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PROSPECTUS AND APPENDIX
This document is incorporated by reference to Post-Effective Amendment No. 16,
Registration Number 2-80746 filed on Form N-1A on April 30, 1995.
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STATEMENT OF ADDITIONAL INFORMATION
LINCOLN NATIONAL BOND FUND, INC.
This Statement of Additional Information should be read in conjunction with the
Prospectus of Lincoln National Bond Fund, Inc. (the Fund) dated April 29, 1995.
You may obtain a copy of the Fund's Prospectus on request and without charge.
Please write Kim Oakman, The Lincoln National Life Insurance Company, P.O. Box
2340, Fort Wayne, Indiana 46801 or call 1-800-1212, Extension 4912.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS.
The date of this Statement of Additional Information is April 29, 1995.
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TABLE OF CONTENTS
Page
General Information and History 2
Investment Objective 2
Investment Policies 2
Investment Restrictions 3
Portfolio Transactions and Brokerage 4
Determination of Net Asset Value 5
Appendix
Investment Advisor and Sub-Advisor A-1
Directors and Officers A-2
Investment Policies and Techniques (continued) A-2
Options, Futures, Securities Lending, Repurchase and Reverse
Repurchase Agreements
Custodian A-6
Independent Auditors A-7
Financial Statements A-7
Bond Ratings A-7
Commercial Paper Ratings A-8
U.S. Government Obligations A-8
Taxes A-8
State Requirements A-9
Derivative Transactions - Definitions A-9
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GENERAL INFORMATION
Lincoln National Bond Fund, Inc. was incorporated in Maryland in 1981 as Lincoln
National Corporate Bond Fund, Inc. It operated under that name until 1988, when
the name was changed to Lincoln National Bond Fund, Inc., consistent with a
change in investment policy approved by Contract Owners.
INVESTMENT OBJECTIVE
The investment objective of the Fund is maximum current income consistent with a
prudent investment strategy. The Fund's investment objective and 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
Prospectus. There can be no assurance that the objectives of the Fund will be
achieved.
This Fund will invest not only in investment-grade, longer-term fixed income
securities of established companies, but also in certain U.S. Government
obligations and U.S. dollar-denominated obligations of foreign governments. The
objectives are high current income consistent with a preservation of capital.
The primary risk is that associated with interest rates. As interest rates
change, these securities will fluctuate in value, with the degree of volatility
dependent upon the average maturity of the portfolio. The policy of investing
primarily in securities in the top four credit categories of the established
rating services minimizes credit risk exposure.
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INVESTMENT POLICIES
The Fund pursues its investment objective by investing in a diversified
portfolio consisting primarily of medium to long-term debt securities. (See
Description of the Fund and Investment Policies and Techniques, in the
Prospectus.)
In addition, the Fund may write (sell) and purchase options and invest in
futures contracts and options thereon, as briefly described below. A detailed
description of put and call options, futures contracts and options thereon
appears, and other techniques in the SAI Appendix.
OPTIONS TRADING
The Fund may write (sell) put and covered call options and purchase covered put
options for financial instruments, and write and purchase options to close out
positions previously entered into by the Fund; provided, that the aggregate cost
of premiums for all outstanding options would not exceed 30% of the Fund's total
assets, although the ultimate loss to the Fund from options could be
substantially greater than 30%. The Fund will only write and purchase options in
standard contracts which may be quoted on NASDAQ or traded on the national
securities exchanges.
Put and call options are generally short-term contracts with durations of nine
months or less. The Investment Adviser will generally write covered call options
when it anticipates declines in the market value of the portfolio securities and
the premiums received may offset to some extent the decline in the Fund's net
asset value. On the other hand, writing put options is a useful portfolio
investment strategy when the Fund has cash or other reserves and it intends to
purchase securities but expects prices to decline.
Generally, the risk to the Fund in writing options is that the Investment
Adviser's assumption about the price trend of the underlying security may prove
inaccurate. If, as a result, the Fund wrote a put, expecting the price of a
security to increase, and it decreased; or if the Fund wrote a call, expecting
the price to decrease but it increased, the Fund could suffer a loss if the
premium received in each case did not equal the difference between the exercise
price and the market price.
LENDING OF PORTFOLIO SECURITIES
As discussed in the Prospectus, the Fund may from time to time lend securities
from its portfolio to brokers, dealers and financial institutions and receive
collateral from the borrower, in the form of cash (which may be invested in
short-term securities), U.S. government obligations or certificates of deposit.
Such collateral will be maintained at all times in an amount equal to at least
100% of the current market value of the loaned securities, and will be in the
actual or constructive
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possession of the Fund during the term of the loan. The Fund will retain the
incidents of ownership of the loaned securities and will continue to be entitled
to the interest or dividends payable on the loaned securities. In addition, the
Fund will receive interest on the amount of the loan. The loans will be
terminable by the Fund at any time and will not be made to any affiliates of the
Fund or the Adviser. The Fund may pay reasonable finder's fees to persons
unaffiliated with it in connection with the arrangement of the loans.
As with any extensions of credit, there are risks of delay in recovery and, in
some cases, even loss of rights in the collateral or the loaned securities
should the borrower of securities fail financially. However, loans of portfolio
securities will be made only to firms deemed by the Adviser to be creditworthy.
REPURCHASE AGREEMENTS
As discussed in the Prospectus, the Fund may make short-term investments in
repurchase agreements. A repurchase agreement typically involves the purchase by
the Fund of securities (U.S. government or other money market securities) from a
financial institution such as a bank, broker or savings and loan association,
coupled with an agreement by the seller to repurchase the same securities from
the Fund at the specified price and at a fixed time in the future, usually not
more than seven days from the date of purchase. The difference between the
purchase price to the Fund and the resale price to the seller represents the
interest earned by the Fund which is unrelated to the coupon rate or maturity of
the Fund and the resale price to the seller represents the interest earned by
the Fund which is unrelated to the coupon rate or maturity of the purchased
security. If the seller defaults, the Fund may incur a loss if the value of the
collateral securing the repurchase agreement declines, or the Fund may incur
disposition costs in connection with liquidating the collateral. If bankruptcy
proceedings are commenced with respect to the seller, realization upon the
collateral by the Fund may be delayed or limited and a loss may be incurred if
the collateral securing the repurchase agreement declines in value during the
bankruptcy proceedings. However, repurchase agreements will be made only with
brokers or dealers deemed by the Board of Directors to be creditworthy; they
will be fully collateralized; and the collateral for each transaction will be in
the actual or constructive possession of the Fund during the term of the
transaction, as provided in the agreement.
FUTURES CONTRACTS AND OPTIONS THEREON
Generally, the Fund may buy and sell financial futures contracts ("futures
contracts") and related options thereon solely for hedging purposes. The Fund
may sell a futures contract or purchase a put option on that futures contract to
protect the value of the Fund's portfolio in the event the Investment Adviser
anticipates declining security prices. Similarly, if security prices are
expected to rise, the Fund may purchase a futures
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contract or a call option thereon. (For certain limited purposes, the Fund is
also authorized to buy futures contracts on an unleveraged basis and not as an
anticipatory hedge. See the SAI Appendix for a more detailed explanation.)
The Fund will not invest in futures contracts and options thereon if immediately
thereafter the amount committed to margins plus the amount paid for option
premium exceeds 5% of the Fund's total assets. In addition, the Fund will not
hedge more than one-third of its net assets. See the SAI Appendix for a more
complete description of the use of futures contracts and options thereon as well
as the risks related thereto.
INVESTMENT RESTRICTIONS
In addition to the investment restrictions listed in the Prospectus, the
following investment restrictions have been adopted by the Fund as fundamental
policies, except as otherwise indicated. Under the Investment Company Act of
1940, as amended (the Act), a fundamental policy may not be changed without the
affirmative vote of a majority of the outstanding voting securities of the Fund.
See General Information, in the Prospectus. For purposes of the following
restrictions: (1) all percentage limitations apply immediately after the making
of an investment; and (2) any subsequent change in any applicable percentage
resulting from market fluctuations does not require elimination of any security
from the portfolio.
The Fund may not:
1. Invest more than 25% of its total assets in the securities of issuers in
any one industry. For purposes of this restriction, gas, electric, water
and telephone utilities are treated as separate industries.
2. Invest in the securities of any one issuer unless at least 75% of the
value of the Fund's total assets is represented by: (a) U.S. government
obligations, cash and cash items, (b) securities of other investment
companies, and (c) securities of issuers as to each of which, at the time
the investment was made, the Fund's investment in the issuer did not
exceed 5% of the Fund's total assets.
3. Purchase or sell real estate or interests therein, although it may
purchase securities of issuers which engage in real estate operations or
securities which are secured by interests in real estate.
4. Make loans except that it may lend its portfolio securities if such loans
are fully collateralized and such loans of securities do not exceed 15%
of its total assets at any one time. See Investment Policies--Lending of
Portfolio Securities, in the Prospectus. The purchase of debt securities
and the entry into repurchase agreements are not considered the making of
loans.
5. Purchase puts, calls or combinations thereof, except the Fund may write
and purchase put and call options and effect closing transactions as
described under Investment
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Policies.
6. Underwrite the securities of other issuers, except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 in
disposing of portfolio securities.
7. Invest more than 10% of its total assets in securities (including
repurchase agreements maturing in more than seven days) which are subject
to legal or contractual restrictions upon resale or are otherwise not
readily marketable.
8. Purchase securities on margin, except for such short-term loans as are
necessary for the clearance of purchases of portfolio securities.
9. Make short sales of securities.
10. Purchase or sell commodities or commodity futures contracts, except
financial futures contracts and options thereon.
11. Purchase securities of investment companies except in connection with an
acquisition, merger, consolidation or reorganization.
12. Invest in companies for the purpose of, or with the effect of acquiring
control.
13. Invest in interests in oil, gas and other mineral exploration or
development programs, except that the Fund may invest in the securities
of companies which invest in or sponsor such programs.
14. Invest in securities of any issuer if, to the knowledge of the Fund,
officers or directors of the Fund or its Adviser, who individually own
beneficially 1/2 of 1% or more of the securities of such issuer,
collectively own beneficially more than 5% of the securities of such
issuer.
15. Pledge its assets or assign or otherwise encumber them except to secure
borrowings effected within the limitations set forth in Restriction 2 in
the Prospectus. (For purposes of this restriction, collateral
arrangements with respect to the writing of options and collateral
arrangements with respect to initial margin for futures contracts are not
deemed to be pledges of assets.)
16. Issue senior securities as defined in the Act except insofar as the Fund
may be deemed to have issued a senior security by borrowing money in
accordance with the restrictions described above. (For the purpose of
this restriction, collateral arrangements with respect to the writing of
options and initial margin deposits for futures contracts and the
purchase or sale of futures contracts are not deemed to be the issuance
of a senior security.)
17. Hold more than 10% of the outstanding voting securities of any one
issuer.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser is responsible for decisions to buy and sell securities for the
Fund, the selection of brokers and dealers to effect the transactions, and the
negotiation of brokerage commissions, if any. Purchases and sales of securities
on a
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stock exchange are effected through brokers who charge a commission for their
services. In the over-the-counter market, securities are generally traded on a
"net" basis with dealers acting as principal for their own accounts without a
stated commission, although the price of the securities usually includes a
profit to the dealer. In underwritten offerings, securities are purchased at a
fixed price which includes an amount of compensation to the underwriter,
generally referred to as the underwriter's concession or discount. On occasion,
certain money market instruments may be purchased directly from an issuer, in
which case no commissions or discounts are paid.
The Adviser currently provides investment advice to a number of other clients.
See Investment Adviser and Sub-Adviser in the Appendix. It will be the practice
of the Adviser to allocate purchase and sale transactions among the Fund and
others whose assets are managed in such manner as is deemed equitable. In making
such allocations, major factors to be considered are investment objectives, the
relative size of portfolio holdings of the same or comparable securities, the
availability of cash for investment, the size of investment commitments
generally held and the opinions of the persons responsible for managing the
portfolios of the Fund and other client accounts. Portfolio securities are not
purchased from or sold to the Adviser or any affiliated person (as defined in
the Act) of the Adviser.
In connection with effecting portfolio transactions, primary consideration will
be given to securing the most favorable price and efficient execution. Within
the framework of this policy, the reasonableness of commission or other
transaction costs is a major factor in the selection of brokers and is
considered together with other relevant factors, including financial
responsibility, research and investment information and other services provided
by such brokers. It is expected that, as a result of such factors, transaction
costs charged by some brokers may be greater than the amounts other brokers
might charge. The Adviser may determine in good faith that the amount of such
higher transaction costs is reasonable in relation to the value of the brokerage
and research services provided. The Board of Directors of the Fund will review
regularly the reasonableness of commission and other transaction costs incurred
by the Fund in the light of facts and circumstances deemed relevant from time to
time, and, in that connection, will receive reports from the Adviser and
published data concerning transaction costs incurred by institutional investors
generally. The nature of the research services provided to the Adviser by
brokerage firms varies from time to time but generally includes current and
historical financial data concerning particular companies and their securities;
information and analysis concerning securities markets and economic and industry
matters; and technical and statistical studies and data dealing with various
investment opportunities, risks and trends, all of which the Adviser regards as
a useful supplement to its own internal research capabilities. The Adviser may
from time to time direct trades to brokers which have provided specific
brokerage or research services for the
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benefit of the Adviser's clients; in addition the Adviser may allocate trades
among brokers that generally provide superior brokerage and research services.
Research services furnished by brokers are used for the benefit of all of the
Adviser's clients and not solely or necessarily for the benefit of the Fund. The
Adviser believes that the value of research services received is not
determinable and does not significantly reduce its expenses. The Fund does not
reduce its fee to the Adviser by any amount that might be attributable to the
value of such services.
If the Fund effects a closing purchase transaction with respect to an option
written by it, normally such transaction will be executed by the same broker-
dealer who executed the sale of the option. If a call written by the Fund is
exercised, normally the sale of the underlying securities will be executed by
the same broker-dealer who executed the sale of the call.
The writing of options by the Fund will be subject to limitations established by
each of the exchanges governing the maximum number of options in each class
which may be written by a single investor or group of investors acting in
concert, regardless of whether the options are written on the same or different
exchanges or are held or written in one or more accounts or through one or more
brokers. Thus, the number of options which the Fund may write may be affected by
options written by other investment advisory clients of its Adviser. An exchange
may order the liquidations of positions found to be in excess of these limits,
and it may impose certain other sanctions. As of the date of this Prospectus,
these limits (which are subject to change) are 2,000 options (200,000 shares) in
each class of puts or calls.
DETERMINATION OF NET ASSET VALUE
A description of the days on which the Fund's net asset value per share will be
determined is given in the Prospectus. The New York Stock Exchange's most recent
announcement (which is subject to change) states that in 1995 it will be closed
on President's Day, February 20; Good Friday, April 14; Memorial Day, May 29;
Independence Day, July 4; Labor Day, September 4; Thanksgiving Day, November 23;
and Christmas Day, December 25. It may also be closed on other days.
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STATEMENT OF ADDITIONAL INFORMATION APPENDIX
This document is incorporated by reference to Post-Effective Amendment No. 16,
Registration Number 2-80746 filed on Form N-1A on April 30, 1995.
