indemnified Party") of notice of the commencement of any action,
proceeding, investigation or claim by any Contractowner or other third party (a
"Proceeding"), the Indemnified Party shall, if a claim in respect thereof is to
be made pursuant to this Section 7.2 against another party to this Agreement
(the "Indemnifying Party"), notify the Indemnifying Party in writing of the
commencement thereof; but the failure so to notify the Indemnifying Party
<PAGE>
shall not relieve the Indemnifying Party from any liability under this Section
7.2, except to the extent that such failure to notify actually prejudices the
Indemnifying Party. In case any such Proceeding shall be brought against an
Indemnified Party, the Indemnifying Party shall be entitled to participate in
and to assume the defense thereof, with counsel satisfactory to the Indemnified
Party, and after notice from the Indemnifying Party to the Indemnified Party of
the Indemnifying Party's election to assume the defense thereof, the
Indemnifying Party shall not be liable to the Indemnified Party for any legal or
other expenses subsequently incurred by the Indemnified Party in connection with
the defense thereof other than reasonable costs of investigation; provided,
however, that (i) if, in the reasonable judgment of the Indemnified Party, it is
advisable for the Indemnified Party to be represented by separate counsel other
than counsel for the Indemnifying Party, the Indemnified Party shall have the
right to employ a single counsel to represent the Indemnified Party, in which
event the reasonable fees and expenses of such separate single counsel shall be
borne by the Indemnifying Party, and (ii) in the case of any Proceeding brought
by any governmental authority, the Indemnifying Party shall have the right to
participate in, but not to assume the defense of, such Proceeding. The
Indemnifying Party shall not be obligated under any settlement agreement
relating to any Proceeding under this Section 7.2 to which it has not consented
in writing, which consent shall not be unreasonably withheld.
(d) Preserving Rights with Respect to Calculation Losses. Notwithstanding
Section 7.2(c), Lincoln Life may in its sole discretion elect to reimburse a
Contractowner, Third Party Administrator, Separate Account or Fund for
Calculation Losses out of Lincoln Life's own funds and such reimbursement shall
have no effect on the respective indemnification obligations of the parties
pursuant to Section 7.2(a) and (b).
(e) Overpayments. The parties agree that there may be circumstances in
which it would not be commercially reasonable for Lincoln Life and the Funds to
seek reimbursement from one or more Contractowners of overpayments made them,
taking into account relevant factors such as industry practice; the amount of
such overpayments; the number of Contractowners overpaid; the cost of seeking
reimbursement; and the implications for customer relations of seeking
reimbursement. In the event of any overpayment to a Contractowner for which
Lincoln Life or any Fund intends to seek indemnification from Delaware pursuant
to Section 7.2(b) without seeking reimbursement from the Contractowner, the
parties shall negotiate in good faith as to what effect, if any, the
determination not to seek such reimbursement should have under the circumstances
on the rights of Lincoln Life or the Funds to indemnification for the amounts
overpaid.
<PAGE>
ARTICLE 8
INSURANCE COVERAGE
------------------
Section 8.1 Insurance. Delaware and Holdings shall maintain
insurance coverage at a level at least equal to the insurance coverage held by
each of them at the time this Agreement becomes effective.
ARTICLE 9
FORCE MAJEURE AND DISASTER RECOVERY PLAN
----------------------------------------
Section 9.1 Force Majeure; Disaster Recovery Plan. No party shall be
liable to any other party for any damages caused by delays beyond its reasonable
control, including, without limitation, those delays occasioned by fire, strike,
labor dispute, acts of the other party, acts of any common carrier, pricing
service, corporate action service, or telephone network, acts of the power
supply company or its networks, restrictions by civil or military authorities,
acts of nature, or unforeseen transportation failures. In the event of any such
delay, the hindered party shall promptly notify the other parties and, upon the
giving of such notice, the period of time for performance of obligations
hereunder affected by such delays will be extended by the same number of days as
the delay. Notwithstanding the foregoing, Delaware shall maintain and implement
a customary disaster recovery plan and such plan shall be reasonably acceptable
to Lincoln Life and the Funds. This Article 9 shall not excuse any failure to
perform, or extend the time for performance of, any obligation of Delaware under
this Agreement to the extent that such failure or delay would have been avoided
by compliance with such disaster recovery plan, or by the use of reasonable,
readily available alternatives.
ARTICLE 10
EFFECTIVENESS
-------------
Section 10.1 Effectiveness.
(a) This Agreement shall become effective upon the later of:
(i) the date first set forth above; or
(ii) the date as of which Lincoln Life has complied with the
requirements of the Indiana insurance holding company laws
at Section 27-1-23-4 of the Indiana Code.
(b) Lincoln Life shall diligently and reasonably pursue the satisfaction
of the requirements of the Indiana insurance holding company laws at
Section 27-1-23-4 of the Indiana Code.
<PAGE>
ARTICLE 11
TERM AND TERMINATION
--------------------
Section 11.1 Term. The initial term of this Agreement shall end on
the fourth anniversary of the Cutover Date of Phase III, and this Agreement
shall be automatically renewed for subsequent Renewal Terms thereafter unless
sooner terminated under Section 11.2.
Section 11.2 Termination. Subject to the procedures set forth in
Article 12 and to Section 11.3, this Agreement may be terminated as follows:
(a) by Lincoln Life, Delaware, or any Fund, in each case upon notice
to each of the other parties at least 180 days prior to the
expiration of the initial term or any Renewal Term, with such
termination to become effective upon such expiration; and
(b) by Lincoln Life, Delaware or any Fund upon 30 days notice to each
of the other parties, for any material breach of this Agreement
unless such breach is cured within such notice period.
For the purpose of this Section 11.2(b) only, a "material breach" shall include,
but not be limited to, the failure by Delaware to provide Accounting Services
hereunder of a quality reasonably determined by Lincoln Life or any Fund to be
consistent with a superior level of service in the industry.
Section 11.3 Effect of Termination by a Fund. In the event one or
more Funds shall terminate this Agreement, this Agreement shall nonetheless
continue in full force and effect between and among those parties who have not
terminated this Agreement.
ARTICLE 12
PROCEDURES UPON TERMINATION
---------------------------
Section 12.1 Obligations Upon Termination. Upon termination of this
Agreement by any party under Article 11, each party shall be obligated to
cooperate with each other party to provide for the transfer of all
responsibilities, duties and obligations of this Agreement as may be necessary
to ensure the orderly, undisrupted business of each party. Such cooperation
shall include, but not be limited to, returning all papers, documents, materials
or equipment to the party owning such materials. In the event that this
Agreement is terminated by Lincoln Life or any Fund under Section 11.2(b),
Lincoln Life and the Funds shall have the right to require Delaware to continue
performing all or any part of its responsibilities, duties and obligations under
this Agreement until the earlier of (a) 210 days following the date notice of
such termination was given, or (b) the date that is 30 days after notice from
Lincoln Life or the Funds that
<PAGE>
Delaware shall cease such performance. For this purpose, (a) the terms of this
Agreement (including without limitation the obligation of Lincoln Life and the
Funds to pay Delaware's fees under Article 6, and the obligation of Delaware to
continue to exercise the standard of care required under Section 7.1 shall
remain in effect with respect to the period in which Delaware is obligated to
continue such performance, and (b) if any portion of Delaware's
responsibilities, duties and obligations during such period are not so extended
as required by Lincoln Life, the parties shall mutually agree in good faith on a
reduction of fees which reflects the termination of such responsibilities,
duties and obligations.
ARTICLE 13
REPRESENTATIONS AND WARRANTIES
------------------------------
Each party represents and warrants to the other parties as follows:
Section 13.1 Organization and Authority. Such party is duly organized,
validly existing and in good standing as a corporation under the laws of the
state indicated on the first page of this Agreement, with the requisite
authority and power, in conformity with applicable laws, rules and regulations,
to execute and deliver this Agreement and to perform its obligations hereunder.
Such party has taken all necessary action to authorize such execution, delivery
and performance.
Section 13.2 No Conflict with Laws. The execution, delivery and
performance of this Agreement by such party do not conflict with or violate any
laws applicable to such party, any provision of its constituent documents, any
order or judgment of any court or governmental agency applicable to it or any of
its assets or any contractual restriction binding on it or its assets.
Section 13.3 Obligation. This Agreement constitutes a legal, valid and
binding obligation of such party, enforceable in accordance with its terms,
subject to applicable bankruptcy, insolvency, reorganization, moratorium and
similar laws relating to the enforcement of creditors' rights generally and
subject to principles of equity.
ARTICLE 14
PARENT GUARANTY
---------------
Section 14.1 Parent Guaranty. Holdings hereby unconditionally guarantees
the full and punctual performance of the covenants, agreements and obligations
of Delaware under this Agreement, including but not limited to the payment when
due of all amounts that may from time to time be payable by Delaware pursuant to
Section 7.2(b) (the "Guaranteed Obligations").
Section 14.2 Guaranty Unconditional. The obligations of
<PAGE>
Holdings hereunder shall be unconditional and absolute and, without limiting the
generality of the foregoing, shall not be released or discharged by:
(a) any extension, settlement, compromise, waiver or release in
respect of any obligation of Delaware under this Agreement;
(b) any modification or amendment of or supplement to this
Agreement;
(c) any change in the corporate existence, structure or ownership of
Delaware, or any insolvency, bankruptcy, reorganization or other similar
proceeding affecting Delaware or its assets; or
(d) any other act or omission to act or delay of any kind by
Delaware, Lincoln Life, any Fund or any other person which would, but for
the provisions of this paragraph (d), constitute a legal or equitable
discharge of Holding's obligations hereunder;
provided, however, that in the event of any extension, settlement, compromise,
waiver or release of any obligation of Delaware under this Agreement, or any
modification or amendment of or supplement to this Agreement, the guaranty
provided for in this Article 14 shall apply to the obligations of Delaware as so
extended, settled, compromised, waived, released, modified, amended or
supplemented.
Section 14.3 Discharge Only Upon Payment or Performance in Full;
Reinstatement in Certain Circumstances. Holding's obligations hereunder shall
remain in full force and effect until the Guaranteed Obligations shall have been
paid or performed in full. If at any time any payment of Guaranteed Obligations
by Delaware under this Agreement is rescinded or must be otherwise restored or
returned upon the insolvency, bankruptcy or reorganization of Delaware or
otherwise, Holding's obligations hereunder with respect to such payment shall be
reinstated as though such payment had been due but not made at such time.
Section 14.4 Waiver by Holdings. Holdings irrevocably waives acceptance
hereof, presentment, demand, protest and any notice not provided for herein, as
well as any requirement that at any time any action be taken by any person
against Delaware or any other person.
Section 14.5 Subrogation. Upon making any payment with respect to
Delaware hereunder, Holdings shall be subrogated to the rights of the payee
against Delaware with respect to such payment; provided that Holdings shall not
enforce payment by way of subrogation until all Guaranteed Obligations have been
paid or performed in full.
<PAGE>
ARTICLE 15
DISPUTE RESOLUTION
------------------
Before commencing litigation of any dispute arising out of or relating to
this Agreement, the parties shall attempt in good faith to resolve the dispute
by the following means:
Section 15.1 Negotiation. The parties shall in good faith attempt to
resolve any dispute arising out of or relating to this Agreement promptly by
negotiations between executives who have authority to settle the controversy. A
party may give the other parties written notice of any dispute not resolved in
the normal course of business. Within 20 days after delivery of that notice,
executives of the affected parties shall meet at a mutually acceptable time and
place, and thereafter as often as they reasonably deem necessary, to exchange
relevant information and to attempt to resolve the dispute. If the matter has
not been resolved within 60 days of the disputing party's notice, or if the
parties fail to meet within 20 days, either party may initiate mediation of the
controversy or claim as provided in Section 15.2. If a negotiator intends to be
accompanied at a meeting by an attorney, the other negotiator shall be given at
least 3 Business Days' notice of that intention and may also be accompanied by
an attorney.
Section 15.2 Mediation. If the dispute has not been resolved by
negotiation as provided in Section 15.1, the parties shall endeavor for an
additional period of 60 days to settle the dispute by mediation under the then-
current Center for Public Resources (CPR) Model Procedure for Mediation of
Business Disputes. The neutral third party will be selected from the CPR Panel
of Neutrals. If the parties encounter difficulty in agreeing on a neutral, they
will seek the assistance of CPR in the selection process.
Section 15.3 Confidentiality. All activities under this Article 15 are
confidential and shall be treated as compromise and settlement negotiations for
purposes of the Federal Rules of Evidence and state rules of evidence.
ARTICLE 16
MISCELLANEOUS
-------------
Section 16.1 Amendment. This Agreement, including any Exhibits or
Schedules, may be amended, modified or supplemented only in writing signed by
Delaware, Lincoln Life and any Fund affected thereby. This Agreement shall be
binding upon all successors, assigns or transferees of the parties to this
Agreement.
Section 16.2 Assignment. This Agreement and the rights, duties and
obligations of the parties hereto shall not be assign able by any party, except
assignment to successors in the case of mergers, sales of all or substantially
all of the assets of such
<PAGE>
party or transfer of ownership by reorganization or similar restructuring to a
successor in interest to the business of such party, without the prior written
consent of the other parties, and any purported assignment in the absence of
such consent shall be void.
Section 16.3 Notices. All notices given or submitted pursuant to this
Agreement shall be made in writing and shall be deemed given when (a) deposited
with the United States Postal Service, postage prepaid, registered or certified
mail, return receipt requested; (b) deposited with a nationally recognized
overnight mail delivery service; (c) sent by facsimile with electronic
confirmation of delivery or with a copy sent by mail as described in (a) or (b)
above; or (d) delivered in person; all to the last address of record of each
party being notified.
Any notice under this Agreement to Lincoln Life shall be given to:
ATTN: O. Douglas Worthington
Vice President and Controller
Lincoln National Life Insurance Company
1300 South Clinton Street
Fort Wayne, IN 46801
Phone: (219) 455-3669
Facsimile: (219) 455-1939
Any notice under this Agreement to Delaware or Holdings
shall be given to:
ATTN: Michael J. Bishof
Vice President and Treasurer
Delaware Management Company
1818 Market Street; 7th Floor
Philadelphia, PA 19103
Phone: (215) 255-2852
Facsimile: (215) 255-1645
With a copy to:
Richard J. Flannery
Managing Director, Corporate
& Tax Affairs
Delaware Management Company
2005 Market Street
Philadelphia, PA 19103
Phone: (215) 255-1244
Facsimile: (215) 255-2822
<PAGE>
Any notice under this Agreement to any Fund shall be given
to:
ATTN: Kelly D. Clevenger
Lincoln National Life Insurance Company
1300 South Clinton Street
Fort Wayne, IN 46801
Phone: (219) 455-5119
Facsimile: (219) 455-1773
Any party may, by means of written notice in compliance with this Section
16.3, change the address or the identity of the person to whom any notice, or
copy thereof, is to be sent.
Section 16.4 Severability. If any provision of this Agreement, as applied
to any party or to any circumstances, shall be found by a court of competent
jurisdiction to be void, invalid or unenforceable, the same shall in no way
affect any other provision of this Agreement, the application of any such provi
sion in any other circumstances, or the validity or enforce ability of this
Agreement; provided, however, that nothing in this Section 16.4 shall adversely
affect the fundamental benefits received by the parties under this Agreement.
Section 16.5 Waiver. A waiver by any party of any of the terms and
conditions of this Agreement in any one instance shall not be deemed or
construed to be waiver of any such term or condition for the future, or of any
subsequent breach thereof, nor shall it be deemed a waiver of performance of any
other obligation hereunder. No waiver of any provision of this Agreement shall
be valid unless agreed to in writing by the party or parties against whom such
waiver is sought to be enforced.
Section 16.6 Entire Agreement. This Agreement contains the entire
understanding of the parties hereto relating to the subject matter of this
Agreement and supersedes all prior and collateral agreements, understandings,
statements and negotiations of the parties.
Section 16.7 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Indiana, without giving
effect to the conflict of law provisions thereof.
Section 16.8 Section and Paragraph Headings. The titles of the sections
and paragraphs of this Agreement are for convenience only and shall not in any
way affect the interpretation of any provision or condition of this Agreement.
Section 16.9 Counterparts. This Agreement may be executed in counterparts
which, taken together, shall constitute the whole of the Agreement as between
the parties.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first written above.
LINCOLN LIFE:
LINCOLN NATIONAL LIFE INSURANCE COMPANY
By: ____________________________
O. Douglas Worthington
Title: Vice President and
Controller
Date: __________________________
HOLDINGS:
DELAWARE MANAGEMENT HOLDINGS, INC.
By: ____________________________
Title: _________________________
Date: __________________________
DELAWARE:
DELAWARE SERVICE COMPANY, INC.
By: ____________________________
Title: _________________________
Date: __________________________
<PAGE>
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.
By: ____________________________
Kelly D. Clevenger
In his capacity as President of each of
the above-named Funds.
Date: __________________________
<PAGE>
EXHIBIT A
---------
INVESTMENT COMPANIES
<PAGE>
EXHIBIT A
---------
INVESTMENT COMPANIES
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.
<PAGE>
EXHIBIT B
---------
FORM OF WRITTEN ACKNOWLEDGEMENT OF CUTOVER DATE
<PAGE>
SCHEDULE 1.1(a)
---------------
CUTOVER SCHEDULE
<PAGE>
SCHEDULE 2.1
------------
PROCEDURES FOR CORRECTING ERRORS
<PAGE>
SCHEDULE 3.1
------------
DATA PROVIDED BY LINCOLN LIFE
<PAGE>
SCHEDULE 3.2
------------
UNAFFILIATED MUTUAL FUNDS
AND
SERVICE PROVIDERS
<PAGE>
SCHEDULE 6.1
------------
FEE SCHEDULE
<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 Post-Effective Amendment No. 5 to the Registration Statement (Form N-1A
No. 33-71158) and related Statement of Additional Information of Lincoln
National Equity-Income Fund, Inc. dated May 1, 1997 and to the incorporation by
reference therein of our report dated January 27, 1997, with respect to the
financial statements of Lincoln National Equity-Income Fund, Inc. included in
its Annual Report for the year ended December 31, 1996, included as item 24(a)
to this Registration Statement.
/s/ Ernst & Young LLP
Fort Wayne, Indiana
April 10, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND> This schedule contains summary financial information extracted from
the Multi Fund Annual Report and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 379,238
<INVESTMENTS-AT-VALUE> 463,779
<RECEIVABLES> 3,065
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 466,844
<PAYABLE-FOR-SECURITIES> 2,240
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 7,451
<TOTAL-LIABILITIES> 9,691
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 360,494
<SHARES-COMMON-STOCK> 28,971
<SHARES-COMMON-PRIOR> 17,677
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 12,117
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 84,542
<NET-ASSETS> 457,153
<DIVIDEND-INCOME> 9,293
<INTEREST-INCOME> 1,403
<OTHER-INCOME> 0
<EXPENSES-NET> 3,761
<NET-INVESTMENT-INCOME> 6,935
<REALIZED-GAINS-CURRENT> 12,117
<APPREC-INCREASE-CURRENT> 48,767
<NET-CHANGE-FROM-OPS> 67,819
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 6,935
<DISTRIBUTIONS-OF-GAINS> 4,278
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 10,948
<NUMBER-OF-SHARES-REDEEMED> 203
<SHARES-REINVESTED> 550
<NET-CHANGE-IN-ASSETS> 218,382
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,303
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,761
<AVERAGE-NET-ASSETS> 347,763
<PER-SHARE-NAV-BEGIN> 13.507
<PER-SHARE-NII> 0.288
<PER-SHARE-GAIN-APPREC> 2.451
<PER-SHARE-DIVIDEND> 0.466
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 15.780
<EXPENSE-RATIO> 1.08
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
EXHIBIT 19
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 F&RM Eric Jones Permanently, the first two
To Shareholders years in an easily accessible
place
Semi-Annual F&RM Eric Jones Permanently, the first two
Reports years in an easily accessible
place
Form N-SAR F&RM Eric Jones Permanently, the first two
years in an easily accessible
place
(b) Every registered investment company shall maintain and keep current the
following books, accounts, and other documents:
Type of Record
(1) Journals (or other records of original entry) containing an itemized daily
record in detail of all purchases and sales of securities (including sales and
redemptions of its own securities), all receipts and deliveries of securities
(including certificate numbers if such detail is not recorded by custodian or
transfer agent), all receipts and disbursements of cash and all other debits and
credits. Such records shall show for each such transaction the name and quantity
of securities, the unit and aggregate purchase or sale price, commission paid,
the market on which effected, the trade date, the settlement date, and the name
of the person through or from whom purchased or received or to whom sold or
delivered.
Purchases and Sales Journals
Daily reports Delaware Fund Accounting Permanently, the first two
of securities years in an easily accessible
transactions place
<PAGE>
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
Portfolio Securities
- --------------------
Equity Delaware Fund Accounting Permanently, the first two
Notifications years in an easily accessible
place
Receipts and Deliveries of Securities (shares)
- ----------------------------------------------
Not Applicable.
Portfolio Securities
- --------------------
Debit and Delaware Fund Accounting Permanently, the first two
Credit Advices years in an easily accessible
from Bankers place
(bank statement)
Receipts and Disbursements of Cash and other Debits and Credits
- ---------------------------------------------------------------
Investment Delaware Fund Accounting Permanently, the first two
Journal years in an easily accessible
place
Daily Journals Delaware Fund Accounting Permanently, the first two
Journals years in an easily accessible
place
(2) General and auxiliary ledgers (or other record) reflecting all asset,
liability, reserve, capital, income and expense accounts, including:
(i) Separate ledger accounts (or other records) reflecting the following:
(a) Securities in transfer;
(b) Securities in physical possession;
(c) Securities borrowed and securities loaned;
(d) Monies borrowed and monies loaned (together with a record of the
collateral therefore and substitutions in such collateral);
(e) Dividends and interest received;
(f) Dividends receivable and interest accrued.
Instructions. (a) and (b) shall be stated in terms of securities quantities
only; (c) and (d) shall be stated in dollar amounts and securities quantities as
appropriate; (e) and (f) shall be stated in dollar amounts only.
General Ledger
- --------------
General Delaware Fund Accounting Permanently, the first two
Ledger years in an easily accessible
place
<PAGE>
<TABLE>
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
Securities in Transfer
- ----------------------
<S> <C> <C> <C>
File consisting State Mutual Funds Permanently, the first two
of bank advices, Street Bank Division years in an easily
confirmations, and Trust accessible place
and Notification Company
of Securities
Transaction
</TABLE>
<TABLE>
Securities in Physical Possession
- ---------------------------------
<S> <C> <C> <C>
Securities State Mutual Funds Permanently, the first two
Ledger Street Bank Division years in an easily
and Trust accessible place
Company
Portfolio State Mutual Funds Permanently, the first two
Listings Street Bank Division years in an easily accessible
and Trust place
Company
</TABLE>
<TABLE>
Securities Borrowed and Loaned
- ------------------------------
<S> <C> <C> <C>
Their files State Mutual Funds Permanently, the first two
Street Bank Division years in an easily
and Trust accessible place
Company
</TABLE>
Monies Borrowed and Loaned
- --------------------------
Not Applicable.
<TABLE>
Dividends and Interest Received
- -------------------------------
<S> <C> <C> <C>
Interest File Delaware Fund Accounting Permanently, the first two
Accrual years in an easily
Activity accessible place
Journal
Dividend Master Delaware Fund Accounting Permanently, the first two
File Display years in an easily
accessible place
</TABLE>
<TABLE>
Dividends Receivable and Interest Accrued
- -----------------------------------------
<S> <C> <C> <C>
Investment Delaware Fund Accounting Permanently, the first two
Journal years in an easily
accessible place
Dividend Master Delaware Fund Accounting Permanently, the first two
File Display years in an easily
accessible place
Interest File Delaware Fund Accounting Permanently, the first two
Accrual years in an easily
Activity accessible place
Journal
</TABLE>
<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.
<TABLE>
<CAPTION>
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
<S> <C> <C> <C>
</TABLE>
<TABLE>
Ledger Account for each portfolio Security
- ------------------------------------------
<S> <C> <C> <C>
Inventory Delaware Fund Accounting Permanently, the first two
(on line) years in an easily accessible
place
</TABLE>
(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.
<TABLE>
<S> <C> <C> <C>
Broker-Dealer Delaware Fund Accounting Permanently, the first two
Ledger years in an easily accessible
place
</TABLE>
(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
- --------------------
<TABLE>
<S> <C> <C> <C>
LNL - only F&RM Eric Jones Permanently, the first two
shareholder years in an easily accessible
place
</TABLE>
(3) A securities record or ledger reflecting separately for each portfolio
security as of trade date all "long" and "short" positio ns carried by the
investment company for its own account and showing the location of all
securities long and the off-setting position to all securities short. The record
called for by this paragraph shall not be required in circumstances under which
all portfolio securities are maintained by a bank or banks or a member or
members of a national securities exchange as custodian under a custody agreement
or as agent for such custodian.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
</TABLE>
<TABLE>
Securities Position Record
- --------------------------
<S> <C> <C> <C>
Maintained by State Mutual Funds Permanently, the fist two
Custodian of Street Bank Division years in an easily accessible
Securities and Trust place
Company
</TABLE>
(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
- -------------------
<TABLE>
<S> <C> <C> <C>
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.
</TABLE>
(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
- -------------
<TABLE>
<S> <C> <C> <C>
Sales Order or Fidelity Mutual Funds Six years, the first two
Purchase Order Division years in an easily accessible
place
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
</TABLE>
(6) A record of all other portfolio purchase or sales showing details
comparable to those prescribed in paragraph 5 above.
Short-Term Investments
- ----------------------
<TABLE>
<S> <C> <C> <C>
Notification State Mutual Funds Six years, the first two
Form (From Street Bank Division years in an easily accessible
AOS S-T and Trust place
System) Company
Bank Advice Delaware Fund Accounting Six years, the first two
and Issuer years in an easily accessible
Confirmation place
</TABLE>
<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.
- ------------------------------------
Trade Notification Delaware Fund Accounting Six Years
(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
- -------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
General Ledger Delaware Fund Accounting Permanently, the first two
years in an easily accessible
place
</TABLE>
(9) A record for each fiscal quarter, which shall be completed within 10 days
after the end of such quarter, showing specifically the basis or bases upon
which the allocation of orders for the purchase and sale of portfolio securities
to named brokers or dealers and the division of brokerage commissions or other
compensation on such purchase and sale orders among named persons were made
during such quarter. The record shall indicate the consideration given to (a)
sales of shares of the investment company by brokers or dealers, (b) the
supplying of services or benefits by brokers or dealers to the investment
company, its investment advisor or principal underwriter or any persons
affiliated therewith, and (c) any other considerations other than the technical
qualifications of the brokers and the dealers as such. The record shall show the
nature of their services or benefits made available, and shall describe in
detail the application of any general or specific formula or other determinant
used in arriving at such allocation of purchase and sales orders and such
division of brokerage commissions or other compensation. The record shall also
include the identifies of the person responsible for the determination of such
allocation and such division of brokerage commissions or other compensation.
Brokerage Fidelity Mutual Funds Six Years, the first two
Allocation Division years in an easily accessible
Report place
(10) A record in the form of an appropriate memorandum identifying the person or
persons, committees, or groups authorizing the purchase or sale of portfolio
securities. Where an authorization is made by a committee or group, a record
shall be kept in the names of its members who participated in the authorization.
There shall be retained a part of the record required by this paragraph any
memorandum, recommendation, or instruction supporting or authorizing the
purchase or sale of portfolio securities. The requirements of this paragraph are
applicable to the extent they are not met by compliance with the requirements of
paragraph 4 of this Rule 31a1(b).
<PAGE>
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
Trading Fidelity Mutual Funds Six years, the first two
Authorization Division years in an easily accessible
place
Advisory Law Janet Lindenburg Six years, the first two
Agreements Division Jeremy Sachs years in an easily accessible
place
(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 Delaware Fund Accounting Permanently, the first two
years in an easily accessible
place
Bank State- Delaware Fund Accounting Six years, the first two
ments, Can- years in an easily accessible
celled Checks place
and Cash
Reconciliations
March 12, 1997
