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As filed with the Securities and Exchange Commission on April 17, 1998
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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. 7
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
___________
Amendment No. 9 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
It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b)
---
on May 1, 1998 pursuant to paragraph (b)
X 60 days after filing pursuant to paragraph (a) (b)
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on May 1, 1998 pursuant to paragraph (a) (1)
---
75 days after filing pursuant to paragraph (a) (2)
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on _________ pursuant to paragraph (a) (2) of Rule 485.
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LINCOLN NATIONAL EQUITY-INCOME FUND, INC.
CONTENTS OF
POST-EFFECTIVE AMENDMENT NO. 7 AND AMENDMENT NO. 9 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
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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
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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
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PREFACE TO THE MULTI FUND-REGISTERED TRADEMARK- PROSPECTUSES
THE PREFACE AND DIRECTORY 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)
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, 1998, 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 1997 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, 1998
27
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DIRECTORY FOR THE FUND PROSPECTUSES
<TABLE>
<CAPTION>
SUBJECT PAGE
<S> <C>
- --------------------------------------------------------
PREFACE 27
DESCRIPTION OF THE FUND
Aggressive Growth Fund 29
Bond Fund 35
Capital Appreciation Fund 39
Equity-Income Fund 43
Global Asset Allocation Fund 47
Growth and Income Fund 53
International Fund 55
Managed Fund 59
Money Market Fund 63
Social Awareness Fund 65
Special Opportunities Fund 69
- --------------------------------------------------------
INVESTMENT POLICIES AND TECHNIQUES
Aggressive Growth Fund 29
Bond Fund 35
Capital Appreciation Fund 39
Equity-Income Fund 43
Global Asset Allocation Fund 47
Growth and Income Fund 53
International Fund 55
Managed Fund 59
Money Market Fund 63
Social Awareness Fund 65
Special Opportunities Fund 69
- --------------------------------------------------------
INVESTMENT RESTRICTIONS
Aggressive Growth Fund 32
Bond Fund 37
Capital Appreciation Fund 41
Equity-Income Fund 45
Global Asset Allocation Fund 50
Growth and Income Fund 53
International Fund 57
Managed Fund 61
Money Market Fund 64
Social Awareness Fund 66
Special Opportunities Fund 70
<CAPTION>
SUBJECT PAGE
- --------------------------------------------------------
<S> <C>
STRATEGIC PORTFOLIO TRANSACTIONS
Aggressive Growth Fund 32
Bond Fund 37
Capital Appreciation Fund 42
Equity-Income Fund 46
Global Asset Allocation Fund 50
Growth and Income Fund 54
International Fund 58
Managed Fund 61
Money Market Fund 64
Social Awareness Fund 66
Special Opportunities Fund 71
- --------------------------------------------------------
APPENDIX -- CONTAINS IMPORTANT INFORMATION
FOR ALL FUNDS
Net asset value 73
Management of the funds 73
Purchase of securities being offered 75
Sale and redemption of shares 76
Distributions and federal income tax
considerations 76
Management discussion of fund performance 76
Description of shares 76
Strategic portfolio transactions --
additional information 77
Foreign investments 79
General information 80
Statement of Additional Information
Table of contents -- 11 underlying funds 83
</TABLE>
28
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LINCOLN NATIONAL
EQUITY-INCOME FUND, INC.
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
potential for capital appreciation. The FUND pursues its objective through the
policies described in Investment policies and techniques. The principal risks of
this FUND are those normally associated with investing in the common stock of a
broad range of companies, including but not limited to the fact that shares will
fluctuate in value. In addition, high-yielding, lower-quality securities held by
the FUND present higher risks of untimely interest and principal payments,
defaults, and price volatility than do higher-quality securities, and may
present problems of liquidity and valuation. These and other risks are discussed
under Special risk factors. There is no assurance that the objective of the FUND
will be achieved.
The FUND'S investment objective and certain investment policies are fundamental
and cannot be changed without the affirmative vote of a majority of the
outstanding voting securities of the FUND. See General information in the
Appendix. All other investment policies are not fundamental, and may be changed
by a majority vote of the Board of Directors.
FUND management expects securities selection for the FUND to closely parallel
that of an existing Fidelity retail fund, the Fidelity Equity-Income Fund, which
has a similar objective. However, there cannot be a precise correlation, and
performance of the FUND is not expected to be the same as the performance of the
corresponding retail fund. Selection criteria for portfolio securities and the
relative weightings of the selections can differ based on asset size, timing,
cash flow, expenses and other factors. Portfolio selections will be made by
Fidelity Management Trust Co. (the sub-advisor), an affiliate of Fidelity
Management & Research Co. (Fidelity), which manages the Fidelity Equity-Income
Fund.
PORTFOLIO MANAGER
The portfolio manager for the FUND is Stephen R. Petersen, Senior Vice-President
of Fidelity Management Trust 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, and the Fidelity 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 Wisconsin.
INVESTMENT POLICIES AND TECHNIQUES
The FUND'S goal, through investing in income-producing equity securities, is to
achieve a yield which exceeds the composite yield on the securities comprising
the Standard & Poor's 500 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-producing
common or preferred stock and debt convertible into common stock. The remainder
of the FUND'S assets will tend to be invested in debt obligations. It is
expected that the FUND will invest, as is consistent with the objective, in
securities of varying quality, but it is not intended that the FUND will invest
in securities of companies without proven earnings or credit.
Since capital appreciation is only a secondary consideration for the FUND, the
FUND'S total return should not be expected to be comparable to funds that have
capital appreciation as a primary objective. The FUND may be appropriate for you
if you can afford to ride out changes in the stock market, because it invests
primarily in common and preferred stock and debt convertible into common stock.
The FUND can also make temporary investments in securities such as
investment-grade bonds, high-quality preferred stocks and short-term notes, for
defensive purposes when market conditions warrant.
The FUND may invest in bonds rated in the lowest category of investment grade
debt (i.e., BBB-rated bonds). These bonds may have speculative characteristics,
and changes in economic conditions or other circumstances are more likely to
lead to a weakened ability of the issuer of such bonds to make principal and
interest payments than is the case with higher grade bonds. In addition, the
FUND may invest in high-yielding, lower-rated debt securities (junk bonds) which
are subject to greater risk than investments in higher quality securities. For a
further discussion of lower-rated securities, please see Special risk factors.
The FUND may engage in short-term trading when consistent with its objective. A
security may be sold and another of comparable quality simultaneously purchased
to take advantage of what the sub-advisor believes to be
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a temporary disparity in the normal yield relationship of the two securities.
The sub-advisor buys and sells securities for the FUND after considering a
company's ability to repay, future business conditions, interest rate levels and
the availability of new investments or higher relative yields.
In addition to its primary emphasis on income-producing securities as described
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 securities
in which the FUND may invest.
SHORT SALES
The FUND may enter into short sales with respect to stocks underlying its
convertible security holdings. These transactions may help to hedge against the
effect of stock price declines, but may result in losses if a convertible
security's price does not track the price of its underlying equity. Convertible
securities hedged with short sales are not currently expected to exceed 15% of
the FUND'S total assets under normal conditions.
ILLIQUID INVESTMENTS
The FUND may invest up to 10% of its net assets in illiquid investments. Under
the supervision of the Board of Directors, the sub-advisor determines the
liquidity of the FUND'S investments. The absence of a trading market can make it
difficult to determine a market value for illiquid investments. Disposing of
illiquid investments may involve time-consuming negotiation and legal expenses,
and it may be difficult or impossible for the FUND to sell them promptly at an
acceptable price.
RESTRICTED SECURITIES
The FUND may also purchase securities which cannot be sold to the public without
registration under the Securities Act of 1933 (restricted securities). Unless
registered for sale, these securities can only be sold in privately negotiated
transactions or pursuant to an exemption from registration. As a result, 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 several
countries. The FUND may have an additional 15% of its net assets invested in
securities of issuers located in any one of the following countries: Australia,
Canada, France, Japan, the United Kingdom or Germany.
Investing outside the United States involves different opportunities and
different risks from U.S. investments. The FUND may invest a portion of its
assets in developing countries, or in countries with new or developing capital
markets; for example, nations in Eastern Europe. The risks noted above are
generally intensified for these investments. These countries may have relatively
unstable governments, economies based on only a few industries and securities
markets that trade a small number of securities. Securities of issuers located
in these countries tend to have volatile prices and may offer significant
potential for loss as well as gain. 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 limitations on the FUND'S
ability to borrow money by engaging in reverse repurchase transactions.
SPECIAL RISK FACTORS
Lower-rated debt securities are usually defined as securities rated Ba or lower
by Moody's Investors Service or
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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 income investing.
The 1980s saw a dramatic increase in the use of lower-rated debt securities to
finance highly leveraged acquisitions and restructurings. Past experience may
not provide an accurate indication of the future performance of lower-rated debt
securities, especially during periods of economic recession. In fact, from 1989
to 1991, the percentage of lower-rated debt securities that defaulted rose
significantly above prior levels.
Lower-rated debt securities may be traded thinly, which can adversely affect the
prices at which these securities can be sold and can result in high transaction
costs. If market quotations are not available, lower-rated debt securities will
be valued in accordance with standards set by the Board of Directors, including
the use of outside pricing services. Judgment plays a greater role in valuing
lower-rated debt securities than securities for which more extensive quotations
and last sale information are available. Adverse publicity and changing investor
perceptions may affect the ability of outside pricing services to value
lower-rated debt securities, and the FUND'S ability to dispose of these
securities.
The market prices of lower-rated debt securities may decline significantly in
periods of general economic difficulty which may follow periods of rising
interest rates. During an economic downturn or a prolonged period of rising
interest rates, the ability of issuers of lower-rated debt to service their
payment obligations, meet projected goals, or obtain additional financing may be
impaired.
The FUND may choose, at its expense or in conjunction with others, to pursue
litigation or otherwise to exercise its rights as a security holder to seek to
protect the interests of security holders if it determines this to be in the
interest of the FUND'S shareholders.
The considerations discussed previously for lower-rated debt securities also
apply to lower-quality, unrated debt instruments of all types, including loans
and other direct indebtedness of businesses with poor credit standing. Unrated
debt instruments are not necessarily of lower quality than rated instruments,
but they may not be attractive to as many buyers. The FUND relies more on the
sub-advisor's credit analysis when investing in debt instruments that are
unrated.
Please refer to the SAI for a discussion of Moody's Investors Service and
Standard and Poor's 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 portfolio
turnover of 100% would occur if all of the FUND'S portfolio were replaced in a
period of one year.) Because a higher turnover rate increases transaction costs
and may have certain tax consequences, the sub-advisor carefully weighs the
anticipated benefits of short-term investment against these consequences. During
1997 the FUND'S portfolio turnover was 17.81% and in 1996 it was 22.17%.
INVESTMENT RESTRICTIONS
The following summarizes the FUND'S principal investment limitations. The
following limitations (except Item 3) and the policies discussed previously are
considered at the time of purchase; the sale of securities is not required in
the event of a subsequent change in circumstances:
1. The FUND will not purchase a security if, as a result, with respect to 75%
of its total assets: (a) more than 5% of its total assets would be invested
in the securities of any single issuer; (b) it would hold more than 10% of
the outstanding voting securities of any issuer; or (c) more than 25% of its
total assets would be invested in a particular industry. Limitations (a)
through (c) do not apply to U.S. Government obligations;
2. No more than 10% of the FUND'S net assets may be invested in illiquid
securities;
3. The FUND may borrow money or engage in reverse repurchase agreements for
temporary or emergency purposes but not in an amount exceeding 25% of its
net assets; and/or
4. The FUND may temporarily lend any security or make any other loan provided
that not more than 33 1/3% of the FUND'S total assets would be lent to other
parties.
Except for Items 1(a), 1(b), 1(c) and 4, the policies described in this
Prospectus are not fundamental, and can be changed at any time without your
consent. See General information in the Appendix for a discussion of fundamental
policies.
Additional investment restrictions can be found in the SAI.
DIVERSIFICATION
The FUND qualifies as a diversified investment company under the 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. Government
securities) if, as applied to 75% of the FUND'S total assets, a) it would cause
the FUND to own more than 10% of the outstanding voting securities of
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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 issuers unless the sub-advisor believes a
security has the potential for substantial income production consistent with the
FUND'S policies and goals. The FUND does intend to take advantage of the ability
to invest more than 5% of its total assets in the securities of one issuer. To
the extent that it does so, its exposure to credit risks and/or market risks
associated with that issuer increases.
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
portfolio 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
associated with them. Note also that the SAI booklet for the 11 FUNDS contains
definitions of the more commonly used derivative transactions, technical
explanations of how these transactions will be used and the limits on their use.
You should consult your financial counselor if you have specific questions.
THE EQUITY-INCOME FUND IS AUTHORIZED:
a) for derivative transactions, to: buy and sell put and call options; buy and
sell futures contracts; engage in forward contracts; engage in interest rate
swaps, currency swaps, and other types of swap agreements such as caps, collars,
and floors.
The FUND will not hedge more than 25% of its total assets by selling futures,
buying puts, and writing calls under normal conditions. In addition, the fund
will not buy futures or write puts whose underlying value exceeds 25% of its
total assets, and the FUND will not buy calls with a value exceeding 5% of its
total assets.
b) for cash enhancement transactions, to: lend portfolio securities, if such
loans of securities do not exceed one-third of the FUND'S total assets, and
engage in repurchase and reverse repurchase transactions. Collateral will be
continually maintained at no less than 102% of the value of the loaned
securities or of the repurchase price, as applicable.
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APPENDIX -- CONTAINS IMPORTANT INFORMATION FOR ALL FUNDS
This Appendix constitutes part of the Prospectuses of Lincoln National
Aggressive Growth Fund, Inc. (Aggressive Growth Fund), Lincoln National Bond
Fund, Inc. (Bond Fund), Lincoln National Capital Appreciation Fund, Inc.
(Capital Appreciation Fund), Lincoln National Equity-Income Fund, Inc.
(Equity-Income Fund), Lincoln National Global Asset Allocation Fund, Inc.
(Global Asset Allocation Fund), Lincoln National Growth and Income Fund, Inc.
(Growth and Income Fund), Lincoln National International Fund, Inc.
(International Fund), Lincoln National Managed Fund, Inc. (Managed Fund),
Lincoln National Money Market Fund, Inc. (Money Market Fund), Lincoln National
Social Awareness Fund, Inc. (Social Awareness Fund), and Lincoln National
Special Opportunities Fund, Inc. (Special Opportunities Fund). Unless otherwise
indicated, the following information applies to each FUND.
NET ASSET VALUE
Each FUND'S net asset value per share is determined as of close of business
(currently 4:00 p.m., New York Time) on the New York Stock Exchange (NYSE) on
each day it is open for trading. The net asset value per share for all FUNDS
except the Money Market Fund is determined by adding the values of all
securities and other assets, subtracting liabilities (including dividends
payable) and dividing by the number of shares outstanding. Debt securities and
other assets of the FUND, other than equity securities, for which market
quotations are readily available, are valued at their bid quotations.
When market quotations are not readily available, debt securities and other
assets are valued at their fair value as determined in good faith. This
valuation is made by or under the authority of 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
securities is based on the last sale prices of those securities on national
securities exchanges or over-the-counter, or in the absence of recorded sales,
at the average of readily available closing bid and asked prices on exchanges or
over-the-counter. 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 discussion 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
maturity, quality and diversification of portfolio securities. The Rule also
assigns 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.
LINCOLN 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 employees
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.
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<PAGE>
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:
<TABLE>
<CAPTION>
FUND ...OF AVERAGE DAILY NET ASSET VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C>
Aggressive Growth .75 of 1% of the first $200 million; .70 of 1% of the next $200
million; .65 of 1% of the excess over $400 million
Capital Appreciation* .75 of 1% of the first $500 million; .70 of 1% of the excess over
$500 million
Equity-Income* .75 of 1% of the first $500 million; .70 of 1% of the excess over
$500 million
Global Asset Allocation .75 of 1% of the first $200 million; .70 of 1% of the next $200
million; and .68 of 1% of the excess over $400 million
International .90 of 1% of the first $200 million; .75 of 1% of the next $200
million; and .60 of 1% in excess over $400 million
All other FUNDS .48 of 1% of the first $200 million; .40 of 1% of the next $200
million; and .30 of 1% in excess over $400 million
</TABLE>
- --------------------------------------------------------------------------------
FUND EXPENSES (see accompanying text below)
<TABLE>
<CAPTION>
1997 RATIO OF THE
ADVISOR'S
COMPENSATION TO 1997 RATIO OF TOTAL
AVERAGE EXPENSES
FUND NET ASSETS TO AVERAGE NET ASSETS
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
Aggressive Growth .73% .81%
Bond .46 .53
Capital Appreciation* .75 .84
Equity-Income* .75 .82
Global Asset Allocation .72 .89
Growth and Income .32 .35
International .79 .93
Managed .37 .42
Money Market .48 .59
Social Awareness .36 .41
Special Opportunities .37 .42
</TABLE>
* The management fees for the Capital Appreciation and the Equity-Income funds
have been decreased effective May 1, 1998 and January 1, 1998 respectively, and
the expense information in this table has been restated to reflect current fees.
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
companies); 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
investment decisions affecting each of the FUNDS. However, LINCOLN INVESTMENT
has entered into sub-advisory agreements with several professional investment
management firms. These firms provide some or substantially all of the
investment advisory services required by a number of the FUNDS, including day-
to-day investment management of those FUNDS' portfolios. Each sub-advisor makes
investment decisions for its respective fund in accordance with that FUND'S
investment objectives and places orders on behalf of that FUND to effect those
decisions. See the following tables for more information about the sub-advisors
and their fees:
73
<PAGE>
<TABLE>
<CAPTION>
DATE OF ANNUAL FEE RATE BASED ON AVERAGE DAILY NET ASSET
FUND SUB-ADVISOR AGREEMENT 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; .55 of 1% of the first $100 million .50 of 1% of the
Appreciation 100 Fillmore Street Amended next $400 million; and .45 of 1% of the excess over
Denver, CO 80206 5/1/98 $500 million
Equity Income Fidelity 12/20/93 .48 of 1%
82 Devonshire Street Amended
Boston, MA 02108 1/1/98
Global Asset Putnam 6/8/87 the greater of (a) $40,000; or (b) .47 of 1% of the
Allocation One Post Office first $200 million; .42 of 1% of the next $200
Square million; and .40 of 1% of any excess over $400
Boston, MA 02104 million
International Delaware 4/27/98 .50 of 1% of the first $200 million; .40 of 1% of the
International next $200 million; and .35 of 1% of any excess over
Advisers, Ltd. $400 million
80 Cheapside,
London, England
EC2V 6EE
- -------------
<CAPTION>
ANNUAL FEE RATE BASED ON MARKET VALUE OF SECURITIES
HELD IN THE PORTFOLIO OF EACH RESPECTIVE CLIENT FUND
DATE OF AT THE CLOSE OF BUSINESS ON THE LAST TRADING DAY OF
FUND SUB-ADVISOR AGREEMENT EACH 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 Vantage 4/30/88 .20 of 1%
Awareness
Special Vantage 8/21/85 .20 of 1%
Opportunities
</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
INVESTMENT. (There is no sub-advisor for the Bond and Money Market Funds.)
SERVICE MARKS. The service mark for the FUNDS and the name Lincoln National have
been adopted by the FUNDS with the permission of LNC, and their continued use is
subject to the right of LNC to withdraw this permission in the event the advisor
should not be the INVESTMENT ADVISOR of the FUNDS.
In the Prospectus and sales literature, the name Fidelity Investments will be
used with the Equity-Income Fund, Janus with the Capital Appreciation Fund and
Putnam with the Global Asset Allocation Fund. The continued use of these names
is subject to the right of the respective sub-advisor to withdraw its permission
in the event it ceases to be the sub-advisor to the particular FUND it advises.
PURCHASE OF SECURITIES BEING OFFERED
Shares of the FUNDS' common stock ($0.01 par value) will be sold to LINCOLN LIFE
for allocation to the VARIABLE ANNUITY ACCOUNT (VAA), which has been established
for the purpose of funding VARIABLE ANNUITY CONTRACTS; shares in the FUNDS will
also be sold to LINCOLN LIFE for allocation to one or more of the variable life
accounts, which have been established for the purpose of funding variable life
insurance contracts. Shares of each FUND are sold and redeemed at their net
asset value 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.
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<PAGE>
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
determined by the Commission, as a result of which (a) disposal by each FUND of
securities owned by it is not reasonably practicable, or (b) it is not
reasonably practicable for 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
ACCOUNTS, 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
investment company under the provisions of Subchapter M of the Internal Revenue
Code of 1986, as amended (the CODE). If a FUND qualifies as a regulated
investment company and complies with the provisions of the CODE relieving
regulated investment companies which distribute substantially all of their net
income (both ordinary income and capital gain) from Federal income tax and the
4% nondeductible 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
Department has adopted. Each FUND intends to comply with these diversification
requirements.
Since the sole shareholder of the FUNDS is LINCOLN LIFE, there is no discussion
here about the Federal income tax consequences at the shareholder level. For
information concerning the Federal income tax consequences to holders of annuity
or life insurance contracts, 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
discusses that FUND'S performance for the previous fiscal year and the factors
which affected that performance. We will send you a copy of the Annual Report
free upon request.
DESCRIPTION OF SHARES
The authorized capital stock of each FUND consists of 50 million shares of
common stock (150 million for the Growth and Income Fund and 100 million each
for the Equity-Income Fund, International Fund, Social Awareness Fund and
Managed Fund), $0.01 par value. As of March 1, 1998, each FUND had the following
number of shares issued and outstanding:
<TABLE>
<S> <C>
Aggressive Growth 24,053,290
Bond 23,710,935
Capital Appreciation 29,127,492
Equity-Income 42,380,182
Global Asset Allocation 30,669,482
Growth and Income 91,450,856
International 31,597,979
Managed 49,579,824
Money Market 9,274,413
Social Awareness 39,436,497
Special Opportunities 27,558,445
</TABLE>
FUND shares will be owned by LINCOLN LIFE and will be held by it in the VARIABLE
ACCOUNTS. As sole shareholder of each FUND, LINCOLN LIFE may be deemed to be a
control person as that term is defined under the 1940 Act. However, as stated in
the Prospectuses for the VARIABLE ACCOUNTS, LINCOLN LIFE provides to CONTRACT
OWNERS of the VARIABLE ACCOUNTS the right to direct the voting of FUND shares at
shareholder meetings, to the extent provided by law. LINCOLN LIFE will vote for
or against any proposition, or will abstain from voting, any FUND shares
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<PAGE>
attributable to a contract for which no timely voting instructions are received,
and any FUND shares held by LINCOLN LIFE for its own account, in proportion to
the voting instructions that it received with respect to all contracts
participating in that FUND. However, if the 1940 Act or any regulation under it
should change, and as a result LINCOLN LIFE determines it is permitted to vote
FUND shares in its own right, it may elect to do so.
All the shares of each FUND are of the same class with equal rights and
privileges. Each full share is entitled to one vote and each fractional share is
entitled to a proportionate fractional vote, on all matters subjected to a vote
of the shareholder. All shares, full and fractional, participate proportionately
in any dividends and capital gains distributions and, in the event of
liquidation, in that FUND'S net assets remaining after satisfaction of
outstanding liabilities.
When issued, each share is fully-paid and non-assessable and the shareholder has
no preemptive or conversion rights. FUND shares have non-cumulative voting
rights, which means that holders of more than 50% of the shares voting for the
election of directors can elect 100% of the directors if they choose to do so.
In that event the holders of the remaining shares so voting will not be able to
elect any directors. Shares may be redeemed as set forth under Sale and
redemption of shares.
The Bylaws of the FUNDS allow them, in proper cases, to dispense with their
annual meetings of the shareholder. Generally, this may be done as long as: (1)
a majority of the Directors then in office have at some point been elected by
the shareholder and, if any vacancy is filled by vote of the Board of Directors,
then immediately after filling the vacancy at least two thirds of the Directors
shall have been elected by the shareholder; (2) there is no change in the
independent auditor of the FUNDS; (3) there is no material change to the
investment advisory and/or sub-advisory agreements and/or fundamental policies;
and (4) a shareholder vote is not required with respect to a distribution
agreement. In adopting this procedure for dispensing with annual meetings that
are a formality, the Directors of the FUNDS have undertaken to comply with the
requirements of Section 16(c) of the 1940 Act. That Section protects CONTRACT
OWNERS by providing a procedure by which they may require management to convene
a meeting of the shareholder to vote on removal of one or more Directors. The
Directors also have agreed to facilitate communication among CONTRACT OWNERS for
the purpose of calling those meetings. Further information about these
procedures is available from FUND management.
STRATEGIC PORTFOLIO TRANSACTIONS -- ADDITIONAL INFORMATION
Because of their different investment objectives and portfolio management
philosophies many of the FUNDS engage to varying degrees in strategic portfolio
transactions, in order to preserve or enhance the value of their assets. These
can be generally identified as either derivative transactions or cash
enhancement transactions. Derivative transactions are recognized by the
investment community as an acceptable way to seek to increase the FUND'S overall
value (or, depending on the condition of the securities markets, at least to
slow its decrease). Cash enhancement transactions are designed to make some
extra money for the FUND when it has excess cash, or to help the FUND obtain
some cash for temporary purposes when needed. See the Prospectus for each FUND
for a listing of the kinds of transactions in which each FUND may engage.
1. DERIVATIVE TRANSACTIONS
A. Introduction
A derivative transaction is a financial agreement the value of which is
dependent upon the values of one or more underlying assets or upon the
values of one or more indices of asset values. The following types are
currently in fairly common use in the investment community, although not
every FUND will use all of them:
1. Equity contracts: stock options and indexed options; equity swaps;
stock index futures and options on futures; swaptions;
2. Interest rate contracts: interest rate futures and options on them;
forward rate agreements (FRAs); interest rate swaps and their related
transactions (e.g., caps, floors, collars and corridors); and/or
3. Currency derivative contracts: currency forward contracts; currency
options; currency futures; currency swaps; cross-currency interest rate
swaps.
SIMPLIFIED DEFINITIONS FOR THESE TRANSACTIONS ARE PROVIDED IN THE SAI APPENDIX.
Although they may be structured in complex combinations, derivative transactions
in which the FUNDS engage generally fall into two broad categories: options
contracts or forward contracts. The combined forms are constantly evolving. In
fact, variations on the types listed previously may come into use after the date
of these Prospectuses. Therefore, where the Prospectus for a particular FUND
discloses the intent of that FUND to engage in any of the types listed, that
FUND hereby
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<PAGE>
reserves the right to engage in related variations on those transactions.
The FUNDS intend to engage in derivative transactions only defensively. Examples
of this defensive use might be: to hedge against a perceived decrease in a
FUND'S asset value; to control transaction costs associated with market timing
(E.G., by using futures on an unleveraged basis); and to lock in returns,
spreads, or currency exchange rates in anticipation of future cash market
transactions.
There is no discussion here of asset-backed or mortgage-backed securities (such
as collateralized mortgage obligations, structured notes, inverse floaters,
principal-only or interest-only securities, etc.). See the Prospectus and SAI
for the Capital Appreciation and Equity-Income FUNDS, which are authorized to
engage in this kind of trading.
B. Risk factors commonly associated with derivative transactions.
There are certain risks associated with derivatives, and some derivatives
involve more of these risks than others. We briefly describe the most
common ones here; however, this is not an exhaustive list. Consult your
financial counselor if you have additional questions.
CREDIT RISK is the possibility that a counterparty to a transaction will
fail to perform according to the terms and conditions of the transaction,
causing the holder of the claim to suffer a loss.
CROSS-CURRENCY SETTLEMENT RISK (or Herstatt risk) is related to the
settlement of foreign exchange contracts. It arises when one of the
counterparties to a contract pays out one currency prior to receiving
payment of the other. Herstatt risk arises because the hours of operation
of domestic interbank fund transfer systems often do not overlap due to
time zone differences. In the interval between the time one counterparty
has received payment in one indicated currency and the time the other
counterparty(ies) receive payment in the others, those awaiting payment
are exposed to credit risk and market risk.
LEGAL RISK is the chance that a derivative transaction, which involves
highly complex financial arrangements, will be unenforceable in particular
jurisdictions or against a financially troubled entity; or will be subject
to regulation from unanticipated sources.
MARKET LIQUIDITY RISK is the risk that a FUND will be unable to control
its losses if a liquid secondary market for a financial instrument does
not exist. It is often considered as the risk that a (negotiable or
assignable) financial instrument cannot be sold quickly and at a price
close to its fundamental value.
MARKET RISK is the risk of a change in the price of a financial
instrument, which may depend on the price of an underlying asset.
OPERATING RISK is the potential of unexpected loss from inadequate
internal controls or procedures; human error; system (including data
processing system) failure; or employee dishonesty.
SETTLEMENT RISK between two counterparties is the possibility that a
counterparty to whom a firm has made a delivery of assets or money
defaults before the amounts due or assets have been received; or the risk
that technical difficulties interrupt delivery or settlement even if the
counterparties are able to perform. In the latter case, payment is likely
to be delayed but recoverable.
SYSTEMIC RISK is the uncertainty that a disruption (at a firm, in a market
segment, to a settlement system, etc.) might cause widespread difficulties
at other firms, in other market segments, or in the financial system as a
whole.
SPECIAL NOTE FOR OPTIONS AND FUTURES TRANSACTIONS: Gains and losses on
options and futures transactions depend on the portfolio manager's ability
to correctly predict the direction of stock prices and interest rates, and
other economic factors. Options and futures trading may fail as hedging
techniques in cases where the price movements of the securities underlying
the options and futures do not follow the price movements of the portfolio
securities subject to the hedge. The loss from investing in futures
transactions is potentially unlimited.
SOME OF THESE RISKS MAY BE PRESENT IN EACH TYPE OF TRANSACTION, WHILE
OTHERS MAY PERTAIN ONLY TO CERTAIN ONES. These risks are discussed here
only briefly. Before you invest in a particular fund, please consult your
financial counselor if you have questions about the risks associated with
that FUND'S use of derivatives.
C. Varying usage of derivative transactions
Subject to the terms of the Prospectus and SAI for each FUND, that FUND'S
portfolio manager decides which types of derivative transactions to
employ, at which times and under what circumstances. For a description of
the limits, risk factors and circumstances under which derivative
transactions will be used by each FUND, refer to the SAI booklet.
D. Increased government scrutiny
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<PAGE>
Derivative transactions are coming under increased scrutiny by Congress
and industry regulators (such as the SEC and the Office of the Comptroller
of the Currency), and by self-regulatory agencies (such as the NASD).
Should legislation or regulatory initiatives be enacted resulting in
additional restrictive requirements for derivative transactions, LINCOLN
LIFE and the FUNDS reserve the right to make all necessary changes in the
CONTRACTS and the Registration Statements for the FUNDS, respectively, to
comply with those requirements.
2. CASH ENHANCEMENT TRANSACTIONS
Cash enhancement transactions also involve certain risks to the fund. They are
discussed more fully in the SAI.
A. Lending of portfolio securities
Any FUND authorized to do so may make secured loans of its portfolio
securities, in order to realize additional income. The loans are limited
to a maximum of a stipulated amount of the FUND'S total assets. As a
matter of policy, securities loans are made to broker/dealers under
agreements requiring that the loans be continuously secured by collateral
in cash or short-term debt obligations at least equal at all times to 102%
of the value of the securities lent.
The borrower pays the FUND an amount equal to any dividends or interest
received on securities lent. The FUND retains all or a portion of the
interest received on securities lent. The FUND also retains all or a
portion of the interest received on investment of the cash collateral, or
receives a fee from the borrower.
With respect to the loaned securities, voting rights or rights to consent
pass to the borrower. 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 repurchase those same securities from the FUND at a specified price
on a fixed future date.
The repurchase date is normally not more than seven days from the date
of purchase. Repurchase agreements maturing in more than seven days
will be considered illiquid and subject to the FUNDS restriction on
illiquid securities.
2. Reverse repos. A FUND may also be authorized to enter into Reverse
Repo transactions. This simply means the FUND is on the reverse side of
a Repo transaction. That is, the FUND is the Seller of some of its
portfolio securities, subject to buying them back at a set price and
date.
Authorized FUNDS will engage in Reverse Repos for temporary purposes,
such as for obtaining cash to fund redemptions; or for the purpose of
increasing the income of the FUND by investing the cash proceeds at a
higher rate than the cost of the agreement. Entering into a reverse
repo transaction is considered to be the borrowing of money by the
FUND. FUNDS authorized to engage in Repos as buyers are not necessarily
authorized to do Reverse Repos.
FOREIGN INVESTMENTS
There are certain risks involved in investing in foreign securities, including
those resulting from fluctuations in currency exchange rates; devaluation of
currencies; political or economic developments including the possible imposition
of currency exchange blockages or other foreign governmental laws or
restrictions; reduced availability of public information concerning issuers; and
the fact that foreign companies are not generally subject to uniform accounting,
auditing, and financial reporting standards or to other regulatory practices and
requirements comparable to those applicable to domestic companies. With respect
to certain foreign countries, there is also the possibility of expropriation,
nationalization, confiscatory taxation, and limitations on the use or removal of
cash or other assets of a FUND, including the withholding of interest payments
or dividends. These risks may be particularly great in so-called developing or
undeveloped countries, sometimes referred to as Emerging Markets.
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<PAGE>
In addition, while the volume of transactions effected on foreign stock
exchanges has increased in recent years, in most cases it remains appreciably
below that of the NYSE. Accordingly, a FUND'S foreign investments may be less
liquid and their prices may be more volatile than comparable investments in
securities of U.S. companies. Moreover, the settlement periods for foreign
securities, which are often longer than those for securities of U.S. issuers,
may affect portfolio liquidity. The FUNDS will incur costs in converting foreign
currencies into U.S. dollars. Custody charges are generally higher for foreign
securities. In buying and selling securities on foreign exchanges, a FUND
normally pays fixed commissions that are generally higher than the negotiated
commissions charged in the United States. In addition, there is generally less
governmental supervision and regulation of securities exchanges, brokers and
issuers in foreign countries that in the United States. There may be difficulty
in enforcing legal rights outside the United States. For example, in the event
of default on any foreign debt obligations, it may be more difficult or
impossible for the FUND 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 extent
to which a FUND may invest in foreign securities. See the SAI.
The share price of a FUND that invests in foreign securities will reflect the
movements of both the prices of the portfolio securities and the currencies in
which those securities are denominated. Depending on the extent of a FUND'S
investments abroad, changes in a FUND'S share price may have a low correlation
with movements in the U.S. markets. Because most of the foreign securities in
which the FUND invests will be denominated in foreign currencies, or otherwise
will have values that depend on the performance of foreign currencies relative
to the U.S. dollar, the relative strength of the U.S. dollar may be an important
factor in the performance of the FUND.
FOREIGN CURRENCIES
When an ADVISOR or sub-advisor believes that a currency in which a portfolio
security or securities is denominated or exposed may suffer a decline against
the U.S. dollar, it may hedge that risk by entering into a forward contract to
sell an amount of foreign currency approximating the value of some or all of the
portfolio securities denominated in or exposed to that foreign currency.
Because foreign securities generally are denominated and pay dividends or
interest in foreign currencies, and a FUND may hold various foreign currencies,
the value of the net assets of that FUND as measured in U.S. dollars will be
affected favorably or unfavorably by changes in exchange rates. Generally,
currency exchange transactions will be conducted on a spot (i.e., cash) basis at
the spot rate prevailing in the currency exchange market. The cost of currency
exchange transactions will generally be the difference between the bid and offer
spot rate of the currency being purchased or sold. Some foreign currency values
may be volatile, and there is the possibility of government controls on currency
exchange or governmental intervention in currency markets which could adversely
affect the FUND.
Investors should be aware that exchange rate movements can be significant and
can endure for long periods of time. In order to protect against uncertainty in
the level of future foreign currency exchange rates, a FUND'S ADVISOR or
sub-advisor may attempt to manage exchange rate risk through active currency
management, including the use of certain foreign currency hedging transactions.
For example, it may hedge some or all of its investments denominated in a
foreign currency against a decline in the value of that currency relative to the
U.S. dollar by entering into contracts to exchange that currency for U.S.
dollars (not exceeding the value of the FUND'S assets denominated in or exposed
to that currency), or by participating in options or futures contracts with
respect to that currency. If the ADVISOR or sub-advisor believes that a
particular currency may decline relative to the U.S. dollar, the FUND may also
enter into contracts to sell that currency (up to the value of the FUND'S assets
denominated in or exposed to that currency) in exchange for another currency
that the ADVISOR or sub-advisor expects to remain stable or to appreciate
relative to the U.S. dollar. This technique is known as currency cross-hedging.
Refer to the Prospectus for each FUND to determine which FUNDS may engage in
these transactions.
These strategies are intended to minimize the effect of currency appreciation as
well as depreciation, but do not protect against a decline in the underlying
value of the hedged security. In addition, these strategies may reduce or
eliminate the opportunity to profit from increases in the value of the original
currency and may adversely impact the FUND'S performance if the ADVISOR or
sub-advisor's projection of future exchange rates is inaccurate. See Strategic
portfolio transactions.
Additionally, several European countries are participating in the European
Economic and Monetary Union, which will establish a common European currency for
participating countries. This currency will commonly be known as the "Euro". It
is anticipated that each such participating country will replace its existing
currency with the Euro on January 1, 1999. Additional European countries may
elect to participate after that date. FUNDS investing in securities of
participating countries could be adversely affected if the computer systems used
by their major service providers are not properly prepared to
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<PAGE>
handle both the imminent implementation of this single currency and the prospect
of the adoption of the Euro by additional countries in the future. These FUNDS
are taking steps to obtain satisfactory assurances that their major service
providers are, in turn, taking steps reasonably designed to address these
matters with respect to the computer systems they use. There can be no
assurances that these steps will be sufficient to avoid any adverse impact on
the business of any FUND.
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. In 1998, in response to certain changes to the
federal securities laws, the Board of Directors of each FUND recommended, and
shareholders of each FUND approved, changes to the fundamental policies for
certain of the FUNDS. The Board of Directors of each FUND also changed or
eliminated certain non-fundamental policies of certain FUNDS.
Under the 1940 Act a fundamental policy of a fund may not be changed without the
affirmative vote of a majority of the fund's outstanding shares.
As used in this Prospectus, the term majority of the FUND'S outstanding shares
means the vote of: (1) 67% or more of each FUND'S shares present at a meeting,
if the holders of more than 50% of the outstanding shares of each FUND are
present or represented by proxy, or (2) more than 50% of each FUND'S outstanding
shares, whichever is less.
These Prospectuses do not contain all the information included in their
Registration Statements filed with the Commission. The Registration Statements,
including the exhibits filed with them, may be examined at the office of the
Commission in Washington, D.C. Statements contained in the Prospectuses about
the contents of any CONTRACT or other document referred to in them are not
necessarily complete. In each instance, reference is made to the copy of that
CONTRACT or other document filed as an exhibit to the Registration Statement of
which the particular Prospectus forms a part, and each statement is qualified in
all respects by that reference.
The use of FUNDS by both variable annuity and variable life insurance separate
accounts is known as mixed funding. Due to differences in redemption rates, tax
treatment, or other considerations, the interests of CONTRACT OWNERS under the
VARIABLE LIFE ACCOUNTS may conflict with those of CONTRACT OWNERS under the
variable annuity account, in those cases where mixed funding occurs. For
example, 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.
PREPARING FOR YEAR 2000
THE 'YEAR 2000' ISSUE. Many existing computer programs use only two digits to
identify a year in the date field. These programs were designed and developed
without considering the impact of the upcoming change in the century. If not
corrected, many computer applications could fail or create erroneous results by
or at the year 2000. This 'year 2000 issue' affects virtually all companies and
organizations.
Lincoln Life is responsible, as part of its year 2000 updating process, for the
updating of FUND-related computer systems. An affiliate of Lincoln Life,
Delaware Service Company (Delaware), provides substantially all of the necessary
accounting and valuation services for the FUNDS. Delaware, for its part, is
responsible for updating all of its computer systems, including those which
serve the FUNDS, to accommodate the year 2000. Lincoln Life and Delaware have
begun formal discussions with each other to assess the requirements for their
respective systems to interface properly in order to facilitate the accurate and
orderly operation of the FUND beginning in the year 2000.
The year 2000 issue is pervasive and complex and affects virtually every aspect
of the businesses of Lincoln Life, Delaware, and the FUNDS (the Companies). The
computer systems of Lincoln Life and Delaware (including those computer systems
which serve the FUNDS) and their interfaces with the computer systems of
vendors, suppliers, customers and other business partners are particularly
vulnerable. The inability to properly recognize date-sensitive electronic
information and to transfer data between systems could cause errors or even
complete failure of systems, which would result in a temporary inability to
process transactions correctly and
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engage in normal business activities for the FUNDS. Lincoln Life and Delaware,
respectively, are redirecting significant portions of their internal information
technology efforts and are contracting, as needed, with outside consultants to
help update their systems to accommodate the year 2000. Also, in addition to the
discussions with each other noted above, Lincoln Life and Delaware have
respectively initiated formal discussions with other critical parties that
interface with their systems to gain an understanding of the progress by those
parties in addressing year 2000 issues. While Lincoln Life and Delaware are
making substantial efforts to address their own systems (including those which
serve the FUNDS) and the systems with which they interface, it is not possible
to provide assurance that operational problems will not occur. Lincoln Life and
Delaware presently believe that, with the modification of existing computer
systems, updates by vendors and conversion to new software and hardware, the
year 2000 issue will not pose significant operations problems for their
respective computer systems. In addition, the Companies are incorporating
potential issues surrounding year 2000 into their contingency planning process,
in the event that, despite these substantial efforts, there are unresolved year
2000 problems. If the remediation efforts noted above are not completed timely
or properly, the year 2000 issue could have a material adverse impact on the
operation of the businesses of Lincoln Life, Delaware, the FUNDS, or all of
them.
The cost of addressing year 2000 issues and the timeliness of completion will be
closely monitored by management for Lincoln Life, Delaware and the FUNDS and,
for each company, will be based on its management's best estimates which are
derived utilizing numerous assumptions of future events, including the continued
availability of certain resources, third-party modification plans and other
factors. Nevertheless, there can be no guarantee by Lincoln Life, by Delaware or
by the FUNDS that estimated costs will be achieved, and actual results could
differ significantly from those anticipated. Specific factors that might cause
such differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer problems, and other uncertainties.
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STATEMENT OF ADDITIONAL
INFORMATION TABLE OF
CONTENTS -- 11 UNDERLYING
FUNDS*
<TABLE>
<CAPTION>
ITEM ITEM
- ------------------------------------------------ ------------------------------------------------
<S> <C>
General Information and History Appendix
Investment objective Investment advisor and sub-advisor
Investment policies and techniques Directors and officers
Investment restrictions Investment policies and techniques
Portfolio transactions and brokerage (continued): options, futures, securities
Determination of net asset value valuation, securities lending, repurchase and
reverse repurchase agreements
Custodian
Independent auditors
Financial statements
Bond and commercial paper ratings
U.S. Government obligations
Taxes
State requirements
Derivative transactions -- definitions
*NOTE: THIS IS A GENERIC TABLE. THERE ARE
VARIATIONS IN THE CONTENTS OF THE SAI FROM FUND
TO FUND.
</TABLE>
- --------------------------------------------------------------------------------
Please send me a free copy of the current Statement of Additional Information
for Lincoln National Life Insurance Co. Variable Annuity Account C:
(Please Print)
Name: __________________________________________________________________________
Address: _______________________________________________________________________
City _________________________________ State ____________________ Zip __________
Mail to Lincoln National Life Insurance Co., P.O. Box 2340, Fort Wayne, Indiana
46081
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THIS PAGE WAS INTENTIONALLY LEFT BLANK.
84
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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, 1998. 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>
<CAPTION>
PAGE
<S> <C>
- ------------------------------------------------------
INVESTMENT OBJECTIVES E1- 2
- ------------------------------------------------------
INVESTMENT POLICIES AND LIMITATIONS
(RESTRICTIONS) E1- 2
- ------------------------------------------------------
INVESTMENT TECHNIQUES E1- 3
- ------------------------------------------------------
PORTFOLIO TRANSACTIONS AND BROKERAGE E1-14
- ------------------------------------------------------
DETERMINATION OF NET ASSET VALUE E1-15
- ------------------------------------------------------
APPENDIX
Investment advisor and sub-advisor A- 1
- ------------------------------------------------------
Directors and officers A- 3
- ------------------------------------------------------
Investment policies and techniques
(continued): options, futures, securities
valuation, securities lending, repurchase
and reverse repurchase agreements A- 4
- ------------------------------------------------------
<CAPTION>
PAGE
- ------------------------------------------------------
<S> <C>
Custodian A- 9
- ------------------------------------------------------
Independent auditors A- 9
- ------------------------------------------------------
Financial statements A- 9
- ------------------------------------------------------
Bond and commercial paper ratings A- 9
- ------------------------------------------------------
U.S. Government obligations A-11
- ------------------------------------------------------
Taxes A-12
- ------------------------------------------------------
State requirements A-12
- ------------------------------------------------------
Derivative transactions-definitions A-12
- ------------------------------------------------------
</TABLE>
THIS SAI IS NOT A PROSPECTUS.
The date of this SAI is May 1, 1998.
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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 objective
and certain investment policies are fundamental and cannot be changed without
the affirmative vote of a majority of the outstanding voting securities of the
FUND. See General information in the Appendix to the Prospectus. There can be no
assurance that the objective of the FUND will be achieved.
The FUND seeks to achieve its objective by actively managing income-producing
common and preferred stock and debt convertible into common stock. In choosing
securities, the FUND will also consider the potential for capital appreciation.
The FUND'S goal is to achieve a yield which exceeds the composite yield on the
securities comprising the Standard & Poor's 500 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
Prospectus. Unless otherwise noted, whenever an investment policy or limitation
states a maximum percentage of the FUND'S assets that may be invested in any
security or other asset, or sets forth a policy regarding quality standards,
such standard or percentage limitation will be determined immediately after and
as a result of the FUND'S acquisition of such security or other asset.
Accordingly, any subsequent change in values, net assets or other circumstances
will not be considered when 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.
Government or any of its agencies or instrumentalities) if, as a result,
(a)more than 5% of the FUND'S total assets would be invested in the
securities of that issuer, or (b)the FUND would hold more than 10% of the
outstanding voting securities of that issuer;
2. issue senior securities, except as permitted under the Investment Company
Act of 1940, as amended (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
reverse 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 Sundays and
holidays) to the extent necessary to comply with the 25% limitation;
4. underwrite securities issued by others, except to the extent that the FUND
may be considered an underwriter within the meaning of the Securities Act of
1933 in the disposition of restricted securities;
5. purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. Government or any of its agencies or
instrumentalities) if, as a result, more than 25% of its total assets would
be invested in the securities of companies whose principal business
activities are in the same industry;
6. purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent the FUND from
investing in securities or other instruments backed by real estate or
securities of companies engaged in the real estate business);
7. purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
FUND from purchasing or selling options and futures contracts or from
investing 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
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in futures contracts and options are not deemed to constitute selling
securities short.
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 constitute
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
necessary to comply with the 25% limitation. The FUND will not purchase any
security while borrowings representing more than 5% of its total assets are
outstanding.
4. The FUND does not currently intend to purchase any security if, as a result,
more than 10% of the FUND'S net assets would be invested in securities that
are deemed to be illiquid because they are subject to legal or contractual
restrictions on resale or because they cannot be sold or disposed of in the
ordinary course of business at approximately the prices at which they are
valued.
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
investment companies, except in the open market where no commission except
the ordinary broker's commission is paid, or (b)purchase or retain
securities issued by other open-end investment companies. Limitations (a)and
(b)do not apply to securities received as dividends, through offers of
exchange, or as a result of a reorganization, consolidation, or merger. (Due
to certain state insurance regulations, the FUND does not currently intend
to purchase the securities of other investment companies.)
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
instrument. Nor are there limitations (except those imposed by certain state
insurance regulations) on the percentage of the FUND'S assets which may be
invested in any foreign country. However, in order to comply with
diversification requirements under Section 817(h) of the Internal Revenue Code
of 1986, as amended, in connection with Fidelity Management Trust Co. serving as
sub-advisor, 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
Securities and Exchange Commission (SEC), the FUND may engage in transactions
with banks that are, or may be considered to be, affiliated persons of the FUND
under the 1940 Act. Such transactions may be entered into only pursuant to
procedures established and periodically reviewed by the Board of Directors.
These transactions may include repurchase agreements with custodian banks;
purchases, as principal, of short-term obligations of, and repurchase agreements
with, the 50 largest U.S. banks (measured by deposits); transactions in
municipal securities; and transactions in U.S. Government securities with
affiliated banks that are primary dealers in these securities.
FUND'S RIGHTS AS A SHAREHOLDER. The FUND does not intend to direct or administer
the day-to-day operations of any company. The FUND, however, may exercise its
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rights as a shareholder and may communicate its views on important matters of
policy to management, the Board of Directors and shareholders of a company when
the sub-advisor determines that such matters could have a significant effect on
the value of the FUND'S investment in the company. The activities that the FUND
may engage in, either individually or in conjunction with others, may include,
among others, supporting or opposing proposed changes in a company's corporate
structure or business activities; seeking changes in a company's directors or
management; seeking changes in a company's direction or policies; seeking the
sale or reorganization of the company or a portion of its assets; or supporting
or opposing third party takeover efforts. This area of corporate activity is
increasingly prone to litigation and it is possible that the FUND could be
involved in lawsuits related to such activities. The sub-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
securities are traded, and includes U.S. Government obligations, commercial
paper, certificates of deposit and bankers' acceptances, time deposits and
short-term corporate obligations. Money market instruments may carry fixed rates
of return or have variable or floating interest rates.
COMMERCIAL PAPER represents short-term obligations issued by banks,
broker-dealers, corporations and other entities for purposes such as financing
their current operations.
CERTIFICATES OF DEPOSIT represent a commercial bank's obligations to repay funds
deposited with it earning specified rates of interest over given periods.
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
usually 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
intermediaries. Floating rate securities have interest rates that change
whenever there is a change in a designated market-based interest rate, while
variable rate instruments provide for a specified periodic adjustment in the
interest rate. These formulas are designed to result in a market value for the
instrument that approximates its par value.
CREDIT ENHANCEMENT AGREEMENTS may be purchased simultaneously with a money
market instrument for guaranteeing 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 issued 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
corporate, governmental or other borrower to another party. They may represent
amounts owed to lenders or lending syndicates (loans and loan participations),
to suppliers of goods or services (trade claims or other receivables), or to
other parties. Direct debt instruments purchased by the FUND may have a maturity
of any number of days or years, may be secured or unsecured, and may be of any
credit quality. Direct debt instruments involve the risk of loss in case of
default or insolvency of the borrower. Direct debt instruments may offer less
legal protection to the FUND in the event of fraud or misrepresentation. In
addition, loan participations involve a risk of insolvency of the lending bank
or other financial intermediary. Direct debt instruments also may include
standby financing commitments that obligate the FUND to supply additional cash
to the borrower on demand at a time when the FUND would not have otherwise done
so, even if the borrower's condition makes it unlikely that the amount ever will
be repaid.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities are securities issued by
government and non-government entities such as banks, mortgage lenders, or other
financial institutions. A mortgage-backed security may be an obligation of the
issuer backed by a mortgage or pool of mortgages or a direct interest in an
underlying pool of mortgages. Some mortgage-backed securities, such as
collateralized mortgage obligations or CMOs, make payments of both principal and
interest at a variety of intervals; others make semiannual interest payments at
a predetermined rate and repay principal at maturity (like a typical bond).
Mortgage-backed securities are based on different types of mortgages, including
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those on commercial real estate or residential properties. Other types of
mortgage-backed securities will likely be developed in the future, and the FUND
may invest in them if the sub-advisor determines they are consistent with the
FUND'S investment objective and policies.
The value of mortgage-backed securities may change due to shifts in the market's
perception of issuers. In addition, regulatory or tax changes may adversely
affect the mortgage securities market as a whole. Non-government mortgage-backed
securities may offer higher yields than those issued by government entities, but
also may be subject to greater price changes than government issues.
Mortgage-backed securities are subject to prepayment risk. Prepayment, which
occurs when unscheduled or early payments are made on the underlying mortgages,
may shorten the effective maturities of these securities and may lower their
total returns. 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 interest
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
security (IO) receives interest payments from the same underlying security.
The prices of stripped mortgage-backed securities may be particularly affected
by changes in interest rates. As interest rates fall, prepayment rates tend to
increase, which tends to reduce prices of IOs and increase prices of POs. Rising
interest rates can have the opposite effect.
ASSET-BACKED SECURITIES consist of undivided fractional interests in pools of
consumer loans (unrelated to mortgage loans) held in a trust. Payments of
principal 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 enhancement 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 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 interest rates. If the credit enhancement is exhausted, certificate holders
may experience losses or delays in payment if the required payments of principal
and interest are not made to the trust with respect to the underlying loans. The
value of these securities also may change because of changes in the market's
perception of the creditworthiness of the servicing agent for the loan pool, the
originator of the loans, or the financial institution providing the credit
enhancement.
The sub-advisor believes that CMOs, asset-backed securities and mortgage-backed
securities are readily marketable based on the size of the market and the number
of trades transacted each day.
ZERO COUPON BONDS do not make interest payments; instead, they are sold at a
deep discount from their face value and are redeemed at face value when they
mature. Because zero coupon bonds do not pay current income, their prices can be
very volatile when interest rates change. In calculating its daily dividend, the
FUND takes into account as income a portion of the difference between a zero
coupon bond's purchase price and its face value.
A broker-dealer creates a derivative zero by separating the interest and
principal components of a U.S. Treasury security and selling them as two
individual securities. Certificates of Accrual on Treasury Securities (CATS),
Treasury Investment 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
components of an outstanding U.S. Treasury bond and selling them as individual
securities. Bonds issued by the Resolution Funding Corp. (REFCORP) and the
Financing Corp. (FICO) can also be separated in this fashion. Original issue
zeros are zero coupon securities originally issued by the U.S. Government, a
government agency or a corporation in zero coupon form.
REPURCHASE AGREEMENTS. The FUND may also make short-term investments in
repurchase agreements. A repurchase agreement typically involves the purchase by
the FUND of securities (U.S. Government or other money market securities) from a
financial institution such as a bank, broker or savings and loan association,
coupled with an agreement by the seller to repurchase the same securities 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
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the purchase price to the FUND and the resale price to the seller represents the
interest earned by the FUND which is unrelated to the coupon rate or maturity of
the purchased security. If the seller defaults, the FUND may incur a loss if the
value of the collateral securing the repurchase agreement declines, or the FUND
may incur disposition costs in connection with liquidating the collateral. If
bankruptcy proceedings are commenced with respect to the seller, realization
upon the collateral by the FUND may be delayed or limited and a loss may be
incurred if the collateral securing the repurchase agreement declines in value
during the bankruptcy proceedings. However, repurchase agreements will be made
only with brokers or dealers deemed by the Board of Directors 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 transaction, as provided in the agreement. The FUND currently
intends to invest only in repurchase agreements collateralized by U.S.
Government securities. Repurchase agreements with a duration of more than seven
days are considered illiquid 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 authorized 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-advisor
or an affiliate thereof, may invest in a pool of one or more large overnight
repurchase agreements. The repurchase agreements' underlying securities are U.S.
Government securities in which the FUND is permitted to invest.
REVERSE REPURCHASE AGREEMENTS. Reverse repurchase agreements are transactions
when the FUND temporarily transfers possession of a portfolio instrument to
another party, such as a bank or broker-dealer, in return for cash. At the same
time, the FUND agrees to repurchase the instrument in an agreed-upon price and
time. The FUND expects that it will engage in reverse repurchase agreements for
temporary purposes such as to FUND redemptions or when it is able to invest the
cash so acquired at a rate higher than the cost of the agreement, which would
increase the income earned by the FUND. Reverse repurchase agreements may
increase the risk of fluctuation in the market value of assets or in its yield.
In a reverse repurchase agreement, the FUND sells a FUND instrument to another
party, such as a bank or broker-dealer, in return for cash and agrees to
repurchase the instrument at a particular price and time. While a reverse
repurchase agreement is outstanding, the FUND will maintain appropriate liquid
assets in a segregated custodial account to cover its obligation under the
agreement. The FUND will enter into reverse repurchase agreements only with
parties whose creditworthiness has been reviewed and found satisfactory by the
Board of Directors. Such transactions may increase fluctuations in the market
value of the FUND'S assets and may be viewed as a form of leverage.
SECURITIES LENDING. The FUND may from time to time lend securities from its
portfolio to brokers, dealers and financial institutions and receive collateral
from the borrower, in the form of cash (which may be invested in short-term
securities), U.S. Government obligations or certificates of deposit. Such
collateral will be maintained at all times in an amount equal to at least 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 terminable 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
valued. Under the supervision of the Board of Directors, the sub-advisor
determines the liquidity of the FUND'S investments and, through reports from the
sub-advisor, the Board monitors investments in illiquid instruments. In
determining 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 marketplace, (3) dealer undertakings to make a market, (4) the nature of the
security (including any demand or tender features), and (5) the nature of the
marketplace for trades (including the ability to assign, 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
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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.
In the absence of market quotations, illiquid investments are valued at fair
value as determined in good faith by a committee appointed by the Board of
Directors of the FUND. If through a change in values, net assets, or other
circumstances, the FUND were in a position where more than 10% of net assets
were invested in illiquid securities, it would seek to take appropriate steps to
protect liquidity.
RESTRICTED SECURITIES generally can be sold in privately negotiated
transactions, pursuant to an exemption from registration under the Securities
Act of 1933, or in a registered public offering. Where registration is required,
the FUND may be obligated to pay all or part of the registration expense and a
considerable period may elapse between the time it decides to seek registration
and the time the FUND may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions were
to develop, the FUND might obtain a less favorable price than prevailed when it
decided to seek registration of the security.
SWAP AGREEMENTS. As one way of managing its exposure to different types of
investments, the FUND may enter into interest rate swaps, currency swaps, and
other types of swap agreements such as caps, collars and floors. In a typical
interest rate swap, one party agrees to make regular payments equal to a
floating interest rate multiplied by a notional principal amount, in return for
payments equal to a fixed rate multiplied by the same amount, for a specified
period of time. If a swap agreement provides for payments in different
currencies, the parties might agree to exchange the notional principal amount as
well. Swaps may also depend on other prices or rates, such as the value of an
index or mortgage prepayment rates.
In a typical cap or floor agreement, one party agrees to make payments only
under specified circumstances, usually in return for payment of a fee by the
other party. For example, the buyer of an interest rate cap obtains the right to
receive payments to the extent that a specified interest rate exceeds an
agreed-upon level, while the seller of an interest rate floor is obligated to
make payments to the extent that a specified interest rate falls below an
agreed-upon level. An interest rate collar combines elements of buying a cap and
selling a floor.
Swap agreements will tend to shift the FUND'S investment exposure from one type
of investment to another. For example, if the FUND agreed to exchange payments
in dollars for payments in foreign currency, the swap agreement would tend to
decrease the FUND'S exposure to U.S. interest rates and increase its exposure to
foreign currency and interest rates. Caps and floors have an effect similar to
buying or writing options. Depending on how they are used, swap agreements may
increase or decrease the overall volatility of the FUND'S investments and its
share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on the
FUND'S performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. The FUND may also suffer losses if
it is unable to terminate outstanding swap agreements or reduce its exposure
through offsetting transactions.
Swap agreements can be individually negotiated and structured to include
exposure to a variety of different types of investments or market factors.
Depending on their structure, swap agreements may increase or decrease the
FUND'S exposure to long or short-term interest rates (in the U.S. or abroad),
foreign currency values, mortgage securities, corporate borrowing rates, or
other factors such as security prices or inflation rates. Swap agreements can
take many different forms and are known by a variety of names. The FUND is not
limited to any particular form of swap agreement if the sub-advisor determines
it is consistent with the FUND'S investment objective and policies.
The most significant factor in the performance of swap agreements is the change
in the specific interest rate, currency, or other factors that determine the
amounts of payments due to and from the FUND. If a swap agreement calls for
payments by the FUND, it must be prepared to make such payments when due. In
addition, if the counterparty's creditworthiness declined, the value of a swap
agreement would be likely to decline, potentially resulting in losses. The FUND
expects to be able to eliminate its exposure under swap agreements either by
assignment or other disposition, or by entering into an offsetting swap
agreement with the same party or a similarly creditworthy party.
The FUND will maintain appropriate liquid assets in a segregated custodial
account to cover its current obligations under swap agreements. If the FUND
enters into a 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.
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INDEXED SECURITIES. The FUND may purchase securities whose prices are indexed to
the prices of other securities, securities indices, currencies, precious metals
or other commodities, or other financial indicators. Indexed securities
typically, but not always, are debt securities or deposits whose value at
maturity or coupon rate is determined by reference to a specific instrument or
statistic. Gold-indexed securities, for example, typically provide for a
maturity value that depends on the price of gold, resulting in a security whose
price tends to rise and fall together with gold prices. Currency-indexed
securities typically are short-term to intermediate-term debt securities whose
maturity values interest rates are determined by reference to the values of one
or more specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; that is, their maturity value may
increase when the specified currency value increases, resulting in a security
that performs similarly to a foreign-denominated instrument, or their maturity
value may decline when foreign currencies increase, resulting in a security
whose price characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
Government agencies.
WARRANTS. Warrants are securities that give the FUND the right to purchase
equity securities from the issuer at a specific price (the strike price) for a
limited period of time. The strike price of warrants typically is much lower
than the current market price of the underlying securities, yet they are subject
to similar price fluctuations. As a result, warrants may be more volatile
investments than the underlying securities and may offer greater potential for
capital appreciation as well as capital loss.
Warrants do not entitle a holder to dividends or voting rights with respect to
the underlying securities and do not represent any rights in the assets of the
issuing company. Also, the value of the warrant does not necessarily change with
the value of the underlying securities and a warrant ceases to have value if it
is not exercised before the expiration date. These factors can make warrants
more speculative than other types of investments.
LOANS AND OTHER DIRECT DEBT INSTRUMENTS. Direct debt instruments are interests
in amounts owed by a corporate, governmental, or other borrower to lenders or
lending syndicates (loans and loan participations), to suppliers of goods or
services (trade claims or other receivables) or to other parties. Direct debt
instruments are subject to the FUND'S policies regarding the quality of debt
securities.
Purchasers of loans and other forms of direct indebtedness depend primarily upon
the creditworthiness of the borrower for payment of principal and interest.
Direct debt instruments may not be rated by any nationally recognized rating
service. If the FUND does not receive scheduled interest or principal payments
on such indebtedness, the FUND'S share price and yield could be adversely
affected. Loans that are fully secured offer the FUND more protections than an
unsecured loan in the event of non-payment of scheduled interest or principal.
However, there is no assurance that the liquidation of collateral from a secured
loan would satisfy the borrower's obligation, or that the collateral can be
liquidated. Indebtedness of borrowers whose creditworthiness is poor involves
substantially greater risks, and may be highly speculative. Borrowers that are
in bankruptcy or restructuring may never pay off their indebtedness, or may pay
only a small fraction of the amount owed. Direct indebtedness of developing
countries will also involve a risk that the governmental entities responsible
for the repayment of the debt may be unable, or unwilling, to pay interest and
repay principal when due.
Investments in loans through direct assignment of a financial institution's
interests with respect to a loan may involve additional risks to the FUND. For
example, if a loan is foreclosed, the FUND could become part owner of any
collateral, and would bear the costs and liabilities associated with owning and
disposing of the collateral. In addition, it is conceivable that under emerging
legal theories of lender liability, the FUND could be held liable as a colender.
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
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agent's general creditors, the FUND might incur certain costs and delays in
realizing payment on the loan or loan participation and could suffer a loss of
principal or interest.
Direct indebtedness purchased by the FUND may include letters of credit,
revolving credit facilities or other standby financing commitments obligating
the FUND to pay additional cash on demand. These commitments may have the effect
of requiring the FUND to increase its investment in a borrower at a time when it
would not otherwise have done so, even if the company's condition makes it
unlikely that the amount will ever be repaid. The FUND will set aside
appropriate liquid assets in a segregated custodial account to cover its
potential obligations under standby financing commitments.
The FUND limits the amount of total assets that it will invest in any one issuer
or in issuers within the same industry (see 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 intermediary as an issuer
of indebtedness may restrict the FUND'S ability to invest in indebtedness
related to a single financial intermediary, or a group of intermediaries engaged
in the same industry, even if the underlying borrowers represent many different
companies and industries.
FOREIGN INVESTMENTS. Foreign investments can involve significant risks in
addition to the risks inherent in U.S. investments. The value of securities
denominated in or indexed to foreign currencies, and of dividends and interest
from such securities, can change significantly when foreign currencies
strengthen or weaken relative to the U.S. dollar. Foreign securities markets
generally have less trading volume and less liquidity than U.S. markets, and
prices on some foreign markets can be highly volatile. Many foreign countries
lack uniform accounting and disclosure standards comparable to those applicable
to U.S. companies, and it may be more difficult to obtain reliable information
regarding an issuer's financial condition and operations. In addition, the costs
of foreign investing, including withholding taxes, brokerage commissions and
custodial costs, are generally higher than for U.S. investments.
Foreign markets may offer less protection to investors than U.S. markets.
Foreign issuers, brokers, and securities markets may be subject to less
government supervision. Foreign security trading practices, including those
involving the release of assets in advance of payment, may involve increased
risks in the event of a failed trade or the insolvency of a broker-dealer, and
may involve substantial delays. It may also be difficult to enforce legal rights
in foreign countries.
Investing abroad also involves different political and economic risks. Foreign
investments may be affected by actions of foreign governments adverse to the
interests of U.S. investors, including the possibility of expropriation or
nationalization of assets, confiscatory taxation, restrictions on U.S.
investment or on the ability to repatriate assets or convert currency into U.S.
dollars or other government intervention. There may be a greater possibility of
default by foreign governments or foreign government-sponsored enterprises.
Investments in foreign countries also involve a risk of local political,
economic or social instability, military action or unrest or adverse diplomatic
developments. There is no assurance that the sub-advisor will be able to
anticipate 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 restrictions.
American Depositary Receipts and European Depositary Receipts (ADRs and EDRs)
are certificates evidencing ownership of shares of a foreign-based issuer held
in trust by a bank or similar financial institution. Designed for use in U.S.
and European securities markets, respectively, ADRs and EDRs are alternatives to
the purchase of the underlying securities in their national markets and
currencies.
FOREIGN CURRENCY TRANSACTIONS. The FUND may conduct foreign currency
transactions on a spot (i.e., cash) basis or by entering into forward contracts
to purchase or sell foreign currencies at a future date and price. The FUND will
convert currency on a spot basis from time to time, and investors should be
aware of the costs of currency conversion. Although foreign exchange dealers
generally do not charge a fee for conversion, they do realize a profit based on
the difference between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to the FUND at
one rate, while offering a lesser rate of exchange should the FUND desire to
resell that currency
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to the dealer. Forward contracts are generally traded in an interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. The parties to a forward contract may agree to offset or
terminate the contract before its maturity, or may hold the contract to maturity
and complete the contemplated currency exchange.
The FUND may use currency forward contracts for any purpose consistent with its
investment objective. The following discussion summarizes some, but not all, of
the possible currency management strategies involving forward contracts that
could be used by the FUND. The FUND may also use options and futures contracts
relating to foreign currencies for the same purposes.
When the FUND agrees to buy or sell a security denominated in a foreign
currency, it may desire to lock in the U.S. dollar price of the security. By
entering into a forward contract for the purchase or sale, for a fixed amount of
U.S. dollars, of the amount of foreign currency involved in the underlying
security transaction, the FUND will be able to protect itself against an adverse
change in foreign currency values between the date the security is purchased or
sold and the date on which payment is made or received. This technique is
sometimes referred to as a settlement hedge or transaction hedge. The FUND may
also enter into forward contracts to purchase or sell a foreign currency in
anticipation of future purchases or sales of securities denominated in foreign
currency, even if the specific investments have not yet been selected by the
sub-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 negative currency
fluctuations, but would not offset changes in security values caused by other
factors. The FUND could also hedge the position by selling another currency
expected to perform similarly to the pound sterling--for example, by entering
into a forward contract to sell Deutschemarks or European Currency Units in
return for U.S. dollars. This type of hedge, sometimes referred to as a proxy
hedge, could offer advantages in terms of cost, yield or efficiency, but
generally will not hedge currency exposure as effectively as a simple hedge into
U.S. dollars. Proxy hedges may result in losses if the currency used to hedge
does not perform similarly to the currency in which the hedged securities are
denominated.
The FUND may enter into forward contracts to shift its investment exposure from
one currency into another currency that is expected to perform better relative
to the U.S. dollar. For example, if the FUND held investments denominated in
Deutschemarks, the FUND could enter into forward contracts to sell Deutschemarks
and purchase Swiss Francs. This type of strategy, sometimes known as a
cross-hedge, will tend to reduce or eliminate exposure to the currency that is
sold, and increase exposure to the currency that is purchased, much as if the
FUND had sold a security denominated in one currency and purchased an equivalent
security denominated in another. Cross-hedges protect against losses resulting
from a decline in the hedged currency, but will cause the FUND to assume the
risk of fluctuations in the value of the currency it purchases.
Under certain conditions, SEC guidelines require mutual FUNDS to set aside
appropriate liquid assets in a segregated custodial account to cover currency
forward contracts. As required by SEC guidelines, the FUND will segregate assets
to cover currency forward contracts, if any, whose purpose is essentially
speculative. The FUND will not segregate assets to cover forward contracts
entered into for hedging purposes, including settlement hedges, position hedges
and proxy hedges.
Successful use of currency forward contracts will depend on the sub-advisor's
skill in analyzing and predicting currency values. Forward contracts may
substantially change the FUND'S investment exposure to changes in currency
exchange rates, and could result in losses to the FUND if currencies do not
perform as the 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 tandem. 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 fluctuations.
Other strategies, including buying futures, writing puts, and buying calls, tend
to increase market exposure. Options and futures may be combined with each other
or with forward contracts in order to adjust the risk and return characteristics
of the overall strategy. The FUND may invest in options and futures based on any
type of security, index, or currency, including options and futures traded
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on foreign exchanges and options not traded on exchanges.
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
conditions 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
Exchange Act, which limits the extent to which the FUND can commit assets to
initial margin deposits and option premiums.
a. The FUND will use futures contracts and related options solely for bona fide
hedging purposes within the meaning of CFTC regulations, provided that the
FUND may hold long positions in futures contracts and related options that
do not fall within the definition of bona fide hedging transactions if the
positions are used as part of a FUND management strategy and are incidental
to the FUND'S activities in the cash market, and the underlying commodity
value of the positions at all times will not exceed the sum of (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
contracts the FUND has purchased, after taking into account unrealized
profits and losses on such contracts, would exceed 5% of the FUND'S total
assets.
In addition, the FUND will not: (a) sell futures contracts, purchase put options
or write call options if, as a result, more than 25% of the FUND'S total assets
would be hedged with futures and options under normal conditions; (b) purchase
futures contracts or write put options if, as a result, the FUND'S total
obligations upon settlement or exercise of purchased futures contracts and
written put options would exceed 25% of its total assets; or (c) purchase call
options if, as a result, the current value of option premiums for call options
purchased by the FUND would exceed 5% of the FUND'S total assets. These
limitations do not apply to options attached to or acquired or traded together
with their underlying securities, and do not apply to securities that
incorporate features similar to options.
FUTURES CONTRACTS. When the FUND purchases a futures contract, it agrees to
purchase a specified underlying instrument at a specified future date. When the
FUND sells a futures contract, it agrees to sell the underlying instrument at a
specified future date. The price at which the purchase and sale will take place
is fixed when the FUND enters into the contract. Some currently available
futures contracts are based on specific securities, such as U.S. Treasury bonds
or notes, and some are based on indices of securities prices, such as the S&P
500) and the Bond Buyer Index of municipal bonds. Futures can be held until
their delivery dates, or can be closed out before then if a liquid secondary
market is available.
The value of a futures contract tends to increase and decrease in tandem with
the value of its underlying instrument. Therefore, purchasing futures contracts
will tend to increase the FUND'S exposure to positive and negative price
fluctuations in the underlying instrument, much as if it had purchased the
underlying instrument directly. When the FUND sells a futures contract, by
contrast, the value of its futures position will tend to move in a direction
contrary to the market. Selling futures contracts, therefore, will tend to
offset both positive and negative market price changes, much as if the
underlying instrument had been sold.
FUTURES MARGIN PAYMENTS. The purchaser or seller of a futures contract is not
required to deliver 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 purchasing
securities on margin for purposes of the FUND'S investment limitations. In the
event of the bankruptcy of an FCM that holds margin on behalf of the FUND, the
FUND may be entitled to return of margin owed to it only in proportion to the
amount received by the FCM's other customers, potentially resulting in losses to
the FUND.
PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, the FUND obtains
the right (but not the obligation) to sell the option's underlying instrument at
a fixed strike price. In return for this right, the FUND pays the current market
price for the option (known as the option premium). Options have various types
of underlying instruments, including specific securities, indices
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of securities prices, and futures contracts. The FUND may terminate its position
in a put option it has purchased by allowing it to expire or by exercising the
option. If the option is allowed to expire, the FUND will lose the entire
premium it paid. If the FUND exercises the option, it completes the sale of the
underlying instrument at the strike price. The FUND may also terminate a put
option position by closing it out in the secondary market at its current price,
if a liquid secondary market exists.
The buyer of a typical put option can expect to realize a gain if security
prices fall substantially. However, if the underlying instrument's price does
not fall enough to offset the cost of purchasing the option, a put buyer can
expect to suffer a loss (limited to the amount of the premium paid, plus related
transaction costs).
The features of call options are essentially the same as those of put options,
except that the purchaser of a call option obtains the right to purchase, rather
than sell, the underlying instrument at the option's strike price.
A call buyer typically attempts to participate in potential price increases of
the underlying instrument with risk limited to the cost of the option if
security prices fall. At the same time, the buyer can expect to suffer a loss if
security prices do not rise sufficiently to offset the cost of the option.
WRITING PUT AND CALL OPTIONS. When the FUND writes a put option, it takes the
opposite side of the transaction from the option's purchaser. In return for
receipt of the premium, the FUND assumes the obligation to pay the strike price
for the option's underlying instrument if the other party to the option chooses
to exercise it. When writing an option on a futures contract the FUND will be
required to make margin payments to an FCM as described above for futures
contracts. The FUND may seek to terminate its position in a put option it writes
before exercise by closing out the option in the secondary market at its current
price. If the secondary market is not liquid for a put option the FUND has
written, however, the FUND must continue to be prepared to pay the strike price
while the option is outstanding, regardless of price changes, and must continue
to set aside assets to cover its position.
If security prices rise, a put writer would generally expect to profit, although
its gain would be limited to the amount of the premium it received. If security
prices remain the same over time, it is likely that the writer will also profit,
because it should be able to close out the option at a lower price. If security
prices fall, the put writer would expect to suffer a loss. This loss should be
less than the loss from purchasing the underlying instrument directly, however,
because the premium received for writing the option should mitigate the effects
of the decline.
Writing a call option obligates the FUND to sell or deliver the option's
underlying instrument, in return for the strike price, upon exercise of the
option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if prices remain the same or fall. Through receipt of the option
premium, a call writer mitigates the effects of a price decline. At the same
time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is greater,
a call writer gives up some ability to participate in security price increases.
COMBINED POSITIONS. The FUND may purchase and write options in combination with
each other, or in combination with futures or forward contracts, to adjust the
risk and return characteristics of the overall position. For example, the FUND
may purchase a put option and write a call option on the same underlying
instrument, in order to construct a combined position whose risk and return
characteristics are similar to selling a futures contract. Another possible
combined position would involve writing a call option at one strike price and
buying a call option at a lower price, in order to reduce the risk of the
written call option in the event of a substantial price increase. Because
combined options positions involve multiple trades, they result in higher
transaction costs and may be more difficult to open and close out.
CORRELATION OF PRICE CHANGES. Because there are a limited number of types of
exchange-traded options and futures contracts, it is likely that the
standardized contracts available will not match the FUND'S current or
anticipated investments exactly. The FUND may invest in options and futures
contracts based on securities with different issuers, maturities or other
characteristics from the securities in which it typically invests, which
involves a risk that the options or futures position will not track the
performance of the FUND'S other investments.
Options and futures prices can also diverge from the prices of their underlying
instruments, even if the underlying instruments match the FUND'S investments
well. Options and futures prices are affected by such factors as current and
anticipated short-term interest rates, changes in the volatility of the
underlying instrument and the time remaining until expiration of the contract,
which may not affect security prices the same way. Imperfect correlation may
also result from differing levels of demand in the options and futures markets
and the securities markets, from structural differences in how options and
futures and securities are traded, or from imposition of daily price fluctuation
limits or trading halts. The FUND may purchase or sell options and futures
contracts with a greater or lesser value than the securities it wishes to hedge
or intends to purchase in order to attempt to compensate for differences in
volatility between the contract and the securities, although
EI-12
<PAGE>
this may not be successful in all cases. If price changes in the FUND'S options
or futures positions are poorly correlated with its other investments, the
positions may fail to produce anticipated gains or result in losses that are not
offset by gains in other investments.
LIQUIDITY OF OPTIONS AND FUTURES CONTRACTS. There is no assurance that a liquid
secondary market will exist for any particular options or futures contract at
any particular time. Options may have relatively low trading volume and
liquidity if their strike prices are not close to the underlying instrument's
current price. In addition, exchanges may establish daily price fluctuation
limits for options and futures contracts, and may 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
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,
contract 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 payment or
delivery in U.S. dollars. The underlying instrument of a currency option may be
a foreign currency, which generally is purchased or delivered in exchange for
U.S. dollars, or may be a futures contract. The purchaser of a currency call
obtains the right to purchase the underlying currency, and the purchaser of a
currency put obtains the right to sell the underlying currency.
The uses and risks of currency options and futures are similar to options and
futures relating to securities or indices, as discussed previously. The FUND may
purchase and sell currency futures and may purchase and write currency options
to increase or decrease its exposure to different foreign currencies. The FUND
may also purchase and write currency options in conjunction with each other or
with currency futures or forward contracts. Currency futures and options values
can be expected to correlate with exchange rates, but may not reflect other
factors that affect the value of the FUND'S investments. A currency hedge, for
example, should protect a Yen-denominated security from a decline in the Yen,
but will not protect the FUND against a price decline resulting from
deterioration in the issuer's creditworthiness. Because the value of the FUND'S
foreign-denominated investments changes in response to many factors other than
exchange rates, it may not be possible to match the amount of currency options
and futures to the value of the FUND'S investments exactly over time.
ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS. The FUND will comply with
guidelines established by the 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 segregation of a large
percentage of the FUND'S assets could impede portfolio management or the FUND'S
ability to meet redemption requests or other current obligations.
SHORT SALES. The FUND may enter into short sales with respect to stocks
underlying its convertible security holdings. For example, if the sub-advisor
anticipates a decline in the price of the stock underlying a convertible
security the FUND holds, it may sell the stock short. If the stock price
subsequently declines, the proceeds of the short sale could be expected to
offset all or a portion of the effect of the stock's decline on the value of the
convertible security. The FUND currently intends to hedge no more than 15% of
its total assets with short sales on equity securities underlying its
convertible security holdings under normal circumstances.
When the FUND enters into a short sale, it will be required to set aside
securities equivalent in kind and amount to those sold short (or securities
convertible or exchangeable into such securities) and will be required to
continue to hold them while the short sale is outstanding. The FUND will incur
transaction costs, including interest expense, in connection with opening,
maintaining, and closing short sales.
LOWER-RATED DEBT INSTRUMENTS
Lower-rated debt securities are usually defined as securities rated Ba or lower
by Moody's or BB or lower by 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 issuer's capacity to
pay. This is an aggressive approach to income investing.
EI-13
<PAGE>
The 1980s saw a dramatic increase in the use of lower-rated debt securities to
finance highly leveraged acquisitions and restructurings. Past experience may
not provide an accurate indication of the future performance of lower-rated debt
securities, especially during periods of economic recession. In fact, from 1989
to 1991, the percentage of lower-rated debt securities that defaulted rose
significantly above prior levels.
Lower-rated debt securities may be thinly traded, which can adversely affect the
prices at which these securities can be sold and can result in high transaction
costs. If market quotations are not available, lower-rated debt securities will
be valued in accordance with standards set by the Board of Directors, including
the use of outside pricing services. Judgment plays a greater role in valuing
lower-rated debt securities than securities for which more extensive quotations
and last sale information are available. Adverse publicity and changing investor
perceptions may affect the ability of outside pricing services to value
lower-rated debt securities, and the FUND'S ability to dispose of these
securities.
The market prices of lower-rated debt securities may decline significantly in
periods of general economic difficulty which may follow periods of rising
interest rates. During an economic downturn or a prolonged period of rising
interest rates, the ability of issuers of lower-rated debt to service their
payment obligations, meet projected goals, or obtain additional financing may be
impaired.
The FUND may choose, at its expense or in conjunction with others, to pursue
litigation or otherwise to exercise its rights as a security holder to seek to
protect the interests of security holders if it determines this to be in the
interest of the FUND'S shareholders.
The considerations discussed 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 agreement.
The ADVISOR may also be responsible for the placement of transaction orders for
other investment companies and accounts for which it or its affiliates 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 commission). 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 nature and character of
the markets for the security to be purchased or sold; the execution efficiency,
settlement capability and financial condition of the broker-dealer firm; the
broker-dealer's execution services rendered on a continuing basis; and the
reasonableness of any commissions. Commissions for foreign investments traded on
foreign exchanges will generally be higher than for U.S. investments and may not
be subject to negotiation.
The FUND may execute portfolio transactions with broker-dealers who provide
research and execution services to the FUND and/or other accounts over which the
ADVISOR or its affiliates exercise investment discretion. Such services may
include advice concerning the value of securities; the advisability of investing
in, purchasing or selling securities; and the availability of securities or the
purchasers or sellers of securities. In addition, such broker-dealers may
furnish analyses and reports concerning issuers, industries, securities,
economic factors and trends, FUND strategy and performance of accounts; and
effecting securities transactions and performing functions incidental thereto
(such as clearance and settlement). The ADVISOR maintains a listing of
broker-dealers who provide such services on a regular basis. However, as many
transactions on behalf of the FUND'S money market securities are placed with
dealers (including broker-dealers on the list) without regard to the furnishing
of such services, it is not possible to estimate the proportion of such
transactions directed to such dealers solely because such services were
provided. The selection of such broker-dealers is generally made by the ADVISOR
(to the extent possible consistent 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 behalf
of the FUND may be useful to the ADVISOR in rendering investment management
services to the FUND and/or other clients, and conversely, such information
provided by broker-dealers who have executed transaction orders on behalf of
other ADVISOR clients may be useful to the ADVISOR in carrying out its
obligations to the FUND. The receipt of such research has not reduced the
advisor'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.
EI-14
<PAGE>
Subject to applicable limitations of the federal securities laws, broker dealers
may receive commissions for agency transactions that are in excess of the amount
of commissions charged by other broker dealers in recognition of their research
and/or execution services. In order to cause the FUND to pay such higher
commissions, the ADVISOR must determine in good faith that such commissions are
reasonable in relation to the value of the brokerage and research services
provided by such executing broker-dealers viewed in terms of a particular
transaction or the ADVISOR'S overall responsibilities to the FUND and its other
clients. In reaching this determination, the ADVISOR will not attempt to place a
specific dollar value on the brokerage and research services provided or to
determine what portion of the compensation should be related to those services.
The 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 transactions with Fidelity Capital Markets (FCM) and Fidelity
Brokerage Services Japan LLC (FBSJ), indirect subsidiaries of FMR Corp., if the
commissions are fair, reasonable, and comparable to commissions charged by
non-affiliated, qualified brokerage firms for similar services. Prior to
December 9, 1997 FMR used research services provided by and placed agency
transactions with Fidelity Brokerage Services (FBSI), an indirect subsidiary of
FMR Corp.
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 provided
research services, the providing of such services is not necessarily a factor in
the placement of all business with such firms. The FUND pays both commissions
and spreads in connection with the placement of FUND transactions. The aggregate
amount of brokerage commissions paid by the FUND during 1997 was $405,650, for
1996 it was $304,769, and for 1995 it was $197,960. Brokerage commissions paid
to FSBI during 1997 and 1996 totaled about $23,488 and $15,424, respectively,
representing 6% and 5%, respectively, of total commissions paid. During 1997 and
1996, the percentage of the Fund's transactions on which commissions were paid
effected through FSBI was 5.9% and 5%, respectively.
From time to time the FUND'S Directors will review whether the recapture for the
benefit of the FUND of some portion of the brokerage commissions or similar fees
paid by the FUND on FUND transactions is legally permissible and advisable. The
FUND seeks to recapture soliciting broker-dealer fees on the tender of portfolio
securities, but at present no other recapture arrangements are in effect. The
Directors intend to continue to review whether recapture opportunities are
available and are legally permissible and, if so, to determine in the exercise
of their business judgment whether it would be advisable for the FUND to seek
such recapture.
Although the ADVISOR or its affiliates also manage other funds, investment
decisions 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
sometimes happens that the same security is held in the portfolio of more than
one of these funds or accounts. Simultaneous transactions are inevitable when
several funds are managed by the same investment advisor, particularly when the
same security is suitable for the investment objective of more than one fund.
Securities of the same issuer may be purchased, held, or sold at the same time
by the FUND or other accounts or companies for which the ADVISOR provides
investment advice (including affiliates of the advisor). On occasions when the
ADVISOR deems the purchase or sale of a security to be in the best interest of
the FUND, as well as the other clients of the advisor, the advisor, to the
extent permitted by applicable laws and regulations, may aggregate such
securities to be sold or purchased for the FUND with those to be sold or
purchased for other clients in order to obtain best execution and lower
brokerage commissions, if any. In such event, allocation of the securities so
purchased or sold, as well as the expenses incurred in the transaction, will be
made by the ADVISOR in the manner it considers to be equitable and consistent
with its fiduciary obligations to all such clients, including the FUND. In some
instances, the procedures may impact the price and size of the position
obtainable for the FUND.
Under the sub-advisory agreement between the ADVISOR and the sub-advisor, the
sub-advisor may perform some, or substantially all, of the investment advisory
services required by the FUND, even though the ADVISOR remains primarily
responsible for investment decisions affecting the FUND. The sub-advisor will
follow the same procedures and policies which are followed by the ADVISOR as
described previously. The sub-advisor currently provides investment advice to a
number of other clients.
DETERMINATION OF NET ASSET VALUE
The FUND'S securities are appraised by various methods depending on the market
or exchange on which they trade. Securities traded on the New York Stock
Exchange (NYSE) or the American Stock Exchange are
EI-15
<PAGE>
appraised at the last sale price, or if no sale has occurred, at the closing bid
price. Securities traded on other exchanges are appraised, to the extent
possible, in the same manner. Securities and other assets for which exchange
quotations are not readily available are valued using closing over-the-counter
bid prices, if available, or at their fair value as determined in good faith
under consistently applied procedures generally supervised by the Board of
Directors. Short-term securities are valued either at amortized cost or at
original cost plus accrued interest, both of which approximate their current
value. Securities pricing services may be utilized by the FUND.
The FUND is open for business and its NAV is calculated each day the NYSE is
open for trading. The NYSE has designated the following holiday closings for
1998: New Year's Day, Martin Luther King 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 observed 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-16
<PAGE>
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 APPRECIATION
FUND), LINCOLN NATIONAL EQUITY-INCOME FUND, INC. (EQUITY-INCOME FUND), LINCOLN
NATIONAL GLOBAL ASSET ALLOCATION FUND, INC. (GLOBAL ASSET ALLOCATION FUND),
LINCOLN NATIONAL GROWTH AND INCOME FUND, INC. (GROWTH AND INCOME FUND), LINCOLN
NATIONAL INTERNATIONAL FUND, INC. (INTERNATIONAL FUND), LINCOLN NATIONAL MANAGED
FUND, INC. (MANAGED FUND), LINCOLN NATIONAL MONEY MARKET FUND, INC. (MONEY
MARKET FUND), LINCOLN NATIONAL SOCIAL AWARENESS FUND, INC. (SOCIAL AWARENESS
FUND), AND LINCOLN NATIONAL SPECIAL OPPORTUNITIES FUND, INC. (SPECIAL
OPPORTUNITIES FUND). UNLESS OTHERWISE INDICATED, THE FOLLOWING INFORMATION
APPLIES TO EACH FUND.
INVESTMENT ADVISOR AND SUB-ADVISOR
LINCOLN INVESTMENT Management, Inc. (LINCOLN INVESTMENT) is the investment
ADVISOR to the FUNDS and is headquartered at 200 E. Berry Street, Fort Wayne,
Indiana 46802. LINCOLN INVESTMENT (THE ADVISOR) is a subsidiary of Lincoln
National Corp. (LNC), a publicly-held insurance holding company organized under
Indiana law. Through its subsidiaries, LNC provides, on a national basis,
insurance and financial services. LINCOLN INVESTMENT is registered with the
Securities and Exchange Commission (SEC) as an INVESTMENT ADVISOR and has acted
as an INVESTMENT ADVISOR to mutual funds for over 40 years. The ADVISOR also
acts as INVESTMENT ADVISOR to Lincoln National Income Fund, Inc. (a closed-end
investment company whose investment objective is to provide a high level of
current income from interest on fixed-income securities) and Lincoln National
Convertible Securities Fund, Inc. (a closed-end investment company whose
investment objective is a high level of total return on its assets through a
combination of capital appreciation and current income) and to other clients,
and also acts as sub-adviser to two of the series of Delaware Group Adviser
Funds, Inc. (the Corporate Income Fund and the Federal Bond Fund of that retail
mutual fund complex).
Under Advisory Agreements with the FUNDS, the ADVISOR provides portfolio
management and investment advice to the FUNDS and administers its other affairs,
subject to the supervision of the funds' Board of Directors. The advisor, at its
expense, will provide office space to the FUNDS and all necessary office
facilities, equipment and personnel and will make its officers and employees
available to the FUNDS as appropriate. In addition, the ADVISOR will pay all
expenses incurred by it or by the FUNDS in connection with the management of
each FUND'S assets or the administration of its affairs, other than those
assumed by the FUNDS, as described in the Appendix to the Prospectus. LINCOLN
LIFE has paid the organizational expenses of all the FUNDS. The rates of
compensation to the ADVISOR and the sub-advisors are set forth in the Appendix
to the Prospectus.
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth Fund $2,109,952 $1,428,803 $ 725,544
Bond Fund 1,221,295 1,188,030 1,061,701
Capital Appreciation Fund 2,940,632 1,549,656 726,011
Equity-Income Fund 6,053,404 3,303,336 1,457,623
Global Asset Allocation Fund 2,808,358 2,072,722 1,570,876
Growth and Income Fund 9,714,765 7,063,276 5,077,981
International Fund 3,741,563 3,319,701 2,770,197
Managed Fund 2,873,786 2,480,524 2,120,656
Money Market Fund 451,243 417,468 385,019
Social Awareness Fund 3,355,544 1,877,030 1,048,366
Special Opportunities Fund 2,824,015 2,274,229 1,809,514
</TABLE>
A-1
<PAGE>
During the last three years, the ADVISOR received the amounts, as mentioned
above, for investment advisory services. If total expenses of the FUNDS
(excluding taxes, interest, portfolio brokerage commissions and fees, and
expenses of an extraordinary and non-recurring nature, but including the
investment advisory fee) exceed 1 1/2% per annum of the average daily net assets
of each FUND (2% for the International Fund), the ADVISOR will pay such excess
by offsetting it against the advisory fee. If such offset is insufficient to
cover the excess, any balance remaining will be paid directly by the ADVISOR to
each FUND.
The current advisory agreements between the ADVISOR and the FUNDS will remain in
effect from year to year if approved annually by: (1) the Board of Directors of
each FUND or by the vote of a majority of the outstanding voting securities of
each FUND, and (2) a vote of a majority of the directors who are not interested
persons of the FUNDS or the advisor, cast in person at a meeting called for the
purpose of voting on such approval. The advisory agreement may be terminated
without penalty at any time, on 60 days' written notice by: (1) the Board of
Directors of each FUND, (2) vote of a majority of the outstanding voting
securities of each FUND or (3) the advisor. The advisory agreement terminates
automatically in the event of assignment.
In like manner, the current sub-advisory 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
applicable FUND, (2) vote of the majority of the outstanding voting securities
of the applicable FUND, (3) the sub-advisor, or (4) the advisor. The
sub-advisory agreements terminate automatically in the event of assignment.
During the last three years each SUB-ADVISOR received the following amounts for
investment sub-advisory services. LINCOLN INVESTMENT, not the FUND, pays all
sub-advisory fees owed.
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth Fund $1,229,800 $ 893,059 $ 483,982
Bond Fund N/A N/A N/A
Capital Appreciation Fund 2,072,388 1,117,383 545,800
Equity-Income Fund 4,781,931 2,612,405 1,152,337
Global Asset Allocation Fund 1,724,369 1,284,185 1,034,321
Growth and Income Fund 6,155,225 4,440,325 3,108,208
International Fund 1,503,294 1,326,484 1,146,153
Managed Fund 974,080 820,633 672,474
Money Market Fund N/A N/A N/A
Social Awareness Fund 1,901,560 923,516 462,593
Special Opportunities Fund 1,519,961 1,168,134 868,019
</TABLE>
A-2
<PAGE>
DIRECTORS AND OFFICERS
The directors and executive officers of each FUND, their business addresses,
positions with FUND, age and their principal occupations during the past five
years are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
* KELLY D. CLEVENGER Vice President, Lincoln National Life Insurance Co.
CHAIRMAN OF THE BOARD,
PRESIDENT AND DIRECTOR, age
45
1300 S. Clinton Street
Fort Wayne, IN 46802
- ------------------------------------------------------------------------------------------------------------------
JOHN B. BORSCH, JR. Retired, formerly Associate Vice President--Investments, Northwestern
DIRECTOR, age 64 University
1776 Sherwood Road
Des Plaines, IL 60016
- ------------------------------------------------------------------------------------------------------------------
NANCY L. FRISBY, CPA Regional Vice President/Chief Financial Officer (formerly Vice
DIRECTOR, age 56 President--Finance; Regional Controller of Finance), St. Joseph Medical
700 Broadway Center, Fort Wayne, Indiana
Fort Wayne, IN 46802
- ------------------------------------------------------------------------------------------------------------------
* BARBARA S. KOWALCZYK Senior Vice President and Director, Corporate Planning and Development,
DIRECTOR, age 46 Lincoln National Corporation; Director, Lincoln Life and Annuity Company
1300 S. Clinton St. of New York (formerly Executive Vice President, LINCOLN INVESTMENT
Fort Wayne, IN 46802 Management, Inc.)
- ------------------------------------------------------------------------------------------------------------------
KENNETH G. STELLA President, Indiana Hospital and Health Association
DIRECTOR, age 54
One America Square
Indianapolis, IN 46282
- ------------------------------------------------------------------------------------------------------------------
* JANET C. WHITNEY Vice President and Treasurer, Lincoln National Corp. (formerly Vice
TREASURER, age 49 President and General Auditor)
200 East Berry Street
Fort Wayne, IN 46802
- ------------------------------------------------------------------------------------------------------------------
* CYNTHIA A. ROSE Assistant Secretary, Lincoln National Life Insurance Co.
SECRETARY, age 43
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
interested person of the FUND. During 1997, each FUND paid $1,000 in director's
fees to each such director, plus out of pocket expenses to attend meetings.
During 1997, the FUND complex paid each of these directors aggregate fees of
$11,000. Mr. Stanley R. Nelson, a director who retired in 1997, received $750 in
director fees from each FUND and aggregate fees of $8,250 from the FUND complex.
Mr. Stella became a director in 1998 and thus received no fees during 1997.
A-3
<PAGE>
INVESTMENT POLICIES AND TECHNIQUES
OPTIONS AND FINANCIAL FUTURES TRADING
This discussion relates to the Bond, Growth and Income, Managed, Social
Awareness and Special Opportunities Funds. Neither the International Fund nor
the Money Market Fund has sought the authority to engage either in options or in
futures trading. (NOTE: The Aggressive Growth, Capital Appreciation,
Equity-Income and Global Asset Allocation Funds have their own respective
discussions of the strategic portfolio transactions in which they may engage.)
OPTIONS TRADING
The FUND may purchase or write (sell) options on financial instruments as a
means of achieving additional return or hedging the value of the FUND'S
portfolio. The FUND may not purchase or write put or covered call options in an
aggregate cost exceeding 30% of the value of its total assets. The FUND would
invest in options in standard contracts which may be quoted on NASDAQ, or on
national securities exchanges. Currently options are traded on numerous
securities and indices including, without limitation, the Standard and Poor's
100 Index (S&P 100), the Standard and Poor's 500 Index (S&P 500), and the NYSE
Beta Index.
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
ADVISOR'S assumption about the price trend of the underlying security may prove
inaccurate. If the FUND wrote a put, expecting the price of a security to
increase, and it decreases, or if the FUND wrote a call, expecting the price to
decrease but it increased, the FUND could suffer a loss if the premium received
in each case did not equal the difference between the exercise price and the
market price.
B. Call Options. The FUND may write only call options which are covered,
meaning that the FUND either owns the underlying security or has an absolute
and immediate right to acquire that security, without additional cash
consideration, upon conversion or exchange of other securities currently
held in its portfolio. In addition, the FUND will not, before the expiration
of a call option, permit the call to become uncovered. If the FUND writes a
call option, the purchaser of the option has the right to buy (and the FUND
has the obligation to sell) the underlying security at the exercise price
throughout the term of the option. The amount paid to the FUND by the
purchaser of the option is the premium. The FUND'S obligation to deliver the
underlying security against payment of the exercise price would terminate
either upon expiration of the option or earlier if the FUND were to effect a
closing purchase transaction through the purchase of an equivalent option on
an exchange. The FUND would not be able to effect a closing purchase
transaction after it had received notice of exercise.
In order to write a call option, the FUND is required to deposit in escrow the
underlying security or other assets in accordance with the rules of The Options
Clearing Corp. (OCC) and the various exchanges. The FUND may not purchase call
options except in connection with a closing purchase transaction. It is possible
that the cost of effecting a closing purchase transaction may be greater than
the premium received by the FUND for writing the option.
Generally, the INVESTMENT ADVISOR (THE ADVISOR) intends to write listed covered
calls during periods when it anticipates declines in the market 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 portfolio
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
increased the selling price of that security, which it would have sold at that
price in any event, by the amount of the premium. In the event the market price
of the security declined and the option were not exercised, the premium would
offset all or some portion of that decline. It is possible, of 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
connection with sales of portfolio securities. If, in the judgment of the
advisor, the market price of a security is overvalued and it should be sold, the
FUND may elect to write a call with an exercise price substantially below the
current market price. So long as the value of the underlying security remains
above the exercise price during the term of the option, the option will be
exercised, and the FUND will be required to sell
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the security at the exercise price. If the sum of the premium and the exercise
price exceeds the market price of the security at the time the call is written,
the FUND would, in effect, have increased the selling price of the security. The
FUND would not write a call under these circumstances if the sum of the premium
and the exercise price were less than the current market price of the security.
In summary, a principal reason for writing calls on a securities portfolio is to
attempt to realize, through 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 security
above the exercise price, but has retained the risk of loss should the price of
the security decline. Unlike one who owns securities not subject to a call, the
FUND as a call writer may be required to hold such securities until the
expiration of the call option or until the FUND engages in a closing purchase
transaction at a price that may be below the prevailing market.
C. Put Options. The FUND may also write put options. If the FUND writes a put
option, it is obligated to purchase a given security at a specified price at
any time during the term of the option. The rules regarding the writing of
put options are generally comparable to those described above with respect
to call options.
Writing put options 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 invested
position is desirable in light of market conditions. If the FUND wishes to
invest its cash or reserves in a particular security at a price lower than
current market value, it may write a put option on that security at an exercise
price which reflects the lower price it is willing to pay. The buyer of the put
option generally will not exercise the option unless the market price of the
underlying security declines to a price near or below the exercise price. If the
FUND writes a put option, the price of the underlying security declines and the
option is exercised, the premium, net of transaction charges, will reduce the
purchase price paid by the FUND for the security. Of course, the price of the
security may continue to decline after exercise of the put options, in which
event the FUND would have foregone an opportunity to purchase the security at a
lower price, or the option might never be exercised.
If, 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 purchasing a
put of the same series as the one which it has previously written. The cost of
effecting a closing purchase transaction may be greater than the premium
received on writing the put option, and there is no guarantee that a closing
purchase transaction can be effected. The FUND may purchase put options only in
connection with a closing transaction.
As with the writer of a call, a put writer generally hopes to realize premium
income. The risk position of the FUND as a put writer is similar to that of a
covered call writer which owns the underlying securities. Like the covered call
writer (who must bear the risk of 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 account
with its custodian consisting of cash or short-term U.S. Government securities
equal in value to the amount which the FUND will be obligated to pay upon
exercise of the put. Principal factors affecting the market value of a put or
call option include supply and demand, interest rates, the current market price
and price volatility of the underlying security and the time remaining until the
expiration date. In addition, there is no assurance that the FUND will be able
to effect a closing transaction at a favorable price. If the FUND cannot enter
into such a transaction, it may be required to hold a security that it might
otherwise have sold, in which case it would continue to be at market risk on the
security. If a substantial number of covered options written by the FUND are
exercised, the FUND'S rate of portfolio turnover could exceed historic levels.
This could result in higher transaction costs, including brokerage commissions.
The FUND will pay brokerage commissions in connection with the writing and
purchasing of options to close out previously written options. Such brokerage
commissions are normally higher than those applicable to purchases and sales of
portfolio securities.
FUTURES CONTRACTS AND OPTIONS THEREON
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
contract to protect the value of the FUND'S portfolio in the event the
INVESTMENT ADVISOR anticipates declining security prices. Similarly, if
security prices are expected to rise, the FUND may purchase a futures
contract or a call option thereon. (For certain limited purposes, as
explained later, the FUND is also authorized to buy futures contracts on an
unleveraged basis and not as an anticipatory hedge.)
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The FUND will not invest in futures contracts and options thereon if immediately
thereafter the amount committed to margins plus the amount paid or option
premiums exceeds 5% of the FUND'S total assets. In addition the FUND will not
hedge more than 1/3 of its net assets.
B. Futures contracts. The FUND may purchase and sell financial futures
contracts (futures contracts) as a hedge against fluctuations in the value
of securities which are held in the FUND'S portfolio or which the FUND
intends to purchase. The FUND will engage in such transactions consistent
with the FUND'S investment objective. Currently, futures contracts are
available on Treasury bills, notes, and bonds 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
liquid than the corresponding cash markets on the underlying securities. Such
enhanced liquidity results from the standardization of the futures contracts and
the large transaction volumes. Greater liquidity permits a portfolio manager to
effect a desired hedge both more quickly and in greater volume than would be
possible in the cash market. Second, a desired sale and subsequent purchase can
generally be accomplished in the futures market for a fraction of the
transaction costs that might be incurred in the cash market.
The purpose of selling a futures contract is to protect the FUND'S portfolio
from fluctuation in asset value resulting from 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, selling
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
securities 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
purchase securities.
When a purchase or sale of a futures contract occurs, a deposit of high-quality,
liquid securities called initial margin is made by both buyer and seller with a
custodian for the benefit of the broker. Unlike other types of margin, a futures
margin account does not involve any loan or borrowing but is merely a good faith
deposit that must be maintained in a minimum amount of cash or U.S. Treasury
bills. All futures positions, both long and short, are marked-to-market daily,
with cash payments called variation margin being made by buyers and sellers to
the custodian, and passed through to the sellers and buyers, to reflect daily
changes in the contract values.
Most futures contracts are typically canceled or closed out before the scheduled
settlement date. The closing is accomplished by purchasing (or selling) an
identical futures contract to offset a short (or long) position. Such an
offsetting transaction cancels the contractual obligations established by the
original futures transaction. Other financial futures contracts call for cash
settlements rather than delivery of securities.
If the price of an offsetting futures transaction varies from the price of the
original futures transaction, the hedger will realize a gain or loss
corresponding to the difference. That gain or loss will tend to offset the
realized loss or gain on the hedged securities position, but may not always or
completely do so.
The FUND will not enter into any futures contract if, immediately thereafter,
the aggregate initial margin for all existing futures contracts and options
thereon and for premiums paid for related options would exceed 5% of the FUND'S
total assets. The FUND will not purchase or sell futures contracts or related
options 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
contract generally parallel but do not necessarily equal changes in the
prices of the securities being hedged. The risk of imperfect correlation
increases as the composition of the FUND'S securities portfolio diverges
from the securities that are the subject of the futures contract. Because
the change in the price of the futures contract may be more or less than the
change in the prices of the underlying securities, even a correct forecast
of price changes may not result in a successful hedging transaction. Another
risk is that the INVESTMENT ADVISOR could be incorrect in its expectation as
to the direction or extent of various market trends or the time period
within which the trends are to take place.
The FUND intends to purchase and sell futures contracts only on exchanges where
there appears to be a market in such futures sufficiently active to accommodate
the volume of its trading activity. 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
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continue to be required to make daily cash payments of variation margin.
However, in the event futures contracts have been sold to hedge portfolio
securities, such securities will not be sold until the offsetting futures
contracts can be executed. Similarly, in the event futures have been bought to
hedge anticipated securities purchases, such purchases will not be executed
until the offsetting futures contracts can be sold.
Successful use of futures contracts by the FUND is also subject to the ability
of the INVESTMENT ADVISOR to predict correctly movements in the direction of
interest rates and other factors affecting markets for securities. For example,
if the FUND has hedged against the possibility of an increase in interest rates
that would adversely affect the price of securities in its portfolio and prices
of such securities increase instead, the FUND will lose part or all of the
benefit of the increased value of its securities because it will have offsetting
losses in its futures positions. In addition, in such situations, if the FUND
has insufficient cash to meet daily variation margin requirements, it may have
to sell securities to meet such requirements. Such sale of securities may be,
but will not necessarily be, at increased prices that reflect the rising market.
The FUND may have to sell securities at a time when it is disadvantageous to do
so. Where futures are purchased to hedge against a possible increase in the
price of securities before the FUND is able to invest its cash in an orderly
fashion, it is possible that the market may decline instead; if the FUND then
concludes not to invest in securities at that time 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
investment 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
custodian an amount of cash and other assets permitted by Commodity Futures
Trading Commission (CFTC) regulations equal to the market value of the futures
contracts and thereby insure that the use of futures contracts is unleveraged.
The FUND will use futures in a manner consistent with these requirements.
D. Options on futures contracts. The FUND only intends to engage in options on
futures contracts for bona fide hedging purposes in compliance with CFTC
regulations. An option on a futures contract gives the purchaser the right,
but not the 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
required upon exercise to assume an offsetting futures position (which
position may be a long or short position). Upon exercise of the option, the
assumption of offsetting futures positions by the writer and holder of the
option will be accompanied by delivery of the accumulated balance in the
writer's futures margin account that represents the amount by which the
market price of the futures contract, at exercise, exceeds, in the case of a
call, or is less than, in the case of a put, the exercise price of the
option on the futures contract.
The holder or writer of an option may terminate its position by selling or
purchasing an option of the same series. There is no guarantee that such closing
transactions can be effected.
The FUND will be required to deposit initial and variation margin with respect
to put and call options on futures contracts written by it pursuant to the
FUND'S futures commissions merchants' requirements similar to those applicable
to the futures contracts themselves, described previously.
E. Risks of futures transactions. The FUND'S successful use of futures
contracts and options thereon depends upon the ability of its investment
ADVISOR to predict movements in the securities markets and other factors
affecting markets for securities and upon the degree of correlation between
the prices of the futures contracts and the prices of the securities being
hedged. As a result, even a correct forecast of price changes may not result
in a successful hedging transaction. Although futures contracts and options
thereon may limit the FUND'S exposure to loss, they may also limit the
FUND'S potential for capital gains. For example, if the FUND has hedged
against the possibility of decrease in prices which would adversely affect
the price of securities in its portfolio and prices of such securities
increase instead, the FUND will lose part or all of the benefit of the
increased value of its securities because it will have offsetting losses in
its futures positions. Although the FUND will enter into futures contracts
only where there appears to be a liquid market,
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there can be no assurance that such liquidity will always exist.
F. The FUND also is authorized, subject to the limitations set out in the
Prospectus, to purchase futures contracts on an unleveraged basis, when not
intended as an anticipatory hedge. When a contract is purchased on this
basis the investment company establishes a segregated account, composed of
cash and/or cash equivalents, equal to the total value of the contract (less
margin on deposit). As with other futures trading, these purchases must not
be for speculative purposes.
The ability to engage in these purchases on an unleveraged basis can
significantly decrease transaction costs to the FUNDS in certain instances. For
example, if an inordinately large deposit should occur on a single day, the
sheer volume of securities purchases required for that day may place the FUND at
a market disadvantage by requiring it to purchase particular securities in such
volume that its own buying activity could cause prices to increase. In addition,
if this deposit had involved market-timing and as a result there subsequently
were an oversized withdrawal, the FUND could again suffer market disadvantage,
this time because the volume of sales could, for the same reason, force prices
of particular securities to decrease. The FUND, by buying a 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 securities that the
FUND might otherwise have purchased. Thus, purchase of a futures contract on an
unleveraged basis allows the FUND to comply with its objective while at the same
time achieving these lower transaction costs.
VALUATION OF PORTFOLIO SECURITIES
SHORT-TERM INVESTMENTS. For FUNDS (other than the Money Market FUND) that own
short-term investments which mature in less than 60 days, these instruments are
valued at amortized cost. Such securities acquired with a remaining maturity of
61 days or more are valued at their fair value until the sixty-first day prior
to maturity; thereafter, their cost for valuation purposes is deemed to be their
fair value on such sixty-first day.
OPTIONS TRADING. For those FUNDS engaging in options trading, FUND investments
underlying call options will be valued as described previously. Options are
valued at the last sale price or, if there has been no sale that day, at the
mean of the last bid and asked price on the principal exchange where the option
is traded, as of the close of trading on the NYSE. The FUND'S net asset value
will be increased or decreased by the difference between the premiums received
on writing options and the cost of liquidating those positions measured by the
closing price of those options on the exchange where traded.
FUTURES CONTRACTS AND OPTIONS THEREON. For those FUNDS buying and selling
futures contracts and related options thereon, the futures contracts and options
are valued at their daily settlement price.
FOREIGN SECURITIES. For FUNDS investing in foreign securities, the value of a
foreign portfolio security held by a FUND is determined based upon its closing
price or upon the mean of the closing bid and asked prices on the foreign
exchange or market on which it is traded and in the currency of that market, as
of the close of the appropriate exchange. As of the close of business on the
NYSE, that FUND'S portfolio securities which are quoted in foreign currencies
are converted into their U.S. dollar equivalents at the prevailing market rates,
as computed by the custodian of the FUND'S assets.
However, trading on foreign exchanges may take place on dates or at times of day
when the NYSE is not open; conversely, overseas trading may not take place on
dates or at times of day when the NYSE is open. Any of these circumstances could
affect the net asset value of FUND shares on days when the investor has no
access to the FUND. There are more detailed explanations of these circumstances
in the SAI for the various FUNDS. See the Preface to this Prospectus booklet for
information about how to obtain a copy of the SAI booklet.
LENDING OF PORTFOLIO SECURITIES
As described in the Prospectus, the FUNDS may from time to time lend securities
from their portfolios to brokers, dealers and financial institutions and receive
collateral from the borrower, in the form of cash (which may be invested in
short-term securities), U.S. Government obligations or certificates of deposit.
Such collateral will be maintained at all times in an amount equal to at least
102% of the current market value of the loaned securities, and will be in the
actual or constructive possession of the particular FUND during the term of the
loan. The FUND will maintain the incidents of ownership of the loaned securities
and will continue to be entitled to the interest or dividends payable on the
loaned securities. In addition, the FUND will receive interest on the amount of
the loan. The loans will be terminable by the FUND at any time and will not be
made to any affiliates of the FUND or the advisor. The FUND may pay reasonable
finder's fees to persons unaffiliated with it in connection with the arrangement
of the loans.
As with any extensions of credit, there are risks of delay in recovery and, in
some cases, even loss of rights in the collateral or the loaned securities
should the borrower of securities fail financially. However, loans of portfolio
securities will be made to firms deemed by the ADVISOR to be creditworthy.
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REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
The FUNDS may make short-term investments in repurchase agreements. A repurchase
agreement typically involves the purchase by the FUND of securities (U.S.
Government or other money market securities) from a financial institution such
as a bank, broker-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
security. If the seller defaults, the FUND may incur a loss if the value of the
collateral securing the repurchase agreement declines, or the FUND may incur
disposition costs in connection with liquidating the collateral. If bankruptcy
proceedings are commenced with respect to the seller, realization upon the
collateral by the FUND may be delayed or limited and a loss may be incurred if
the collateral securing the repurchase agreement declines in value during the
bankruptcy proceedings. The Board of Directors of the FUNDS or its delegate will
evaluate the creditworthiness of all entities, including banks and
broker-dealers, with which they propose to enter into repurchase agreements.
These transactions will be fully collateralized; and the collateral for each
transaction will be in the actual or constructive possession of the particular
FUND during the terms of the transaction, as provided in the agreement.
In a reverse repurchase agreement, the FUND involved sells a portfolio security
to another party, such as a bank or broker-dealer, in return for cash and agrees
to repurchase the instrument at a particular price and time. While a reverse
repurchase agreement is outstanding, the FUNDS will maintain cash and
appropriate liquid assets in a segregated custodial account to cover its
obligation under the agreement. The FUND will enter into reverse repurchase
agreements only with parties that the ADVISOR or sub-advisor deems creditworthy.
Reverse repurchase agreements are considered to be borrowing transactions, and
thus are subject to the FUND'S limitation on borrowing. Not every FUND is
authorized to enter into reverse repurchase agreements.
CUSTODIAN
All securities, cash and other similar assets of the Bond, Growth and Income,
Managed, Money Market, Social Awareness and Special Opportunities Funds are
currently held in custody by The Chase Manhattan Bank, N.A., 4 Chase MetroTech
Center, Brooklyn, NY 11245. Chase Manhattan agreed to act as custodian for each
FUND pursuant to a Custodian Agreement dated March 30, 1998.
All securities, cash and other similar assets of the Aggressive Growth, Capital
Appreciation, Equity-Income, Global Asset Allocation and International Funds are
held in custody by State Street Bank and Trust Co., 225 Franklin Street, Boston,
Massachusetts 02110. State Street agreed to act as custodian for these FUNDS
pursuant to Custodian Contracts effective July 21, 1987 for the Global Asset
Allocation Fund, April 29, 1991 for the International Fund, and December 6, 1993
for the other three FUNDS.
Under these Agreements, the respective custodians shall (1) receive and disburse
money; (2) receive and hold securities; (3) transfer, exchange, or deliver
securities; (4) present for payment coupons and other income items, collect
interest and cash dividends received, hold stock dividends, etc.; (5) cause
escrow and deposit receipts to be executed; (6) register securities; and (7)
deliver to the FUNDS proxies, proxy statements, etc.
INDEPENDENT AUDITORS
Each FUND'S Board of Directors has engaged Ernst & Young LLP, Two Commerce
Square, Suite 4000, 2001 Market Street, Philadelphia, PA 19103, to be the
independent auditors for the FUND. In addition to the audit of the 1997
financial statements of the FUNDS, other services provided include review and
consultation connected with filings of annual reports and registration
statements with the Securities and Exchange Commission (SEC); consultation on
financial accounting and reporting matters; and meetings with the Audit
Committee.
FINANCIAL STATEMENTS
The audited financial statements and the report of Ernst & Young LLP,
Independent Auditors, for the FUNDS are incorporated by reference to the FUNDS'
1997 Annual Report. We will provide a copy of the Annual Report on request and
without charge. Either write Lincoln National Life Insurance Co., P.O. Box 2340,
Fort Wayne, Indiana 46801 or call: 1-800-4LINCOLN (452-6265).
BOND AND COMMERCIAL PAPER RATINGS
Certain of the funds' investment policies and restrictions include references to
bond and commercial paper ratings. The following is a discussion of the rating
categories of Moody's Investors Service, Inc. and Standard & Poor's Corp.
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MOODY'S INVESTORS SERVICE, INC.
Aaa -- Bonds which are rated Aaa are judged to be of the best quality and carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa -- Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
STANDARD & POOR'S CORP.
AAA -- This is the highest rating assigned by Standard & Poor's Corp. to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA -- Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
A -- Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas these bonds normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest than for
bonds in the A category and higher.
BB-B-CCC-CC -- Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and C the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
MOODY'S INVESTORS SERVICE, INC.
Moody's Commercial Paper ratings are opinions of the ability of issuers to repay
punctually promissory obligations not having an original maturity in excess of
nine months. Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Prime 1 -- Highest Quality;
Prime 2 -- Higher Quality;
Prime 3 -- High Quality.
(The FUND will not invest in commercial paper rated Prime 3).
STANDARD & POOR'S CORP.
A Standard & Poor's Corp. commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. The FUND will invest in commercial paper rated in the A Categories, as
follows:
A -- Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
the designation 1, 2, and 3 to indicate the relative degree of safety. (The FUND
will not invest in commercial paper rated A-3).
A-10
<PAGE>
A -- 1 this designation indicates that the degree of safety regarding timely
payment is very strong.
A -- 2 Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not overwhelming as for issues
designated A-1.
U.S. GOVERNMENT
OBLIGATIONS
Securities issued or guaranteed as to principal and interest by the U.S.
Government include a variety of Treasury securities, which differ only in their
interest rates, maturities and times of issuance. Treasury bills have a maturity
of one year or less. Treasury notes have maturities of two to ten years and
Treasury bonds generally have a maturity of greater than ten years.
Various agencies of the U.S. Government issue obligations. Some of these
securities are supported by the full faith and credit of the U.S. Treasury (for
example those issued by Export-Import Bank of the United States, Farmers Home
Administration, Federal Housing Administration, Government National Mortgage
Association, Maritime Administration, Small Business Administration and The
Tennessee Valley Authority).
Obligations of instrumentalities of the U.S. Government are supported by the
right of the issuer to borrow from the Treasury (for example, those issued by
Federal Farm Credit Banks, Federal Home Loan Bank, Federal Home Loan Mortgage
Corp., Federal Intermediate Credit Banks, Federal Land Bank and the U.S. Postal
Service). Obligations supported by the credit of the instrumentality include
securities issued by government-sponsored corporations whose stock is publicly
held (for example, the Federal National Mortgage Association, and the Student
Loan Marketing Association). There is no guarantee that the government will
support these types of securities, and therefore they may involve more risk than
other government obligations.
TAXES
Each FUND intends to qualify and has elected to be taxed as a regulated
investment company under certain provisions of the Internal Revenue Code of
1986, as amended (the CODE). If a FUND qualifies as a regulated investment
company and complies with the provisions of the CODE relieving regulated
investment companies which distribute substantially all of their net income
(both net ordinary income and net capital gain) from Federal income tax, it will
be relieved from such tax on the part of its net ordinary income and net
realized capital gain which it distributes to its shareholders. To qualify for
treatment as a regulated investment company, each FUND must, among other things,
derive in each taxable year at least 90% of its gross income from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stock or securities or foreign currencies (subject to the
authority of the Secretary of the Treasury to exclude foreign currency gains
which are not directly related to the FUND'S principal business of investing in
stock or securities or options and futures with respect to such stock or
securities), or other income (including but not limited to gains from options,
futures, or forward contracts) derived with respect to its investing in such
stocks, securities, or currencies.
The Federal tax laws impose a 4% nondeductible excise tax on each regulated
investment company with respect to an amount, if any, by which such company does
not meet distribution requirements specified in such tax laws, unless certain
exceptions apply. Each FUND intends to comply with such distribution
requirements or qualify under one or more exceptions, and thus does not expect
to incur the 4% nondeductible excise tax.
Since the sole shareholder of each FUND will be LINCOLN LIFE, no discussion is
stated herein as to the Federal income tax consequences at the shareholder
level.
The discussion of Federal income tax considerations in the Prospectus, in
conjunction with the foregoing, is a general and abbreviated summary of the
applicable provisions of the CODE and Treasury Regulations currently in effect
as interpreted by the Courts and the Internal Revenue Service (IRS). These
interpretations can be changed at any time. The above discussion covers only
Federal tax considerations with respect to the FUND. State and local taxes vary.
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,
A-11
<PAGE>
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 countries 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 booklet
discuss the type of derivative transactions in which the FUNDS may engage and
the risks typically associated with many derivative transactions. Here are some
definitions for the derivatives listed in the Appendix:
OPTION. A contract which gives the FUND the right, but not the obligation, to
buy or sell specified securities at a fixed price before or at a designated
future date. If the contract allows the FUND to buy securities, it is a call
option; if to sell, it is a put option. It is common practice in options trading
to terminate an outstanding option contract by entering into an offsetting
transaction known as a closing transaction; as a result of which the FUND would
either pay out or receive a cash settlement. This is discussed below.
CURRENCY OPTION. Discussed later.
FIXED INCOME OPTION. One based on a fixed-income security, such as a corporate
or government bond.
INDEX OPTION. One based on the value of an index which measures the fluctuating
value of a basket of pre-selected securities.
STOCK (EQUITY) OPTION. One based on the shares of stock of a particular company.
OPTION ON A FUTURES CONTRACT. Discussed later.
SWAP. A financial transaction in which the FUND and another party agree to
exchange streams of payments at periodic intervals under a predetermined set of
occurrences related to the price, level, performance or value of one or more
underlying securities, and pegged to a reference amount known as the notional
amount. A swap is normally used to change the market risk associated with a loan
or bond borrowing from one interest rate base (fixed term or floating rate) or
currency of one denomination to another.
EQUITY SWAP. One which allows the FUND to exchange the rate of return (or some
portion of the rate) on its portfolio stocks (an individual share, a basket or
index) for the rate of return on another equity or non-equity investment.
INTEREST RATE SWAP. One in which the FUND and another party exchange different
types of interest payment streams, pegged to an underlying notional principal
amount. The three main types of interest rate swaps are coupon swaps (fixed rate
to floating rate in the same currency); basis swaps (one floating rate index to
another floating rate index in the same currency); and cross-currency interest
rate swaps (fixed rate in one currency to floating rate in another).
Related transactions to interest rate swaps:
a. Cap. A contract for which the buyer pays a fee, or premium, to obtain
protection against a rise in a particular interest rate above a certain
level. For example, an interest rate cap may cover a specified principal
amount of a loan over a designated time period, such as a calendar quarter.
If the covered interest rate rises above the rate ceiling, the seller of the
rate cap pays the purchaser an amount of money equal to the average rate
differential times the principal amount times one-quarter.
b. Floor. A contract in which the seller agrees to pay to the purchaser, in
return for the payment of a premium, the difference between current interest
rates and an agreed (strike) rate times the notional amount, should interest
rates fall below the agreed level (the floor). A floor contract has the
effect of a string of interest rate guarantees.
c. Collar. An arrangement to simultaneously purchase a cap and sell a floor, in
order to maintain interest rates within a defined range. The premium income
from the sale of the floor reduces or offsets the cost of buying the cap.
d. Corridor. An agreement to buy a cap at one interest rate and sell a cap at a
higher rate.
SWAPTION. An option to enter into, extend, or cancel a swap.
FUTURES CONTRACT. A contract which commits the FUND to buy or sell a specified
amount of a financial instrument at a fixed price on a fixed date in the future.
Futures contracts are normally traded on an exchange and their terms are
standardized, which makes it easier to buy and sell them.
INTEREST RATE FUTURES (AND OPTIONS ON THEM). Futures contracts pegged to U.S.
and foreign fixed-income securities, debt indices and reference rates.
STOCK INDEX FUTURES. Futures contracts based on an index of pre-selected stocks,
with prices based on a composite of the changes to the prices of the individual
securities in the index (e.g., S&P 500).
A-12
<PAGE>
OPTION ON A FUTURES CONTRACT. An option taken on a futures position.
FORWARD CONTRACT. An over-the-counter, individually-tailored futures contract.
FORWARD RATE AGREEMENT (FRA). A contract in which the FUND and another party
agree on the interest rate to be paid on a notional deposit of specified
maturity at a specific future time. Normally, no exchange of principal is
involved; the difference between the contracted rate and the prevailing rate is
settled in cash.
CURRENCY CONTRACT. A contract entered into for the purpose of reducing or
eliminating an anticipated rise or drop in currency exchange rates over time.
CURRENCY FUTURES. Futures contracts on foreign currencies. Used to hedge the
purchase or sale of foreign securities.
CURRENCY OPTION. An option taken on foreign currency.
CURRENCY SWAP. A swap involving the exchange of cash flows and principal in one
currency for those in another, with an agreement to reverse the principal swap
at a future date.
CROSS-CURRENCY INTEREST RATE SWAP. A swap involving the exchange of streams of
interest rate payments (but not necessarily principal payments) in different
currencies and often on different interest bases (e.g., fixed Deutsche Mark
against floating dollar, but also fixed Deutsche Mark against fixed dollar).
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>
THIS PAGE WAS INTENTIONALLY LEFT BLANK.
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, 1997, 1996,
1995, 1994, 1993 are incorporated by reference to Pages 53 and 54
of the Fund's 1997 Annual Report.
Part B.
------
The following financial statements and Report of Independent
Auditors of the Fund are incorporated by reference to Pages
16-19, 42, 44 and 46-52 and 55 of the Fund's 1997 Annual Report:
- Statement of Net Assets -- December 31, 1997
- Statement of Operations -- Year Ended December 31, 1997
- Statements of Changes in Net Assets -- Years Ended December
31, 1997 and 1996
- Notes to Financial Statements -- December 31, 1997
- Report of Independent Auditors
In total, only pages 16-19, 42, 44 and 46-55 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(a)- Articles (Filed with post-effective Amendment No. 6 to
this Registration Statement)
(b)- Articles Supplementary (Filed with post-effective Amendment
No. 5 to this Registration Statement)
2 - By-Laws (Filed with post-effective Amendment No. 6 to
this Registration Statement)
3 - NA
4 - Certificate
5(a)- Sub-Advisory Agreement between Lincoln Investment Management,
Inc. and Fidelity Management Trust Company dated
December 20, 1993
5(b)- Advisory Agreement between Lincoln Investment Management, Inc.
and Lincoln National Equity Income Fund, Inc. dated
September 23, 1993.
5(c)- Amendment, dated January 1, 1998 to Advisory
Agreement between Lincoln Investment Management, Inc. and
Lincoln National Equity-Income Fund, Inc. Dated September 23,
1993.
5(d)- Amendment, dated January 1, 1998, to Sub-Advisory
Agreement between Lincoln Investment Management, Inc. and
Fidelity Management & Trust Company dated December 20, 1993.
6(a)- Specimen Agents Contract (filed with Post-Effective Amendment
No. 5 to this Registration Statement)
7 - NA
8(a)- Custody Agreement
8(b)- Custody Fee Schedule (filed with Post-Effective Amendment
No. 5 to this Registration Statement)
9(a)- Agreement to Purchase Shares
9(b)-Trade Name Agreement
9(c)- NA
9(d)- Service Agreement between Delaware Management Holdings, Inc.,
Delaware Service Company, Inc., and Lincoln National Life
Insurance Company is incorporated herein by reference to the
Registration Statement of Lincoln National Life Insurance Co.,
Form S-6 (333-40745) filed November 21, 1997.
10 - Opinion of counsel
11 - Consent of Ernst & Young LLP, Independent Auditors
12 - NA
13 - Investment Letter
14 - NA
15 - NA
16 - NA
17(a)- Financial Data Schedule
18(a)- Power of Attorney - Nancy L. Frisby
18(b)- Power of Attorney - John B. Borsch, Jr.
19(a)- Org Chart
19(b)- Memorandum Concerning Books and Records
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 February 1, 1998, there was one record holder of common
stock, $.01 par value per share.
Item 27. Indemnification
As permitted by Section 17(h) and (i) of the Investment
Company Act of 1940 (the "1940 Act") and pursuant to Article
VII of the Fund's By-Laws (Exhibit 2 to the Registration
Statement), officers, directors, employees and agents of the
Registrant will not be liable to the Registrant, and
Sotickholder, officer, director, emplyee, agent or other
person for any action or failure to act, except for bad faith,
willful misfeasance, gross negligence or reckless disregard of
duties, and those individuals may be indemnified against
liabilities in connection with the Registrant, subject to the
same exceptions. Section 2-418 of Maryland General
Corporation Law permits indemnification of directors who acted
in good faith and reasonably believed that the conduct was in
the best interests of the Registrant.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Securities Act") may be permitted
to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the 1940 Act and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a
director, officer, or controlling person of the Registrant in
connection with the successful defense of any action, suit or
proceeding) is asserted against the Registrant by such
director, officer or controlling person in connection with the
shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it
is against public policy as expressed in the 1940 Act and will
be governed by the final adjudication of such issue.
The Registrant will purchase an insurance policy insuring its
officers and directors against liabilities, and certain costs
of defending claims against such officers and directors, to
the extent such officers and directors are not found to have
committed conduct constituting willful misfeasance, bad faith,
gross negligence or reckless disregard in the performance of
their duties. The insurance policy will also insure the
Registrant against the cost of indemnification payments to
officers and directors under certain circumstances.
Section 9 of the Investment Advisory Agreement (Exhibit 5(a)
to the Registration Statement) and Section 4 of the
Sub-Advisory Agreement (Exhibit 5(b) to the Registration
Statement) limit the liability of Lincoln National Investment
Management Company and Fidelity Management Trust Company to
liabilities arising from willful misfeasance, bad faith or gross
negligence in the performance of their respective duties or from
reckless disregard by them of their respective obligations and
duties under the agreements.
The Registrant hereby undertakes that it will apply the
indemnification provisions of its By-Laws in a manner
consistent with Release No. 11330 of the Securities and
Exchange Commission under the 1940 Act so long as the
interpretations of Section 17(h) and 17(i) of such Act remain
in effect and are consistently applied.
<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.
(a) As of April 1, 1998, the officers and/or directors of the
Investment Adviser held the following positions:
<TABLE>
<CAPTION>
POSITION OTHER SUBSTANTIAL BUSINESS
INVESTMENT PROFESSION, VOCATION OR
NAME ADVISER EMPLOYMENT; ADDRESS
- ------------------------ --------------------- ---------------------------------------------------------
<S> <C> <C>
JoAnn Becker Senior Vice President 200 East Berry Street,
and Director Fort Wayne, Indiana 46802
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
Steven R. Brody Senior Vice President President and Director, Lincoln National Realty
and Director Corporation; Vice President, The Lincoln National Life
Insurance Company, and Lincoln Advisor Funds, Inc., 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
Mark Laurent Second Vice President 200 East Berry Street, Fort Wayne, Indiana 46802
Thomas M. McMeekin President and President and Director, Lincoln National Convertible
Director Securities Fund, Inc., Lincoln National Income Fund,
Inc., President, Chief Executive Officer and Director,
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 Other Substantial Business
Jil Schoeff-Lindholm Portfolio Manager 200 East Berry Street, Fort Wayne, Indiana 46802
Cedrick Walta Short Term Investment 200 East Berry Street, Fort Wayne, Indiana 46802
Manager
Denny Westrick Second Vice President 200 East Berry Street, Fort Wayne, Indiana 46802
Jay Yentis Second Vice President 200 East Berry Street, Fort Wayne, Indiana 46802
</TABLE>
(b) The Sub-Advisor. As of March 1, 1998, the officers and/or
directors of the Sub-Advisor are as follows:
Fidelity Management Trust Company
82 Devonshire Street
Boston, MA 02109
FMTC OFFICERS AND DIRECTORS
----------------------------
<TABLE>
Name Title
---- -----
<S> <C>
Denis M. McCarthy Chairman of the Board,
President and Chief
Executive Officer;
Director;
Edward E. Madden Vice Chairman; Director;
John P. O'Reilly, Jr. Executive Vice President,
Administration; Director;
Cynthia Egan Executive Vice President,
Trustee Services;
John E. Murphy Senior Vice President,
Chief Financial Officer and
Treasurer; Director;
J. Gary Burkhead Director;
Abigail P. Johnson Director;
Robert L. Reynolds Director;
Ralph B. Vogel Director;
John P. Wilkins Director;
<PAGE>
Jill Roosevelt Senior Vice President
Robert Tuckett Vice President
Vincent Walsh Vice President
Paul M. Cahill, Jr. Vice President
Kenneth Fazio Vice President
Regina Sullivan Vice President
Mark Harris Vice President
Ren Y. Cheng Vice President
Katherine Collins Vice President
Joseph Day Vice President
Jennifer Farrelly Vice President
Richard Fentin Vice President
Timothy Hefferman Vice President
Brad Lewis Vice President
J. Fergus Shiel Vice President
Steve Snider Vice President
Tom Sprague Vice President
George Vanderheiden Vice President
Robert K. Duby Vice President
Andrew J. Dudley Vice President
George Fischer Vice President
Kevin Grant Vice President
Curt Hollingsworth Vice President
Norman Lind Vice President
Charles Morrison Vice President
Ford E. O'Neil Vice President
Thomas J. Silvia Vice President
Christine Thompson Vice President
John Carlson Vice President
Barry Coffman Vice President
Bart Grenier Vice President
Tom Hense Vice President
Mark Notkin Vice President
Thomas T. Soviero Vice President
Robin Lee Foley Vice President
Robert Galusza Vice President
<PAGE>
Michael Hall Vice President
Stephanie Sales Vice President
Mark Sommer Vice President
Veronica Ferro Vice President
Brian Keeney Vice President
Robert Perrotta Vice President
Jonathan Weed Vice President
Michael Elizondo Vice President
Thomas P. Lavin Vice President
Mark P. Snyderman Vice President
Richard Biester Vice President
Sally Bunn Miller Vice President
Louis Russo Vice President
Maureen Garrity Vice President
Matthew J. Appolstein Vice President
Paul Medici Vice President
Tricia Cristoforo Vice President
Kevin Long Vice President
Douglas Ciccolo Vice President
John DiBenedetto Vice President
Cheryl Gladstone Vice President
Joe LoDato Vice President
Kenneth Trchub Vice President
Steve Quackenbush Vice President
Myra J. Wonisch Assistant Vice President,
Investments
Mary Cross Assistant Vice President
Erica Fotta Assistant Vice President
James McInerncy Assistant Vice President
John Saxe Assistant Vice President
<PAGE>
Walter Downey Senior Vice President
Karen Firestone Senior Vice President
Cesar Hernandez Senior Vice President
Robert L. Macdonald Senior Vice President
John McDowell Senior Vice President
Neal Miller Senior Vice President
Stephen Petersen Senior Vice President
Kennedy Richardson Senior Vice President
Scott Stewart Senior Vice President
Beth Terrana Senior Vice President
Dwight Churchill Senior Vice President
Boyce Greer Senior Vice President
Robert Middlebrook Senior Vice President
Margaret Eagle Senior Vice President
Robert Lawrence Senior Vice President
Barry Greenfield Senior Vice President
Mike E. Miles Senior Vice President
Lee Sandwen Senior Vice President
Charles McKenzie Senior Vice President
Michael Forrester Senior Vice President
William Fink Senior Vice President
Jeffrey Lagarce Senior Vice President
Bradford Allinson Senior Vice President
Arthur J. Greenwood Senior Vice President
Walter Lindsay Senior Vice President
William Lynch Senior Vice President
R. Reuel Stanley Senior Vice President
Garrett Williams Senior Vice President
David Yearwood Senior Vice President
Theresa M. Messina Senior Vice President
Ellen McCarthy Senior Vice President
James Cornell Senior Vice President
Frimette Field Senior Vice President
<PAGE>
Rich Durben Trust Officer
Karen Grethen Trust Officer
Megan Roberts Trust Officer
Deborah C. Segal Trust Officer
Amy J. Zelman Trust Officer
Mohsin Ansari Investment Officer
David Ben-ur Investment Officer
Daniel Evans Investment Officer
Ellen McCarthy Affirmative Action Officer
Ellen McCarthy CRA Liaison Officer
Lisa Menelly Clerk
William Corson Assistant Clerk
Douglas Kant Assistant Clerk
John Kimpel Assistant Clerk
John P. O'Reilly Assistant Clerk
Regina Sullivan Assistant Clerk
</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"):
The Registrant undertakes, if requested to do so by the
holders of at least 10% of the Registrant's outstanding
shares, to call a meeting of shareholders for the purpose of
voting upon the question of removal of a director or directors
and to assist in communications with other shareholders as
required by Section 16(c).
The Registrant undertakes to file a post-effective amendment,
including financial statements which need not be certified,
within four to six months from the effective date of the
Registrant's 1933 Act Registration Statement.
The Registrant undertakes to furnish each person to whom a
Prospectus is delivered with a copy of the Registrant's latest
annual report to shareholders, upon request and without charge.
<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 Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Fort Wayne, and
State of Indiana, on the 17th day of April, 1998
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 on April 17, 1998, by the
following persons in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ Kelly D. Clevenger Chairman of the Board April 17, 1998
- ----------------------- and President
Kelly D. Clevenger (Principal Executive Officer)
* Director April 17, 1998
- -----------------------
John B. Borsch, Jr.
Director April 17, 1998
- -----------------------
Kenneth G. Stella
Director April 17, 1998
- -----------------------
Barbara S. Kowalczyk
* Director April 17, 1998
- -----------------------
Nancy L. Frisby
/s/Eric C. Jones Chief Accounting Officer April 17, 1998
- ----------------------- (Principal Accounting Officer)
Eric C. Jones
/s/ Janet C. Whitney Vice President and Treasurer April 17, 1998
- ----------------------- (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
--------------------------
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
4 Certificate
5(a) Sub-Advisory Agreement between Lincoln Investment
Management, Inc. and Fidelity Management Trust Company
dated December 20, 1993
5(b) Advisory Agreement between Lincoln Investment Management,
Inc. and Lincoln National Equity Income Fund, Inc. Dated
September 23, 1993
5(c) Amendment, dated January 1, 1998, to Advisory
Agreement between Lincoln Investment Management, Inc.
and Lincoln National Equity-Income Fund, Inc. Dated
September 23, 1993.
5(d) Amendment, dated January 1, 1998 to Sub-Advisory
Agreement between Lincoln Investment Management, Inc. and
Fidelity Management & Trust Company dated December 20, 1993.
8(a) Custody Agreement
9(a) Agreement to Purchase Shares
9(b) Trade Name Agreement
10 Opinion of Counsel
11 Consent of Ernst & Young LLP, Independent Auditors
13 Investment Letter
17(a) Financial Data Schedule
18(a) Power of Attorney - Nancy L. Frisby
18(b) Power of Attorney, John B. Borsch, Jr.
19(a) Org Chart
19(b) Memorandum Concerning Books and Records
</TABLE>
<PAGE>
Exhibit 4
LINCOLN NATIONAL EQUITY-INCOME FUND, INC.
(Incorporated under the laws of Maryland)
Common Stock, $.01 Par Value
THIS CERTIFIES THAT SPECIMEN IS THE OWNER OF ____________________________ SHARES
of the Capital Stock of LINCOLN NATIONAL EQUITY-INCOME FUND, INC. TRANSFERABLE
ONLY ON THE BOOKS OF THE CORPORATION BY THE HOLDER HEREOF IN PERSON OR BY
ATTORNEY UPON SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED.
IN WITNESS WHEREOF, THE SAID CORPORATION HAS CAUSED THIS CERTIFICATE TO BE
SIGNED BY ITS DULY AUTHORIZED OFFICERS AND SEALED WITH THE SEAL OF THE
CORPORATION,
THIS __________________________ DAY OF ________________________ A.D. 19__
- ---------------------------------- -----------------------------------
Secretary President
<PAGE>
Exhibit 99.5(a)
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 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).
<PAGE>
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
or 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 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
-2-
<PAGE>
pursuant to Section 1, a fee, computed and paid at the annual rate of: .75 of 1%
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 the Adviser or of the 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
-3-
<PAGE>
(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.
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
-4-
<PAGE>
"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:
(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 be 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 SUE-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.
-5-
<PAGE>
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 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.
-6-
<PAGE>
(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: [ILLEGIBLE]
-------------------------------------
Printed Name: [ILLEGIBLE]
---------------------------
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
---------------------------------
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<PAGE>
LINCOLN NATIONAL EQUITY-INCOME FUND, INC.
ADVISORY AGREEMENT
This Agreement, made this 23rd day of September, 1993 between Lincoln
National Equity-Income Fund, Inc., a Maryland corporation (the "Fund"), and
Lincoln National Investment Management Company (the "Adviser"),
WHEREAS, the Fund is to be an open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"); and
WHEREAS, the Fund desires to retain the Adviser to render investment
advisory and administrative services to the Fund, and the Adviser is willing to
render such services;
NOW, THEREFORE, in consideration of the premises and mutual promises
hereinafter set forth, the parties hereto agree as follows:
1. Appointment of Adviser. The Fund hereby appoints the Adviser to act as
investment adviser to the Fund and to administer its corporate affairs, subject
to the supervision of the Board of Directors of the Fund for the period and on
the terms set forth in this Agreement. The Adviser accepts such appointment and
agrees to render the services herein set forth, for the compensation herein
provided.
2. Investment Advisory Duties. Subject to the supervision of the Board of
Directors of the Fund, the Adviser shall manage the investment operations of the
Fund, subject to the following:
(a) The Adviser shall provide supervision of the Fund's investments,
furnish a continuous investment program for the Fund's portfolio,
determine from time to time what securities will be purchased,
retained or sold by the Fund, and what portion of the assets will be
invested or held uninvested as cash;
(b) The Adviser shall use the same skill and care in the management of
the Fund's portfolio as it uses in the management of other accounts
for which it has investment responsibility;
(c) The Adviser, in the performance of its duties and obligations under
this Agreement, shall act in conformity with the Articles of
Incorporation, Bylaws and prospectus of the Fund and with the
instructions and directions of the Board of Directors of the Fund
and will conform to and comply with the requirements of the 1940 Act
and all other applicable federal and state laws and regulations;
(d) The Adviser shall determine the securities to be purchased or sold
by the Fund and will place orders pursuant to its
<PAGE>
determinations either directly with the issuer or with any broker
and/or dealer who specializes in the securities in which the Fund is
active, but shall in no event place such orders with any affiliated
person of the Adviser. In placing orders with brokers and/or dealers
the Adviser shall attempt to obtain the best price and the most
favorable execution of its orders, subject to such other
considerations as may be set forth in the then most recent
prospectus of the Fund;
(e) The Adviser shall maintain books and records with respect to the
Fund's securities transactions and shall render to the Fund's Board
of Directors such periodic and special reports as the Fund's Board
of Directors may reasonably request;
(f) The investment advisory services of the Adviser to the Fund under
this Agreement are not to be deemed exclusive, and the Adviser
shall be free to render similar services to others. In addition, it
is understood that the persons employed by the Adviser to assist in
the performance of its duties under this Agreement will not
necessarily devote their full time to such activity.
(g) For purposes of this Agreement, the term "prospectus" includes the
Statement of Additional Information for the Fund pursuant to the
requirements of the 1940 Act and regulations thereunder.
3. Administrative Functions. The Adviser will administer the Fund's
corporate affairs, subject to the overall supervision of the Board of Directors
of the Fund and, in connection therewith, shall furnish the Fund with office
space and all necessary office facilities, equipment and personnel, and shall
provide all necessary executive and other personnel (including certain of its
officers and employees) for managing the investments and affairs of the Fund.
The Fund delegates to the Adviser the authority to vote proxies of the companies
whose securities are held in the Fund's portfolio.
In connection with its administration of the affairs of the Fund, the
Adviser will bear all of the following expenses:
(i) The salaries and expenses of all personnel, except the fees and
expenses of directors who are not "interested persons" of the Fund,
as that term is defined in the 1940 Act;
(ii) All expenses incurred by the Adviser in connection with
administering the Fund's business other than those assumed by the
Fund herein; and
The Fund assumes and will pay the following expenses, except to the extent
incurred in connection with the organization of the Fund:
(a) The fee of the Adviser;
(b) The compensation and expenses of directors who are not "interested
persons" of the Fund;
- 2 -
<PAGE>
(c) The fees and expenses of the custodian of the Fund's assets;
(d) The fees and expenses of independent accountants for the Fund;
(e) Brokerage commissions and securities transaction costs incurred by
the Fund, including any portion of such commissions attributable to
research and brokerage services as defined by Section 28(e) of the
Securities Exchange Act of 1934, as amended;
(f) All taxes and corporate fees payable by the Fund to federal, state
or other governmental agencies;
(g) The fees of any trade association of which the Fund may be a member;
(h) The cost of stock certificates representing shares of the Fund;
(i) The fees and expenses involved in registering and maintaining
registrations of the Fund and its shares with the Securities and
Exchange Commission (the "Commission"), and qualifying its shares
under state securities laws, including the preparation and printing
of the Fund's registration statements and updated prospectuses
provided to current stockholders;
(j) Expenses of stockholders' and directors' meetings and of preparing
and printing proxy material and mailing reports to stockholders;
(k) The charges and expenses of outside legal counsel for the Fund,
including legal services rendered in connection with the Fund's
corporate existence, corporate and financial structure and relations
with its stockholders, registrations and qualifications of
securities and litigation; and
(l) Expenses of any extraordinary nature (including litigation and
indemnification expenses) which are not incurred in the ordinary
course of the Fund's business.
4. Contractual Services. The Adviser may contract with other entities to
assist it in rendering services described in this Agreement; provided, however,
that the Adviser will continue to be contractually bound with respect to the
performance of its duties and obligations as set forth herein.
5. Books and Records. The Adviser shall keep the Fund's books and records
required to be maintained by it pursuant to paragraph 2 hereof. The Adviser
agrees that all records which it maintains for the Fund are the property of the
Fund and it will surrender promptly to the Fund any of such records upon the
Fund's request. The Adviser further agrees to preserve for the periods
prescribed by Rule 31a-2 of the Commission under the 1940 Act any such records
as are required to be maintained by Rule 31a-1 of the Commission under the 1940
Act. (See also paragraph 13, Right to Audit.)
- 3 -
<PAGE>
6. Compensation. The Fund shall pay the Adviser, as full compensation for
all services rendered and all facilities and personnel furnished hereunder, a
monthly fee at the annual rate of .95 of 1% of the average daily net asset value
of the Fund during the fiscal year, computed in the manner used for the
determination of the offering price of shares of the Fund. The fee for each
month shall be payable to the Adviser not later than the tenth day of the
following month.
7. Reimbursement of Expenses. If, in any fiscal year, the total of the
Fund's expenses (including the fee payable pursuant to paragraph 6 hereof, but
excluding taxes, interest, brokerage commissions relating to the purchase or
sale of portfolio securities and extraordinary non-recurring expenses) exceeds
1-1/2% of the average daily net asset value of the Fund, computed in the manner
above described, the Adviser will pay such excess. For purposes of this
paragraph, the term "fiscal year" shall include the portion of any fiscal year
which shall have elapsed at the date of termination of this Agreement, and the
expense limitation shall be that part of 1-1/2% proportioned to the portion of a
full fiscal year elapsed.
8. Limitation of Liability. The Adviser shall not be liable for any error
of judgment or mistake of law or fact or for any loss suffered by the Fund in
connection with the matters to which this Agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on its part in
the performance of its duties or from reckless disregard of its obligations and
duties under this Agreement.
9. Duration and Termination. This Agreement, unless sooner terminated as
provided herein, shall continue until the earlier of one year from the effective
date of the Fund's Registration Statement or the date of the first annual or
special meeting of the stockholders of the Fund, and, if approved by a majority
of the Fund's outstanding voting securities (as defined in the 1940 Act),
thereafter shall continue automatically for periods of one calendar year so long
as such continuance is specifically approved at least annually (a) by the vote
of a majority of the Fund's outstanding voting securities or by the Fund's Board
of Directors, and (b) by the vote of a majority of those members of the Board of
Directors of the Fund who are not parties to this Agreement or interested
persons (as defined in the 1940 Act) of any such party, cast in person at a
meeting called for the purpose of voting on such approval; provided, however,
that this Agreement may be terminated by the Fund at any time, without the
payment of any penalty, by vote of a majority of the entire Board of Directors
of the Fund or by vote of a majority of the Fund's outstanding voting securities
on 60 days' written notice to the Adviser, or by the Adviser at any time,
without the payment of any penalty, on 90 days' written notice to the Fund. This
Agreement will automatically and immediately terminate in the event of its
"assignment" (as defined in the 1940 Act).
10. Amendment of Agreement. This Agreement may be amended by mutual
consent, but the consent of the Fund must be approved (a) by vote of a majority
of those members of the Board of Directors of the Fund who are not "interested
persons" of any party to this Agreement, cast in person at a meeting called for
the purpose of voting on such amendment, and (b) by vote
- 4 -
<PAGE>
of a majority of the Fund's outstanding voting securities, provided, however,
that compliance with subparagraph (b) of this paragraph 10 shall not be required
in order to amend this Agreement to lower the Adviser's compensation under
paragraph 6 hereof.
12. Dispute Resolution. Prior to proceeding to trial 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. Either party may give the other party written notice of
any dispute not resolved in the normal course of business. Within
twenty (20) days after delivery of that notice, executives from the
parties 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 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, either party may initiate
a minitrial of the controversy or claim as provided in Paragraph b.
1f a negotiator intends to be accompanied at a meeting by an
attorney, the other negotiator shall be given at least three (3)
working days' notice of such intention and may also be accompanied
by an attorney.
(b) Minitrial. If the dispute has not been resolved by negotiation as
provided herein, the 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 parties encounter difficulty in agreeing on a
neutral, they will seek the assistance of CPR in the selection
process.
(c) Extension of Deadlines. By mutual agreement 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. Right to Audit. The Adviser shall permit employees or legal
representatives of the Fund (including independent auditors), at the Fund's
discretion, to audit the books and records of Adviser which relate to
- 5 -
<PAGE>
transactions which are the subject of this agreement. For purposes of this
agreement, "books and records" shall be deemed to include, but not by way of
limitation, all records processed or managed through electronic data processing,
such as E-mail, on-line files and any data in storage. Any audit will be
conducted during normal business hours of the Adviser and on the Adviser's
premises. Adviser agrees to provide to the Fund, without charge, reasonable
access to its facilities and personnel during the conduct of an audit. Adviser
may charge a reasonable fee for photocopying and other out-of-pocket costs
associated with an audit conducted under this paragraph. The Adviser may not
charge for salaries of Adviser's personnel who participate in the audit.
IN WITNESS WHEREOF, the parties hereto have caused this instrument, in two
counterparts (each of which shall be deemed an original), to be executed by
their officers designated below as of the day and year first above written.
Lincoln National Equity-Income Fund, Inc.
By /s/ Robert A. Nikels
--------------------------------------------
Robert A. Nikels, President
ATTEST:
/s/ Cynthia A. Rose
- ------------------------------
Assistant Secretary
Lincoln National Investment Management Company
By /s/ Jon A. Boscia
--------------------------------------------
Jon A. Boscia, President
ATTEST:
/s/ Cynthia A. Rose
- -------------------------------
Assistant Secretary
- 6 -
<PAGE>
EXHIBIT 5(c)
AMENDMENT
(EFFECTIVE JANUARY 1, 1998)
TO THE
ADVISORY AGREEMENT
(EFFECTIVE DATE SEPTEMBER 23, 1993)
BETWEEN
LINCOLN INVESTMENT MANAGEMENT, INC.
(FORMERLY: LINCOLN NATIONAL INVESTMENT MANAGEMENT COMPANY)
AND
LINCOLN NATIONAL EQUITY-INCOME FUND, INC.
Paragraph 6 of the Agreement relating to investment management for Lincoln
National Equity-Income Fund, Inc. is hereby amended to substitute the following
sentence for the first sentence of the paragraph:
"The Fund shall pay the Adviser, as full compensation for all services
rendered and all facilities and personnel furnished hereunder, a monthly
fee at the annual rate of .75 of 1% on the first $500 million of the
average daily net asset value of the Fund in each fiscal year, and .70 of
1% for all amounts in excess of $500 million during that fiscal year,
computed in the manner used for the determination of the offering price of
shares of the Fund."
LINCOLN INVESTMENT MANAGEMENT
COMPANY
By: /s/ H. Thomas McMeekin
--------------------------------------------
H. Thomas McMeekin
LINCOLN NATIONAL EQUITY-INCOME
FUND, INC.
By: /s/ Kelly D. Clevenger
------------------------------------------
Kelly D. Clevenger
<PAGE>
EXHIBIT 5(d)
AMENDMENT
(EFFECTIVE JANUARY 1, 1998)
TO THE
SUB-ADVISORY AGREEMENT
(EFFECTIVE DATE DECEMBER 20, 1993)
BETWEEN
LINCOLN INVESTMENT MANAGEMENT, INC.
(FORMERLY: LINCOLN NATIONAL INVESTMENT MANAGEMENT COMPANY)
AND
FIDELITY MANAGEMENT TRUST COMPANY
Paragraph 3 of the Agreement relating to Compensation to be paid by The
Advisor to the Sub-Adviser is hereby amended to substitute the following
sentence for the first sentence of the paragraph:
"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: .48 of 1% of the average daily net assets of the Fund."
LINCOLN INVESTMENT MANAGEMENT
COMPANY
By: /s/ H. Thomas McMeekin
-------------------------------------------
H. Thomas McMeekin
FIDELITY MANAGEMENT TRUST COMPANY
By: /s/ John P. O'Reilly, Jr.
-----------------------------------------
John P. O'Reilly, Jr.
<PAGE>
CUSTODIAN CONTRACT
Between
LINCOLN NATIONAL EQUITY-INCOME FUND, INC.
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
1. Employment of Custodian and Property to be
Held By It...............................................................1
2. Duties of the Custodian with Respect to Property of
the Fund Held by the Custodian in the United States......................2
2.1 Holding Securities.................................................2
2.2 Delivery of Securities.............................................3
2.3 Registration of Securities.........................................7
2.4 Bank Accounts......................................................8
2.5 Availability of Federal Funds......................................9
2.6 Collection of Income...............................................9
2.7 Payment of Fund Monies............................................10
2.8 Liability for Payment in Advance of
Receipt of Securities Purchased...................................13
2.9 Appointment of Agents.............................................13
2.10 Deposit of Securities in Securities System........................14
2.1OA Fund Assets Held in the Custodian's Direct
Paper System .....................................................17
2.11 Segregated Account................................................18
2.12 Ownership Certificates for Tax Purposes...........................20
2.13 Proxies...........................................................20
2.14 Communications Relating to Fund
Portfolio Securities..............................................20
2.15 Reports to Fund by Independent Public
Accountants.......................................................21
3. Duties of the Custodian with Respect to Property of
the Fund Held Outside of the United States...............................22
3.1 Appointment of Foreign Sub-Custodians.............................22
3.2 Assets to be Held.................................................22
3.3 Foreign Securities Depositories...................................23
3.4 Agreements with Foreign Banking Institutions......................23
3.5 Access of Independent Accountants of the Fund.....................24
3.6 Reports by Custodian..............................................24
3.7 Transactions in Foreign Custody Account...........................25
3.8 Liability of Foreign Sub-Custodians...............................25
3.9 Liability of Custodian............................................26
3.10 Reimbursement for Advances........................................27
3.11 Monitoring Responsibilities.......................................28
3.12 Branchesof U.S. Banks.............................................28
3.13 Tax Law...........................................................29
4. Payments for Repurchases or Redemptions and Sales
of Shares of the Fund...................................................30
5. Proper Instructions.....................................................31
6. Actions Permitted Without Express Authority.............................31
<PAGE>
7. Evidence of Authority...................................................32
8. Duties of Custodian with Respect to the Books of
Account and Calculations of Net Asset Value and
Net Income..............................................................33
9. Records.................................................................33
10. Opinion of Fund's Independent Accountant................................34
11. Compensation of Custodian...............................................34
12. Responsibility of Custodian.............................................34
13. Effective Period, Termination and Amendment.............................36
14. Successor Custodian.....................................................38
15. Interpretive and Additional Provisions..................................39
16. Massachusetts Law to Apply..............................................40
17. Prior Contracts.........................................................40
18. Shareholder Communications Election.....................................40
<PAGE>
CUSTODIAN CONTRACT
This Contract between Lincoln National Equity-Income Fund, Inc., a
corporation organized and existing under the laws of Maryland, having its
principal place of business at 1300 South Clinton Street, Fort Wayne, Indiana,
hereinafter called the "Fund", and State Street Bank and Trust Company, a
Massachusetts trust company, having its principal place of business at 225
Franklin Street, Boston, Massachusetts, 02110, hereinafter called the
"Custodian",
WITNESSETH: That in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
The Fund hereby employs the Custodian as the custodian of its assets,
including securities it desires to be held in places within the United States
("domestic securities") and securities it desires to be held outside the United
States ("foreign securities") pursuant to the provisions of the Articles of
Incorporation. The Fund agrees to deliver to the Custodian all securities and
cash owned by it, and all payments of income, payments of principal or capital
distributions received by it with respect to all securities owned by the Fund
from time to time, and the cash consideration received by it for such new or
treasury shares of capital stock, $.01 par value, ("Shares") of the Fund as may
be issued or sold from time to time. The Custodian shall not be responsible for
any property of the Fund held or received by the Fund and not delivered to the
Custodian.
<PAGE>
Upon receipt of "Proper Instructions" (within the meaning of Article 5),
the Custodian shall from time to time employ one or more sub-custodians located
in the United States, but only in accordance with an applicable vote by the
Board of Directors of the Fund, and provided that the Custodian shall have no
more or less responsibility or liability to the Fund on account of any actions
or omissions of any sub-custodian so employed than any such sub-custodian has to
the Custodian. The Custodian may employ as sub-custodians for the Fund's
securities and other assets the foreign banking institutions and foreign
securities depositories designated in Schedule "A" hereto but only in accordance
with the-provisions of Article 3.
2. Duties of the Custodian with Respect to Property of the Fund Held By the
Custodian in the United States
2.1 Holding Securities. The Custodian shall hold and physically segregate for
the account of the Fund all non-cash property, to be held by it in the
United States, including all domestic securities owned by the Fund, other
than (a) securities which are maintained pursuant to Section 2.10 in a
clearing agency which acts as a securities depository or in a book-entry
system authorized by the U.S. Department of the Treasury, collectively
referred to herein as "Securities System" and (b) commercial paper of an
issuer for which State Street Bank and Trust Company acts as issuing and
paying agent ("Direct Paper") which is deposited and/or maintained in the
Direct Paper System of the Custodian pursuant to Section 2.10A.
-2-
<PAGE>
2.2 Delivery of Securities. The Custodian shall release and deliver domestic
securities owned by the Fund held by the Custodian or in a Securities
System account of the Custodian or in the Custodian's Direct Paper
book-entry system account ("Direct Paper System Account") only upon
receipt of Proper Instructions, which may be continuing instructions when
deemed appropriate by the parties, and only in the following cases:
1) Upon sale of such securities for the account of the Fund and receipt
of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Fund;
3) In the case of a sale effected through a Securities System, in
accordance with the provisions of Section 2.10 hereof;
4) To the depository agent in connection with tender or other similar
offers for portfolio securities of the Fund;
5) To the issuer thereof or its agent when such securities are called,
redeemed, retired or otherwise become payable; provided that, in any
such case, the cash or other consideration is to be delivered to the
Custodian;
6) To the issuer thereof, or its agent, for transfer into the name of
the Fund or into
-3-
<PAGE>
the name of any nominee or nominees of the Custodian or into the
name or nominee name of any agent appointed pursuant to Section 2.9
or into the name or nominee name of any sub-custodian appointed
pursuant to Article 1; or for exchange for a different number of
bonds, certificates or other evidence representing the same
aggregate face amount or number of units; provided that, in any such
case, the new securities are to be delivered to the Custodian;
7) Upon the sale of such securities for the account of the Fund, to the
broker or its clearing agent, against a receipt, for examination in
accordance with "street delivery" custom; provided that in any such
case, the Custodian shall have no responsibility or liability for
any loss arising from the delivery of such securities prior to
receiving payment for such securities except as may arise from the
Custodian's own negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization reorganization or readjustment of
the securities of the issuer
-4-
<PAGE>
of such securities, or pursuant to provisions for conversion
contained in such securities, or pursuant to any deposit agreement;
provided that, in any such case, the new securities and cash, if
any, are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the surrender
thereof in the exercise of such warrants, rights or similar
securities or the surrender of interim receipts or temporary
securities for definitive securities; provided that, in any such
case, the new securities and cash, if any, are to be delivered to
the Custodian;
10) For delivery in connection with any loans of securities made by the
Fund, but on1y against receipt of adequate collateral as agreed
upon from time to time by the Custodian and the Fund, which may be
in the form of cash or obligations issued by the United States
government, its agencies or instrumentalities, except that in
connection with any loans for which collateral is to be credited to
the Custodian's account in the book-entry system authorized by the
U.S. Department of the Treasury, the Custodian will not be held
liable or responsible for
-5-
<PAGE>
the delivery of securities owned by the Fund prior to the receipt of
such collateral;
11) For delivery as security in connection with any borrowings by the
Fund requiring a pledge of assets by the Fund, but only against
receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any agreement
among the Fund, the Custodian and a broker-dealer registered under
the Securities Exchange Act of 1934 (the "Exchange Act") and a
member of The National Association of Securities Dealers, Inc.
("NASD"), relating to compliance with the rules of The Options
Clearing Corporation and of any registered national securities
exchange, or of any similar organization or organizations, regarding
escrow or other arrangements in connection with transactions by the
Fund;
13) For delivery in accordance with the provisions of any agreement
among the Fund, the Custodian, and a Futures Commission Merchant
registered under the Commodity Exchange Act, relating to compliance
with the rules of the Commodity Futures Trading Commission and/or
any Contract Market, or any similar organization or organizations,
-6-
<PAGE>
regarding account deposits in connection with transactions by the
Fund;
14) Upon receipt of instructions from the transfer agent ("Transfer
Agent") for the Fund, for delivery to such Transfer Agent or to the
holders of shares in connection with distributions in kind, as may
be described from time to time in the Fund's currently effective
prospectus and statement of additional information ("prospectus"),
in satisfaction of requests by holders of Shares for repurchase or
redemption; and
15) For any other proper corporate purpose, but only upon receipt of, in
addition to Proper Instructions, a certified copy of a resolution of
the Board of Directors or of the Executive Committee signed by an
officer of the Fund and certified by the Secretary or an Assistant
Secretary, specifying the securities to be delivered, setting forth
the purpose for which such delivery is to be made, declaring such
purpose to be a proper corporate purpose, and naming the person or
persons to whom delivery of such securities shall be made.
2.3 Registration of Securities. Domestic securities held by the Custodian
(other than bearer securities) shall be
-7-
<PAGE>
registered in the name of the Fund or in the name of any nominee of the
Fund or of any nominee of the Custodian which nominee shall be assigned
exclusively to the Fund, unless the Fund has authorized in writing the
appointment of a nominee to be used in common with other registered
investment companies having the same investment adviser as the Fund, or in
the name or nominee name of any agent appointed pursuant to Section 2.9 or
in the name or nominee name of any sub-custodian appointed pursuant to
Article 1. All securities accepted by the Custodian on behalf of the Fund
under the terms of this Contract shall be in "street name" or other good
delivery form. If, however, the Fund directs the Custodian to maintain
securities in "street name", the Custodian shall utilize its best efforts
only to timely collect income due the Fund on such securities and to
notify the Fund on a best efforts basis only of relevant corporate actions
including, without limitation, pendency of calls, maturities, tender or
exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
account or accounts in the United States in the name of the Fund, subject
only to draft or order by the Custodian acting pursuant to the terms of
this Contract, and shall hold in such account or accounts, subject to the
provisions hereof, all cash received by it from or for the account of the
Fund, other than cash maintained by the Fund in a bank account established
and
-8-
<PAGE>
used in accordance with Rule 17f-3 under the Investment Company Act of
1940. Funds held by the Custodian for the Fund may be deposited by it to
its credit as Custodian in the Banking Department of the Custodian or in
such other banks or trust companies as it may in its discretion deem
necessary or desirable; provided, however, that every such bank or trust
company shall be qualified to act as a custodian under the Investment
Company Act of 1940 and that each such bank or trust company and the funds
to be deposited with each such bank or trust company shall be approved by
vote of a majority of the Board of Directors of the Funds. Such funds
shall be deposited by the Custodian in its capacity as Custodian and shall
be withdrawable by the Custodian only in that capacity.
2.5 Availability of Federal Funds. Upon mutual agreement between the Fund and
the Custodian, the Custodian shall, upon the receipt of Proper
Instructions, make federal funds available to the Fund as of specified
times agreed upon from time to time by the Fund and the Custodian in the
amount of checks received in payment for Shares of the Fund which are
deposited into the Fund's account.
2.6 Collection of Income. Subject to the provisions of Section 2.3, the
Custodian shall collect on a timely basis all income and other payments'
with respect to United States registered securities held hereunder to
which the Fund shall be entitled either by law or pursuant to custom in
the securities business, and shall
-9-
<PAGE>
collect on a timely basis all income and other payments with respect to
United States bearer securities if, on the date of payment by the issuer,
such securities are held by the Custodian or its agent thereof and shall
credit such income, as collected, to the Fund's custodian account. Without
limiting the generality of the foregoing, the Custodian shall detach and
present for payment all coupons and other income items requiring
presentation as and when they become due and shall collect interest when
due on securities held hereunder. Income due the Fund on United States
securities loaned pursuant to the provisions of Section 2.2 (10) shall be
the responsibility of the Fund. The Custodian will have no duty or
responsibility in connection therewith, other than to provide the Fund
with such information or data as may be necessary to assist the Fund in
arranging for the timely delivery to the Custodian of the income to which
the Fund is properly entitled.
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions, which may be
continuing instructions when deemed appropriate by the parties, the
Custodian shall pay out monies of the Fund in the following cases only:
1) Upon the purchase of domestic securities, options, futures
contracts or options on futures contracts for the account of
the Fund but only (a) against the delivery of such securities,
or evidence of title to such
-10-
<PAGE>
options, futures contracts or options on futures contracts, to
the Custodian (or any bank, banking firm or trust company
doing business in the United States or abroad which is
qualified under the Investment Company Act of 1940, as
amended, to act as a custodian and has been designated by the
Custodian as its agent for this purpose) registered in the
name of the Fund or in the name of a nominee of the Custodian
referred to in Section 2.3 hereof or in proper form for
transfer; (b) in the case of a purchase effected through a
Securities System, in accordance with the conditions set forth
in Section 2.10 hereof; (c) in the case of a purchase
involving the Direct Paper System, in accordance with the
conditions set forth in Section 2.lOA; (d) in the case of
repurchase agreements entered into between the Fund and the
Custodian, or another bank, or a broker-dealer which is a
member of NASD, (i) against delivery of the securities either
in certificate form or through an entry crediting the
Custodian's account at the Federal Reserve Bank with such
securities or (ii) against delivery of the receipt evidencing
purchase by the Fund of securities owned by the Custodian
along with
-11-
<PAGE>
written evidence of the agreement by the Custodian to
repurchase such securities from the Fund or (e) for transfer
to a time deposit account of the Fund in any bank, whether
domestic or foreign; such transfer may be effected prior to
receipt of a confirmation from a broker and/or the applicable
bank pursuant to Proper Instructions from the Fund as defined
in Article 5;
2) In connection with conversion, exchange or surrender of
securities owned by the Fund as set forth in Section 2.2
hereof;
3) For the redemption or repurchase of Shares issued by the Fund
as set forth in Article 4 hereof;
4) For the payment of any expense or liability incurred by the
Fund, including but not limited to the following payments for
the account of the Fund: interest, taxes, management,
accounting, transfer agent and legal fees, and operating
expenses of the Fund whether or not such expenses are to be in
whole or part capitalized or treated as deferred expenses;
5) For the payment of any dividends declared pursuant to the
governing documents of the Fund;
-12-
<PAGE>
6) For payment of the amount of dividends received in respect of
securities sold short;
7) For any other proper purpose, but only upon receipt of, in
addition to Proper Instructions, a certified copy of a
resolution of the Board of Directors or of the Executive
Committee of the Fund signed by an officer of the Fund and
certified by its Secretary or an Assistant Secretary,
specifying the amount of such payment, setting forth the
purpose for which such payment is to be made, declaring such
purpose to be a proper purpose, and naming the person or
persons to whom such payment is to be made.
2.8 Liability for Payment in Advance of Receipt of Securities Purchased.
Except as specifically stated otherwise in this Contract, in any and every
case where payment for purchase of domestic securities for the account of
the Fund is made by the Custodian in advance of receipt of the securities
purchased in the absence of specific written instructions from the Fund to
so pay in advance, the Custodian shall be absolutely liable to the Fund
for such securities to the same extent as if the securities had been
received by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or trust
company which is itself
-13-
<PAGE>
qualified under the Investment Company Act of 1940, as amended, to act as
a custodian, as its agent to carry out such of the provisions of this
Article 2 as the Custodian may from time to time direct; provided,
however, that the appointment of any agent shall not relieve the Custodian
of its responsibilities or liabilities hereunder.
2.10 Deposit of Securities in Securities Systems. The Custodian may deposit
and/or maintain domestic securities owned by the Fund in a clearing agency
registered with the Securities and Exchange Commission under Section 17A
of the Securities Exchange Act of 1934, which acts as a securities
depository, or in the book-entry system authorized by the U.S. Department
of the Treasury and certain federal agencies, collectively referred to
herein as "Securities System" in accordance with applicable Federal
Reserve Board and Securities and Exchange Commission rules and
regulations, if any, and subject to the following provisions:
1) The Custodian may keep domestic securities of the Fund in a
Securities System provided that such securities are
represented in an account ("Account") of the Custodian in the
Securities System which shall not include any assets of the
Custodian other than assets held as a fiduciary, custodian or
otherwise for customers;
-14-
<PAGE>
2) The records of the Custodian with respect to domestic
securities of the Fund which are maintained in a Securities
System shall identify by book-entry those securities belonging
to the Fund;
3) The Custodian shall pay for domestic securities purchased for
the account of the Fund upon (i) receipt of advice from the
Securities System that such securities have been transferred
to the Account, and (ii) the making of an entry on the records
of the Custodian to reflect such payment and transfer for the
account of the Fund. The Custodian shall transfer domestic
securities sold for the account of the Fund upon (i) receipt
of advice from the Securities System that payment for such
securities has been transferred to the Account, and (ii) the
making of an entry on the records of the Custodian to reflect
such transfer and payment for the account of the Fund. Copies
of all advices from the Securities System of transfers of
domestic securities for the account of the Fund shall identify
the Fund, be maintained for the Fund by the Custodian and be
provided to the Fund at its request. Upon request, the
Custodian shall furnish the
-15-
<PAGE>
Fund confirmation of each transfer to or from the account of
the Fund in the form of a written advice or notice and shall
furnish to the Fund copies of daily transaction sheets
reflecting each day's transactions in the Securities System
for the account of the Fund.
4) The Custodian shall provide the Fund with any report obtained
by the Custodian on the Securities System's accounting system,
internal accounting control and procedures for safeguarding
domestic securities deposited in the Securities System;
5) The Custodian shall have received the initial or annual
certificate, as the case may be, required by Article 13
hereof;
6) Anything to the contrary in this Contract notwithstanding,
the Custodian shall be liable to the Fund for any loss or
damage to the Fund resulting from use of the Securities System
by reason of any negligence, misfeasance or misconduct of the
Custodian or any of its agents or of any of its or their
employees or from failure of the Custodian or any such agent
to enforce effectively such rights as it may have against the
Securities System; at the election of the Fund, it shall be
entitled to be subrogated to the rights of
-16-
<PAGE>
the Custodian with respect to any claim against the Securities
System or any other person which the Custodian may have as a
consequence of any such loss or damage if and to the extent
that the Fund has not been made whole for any such loss or
damage.
2.l0A Fund Assets Held in the Custodian's Direct Paper System.
The Custodian may deposit and/or maintain securities owned by the Fund in
the Direct Paper System of the Custodian subject to the following
provisions:
1) No transaction relating to securities in the Direct Paper
System will be effected in the absence of Proper Instructions;
2) The Custodian may keep securities of the Fund in the Direct
Paper System only if such securities are represented in an
account ("Account") of the Custodian in the Direct Paper
System which shall not include any assets of the Custodian
other than assets held as a fiduciary, custodian or otherwise
for customers;
3) The records of the Custodian with respect to securities of
the-Fund which are maintained in the Direct Paper System shall
identify by book-entry those securities belonging to the Fund;
-17-
<PAGE>
4) The Custodian shall pay for securities purchased for the
account of the Fund upon the making of an entry on the records
of the Custodian to reflect such payment and transfer of
securities to the account of the Fund. The Custodian shall
transfer securities sold for the account of the Fund upon the
making of an entry on the records of the Custodian to reflect
such transfer and receipt of payment for the account of the
Fund;
5) The Custodian shall furnish the Fund confirmation of each
transfer to or from the account of the Fund, in the form of a
written advice or notice, of Direct Paper on the next business
day following such transfer and shall furnish to the Fund
copies of daily transaction sheets reflecting each day's
transaction in the Securities System for the account of the
Fund;
6) The Custodian shall provide the Fund with any report on its
system of internal accounting control as the Fund may
reasonably request from time to time;
2.11 Segregated Account. The Custodian shall upon receipt of Proper
Instructions establish and maintain a segregated account or accounts for
and on behalf of the Fund, into
-18-
<PAGE>
which account or accounts may be transferred cash and/or securities,
including securities maintained in an account by the Custodian pursuant to
Section 2.10 hereof, (i) in accordance with the provisions of any
agreement among the Fund, the Custodian and a broker-dealer registered
under the Exchange Act and a member of the NASD (or any futures commission
merchant registered under the Commodity Exchange Act), relating to
compliance with the rules of The Options Clearing Corporation and of any
registered national securities exchange (or the Commodity Futures Trading
Commission or any registered contract market), or of any similar
organization or organizations, regarding escrow or other arrangements in
connection with transactions by the Fund, (ii) for purposes of segregating
cash or government securities in connection with options purchased, sold
or written by the Fund or commodity futures contracts or options thereon
purchased or sold by the Fund, (iii) for the purposes of compliance by the
Fund with the procedures required by Investment Company Act Release No.
10666, or any subsequent release or releases of the Securities and
Exchange Commission relating to the maintenance of segregated accounts by
registered investment companies and (iv) for other proper corporate
purposes, but only, in the case of clause (iv), upon receipt of, in
addition to Proper Instructions, a certified copy of a resolution of the
Board of Directors or of the Executive Committee signed by an officer of
the
-19-
<PAGE>
Fund and certified by the Secretary or an Assistant Secretary, setting
forth the purpose or purposes of such segregated account and declaring
such purposes to be proper corporate purposes.
2.12 Ownership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and state
tax purposes in connection with receipt of income or other payments with
respect to domestic securities of the Fund held by it and in connection
with transfers of such securities.
2.13 Proxies. The Custodian shall, with respect to the domestic securities held
hereunder, cause to be promptly executed by the registered holder of such
securities, if the securities are registered otherwise than in the name of
the Fund or a nominee of the Fund, all proxies, without indication of the
manner in which such proxies are to be voted, and shall promptly deliver
to the Fund such proxies, all proxy soliciting materials and all notices
relating to such securities.
2.14 Communications Relating to Fund Portfolio Securities Subject to the
provisions of Section 2.3, the Custodian shall transmit promptly to the
Fund all written information (including, without limitation, pendency of
calls and maturities of domestic securities and expirations of rights in
connection therewith and notices of exercise of call and put options
written by the Fund and the maturity of futures contracts purchased or
sold
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by the Fund) received by the Custodian from issuers of the domestic
securities being held for the Fund. With respect to tender or exchange
offers, the Custodian shall transmit promptly to the Fund all written
information received by the Custodian from issuers of the domestic
securities whose tender or exchange is sought and from the party (or his
agents) making the tender or exchange offer. If the Fund desires to take
action with respect to any tender offer, exchange offer or any other
similar transaction, the Fund shall notify the Custodian at least three
business days prior to the date on which the Custodian is to take such
action.
2.15 Reports to Fund by Independent Public Accountants The Custodian shall
provide the Fund, at such times as the Fund may reasonably require, with
reports by independent public accountants on the accounting system,
internal accounting control and procedures for safeguarding securities,
futures contracts and options on futures contracts, including domestic
securities deposited and/or maintained in a Securities System, relating to
the services provided by the Custodian under this Contract; such reports
shall be of sufficient scope and in sufficient detail, as may reasonably
be required by the Fund to provide reasonable assurance that any material
inadequacies would be disclosed by such examination, and, if there are no
such inadequacies, the reports shall so state.
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3. Duties of the Custodian with Respect to Property Of the Fund Held Outside
of the United States
3.1 Appointment of Foreign Sub-Custodians
The Fund hereby authorizes and instructs the Custodian to employ as
sub-custodians for the Fund's securities and other assets maintained
outside the United States the foreign banking institutions and foreign
securities depositories designated on Schedule A hereto ("foreign
sub-custodians"). Upon receipt of "Proper Instructions", as defined in
Section 5 of this Contract, together with a certified resolution of the
Fund's Board of Directors, the Custodian and the Fund may agree to amend
Schedule A hereto from time to time to designate additional foreign
banking institutions and foreign securities depositories to act as
sub-custodian. Upon receipt of Proper Instructions, the Fund may instruct
the Custodian to cease the employment of any one or more such
sub-custodians for maintaining custody of the Fund's assets.
3.2 Assets to be Held. The Custodian shall limit the securities and other
assets maintained in the custody of the foreign sub-custodians to: (a)
"foreign securities", as defined in paragraph (c)(1) of Rule 17f-5 under
the Investment Company Act of 1940, and (b) cash and cash equivalents in
such amounts as the Custodian or the Fund may determine to be reasonably
necessary to effect the Fund's foreign securities transactions. The
Custodian
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shall identify on its books as belonging to the Fund, the foreign
securities of the Fund held by each foreign sub-custodian.
3.3 Foreign Securities Depositories. Except as may otherwise be agreed upon in
writing by the Custodian and the Fund, assets of the Fund shall be
maintained in foreign securities depositories only through arrangements
implemented by the foreign banking institutions serving as sub-custodians
pursuant to the terms hereof. Where possible, such arrangements shall
include entry into agreements containing the provisions set forth in
Section 3.4 hereof.
3.4 Agreements with Foreign Banking Institutions. Each agreement with a
foreign banking institution shall be substantially in the form set forth
in Exhibit 1 hereto and shall provide that: (a) the Fund's assets will not
be subject to any right, charge, security interest, lien or claim of any
kind in favor of the foreign banking institution or its creditors or
agent, except a claim of payment for their safe custody or administration;
(b) beneficial ownership of the Fund's assets will be freely transferable
without the payment of money or value other than for custody or
administration; (c) adequate records will be maintained identifying the
assets as belonging to the Fund; (d) officers of or auditors employed by,
or other representatives of the Custodian, including to the extent
permitted under applicable law the independent
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public accountants for the Fund, will be given access to the books and
records of the foreign banking institution relating to its actions under
its agreement with the Custodian; and (e) assets of the Fund held by the
foreign sub-custodian will be subject only to the instructions of the
Custodian or its agents.
3.5 Access of Independent Accountants of the Fund. Upon request of the Fund,
the Custodian will use its best efforts to arrange for the independent
accountants of the Fund to be afforded access to the books and records of
any foreign banking institution employed as a foreign sub-custodian
insofar as such books and records relate to the performance of such
foreign banking institution under its agreement with the Custodian.
3.6 Reports by Custodian. The Custodian will supply to the Fund from time to
time, as mutually agreed upon, statements in respect of the securities and
other assets of the Fund held by foreign sub-custodians, including but not
limited to an identification of entities having possession of the Fund's
securities and other assets and advices or notifications of any transfers
of securities to or from each custodial account maintained by a foreign
banking institution for the Custodian on behalf of the Fund indicating, as
to securities acquired for the Fund, the identity of the entity having
physical possession of such securities.
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3.7 Transactions in Foreign Custody Account
(a) Except as otherwise provided in paragraph (b) of this Section 3.7, the
provision of Sections 2.2 and 2.7 of this Contract shall apply, mutatis
mutandis to the foreign securities of the Fund held outside the United
States by foreign sub-custodians.
(b) Notwithstanding any provision of this Contract to the contrary,
settlement and payment for securities received for the account of the Fund
and delivery of securities maintained for the account of the Fund may be
effected in accordance with the customary established securities trading
or securities processing practices and procedures in the jurisdiction or
market in which the transaction occurs, including, without limitation,
delivering securities to the purchaser thereof or to a dealer therefor (or
an agent for such purchaser or dealer) against a receipt with the
expectation of receiving later payment for such securities from such
purchaser or dealer.
(c) Securities maintained in the custody of a foreign sub-custodian may be
maintained in the name of such entity's nominee to the same extent as set
forth in Section 2.3 of this Contract, and the Fund agrees to hold any
such nominee harmless from any liability as a holder of record of such
securities.
3.8 Liability of Foreign Sub-Custodians. Each agreement pursuant to which the
Custodian employs a foreign banking institution as a foreign sub-custodian
shall require the
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institution to exercise reasonable care in the performance of its duties
and to indemnify, and hold harmless, the Custodian and each Fund from and
against any loss, damage, cost, expense, liability or claim arising out of
or in connection with the institution's performance of such obligations.
At the election of the Fund, it shall be entitled to be subrogated to the
rights of the Custodian with respect to any claims against a foreign
banking institution as a consequence of any such loss, damage, cost,
expense, liability or claim if and to the extent that the Fund has not
been made whole for any such loss, damage, cost, expense, liability or
claim.
3.9 Liability of Custodian. The Custodian shall be liable for the acts or
omissions of a foreign banking institution to the same extent as set forth
with respect to sub-custodians generally in this Contract and, regardless
of whether assets are maintained in the custody of a foreign banking
institution, a foreign securities depository or a branch of a U.S. bank as
contemplated by paragraph 3.12 hereof, the Custodian shall not be liable
for any loss, damage, cost, expense, liability or claim resulting from
nationalization, expropriation, currency restrictions, or acts of war or
terrorism or any loss where the sub-custodian has otherwise exercised
reasonable care. Notwithstanding the foregoing provisions of this
paragraph 3.9, in delegating custody duties to State Street London Ltd.,
the Custodian
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shall not be relieved of any responsibility to the Fund for any loss due
to such delegation, except such loss as may result from (a) political risk
(including, but not limited to, exchange control restrictions,
confiscation, expropriation, nationalization, insurrection, civil strife
or armed hostilities) or (b) other losses (excluding a bankruptcy or
insolvency of State Street London Ltd. not caused by political risk) due
to Acts of God, nuclear incident or other losses under circumstances where
the Custodian and State Street London Ltd. have exercised reasonable care.
3.10 Reimbursement for Advances. If the Fund requires the Custodian to advance
cash or securities for any purpose including the purchase or sale of
foreign exchange or of contracts for foreign exchange, or in the event
that the Custodian or its nominee shall incur or be assessed any taxes,
charges, expenses, assessments, claims or liabilities in connection with
the performance of this Contract, except such as may arise from its or its
nominee's own negligent action, negligent failure to act or willful
misconduct, any property at any time held for the account of the Fund
shall be security therefor and should the Fund fail to repay the Custodian
promptly, the Custodian shall be entitled to utilize available cash and to
dispose of the Fund assets to the extent necessary to obtain
reimbursement.
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3.11 Monitoring Responsibilities. The Custodian shall furnish annually to the
Fund, during the month of June, information concerning the foreign
sub-custodians employed by the Custodian. Such information shall be
similar in kind and scope to that furnished to the Fund in connection with
the initial approval of this Contract. In addition, the Custodian will
promptly inform the Fund in the event that the Custodian learns of a
material adverse change in the financial condition of a foreign
sub-custodian or any material loss of the assets of the Fund or in the
case of any foreign sub-custodian not the subject of an exemptive order
from the Securities and Exchange Commission is notified by such foreign
sub-custodian that there appears to be a substantial likelihood that its
shareholders' equity will decline below $200 million (U.S. dollars or the
equivalent thereof) or that its shareholders' equity has declined below
$200 million (in each case computed in accordance with generally accepted
U.S. accounting principles).
3.12 Branches of U.S. Banks
(a) Except as otherwise set forth in this Contract, the provisions hereof
shall not apply where the custody of the Fund assets are maintained in a
foreign branch of a banking institution which is a "bank" as defined by
Section 2(a)(5) of the Investment Company Act of 1940 meeting the
qualification set forth in Section 26(a) of said Act. The appointment of
any such branch as a
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sub-custodian shall be governed by paragraph 1 of this Contract.
(b) Cash held for the Fund in the United Kingdom shall be maintained in an
interest bearing account established for the Fund with the Custodian's
London branch, which account shall be subject to the direction of the
Custodian, State Street London Ltd. or both.
3.13 Tax Law
The Custodian shall have no responsibility or liability for any
obligations now or hereafter imposed on the Fund or the Custodian as
custodian of the Fund by the tax law of the United States of America or
any state or political subdivision thereof. It shall be the responsibility
of the Fund to notify the Custodian of the obligations imposed on the Fund
or the Custodian as custodian of the Fund by the tax law of jurisdictions
other than those mentioned in the above sentence, including responsibility
for withholding and other taxes, assessments or other governmental
charges, certifications and governmental reporting. The sole
responsibility of the Custodian with regard to such tax law shall be to
use reasonable efforts to assist the Fund with respect to any claim for
exemption or refund under the tax law of jurisdictions for which the Fund
has provided such information.
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4. Payments for Repurchases or Redemptions and Sales of Shares of the Fund
From such funds as may be available for the purpose but subject to the
limitations of the Articles of Incorporation and any applicable votes of the
Board of Directors of the Fund pursuant thereto, the Custodian shall, upon
receipt of instructions from the Transfer Agent, make funds available for
payment to holders of Shares who have delivered to the Transfer Agent a request
for redemption or repurchase of their Shares. In connection with the redemption
or repurchase of Shares of the Fund, the Custodian is authorized upon receipt of
instructions from the Transfer Agent to wire funds to or through a commercial
bank designated by the redeeming shareholders. In connection with the redemption
or repurchase of Shares of the Fund, the Custodian shall honor checks drawn on
the Custodian by a holder of Shares, which checks have been furnished by the
Fund to the holder of Shares, when presented to the Custodian in accordance with
such procedures and controls as are mutually agreed upon from time to time
between the Fund and the Custodian.
The Custodian shall receive from the distributor for the Fund's Shares or
from the Transfer Agent of the Fund and deposit into the Fund's account such
payments as are received for Shares of the Fund issued or sold from time to time
by the Fund. The Custodian will provide timely notification to the Fund and the
Transfer Agent of any receipt by it of payments for Shares of the Fund.
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5. Proper Instructions
Proper Instructions as used herein means a writing signed or initialled by
one or more person or persons as the Board of Directors shall have from time to
time authorized. Each such writing shall set forth the specific transaction or
type of transaction involved, including a specific statement of the purpose for
which such action is requested. Oral instructions will be considered Proper
Instructions if the Custodian reasonably believes them to have been given by a
person authorized to give such instructions with respect to the transaction
involved. The Fund shall cause all oral instructions to be confirmed in writing.
Upon receipt of a certificate of the Secretary or an Assistant Secretary as to
the authorization by the Board of Directors of the Fund accompanied by a
detailed description of procedures approved by the Board of Directors, Proper
Instructions may include communications effected directly between
electro-mechanical or electronic devices provided that the Board of Directors
and the Custodian are satisfied that such procedures afford adequate safeguards
for the Fund's assets. For purposes of this Section, Proper Instructions shall
include instructions received by the Custodian pursuant to any three-party
agreement which requires a segregated asset account in accordance with Section
2.11.
6. Actions Permitted without Express Authority
The Custodian may in its discretion, without express authority from the
Fund:
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1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under this Contract,
provided that all such payments shall be accounted for to the Fund;
2) surrender securities in temporary form for securities in definitive
form;
3) endorse for collection, in the name of the Fund, checks, drafts and
other negotiable instruments; and
4) in general, attend to all non-discretionary details in connection with
the sale, exchange, substitution, purchase, transfer and other dealings with the
securities and property of the Fund except as otherwise directed by the Board of
Directors of the Fund.
7. Evidence of Authority
The Custodian shall be protected in acting upon any instructions, notice,
request, consent, certificate or other instrument or paper believed by it to be
genuine and to have been properly executed by or on behalf of the Fund. The
Custodian may receive and accept a certified copy of a vote of the Board of
Directors of the Fund as conclusive evidence (a) of the authority of any person
to act in accordance with such vote or (b) of any determination or of any action
by the Board of Directors pursuant to the Articles of Incorporation as described
in such vote, and such vote may be considered as in full force and effect until
receipt by the Custodian of written notice to the contrary.
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8. Duties of Custodian with Respect to the Books of Account and Calculation
of Net Asset Value and Net Income
The Custodian shall cooperate with and supply necessary information to the
entity or entities appointed by the Board of Directors of the Fund to keep the
books of account of the Fund and/or compute the net asset value per share of the
outstanding shares of the Fund or, if directed in writing to do so by the Fund,
shall itself keep such books of account and/or compute such net asset value per
share. If so directed, the Custodian shall also calculate daily the net income
of the Fund as described in the Fund's currently effective prospectus and shall
advise the Fund and the Transfer Agent daily of the total amounts of such net
income and, if instructed in writing by an officer of the Fund to do so, shall
advise the Transfer Agent periodically of the division of such net income among
its various components. The calculations of the net asset value per share and
the daily income of the Fund shall be made at the time or times described from
time to time in the Fund's currently effective prospectus.
9. Records
The Custodian shall create and maintain all records relating to its
activities and obligations under this Contract in such manner as will meet the
obligations of the Fund under the Investment Company Act of 1940, with
particular attention to Section 31 thereof and Rules 31a-l and 31a-2 thereunder.
All such records shall be the property of the Fund and shall at all times
during, the regular business hours of the Custodian be open for inspection by
duly authorized officers, employees or agents
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of the Fund and employees and agents of the Securities and Exchange Commission.
The Custodian shall, at the Fund's request, supply the Fund with a tabulation of
securities owned by the Fund and held by the Custodian and shall, when requested
to do so by the Fund and for such compensation as shall be agreed upon between
the Fund and the Custodian, include certificate numbers in such tabulations.
10. Opinion of Fund's Independent Accountant
The Custodian shall take all reasonable action, as the Fund may from time
to time request, to obtain from year to year favorable opinions from the Fund's
independent accountants with respect to its activities hereunder in connection
with the preparation of the Fund's Form N-lA, and Form N-SAR or other annual
reports to the Securities and Exchange Commission and with respect to any other
requirements of such Commission.
11. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between the
Fund and the Custodian.
12. Responsibility of Custodian
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party
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or parties, including any futures commission merchant acting pursuant to the
terms of a three-party futures or options agreement. The Custodian shall be held
to the exercise of reasonable care in carrying out the provisions of this
Contract, but shall be kept indemnified by and shall be without liability to the
Fund for any action taken or omitted by it in good faith without negligence. It
shall be entitled to rely on and may act upon advice of counsel (who may be
counsel for the Fund) on all matters, and shall be without liability for any
action reasonably taken or omitted pursuant to such advice.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution appointed pursuant to the provisions of Article 3 to the
same extent as set forth in Article 1 hereof with respect to sub-custodians
located in the United States (except as specifically provided in Article 3.9)
and, regardless of whether assets are maintained in the custody of a foreign
banking institution, a foreign securities depository or a branch of a U.S. bank
as contemplated by paragraph 3.12 hereof, the Custodian shall not be liable for
any loss, damage, cost, expense, liability or claim resulting from, or caused
by, the direction of or authorization by the Fund to maintain custody or any
securities or cash of the Fund in a foreign country including, but not limited
to, losses resulting from nationalization, expropriation, currency restrictions,
or acts of war or terrorism.
If the Fund requires the Custodian to take any action with respect to
securities, which action involves the payment of
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money or which action may, in the opinion of the Custodian, result in the
Custodian or its nominee assigned to the Fund being liable for the payment of
money or incurring liability of some other form, the Fund, as a prerequisite to
requiring the Custodian to take such action, shall provide indemnity to the
Custodian in an amount and form satisfactory to it.
If the Fund requires the Custodian, its affiliates, subsidiaries or
agents, to advance cash or securities for any purpose (including but not limited
to securities settlements, foreign exchange contracts and assumed settlement) or
in the event that the Custodian or its nominee shall incur or be assessed any
taxes, charges, expenses, assessments, claims or liabilities in connection with
the performance of this Contract, except such as may arise from its or its
nominee's own negligent action, negligent failure to act or willful misconduct,
any property at any time held for the account of the Fund shall be security
therefor and should the Fund fail to repay the Custodian promptly, the Custodian
shall be entitled to utilize available cash and to dispose of the Fund assets to
the extent necessary to obtain reimbursement.
13. Effective Period, Termination and Amendment
This Contract shall become effective as of its execution, shall continue
in full force and effect until terminated as hereinafter provided, may be
amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not
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sooner than thirty (30) days after the date of such delivery or mailing;
provided, however that the Custodian shall not act under Section 2.10 hereof in
the absence of receipt of an initial certificate of the Secretary or an
Assistant Secretary that the Board of Directors of the Fund has approved the
initial use of a particular Securities System and the receipt of an annual
certificate of the Secretary or an Assistant Secretary that the Board of
Directors has reviewed the use by the Fund of such Securities System, as
required in each case by Rule 17f-4 under the Investment Company Act of 1940, as
amended and that the Custodian shall not act under Section 2.1OA hereof in the
absence of receipt of an initial certificate of the Secretary or an Assistant
Secretary that the Board of Directors has approved the initial use of the Direct
Paper System and the receipt of an annual certificate of the Secretary or an
Assistant Secretary that the Board of Directors has reviewed the use by the Fund
of the Direct Paper System; provided, further, however, that the Fund shall not
amend or terminate this Contract in contravention of any applicable federal or
state regulations, or any provision of the Articles of Incorporation, and
further provided, that the Fund may at any time by action of its Board of
Directors (i) substitute another bank or trust company for the Custodian by
giving notice as described above to the Custodian, or (ii) immediately terminate
this Contract in the event of the appointment of a conservator or receiver for
the Custodian by the Comptroller of the Currency or upon the happening of a like
event at the direction of an appropriate regulatory agency or court of competent
jurisdiction.
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Upon termination of the Contract, the Fund shall pay to the Custodian such
compensation as may be due as of the date of such termination and shall likewise
reimburse the Custodian for its costs, expenses and disbursements.
14. Successor Custodian
If a successor custodian shall be appointed by the Board of Directors of
the Fund, the Custodian shall, upon termination, deliver to such successor
custodian at the office of the Custodian, duly endorsed and in the form for
transfer, all securities then held by it hereunder and shall transfer to an
account of the successor custodian all of the Fund's securities held in a
Securities System.
If no such successor custodian shall be appointed, the Custodian shall, in
like manner, upon receipt of a certified copy of a vote of the Board of
Directors of the Fund, deliver at the office of the Custodian and transfer such
securities, funds and other properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Directors shall have been delivered to
the Custodian on or before the date when such termination shall become
effective, then the Custodian shall have the right to deliver to a bank or trust
company, which is a "bank" as defined in the Investment Company Act of 1940,
doing business in Boston, Massachusetts, of its own selection, having an
aggregate capital, surplus, and undivided profits, as shown by its last
published report, of not less than $25,000,000, all securities, funds and other
properties held by
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the Custodian and all instruments held by the Custodian relative thereto and all
other property held by it under this Contract and to transfer to an account of
such successor custodian all of the Fund's securities held in any Securities
System. Thereafter, such bank or trust company shall be the successor of the
Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Directors to appoint a successor custodian, the Custodian shall be
entitled to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other properties and
the provisions of this Contract relating to the duties and obligations of the
Custodian shall remain in full force and effect.
15. Interpretive and Additional Provisions
In connection with the operation of this Contract, the Custodian and the
Fund may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint opinion be
consistent with the general tenor of this Contract. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall be
annexed hereto, provided that no such interpretive or additional provisions
shall contravene any applicable federal or state regulations or any provision of
the Articles of Incorporation of the Fund. No interpretive or
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additional provisions made as provided in the preceding sentence shall be deemed
to be an amendment of this Contract.
16. Massachusetts Law to Apply
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of the Commonwealth of Massachusetts.
17. Prior Contracts
This Contract supersedes and terminates, as of the date hereof, all prior
contracts between the Fund and the Custodian relating to the custody of the
Fund's assets.
18. Shareholder Communications Election
Securities and Exchange Commission Rule 14b-2 requires banks which hold
securities for the account of customers to respond to requests by issuers of
securities for the names, addresses and holdings of beneficial owners of
securities of that issuer held by the bank unless the beneficial owner has
expressly objected to disclosure of this information. In order to comply with
the rule, the Custodian needs the Fund to indicate whether it authorizes the
Custodian to provide the Fund's name, address, and share position to requesting
companies whose securities the Fund owns. If the Fund tells the Custodian "no",
the Custodian will not provide this information to requesting companies. If the
Fund tells the Custodian "yes" or does not check either "yes" or "no" below, the
Custodian is required by the rule to treat the Fund as consenting to disclosure
of this information for all securities owned by the Fund or any funds or
accounts established by the Fund. For the Fund's protection, the Rule prohibits
the
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requesting company from using the Fund's name and address for any purpose other
than corporate communications. Please indicate below whether the Fund consents
or objects by checking one of the alternatives below.
YES [ ] The Custodian is authorized to release the Fund's name,
address, and share positions.
NO [ ] The Custodian is not authorized to release the Fund's name,
address, and share positions.
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the sixth day of December, 1993.
ATTEST LINCOLN NATIONAL EQUITY-INCOME
FUND, INC.
/s/ C. Suzanne Womack By /s/ Robert A. Nikels
- ----------------------------- -----------------------------
ATTEST STATE STREET BANK AND TRUST COMPANY
[ILLEGIBLE] By [ILLEGIBLE]
- ----------------------------- -----------------------------
Assistant Secretary Executive Vice President
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Schedule A
----------
The following foreign banking institutions and foreign securities
depositories have been approved by the Board of Directors of Lincoln National
Equity-Income Fund, Inc. for use as sub-custodians for the Fund's securities and
other assets:
(Insert banks and securities depositories)
Certified:
- ------------------------------------
Fund's Authorized Officer
Date:
-------------------------------
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AGREEMENT TO PURCHASE SHARES
The Lincoln National Life Insurance Company ("LNL"), on its behalf and on
behalf of Lincoln National Variable Annuity Account C (the "Variable Account"),
and Lincoln National Equity-Income Fund, Inc. (the "Fund") hereby agree that
shares of the Fund shall be made available to serve as an underlying investment
medium for variable annuity contracts to be offered by LNL through the Variable
Account subject to the following provisions:
1. LNL represents and warrants that it is an insurance company duly
organized and existing in good standing under Indiana law and that it has
legally and validly established the Variable Account as permitted under Indiana
law and has registered the Variable Account as permitted under Indiana law and
has registered the Variable Account as a unit investment trust in accordance
with the provisions of the Investment Company Act of 1940, as amended (the "1940
Act"), to serve as a segregated investment account for certain variable annuity
contracts (the "Contracts"). LNL further represents and warrants that the
Contracts will be registered under the Securities Act of 1933, as amended (the
"1933 Act"), and the Contracts will be issued and sold in compliance with all
applicable federal and state laws. The Contracts will provide for the
allocation of net amounts received by LNL thereunder to separate divisions of
the Variable Account designated as "sub-accounts" for investment in the shares
of registered
<PAGE>
investment companies selected by LNL ("underlying funds"). The Fund will be an
underlying fund for one of the sub-accounts.
2. Fund shares may be purchased and redeemed by LNL in accordance with
the provisions of the then current prospectus of the Fund. The Fund anticipates
that it will make its shares available indefinitely for purchase by LNL
hereunder, but the Fund reserves the right to suspend or terminate sales of its
shares hereunder at any time or times when its Board of Directors makes a good
faith determination that further sales would be to the detriment of current
holders of Fund shares. Payment for Fund shares shall be made by LNL within
five days after placement of the order for Fund shares. The Fund reserves the
right to delay issuance or transfer of Fund shares and/or to delay the accrual
and/or declaration of dividends in accordance with any policy set forth in its
then current prospectus with respect to such shares until any payment check has
cleared. If payment is not received by the Fund or an agent of the Fund within
the five day period, the Fund may, without notice, cancel the order and require
LNL to promptly reimburse the Fund for any loss suffered by the Fund resulting
from such failure to make timely payment. The Fund represents and warrants that
Fund shares sold hereunder shall be registered under the 1933 Act and duly
authorized for issuance in accordance with Maryland law.
3. LNL and its agents shall make no representation concerning the
-2-
<PAGE>
Fund or Fund shares except those contained in the then current prospectus of the
Fund or in current printed sales literature of the Fund, or as otherwise
approved by the Fund in writing.
4. Administrative services to owners of and participants under Contracts
shall be the responsibility of LNL and shall not be the responsibility of the
Fund. The Fund will furnish LNL copies of its proxy material, reports to
stockholders and other communications to stockholders in such quantities as LNL
shall reasonably require for distribution to owners of or participants under the
Contracts and LNL will distribute these materials to such owners or participants
as required. LNL will vote Fund shares, to the extent required by law, in
accordance with instructions received from Contract owners. LNL will vote Fund
shares for which no instructions have been received in the same proportion as
Fund shares for which instructions have been received from Contract owners. LNL
and persons under its control will in no way recommend action in connection with
the solicitation of proxies for Fund shares held in the Variable Account.
5. The Fund shall amend the Registration Statement for its shares under
the 1933 Act and the 1940 Act from time to time as required in order to effect
the continuous offering of its shares and shall provide LNL with as many copies
of its current prospectus as LNL may reasonably request.
-3-
<PAGE>
6. This Agreement may be terminated as to the issuance of Fund shares as
follows:
(a) at the option of LNL or the Fund upon 90 days' written notice to
the other party;
(b) at the option of LNL if Fund shares are not available for any
reason to meet the requirements of the Contracts as determined by
LNL; or
(c) at the option of the Fund upon institution of any proceedings
against LNL relating to the Variable Account or the issuance and
sale of the Contracts,, by the National Association of Securities
Dealers, Inc., the Securities and Exchange Commission, the
Indiana Insurance Commissioner or any other regulatory body.
7. (a) LNL agrees to indemnify and hold harmless the Fund and each of
its directors who is not an "interested person" of the Fund, as defined in the
1940 Act (collectively, the "Indemnified Parties") against any losses, claims,
damages, liabilities (including amounts paid in settlement thereof with the
written consent of LNL) or expenses or actions with respect thereto to which
such Indemnified Parties may become subject, under the federal securities laws
or otherwise, insofar as such losses, claims, damages, liabilities or expenses
(or actions in respect thereof) or settlements
(i) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the
Registration Statement or prospectus of the Variable Account or
contained in the Contracts or sales literature (or any
amendment or supplement to any of the foregoing), or
-4-
<PAGE>
arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not
misleading, provided that this agreement to indemnify shall not
apply as to an Indemnified Party such statement or omission or
such alleged statement or omission was made in reliance upon
and in conformity with written information furnished to LNL by
such Indemnified Party expressly for use in the Registration
Statement or prospectus for the Variable Account or the
Contracts or sales literature (or any amendment or supplement);
(ii) arise out of or as a result of conduct, statements, or
representations (other than statements or representations
contained in the prospectus of the Fund and sales literature
not supplied by LNL) of LNL or persons under its control, with
respect to the sale and distribution of the Contracts, or
(iii) arise as a result of any failure by LNL to provide the services
and furnish the materials set forth in paragraph four hereof.
LNL will reimburse any legal or other expenses reasonably incurred by the
Indemnified Parties in connection with investigating or defending any such loss,
claim, damage, liability or action. This indemnity agreement is in addition to
any liability which LNL may otherwise have.
(b) Promptly after receipt by any of the Indemnified Parties of
notice of the commencement of any action, or the making of any claim for which
indemnity may apply under this paragraph, the Indemnified Parties will, if a
claim in respect thereof is to be made against LNL, notify LNL of the
commencement thereof; but the omission so to notify LNL will not relieve LNL
from any liability which it may have to the Indemnified Parties otherwise than
under this Agreement. In case any such action is brought against the
Indemnified Parties,
-5-
<PAGE>
and LNL is notified of the commencement thereof, LNL will be entitled to
participate therein and to assume the defense thereof, with counsel satisfactory
to the party named in the action, and after notice from LNL to such party of
LNL's election to assume the defense thereof, LNL will not be liable to such
party under this Agreement for any legal or other expenses subsequently incurred
by such party independently in connection with the defense thereof other than
reasonable costs of investigation.
8. (a) 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. Either party may give
the other party written notice of any dispute not resolved in the normal course
of business. Within 20 days after delivery of that notice, executives of both
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 sub-paragraph (b) above. If a negotiator intends to be accompanied
at a meeting by an attorney, the other negotiator shall be given at least three
working days' notice of that intention and may also be accompanied by an
attorney.
-6-
<PAGE>
ADDENDUM
(effective November 1, 1994)
to the
AGREEMENT to PURCHASE SHARES
(effective September 23, 1993)
between
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY and
LINCOLN NATIONAL EQUITY - INCOME FUND, INC.
The Agreement is hereby supplemented to include a new paragraph 9, which reads
as follows:
"9. a) LNL shall own and control all the pertinent records
pertaining to the operation of Variable Account C under this Agreement; and b)
LNL, during normal business hours, shall have the right to inspect, audit and
copy all records pertaining to performance by the Fund of services for LNL under
this Agreement."
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
By: Robert A. Nikels
LINCOLN NATIONAL EQUITY - INCOME FUND, INC.
By: Kelly D. Clevenger
V10N1CRT.E
<PAGE>
EXHIBIT 99.9(b)
TRADENAME AGREEMENT
THIS AGREEMENT, made this 13th day of September, 1993, between Lincoln
National Corporation ("LNC") and Lincoln National Aggressive Growth Fund, Inc.
(the "Fund").
W I T N E S S E T H:
LNC, an Indiana corporation, holds diversified interests, primarily in
insurance and related financial service companies. Various subsidiary and
affiliated corporations organized or acquired by LNC use the words "Lincoln
National" in their names and business, and these words when used by a company
associated with LNC have a recognized business acceptance and identity
throughout the United States and in foreign countries. The right to use the
words "Lincoln National" as a part of the corporate name and business is an
asset of LNC, and it is entitled to protect its valuable property right against
improper use by others.
Lincoln National Investment Management Company, a subsidiary of LNC, has
agreed to act as investment adviser to the Fund. LNC believes that it is in its
best interests to agree to make the words "Lincoln National" available for use
by the Fund so long as the Fund has in effect an investment advisory contract
with Lincoln National Investment Management Company.
Accordingly, in consideration of the premises and for other good and
valuable consideration, the parties hereto agree as follows:
1. The use of the words "Lincoln National" as a part of the corporate name
and business of the Fund is subject to consent of LNC, which consent is
hereby granted upon the conditions and terms set forth herein.
2. The Fund is authorized to use the words "Lincoln National" in its
corporate name and business only while the Fund is a party to an
investment advisory contract with Lincoln National Investment Management
Company and for a period not exceeding ninety (90) days following the
termination of any such contract. In the event that the Fund ceases to be
a party to an investment advisory contract with Lincoln National
Investment Management Company, the Fund shall promptly take such steps as
may be necessary to change its corporate name and business practices so as
to eliminate the words "Lincoln National" or any name that, in the opinion
of LNC, is confusingly similar or indicates an affiliation with LNC or any
of its subsidiaries and affiliates.
3. The use of the words "Lincoln National" by the Fund shall not prevent LNC
or any of its subsidiaries or affiliates, or any of their respective
successors or assigns, from using or permitting the use of the words
"Lincoln National" alone or with any other word or words by or in
connection with any other entity or business, whether or not the same
directly or indirectly competes or conflicts with the Fund or its business
in any manner.
4. (a) 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. Either party may
give the other party written notice of any dispute not resolved in the
normal course of business. Within 20 days after delivery of that notice,
executives of both 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
<PAGE>
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. If
a negotiator intends to be accompanied at a meeting by an attorney, the
other negotiator shall be given at least three working days' notice of
that intention and may also be accompanied by an attorney.
(b) If the dispute has not been resolved by negotiation as provided
herein, the parties shall endeavor 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 Panels of Neutrals. If the parties encounter
difficulty in agreeing on a neutral, they will seek the assistance of CPR
in the selection process. All negotiations pursuant to sub-paragraphs (a)
and (b) of this paragraph 4 are confidential and shall be treated as
compromise and settlement negotiations for purposes of the Federal Rules
of Evidence and state rules of evidence.
(c) Any dispute arising out of or relating to this agreement or the
breach, termination or validity thereof, which has not been resolved by
non-binding procedures as provided in sub-paragraphs (a) or (b) herein
within 60 days of the initiation of those procedures shall be finally
settled by arbitration conducted expeditiously in accordance with the CPR
Rules for Non-Administered Arbitration of Business Disputes by a sole
arbitrator; provided, however, that if one party has requested the other
party to participate in a non-binding procedure and the other has failed
to participate, the requesting party may initiate arbitration before
expiration of the 60-day period set out just above. If within 45 days of
the commencement of the process to select an arbitrator the parties cannot
agree upon the arbitrator, then he or she will be selected from the CPR
Panels of Neutrals. The arbitration shall be governed by the United States
Arbitration Act, 9 U.S.C. Sec. 1-16, and judgment upon the award rendered
by the Arbitrator may be entered by any court having jurisdiction thereof.
The place of arbitration shall be Fort Wayne, Indiana. The Arbitrator is
not empowered to award damages in excess of compensatory damages.
IN WITNESS WHEREOF, LNC and the Fund have caused this Agreement to be
executed by their duly authorized officers upon the day aforesaid.
Attest: LINCOLN NATIONAL CORPORATION
/s/ C. Suzanne Womack By: /s/ Robert A. Anker
- -------------------------- --------------------------
Robert A. Anker
Secretary President
- -------------------------- --------------------------
(Title) (Title)
Attest: LINCOLN NATIONAL AGGRESSIVE
GROWTH FUND, INC.
/s/ C. Suzanne Womack By: /s/ Robert A. Nikels
- -------------------------- --------------------------
Robert A. Nikels
Secretary President
- -------------------------- --------------------------
(Title) (Title)
<PAGE>
AMENDED AND RESTATED TRADENAME AGREEMENT
THIS amended and restated AGREEMENT is made this 13th day of September,
1993, between Lincoln National Corporation ("LNC") and Lincoln National
Aggressive Growth Fund, Inc. (the "Fund"). Its terms supersede those of any
prior agreement.
W I T N E S S E T H:
LNC, an Indiana corporation, holds diversified interests, primarily in
insurance and related financial service companies. Various subsidiary and
affiliated corporations organized or acquired by LNC use the words "Lincoln
National" in their names and business, and, these words when used by a company
associated with LNC have a recognized business acceptance and identity
throughout the United States and in foreign countries. The right to use the
words "Lincoln National" as a part of the corporate name and business is an
asset of LNC, and it is entitled to protect its valuable property right against
improper use by others.
Lincoln National Investment Management Company, a subsidiary of LNC, has
agreed to act as investment adviser to the Fund. LNC believes that it is in its
best interests to agree to make the words "Lincoln National" available for use
by the Fund so long as the Fund has in effect an investment advisory contract
with Lincoln National Investment Management Company.
Accordingly, in consideration of the premises and for other good and
valuable consideration, the parties hereto agree as follows:
1. The use of the words "Lincoln National" as a part of the corporate name
and business of the Fund is subject to consent of LNC, which consent is
hereby granted upon the conditions and terms set forth herein.
2. The Fund is authorized to use the words "Lincoln National" in its
corporate name and business only while the Fund is a party to an
investment advisory contract with Lincoln National Investment Management
Company and for a period not exceeding ninety (90) days following the
termination of any such contract. In the event that the Fund ceases to be
a party to an investment advisory contract with Lincoln National
Investment Management Company, the Fund shall promptly take such steps as
may be necessary to change its corporate name and business practices so as
to eliminate the words "Lincoln National" or any name that, in the opinion
of LNC, is confusingly similar or indicates an affiliation with LNC or any
of its subsidiaries and affiliates.
3. The use of the words "Lincoln National" by the Fund shall not prevent LNC
or any of its subsidiaries or affiliates, or
<PAGE>
any of their respective successors or assigns, from using or permitting
the use of the words "Lincoln National" alone or with any other word or
words by or in connection with any other entity or business, whether or
not the same directly or indirectly competes or conflicts with the Fund or
its business in any manner.
IN WITNESS WHEREOF, LNC and the Fund have caused this Agreement to be
executed by their duly authorized officers upon the day aforesaid.
Attest:
Attest: LINCOLN NATIONAL CORPORATION
/s/ C. Suzanne Womack By: /s/ Robert A. Anker
- -------------------------- --------------------------
C. Suzanne Womack Robert A. Anker
Secretary President
- -------------------------- --------------------------
(Title) (Title)
Attest: LINCOLN NATIONAL AGGRESSIVE
GROWTH FUND, INC.
/s/ C. Suzanne Womack By: /s/ Robert A. Nikels
- -------------------------- --------------------------
C. Suzanne Womack Robert A. Nikels
Secretary President
- -------------------------- --------------------------
(Title) (Title)
<PAGE>
[LETTERHEAD OF LINCOLN NATIONAL CORPORATION]
EXHIBIT 10
(219) 455-3018
January 14, 1994
SECURITIES AND EXCHANGE COMMISSION
450 Fifth Street, NW
Washington, DC 20549
Re: Lincoln National Equity-Income Fund, Inc.
[File No. 33-71158]
Shares of Common Stock, $.01 par value
Ladies and Gentlemen:
As counsel for Lincoln National Equity-Income Fund, Inc., a Maryland
corporation (the "Fund"), I have examined the proceedings taken and being taken
for the registration by the Fund on Form N-1A of an indefinite number of shares
of its Common Stock, $.01 par value.
I have examined all instruments, documents and records which, in my
opinion, were necessary to examine for the purpose of rendering this opinion.
Based upon such examination, I am of the opinion that the above-described shares
of Common Stock will be, if and when issued by the Fund in the manner and upon
the terms set forth in said Registration Statement, validly authorized and
issued, fully paid and non-assessable.
I hereby consent to the filing of this opinion as an Exhibit to Form N-1A.
Very truly yours,
/s/ JEREMY SACHS
---------------------
Jeremy Sachs
Assistant General Counsel
<PAGE>
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Financial Statements"
in the Statement of Additional Information and to the incorporation by reference
in this Post-Effective Amendment No. 7 to the Registration Statement (Form N-1A)
(No. 33-71158) of Lincoln National Equity-Income Fund, Inc. of our report dated
February 4, 1998, included in the Multi Fund Variable Annuity Annual Report
1997.
Philadelphia, Pennsylvania
April 14, 1998
<PAGE>
Jon A. Boscia
Executive Vice President & Chief Investment Officer
- --------------------------------------------------------------------------------
[LETTERHEAD OF LINCOLN NATIONAL LIFE INSURANCE CO.]
Exhibit No. 13(b)
INVESTMENT LETTER
September 24, 1993
Lincoln National Equity-Income Fund, Inc.
1300 South Clinton Street
Fort Wayne, Indiana 46802
Ladies and Gentlemen:
This will advise you that in consideration of your issuance to the
undersigned of 11,000 shares of Common Stock (the Stock) $.01 par value of
Lincoln National Equity-Income Fund, Inc. (the Fund) for an aggregate purchase
price of $110,000, Lincoln National Variable Annuity (Account C) represents and
warrants that the Stock will be held by Account C for its own account, for
investment and not with a view to distribution.
Account C understands that the Stock being issued to it has not been
registered under the Securities Act of 1933, as amended (the Act), and agrees
that the Stock may not be sold or transferred except pursuant to an effective
Registration Statement under the Act or unless exemption from such registration
is available under the Act with respect to such proposed sale or transfer.
In order to insure compliance with the Act, Account C agrees that the Fund
may, if it desires, refuse to transfer the Stock unless:
(i) a Registration Statement under the Act is then in effect with
respect to such Stock; or
(ii) an opinion has been obtained from counsel for the Fund to the effect
that an exemption from registration under the Act is available with
respect to the proposed transfer and that no such registration is
required; or
(iii) a no-action letter has been obtained with respect to such transfer
from the staff of the Securities and Exchange Commission.
<PAGE>
Lincoln National Equity-Income Fund, Inc.
September 24, 1993
Page 2
Account C further agrees that a legend briefly describing the restrictions
set forth in this letter may be placed on the stock certificate, if any,
delivered to Account C.
Very truly yours,
LINCOLN NATIONAL VARIABLE
ANNUITY ACCOUNT C
By: THE LINCOLN NATIONAL
LIFE INSURANCE COMPANY
By: /s/ JON A. BOSCIA
---------------------------
Jon A. Boscia,
Executive Vice President
<PAGE>
POWER OF ATTORNEY
Each person whose signature appears following paragraph b) under
"SIGNATURES" below hereby constitutes and appoints John L. Steinkamp, Jeremy
Sachs and C. Suzanne Womack, and each of them, his or her true and lawful
attorneys-in-fact in his name, place and stead, in any and all capacities, to
sign any and all amendments to this Registration Statement and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission under the Securities Act of 1933 and the
Investment Company Act of 1940.
SIGNATURES
a) Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Fort Wayne, and State of Indiana, on the 1st day of
November, 1993.
LINCOLN NATIONAL
EQUITY-INCOME FUND, INC.
By ______________________________
Robert A. Nikels, Chairman of
the Board and President
b) Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
Chairman of the Board,
- ------------------------- President and Director -----------
Robert A. Nikels (Principal Executive
Officer)
Director
- ------------------------- -----------
John B. Borsch, Jr.
Director
- ------------------------- -----------
Stanley R. Nelson
Director
- ------------------------- -----------
Jon A. Boscia
/s/ Nancy L. Frisby Director 11-01-93
- ------------------------- -----------
Nancy L. Frisby
Chief Accounting Officer
- ------------------------- (Principal Accounting -----------
Lantz H. Mintch Officer)
Vice President and
- ------------------------- Treasurer (Principal -----------
Max A. Roesler Financial Officer)
<PAGE>
POWER OF ATTORNEY
Each person whose signature appears following paragraph b) under
"SIGNATURES" below hereby constitutes and appoints John L. Steinkamp, Jeremy
Sachs and C. Suzanne Womack, and each of them, his or her true and lawful
attorneys-in-fact in his name, place and stead, in any and all capacities, to
sign any and all amendments to this Registration Statement and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission under the Securities Act of 1933 and the
Investment Company Act of 1940.
SIGNATURES
a) Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Fort Wayne, and State of Indiana, on the 1st day of
November, 1993.
LINCOLN NATIONAL
EQUITY-INCOME FUND, INC.
By ______________________________
Robert A. Nikels, Chairman of
the Board and President
b) Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
Chairman of the Board,
- ------------------------- President and Director -----------
Robert A. Nikels (Principal Executive
Officer)
/s/ John B. Borsch, Jr. Director 11-01-93
- ------------------------- -----------
John B. Borsch, Jr.
Director
- ------------------------- -----------
Stanley R. Nelson
Director
- ------------------------- -----------
Jon A. Boscia
Director
- ------------------------- -----------
Nancy L. Frisby
Chief Accounting Officer
- ------------------------- (Principal Accounting -----------
Lantz H. Mintch Officer)
Vice President and
- ------------------------- Treasurer (Principal -----------
Max A. Roesler Financial Officer)
<PAGE>
ORGANIZATIONAL CHART OF THE
LINCOLN NATIONAL INSURANCE HOLDING COMPANY SYSTEM
All the members of the holding company system are corporations, with
the exception of, Delaware Distributors, L.P and Founders CBO, L.P.
--------------------------------
| |
| Lincoln National Corporation |
| Indiana - Holding Company |
--------------------------------
| --------------------------------------------
|--| City Financial Planners, Ltd. |
| | 100% - Englad/Wales - Distribution of life|
| | assurance & pension products |
| --------------------------------------------
| -------------------------------
|--| The Insurers' Fund, Inc. # |
| | 100% - Maryland - Inactive |
| -------------------------------
| ------------------------------------------------
|--| LNC Administrative Services Corporation |
| | 100% - Indiana - Third Party Administrator |
| ------------------------------------------------
| ------------------------------------------------
|--| Lincoln Funds Corporation |
| | 100% - Delaware - Intermediate Holding Company |
| ------------------------------------------------
| ---------------------------------------------------
|--|Lincoln National Financial Institutions Group, Inc.|
| |(fka The Richard Leahy Corporation) |
| | 100% - Indiana - Insurance Agency |
| ---------------------------------------------------
| | ---------------------------------
| |--| The Financial Alternative, Inc. |
| | | 100% - Utah- Insurance Agency |
| | ---------------------------------
| | ---------------------------------------
| |--| Financial Alternative Resources, Inc. |
| | | 100% - Kansas - Insurance Agency |
| | ---------------------------------------
| | -----------------------------------------
| |--| Financial Choices, Inc. |
| | | 100% - Pennsylvania - Insurance Agency |
| | -----------------------------------------
| | -----------------------------------------------
| | | Financial Investment Services, Inc. |
| |--| (formerly Financial Services Department, Inc.)|
| | | 100% - Indiana - Insurance Agency |
| | -----------------------------------------------
| | -----------------------------------------
| | | Financial Investments, Inc. |
| |--| (formerly Insurance Alternatives, Inc.) |
| | | 100% - Indiana - Insurance Agency |
| | -----------------------------------------
| | -------------------------------------------
| |--| The Financial Resources Department, Inc. |
| | | 100% - Michigan - Insurance Agency |
| | -------------------------------------------
| | -----------------------------------------
| |--| Investment Alternatives, Inc. |
| | | 100% - Pennsylvania - Insurance Agency |
| | -----------------------------------------
| | --------------------------------------
| |--| The Investment Center, Inc. |
| | | 100% - Tennessee - Insurance Agency |
| | --------------------------------------
| | --------------------------------------
| |--| The Investment Group, Inc. |
| | | 100% - New Jersey - Insurance Agency |
| | --------------------------------------
<PAGE>
-------------------------------
| |
| Lincoln National Corporation |
| Indiana - Holding Company |
-------------------------------
| ---------------------------------------------------
|--|Lincoln National Financial Institutions Group, Inc.|
| |(fka The Richard Leahy Corporation) |
| | 100% - Indiana - Insurance Agency |
| ---------------------------------------------------
| | ------------------------------------
| |--| Personal Financial Resources, Inc. |
| | | 100% - Arizona - Insurance Agency |
| | ------------------------------------
| | ----------------------------------------
| |--| Personal Investment Services, Inc. |
| | 100% - Pennsylvania - Insurance Agency |
| ----------------------------------------
| -------------------------------------------
|--| LincAm Properties, Inc. |
| | 50% - Delaware - Real Estate Investment |
| -------------------------------------------
|
| ----------------------------------------------
| | Lincoln Financial Group, Inc. |
|--| (formerly Lincoln National Sales Corporation)|
| | 100% - Indiana - Insurance Agency |
| ----------------------------------------------
| | ----------------------------------------
| |--| Lincoln Financial Advisors Corporation |
| | | (formerly LNC Equity Sales Corporation)|
| | | 100% - Indiana - Broker-Dealer |
| | ----------------------------------------
| | -------------------------------------------------------------
| | |Corporate agencies: Lincoln Financial Group, Inc. ("LFG") |
| |--|has subsidiaries of which LFG owns from 80%-100% of the |
| | |common stock (see Attachment #1). These subsidiaries serve |
| | |as the corporate agency offices for the marketing and |
| | |servicing of products of The Lincoln National Life Insurance |
| | |Company. Each subsidiary's assets are less than 1% of the |
| | |total assets of the ultimate controlling person. |
| | -------------------------------------------------------------
| |
| | ------------------------------------------------
| |--| Professional Financial Planning, Inc. |
| | 100% - Indiana - Financial Planning Services |
| ------------------------------------------------
| ---------------------------------------
|--| Lincoln Life Improved Housing, Inc. |
| | 100% - Indiana |
| ---------------------------------------
|
| -----------------------------------------------
|--| Lincoln National (China) Inc. |
| | 100% - Indiana - China Representative Office |
| -----------------------------------------------
|
| -----------------------------------------------
|--| Lincoln National (India) Inc. |
| | 100% - Indiana - India Representative Office |
| -----------------------------------------------
| ---------------------------------------------
|--| Lincoln National Intermediaries, Inc. |
| | 100% - Indiana - Reinsurance Intermediary |
| ---------------------------------------------
| --------------------------------------------------
|__| Lincoln National Investments, Inc. |
| | (fka Lincoln National Investment Companies, Inc.)|
| | 100% - Indiana - Holding Company |
| --------------------------------------------------
| | --------------------------------------------
| |--| Lincoln National Investment Companies, Inc.|
| | |(fka Lincoln National Investments, Inc.) |
| | | 100% - Indiana - Holding Company |
| | --------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
<S><C>
-------------------------------
| |
| Lincoln National Corporation |
| Indiana - Holding Company |
-------------------------------
| --------------------------------------------------
|__| Lincoln National Investments, Inc. |
| | (fka Lincoln National Investment Companies, Inc.)|
| | 100% - Indiana - Holding Company |
| --------------------------------------------------
| | --------------------------------------------
| |--| Lincoln National Investment Companies, Inc.|
| | |(fka Lincoln National Investments, Inc.) |
| | | 100% - Indiana - Holding Company |
| | --------------------------------------------
| | | ----------------------------------
| | |--|Delaware Management Holdings, Inc.|
| | | | 100% - Delaware - Holding Company|
| | | ----------------------------------
| | | | -----------------------------------
| | | |--| DMH Corp. |
| | | | 100% - Delaware - Holding Company |
| | | -----------------------------------
| | | | ----------------------------------------
| | | |--| Delaware International Advisers Ltd. |
| | | | | 81.1% - England - Investment Advisor |
| | | | ----------------------------------------
| | | | --------------------------------------
| | | |--| Delaware Management Trust Company |
| | | | | 100% - Pennsylvania - Trust Service |
| | | | --------------------------------------
| | | | ------------------------------------------------
| | | |--| Delaware International Holdings, Ltd. |
| | | | | 100% - Bermuda - Investment Advisor |
| | | | ------------------------------------------------
| | | | | | --------------------------------------
| | | | | --| Delaware International Advisers, Ltd.|
| | | | | | 18.9% - England - Investment Advisor |
| | | | | --------------------------------------
| | | | -------------------------------------------------
| | | |--| Delvoy, Inc. |
| | | | | 100% - Minnesota - Holding Company |
| | | | -------------------------------------------------
| | | | ---------------------------------------
| | | | |--| Delaware Management Company, Inc. |
| | | | | | 100% - Delaware - Investment Advisor |
| | | | | ---------------------------------------
| | | | | | -------------------------------------------------------
| | | | | |--| Delaware Distributors, L.P. |
| | | | | | | 98%-Delaware-MutualFund Distributor & Broker/Dealer |
| | | | | | | 1% Equity-Delaware Capital Management, Inc. |
| | | | | | | 1% Equity-Delaware Distributors, Inc. |
| | | | | | | |
| | | | | | -------------------------------------------------------
| | | | | | ------------------------------------
| | | | | |--| Founders Holdings, Inc. |
| | | | | | | 100% - Delaware - General Partner |
| | | | | | ------------------------------------
| | | | | | | -----------------------------------------
| | | | | | | | Founders CBO, L.P. |
| | | | | | --| 1% - Delaware - Investment Partnership |
| | | | | | | 99% held by outside investors |
| | | | | | -----------------------------------------
| | | | | | | ------------------------------------------
| | | | | | --|Founders CBO Corporation |
| | | | | | |100%-Delaware-Co-Issuer with Founders CBO |
------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S><C>
--------------------------------
| |
| Lincoln National Corporation |
| Indiana - Holding Company |
--------------------------------
| --------------------------------------------------
|--| Lincoln National Investments, Inc. |
| | (fka Lincoln National Investment Companies, Inc.)|
| | 100% - Indiana - Holding Company |
| --------------------------------------------------
| | --------------------------------------------
| |--| Lincoln National Investment Companies, Inc.|
| | |(fka Lincoln National Investments, Inc.) |
| | | 100% - Indiana - Holding Company |
| | --------------------------------------------
| | | ----------------------------------
| | |--|Delaware Management Holdings, Inc.|
| | | | 100% - Delaware - Holding Company|
| | | ----------------------------------
| | | | -----------------------------------
| | | |--| DMH Corp. |
| | | | 100% - Delaware - Holding Company |
| | | -----------------------------------
| | | | -------------------------------------
| | | |--| Delvoy, Inc. |
| | | | | 100% - Minnesota - Holding Company |
| | | | -------------------------------------
| | | | | ------------------------------------
| | | | |---| Delaware Distributors, Inc. |
| | | | | | 100% - Delaware - General Partner |
| | | | | ------------------------------------
| | | | | | ------------------------------------------------------
| | | | | |--| Delaware Distributors, L.P. |
| | | | | | 98%-Delaware-Mutual Fund Distributor & Broker/Dealer |
| | | | | | 1% Equity-Delaware Capital Management, Inc. |
| | | | | | 1% Equity-Delaware Distributors, Inc. |
| | | | | ------------------------------------------------------
| | | | | -----------------------------------------------
| | | | |---| Delaware Capital Management, Inc. |
| | | | | |(formerly Delaware Investment Counselors, Inc.)|
| | | | | | 100% - Delaware - Investment Advisor |
| | | | | -----------------------------------------------
| | | | | | -------------------------------------------------------
| | | | | |-- | Delaware Distributors, L.P. |
| | | | | | | 98%-Delaware-Mutual Fund Distributor & Broker/Dealer |
| | | | | | |1% Equity-Delaware Capital Management, Inc. |
| | | | | | | 1% Equity-Delaware Distributors, Inc. |
| | | | | | -------------------------------------------------------
| | | | | -----------------------------------------------------
| | | | |---| Delaware Service Company, Inc. |
| | | | | | 100%-Delaware-Shareholder Services & Transfer Agent |
| | | | | -----------------------------------------------------
| | | | | -----------------------------------------------------
| | | | |---| Delaware Investment & Retirement Services, Inc. |
| | | | | 100% - Delaware - Registered Transfer Agent |
| | | | -----------------------------------------------------
| | | -----------------------------------------
| | |--| Lynch & Mayer, Inc. |
| | | | 100% - Indiana - Investment Adviser |
| | | -----------------------------------------
| | | | -----------------------------------------
| | | |--| Lynch & Mayer Asia, Inc. |
| | | | | 100% - Delaware - Investment Management |
| | | | -----------------------------------------
| | | | ----------------------------------------
| | | |--| Lynch & Mayer Securities Corp. |
| | | | 100% - Delaware - Securities Broker |
| | | ----------------------------------------
| | | ----------------------------------------------------
| | | | Vantage Global Advisors, Inc. |
| | |--| (formerly Modern Portfolio Theory Associates, Inc.)|
| | | | 100% - Delaware - Investment Adviser |
| | | ----------------------------------------------------
</TABLE>
<PAGE>
--------------------------------
| |
| Lincoln National Corporation |
| Indiana - Holding Company |
--------------------------------
| --------------------------------------------------
|--| Lincoln National Investments, Inc. |
| | (fka Lincoln National Investment Companies, Inc.)|
| | 100% - Indiana - Holding Company |
| --------------------------------------------------
| | -----------------------------------------------------------
| | | Lincoln Investment Management, Inc. |
| |--| (formerly Lincoln National Investment Management Company) |
| | | 100% - Illinois - Mutual Fund Manager and |
| | | Registered Investment Adviser |
| -----------------------------------------------------------
| -----------------------------------------------
|--| The Lincoln National Life Insurance Company |
| | 100% - Indiana |
| -----------------------------------------------
| | --------------------------------------------------
| |--| AnnuityNet, Inc. |
| | | 100% - Indiana - Distribution of annuity products|
| | --------------------------------------------------
| | -------------------------------------------
| |--| Cigna Associates, Inc. |
| | | 100% - Connecticut - Insurance Agency |
| | -------------------------------------------
| | | ----------------------------------------------------------
| | |--| Cigna Associates of Massachusetts, Inc. |
| | | | 100% - Massachusetts - Insurance Agency |
| | ----------------------------------------------------------
| | -------------------------------------------
| |--|Cigna Financial Advisors, Inc. |
| | | 100% - Connecticut - Broker Dealer |
| | -------------------------------------------
| | -------------------------------------------
| |--| First Penn-Pacific Life Insurance Company |
| | | 100% - Indiana |
| | -------------------------------------------
| | -----------------------------------------------
| |--| Lincoln Life & Annuity Company of New York |
| | | 100% - New York |
| | -----------------------------------------------
| |
| | ------------------------------------------------
| |--| Lincoln National Aggressive Growth Fund, Inc. |
| | | 100% - Maryland - Mutual Fund |
| | ------------------------------------------------
| | -----------------------------------
| |--| Lincoln National Bond Fund, Inc. |
| | | 100% - Maryland - Mutual Fund |
| | -----------------------------------
| | --------------------------------------------------
| |--| Lincoln National Capital Appreciation Fund, Inc. |
| | | 100% - Maryland - Mutual Fund |
| | --------------------------------------------------
| | --------------------------------------------
| |--| Lincoln National Equity-Income Fund, Inc. |
| | | 100% - Maryland - Mutual Fund |
| | --------------------------------------------
| | ------------------------------------------------------
| | | Lincoln National Global Asset Allocation Fund, Inc. |
| |--| (formerly Lincoln National Putnam Master Fund, Inc.) |
| | | 100% - Maryland - Mutual Fund |
| | ------------------------------------------------------
| | ------------------------------------------------
| | | Lincoln National Growth and Income Fund, Inc. |
| |--| (formerly Lincoln National Growth Fund, Inc.) |
| | | 100% - Maryland - Mutual Fund |
| | ------------------------------------------------
<PAGE>
--------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
--------------------------------
| -----------------------------------------------
|--| The Lincoln National Life Insurance Company |
| | 100% - Indiana |
| -----------------------------------------------
| | --------------------------------------------------------
| |--| Lincoln National Health & Casualty Insurance Company |
| | | 100% - Indiana |
| --------------------------------------------------------
| | -----------------------------------------------
| |--| Lincoln Re, S.A. |
| | | 1% Argentina - General Business Corp |
| | | (Remaining 99% owned by Lincoln National |
| | | Reassurance Company) |
| -----------------------------------------------
| -------------------------------------------
| |--| Lincoln National International Fund, Inc. |
| | | 100% - Maryland - Mutual Fund |
| | | -------------------------------------------
| | ---------------------------------------
| |--| Lincoln National Managed Fund, Inc. |
| | | 100% - Maryland - Mutual Fund |
| | ---------------------------------------
| | --------------------------------------------
| |--| Lincoln National Money Market Fund, Inc. |
| | | 100% - Maryland - Mutual Fund |
| | --------------------------------------------
| | -----------------------------------------------
| |--| Lincoln National Social Awareness Fund, Inc. |
| | | 100% - Maryland - Mutual Fund |
| | -----------------------------------------------
| | -----------------------------------------------------
| |--| Lincoln National Special Opportunities Fund, Inc. |
| | | 100% - Maryland - Mutual Fund |
| | -----------------------------------------------------
| | ------------------------------------------------------
| |--| Lincoln National Reassurance Company |
| | 100% - Indiana - Life Insurance |
| ------------------------------------------------------
| | -----------------------------------------------
| |--| Lincoln Re, S.A. |
| | | 99% Argentina - General Business Corp |
| | | (Remaining 1% owned by Lincoln National Health|
| | | & Casualty Insurance Company) |
| | -----------------------------------------------
| | -----------------------------------------------
| |--| Special Pooled Risk Administrators, Inc. |
| | 100% - New Jersey - Catastrophe Reinsurance |
| | Pool Administrator |
| -----------------------------------------------
| ---------------------------------------------------------
|--| Lincoln National Management Services, Inc. |
| | 100% - Indiana - Underwriting and Management Services |
| ---------------------------------------------------------
| ---------------------------------------
|--| Lincoln National Realty Corporation |
| | 100% - Indiana - Real Estate |
| ---------------------------------------
| -----------------------------------------------------------
|--| Lincoln National Reinsurance Company (Barbados) Limited |
| | 100% - Barbados |
| -----------------------------------------------------------
|
| ----------------------------------------------
|--| Lincoln National Reinsurance Company Limited |
| | (formerly Heritage Reinsurance, Ltd.) |
| | 100% ** - Bermuda |
| ----------------------------------------------
| | -------------------------------------------------------
| |--| Lincoln European Reinsurance S.A. |
| | | 79% - Belgium |
| | | (Remaining 21% owned by Lincoln National Underwriting |
| | | Services, Ltd. |
| | -------------------------------------------------------
<PAGE>
--------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
--------------------------------
| ----------------------------------------------
|--| Lincoln National Reinsurance Company Limited |
| | (formerly Heritage Reinsurance, Ltd.) |
| | 100% ** - Bermuda |
| ----------------------------------------------
| | ---------------------------------------------------------
| | | Lincoln National Underwriting Services, Ltd. |
| |--| 90% - England/Wales - Life/Accident/Health Underwriter |
| | | (Remaining 10% owned by Old Fort Ins. Co. Ltd.) |
| | ---------------------------------------------------------
| | | ------------------------------------------------------
| | |--| Lincoln European Reinsurance S.A. |
| | | | 21% - Belgium |
| | | |(Remaining 79% owned by Lincoln National Reinsurance |
| | | | Company Limited |
| | | ------------------------------------------------------
| | --------------------------------------------------------
| | | Servicios de Evaluacion de Riesgos, S. de R.L. de C.V. |
| |--| 51% - Mexico - Reinsurance Underwriter |
| | | (Remaining 49% owned by Lincoln National Corp.) |
| | --------------------------------------------------------
| ---------------------------------------------
|--| Lincoln National Risk Management, Inc. |
| | 100% - Indiana - Risk Management Services |
| ---------------------------------------------
| ------------------------------------------------
|--| Lincoln National Structured Settlement, Inc. |
| | 100% - New Jersey |
| ------------------------------------------------
| -----------------------------------------
|--| Lincoln National (UK) PLC |
| | 100% - England/Wales - Holding Company |
| -----------------------------------------
| | -------------------------------------------------------
| |--| Allied Westminster & Company Limited |
| | | (formerly One Olympic Way Financial Services Limited) |
| | | 100% - England/Wales - Sales Services |
| | -------------------------------------------------------
| | -----------------------------------
| |--|Cannon Fund Managers Limited |
| | | 100% - England/Wales - Inactive |
| | -----------------------------------
| | --------------------------------------------------------
| |--| Culverin Property Services Limited |
| | | 100% - England/Wales - Property Development Services |
| | --------------------------------------------------------
| | ---------------------------------------------------------
| |--| HUTM Limited |
| | | 100% - England/Wales - Unit Trust Management (Inactive) |
| | ---------------------------------------------------------
| |
| | --------------------------------------------
| |--| ILI Supplies Limited |
| | | 100% - England/Wales - Computer Leasing |
| | --------------------------------------------
| | ------------------------------------------------
| |--| Lincoln Financial Advisers Limited |
| | | (formerly: Laurentian Financial Advisers Ltd.) |
| | | 100% - England/Wales - Sales Company |
| | ------------------------------------------------
| |
| | --------------------------------------------------
| |--| Lincoln Financial Group PLC |
| | | (formerly: Laurentian Financial Group PLC) |
| | | 100% - England/Wales - Holding Company |
| | --------------------------------------------------
| | | ----------------------------------------------------
| | |--| Lincoln Unit Trust Management Limited |
| | | |(formerly: Laurentian Unit Trust Management Limited)|
| | | | 100% - England/Wales - Unit Trust Management |
| | | ----------------------------------------------------
| | | | --------------------------------------------------
| | | |--| LUTM Nominees Limited |
| | | | | 100% - England/Wales - Nominee Services (Dormat) |
| | | | --------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
<S><C>
--------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
--------------------------------
| -----------------------------------------
|--| Lincoln National (UK) PLC |
| | 100% - England/Wales - Holding Company |
| -----------------------------------------
| | --------------------------------------------------
| |--| Lincoln Financial Group PLC |
| | | (formerly: Laurentian Financial Group PLC) |
| | | 100% - England/Wales - Holding Company |
| | --------------------------------------------------
| | | ---------------------------------------
| | |--| Lincoln Milldon Limited |
| | | |(formerly: Laurentian Milldon Limited) |
| | | | 100% - England/Wales - Sales Company |
| | | ---------------------------------------
| | | -----------------------------------------------------------
| | |--| Laurtrust Limited |
| | | | 100% - England/Wales - Pension Scheme Trustee (Inactive) |
| | | -----------------------------------------------------------
| | | --------------------------------------------------
| | |--| Lincoln Management Services Limited |
| | | |(formerly: Laurentian Management Services Limited)|
| | | | 100% - England/Wales - Management Services |
| | | --------------------------------------------------
| | | | ------------------------------------------------
| | | |--|Laurit Limited |
| | | | |100% - England/Wales - Data Processing Systems |
| | | | ------------------------------------------------
| | --------------------------------------------------------
| |--| Liberty Life Pension Trustee Company Limited |
| | | 100% - England/Wales - Corporate Pension Fund (Dormat) |
| | --------------------------------------------------------
| | ----------------------------------------------------------
| |--| LN Management Limited |
| | | 100% - England/Wales - Administrative Services (Dormat) |
| | ----------------------------------------------------------
| | | -----------------------------------
| | |--| UK Mortgage Securities Limited |
| | | 100% - England/Wales - Inactive |
| | -----------------------------------
| | ------------------------------------------
| |--| Liberty Press Limited |
| | | 100% - England/Wales - Printing Services |
| ------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S><C>
--------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
--------------------------------
| -----------------------------------------
|--| Lincoln National (UK) PLC |
| | 100% - England/Wales - Holding Company |
| -----------------------------------------
| | ----------------------------------------------
| |--| Lincoln General Insurance Co. Ltd. |
| | | 100% - Accident & Health Insurance |
| | ----------------------------------------------
| | --------------------------------------------
| |--|Lincoln Assurance Limited |
| | | 100% ** - England/Wales - Life Assurance |
| | --------------------------------------------
| | | |
| | | | ---------------------------------------------
| | | |--|Barnwood Property Group Limited |
| | | | |100% - England/Wales - Property Management Co|
| | | | ---------------------------------------------
| | | | | ------------------------------------------
| | | | |--| Barnwood Developments Limited |
| | | | | | 100% England/Wales - Property Development|
| | | | | ------------------------------------------
| | | | |
| | | | | --------------------------------------------
| | | | |--| Barnwood Properties Limited |
| | | | | | 100% - England/Wales - Property Investment |
| | | | --------------------------------------------
| | | | -----------------------------------------------------
| | | |--|IMPCO Properties G.B. Ltd. |
| | | | |100% - England/Wales - Property Investment (Inactive)|
| | | | -----------------------------------------------------
| | | | ----------------------------------------------------
| | | |--| Lincoln Insurance Services Limited |
| | | | 100% - Holding Company |
| | | ----------------------------------------------------
| | | | ---------------------------------
| | | |--| British National Life Sales Ltd.|
| | | | | 100% - Inactive |
| | | | ---------------------------------
| | | |
| | | | ----------------------------------------------------------
| | | |--| BNL Trustees Limited |
| | | | | 100% - England/Wales - Corporate Pension Fund (Inactive) |
| | | | ----------------------------------------------------------
| | | | -------------------------------------
| | | |--| Chapel Ash Financial Services Ltd. |
| | | | | 100% - Direct Insurance Sales |
| | | | -------------------------------------
| | | | --------------------------
| | | |--| P.N. Kemp-Gee & Co. Ltd. |
| | | | | 100% - Inactive |
--------------------------
</TABLE>
<PAGE>
--------------------------------
| |
| Lincoln National Corporation |
| Indiana - Holding Company |
--------------------------------
|
| -----------------------------------------
|--| Lincoln National (UK) PLC |
| | 100% - England/Wales - Holding Company |
| -----------------------------------------
| | ----------------------------------------------
| |--| Lincoln Unit Trust Managers Limited |
| | | 100% - England/Wales - Investment Management |
| | ----------------------------------------------
| | ----------------------------------------------------------
| |--| LIV Limited (formerly Lincoln Investment Management Ltd.)|
| | | 100% - England/Wales - Investment Management Services |
| | ----------------------------------------------------------
| | | -----------------------------------------------
| | |--| CL CR Management Ltd. |
| | | 50% - England/Wales - Administrative Services |
| | -----------------------------------------------
| | -----------------------------------------------------------
| |--| Lincoln Independent Limited |
| | |(formerly: Laurentian Independent Financial Planning Ltd.) |
| | | 100% - England/Wales - Independent Financial Adviser |
| | -----------------------------------------------------------
| | ----------------------------------------------
| |--| Lincoln Investment Management Limited |
| | |(formerly: Laurentian Fund Management Ltd.) |
| | | 100% - England/Wales - Investment Management |
| | ----------------------------------------------
| | ------------------------------------------
| |--| LN Securities Limited |
| | | 100% - England/Wales - Nominee Company |
| | ------------------------------------------
| |
| | ---------------------------------------------
| |--| Niloda Limited |
| | | 100% - England/Wales - Investment Company |
| | ---------------------------------------------
| |
| | --------------------------------------------------
| |--| Lincoln National Training Services Limited |
| | | 100% - England/Wales - Training Company |
| | --------------------------------------------------
| | -------------------------------------------------
| |--| Lincoln Pension Trustees Limited |
| | | 100% - England/Wales - Corporate Pension Fund |
| | -------------------------------------------------
| |
| | --------------------------------------------------
| |--| Lincoln National (Jersey) Limited |
| | | 100% - England/Wales - Dormat |
| | --------------------------------------------------
| |
| | -------------------------------------------------
| |--| Lincoln National (Guernsey) Limited |
| | | 100% - England/Wales - Dormat |
| | -------------------------------------------------
| |
| | -------------------------------------------------
| |--| Lincoln SBP Trustee Limited |
| | 100% - England/Wales |
--------------------------------------------------
<PAGE>
--------------------------------
| |
| Lincoln National Corporation |
| Indiana - Holding Company |
--------------------------------
| -------------------------------------------------
| | Linsco Reinsurance Company |
|--| (formerly Lincoln National Reinsurance Company) |
| | 100% - Indiana - Property/Casualty |
| -------------------------------------------------
|
| ------------------------------------
|--| Old Fort Insurance Company, Ltd. |
| | 100% ** - Bermuda |
| ------------------------------------
| | --------------------------------------------------------
| | | Lincoln National Underwriting Services, Ltd. |
| |--| 10% - England/Wales - Life/Accident/Health Underwriter |
| | | (Remaining 90% owned by Lincoln Natl. Reinsurance Co.) |
| | --------------------------------------------------------
| | ---------------------------------------------------
| | | Solutions Holdings, Inc. |
| |--| 100% - Delaware - General Business Corporation |
| | ---------------------------------------------------
| | | ----------------------------------------
| | |--|Solutions Reinsurance Limited |
| | | 100% - Bermuda - Class III Insurance Co|
| ----------------------------------------
| ----------------------------------------------------------
| | Seguros Serfin Lincoln, S.A. |
|--| 49% - Mexico - Insurance |
| ----------------------------------------------------------
| ----------------------------------------------------------
| | Servicios de Evaluacion de Riesgos, S. de R.L. de C.V. |
|--| 49% - Mexico - Reinsurance Underwriter |
| | (Remaining 51% owned by Lincoln Natl. Reinsurance Co.) |
| ----------------------------------------------------------
| --------------------------------------------
|--| Underwriters & Management Services, Inc. |
| 100% - Indiana - Underwriting Services |
--------------------------------------------
FOOTNOTES:
* The funds contributed by the Underwriters were, and continue to be subject
to trust agreements between American States Insurance Company, the grantor,
and each Underwriter, as trustee.
** Except for director-qualifying shares
# Lincoln National Corporation has subscribed for and paid for 100 shares of
Common Stock (with a par value of $1.00 per share) at a price of $10 per
share, as part of the organizing of the fund. As such stock is further
sold, the ownership of voting securities by Lincoln National Corporation
will decline and fluctuate.
<PAGE>
ATTACHMENT #1
LINCOLN FINANCIAL GROUP, INC.
CORPORATE AGENCY SUBSIDIARIES
1) Lincoln Financial Group, Inc. (AL)
2) Lincoln Southwest Financial Group, Inc. (Phoenix, AZ)
3) Lincoln Financial and Insurance Services Corporation (Walnut Creek, CA)
3a) California Fringe Benefit and Insurance Marketing Corporation
DBA/California Fringe Benefit Company (Walnut Creek, CA)
4) Colorado-Lincoln Financial Group, Inc. (Denver, CO)
5) Lincoln National Financial Services, Inc. (Lake Worth, FL)
6) CMP Financial Services, Inc. (Chicago, IL)
7) Lincoln Financial Group of Northern Indiana, Inc. (Fort Wayne, IN)
8) Financial Planning Partners, Ltd. (Mission, KS)
9) The Lincoln National Financial Group of Louisiana, Inc. (Shreveport, LA)
10) Benefits Marketing Group, Inc. (D.C. & Chevy Chase, MD)
11) Lincoln Financial Services and Insurance Brokerage of New England, Inc
(formerly: Lincoln National of New England Insurance Agency, Inc.)
(Worcester, MA)
12) Lincoln Financial Group of Michigan, Inc. (Troy, MI)
12a) Financial Consultants of Michigan, Inc. (Troy, MI)
13) Lincoln Financial Group of Missouri, Inc. (formerly: John J. Moore &
Associates, Inc.) (St. Louis, MO)
14) Beardslee & Associates, Inc. (Clifton, NJ)
15) Lincoln Financial Group, Inc. (formerly: Resources/Financial, Inc.
(Albuquerque, NM)
16) Lincoln Cascades, Inc. (Portland, OR)
17) Lincoln Financial Group, Inc. (Salt Lake City, (UT)
<PAGE>
Summary of Changes to Organizational Chart:
JANUARY 1, 1995-DECEMBER 31, 1995
SEPTEMBER 1995
a. Lincoln National (Jersey) Limited was incorporated on September 18,
1995. Company is dormat and was formed for tax reasons per Barbara
Benoit, Assistant Corporate Secretary at Lincoln UK.
JANUARY 1, 1996-DECEMBER 1, 1996
MARCH 1996
a. Delaware Investment Counselors, Inc. changed its name to Delaware
Capital Management, Inc. effective March 29, 1996.
AUGUST 1996
a. Lincoln National (Gernsey) Limited was incorporated on August 9, 1996;
company is dormat and was formed for tax reasons.
SEPTEMBER 1996
a. Morgan Financial Group, Inc. changed its name to Lincoln National
Sales Corporation of Maryland effective September 23, 1996.
OCTOBER 1996
a. Addition of Lincoln National (India) Inc., incorporated as an Indiana
corporation on October 17, 1996.
NOVEMBER 1996
a. Lincoln National SBP Trustee Limited was bought "off the shelf" and
was incorporated on November 26, 1996; it was formed to act ast
Trustee for Lincoln Staff Benefits Plan.
DECEMBER 1996
a. Addition of Lincoln National Investments, Inc., incorporated as an
Indiana corporation on December 12, 1996.
JANUARY 1, 1997-DECEMBER 31, 1997
JANUARY 1997
a. Delaware Management Holdings, Inc., Lynch & Mayer, Inc. and Vantage
Global Advisors, Inc. were transferred via capital contribution to
Lincoln National Investments, Inc. effective January 2, 1997.
b. Lincoln National Investments, Inc. changed its name to Lincoln
National Investment Companies, Inc. effective January 24, 1997.
c. Lincoln National Investment Companies, Inc. changed its named to
Lincoln National Investments, Inc. effective January 24, 1997.
<PAGE>
JANUARY 1997 CON'T
d. The following Lincoln National (UK) subsidiaries changed their name
effective January 1, 1997: Lincoln Financial Group PLC (formerly
Laurentian Financial Group PLC); Lincoln Milldon Limited (formerly
Laurentian Milldon Limited); Lincoln Management Services Limited
(formerly Laurentian Management Services Limited).
FEBRUARY 1997
a. Removal of Lincoln National Financial Group of Philadelphia, Inc.
which was dissolved effective February 25, 1997.
MARCH 1997
a. Removal of Lincoln Financial Services, Inc. which was dissolved
effective March 4, 1997.
APRIL 1997
a. Acquisition of Dougherty Financial Group, Inc. on April 30, 1997.
Company then changed its name to Delvoy, Inc. The acquisition
included the mutual fund group of companies as part of the Voyager
acquisition. The following companies all then were moved under the
newly formed holding company, Delvoy, Inc. effective April 30, 1997:
Delaware Management Company, Inc., Delaware Distributors, Inc.,
Delaware Capital Management, Inc., Delaware Service Company, Inc. and
Delaware Investment & Retirement Services, Inc.
b. Acquisition of Voyager Fund Managers, Inc. and Voyager Fund
Distributors, Inc. on April 30, 1997; merger is scheduled for May 31,
1997 for Voyager Fund Managers, Inc. into Delaware Management Company,
Inc. and Voyager Fund Distributors, Inc. is to merge into Delaware
Distributors, L.P.
c. Removal of Aseguradora InverLincoln, S.A. Compania de Seguros y
Reaseguros, Grupo Financiero InverMexico. Stock was sold to Grupo
Financiero InverMexico effective April 18, 1997.
MAY 1997
a. Name change of The Richard Leahy Corporation to Lincoln National
Financial Institutions Group, Inc. effective May 6, 1997.
b. Voyager Fund Managers, Inc. merged into Delaware Management Company,
Inc. effective May 30, 1997 at 10:00 p.m. with Delaware Management
Company, Inc. surviving.
c. On May 31, 1997 at 2:00 a.m., Voyager Fund Distributors, Inc. merged
into a newly formed company Voyager Fund Distributors (Delaware),
Inc., incorporated as a Delaware corporation on May 23, 1997. Voyager
Fund Distributors (Delaware), Inc. then merged into Delaware
Distributors, L.P. effective May 31, 1997 at 2:01 a.m. Delaware
Distributors, L.P. survived.
JUNE 1997
a. Removal of Lincoln National Sales Corporation of Maryland -- company
dissolved June 13, 1997.
b. Addition of Lincoln Funds Corporation, incorporated as a Delaware
corporation on June 10, 1997 at 2:00 p.m.
<PAGE>
c. Addition of Lincoln Re, S.A., incorporated as an Argentina company on
June 30, 1997.
JULY 1997
a. LNC Equity Sales Corporation changed its name to Lincoln Financial
Advisors Corporation effective July 1, 1997.
b. Addition of Solutions Holdings, Inc., incorporated as a Delaware
corporation on July 27, 1997.
SEPTEMBER 1997
a. Addition of Solutions Reinsurance Limited, incorporated as a Bermuda
corporation on September 29, 1997.
OCTOBER 1997
a. Removal of the following companies: American States Financial
Corporation, American States Insurance Company, American Economy
Insurance Company, American States Insurance Company of Texas,
American States Life Insurance Company, American States Lloyds
Insurance Company, American States Preferred Insurance Company, City
Insurance Agency, Inc. And Insurance Company of Illinois -- all were
sold 10-1-97 to SAFECO Corporation.
b. Liberty Life Assurance Limited was sold to Liberty International
Holdings PLC effective 10-6-97.
c. Addition of Seguros Serfin Lincoln, S.A., acquired by LNC on 10-15-97.
DECEMBER 1997
a. Addition of City Financial Planners, Ltd. as a result of its
acquisition by Lincoln National Corporation on December 22, 1997.
This company will distribute life assurance and pension products of
Lincoln Assurance Limited.
JANUARY 1998
a. Addition of Cigna Associates, Inc., Cigna Financial Advisors, Inc. and
Cigna Associates of Massachusetts, Inc., acquired by The Lincoln
National Life Insurance Company on January 1, 1998. Cigna Associates
of Massachusetts is 100% owned by Cigna Associates, Inc.
b. Removal of Lincoln National Mezzanine Corporation and Lincoln National
Mezzanine Fund, L.P. Lincoln National Mezzanine Corporation was
dissolved on January 12, 1998 and Lincoln National Mezzanine Fund,
L.P. was cancelled January 12, 1998.
c. Corporate organizational changes took place in the UK group of
companies on January 21, 1998: Lincoln Insurance Services Limited and
its subsidiaries were moved from Lincoln National (UK) PLC to Lincoln
Assurance Limited; Lincoln General Insurance Co. Ltd. was moved from
Lincoln Insurance Services Limited to Lincoln National (UK) PLC.
d. Addition of AnnuityNet, Inc., incorporated as an Indiana corporation
on January 16, 1998 and a wholly-owned subsidiary of The Lincoln
National Life Insurance Company.
<PAGE>
BOOKS AND RECORDS
LINCOLN NATIONAL EQUITY-INCOME FUND, INC.
RULES UNDER SECTION 31 OF THE INVESTMENT COMPANY ACT OF 1940
Records to Be Maintained by Registered Investment Companies, Certain
Majority-Owned Subsidiaries Thereof, and Other Persons Having Transactions
with Registered Investment Companies.
Reg. 270.31a-1. (a) Every registered investment company, and every
underwriter, broker, dealer, or investment advisor which is a majority-owned
subsidiary of such a company, shall maintain and keep current the accounts,
books, and other documents relating to its business which constitute the record
forming the basis for financial statements required to be filed pursuant to
Section 30 of the Investment Company Act of 1940 and of the auditor's
certificates relating thereto.
<TABLE>
<CAPTION>
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
<S> <C> <C> <C>
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
</TABLE>
(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.
<TABLE>
<CAPTION>
PURCHASES AND SALES JOURNALS
<S> <C> <C> <C>
Daily reports Delaware Fund Accounting Permanently, the first two
of securities years in an easily
transactions accessible place
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
<S> <C> <C> <C>
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
from Bankers accessible 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
</TABLE>
(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.
<TABLE>
<CAPTION>
GENERAL LEDGER
<S> <C> <C> <C>
General Delaware Fund Accounting Permanently, the first two
Ledger years in an easily
accessible place
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
<S> <C> <C> <C>
SECURITIES IN TRANSFER
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
SECURITIES IN PHYSICAL POSSESSION
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
and Trust accessible place
Company
SECURITIES BORROWED AND LOANED
Their files State Mutual Funds Permanently, the first two
Street Bank Division years in an easily
and Trust accessible place
Company
MONIES BORROWED AND LOANED
Not Applicable.
DIVIDENDS AND INTEREST RECEIVED
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
DIVIDENDS RECEIVABLE AND INTEREST ACCRUED
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
<PAGE>
Interest File Delaware Fund Accounting Permanently, the first two
Accrual years in an easily
Activity accessible place
Journal
</TABLE>
(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>
LEDGER ACCOUNT FOR EACH PORTFOLIO SECURITY
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>
<CAPTION>
<S> <C> <C> <C>
Broker-Dealer Delaware Fund Accounting Permanently, the first two
Journal 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>
<CAPTION>
<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" positions 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>
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
<S> <C> <C> <C>
SECURITIES POSITION RECORD
Maintained by State Mutual Funds Permanently, the first two
Custodian of Street Bank Division years in an easily
Securities and Trust accessible 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>
<CAPTION>
<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>
<CAPTION>
<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
AOS Trading and Trust accessible 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>
<CAPTION>
<S> <C> <C> <C>
Notification State Mutual Funds Six years, the first two
Form (From Street Bank Division years in an easily
AOS S-T and Trust accessible place
System) Company
Bank Advice Delaware Fund Accounting Six years, the first two
and Issuer years in an easily
Confirmation accessible 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.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Brokerage Fidelity Mutual Funds Six Years, the first two
Allocation Division years in an easily
Report accessible place
</TABLE>
(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>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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
</TABLE>
(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.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Correspondence Product Nancy Alford Six years, the first two
Admin. years in an easily
Product accessible 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
celled Checks accessible place
and Cash
Reconciliations
</TABLE>
March 12, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE FUND ANNUAL REPORT DATED 12/31/97 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000914512
<NAME> EQUITY INCOME FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 603,038,297
<INVESTMENTS-AT-VALUE> 825,386,501
<RECEIVABLES> 4,225,429
<ASSETS-OTHER> 83,429
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 829,695,359
<PAYABLE-FOR-SECURITIES> 17,900,326
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 725,197
<TOTAL-LIABILITIES> 18,625,523
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 561,869,045
<SHARES-COMMON-STOCK> 40,315,773
<SHARES-COMMON-PRIOR> 28,971,111
<ACCUMULATED-NII-CURRENT> 9,232,321
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 17,621,623
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 222,346,847
<NET-ASSETS> 811,069,836
<DIVIDEND-INCOME> 14,332,829
<INTEREST-INCOME> 1,440,030
<OTHER-INCOME> (97,617)
<EXPENSES-NET> (6,442,921)
<NET-INVESTMENT-INCOME> 9,232,321
<REALIZED-GAINS-CURRENT> 17,621,623
<APPREC-INCREASE-CURRENT> 137,804,605
<NET-CHANGE-FROM-OPS> 164,658,549
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (12,117,083)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 10,211,887
<NUMBER-OF-SHARES-REDEEMED> (51,029)
<SHARES-REINVESTED> 1,183,804
<NET-CHANGE-IN-ASSETS> 353,916,499
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 12,117,083
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 6,053,404
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 6,442,921
<AVERAGE-NET-ASSETS> 634,375,645
<PER-SHARE-NAV-BEGIN> 15.780
<PER-SHARE-NII> 0.229
<PER-SHARE-GAIN-APPREC> 4.511
<PER-SHARE-DIVIDEND> 0.000
<PER-SHARE-DISTRIBUTIONS> (0.402)
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 20.118
<EXPENSE-RATIO> 1.02
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
