<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 9, 1998
1933 Act Registration No. 333-40937
1940 Act Registration No. 811-08517
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / /
POST-EFFECTIVE AMENDMENT NO. 1
/X/
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / /
AMENDMENT NO. 3 /X/
LINCOLN LIFE VARIABLE ANNUITY ACCOUNT N
(EXACT NAME OF REGISTRANT)
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
(NAME OF DEPOSITOR)
1300 South Clinton Street, P.O. Box 1110, Fort Wayne, Indiana 46802
(ADDRESS OF DEPOSITOR'S PRINCIPAL EXECUTIVE OFFICES)
DEPOSITOR'S TELEPHONE NUMBER, INCLUDING AREA CODE
(219) 455-2000
<TABLE>
<S> <C>
COPY TO:
Jack D. Hunter, Esquire Kimberly J. Smith, Esquire
200 East Berry Street Sutherland, Asbill & Brennan LLP
P.O. Box 1110 1275 Pennsylvania Ave., N.W.
Fort Wayne, Indiana 46802 Washington, D.C. 20004
(NAME AND ADDRESS OF
AGENT FOR SERVICE)
</TABLE>
Title of Securities: Interests in a separate account under individual flexible
payment deferred variable annuity contracts.
It is proposed that this filing will become effective:
/X/ immediately upon filing pursuant to paragraph (b) of Rule 485
/ / on April 1, 1998, pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1) of Rule 485
/ / on , 1998 pursuant to paragraph (a)(1) of Rule 485
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
PURSUANT TO RULE 481
SHOWING LOCATION IN PART A (PROSPECTUS) AND
PART B (STATEMENT OF ADDITIONAL INFORMATION)
OF REGISTRATION STATEMENT OF INFORMATION REQUIRED BY FORM N-4
PART A
<TABLE>
<CAPTION>
ITEM OF FORM N-4 PROSPECTUS CAPTION
- ----------------------------------------------------- --------------------------------------------------------
<C> <S> <C>
1. Cover Page...................................... Cover Page
2. Definitions..................................... Definitions
3. Synopsis........................................ Highlights; Fees and Expenses
4. Condensed Financial Information................. Condensed Financial Information
5. General.........................................
(a) Depositor................................... Lincoln Life and the Variable Account
(b) Registrant.................................. Lincoln Life and the Variable Account
(c) Portfolio Company The Funds
(d) Fund Prospectus The Funds
(e) Voting Rights............................... The Funds -- Voting Rights
6. Deductions and Expenses
(a) General..................................... Charges and Deductions
(b) Sales Load %................................ Charges and Deductions -- Contingent Deferred Sales
Charge (Sales Load)
(c) Special Purchase Plan....................... N/A
(d) Commissions................................. Distribution of the Contracts
(e) Fund Expenses............................... Fees and Expenses -- Fund Portfolio Annual Expenses
(f) Organizational Expenses..................... N/A
7. Contracts
(a) Persons with Rights......................... Other Contract Features (Ownership, Assignment,
Beneficiary, Change of Beneficiary, Annuitant,
Surrenders and Partial Withdrawals, Death of Owner,
Death of Annuitant); Annuity Provisions; Voting Rights
(b) (i) Allocation of Premium Payments.......... Premium Payments and Contract Value -- Allocation of
Premium Payments
(ii) Transfers.................................. Transfer of Contract Values Between Sub-Accounts
(iii) Exchanges................................. N/A
(c) Changes..................................... Modification; Substitution of Securities; Change in
Operation of Variable Account
(d) Inquiries................................... Cover Page; Highlights
8. Annuity Period.................................. Annuity Provisions
9. Death Benefit................................... Death of the Owner; Death of the Annuitant
10. Purchase and Contract Values
(a) Purchases................................... Premium Payments
(b) Valuation................................... Contract Value; Accumulation Unit;
(c) Daily Calculation........................... Accumulation Unit; Allocation of Premium Payments
(d) Underwriter................................. Distribution of the Contracts
11. Redemptions
(a) By Owners................................... Surrenders
By Annuitant.................................... Annuity Provisions -- Variable Options
(b) Texas ORP................................... Other Contract Features
(c) Check Delay................................. Delay of Payments and Transfers
(d) Lapse....................................... Premium Payments
(e) Free Look................................... Highlights
12. Taxes........................................... Tax Matters
13. Legal Proceedings............................... Legal Proceedings
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
ITEM OF FORM N-4 PROSPECTUS CAPTION
- ----------------------------------------------------- --------------------------------------------------------
<C> <S> <C>
14. Table of Contents for the Statement of
Additional Information......................... Table of Contents of the Statement of Additional
Information
</TABLE>
PART B
<TABLE>
<CAPTION>
ITEM OF FORM N-4 STATEMENT OF ADDITIONAL INFORMATION CAPTION
- ----------------------------------------------------- --------------------------------------------------------
<C> <S> <C>
15. Cover Page...................................... Cover Page
16. Table of Contents............................... Table of Contents
17. General Information and History................. a) N/A
b) N/A
c) (Prospectus) Lincoln Life and the Variable Account;
the Fixed Account
18. Services
(a) Fees and Expenses of Registrant............. N/A
(b) Management Contracts........................ N/A
(c) Custodian................................... Custody of Assets
Independent Accountant.......................... Experts
(d) Assets of Registrant........................ N/A
(e) Affiliated Person........................... N/A
(f) Principal Underwriter....................... Distribution of the Contracts
19. Purchase of Securities Being Offered............ Distribution of the Contracts
Offering Sales Load............................. Distribution of the Contracts; (Prospectus) Charges and
Deductions -- Contingent Deferred Sales Charge (Sales
Load)
20. Underwriters.................................... Distribution of the Contracts; (Prospectus) Distribution
of the Contracts
21. Calculation of Performance Data................. Investment Experience; Historical Performance Data
22. Annuity Payments................................ (Prospectus) Annuity Provisions
23. Financial Statements............................ Financial Statements
</TABLE>
PART C -- OTHER INFORMATION
<TABLE>
<CAPTION>
ITEM OF FORM N-4 PART C CAPTION
- ----------------------------------------------------- --------------------------------------------------------
<C> <S> <C>
24. Financial Statements and Exhibits............... Financial Statements and Exhibits
(a) Financial Statements........................ Financial Statements
(b) Exhibits.................................... Exhibits
25. Directors and Officers of the Depositor......... Directors and Officers of the Depositor
26. Persons Controlled By or Under Common Control
with the Depositor or Registrant............... Persons Controlled By or Under Common Control with the
Depositor or Registrant
27. Number of Owners................................ Number of Owners
28. Indemnification................................. Indemnification
29. Principal Underwriters.......................... Principal Underwriter
30. Location of Accounts and Records................ Location of Accounts and Records
31. Management Services............................. Management Services
32. Undertakings.................................... Undertakings
Signature Page.................................. Signatures
</TABLE>
ii
<PAGE>
DELAWARE-LINCOLN CHOICEPLUS
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
LINCOLN LIFE VARIABLE ANNUITY ACCOUNT N
HOME OFFICE:
1300 S. CLINTON STREET
FORT WAYNE, IN 46802
(888) 868-2583
- --------------------------------------------------------------------------------
FLEXIBLE PAYMENT DEFERRED VARIABLE ANNUITY CONTRACTS
- --------------------------------------------------------------------------------
The Flexible Payment Deferred Variable Annuity Contracts (the "Contracts")
described in this prospectus provide for accumulation of Contract Values and
eventual payment of monthly annuity payments on a fixed or variable basis. The
Contracts are designed to aid individuals in long term planning for retirement
or other long term purposes. The Contracts are available for retirement plans
which do not qualify for the special federal tax advantages available under the
Internal Revenue Code ("Non-Qualified Plans") and for retirement plans which do
qualify for the federal tax advantages available under the Internal Revenue Code
("Qualified Plans"). (See "Tax Matters -- Qualified Plans.") Premium payments
for the Contracts will be allocated to a segregated investment account of The
Lincoln National Life Insurance Company ("Lincoln Life"), designated Lincoln
Life Variable Annuity Account N (the "Variable Account"), or to the Fixed
Account, or some combination of them, as selected by the owner of the Contract.
The following funding options are available under a Contract: Through the
Variable Account, Lincoln Life offers thirty diversified open-end management
investment companies (commonly called mutual funds), each with a different
investment objective: AIM Variable Insurance Funds -- AIM V.I. Growth Fund, AIM
V.I. Value Fund and AIM V.I. International Equity Fund; BT Insurance Funds Trust
- -- Equity 500 Index Fund; Delaware Group Premium Fund -- Decatur Total Return
Series, Devon Series, Delchester Series, Emerging Markets Series, International
Equity Series, REIT Series, Small Cap Value Series, Social Awareness Series, and
Trend Series; Dreyfus Variable Investment Fund -- Small Cap Portfolio; Fidelity
Variable Insurance Products Fund -- Equity-Income Portfolio, Growth Portfolio
and Overseas Portfolio; Fidelity Variable Insurance Products Fund III -- Growth
Opportunities Portfolio; Investors Fund Series -- Kemper Government Securities
Portfolio and Kemper Small Cap Growth Portfolio; Liberty Variable Investment
Trust -- Colonial U.S. Stock Fund and Newport Tiger Fund; Lincoln National Bond
Fund; Lincoln National Money Market Fund; MFS-Registered Trademark- Variable
Insurance Trust -- MFS Total Return Series, MFS Utilities Series, MFS Emerging
Growth Series, MFS Research Series; OCC Accumulation Trust -- Global Equity
Portfolio, Managed Portfolio. The fixed interest option offered under a Contract
is the Fixed Account. Premium payments or transfers allocated to the Fixed
Account, and 3% interest per year thereon, are guaranteed, and additional
interest may be credited, with certain withdrawals subject to a Market Value
Adjustment and withdrawal charges. Unless specifically mentioned, this
prospectus only describes the variable investment options.
This entire prospectus, and those of the Funds, should be read carefully before
investing to understand the Contracts being offered. The "Statement of
Additional Information" dated November 9, 1998, has been filed with the
Securities and Exchange Commission and is incorporated by reference to this
Prospectus. It is available at no charge by calling or writing Lincoln Life's
Home Office as shown above, provides further information. Its Table of Contents
is at the end of this prospectus.
THE CONTRACTS MAY NOT BE AVAILABLE IN ALL STATES. PLEASE CONTACT YOUR
REPRESENTATIVE AS TO THE AVAILABILITY IN YOUR STATE.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUSES OF
THE MUTUAL FUNDS AVAILABLE AS FUNDING OPTIONS FOR THE CONTRACTS OFFERED BY THIS
PROSPECTUS. ALL PROSPECTUSES SHOULD BE RETAINED FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PROSPECTUS DATED: NOVEMBER 9, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CONTENTS PAGE
<S> <C>
DEFINITIONS.................................... 3
HIGHLIGHTS..................................... 5
FEES AND EXPENSES.............................. 7
CONDENSED FINANCIAL INFORMATION................ 13
LINCOLN LIFE AND THE VARIABLE ACCOUNT.......... 13
THE FUNDS...................................... 14
General...................................... 19
Substitution of Securities................... 19
Voting Rights................................ 20
PREMIUM PAYMENTS AND CONTRACT VALUE............ 20
Premium Payments............................. 20
Allocation of Premium Payments............... 20
Optional Variable Account Sub-Account
Allocation Programs......................... 21
Dollar Cost Averaging...................... 21
Automatic Rebalancing...................... 22
Contract Value............................... 22
Accumulation Unit............................ 22
CHARGES AND DEDUCTIONS......................... 23
Contingent Deferred Sales Charge (Sales
Load)....................................... 23
Mortality and Expense Risk Charge............ 24
Administrative Expense Charge................ 24
Account Fee.................................. 25
Premium Tax Equivalents...................... 25
Income Taxes................................. 25
Fund Expenses................................ 25
Transfer Fee................................. 25
Rider Charges................................ 26
DEATH BENEFITS................................. 26
Death Benefits Provided by the Contract...... 26
Amount of Death Benefit...................... 26
Election and Effective Date of Election...... 27
Death of the Annuitant before the Annuity
Date........................................ 27
Death of the Annuitant after the Annuity
Date........................................ 27
OTHER CONTRACT FEATURES........................ 28
Ownership.................................... 28
Assignment................................... 28
Beneficiary.................................. 28
Change of Beneficiary........................ 28
Annuitant.................................... 28
Transfer of Contract Values between Sub-
Accounts.................................... 29
Procedures for Telephone Transfers........... 30
Surrenders and Partial Withdrawals........... 30
Restrictions under the Texas Optional
Retirement Program.......................... 31
<CAPTION>
CONTENTS PAGE
<S> <C>
Delay of Payments and Transfers.............. 31
Change in Operation of Variable Account...... 31
Modification................................. 32
Discontinuance............................... 32
ANNUITY PROVISIONS............................. 32
Annuity Date; Change in Annuity Date and
Annuity Option.............................. 32
Penalty-Free Annuitization................... 32
Annuity Options.............................. 33
Guaranteed Minimum Income Payment Rider...... 33
Fixed Options................................ 33
Variable Options............................. 34
Evidence of Survival......................... 36
Endorsement of Annuity Payments.............. 36
THE FIXED ACCOUNT.............................. 36
Market Value Adjustment...................... 38
DISTRIBUTION OF THE CONTRACTS.................. 39
PERFORMANCE DATA............................... 40
Money Market Sub-Account..................... 40
Other Variable Account Sub-Accounts.......... 40
Performance Ranking or Rating................ 40
TAX MATTERS.................................... 41
General...................................... 41
Diversification.............................. 42
Distribution Requirements.................... 42
Multiple Contracts........................... 43
Tax Treatment of Assignments................. 43
Withholding.................................. 43
Section 1035 Exchanges....................... 43
Tax Treatment of Withdrawals -- Non-Qualified
Contracts................................... 43
Qualified Plans.............................. 44
Section 403(b) Plans......................... 44
Individual Retirement Annuities.............. 45
Roth IRA..................................... 45
Corporate Pension and Profit-Sharing Plans
and H.R. 10 Plans........................... 45
Deferred Compensation Plans.................. 45
Tax Treatment of Withdrawals -- Qualified
Contracts................................... 45
OTHER CONTRACTS................................ 46
FINANCIAL STATEMENTS........................... 46
PREPARING FOR THE YEAR 2000.................... 46
LEGAL PROCEEDINGS.............................. 47
TABLE OF CONTENTS OF THE STATEMENT OF
ADDITIONAL INFORMATION........................ 48
</TABLE>
2
<PAGE>
DEFINITIONS
ACCUMULATION PERIOD: The period from the Effective Date to
the Annuity Date, the date on which the Death Benefit
becomes payable or the date on which the Contract is
surrendered or annuitized, whichever is earliest.
ACCUMULATION UNIT: A measuring unit used to calculate the
value of the Owner's interest in each funding option used in
the variable portion of the Contract prior to the Annuity
Date.
ANNUITANT: A person designated by the Owner in writing upon
whose continuation of life any series of payments for a
definite period or involving life contingencies depends. If
the Annuitant dies before the Annuity Date, the Owner
becomes the Annuitant until naming a new Annuitant.
ANNUITY ACCOUNT VALUE: The value of the Contract at any
point in time.
ANNUITY DATE: The date on which the Contract is annuitized.
ANNUITY OPTION: The arrangement under which annuity payments
are made.
ANNUITY PERIOD: The period starting on the Annuity Date.
ANNUITY UNIT: A measuring unit used to calculate the portion
of annuity payments attributable to each funding option used
in the fixed and variable portion of the Contract on and
after the Annuity Date.
BENEFICIARY: The person entitled to the Death Benefit, who
must also be the "Designated Beneficiary", for purposes of
Section 72(s) of the Code, upon the Owner's death.
CODE: The Internal Revenue Code of 1986, as amended.
CONTRACT: The Variable Annuity Contract described in this
prospectus (or the certificate evidencing the Owner's
participation in a group contract).
CONTRACT ANNIVERSARY, CONTRACT YEAR, EFFECTIVE DATE: The
Contract's Effective Date is the date it is issued. It is
also the date on which the first Contract Year, a 12-month
period, begins. Subsequent Contract Years begin on each
Contract Anniversary, which is the anniversary of the
Effective Date.
CONTRACT MONTH: The period from one Monthly Anniversary Date
to the next.
CONTRACT OWNER (OR OWNER): The person(s) initially
designated in the application or order to purchase or
otherwise, unless later changed, as having all ownership
rights under the Contract; is the Certificate Owner under a
group contract.
FIXED ACCOUNT: Those Sub-Accounts associated with Guaranteed
Periods and Guaranteed Rates. Fixed Account Assets are
maintained in Lincoln Life's General Account and not
allocated to the Variable Account.
FIXED ANNUITY: An annuity with payments which do not vary as
to dollar amount.
FUND(S): One or more of AIM Variable Insurance Funds, Inc.
-- AIM V.I. Growth Fund, AIM V.I. Value Fund, and AIM V.I.
International Equity Fund; BT Insurance Funds Trust -- BT
Equity Index Fund; Delaware Group Premium Fund -- Decatur
Total Return Series, Devon Series, Social Awareness Series,
REIT Series, Small Cap Value Series, Trend Series,
International Equity Series, Emerging Markets Series, and
Delchester Series; Dreyfus Variable Investment Fund -- Small
Cap Portfolio; Fidelity Variable Insurance Products Fund --
Growth Portfolio, Equity-Income Portfolio, and Overseas
Portfolio: Fidelity Variable Insurance Products Fund III --
Growth Opportunities Portfolio; Investors
3
<PAGE>
Fund Series -- Kemper Government Securities Portfolio, and
Kemper Small Cap Growth Portfolio; Liberty Variable
Investment Trust -- Colonial U.S. Stock Fund and Newport
Tiger Fund; Lincoln National Bond Fund; Lincoln National
Money Market Fund; MFS-Registered Trademark- Variable
Insurance Trust -- MFS Total Return Series, MFS Utilities
Series, MFS Emerging Growth Series, and MFS Research Series;
OCC Accumulation Trust -- Global Equity Portfolio, and
Managed Portfolio. Each is an open-end management investment
company (mutual fund) whose shares are available to fund the
benefits provided by the Contract.
GUARANTEED INTEREST RATE: The rate of interest credited by
Lincoln Life on a compound annual basis during a Guaranteed
Period.
GUARANTEED PERIOD: The period for which interest, at either
an initial or subsequent Guaranteed Interest Rate, will be
credited to any amounts which an Owner allocates to a Fixed
Account Sub-Account. In most states in which these Contracts
are issued, this period may generally be 1, 3, 5, 7, or 10
years as elected by the Owner.
GUARANTEED PERIOD AMOUNT: Any portion of a Purchaser's
Annuity Account Value allocated to a specific Guaranteed
Period with a specified Expiration Date (including credited
interest thereon).
HOME OFFICE: The headquarters of Lincoln National Life
Insurance Co., located at 1300 South Clinton Street, Fort
Wayne, Indiana 46802.
INCOME PAYMENT DATE: Shall be the date on which the Owner is
entitled to the Income Payment.
INDEX RATE: An index rate based on the Treasury Constant
Maturity Series published by the Federal Reserve Board.
IN WRITING: In a written form satisfactory to Lincoln Life
and received by Lincoln Life at its Administrative Office.
LINCOLN LIFE: Lincoln National Life Insurance Company.
MONTHLY ANNIVERSARY DATE: The monthly anniversary of the
Effective Date, as shown on the specifications page of the
Contract.
NON-QUALIFIED CONTRACTS: A Contract used in connection with
a retirement plan which does not receive favorable federal
income tax treatment under Code Section 401, 403, 408, or
457. The owner of a Non-Qualified Contract must be a natural
person or an agent for a natural person in order for the
Contract to receive favorable income tax treatment as an
annuity.
PAYEE: A recipient of payments under the Contract.
PREMIUM PAYMENT: Any amount paid to Lincoln Life cleared in
good funds as consideration for the benefits provided by the
Contract. Includes the initial Premium Payment and
subsequent Premium Payments.
QUALIFIED CONTRACT: A Contract used in connection with a
retirement plan which receives favorable federal income tax
treatment under Code Section 401, 403, 408 or 457.
SHARES: Shares of a Fund.
SUB-ACCOUNT: That portion of the Fixed Account associated
with specific Guaranteed Period(s) and Guaranteed Interest
Rate(s) and that portion of the Variable Account which
invests in shares of a specific Fund.
4
<PAGE>
SURRENDER (OR WITHDRAWAL): When a lump sum amount
representing all or part of the Annuity Account Value (minus
any applicable withdrawal charges, contract fees and premium
tax equivalents and adjusted by any Market Value Adjustment)
is paid to the Owner. After a full surrender, all of the
Owner's rights under the Contract are terminated. In this
prospectus, the terms "surrender" and "withdrawal" are used
interchangeably.
SURRENDER DATE: The date Lincoln Life processes the Owner's
election to surrender the Contract or to receive a partial
withdrawal.
VALUATION DATE: Every day on which Accumulation Units are
valued, which is each day on which the New York Stock
Exchange ("NYSE") is open for business, except any day on
which trading on the NYSE is restricted, or on which an
emergency exists, as determined by the Securities and
Exchange Commission ("Commission"), so that valuation or
disposal of securities is not practicable.
VALUATION PERIOD: The period of time beginning on the day
following the Valuation Date and ending at the close of
business on the next Valuation Date. A Valuation Period may
be more than one day in length.
VARIABLE ACCOUNT: Lincoln Life Variable Annuity Account N, a
separate account of Lincoln Life under Indiana law, in which
the assets of the Sub-Account(s) funded through shares of
one or more of the Funds are maintained. Assets of the
Variable Account attributable to the Contracts are not
chargeable with the general liabilities of Lincoln Life.
VARIABLE ACCUMULATION UNIT: A unit of measure used in the
calculation of the value of each variable portion of the
Owner's Annuity Account Value during the Accumulation
Period.
VARIABLE ANNUITY UNIT: A unit of measure used in the
calculation of the value of each variable portion of the
Owner's Annuity Account Value during the Annuity Period, to
determine the amount of each variable annuity payment.
HIGHLIGHTS
Premium Payments attributable to the variable portion of the
Contracts will be allocated to a segregated asset account of
Lincoln Life which has been designated Lincoln Life Variable
Annuity Account N (the "Variable Account"). The Variable
Account invests in shares of one or more of the Funds
available to fund the Contract as selected by the Owner.
Contract Owners bear the investment risk for all amounts
allocated to the Variable Account. The Contract's provisions
may vary in some states. Inquiries about the Contracts may
be made to Lincoln Life's Home Office.
Procedures for purchasing a Contract are described at
"Premium Payments and Contract Value -- Premium Payments."
The Contract may be returned within 10 days after it is
received, longer in some states. It can be mailed or
delivered to either Lincoln Life or the agent who sold it.
Return of the Contract by mail is effective on being
postmarked, properly addressed and postage prepaid. Lincoln
Life will promptly refund the Contract Value in states where
permitted. This may be more or less than the Premium
Payment. In states where required, Lincoln Life will
promptly refund the Premium Payment, less any partial
surrenders. Lincoln Life has the right to allocate initial
Premium Payments to the Money Market Sub-Account until the
expiration of the right-to-examine period. If Lincoln Life
does so allocate an initial Premium Payment, it will refund
the greater of the Premium Payment, less any partial
surrenders, or the Contract Value. It is Lincoln Life's
current practice to directly allocate the initial Premium
Payment to the Fund(s) designated in the application or
order to purchase, unless state law requires a refund of
Premium Payments rather than of Annuity Account Value.
5
<PAGE>
Procedures for making surrenders and partial withdrawals are
described at "Other Contract Features -- Surrenders and
Partial Withdrawals." A Contingent Deferred Sales Charge
(sales load) may be deducted in the event of a full
surrender or partial withdrawal. The Contingent Deferred
Sales Charge is imposed on Premium Payments within seven (7)
years after their being made. Contract Owners may, during
each Contract Year, withdraw up to fifteen percent (15%) of
Premium Payments made, or any remaining portion thereof,
("the Fifteen Percent Free") without incurring a Contingent
Deferred Sales Charge. The Contingent Deferred Sales Charge
will vary in amount, depending upon the Contract Year in
which the Premium Payment being surrendered or withdrawn was
made. For purposes of determining the applicability of the
Contingent Deferred Sales Charge, surrenders and withdrawals
are deemed to be on a first-in, first-out basis.
The Contingent Deferred Sales Charge is found in the fee
table (See "Charges and Deductions -- Contingent Deferred
Sales Charge (Sales Load)"). The maximum Contingent Deferred
Sales Charge is 7% of Premium Payments. There may also be a
Market Value Adjustment on surrenders, withdrawals or
transfers from the Fixed Account portion of the Contract.
There is a Mortality and Expense Risk Charge which is equal,
on an annual basis, to 1.25% of the average daily net assets
of the Variable Account. This Charge compensates Lincoln
Life for assuming the mortality and expense risks under the
Contract (See "Charges and Deductions -- Mortality and
Expense Risk Charge").
There is an Administrative Expense Charge which is equal, on
an annual basis, to 0.15% of the average daily net assets of
the Variable Account (See "Charges and Deductions --
Administrative Expense Charge").
There is an annual Account Fee of $35 which is waived if the
Annuity Account Value equals or exceeds $100,000 at the end
of the Contract Year or at annuitization (See "Charges and
Deductions -- Account Fee").
Premium tax equivalents or other taxes payable to a state or
other governmental entity will be charged against Annuity
Account Value (See "Charges and Deductions -- Premium Tax
Equivalents").
Under certain circumstances there may be assessed a $10
transfer fee when a Contract Owner transfers Annuity Account
Values from one Sub-Account to another (See "Charges and
Deductions -- Transfer Fee").
There is a ten percent (10%) federal income tax penalty
applied to the income portion of any premature distribution
from Non-Qualified Contracts. However, the penalty is not
imposed on amounts distributed:
(a) after the Payee reaches age 59 1/2; (b) after the death
of the Contract Owner (or, if the Contract Owner is not a
natural person, the Annuitant); (c) if the Payee is totally
disabled (for this purpose, disability is as defined in
Section 72(m)(7) of the Code); (d) in a series of
substantially equal periodic payments made not less
frequently than annually for the life (or life expectancy)
of the Payee or for the joint lives (or joint life
expectancies) of the Payee and his or her beneficiary; (e)
under an immediate annuity; or (f) which are allocable to
Premium Payments made prior to August 14, 1982. For federal
income tax purposes, distributions are deemed to be on a
last-in, first-out basis. Different tax withdrawal penalties
and restrictions apply to Qualified Contracts issued
pursuant to plans qualified under Code Section 401, 403(b),
408 or 457. (See "Tax Matters -- Tax Treatment of
Withdrawals -- Qualified Contracts.") For a further
discussion of the taxation of the Contracts, see "Tax
Matters."
6
<PAGE>
MARKET VALUE ADJUSTMENT. In certain situations, a surrender
or transfer of amounts from the Fixed Account will be
subject to a Market Value Adjustment. The Market Value
Adjustment will reflect the relationship between a rate
based on an index published by the Federal Reserve Board as
to current yields on U.S. government securities of various
maturities at the time a surrender or transfer is made
("Index Rate"), and the Index Rate at the time that the
Premium Payments being surrendered or transferred were made.
Generally, if the Index Rate at the time of surrender or
transfer is lower than the Index Rate at the time the
Premium Payment was allocated, then the application of the
Market Value Adjustment will result in a higher payment upon
surrender or transfer. Similarly, if the Index Rate at the
time of surrender or transfer is higher than the Index Rate
at the time the Premium Payment was allocated, the
application of the Market Value Adjustment will generally
result in a lower payment upon surrender or transfer. It is
not applied against a surrender or transfer taking place at
the end of the Guaranteed Period.
FEES AND EXPENSES
CONTRACT OWNER TRANSACTION FEES
Contingent Deferred Sales Charge (as a percentage of Premium
Payments):
<TABLE>
<CAPTION>
YEARS
SINCE
PAYMENT CHARGE
---------- ------
<S> <C> <C> <C>
0-1 7%
1-2 6%
A Contract Owner may, during each Contract Year, withdraw up to
2-3 5% 15% of Premium Payments made, or any remaining portion
3-4 4% thereof, without incurring a Contingent Deferred Sales Charge.
4-5 3%
5-6 2%
6-7 1%
7+ 0
</TABLE>
<TABLE>
<S> <C> <C>
Transfer Fee........ $10
- Not imposed on the first twelve transfers during a Contract
Year. Pre-scheduled automatic dollar cost averaging or
automatic rebalancing transfers are not counted.
Account Fee......... $35 per Contract Year
- Waived if Annuity Account Value at the end of the Contract
Year is $100,000 or more.
</TABLE>
VARIABLE ACCOUNT ANNUAL EXPENSES
(as a percentage of average account value)
<TABLE>
<S> <C>
Mortality and Expense Risk Charge......... 1.25%
Administrative Expense Charge............. 0.15%
---
Total Variable Account Annual Expenses.... 1.40%
</TABLE>
7
<PAGE>
EXPENSE DATA
The purpose of the following Table is to help Purchasers and prospective
purchasers understand the costs and expenses that are borne, directly and
indirectly, by Purchasers assuming that all Premium Payments are allocated to
the Variable Account. The table reflects expenses of the Variable Account as
well as of the individual Funds underlying the Variable Sub-Accounts. The table
does not reflect the deductions for the annual $35 Account Fee or premium tax
equivalents. The information set forth should be considered together with the
information provided in this Prospectus under the heading "Fees and Expenses",
and in each Fund's Prospectus. All expenses are expressed as a percentage of
average account value.
FEE TABLE
<TABLE>
<CAPTION>
AIM VARIABLE INSURANCE FUNDS (1) BT INSURANCE
----------------------------------------------- FUNDS TRUST
AIM AIM AIM ---------------
V.I. GROWTH V.I. VALUE V.I. INTERNATIONAL EQUITY 500
FUND FUND EQUITY FUND INDEX FUND
------------- ------------ ------------------ ---------------
<S> <C> <C> <C> <C>
SEPARATE ACCOUNT ANNUAL EXPENSES
Mortality and Expense Risk Charge...................... 1.25% 1.25% 1.25% 1.25%
Administrative Expense Charge.......................... 0.15% 0.15% 0.15% 0.15%
Total Separate Account Annual Expenses................. 1.40% 1.40% 1.40% 1.40%
FUND PORTFOLIO ANNUAL EXPENSES
(AFTER ANY APPLICABLE REIMBURSEMENT/WAIVER)
Management Fees........................................ 0.65% 0.62% 0.75% 0.20%
Other Expenses......................................... 0.08% 0.08% 0.18% 0.10%
Total Fund Portfolio Annual Expenses................... 0.73% 0.70% 0.93% 0.30%(2)
</TABLE>
- ------------------------------
(1) A I M Advisors, Inc. ("AIM") may from time to time voluntarily waive or
reduce its respective fees. Effective May 1, 1998, the Funds reimburse AIM
in an amount up to 0.25% of the average net asset value of each Fund, for
expenses incurred in providing, or assuring that participating insurance
companies provide, certain administrative services. Currently, the fee only
applies to the average net asset value of each Fund in excess of the net
asset value of each Fund as calculated on April 30, 1998, and AIM will not
seek reimbursement of the cost of any service in excess of the amount
charged by a participating insurance company for providing the services
above. The amount of reimbursements that will be paid by each Fund under
this arrangement for the year ending December 31, 1998 cannot be predicted.
(2) Under the Advisory Agreement with the Advisor, the Funds will pay advisory
fees at the annual percentage rate of .20% of the average daily net assets
of the Equity 500 Index Fund. These fees are accrued daily and paid monthly.
The Advisor has voluntarily undertaken to waive the fees and to reimburse
the Fund for certain expenses so that the Equity 500 Index Fund total
operating expenses will not exceed .30%. Such expense reimbursements may be
terminated at the discretion of the Advisor. If this reimbursement were not
in place, the total operating expenses for the year ended December 31, 1997,
would have been 2.78%.
8
<PAGE>
<TABLE>
<CAPTION>
DELAWARE GROUP PREMIUM FUND
- ----------------------------------------------------------------------------------------------- DREYFUS VARIABLE
DECATUR SMALL INVESTMENT FUND
TOTAL SOCIAL CAP EMERGING ----------------
RETURN DEVON AWARENESS REIT VALUE TREND INTERNATIONAL MARKETS DELCHESTER SMALL CAP
SERIES SERIES SERIES SERIES SERIES SERIES EQUITY SERIES SERIES SERIES PORTFOLIO
- ------- ------ --------- ------ ------ ------ ------------- -------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1.25% 1.25% 1.25% 1.25% 1.25% 1.25% 1.25% 1.25% 1.25% 1.25%
0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15%
1.40% 1.40% 1.40% 1.40% 1.40% 1.40% 1.40% 1.40% 1.40% 1.40%
0.60% 0.54% 0.20% 0.75% 0.60% 0.62% 0.75% 0.30% 0.60% 0.75%
0.11% 0.26% 0.65% 0.10% 0.25% 0.23% 0.20% 1.20% 0.10% 0.03%
0.71%(4) 0.80%( )(4) 0.85%(3)(4) 0.85%(4) 0.85%( )(4) 0.85%( )(4) 0.95%(4)(5) 1.50%(3)(4) 0.70%(4) 0.78%
</TABLE>
- ------------------------------
(3) For the fiscal year ended December 31, 1997, before waiver and/or
reimbursement by the investment adviser, total Series expenses as a
percentage of average daily net assets were 0.91% for Devon Series, 1.40%
for Social Awareness Series, 0.90% for Small Cap Value Series, 0.88% for
Trend Series, 2.45% for Emerging Markets Series.
(4) The investment adviser for the Decatur Total Return Series, Devon Series,
Social Awareness Series, REIT Series, Small Cap Value Series, Trend Series,
and Delchester Series, is Delaware Management Company, Inc. ("Delaware
Management"). The Investment Adviser for the International Equity Series and
Emerging Markets Series is Delaware International Advisers Ltd. ("Delaware
International"). Effective May 1, 1998 through April 30, 1999, the
investment advisers for the Series of DGPF have agreed voluntarily to waive
their management fees and reimburse each Series for expenses to the extent
that total expenses will not exceed 1.50% for the Emerging Markets Series;
0.95% for the International Equity Series; 85% for Social Awareness Series,
REIT Series, Small Cap Value Series, and Trend Series, and 0.80% for Devon,
Decatur Total Return and Delchester Series. The declaration of a voluntary
expense limitation does not bind the investment advisers to declare future
expense limitations with respect to these Funds.
(5) Effective July 1, 1997, the Total Fund expenses of the International Equity
Series were voluntarily limited to a rate of 0.95% of the average daily net
assets. In 1997 the total annual expenses of the International Equity Series
was 0.90%.
9
<PAGE>
<TABLE>
<CAPTION>
FIDELITY VARIABLE INSURANCE
PRODUCTS FUNDS
(INITIAL CLASS) INVESTORS FUND SERIES
-------------------------------------------------------- ----------------------
VIP III KEMPER KEMPER
VIP VIP GROWTH GOVERNMENT SMALL CAP
VIP EQUITY INCOME GROWTH OVERSEAS OPPORTUNITIES SECURITIES GROWTH
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------------- --------- -------- ------------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
SEPARATE ACCOUNT ANNUAL EXPENSES
Mortality and Expense Risk Charge............ 1.25% 1.25% 1.25% 1.25% 1.25% 1.25%
Administrative Expense Charge................ 0.15% 0.15% 0.15% 0.15% 0.15% 0.15%
Total Separate Account Annual Expenses....... 1.40% 1.40% 1.40% 1.40% 1.40% 1.40%
FUND PORTFOLIO ANNUAL EXPENSES (AFTER ANY
APPLICABLE REIMBURSEMENT/WAIVER)
Management Fees.............................. 0.50% 0.60% 0.75% 0.60% 0.55% 0.65%
Other Expenses............................... 0.08% 0.09% 0.15% 0.14% 0.09% 0.06%
Total Fund Portfolio Annual Expenses......... 0.58%(6) 0.69%(6) 0.92%(6) 0.74%(6) 0.64% 0.71%
</TABLE>
- ------------------------------
(6) A portion of the brokerage commissions the certain funds pay was used to
reduce funds expenses. In addition, certain funds have entered into
arrangements with their custodian and transfer agent whereby interest earned
on uninvested cash balances was used to reduce custodian expenses. With
these reductions reflected, Total Fund Portfolio Annual Expenses would have
been 0.57% for the VIP Equity-Income Portfolio, 0.67% for the VIP Growth
Portfolio, 0.90% for the VIP Overseas Portfolio and, 0.73% for the VIP III
Growth Opportunities Portfolio.
10
<PAGE>
<TABLE>
<CAPTION>
LIBERTY VARIABLE LINCOLN NATIONAL MFS VARIABLE INSURANCE TRUST OCC ACCUMULATION
INVESTMENT TRUST FUNDS ---------------------------------------------- TRUST
- -------------------------- -------------------- MFS -------------------
COLONIAL LN LN MFS MFS EMERGING MFS GLOBAL
U.S. STOCK NEWPORT TIGER MONEY MARKET BOND TOTAL RETURN UTILITIES GROWTH RESEARCH EQUITY MANAGED
FUND FUND FUND FUND SERIES SERIES SERIES SERIES PORTFOLIO PORTFOLIO
- ---------- ------------- ------------ ----- ------------ --------- -------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1.25 % 1.25% 1.25% 1.25% 1.25% 1.25% 1.25% 1.25% 1.25% 1.25%
0.15 % 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15%
1.40 % 1.40% 1.40% 1.40% 1.40% 1.40% 1.40% 1.40% 1.40% 1.40%
0.80 % 0.90% 0.48% 0.46% 0.75% 0.75% 0.75% 0.75% 0.79% 0.80%
0.14 % 0.35% 0.11% 0.07% 0.25%(7) 0.25%(7) 0.12%(7) 0.13%(7) 0.40% 0.07%
0.94 % 1.25% 0.59% 0.53% 1.00%(8) 1.00%(8) 0.87% 0.88% 1.19%(9) 0.87%(9)
</TABLE>
- ------------------------------
(7) Each Series has an expense offset arrangement which reduces the Series'
custodian fee based upon the amount of cash maintained by the Series with
its custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Series' expenses). Any such fee reductions are not
reflected under "Other Expenses".
(8) Massachusetts Financial Services Company has agreed to bear expenses for
each Series, subject to reimbursement by each Series, such that the MFS
Total Return Series and the MFS Utilities Series "Other Expenses" shall not
exceed 0.25% of the average daily net assets of the Series during the
current fiscal year. Otherwise, "Other Expenses" for the MFS Total Return
Series and Utilities Series would be 0.27% and 0.45% respectively and "Total
Fund Portfolio Annual Expenses" would have been 1.02% and 1.20% respectively
for these Series. See "Information Concerning Shares of Each
Series--Expenses."
(9) Other Expenses are shown gross of expense offsets afforded the Portfolios
which effectively lowered overall custody expenses. Total fund portfolio
annual expenses for the Managed Portfolio are limited by OpCap advisors so
that its annualized expenses (net of any expense offsets) do not exceed
1.00% of average daily net assets. Total fund portfolio annual expenses for
the Global Equity Portfolio are limited to 1.25% of average daily net
assets. With respect to the Global Equity Portfolio, the advisor waived a
portion of its management fee. If such waiver had not been in effect, total
fund portfolio annual expenses would have been 1.20% for the year ended
December 31, 1997.
11
<PAGE>
EXAMPLES
The Contract Owner would pay the following expenses on a
$1,000 investment, assuming a 5% annual return on assets,
and assuming all Premium Payments are allocated to the
Variable Account:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
----------- -----------
<S> <C> <C>
1. IF THE CONTRACT IS SURRENDERED AT THE END OF THE APPLICABLE TIME PERIOD:
AIM V.I. Growth Fund........................................................ $ 93 $ 121
AIM V.I. Value Fund......................................................... $ 93 $ 120
AIM V.I. International Equity Fund.......................................... $ 95 $ 127
BT Insurance Trust Equity 500 Index Fund.................................... $ 89 $ 107
Delaware Group Decatur Total Return Series.................................. $ 93 $ 120
Delaware Group Devon Series................................................. $ 94 $ 123
Delaware Group Social Awareness Series...................................... $ 94 $ 125
Delaware Group REIT Series.................................................. $ 94 $ 125
Delaware Group Small Cap Value Series....................................... $ 94 $ 125
Delaware Group Trend Series................................................. $ 94 $ 125
Delaware Group International Equity Series.................................. $ 95 $ 128
Delaware Group Emerging Markets Series...................................... $ 110 $ 144
Delaware Group Delchester Series............................................ $ 93 $ 120
Dreyfus Variable Fund Small Cap Portfolio................................... $ 93 $ 122
Fidelity VIP Equity-Income Portfolio........................................ $ 91 $ 116
Fidelity VIP Growth Portfolio............................................... $ 93 $ 119
Fidelity VIP Overseas Portfolio............................................. $ 95 $ 127
Fidelity VIP III Growth Opportunities Portfolio............................. $ 93 $ 121
Investors Fund Kemper Government Securities Portfolio....................... $ 92 $ 118
Investors Fund Kemper Small Cap Growth Portfolio............................ $ 93 $ 120
Liberty Variable Trust Colonial U.S. Stock Fund............................. $ 95 $ 127
Liberty Variable Trust Newport Tiger Fund................................... $ 98 $ 137
Lincoln National Bond Fund.................................................. $ 91 $ 115
Lincoln National Money Market Fund.......................................... $ 92 $ 116
MFS Variable Trust Total Return Series...................................... $ 96 $ 129
MFS Variable Trust Utilities Series......................................... $ 96 $ 129
MFS Variable Trust Emerging Growth Series................................... $ 94 $ 125
MFS Variable Trust Research Series.......................................... $ 95 $ 129
OCC Trust Global Equity Portfolio........................................... $ 98 $ 135
OCC Trust Managed Portfolio................................................. $ 94 $ 125
2. IF THE CONTRACT IS NOT SURRENDERED OR IF IT IS ANNUITIZED:
AIM V.I. Growth Fund........................................................ $ 23 $ 71
AIM V.I. Value Fund......................................................... $ 23 $ 70
AIM V.I. International Equity Fund.......................................... $ 25 $ 77
BT Insurance Trust Equity 500 Index Fund.................................... $ 19 $ 57
Delaware Group Decatur Total Return Series.................................. $ 23 $ 70
Delaware Group Devon Series................................................. $ 24 $ 73
Delaware Group Social Awareness Series...................................... $ 24 $ 75
Delaware Group REIT Series.................................................. $ 24 $ 75
Delaware Group Small Cap Value Series....................................... $ 24 $ 75
Delaware Group Trend Series................................................. $ 24 $ 75
Delaware Group International Equity Series.................................. $ 25 $ 78
</TABLE>
12
<PAGE>
<TABLE>
<S> <C> <C>
Delaware Group Emerging Markets Series...................................... $ 31 $ 94
Delaware Group Delchester Series............................................ $ 23 $ 70
Dreyfus Variable Fund Small Cap Portfolio................................... $ 23 $ 72
Fidelity VIP Equity-Income Portfolio........................................ $ 21 $ 66
Fidelity VIP Growth Portfolio............................................... $ 23 $ 69
Fidelity VIP Overseas Portfolio............................................. $ 25 $ 77
Fidelity VIP III Growth Opportunities Portfolio............................. $ 23 $ 71
Investors Fund Kemper Government Securities Portfolio....................... $ 22 $ 68
Investors Fund Kemper Small Cap Growth Portfolio............................ $ 23 $ 70
Liberty Variable Trust Colonial U.S. Stock Fund............................. $ 25 $ 77
Liberty Variable Trust Newport Tiger Fund................................... $ 28 $ 87
Lincoln National Bond Fund.................................................. $ 21 $ 65
Lincoln National Money Market Fund.......................................... $ 22 $ 66
MFS Variable Trust Total Return Series...................................... $ 26 $ 79
MFS Variable Trust Utilities Series......................................... $ 26 $ 79
MFS Variable Trust Emerging Growth Series................................... $ 24 $ 75
MFS Variable Trust Research Series.......................................... $ 25 $ 75
OCC Trust Global Equity Portfolio........................................... $ 28 $ 85
OCC Trust Managed Portfolio................................................. $ 24 $ 75
</TABLE>
The preceding tables are intended to assist the Owner in
understanding the costs and expenses borne, directly or
indirectly, by Premium Payments allocated to the Variable
Account. These include the expenses of the Funds, certain of
which are subject to expense reimbursement arrangements
which may be subject to change. See the Funds' Prospectuses.
In addition to the expenses listed above, charges for
premium tax equivalents may be applicable.
These examples reflect the annual $35 Account Fee as an
annual charge of .07% of assets, based upon an anticipated
average Annuity Account Value of $50,000.
THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER
OR LESS THAN THOSE SHOWN.
CONDENSED FINANCIAL INFORMATION
Because the Sub-Accounts which are available under the
Contracts did not begin operation before the date of this
Prospectus, financial information for the Sub-Accounts is
not included in this prospectus or the Statement of
Additional Information.
LINCOLN LIFE AND THE VARIABLE ACCOUNT
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY. Lincoln Life is
a stock life insurance company incorporated under the laws
of Indiana on June 12, 1905. Lincoln Life is principally
engaged in offering life insurance policies and annuity
policies, and ranks among the largest United States stock
life insurance companies in terms of assets and life
insurance in force. Lincoln Life is also one of the leading
life reinsurers in the United States. Lincoln Life is
licensed in all states (except New York) and the District of
Columbia, Guam, and the Virgin Islands.
We are one of the largest stock life insurance companies in
the United States. We are owned by Lincoln National Corp.
(LNC) which is also organized under Indiana law. LNC's
primary businesses are insurance and financial services.
Lincoln Life is the issuer of the variable annuity
Contracts. The obligations set forth in the Contracts, other
than those of the Contractowner, are our obligations. We
also serve as principal underwriter for the Contracts.
13
<PAGE>
On October 1, 1998, The Lincoln National Life Insurance
Company acquired the domestic individual life insurance
business from Aetna, Inc. via a 100% indemnity reinsurance
transaction.
THE VARIABLE ACCOUNT. The Variable Account was established
by Lincoln Life as a separate account on November 3, 1997
pursuant to a resolution of its Board of Directors. Under
Indiana insurance law, the income, gains or losses of the
Variable Account are credited to or charged against the
assets of the Variable Account without regard to the other
income, gains, or losses of Lincoln Life. These assets are
held in relation to the Contracts described in this
Prospectus, to the extent necessary to meet Lincoln Life's
obligations thereunder. Although that portion of the assets
maintained in the Variable Account equal to the reserves and
other contract liabilities with respect to the Variable
Account will not be charged with any liabilities arising out
of any other business conducted by Lincoln Life, all
obligations arising under the Contracts, including the
promise to make annuity payments, are general corporate
obligations of Lincoln Life.
The Variable Account is registered with the Commission as a
unit investment trust under the 1940 Act and meets the
definition of a separate account under the federal
securities laws. Registration with the Commission does not
involve supervision of the management or investment
practices or policies of the Variable Account or of Lincoln
Life by the Commission.
The assets of the Variable Account are divided into
Sub-Accounts. Each Sub-Account invests exclusively in shares
of a specific Fund. All amounts allocated to the Variable
Account will be used to purchase Fund shares as designated
by the Owner at their net asset value. Any and all
distributions made by the Fund with respect to the shares
held by the Variable Account will be reinvested to purchase
additional shares at their net asset value. Deductions from
the Variable Account for cash withdrawals, annuity payments,
death benefits, account fees, mortality and expense risk
charges, administrative expense charges and any applicable
taxes will, in effect, be made by redeeming the number of
Fund shares at their net asset value equal in total value to
the amount to be deducted. The Variable Account will
purchase and redeem Fund shares on an aggregate basis and
will be fully invested in Fund shares at all times.
THE FUNDS
Each of the thirty Sub-Accounts of the Variable Account is
invested solely in shares of one of the thirty Funds
available as funding vehicles under the Contracts. Each of
the Funds is a series of one of twelve Massachusetts or
Delaware business trusts or a Maryland corporation,
collectively referred to herein as the "Trusts", each of
which is registered as an open-end management investment
company under the 1940 Act. All of the Funds except for the
Delaware Group REIT Series and Delaware Group Emerging
Market Series are diversified under the 1940 Act.
The investment objectives and policies of certain Funds are
similar to the investment objectives and policies of
portfolios, other than those Funds, that are advised by the
same adviser. The investment results of the Funds, however,
may be higher or lower than the other portfolios that are
advised by the same adviser. There can be no assurance, and
no representation is made, that the investment results of
any of the Funds will be comparable to the investment
results of any other portfolio advised by the same adviser.
The Trusts and their investment advisers and distributors
are:
AIM Variable Insurance Funds, Inc., ("AIM V.I. Funds")
managed by A I M Advisors, Inc., and distributed by AIM
Distributors, Inc., 11 Greenway Plaza, Suite 100,
Houston, TX 77046-1173.
14
<PAGE>
BT Insurance Funds Trust (the "BT Insurance Trust")
managed by Bankers Trust Company, 130 Liberty Street,
(One Bankers Trust Plaza), New York, NY 10006 and
distributed by First Data Distributors, Inc., 4400
Computer Drive, Westborough, MA 01581.
Delaware Group Premium Fund, Inc. ("Delaware Group")
managed by Delaware Management Company One Commerce
Square Philadelphia, PA 19103 and for International and
Emerging Markets, Delaware International Advisors, Ltd.
80 Cheapside London, England ECV2 6EE and distributed by
Delaware Distributors, L.P., 1818 Market Street,
Philadelphia, PA 19103.
Dreyfus Variable Investment Fund ("Dreyfus Variable
Fund") managed by The Dreyfus Corporation, 200 Park
Avenue, New York, NY 10166 and distributed by Premier
Mutual Fund Services, Inc., 60 State Street, Boston, MA
02109.
Variable Insurance Products Fund ("Fidelity VIP"), and
Variable Insurance Products Fund III ("Fidelity VIP
III"), managed by Fidelity Management & Research Company
and distributed by Fidelity Distribution Corporation, 82
Devonshire Street, Boston, MA 02103;
Investors Fund Series ("Investor Fund") managed by
Scudder Kemper Investments, Inc., 345 Park Avenue, New
York, NY 10166 and distributed by Kemper Distributors,
Inc., 222 South Riverside Plaza, Chicago, IL 60606.
Liberty Variable Investment Trust ("Liberty Variable
Trust") managed by Liberty Advisory Services Corp., 125
High Street, Boston, MA 02110 and sub-advised by
Colonial, and distributed by Liberty Financial
Investments, Inc., One Financial Center, Boston, MA
02110
Lincoln National Bond Fund, Inc. and Lincoln National
Money Market Fund, Inc., managed by Lincoln Investment
Management, Inc. 200 East Berry St., Fort Wayne, IN
46802;
MFS-Registered Trademark- Variable Insurance Trust ("MFS
Variable Trust"), managed by Massachusetts Financial
Services Company and distributed by MFS Fund
Distributors, Inc., 500 Boylston Street, Boston, MA
02116;
OCC Accumulation Trust ("OCC Trust") (formerly Quest for
Value Accumulation Trust), managed by OpCap Advisors
(formerly Quest for Value Advisors) and distributed by
OCC Distributors (formerly Quest for Value
Distributors), One World Financial Center, New York, NY
10281.
Three AIM V.I. Funds are available under the Contracts:
AIM V.I. Growth Fund;
AIM V.I. Value Fund;
AIM V.I. International Equity Fund.
One Fund of BT INSURANCE TRUST is available under the
Contracts:
Equity 500 Index Fund.
Nine Funds of DELAWARE GROUP are available under the
Contracts:
Decatur Total Return Series;
Devon Series;
Social Awareness Series;
REIT Series;
Small Cap Value Series;
Trend Series;
15
<PAGE>
International Equity Series;
Emerging Markets Series;
Delchester Series.
One Fund of DREYFUS VARIABLE FUND is available under the
Contracts:
Dreyfus Small Cap Portfolio.
Three Funds of FIDELITY VIP are available under the
Contracts:
Fidelity VIP Growth Portfolio;
Fidelity VIP Equity-Income Portfolio;
Fidelity VIP Overseas Portfolio.
One Fund of FIDELITY VIP III is available under the
Contracts:
Fidelity VIP III Growth Opportunities Portfolio.
Two Funds of INVESTORS FUND are available under the
Contracts:
Kemper Government Securities Portfolio;
Kemper Small Cap Growth Portfolio.
Two Funds of LIBERTY VARIABLE TRUST are available under the
Contracts:
Colonial U.S. Stock Fund;
Newport Tiger Fund.
The Lincoln National Bond Fund is available under the
Contracts.
The Lincoln National Money Market Fund is available under
the Contracts.
Four Funds of MFS VARIABLE Trust are available under the
Contracts:
MFS Total Return Series;
MFS Utilities Series;
MFS Emerging Growth Series;
MFS Research Series.
Two Funds of OCC Trust are available under the Contracts:
Global Equity Portfolio;
Managed Portfolio.
The investment advisory fees charged the Funds by their
advisers are shown in the Fee Table under Fees and Expenses
in this Prospectus.
There follows a brief description of the investment
objective of each Fund which are described more fully in the
attached Fund prospectuses. There can be no assurance that
any Fund will achieve its stated investment objectives.
AIM V.I. GROWTH FUND (Large Cap Stocks): Seeks growth of
capital principally through investment in common stocks of
seasoned and better capitalized companies considered by AIM
to have strong earnings momentum. Current income will not be
an important criterion of investment selection, and any such
income should be considered incidental.
AIM V.I. VALUE FUND (Large Cap Stocks): Seeks to achieve
long-term growth of capital by investing primarily in equity
securities judged by AIM to be undervalued relative to the
current or projected earnings of the companies issuing the
securities, or relative to current market values of assets
owned by the companies issuing the securities or relative to
the equity market generally. Income is a secondary objective
and would be satisfied principally from the income (interest
and dividends) generated by the common stocks, convertible
bonds and convertible preferred stocks that make up the
Fund's portfolio.
AIM V.I. INTERNATIONAL EQUITY FUND (Large Cap Stocks): Seeks
to provide long-term growth of capital by investing in a
diversified portfolio of international equity securities
16
<PAGE>
the issuers of which are considered by AIM to have strong
earnings momentum. Any income realized by the Fund will be
incidental and will not be an important criterion in the
selection of portfolio securities.
BT INSURANCE TRUST EQUITY 500 INDEX FUND (Large Cap Stocks):
Seeks to replicate as closely as possible the performance of
the Standard & Poor's 500 Composite Stock Price Index before
the deduction of Fund expenses.
DELAWARE GROUP DECATUR TOTAL RETURN SERIES (Large Cap
Stocks): Seeks the highest possible total rate of return by
selecting issues that exhibit the potential for capital
appreciation while providing higher than average dividend
income. It invests generally, but not exclusively, in common
stocks and income-producing securities convertible into
common stocks, consistent with the Series' objective.
DELAWARE GROUP DEVON SERIES (Large Cap Stocks): Seeks
current income and capital appreciation. The Series will
seek to achieve its objective by investing primarily in
income-producing common stocks, with a focus on common
stocks that the investment manager believes have the
potential for above-average dividend increases over time.
Under normal circumstances, the Series will invest at least
65% of its total assets in dividend paying common stocks.
DELAWARE GROUP SOCIAL AWARENESS SERIES (Specialty): Seeks to
achieve long-term capital appreciation. The Series seeks to
achieve its objective by investing primarily in equity
securities of medium to large-sized companies expected to
grow over time that meet the Series' "Social Criteria"
strategy.
DELAWARE GROUP REIT SERIES (Specialty): Seeks to achieve
maximum long-term total return. Capital appreciation is a
secondary objective. It seeks to achieve its objectives by
investing in securities of companies primarily engaged in
the real estate industry.
DELAWARE GROUP SMALL CAP VALUE SERIES (Small Cap Stocks):
Seeks capital appreciation by investing primarily in small
cap common stocks whose market value appears low relative to
their underlying value or future earnings and growth
potential. Emphasis will also be placed on securities of
companies that may be temporarily out of favor or whose
value is not yet recognized by the market.
DELAWARE GROUP TREND SERIES (Small Cap Stocks): Seeks
long-term capital appreciation by investing primarily in
small-cap common stocks and convertible securities of
emerging and other growth-oriented companies. These
securities will have been judged to be responsive to changes
in the market place and to have fundamental characteristics
to support growth. Income is not an objective.
DELAWARE GROUP INTERNATIONAL EQUITY SERIES (International
Equity): Seeks long-term growth without undue risk to
principal by investing primarily in equity securities of
foreign issuers providing the potential for capital
appreciation and income. It invests in a broad range of
equity securities of foreign issuers, including common
stocks, preferred stocks, convertible securities and
warrants, consistent with the Series' objective.
DELAWARE GROUP EMERGING MARKETS SERIES (Specialty): Seeks to
achieve long-term capital appreciation. The Series seeks to
achieve its objective by investing primarily in equity
securities of issuers located or operating in emerging
countries. The Series is an international fund. As such,
under normal market conditions, at least 65% of the Series'
assets will be invested in equity securities of issuers
organized or having a majority of their assets or deriving a
majority of their operating income in at least three
countries that are considered to be emerging or developing.
DELAWARE GROUP DELCHESTER SERIES (High Yield Bonds): Seeks
as high a current income as possible by investing in rated
and unrated corporate bonds (including high-yield bonds
commonly known as junk bonds), U.S. government securities
and commercial paper. An investment in this Series may
involve greater risks than an investment in a portfolio
comprised primarily of investment grade bonds.
17
<PAGE>
DREYFUS VARIABLE FUND SMALL CAP PORTFOLIO (Small Cap
Stocks): Seeks to maximize capital appreciation.
FIDELITY VIP EQUITY-INCOME PORTFOLIO (Large Cap Stocks):
Seeks reasonable income by investing primarily in
income-producing equity securities, with some potential for
capital appreciation, seeking a yield that exceeds the
composite yield on the securities comprising the Standard
and Poor's Composite Index of 500 Stocks.
FIDELITY VIP GROWTH PORTFOLIO(Large Cap Stocks): Seeks to
achieve capital appreciation. The Portfolio normally
purchases common stocks, although its investments are not
restricted to any one type of security. Capital appreciation
may also be found in other types of securities, including
bonds and preferred stocks.
FIDELITY VIP OVERSEAS PORTFOLIO (International Equity):
Seeks long term growth of capital by investing mainly in
foreign securities.
FIDELITY VIP III GROWTH OPPORTUNITIES PORTFOLIO (Large Cap
Stocks): Seeks capital growth by investing primarily in
common stocks and securities convertible into common stocks.
INVESTORS FUND KEMPER GOVERNMENT SECURITIES PORTFOLIO
(Intermediate Term Bonds): Seeks high current return
consistent with preservation of capital from a portfolio
composed primarily of U.S. Government securities.
INVESTORS FUND KEMPER SMALL CAP GROWTH PORTFOLIO (Small Cap
Stocks): Seeks maximum appreciation of investors' capital
from a portfolio primarily of growth stocks of smaller
companies.
LIBERTY VARIABLE TRUST COLONIAL U.S. STOCK FUND (Large Cap
Stocks): Seeks long-term capital growth by investing
primarily in large-cap equity securities.
LIBERTY VARIABLE TRUST NEWPORT TIGER FUND (Specialty): Seeks
long-term capital growth by investing primarily in equity
securities of companies located in the nine Tigers of Asia
(Hong Kong, Singapore, South Korea, Taiwan, Malaysia,
Thailand, Indonesia, China and the Philippines).
LINCOLN NATIONAL BOND FUND (Long-Term Bonds): Seeks maximum
current income consistent with prudent investment strategy.
The fund invests primarily in medium- and long-term
corporate and government bonds.
LINCOLN NATIONAL MONEY MARKET FUND (Money Market): Seeks
maximum current income consistent with the preservation of
capital. The Fund invests in short-term obligations issued
by U.S. corporations; the U.S. Government; and
federally-charted banks and U.S. branches of foreign banks.
MFS VARIABLE TRUST EMERGING GROWTH SERIES (Large Cap
Stocks): Seeks long-term growth of capital by investing
primarily in common stocks of companies management believes
to be early in their life cycle but which have the potential
to become major enterprises.
MFS VARIABLE TRUST RESEARCH SERIES (Large Cap Stocks): Seeks
to provide long-term growth of capital and future income.
MFS VARIABLE TRUST TOTAL RETURN SERIES (Balanced or Total
Return): Seeks primarily to obtain above-average income,
(compared to a portfolio invested entirely in equity
securities) consistent with the prudent employment of
capital, and secondarily to provide a reasonable opportunity
for growth of capital and income.
MFS VARIABLE TRUST UTILITIES SERIES (Specialty): Seeks
capital growth and current income (income above that
available from a portfolio invested entirely in equity
securities) by investing, under normal circumstances, at
least 65% of its assets in equity and debt securities of
utility companies.
18
<PAGE>
OCC TRUST GLOBAL EQUITY PORTFOLIO (International Stocks):
Seeks long-term capital appreciation through a global
investment strategy primarily involving equity securities.
OCC TRUST MANAGED PORTFOLIO (Balanced or Total Return):
Seeks growth of capital over time through investment in a
portfolio of common stocks, bonds and cash equivalents, the
percentage of which will vary based on management's
assessments of relative investment values.
The Delaware Group Delchester Series, Delaware Group
Emerging Market Series, Dreyfus Variable Fund Small Cap
Portfolio, Fidelity VIP Equity-Income Portfolio, Fidelity
VIP Overseas Portfolio, MFS Variable Trust Emerging Growth
Series, MFS Variable Trust Research Series, MFS Variable
Trust Total Return Series, MFS Variable Trust Utilities
Series, OCC Trust Global Equity Portfolio, and the OCC Trust
Managed Portfolio funds may invest in non-investment grade,
high yield, high-risk debt securities (commonly referred to
as "junk bonds"), as detailed in the individual Fund
prospectuses.
With respect to a Trust, the adviser and/or the distributor,
or an affiliate thereof, may compensate Lincoln Life (or an
affiliate) for administrative, distribution, or other
services. It is anticipated that such compensation would be
based on assets of the particular Trust attributable to the
Contracts along with certain other variable contracts issued
or administered by Lincoln Life (or an affiliate).
GENERAL
There is no assurance that the investment objective of any
of the Funds will be met. Contract Owners bear the complete
investment risk for Annuity Account Values allocated to a
Variable Account Sub-Account. Each such Sub-Account involves
inherent investment risk, and such risk varies significantly
among the Sub-Accounts. Contract Owners should read each
Fund's prospectus carefully and understand the Funds'
relative degrees of risk before making or changing
investment choices. Additional Funds may, from time to time,
be made available as investments to underlie the Contracts.
However, the right to make such selections will be limited
by the terms and conditions imposed on such transactions by
Lincoln Life (See "Premium Payments and Contract Value-
Allocation of Premium Payments").
The Funds' shares are issued and redeemed only in connection
with variable annuity contracts and variable life insurance
policies issued through separate accounts of Lincoln Life
and other life insurance companies. The Trusts do not
foresee any disadvantage to Contract Owners arising out of
the fact that shares may be made available to separate
accounts which are used in connection with both variable
annuity and variable life insurance products. Nevertheless,
the Trusts' Boards intend to monitor events in order to
identify any material irreconcilable conflicts which may
possibly arise and to determine what action, if any, should
be taken in response thereto. If such a conflict were to
occur, one of the separate accounts might withdraw its
investment in a Fund. This might force a Fund to sell
portfolio securities at disadvantageous prices.
SUBSTITUTION OF SECURITIES
If the shares of any Fund should no longer be available for
investment by the Variable Account or if, in the judgment of
Lincoln Life, further investment in such shares should
become inappropriate in view of the purpose of the Contracts
or in view of legal regulatory or federal income tax
restrictions, Lincoln Life may substitute shares of another
Fund. No substitution of securities in any Sub-Account may
take place without prior approval of the Commission and
under such requirements as it may impose.
19
<PAGE>
VOTING RIGHTS
In accordance with its view of present applicable law,
Lincoln Life will vote the shares of each Fund held in the
Variable Account at special meetings of the shareholders of
the particular Trust in accordance with written instructions
received from persons having the voting interest in the
Variable Account. Lincoln Life will vote shares for which it
has not received instructions, as well as shares
attributable to it, in the same proportion as it votes
shares for which it has received instructions. The Trusts do
not hold regular meetings of shareholders. Shareholder votes
take place whenever state law or the 1940 Act so require,
for example on certain elections of Board of Trustees, the
initial approval of investment advisory contracts and
changes in investment objectives and fundamental investment
policies.
The number of shares which a person has a right to vote will
be determined as of a date to be chosen by Lincoln Life not
more than sixty (60) days prior to the meeting of the
particular Trust. Voting instructions will be solicited by
written communication at least fourteen (14) days prior to
the meeting.
PREMIUM PAYMENTS AND CONTRACT VALUE
PREMIUM PAYMENTS
The Contracts may be purchased under a flexible premium
payment plan. Premium Payments are payable in the frequency
and in the amount selected by the Contract Owner. The
initial Premium Payment is due on the Effective Date. It
must be at least $10,000 (for Qualified Contracts $2,000).
Subsequent Premium Payments must be at least $100. Lincoln
Life reserves the right to decline any application or order
to purchase or Premium Payment. A Premium Payment in excess
of $1 million requires preapproval by the Lincoln Life.
Lincoln Life may, at its sole discretion, offer special
premium payment programs and/or waive the minimum payment
requirements.
The Contract Owner may elect to increase, decrease or change
the frequency of Premium Payments.
If no Premium Payments have been made for three consecutive
years and the Annuity Account Value decreases to less than
$1,000 during that period, or if any partial withdrawal
decreases the Annuity Account Value to less than $1,000,
Lincoln Life reserves the right to cancel the Contract and
pay the Owner an adjusted Annuity Account Value. Lincoln
Life will provide the Owner at least 30 days advance notice
of its intended action. During the notification period, the
Owner may make an additional Premium Payment to meet the
minimum value requirements and avoid cancellation of the
Contract.
ALLOCATION OF PREMIUM PAYMENTS
Premium Payments are allocated to one or more of the
appropriate Sub-Accounts within the Variable Account and
Fixed Account as selected by the Contract Owner. For each
Variable Account Sub-Account, the Premium Payments are
converted into Accumulation Units. The number of
Accumulation Units credited to the Contract is determined by
dividing the Premium Payment allocated to the Sub-Account by
the value of the Accumulation Unit for the Sub-Account.
Lincoln Life will allocate the initial Premium Payment
directly to the Sub-Account(s) selected by the Owner unless
state law requires, during the right-to-examine period, a
refund of Premium Payments rather than Annuity Account
Value.
20
<PAGE>
In such cases, the initial Premium Payment will be allocated
to the money market account until the right-to-examine
period has expired.
Transfers do not necessarily affect the allocation
instructions for payments. Subsequent payments will be
allocated as directed by the Owner; if no direction is
given, the allocation will be that which has been most
recently directed for payments by the Owner. The Owner may
change the allocation of future payments without fee,
penalty or other charge upon written notice to Lincoln
Life's Home Office. A change will be effective for payments
received on or after receipt of the notice of change.
Any Premium Payment at the time of any allocation may be
allocated to a single or multiple sub-accounts in whole
percentages (e.g., 12%). No allocation can be made which
would result in a Variable Account Sub-Account of less than
$50 or a Fixed Account Sub-Account value of less than
$2,000.
Lincoln Life may, at its sole discretion, waive minimum
premium allocation requirements or minimum Variable Account
Sub-Account requirements.
For initial Premium Payments, if the application for or
order to purchase a Contract is in good order, Lincoln Life
will apply the Premium Payment to the Variable Account and
credit the Contract with Accumulation Units within two
business days of receipt at the Accumulation Unit Value for
the Valuation Period during which the Premium Payment is
accepted unless state law requires, during the
right-to-examine period, a refund of Premium Payments rather
than Annuity Account Value.
If the application or order to purchase for a Contract is
not in good order, Lincoln Life will attempt to get it in
good order or Lincoln Life will return the application or
order to purchase and the Premium Payment within five
business days. Lincoln Life will not retain a Premium
Payment for more than five business days while processing an
incomplete application or order to purchase unless it has
been so authorized by the purchaser.
For each subsequent Premium Payment, Lincoln Life will apply
such payment to the Variable Account and credit the Contract
with Accumulation Units at the Accumulation Unit Value for
the Valuation Period during which each such payment was
received in good order.
OPTIONAL VARIABLE ACCOUNT SUB-ACCOUNT ALLOCATION PROGRAMS
The Contract Owner may elect to enroll in either of the
following programs. However, both programs cannot be in
effect at the same time.
DOLLAR COST AVERAGING
Dollar Cost Averaging is a program which, if elected by the
Contract Owner, systematically allocates specified dollar
amounts from the Money Market Sub-Account or the One-Year
Fixed Account Sub-Account to one or more of the Contract's
Variable Account Sub-Accounts at regular intervals as
selected by the Contract Owner. By allocating on a regularly
scheduled basis as opposed to allocating the total amount at
one particular time, an Owner may be less susceptible to the
impact of market fluctuations.
Dollar Cost Averaging may be selected by establishing a
Money Market Sub-Account of at least $1,000 or a One-Year
Fixed Account Sub-Account with a value of at least $2,000.
The minimum amount per month to allocate is $50. Enrollment
in this program may occur at any time by calling or writing
Lincoln Life's Home Office or by providing the information
requested on the Dollar Cost Averaging election form to
Lincoln Life and ensuring that sufficient value is in the
Money Market Sub-Account or the One-year Fixed
21
<PAGE>
Account Sub-Account. Transfers to any Fixed Account
Sub-Account or from a Fixed Account Sub-Account other than
the One-Year Fixed Account Sub-Account are not permitted
under Dollar Cost Averaging. Lincoln Life may, upon
occasion, offer a Fixed Account Sub-Account for periods of
less than one year solely for the purpose of Dollar Cost
Averaging. Lincoln Life may, at its sole discretion, waive
Dollar Cost Averaging minimum deposit and transfer
requirements.
Dollar Cost Averaging will terminate when any of the
following occurs: (1) the number of designated transfers has
been completed; (2) the value of the Money Market Sub-
Account or the One-Year Fixed Sub-Account is insufficient to
complete the next transfer; (3) the Owner requests
termination by telephone or in writing and such request is
received at least one week prior to the next scheduled
transfer date to take effect that month; or (4) the Contract
is surrendered.
The Dollar Cost Averaging program is not available following
the Annuity Date. There is no current charge for Dollar Cost
Averaging but Lincoln Life reserves the right to charge for
this program.
Dollar Cost Averaging will not assure a profit or protect
against a declining market.
AUTOMATIC REBALANCING
Automatic Rebalancing is an option which, if elected by the
Contract Owner, periodically restores to a pre-determined
level the percentage of Contract Value allocated to each
Variable Account Sub-Account (e.g. 20% Money Market, 50%
Growth, 30% Utilities). This pre-determined level will be
the allocation initially selected when the Contract was
purchased, unless subsequently changed. The Automatic
Rebalancing allocation may be changed at any time by
submitting a request to Lincoln Life.
If Automatic Rebalancing is elected, all Net Premium
Payments allocated to the Variable Account Sub-Accounts must
be subject to Automatic Rebalancing. The Fixed Account
Sub-Account is not available for Automatic Rebalancing.
Automatic Rebalancing may take place on either a quarterly,
semi-annual or annual basis, as selected by the Owner. Once
the rebalancing option is activated, any Variable Account
Sub-Account transfers executed outside of the rebalancing
option will terminate the Automatic Rebalancing option. Any
subsequent premium payment or withdrawal that modifies the
net account balance within each Variable Account Sub-Account
may also cause termination of the Automatic Rebalancing
option. Any such termination will be confirmed to the Owner.
The Owner may terminate the Automatic Rebalancing option or
re-enroll at any time by calling or writing Lincoln Life's
Home Office.
The Automatic Rebalancing program is not available following
the Annuity Date. There is no current charge for Automatic
Rebalancing but Lincoln Life reserves the right to charge
for this program.
CONTRACT VALUE
The value of the Contract is the sum of the values
attributable to the Contract for each Fixed and Variable
Sub-Account. The value of each Variable Sub-Account is
determined by multiplying the number of Accumulation Units
attributable to the Contract in the Sub-Account by the value
of an Accumulation Unit for the Sub-Account.
ACCUMULATION UNIT
Premium Payments allocated to the Variable Account are
converted into Accumulation Units. This is done by dividing
each Premium Payment by the value of an Accumulation Unit
calculated at the end of the Valuation Period during which
the Premium Payment is
22
<PAGE>
allocated to the Variable Account. The Accumulation Unit
value for each Sub-Account was or will be established by
Lincoln Life at the inception of the Sub-Account. It may
increase or decrease from Valuation Period to Valuation
Period. The Accumulation Unit value for a Sub-Account for
any later Valuation Period is determined as follows:
(1)The total value of Fund shares held in the Sub-Account
is calculated by multiplying the number of Fund shares
owned by the Sub-Account at the beginning of the
Valuation Period by the net asset value per share of
the Fund at the end of the Valuation Period, and
adding any dividend or other distribution of the Fund
if an ex-dividend date occurs during the Valuation
Period; minus
(2)The liabilities of the Sub-Account at the end of the
Valuation Period; such liabilities include daily
charges imposed on the Sub-Account, and may include a
charge or credit with respect to any taxes paid or
reserved for by Lincoln Life that Lincoln Life
determines result from the operations of the Variable
Account; and
(3)The result of (2) is divided by the number of
Sub-Account units outstanding at the beginning of the
Valuation Period.
The daily charges imposed on a Sub-Account for any Valuation
Period are equal to the daily mortality and expense risk
charge and the daily administrative charge multiplied by the
number of calendar days in the Valuation Period.
CHARGES AND DEDUCTIONS
Various charges and deductions are made from Annuity Account
Values and the Variable Account. Lincoln Life may use any of
its corporate assets, including potential profit which may
arise from the Mortality and Expense Risk Charge, to cover
actual cost of distribution of the Contracts. These charges
and deductions are:
CONTINGENT DEFERRED SALES CHARGE (SALES LOAD)
Upon a partial withdrawal or full surrender, a Contingent
Deferred Sales Charge (sales load) will be calculated and
will be deducted from the Annuity Account Value. This Charge
reimburses Lincoln Life for expenses incurred in connection
with the promotion, sale and distribution of the Contracts.
The Contingent Deferred Sales Charge applies only to those
Premium Payments received within seven (7) years of the date
of partial withdrawal or full surrender. In calculating the
Contingent Deferred Sales Charge, Premium Payments are
allocated to the amount surrendered or withdrawn on a
first-in, first-out basis. After all Premium Payments have
been deemed withdrawn, Lincoln Life will deem further
withdrawals to be from net investment results. The amount of
the Contingent Deferred Sales Charge is calculated by: (a)
allocating Premium Payments to the amount withdrawn or
surrendered; (b) multiplying each allocated Premium Payment
that has been held under the Contract for the period shown
below by the charge shown below:
<TABLE>
<CAPTION>
YEARS SINCE PAYMENT CHARGE
-------------------- --------
<S> <C>
0-1 7%
1-2 6%
2-3 5%
3-4 4%
4-5 3%
5-6 2%
6-7 1%
7+ 0
</TABLE>
and (c) adding the products of each multiplication in (b)
above. The charge will not exceed 7% of the Premium
Payments. Any applicable negative Market Value Adjustment
23
<PAGE>
and Account Fee will be deducted before application of the
Contingent Deferred Sales Charge. The charge is not imposed
on any death benefit paid or upon amounts applied to an
annuity option.
A Contract Owner may, during each Contract Year, withdraw up
to fifteen percent (15%) of Premium Payments, or any
remaining portion thereof, without incurring a Contingent
Deferred Sales Charge. The earliest Premium Payments
remaining in the Contract will be deemed withdrawn first
under this Fifteen Percent Free provision. No Contingent
Deferred Sales Charge will be deducted on withdrawals from
Premium Payments which have been held under the Contract for
more than seven (7) Contract Years or from annuity payments.
Lincoln Life may also eliminate or reduce the Contingent
Deferred Sales Charge under Lincoln Life procedures then in
effect.
For a partial withdrawal, unless the Owner designates
otherwise, the Contingent Deferred Sales Charge will be
deducted proportionately from the Sub-Account(s) from which
the withdrawal is to be made by cancelling Accumulation
Units from each applicable Sub-Account in the ratio that the
value of each Sub-Account bears to the total of the values
of the Sub-Accounts from which the partial withdrawal is
made. If the value(s) of such Sub-Account(s) are
insufficient, remaining Contingent Deferred Sales Charges
will be deducted on a pro rata basis from all Sub-Accounts
in proportion to the then current account value(s) of such
Sub-Accounts unless the Owner and Lincoln Life agree
otherwise.
To the extent that the Contingent Deferred Sales Charge is
insufficient to cover the actual cost of distribution of the
contracts, Lincoln Life may use any of its corporate assets,
including potential profit which may arise from the
Mortality and Expense Risk Charge, to make up any
difference.
MORTALITY AND EXPENSE RISK CHARGE
Lincoln Life deducts on each Valuation Date a Mortality and
Expense Risk Charge which is equal, on an annual basis, to
1.25% of the average daily net assets of the Variable
Account. The mortality risks assumed by Lincoln Life arise
from its contractual obligation to make annuity payments
after the Annuity Date for the life of the Annuitant in
accordance with annuity rates guaranteed in the Contract and
to pay death benefits that may exceed the Annuity Account
Value. The expense risk assumed by Lincoln Life is that all
actual expenses involved in administering the Contracts,
including Contract maintenance costs, administrative costs,
mailing costs, data processing costs, legal fees, accounting
fees, filing fees, and the costs of other services may
exceed the amount recovered from the Account Fee and the
Administrative Expense Charge, each of which is described
below.
If the Mortality and Expense Risk Charge is insufficient to
cover the actual costs, the loss will be borne by Lincoln
Life. Conversely, if the amount deducted proves more than
sufficient, the excess will be a profit to Lincoln Life.
Lincoln Life expects to profit from this charge.
The Mortality and Expense Risk Charge is guaranteed by
Lincoln Life and cannot be increased.
ADMINISTRATIVE EXPENSE CHARGE
Lincoln Life deducts on each Valuation Date an
Administrative Expense Charge which is equal, on an annual
basis, to 0.15% of the average daily net assets of the
Variable Account. This charge is to reimburse Lincoln Life
for a portion of its expenses in administering the
Contracts. This charge is guaranteed by Lincoln Life and
cannot be increased.
24
<PAGE>
ACCOUNT FEE
Lincoln Life deducts an annual Account Fee of $35 from the
Annuity Account Value on the last Valuation Date of each
Contract Year. This charge, like the Administrative Expense
Charge, is to reimburse Lincoln Life for its expenses in
administering the Contracts. Prior to the Annuity Date, this
charge is deducted by cancelling Accumulation Units from
each applicable Sub-Account in the ratio that the value of
each Sub-Account bears to the total Annuity Account Value.
When the Contract is annuitized or surrendered for its full
Surrender Value on other than a Contract Anniversary, the
Account Fee will be prorated at the time of surrender or
annuitization. The Account Fee will be waived for any
Contract Year in which the Annuity Account Value equals or
exceeds $100,000 as of the last Valuation Date of the
Contract Year or at annuitization.
PREMIUM TAX EQUIVALENTS
Premium tax equivalents or other taxes payable to a state,
municipality or other governmental entity will be charged
against Annuity Account Value. Premium taxes currently
imposed by certain states on the Contracts offered hereby
range from 0% to 4.0% of Premiums paid. Some states assess
premium taxes at the time Premium Payments are made; others
assess premium taxes at the time annuity payments begin.
Lincoln Life will, in its sole discretion, determine when
taxes have resulted from: the investment experience of the
Variable Account; receipt by Lincoln Life of the Premium
Payment(s); or commencement of annuity payments. Lincoln
Life may, at its sole discretion, pay taxes when due and
deduct an equivalent amount reflecting investment experience
from the Annuity Account Value at a later date. Payment at
an earlier date does not waive any right Lincoln Life may
have to deduct amounts at a later date.
INCOME TAXES
While Lincoln Life is not currently maintaining a provision
for federal income taxes, Lincoln Life has reserved the
right to establish a provision for income taxes if it
determines, in its sole discretion, that it will incur a tax
as a result of the operation of the Variable Account.
Lincoln Life will deduct for any income taxes incurred by it
as a result of the operation of the Variable Account whether
or not there was a provision for taxes and whether or not it
was sufficient.
FUND EXPENSES
There are other deductions from, and expenses paid out of,
the assets of the Funds which are described in the
accompanying Funds' prospectuses.
TRANSFER FEE
Prior to the Annuity Date, a Contract Owner may transfer all
or a part of the Annuity Account Value in a Sub-Account to
another Sub-Account without the imposition of any transfer
fee or charge if there have been no more than twelve
transfers made in the Contract Year. For additional
transfers, Lincoln Life reserves the right to deduct a
transfer fee of up to $10 per transfer. Prescheduled
automatic Dollar Cost Averaging or Automatic Rebalancing
transfers are not counted toward the twelve transfer limit.
Lincoln Life reserves the right to charge a fee of up to $10
for each transfer after the Annuity Date. The transfer fee
at any given time will not be set at a level greater than
its cost and will contain no element of profit.
25
<PAGE>
RIDER CHARGES
A fee or expense may also be deducted in connection with any
benefits added to the Contract by rider or endorsement. See
the rider for any applicable fee or expense.
DEATH BENEFITS
DEATH BENEFITS PROVIDED BY THE CONTRACTS
In the event of death of the Contract Owner (or the
Annuitant, if the Owner is a non-natural person) prior to
the Annuity Date, a death benefit is payable to the
Beneficiary designated by the Owner upon due proof of death
(a certified copy of the Death Certificate) of the Owner. If
there is no designated Beneficiary, or contingent
Beneficiary,
Lincoln Life will, within seven (7) days of receipt of due
proof of death of Owner, Beneficiary and contingent
Beneficiary, pay the death benefit in one lump sum to the
deceased Owner's estate.
If the death of any annuitant occurs on or after the Annuity
Date, no death benefit will be payable under the Contract
except as may be provided under the Annuity Option elected.
AMOUNT OF DEATH BENEFIT
The amount of the death benefit is determined as of the
effective date or deemed effective date of the death benefit
election (see "Election and Effective Date of Election"),
and is equal to the greatest of --
(a) the Annuity Account Value for the Valuation Period
during which the death benefit election is effective or
deemed to become effective;
(b) the sum of all the Premium Payments made under the
Contract, less the sum of all partial withdrawals; or
(c) the highest Annuity Account Value ever attained on a
Contract Anniversary date occurring on or before the
Owner's 80th birthday, with adjustments for any
subsequent Premium Payments, partial withdrawals and
charges made since such Contract Anniversary Date.
On or after Owner's 90th birthday, the amount of the death
benefit is the greater of (a) and (b) above.
No Market Value Adjustment (see "Market Value Adjustment")
or withdrawal charges are assessed against amounts which are
applied toward payment of a death benefit.
Upon a transfer of ownership, the death benefit becomes the
greatest of --
(a) the Annuity Account Value for the Valuation Period
during which the death benefit election is effective or
deemed to become effective;
(b) the sum of Premium Payments made less the sum of
withdrawals made on or before the date of transfer,
adjusted for any subsequent Premium Payments and partial
withdrawals made under the Contract; or
(c) the highest Annuity Account Value ever attained on a
Contract Anniversary date subsequent to the date of
transfer occurring on or before the new Owner's 80th
birthday, with adjustments for any subsequent Premium
Payments, partial withdrawals and charges made since
such Contract Anniversary Date.
On or after the then current Owner's 90th birthday, the
amount of the death benefit is the greater of (a) and (b)
above.
26
<PAGE>
ELECTION AND EFFECTIVE DATE OF ELECTION
Unless specified in writing by the Owner the Beneficiary
may, at any time before the end of the sixty (60) day period
immediately following receipt of due proof of death by
Lincoln Life, elect the death benefit to be paid as follows:
1. the payment of the entire death benefit on a specified
date, which must be within five years of the date of the
death of the Owner or Annuitant, whichever is
applicable; or
2. payment over the lifetime of the designated Beneficiary
or over a period not extending beyond the life
expectancy of the Beneficiary, with distribution
beginning within one year of the date of death of the
Owner or Annuitant, whichever is applicable (see
"Annuity Provisions -- Annuity Options"); or
3. payment in accordance with one of the settlement options
under the Contract (see "Annuity Provisions -- Annuity
Options"); or
4. if the designated Beneficiary is the Owner's spouse,
he/she can continue the Contract in his/her own name.
Payment amounts may vary with their frequency and duration
(see "Annuity Provisions -- Annuity Options"). To the extent
that the Beneficiary elects a variable payment option, the
Beneficiary will bear the investment risk associated with
the performance of the underlying Fund(s) in which the
relevant Variable Sub-Account invest(s).
Such election may be made by filing with Lincoln Life a
statement in writing specifying the method by which the
death benefit shall be paid and such election shall become
effective on the later of (a) the date the election is
received by Lincoln Life, and (b) the date due proof of
death of the Owner is received by Lincoln Life. Payments
will begin thirty (30) days after the effective date of the
election.
If no payment option is elected, a single sum settlement
will be made by Lincoln Life within seven (7) days of the
end of the sixty (60) day period following receipt of due
proof of death of the Owner or Annuitant as applicable.
If the Owner is a non-natural person, then for purposes of
the death benefit, the Annuitant shall be treated as the
Owner, except that in such case a change of annuitant would
be treated as a death of the annuitant.
DEATH OF THE ANNUITANT BEFORE THE ANNUITY DATE
If the Annuitant dies prior to the Annuity Date and the
Annuitant is different from the Contract Owner, the Contract
Owner, if a natural person, may designate a new Annuitant.
Unless and until one is designated, the Contract Owner will
be the Annuitant. If the Contract Owner is not a natural
person, then the death benefit, valued as described in
"Amount of Death Benefit" but based on the Annuitant, is
paid on due proof of the Annuitant's death.
DEATH OF THE ANNUITANT AFTER THE ANNUITY DATE
If the Annuitant dies after the Annuity Date, the death
benefit, if any, will be as specified in the Annuity Option
elected.
Lincoln Life will require due proof of the Annuitant's
death. Death benefits will be paid at least as rapidly as
under the method of distribution in effect at the
Annuitant's death.
27
<PAGE>
OTHER CONTRACT FEATURES
OWNERSHIP
The Contract Owner has all rights and may receive all
benefits under the Contract. The Contract Owner may change
the Contract Owner at any time. If the Contract Owner dies,
a death benefit will be paid to the Beneficiary upon proof
of the Contract Owner's death. If the Owner is a
corporation, partnership or other non-natural person, the
death benefit is paid upon receipt of due proof of the
Annuitant's death. A change of Contract Owner will
automatically revoke any prior designation of Contract
Owner. A request for change must be: (1) made in writing;
and (2) received by Lincoln Life at its Home Office. The
change will become effective as of the date the written
request is signed. A new designation of Contract Owner will
not apply to any payment made or action taken by Lincoln
Life prior to the time it was received.
For non-qualified contracts, in accordance with Code Section
72(u), a deferred annuity contract held by a corporation or
other entity that is not a natural person is not treated as
an annuity contract for tax purposes. Income on the contract
is treated as ordinary income received by the owner during
the taxable year. But in accordance with Code Section 72(u),
an annuity contract held by a trust or other entity as agent
for a natural person is considered held by a natural person.
ASSIGNMENT
The Contract Owner may assign the Contract at any time
during his or her lifetime. Unless provided otherwise, an
assignment will not affect the interest of any previously
indicated Beneficiary. Lincoln Life will not be bound by any
assignment until written notice is received by Lincoln Life
at its Home Office. Lincoln Life is not responsible for the
validity of any assignment. Lincoln Life will not be liable
as to any payment or other settlement made by Lincoln Life
before such assignment has been recorded at Lincoln Life's
Home Office.
If the Contract is issued pursuant to a Qualified Plan, it
may not be assigned, pledged or otherwise transferred except
as may be allowed under applicable law.
BENEFICIARY
The Beneficiary is named when the Contract is applied for
and, unless changed, is entitled to receive any death
benefits to be paid. Prior to the Annuity Date, death
benefits are paid to the Beneficiary on the death of the
Owner.
CHANGE OF BENEFICIARY
The Contract Owner may change a Beneficiary by filing a
written request with Lincoln Life at its Home Office unless
an irrevocable Beneficiary designation was previously filed.
After the change is recorded, it will take effect as of the
date the request was signed. If the request reaches the
Lincoln Life's Home Office after the death of the Annuitant
or Contract Owner, as applicable, but before any payment is
made, the change will be valid. Lincoln Life will not be
liable for any payment made or action taken before it
records the change.
ANNUITANT
The Annuitant must be a natural person. The maximum age of
the Annuitant on the date the Contract is issued is 90 years
old. The Annuitant may be changed at any time prior to the
Annuity Date unless the Contract is owned by a non-natural
person. Joint Annuitants are allowed at the time of
annuitization only, if Lincoln Life chooses to make
28
<PAGE>
a joint and survivor annuity payment option available in
addition to the options provided in the Contract. The
Annuitant has no rights or privileges prior to the Annuity
Date. When an Annuity Option is elected, the amount payable
as of the Annuity Date is based on the age and gender
classification (in accordance with state law) of the
Annuitant, as well as the Option selected and the Annuity
Account Value.
TRANSFER OF CONTRACT VALUES BETWEEN SUB-ACCOUNTS
Prior to the Annuity Date, the Contract Owner may transfer
all or part of the Annuity Account Value in a Sub-Account to
another Sub-Account without the imposition of any fee or
charge if there have been no more than twelve transfers made
in the Contract Year. For additional transfers, Lincoln Life
reserves the right to deduct a transfer fee of up to $10
(See "Charges and Deductions -- Transfer Fee"). This
Contract is not designed for professional market timing
organizations or other entities using programmed and
frequent transfers.
Repeated patterns of frequent transfers are disruptive to
the operation of the Sub-Accounts, and should Lincoln Life
become aware of such disruptive practices, Lincoln Life may
refuse to permit more than 12 transfers in any year and may
modify the transfer provisions of the Contract.
There may be limits on the amount that can be transferred
from each Fixed Account Sub-Account during a Contract Year.
After the Annuity Date, provided a variable annuity option
was selected, the Contract Owner may make up to three
transfers between Variable Sub-Accounts in any Contract
Year.
All transfers are subject to the following:
a. The deduction of any transfer fee that may be imposed.
The transfer fee will be deducted from the amount which
is transferred if the entire amount in the Sub-Account is
being transferred, otherwise from the Sub-Account from
which the transfer is made.
b. The minimum amount which may be transferred is the lesser
of (i) $2,000 per Fixed Account Sub-Account or $50 per
Variable Account Sub-Account; or (ii) the Contract
Owner's entire interest in the Sub-Account. Lincoln Life,
at its sole discretion may waive these minimum
requirements.
c. No partial transfer will be made if the Contract Owner's
remaining Contract Value in Fixed Account Sub-Account
will be less than $2,000 or in the Variable Sub-Account
will be less than $50.
d. Transfers involving Variable Account Sub-Accounts will
reflect the purchase or cancellation of Variable
Accumulation Units having an aggregate value equal to the
dollar amount being transferred to or from a particular
Variable Account Sub-Account. The purchase or
cancellation of units shall be made using Variable
Accumulation Unit Values of the applicable Variable
Account Sub-Account at the end of the Valuation Period
during which the transfer request is received in good
order at Lincoln Life's Home Office. However, no transfer
may be made effective within seven calendar days of the
date on which the first annuity payment is due. Transfers
are not permitted during the right-to-examine period.
e. Any transfer request must clearly specify the amount
which is to be transferred and the Sub-Accounts which are
to be affected.
f. Transfers of all or a portion of any Fixed Account
Sub-Account values (other than transfers pursuant to the
Dollar Cost Averaging program or at the end of a
Guaranteed Period) are subject to any applicable Market
Value Adjustment;
g. Lincoln Life reserves the right to defer transfers from
any Fixed Account Sub-Account for up to six months after
date of receipt of the transfer request;
29
<PAGE>
h. Transfers involving the Variable Account Sub-Accounts are
subject to such restrictions as may be imposed by the
Funds;
i. Lincoln Life reserves the right at any time and without
prior notice to any party to terminate, suspend or modify
the transfer privileges described above.
j. After the Annuity Date, transfers may not take place
between a Fixed Annuity Option and a Variable Annuity
Option.
k. Lincoln Life reserves the right to reject any premium
allocation or transfer which would cause the Fixed
Account Sub-Account values in aggregate to exceed then
current Lincoln Life limits.
Transfers between Sub-Accounts may be made by calling or
writing Lincoln Life's Home Office. Transfer requests must
be received prior to 4:00 Eastern Time in order to be
effective that day.
Transfers between any Sub-Accounts may be suspended or
postponed during any period in which the New York Stock
Exchange is closed or has suspended trading.
PROCEDURES FOR TELEPHONE TRANSFERS
Owners may effect telephone transfers by calling Lincoln
Life's Home Office.
Lincoln Life will take the following procedures to confirm
that instructions communicated by telephone are genuine.
Before a service representative accepts any request, the
caller will be asked for specific information to validate
the request. All calls will be recorded. All transactions
performed will be confirmed by Lincoln Life in writing.
Lincoln Life is not liable for any loss, cost or expense for
acting on telephone instructions which are believed to be
genuine in accordance with these procedures.
SURRENDERS AND PARTIAL WITHDRAWALS
While the Contract is in force and before the Annuity Date,
Lincoln Life will, upon written request to Lincoln Life by
the Contract Owner, allow the surrender or partial
withdrawal of all or a portion of the Contract for its
Surrender Value. Surrenders or partial withdrawals will
result in the cancellation of Accumulation Units from each
applicable Sub-Account in the ratio that the value of each
Sub-Account bears to the total Annuity Account Value, unless
the Contract Owner specifies in writing in advance which
units are to be cancelled. Lincoln Life will pay the amount
of any surrender or partial withdrawal within seven (7) days
of receipt of a valid request, unless the "Delay of
Payments" provision is in effect. (See "Delay of Payments
and Transfers")
Certain tax withdrawal penalties and restrictions may apply
to surrenders and partial withdrawals from Contracts. (See
"Tax Matters.") Contract Owners should consult their own tax
counsel or other tax adviser regarding any surrenders and
partial withdrawals.
The Surrender Value is the Annuity Account Value for the
Valuation Period next following the Valuation Period during
which the written request to Lincoln Life for surrender is
received, reduced, in the case of full surrender, by the sum
of:
A. any applicable premium tax equivalents not previously
deducted;
B. any applicable Account Fee; and
C. any applicable Contingent Deferred Sales Charge; and
for partial withdrawals, by the sum of A and C above.
30
<PAGE>
RESTRICTIONS UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM
Title 8, Section 830.105 of the Texas Government Code,
consistent with prior interpretations of the Attorney
General of the State of Texas, permits participants in the
Texas Optional Retirement Program "ORP" to redeem their
interest in a variable annuity contract issued under the ORP
only upon:
1. Termination of employment in all institutions of higher
education as defined in Texas law;
2. Retirement; or
3. Death.
Accordingly, a participant in the ORP will be required to
obtain a certificate of termination from the participant's
employer before accounts can be redeemed.
DELAY OF PAYMENTS AND TRANSFERS
Lincoln Life reserves the right to suspend or postpone
payment of proceeds or transfers for any period when:
1. the New York Stock Exchange is closed (other than
customary weekend and holiday closings);
2. trading on the New York Stock Exchange is restricted;
3. an emergency exists as a result of which disposal of
securities held in the Variable Account is not reasonably
practicable or it is not reasonably practicable to
determine the value of the Variable Account's net assets;
or
4. during any other period when the Commission, by order, so
permits for the protection of Contract Owners.
The applicable rules and regulations of the Commission will
govern as to whether the conditions described in 2. and 3.
exist.
Lincoln Life reserves the right to defer the payment or
transfer of amounts withdrawn from any Fixed Account
Sub-Account for a period not to exceed six months from the
date written request for such withdrawal or transfer is
received by Lincoln Life. If payment or transfer is deferred
beyond thirty (30) days, Lincoln Life will pay interest of
not less than 3% per year on amounts so deferred.
In addition, payment of the amount of any withdrawal
derived, all or in part, from any Premium Payment paid to
Lincoln Life by check or draft may be postponed until
Lincoln Life determines the check or draft has been honored.
CHANGE IN OPERATION OF VARIABLE ACCOUNT
At Lincoln Life's election and subject to the approval of
persons having voting rights under the Contracts, the
Variable Account may be operated as a management company
under the 1940 Act or any other form permitted by law;
de-registered under the 1940 Act in the event registration
is no longer required (deregistration of the Variable
Account requires an order by the Commission); or combined
with one or more other separate accounts. To the extent
permitted by applicable law, Lincoln Life also may transfer
the assets of the Variable Account associated with the
Contracts to another account or accounts. In the event of
any change in the operation of the Variable Account pursuant
to this provision, Lincoln Life may make appropriate
endorsement to the Contracts to reflect the change and take
such other action as may be necessary and appropriate to
effect the change.
31
<PAGE>
MODIFICATION
Upon notice to the Owner (or the Payee(s) during the Annuity
Period), the Contracts may be modified by Lincoln Life if
such modification: (i) is necessary to make the Contracts or
the Variable Account comply with, or take advantage of, any
law or regulation issued by a governmental agency to which
Lincoln Life or the Variable Account is subject; or (ii) is
necessary to attempt to assure continued qualification of
the Contracts under the Code or other federal or state laws
relating to retirement annuities or annuity contracts; or
(iii) is necessary to reflect a change in the operation of
the Variable Account or its Sub-Account(s) (See "Change in
Operation of Variable Account"); or (iv) provides additional
Variable Account and/or fixed accumulation options. In the
event of any such modification, Lincoln Life may make
appropriate endorsement to the Contracts to reflect such
modification.
In addition, upon notice to the Owner, the Contracts may be
modified by Lincoln Life to change the withdrawal charges,
Account Fees, mortality and expense risk charges,
administrative expense charges, the tables used in
determining the amount of the first monthly fixed annuity
payment, and the formula used to calculate the Market Value
Adjustment, provided that such modification shall apply only
to Contracts established after the effective date of such
modification. In order to exercise its modification rights
in these particular instances, Lincoln Life must notify the
Owner of such modification in writing. All of the charges
and the annuity tables which are provided in the Contracts
prior to any such modification will remain in effect
permanently, unless improved by Lincoln Life, with respect
to Contracts established prior to the effective date of such
modification.
DISCONTINUANCE
Lincoln Life reserves the right to limit or discontinue the
offer and issuance of new Contracts. Such limitation or
discontinuance shall have no effect on rights or benefits
with respect to any Contracts issued prior to the effective
date of such limitation or discontinuance.
ANNUITY PROVISIONS
ANNUITY DATE; CHANGE IN ANNUITY DATE AND ANNUITY OPTION
The Contract Owner selects an Annuity Date at the time of
application or order to purchase. The Contract Owner may,
upon at least forty-five (45) days prior written notice to
Lincoln Life, at any time prior to the Annuity Date, change
the Annuity Date. The new Annuity Date must be at least 30
days after the effective date of the change. If the Income
Payment is a 100% Fixed Income Payment, the first Income
Payment Date under the Settlement Option selected will be at
least 30 days after the Annuity Date as selected by the
Owner. If the Income Payment is any part a variable Income
Payment, the first Income Payment under the settlement
option selected will be 14 days after the Valuation Period
which ends immediately preceding the Annuity Date as
selected by the Owner. The Annuity Date may not be later
than the month following the Annuitant's 90th birthday.
The Contract Owner may, upon at least forty-five (45) days
prior written notice to Lincoln Life, at any time prior to
the Annuity Date, select and/or change the Annuity Option.
The Annuity Date will then be automatically changed to the
date of such annuitization.
PENALTY-FREE ANNUITIZATION
At any time the Owner may request in writing payment of the
then current Annuity Account Value in accordance with any
one of the settlement options set forth in the Contract. In
such event, no Contingent Deferred Sales Charge or Market
Value Adjustment will be imposed at the time such settlement
is made.
32
<PAGE>
ANNUITY OPTIONS
Instead of having the proceeds paid in one sum, the Contract
Owner may select one of the Annuity Options. These may be on
a fixed or variable basis, or a combination thereof.
However, if the amount to be applied under any settlement
option is less than $5,000, or if the first income payment
payable in accordance with such option is less than $50,
Lincoln Life reserves the right to pay the adjusted value in
a single payment to the payee designated by the Owner. If
the Annuity Option elected results in a payment less than
the minimum payment required by the Contract, Lincoln Life
reserves the right to change the frequency of payments to an
interval that will provide the minimum payment amount. The
Annuity Option must be selected at least 30 days prior to
the Annuity Date. If no such selection is made, the adjusted
Annuity Account Value will be applied under a life Annuity
with 120 months guaranteed. In such situation, the adjusted
Annuity Account Value on the Annuity Date will be applied to
either a fixed option or a variable option in proportion to
the Annuity Account Value in the Fixed Account or the
Sub-Accounts, respectively, on the Annuity Date. Lincoln
Life also may make available other settlement options.
Lincoln Life uses sex distinct or unisex annuity rate tables
when determining appropriate annuity payments.
GUARANTEED MINIMUM INCOME PAYMENT RIDER
Lincoln Life may offer in the future a rider benefit that
will allow a Contract Owner to receive a guaranteed minimum
income payment regardless of the investment results of the
Sub-Accounts in which the Contract Owner has allocated
Premium Payments. Where a Contract Owner elects the rider,
each annuity payment will be the greater of the annuity
payment under the settlement option elected by the Contract
Owner or the guaranteed minimum income payment provided by
the rider. It is anticipated an annual charge of up to 0.50%
will be deducted from the Contract's average daily net
assets while the rider is in effect. If Lincoln Life offers
the guaranteed minimum income payment rider, it is expected
to provide that a Contract Owner may request to annuitize
the Contract under the terms of the rider during certain
benefit option periods, as specified in the rider.
FIXED OPTIONS
Under a fixed option, once the selection has been made and
payments have begun, the amount of the payments will not
vary. The fixed options currently available are:
FIRST OPTION -- LIFE ANNUITY. An annuity which provides
annuity payments during the lifetime of the Annuitant,
ceasing with the last payable due prior to the death of the
Annuitant.
SECOND OPTION -- LIFE ANNUITY WITH CERTAIN PERIOD. An
annuity which provides annuity payments during the lifetime
of the Annuitant and further provides that if at the death
of an Annuitant payments have been made for less than the
elected certain period, which may be 120 or 240 months, the
annuity payments will continue for the remainder of elected
certain period.
THIRD OPTION -- CASH REFUND LIFE ANNUITY. An annuity which
provides annuity payments during the lifetime of the
Annuitant, ceasing with the last payment due prior to the
death of the Annuitant, with the guarantee that upon the
death of the Annuitant, if: (a) the total dollar amount
applied to the purchase this Fixed Income Payment option is
greater than; (b) the Fixed Income Payment multiplied by the
number of Income Payments paid prior to death; then a refund
payment equal to the dollar amount of
33
<PAGE>
(a) minus (b) will be made after the death claim is approved
by the Company for payment and the Company is in receipt of:
(a) proof of death acceptable to the Company; (b) written
authorization for payment; and (c) all claim forms, fully
completed.
FOURTH OPTION -- JOINT LIFE ANNUITY. An annuity which
provides annuity payments during the joint lifetime of the
Annuitant and a Joint Annuitant, ceasing with the last
payment due prior to the last death of the joint annuitants.
FIFTH OPTION -- JOINT LIFE AND TWO-THIRDS TO SURVIVOR
ANNUITY. An annuity which provides annuity payments during
the joint lifetime of the Annuitant and a Joint Annuitant,
with the two-thirds of such amount payable during the
remaining lifetime of the survivor and ceasing with the last
payment due prior to the last death of the joint annuitants.
SIXTH OPTION -- JOINT LIFE ANNUITY WITH CERTAIN PERIOD. An
annuity which provides annuity payments during the joint
lifetime of the Annuitant and Joint Annuitant and further
provides that if after death of both Annuitants payments
have been made for less than the elected certain period,
which may be 120 or 240 months, the annuity payments will
continue for the remainder of elected certain period.
SEVENTH OPTION -- JOINT LIFE AND TWO-THIRDS TO SURVIVOR
ANNUITY WITH CERTAIN PERIOD. An annuity which provides
annuity payments during the joint lifetime of the Annuitant
and a Joint Annuitant, with two-thirds of such amount
payable during the remaining lifetime of the survivor,
further providing that should one or both the Annuitants die
during the elected certain period, which may be 120 or 240
months, the full benefit payment will continue for the
remainder of the elected certain period.
VARIABLE OPTIONS
The actual dollar amount of variable annuity payments is
dependent upon (i) the Annuity Account Value at the time of
annuitization, (ii) the annuity table specified in the
Contract, (iii) the Annuity Option selected, and (iv) the
investment performance of the Sub-Account selected. Each
annuity payment will be less if payments are to be made more
frequently or for longer periods of time. The mortality and
expense risk charge will be assessed on all variable annuity
payments, including options that do not have a life
contingency and therefore no mortality risk.
The dollar amount of the first monthly variable annuity
payment is determined by applying the available value (after
deduction of any premium tax equivalents not previously
deducted) to the table using the age and gender (in
accordance with state law) of the Annuitant. The number of
Annuity Units is then determined by dividing this dollar
amount by the then current Annuity Unit value. Thereafter,
the number of Annuity Units remains unchanged during the
period of annuity payments. This determination is made
separately for each Sub-Account of the Variable Account. The
number of Annuity Units is determined for each Sub-Account
and is based upon the available value in each Sub-Account at
the end of the Valuation Period immediately preceding the
Annuity Date.
The dollar amount determined for each Sub-Account will then
be aggregated for purposes of making payments.
The dollar amount of the second and later variable annuity
payments is equal to the number of Annuity Units determined
for each Sub-Account times the Annuity Unit value for that
Sub-Account at the end of the Valuation Period that is 14
days prior to the Valuation Income Payment Date. This amount
may increase or decrease from month to month.
34
<PAGE>
The annuity tables contained in the Contract are based on a
four percent (4%) assumed net investment rate. If the actual
net investment rate exceeds four percent (4%), payments will
increase. Conversely, if the actual rate is less than four
percent (4%), annuity payments will decrease.
The Annuitant receives the value of a fixed number of
Annuity Units each Income Payment Date. The value of a fixed
number of Annuity Units will reflect the investment
performance of the Sub-Account selected and the amount of
each annuity payment will vary accordingly.
The Annuity Unit Value for a Sub-Account is determined by
multiplying the Annuity Unit Value for that Sub-Account for
the preceding Valuation Period by the Net Investment Factor
for the current Valuation Period (calculated as described on
pages 19 and 20 of this Prospectus) and multiplying the
result by 0.9998926, the daily factor to neutralize the
assumed net investment rate, discussed above, of 4% per
annum which is built into the annuity rate table. It may
increase or decrease from Valuation Period to Valuation
Period.
The variable options currently available are:
OPTION I -- VARIABLE LIFE ANNUITY. A variable annuity which
provides annuity payments during the lifetime of the
Annuitant, ceasing with the last payment due prior to the
death of the Annuitant.
OPTION II -- VARIABLE LIFE ANNUITY WITH CERTAIN PERIOD. A
variable annuity which provides annuity payments during the
lifetime of the Annuitant and further provides that if at
the death of the Annuitant payments have been made for less
than the elected period certain, which may be 120 or 240
months, the annuity payments will continue for the remainder
of elected period certain.
OPTION III -- VARIABLE UNIT REFUND LIFE ANNUITY. A variable
annuity which provides annuity payments during the lifetime
of the Annuitant, ceasing with the last payment due prior to
the death of the Annuitant, with the guarantee that upon the
death of the Annuitant, if: (a) the number of Annuity Units
initially purchased (determined by dividing the total dollar
amount applied to purchase this Variable Income Payment
option by the Annuity Unit value on the Valuation Period
which ends immediately preceding the Annuity Date) is
greater than; (b) the number of Annuity Units paid as part
of each Variable Income Payment multiplied by the number of
Income Payments paid prior to death; then a refund payment
equal to the number of Annuity Units determined by (a) minus
(b) will be made. The refund payment value will be
determined using the Annuity Unit value on the Valuation
Date on which the death claim is approved by the Company for
payment after the Company is in receipt of: (a) proof of
death acceptable to the Company; (b) written authorization
for payment; and (c) all claim forms, fully completed.
OPTION IV -- VARIABLE JOINT LIFE ANNUITY. A variable annuity
which provides annuity payments during the joint lifetime of
the Annuitant and a Joint Annuitant, ceasing with the last
payment due prior to the last death of the joint annuitants.
OPTION V -- JOINT LIFE AND TWO-THIRDS TO SURVIVOR
ANNUITY. An annuity which provides annuity payments during
the joint lifetime of the Annuitant and a Joint Annuitant,
with two-thirds of such amount payable during the remaining
lifetime of the survivor and ceasing with the last payment
due prior to the last death of the joint annuitants.
OPTION VI -- VARIABLE JOINT ANNUITANT WITH CERTAIN PERIOD. A
variable annuity which provides annuity payments during the
joint lifetime of the Annuitant and a Joint Annuitant and
further provides that if after the death of both Annuitants
payments have been made for less than the elected period
certain, which may be 60, 120, 180 or 240 months, the
annuity payments will continue for the remainder of elected
period certain.
35
<PAGE>
OPTION VII -- VARIABLE JOINT LIFE AND TWO-THIRDS TO SURVIVOR
ANNUITY WITH CERTAIN PERIOD. A variable annuity which
provides annuity payments during the joint lifetime of the
Annuitant and a Joint Annuitant, with two-thirds of such
amount payable during the remaining lifetime of the
survivor, further providing that should one or both the
Annuitants die during the elected certain period, which may
be 120 or 240 months, the full benefit payment will continue
for the remainder of the elected period.
After the Annuity Date, the payee may, by written request to
Lincoln Life's Administrative Office, exchange Annuity Units
of one Variable Sub-Account for Annuity Units of equivalent
value in another Variable Sub-Account up to three times each
Contract Year.
EVIDENCE OF SURVIVAL
Lincoln Life reserves the right to require evidence of the
survival of the Annuitant(s) upon each Income Payment Date.
ENDORSEMENT OF ANNUITY PAYMENTS
Lincoln Life will make each annuity payment at its Home
Office by check. Each check must be personally endorsed by
the Payee or Lincoln Life may require that proof of the
Annuitant's survival be furnished.
THE FIXED ACCOUNT
THE FIXED ACCOUNT IS MADE UP OF THE GENERAL ASSETS OF
LINCOLN LIFE OTHER THAN THOSE ALLOCATED TO ANY SEPARATE
ACCOUNT. THE FIXED ACCOUNT IS PART OF LINCOLN LIFE'S GENERAL
ACCOUNT. BECAUSE OF APPLICABLE EXEMPTIVE AND EXCLUSIONARY
PROVISIONS, INTERESTS IN THE FIXED ACCOUNT HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "1933
ACT"), AND NEITHER THE FIXED ACCOUNT NOR LINCOLN LIFE'S
GENERAL ACCOUNT HAS BEEN REGISTERED UNDER THE INVESTMENT
COMPANY ACT OF 1940 (THE "1940 ACT"). THEREFORE, NEITHER THE
FIXED ACCOUNT NOR ANY INTEREST THEREIN IS GENERALLY SUBJECT
TO REGULATION UNDER THE PROVISIONS OF THE 1933 ACT OR THE
1940 ACT. ACCORDINGLY, LINCOLN LIFE HAS BEEN ADVISED THAT
THE STAFF OF THE COMMISSION HAS NOT REVIEWED THE DISCLOSURE
IN THIS PROSPECTUS RELATING TO THE FIXED ACCOUNT.
The initial Premium Payment and any subsequent Premium
Payment(s) will be allocated to Sub-Accounts available in
connection with the Fixed Account to the extent elected by
the Owner at the time such Premium Payment is made. In
addition, all or part of the Owner's Annuity Account Value
may be transferred among Sub-Accounts available under the
Contract as described under "Transfer of Contract Values
between Sub-Accounts." Instead of the Owner's assuming all
of the investment risk as is the case for Premium Payments
allocated to the Variable Account, Lincoln Life guarantees
it will credit interest of at least 3% per year to amounts
allocated to the Fixed Account.
Assets supporting amounts allocated to Sub-Accounts within
the Fixed Account become part of Lincoln Life's general
account assets and are available to fund the claims of all
creditors of Lincoln Life. All of Lincoln Life's general
account assets will be available to fund benefits under the
Contracts. The Owner does not participate in the investment
performance of the assets of the Fixed Account or Lincoln
Life's general account.
Lincoln Life will invest the assets of the general account
in those assets chosen by Lincoln Life and allowed by
applicable state laws regarding the nature and quality of
investments that may be made by life insurance companies and
the percentage of their assets that may be committed to any
particular type of investment. In general, these
36
<PAGE>
laws permit investments, within specified limits and subject
to certain qualifications, in federal, state and municipal
obligations, corporate bonds, preferred and common stocks,
real estate mortgages, real estate and certain other
investments.
If the Account Value within a Fixed Account Sub-Account is
maintained for the duration of the Sub-Account's Guaranteed
Period, Lincoln Life guarantees that it will credit interest
to that amount at the guaranteed rate specified for the
Sub-Account which may but need not be more than 3% per year.
Any amount withdrawn from or transferred out of the
Sub-Account prior to the expiration of the Sub-Account's
Guaranteed Period is subject to a Market Value Adjustment
(see "Market Value Adjustment") and a Deferred Sales Charge,
if applicable. Lincoln Life guarantees, however, that a
Contract will be credited with interest at a rate of not
less than 3% per year, compounded annually, on amounts
allocated to any Fixed Account Sub-Account, regardless of
any application of the Market Value Adjustment (that is, the
Market Value Adjustment will not reduce the amount available
for surrender, withdrawal or transfer to an amount less than
the initial amount allocated or transferred to the Fixed
Account Sub-Account plus interest of 3% per year). Lincoln
Life reserves the right to defer the payment or transfer of
amounts withdrawn from the Fixed Account for a period not to
exceed six (6) months from the date a proper request for
surrender, withdrawal or transfer is received by Lincoln
Life.
FIXED ACCUMULATION VALUE. The fixed accumulation value of an
Annuity Account, if any, for any Valuation Period is equal
to the sum of the values of all Fixed Account Sub-Accounts
which are part of the Annuity Account for such Valuation
Period.
GUARANTEED PERIODS. The Owner may elect to allocate Premium
Payments to one or more Sub-Accounts within the Fixed
Account. Currently, each Sub-Account maintains a Guaranteed
Period with a duration of 1, 3, 5, 7, or 10 years. Lincoln
Life may, upon occasion, offer a Fixed Account Sub-Account
for periods of less than one year solely for the purpose of
Dollar Cost Averaging. Every Premium Payment allocated to a
Fixed Account Sub-Account starts a new Sub-Account with its
own duration and Guaranteed Interest Rate. The duration of
the Guaranteed Period will affect the Guaranteed Interest
Rate of the Sub-Account. Initial Premium Payments and
subsequent Premium Payments, or portions thereof, and
transferred amounts allocated to a Fixed Account
Sub-Account, less any amounts subsequently withdrawn, will
earn interest at the Guaranteed Interest Rate during the
particular Sub-Account's Guaranteed Period unless
prematurely withdrawn prior to the end of the Guaranteed
Period. Initial Sub-Account Guaranteed Periods begin on the
date a Premium Payment is accepted or, in the case of a
transfer, on the effective date of the transfer, and end on
the date after the number of calendar years in the
Sub-Account's Guaranteed Period elected from the date on
which the amount was allocated to the Sub-Account (the
"Expiration Date"). Any portion of Annuity Account Value
allocated to a specific Sub-Account with a specified
Expiration Date (including interest earned thereon) will be
referred to herein as a "Guaranteed Period Amount." Interest
will be credited daily at a rate equivalent to the compound
annual rate determined on the first day of the Sub-Account
Guaranteed Period. As a result of renewals and transfers of
portions of the Annuity Account Value described under
"Transfer of Contract Values between Sub-Accounts" above,
which will begin new Sub-Account Guaranteed Periods, amounts
allocated to Sub-Accounts of the same duration may have
different Expiration Dates. Thus each Guaranteed Period
Amount will be treated separately for purposes of
determining any applicable Market Value Adjustment (see
"Market Value Adjustment").
Lincoln Life will notify the Owner in writing at least 60
days prior to the Expiration Date for any Guaranteed Period
Amount. A new Sub-Account Guaranteed Period of the same
duration as the previous Sub-Account Guaranteed Period will
commence automatically at the end of the previous Guaranteed
Period unless Lincoln Life receives, following such
notification but prior to the end of such Guaranteed Period,
a written election by the
37
<PAGE>
Owner to transfer the Guaranteed Period Amount to a
different Fixed Account Sub-Account or to a Variable Account
Sub-Account from among those being offered by Lincoln Life
at such time. Transfers of any Guaranteed Period Amount
which become effective upon the expiration of the applicable
Guaranteed Period are not subject to the twelve transfers
per Contract Year limitations or the additional Fixed
Sub-Account transfer restrictions (see "Transfer of Contract
Values between Sub-Accounts").
GUARANTEED INTEREST RATES. Lincoln Life periodically will
establish an applicable Guaranteed Interest Rate for each of
the Sub-Account Guaranteed Periods within the Fixed Account.
Current Guaranteed Interest Rates may be changed by Lincoln
Life frequently or infrequently depending on interest rates
on investments available to Lincoln Life and other factors
as described below, but once established, rates will be
guaranteed for the entire duration of the respective
Sub-Account's Guaranteed Period. However, any amount
withdrawn from the Sub-Account may be subject to any
applicable withdrawal charges, Account Fees, Market Value
Adjustment, premium taxes or other fees. Amounts transferred
out of a Fixed Account Sub-Account prior to the end of the
Guaranteed Period will be subject to the Market Value
Adjustment.
The Guaranteed Interest Rate will not be less than 3% per
year compounded annually, regardless of any application of
the Market Value Adjustment. Lincoln Life has no specific
formula for determining the rate of interest that it will
declare as a Guaranteed Interest Rate, as these rates will
be reflective of interest rates available on the types of
debt instruments in which Lincoln Life intends to invest
amounts allocated to the Fixed Account (see "The Fixed
Account"). In addition, Lincoln Life's management may
consider other factors in determining Guaranteed Interest
Rates for a particular Sub-Account including: regulatory and
tax requirements; sales commissions and administrative
expenses borne by Lincoln Life; general economic trends; and
competitive factors. THERE IS NO OBLIGATION TO DECLARE A
RATE IN EXCESS OF 3% PER YEAR; THE OWNER ASSUMES THE RISK
THAT DECLARED RATES WILL NOT EXCEED 3% PER YEAR. LINCOLN
LIFE HAS COMPLETE DISCRETION TO DECLARE ANY RATE, SO LONG AS
THAT RATE IS AT LEAST 3% PER YEAR.
MARKET VALUE ADJUSTMENT
Any surrender or transfer of a Fixed Account Guaranteed
Period Amount, other than a surrender or transfer pursuant
to an election which becomes effective upon the Expiration
Date of the Guaranteed Period, will be subject to a Market
Value Adjustment ("MVA"). The MVA will be applied to the
amount being surrendered or transferred after deduction of
any applicable Account Fee and before deduction of any
applicable surrender charge.
The MVA generally reflects the relationship between the
Index Rate (based upon the Treasury Constant Maturity Series
published by the Federal Reserve) in effect at the time a
Premium Payment is allocated to a Sub-Account's Guaranteed
Period under the Contract and the Index Rate in effect at
the time of the Premium Payment's surrender or transfer. It
also reflects the time remaining in the Sub-Account's
Guaranteed Period. Generally, if the Index Rate at the time
of surrender or transfer is lower than the Index Rate at the
time the Premium Payment was allocated, then the application
of the MVA will result in a higher payment upon surrender or
transfer. Similarly, if the Index Rate at the time of
surrender or transfer is higher than the Index Rate at the
time the Premium Payment was allocated, the application of
the MVA will generally result in a lower payment upon
surrender or transfer.
38
<PAGE>
The MVA is computed by applying the following formula:
(1+A)to the power N
------------------
(1+B)to the power N
where:
A = an Index Rate (based on the Treasury Constant Maturity
Series published by the Federal Reserve) for a security with
time to maturity equal to the Sub-Account's Guaranteed
Period, determined at the beginning of the Guaranteed
Period.
B = an Index Rate (based on the Treasury Constant Maturity
Series published by the Federal Reserve) for a security with
time to maturity equal to the Sub-Account's Guaranteed
Period, determined at the time of surrender or transfer,
plus a 0.50% adjustment (unless otherwise limited by
applicable state law). If Index Rates "A" and "B" are within
.25% of each other when the index rate factor is determined,
no such percentage adjustment to "B" will be made, unless
otherwise required by state law. This adjustment builds into
the formula a factor representing direct and indirect costs
to Lincoln Life associated with liquidating general account
assets in order to satisfy surrender requests. This
adjustment of 0.50% has been added to the denominator of the
formula because it is anticipated that a substantial portion
of applicable general account portfolio assets will be in
relatively illiquid securities. Thus, in addition to direct
transaction costs, if such securities must be sold (E.G.,
because of surrenders), the market price may be lower.
Accordingly, even if interest rates decline, there will not
be a positive adjustment until this factor is overcome, and
then any adjustment will be lower than otherwise, to
compensate for this factor. Similarly, if interest rates
rise, any negative adjustment will be greater than
otherwise, to compensate for this factor. If interest rates
stay the same, this factor will result in a small but
negative Market Value Adjustment.
N = The number of years remaining in the Guaranteed Period
(E.G. 1 year and 73 days = 1 + (73 divided by 365) = 1.2
years)
Straight-Line interpolation is used for periods to maturity
not quoted.
See the Statement of Additional information for examples of
the application of the Market Value Adjustment.
DISTRIBUTION OF THE CONTRACTS
Lincoln Life is the principal underwriter of the contracts,
and, as such, will form a selling group. Under an agreement
with Lincoln Life, Delaware Distributors, L.P. ("DDLP") will
act as wholesaler and will assist Lincoln Life in forming
the selling group. DDLP will also perform certain enumerated
marketing and ancillary functions in support of the selling
group. Lincoln Life will have ultimate responsibility for
the distribution of the contracts. The Contracts will be
sold by our registered representatives who have been
licensed by state insurance departments. The Contracts may
also be sold by independent broker-dealers who have been
licensed by state insurance departments to represent us and
who have selling agreements with us. Lincoln Life is
registered with the Commission under the Securities Exchange
Act of 1934 as a broker-dealer and is a member of the
National Association of Securities Dealers (NASD). We will
offer the Contracts in all states where we are licensed to
do business and in which the Contracts are approved.
Commissions of up to 6.50% of deposits will be paid to
broker dealers who sell the Contracts. In some instances,
commissions on deposits may be lowered up by as
39
<PAGE>
much as 2.50% and replaced by a commission of up to .65% of
annual contract values. Lincoln Life will also incur other
promotional or distribution expenses associated with the
marketing of the Contracts.
PERFORMANCE DATA
MONEY MARKET SUB-ACCOUNT
From time to time, the Money Market Sub-Account may
advertise its "yield" and "effective yield." Both yield
figures will be based on historical earnings and are not
intended to indicate future performance. The "yield" of the
Money Market Sub-Account refers to the income generated by
Annuity Account Values in the Money Market Sub-Account over
a seven-day period (which period will be stated in the
advertisement). This income is then "annualized." That is,
the amount of income generated by the investment during that
week is assumed to be generated each week over a 52-week
period and is shown as a percentage of the Annuity Account
Values in the Money Market Sub-Account. The "effective
yield" is calculated similarly but, when annualized, the
income earned by Annuity Account Values in the Money Market
Sub-Account is assumed to be reinvested. The "effective
yield" will be slightly higher than the "yield" because of
the compounding effect of this assumed reinvestment. The
computation of the yield calculation includes a deduction
for the Mortality and Expense Risk Charge, the
Administrative Expense Charge, and the Account Fee.
OTHER VARIABLE ACCOUNT SUB-ACCOUNTS
From time to time, the other Variable Account Sub-Accounts
may publish their current yields and total returns in
advertisements and communications to Contract Owners. The
current yield for each Variable Account Sub-Account will be
calculated by dividing the annualization of the dividend and
interest income earned by the underlying Fund during a
recent 30-day period by the maximum Accumulation Unit value
at the end of such period. Total return information will
include the underlying Fund's average annual compounded rate
of return over the most recent four calendar quarters and
the period from the underlying Fund's inception of
operations, based upon the value of the Accumulation Units
acquired through a hypothetical $1,000 investment at the
Accumulation Unit value at the beginning of the specified
period and upon the value of the Accumulation Unit at the
end of such period, assuming reinvestment of all
distributions and the deduction of the Mortality and Expense
Risk Charge, the Administrative Expense Charge and the
Annuity Account Fee. Each Variable Account Sub-Account may
also advertise aggregate and average total return
information over different periods of time.
In each case, the yield and total return figures will
reflect all recurring charges against the Variable Account
Sub-Account's income, including the deduction for the
Mortality and Expense Risk Charge, the Administrative
Expense Charge and the Account Fee for the applicable time
period. Contract Owners should note that the investment
results of each Sub-Account will fluctuate over time, and
any presentation of a Variable Account Sub-Account's current
yield or total return for any prior period should not be
considered as a representation of what an investment may
earn or what a Contract Owner's yield or total return may be
in any future period. See "Historical Performance Data" in
the Statement of Additional Information.
PERFORMANCE RANKING OR RATING
In marketing the Contracts, we and our various sales
representatives may refer to certain ratings assigned to us
under the Rating System of the A.M. Best Co., Oldwick, New
Jersey. The objective of Best's Rating System is to evaluate
the various factors
40
<PAGE>
affecting the overall performance of an insurance company in
order to provide Best's opinion about that company's
relative financial strength and ability to meet its
contractual obligations. The procedure includes both a
quantitative and qualitative review of the insurance
company. Ratings apply to Lincoln Life and its general
contractual obligations, not to the contract's sub-accounts.
In marketing the Contracts and the underlying funds, we may
at times use data published by other nationally-known
independent statistical services. These service
organizations provide relative measures of such factors as
an insurer's claim-paying ability, the features of
particular contracts, and the comparative investment
performance of the funds with other portfolios having
similar objectives. A few such services are: Duff & Phelps,
the Lipper Group, Moody's, Morningstar, Standard and Poor's
and VARDS. Marketing materials may employ illustrations of
compound interest and dollar-cost averaging; discuss
automatic withdrawal services; describe our customer base,
assets, and our relative size in the industry. They may also
discuss other features of Lincoln Life, the Variable
Account, the funds and their investment management.
TAX MATTERS
NOTE: THE FOLLOWING DESCRIPTION IS BASED UPON LINCOLN LIFE'S
UNDERSTANDING OF CURRENT FEDERAL INCOME TAX LAW APPLICABLE
TO ANNUITIES IN GENERAL. LINCOLN LIFE CANNOT PREDICT THE
PROBABILITY THAT ANY CHANGES IN SUCH LAWS WILL BE MADE.
OWNERS ARE CAUTIONED TO SEEK COMPETENT TAX ADVICE REGARDING
THE POSSIBILITY OF SUCH CHANGES. LINCOLN LIFE DOES NOT
GUARANTEE THE TAX STATUS OF THE CONTRACTS. OWNERS BEAR THE
COMPLETE RISK THAT THE CONTRACTS MAY NOT BE TREATED AS
"ANNUITY CONTRACTS" UNDER FEDERAL INCOME TAX LAWS.
GENERAL
Section 72 of the Code governs taxation of annuities in
general. A Contract Owner is not taxed on increases in the
value of a Contract until distribution occurs, either in the
form of a lump sum payment or as annuity payments under the
Settlement Option elected. For a lump sum payment received
as a total surrender (total redemption), the recipient is
taxed on the portion of the payment that exceeds the cost
basis of the Contract. For Non-Qualified Contracts, this
cost basis is generally the Premium Payments, while for
Qualified Contracts there may be no cost basis. The taxable
portion of the lump sum payment is taxed at ordinary income
tax rates.
For annuity payments, the taxable portion is determined by a
formula which establishes the ratio that the cost basis of
the Contract bears to the total value of annuity payments
for the term of the Contract. The taxable portion is taxed
at ordinary income rates. For certain types of Qualified
Plans there may be no cost basis in the Contract within the
meaning of Section 72 of the Code. Contract Owners,
Annuitants and Beneficiaries under the Contracts should seek
competent financial advice about the tax consequences of any
distributions.
Lincoln Life is taxed as a life insurance company under
Subchapter L of the Code. For federal income tax purposes,
the Variable Account is not a separate entity from Lincoln
Life, and its operations form a part of Lincoln Life.
Accordingly, the Variable Account will not be taxed
separately as a "regulated investment company" under
Subchapter M of the Code. Lincoln Life does not expect to
incur any federal income tax liability with respect to
investment income and net capital gains arising from the
activities of the Variable Account retained as part of the
reserves under the Contract. Based on this expectation, it
is anticipated that no charges will be made against the
Variable Account for federal income taxes. If, in future
years, any federal income taxes or other economic burden are
incurred by Lincoln Life with respect to the Variable
Account or the Contracts, Lincoln Life may make a charge for
any such amounts that are attributable to the Variable
Account.
41
<PAGE>
DIVERSIFICATION
Section 817(h) of the Code imposes certain diversification
standards on the underlying assets of variable annuity
contracts. The Code provides that a variable annuity
contract will not be treated as an annuity contract for any
period (and any subsequent period) for which the investments
are not adequately diversified in accordance with
regulations prescribed by the United States Treasury
Department ("Treasury Department"). Disqualification of the
Contract as an annuity contract would result in imposition
of federal income tax to the Contract Owner with respect to
earnings allocable to the Contract prior to the receipt of
payments under the Contract. The Code contains a safe harbor
provision which provides that annuity contracts such as the
Contracts meet the diversification requirements if, as of
the end of each quarter, the underlying assets meet the
diversification standards for a regulated investment company
and no more than fifty-five percent (55%) of the total
assets consist of cash, cash items, U.S. government
securities and securities of other regulated investment
companies.
The Treasury Department issued regulations (Treas. Reg.
1.817-5) which established diversification requirements for
the investment portfolios underlying variable contracts such
as the Contracts. The regulations amplify the
diversification requirements for variable contracts set
forth in the Code and provide an alternative to the safe
harbor provision described above. Under the regulations, an
investment portfolio will be deemed adequately diversified
if: (1) no more than 55% of the value of the total assets of
the portfolio is represented by any one investment; (2) no
more than 70% of the value of the total assets of the
portfolio is represented by any two investments; (3) no more
than 80% of the value of the total assets of the portfolio
is represented by any three investments; and (4) no more
than 90% of the value of the total assets of the portfolio
is represented by any four investments.
The Code provides that for purposes of determining whether
or not the diversification standards imposed on the
underlying assets of variable contracts by Section 817(h) of
the Code have been met, "each United States government
agency or instrumentality shall be treated as a separate
issuer."
Lincoln Life intends, and the Trusts have undertaken, that
all Funds underlying the Contracts will be managed in such a
manner as to comply with these diversification requirements.
The Treasury Department has indicated that guidelines may be
forthcoming under which a variable annuity contract will not
be treated as an annuity contract for tax purposes if the
owner of the contract has excessive control over the
investments underlying the contract (i.e., by being able to
transfer values among sub-accounts with only limited
restrictions). The issuance of such guidelines may require
Lincoln Life to impose limitations on a Contract Owner's
right to control the investment. It is not known whether any
such guidelines would have a retroactive effect.
DISTRIBUTION REQUIREMENTS
The Treasury Department has indicated that guidelines may be
forthcoming under which a variable annuity will not be
treated as an annuity for tax purposes if the owner of the
annuity has excessive control over the investments
underlying the contract. Should the Secretary of the
Treasury issue additional rules or regulations limiting the
number of underlying funds, transfers between underlying
funds, exchanges of underlying funds or changes in
investment objectives of underlying funds such that the
contract would no longer qualify as an annuity under Section
72 of the Code, Lincoln Life will take whatever steps are
available to remain in compliance. In addition, we do not
know what standards will be set forth in the regulations or
rulings which the Treasury Department
42
<PAGE>
has stated it expects to issue. It is possible that Treasury
Department's position, when announced, may adversely affect
the tax treatment of existing contracts. It is not clear
what this additional guidance will provide nor whether it
will be applied on a prospective basis only. Lincoln Life,
therefore, reserves the right to modify the contract as
necessary to attempt to prevent the contract owner from
being considered the federal tax owner of the assets of the
Variable Account. However, Lincoln Life makes no guarantee
that such modification to the contract will be successful.
MULTIPLE CONTRACTS
The Code provides that multiple non-qualified annuity
contracts which are issued during a calendar year to the
same contract owner by one company or its affiliates are
treated as one annuity contract for purposes of determining
the tax consequences of any distribution. Such treatment may
result in adverse tax consequences, including more rapid
taxation of the distributed amounts from such combination of
contracts. Contract Owners should consult a tax adviser
prior to purchasing more than one nonqualified annuity
contract in any single calendar year.
TAX TREATMENT OF ASSIGNMENTS
An assignment or pledge of a Contract may be a taxable
event. Contract Owners should therefore consult competent
tax advisers should they wish to assign their Contracts.
WITHHOLDING
Withholding of federal income taxes on the taxable portion
of all distributions may be required unless the recipient
elects not to have any such amounts withheld and properly
notifies Lincoln Life of that election. Different rules may
apply to United States citizens or expatriates living
abroad. Withholding is mandatory for certain distributions
from Qualified Contracts. In addition, some states have
enacted legislation requiring withholding.
SECTION 1035 EXCHANGES
Code Section 1035 generally provides that no gain or loss
shall be recognized on the exchange of one annuity contract
for another. If the surrendered contract was issued prior to
August 14, 1982, the tax rules that formerly provided that
the surrender was taxable only to the extent the amount
received exceeds the owner's investment in the contract will
continue to apply to amounts allocable to investment in the
contract before August 14, 1982. Special rules and
procedures apply to Code Section 1035 transactions.
Prospective purchasers wishing to take advantage of Code
Section 1035 should consult their tax advisers.
TAX TREATMENT OF WITHDRAWALS --
NON-QUALIFIED CONTRACTS
Section 72 of the Code governs the treatment of
distributions from annuity contracts. It provides that if
the Annuity Account Value exceeds the aggregate Premium
Payments made, any amount withdrawn will be treated as
coming first from the earnings and then, only after the
income portion is exhausted, as coming from the principal.
Withdrawn earnings are includable in gross income. It
further provides that a ten percent (10%) penalty will apply
to the income portion of any premature distribution.
However, the penalty is not imposed on amounts received: (a)
after the Payee reaches age 59 1/2; (b) after the death of
the Contract Owner (or, if the Contract Owner is a
non-natural person, the Annuitant); (c) if the Payee is
totally disabled (for this purpose disability is
43
<PAGE>
as defined in Section 72(m)(7) of the Code); (d) in a series
of substantially equal periodic payments made not less
frequently than annually for the life (or life expectancy)
of the Payee or for the joint lives (or joint life
expectancies) of the Payee and his/her beneficiary; (e)
under an immediate annuity; or (f) which are allocable to
Premium Payments made prior to August 14, 1982.
The above information does not apply, except where noted, to
Qualified Contracts. However, separate tax withdrawal
penalties and restrictions may apply to such Qualified
Contracts. (See "Tax Treatment of Withdrawals -- Qualified
Contracts.")
QUALIFIED PLANS
The Contracts offered by this Prospectus are designed to be
suitable for use under various types of Qualified Plans.
Because of the minimum purchase payment requirements, these
Contracts may not be appropriate for some periodic payment
retirement plans. Taxation of participants in each Qualified
Plan varies with the type of plan and terms and conditions
of each specific plan. Contract Owners, Annuitants and
Beneficiaries are cautioned that benefits under a Qualified
Plan may be subject to the terms and conditions of the plan
regardless of the terms and conditions of the Contracts
issued pursuant to the plan. Although Lincoln Life provides
administration for the Contract, it does not provide
administrative support for Qualified Plans. Following are
general descriptions of the types of Qualified Plans with
which the Contracts may be used. Such descriptions are not
exhaustive and are for general informational purposes only.
The tax rules regarding Qualified Plans are very complex and
will have differing applications, depending on individual
facts and circumstances. Each purchaser should obtain
competent tax advice prior to purchasing a Contract issued
in connection with a Qualified Plan.
Special favorable tax treatment may be available for certain
types of contributions and distributions (including special
rules for certain lump sum distributions). Adverse tax
consequences may result from contributions in excess of
specified limits, distributions prior to age 59 1/2 (subject
to certain exceptions), distributions that do not conform to
specified minimum distribution rules, aggregate
distributions in excess of a specified annual amount, and in
certain other circumstances. Therefore, Lincoln Life makes
no attempt to provide more than general information about
use of the Contract with the various types of qualified
plans. Purchasers and participants under qualified plans as
well as Annuitants, Payees and Beneficiaries are cautioned
that the rights of any person to any benefits under
qualified plans may be subject to the terms and conditions
of the plan themselves, regardless of the terms and
conditions of the Contract issued in connection therewith.
SECTION 403(b) Plans
Under Section 403(b) of the Code, payments made by public
school systems and certain tax exempt organizations to
purchase annuity policies for their employees are excludable
from the gross income of the employee, subject to certain
limitations. However, such payments may be subject to FICA
(Social Security) taxes. Additionally, in accordance with
the requirements of the Code, Section 403(b) annuities
generally may not permit distribution of (i) elective
contributions made in years beginning after December 31,
1988, and (ii) earnings on those contributions and (iii)
earnings on amounts attributed to elective contributions
held as of the end of the last year beginning before January
1, 1989. Distributions of such amounts will be allowed only
upon the death of the employee, on or after attainment of
age 59 1/2, separation from service, disability, or
financial hardship, except that income attributable to
elective contributions may not be distributed in the case of
hardship.
44
<PAGE>
INDIVIDUAL RETIREMENT ANNUITIES
Sections 219 and 408 of the Code permit individuals or their
employers to contribute to an individual retirement program
known as an "Individual Retirement Annuity" or an "IRA".
Individual Retirement Annuities are subject to limitation on
the amount which may be contributed and deducted and the
time when distributions may commence. In addition,
distributions from certain other types of qualified plans
may be placed into an Individual Retirement Annuity on a
tax-deferred basis.
ROTH IRA
Section 408A of the Code permits eligible individuals to
make nondeductible contributions to an individual retirement
program known as a Roth Individual Retirement Annuity (Roth
IRA). Roth IRAs are subject to limitations on the amount
that can be contributed and on the time when distributions
may be taken. Subject to certain limitations, a traditional
IRA may be converted or "rolled over" to a Roth IRA. The
taxable portion of a conversion or rollover distribution is
includible in gross income, but is exempted from the 10%
penalty tax on premature distributions.
CORPORATE PENSION AND PROFIT-SHARING PLANS AND H.R. 10 PLANS
Section 401(a) and 403(a) of the Code permit corporate
employers to establish various types of retirement plans for
employees and self-employed individuals to establish
qualified plans for themselves and their employees. Such
retirement plans may permit the purchase of the Contracts to
provide benefits under the plans.
DEFERRED COMPENSATION PLANS
Section 457 of the Code, while not actually providing for a
qualified plan as that term is normally used, provides for
certain deferred compensation plans with respect to service
for state governments, local governments, political
sub-divisions, agencies, instrumentalities and certain
affiliates of such entities and tax exempt organizations
which enjoy special treatment. The Contracts can be used
with such plans. Under such plans a participant may specify
the form of investment in which his or her participation
will be made. All such investments of a nongovernmental
organization, however, are owned by, and are subject to, the
claims of the general creditors of the sponsoring employer.
Recent tax legislation provides that governmental plans, on
or after August 20, 1996, must hold the assets and income of
the plan for the exclusive benefit of participants and their
beneficiaries; preexisting plans have until January 1, 1999
to meet this requirement.
The above description of federal income tax consequences
pertaining to the different types of Qualified Plans that
may be funded by the Contracts is only a brief summary and
is not intended as tax advice. The rules governing the
provisions of Qualified Plans are extremely complex and
often difficult to comprehend. Anything less than full
compliance with the applicable rules, all of which are
subject to change, may have significant adverse tax
consequences. A prospective purchaser considering the
purchase of a Contract in connection with a Qualified Plan
should first consult a qualified and competent tax adviser
with regard to the suitability of the Contract as an
investment vehicle for the Qualified Plan.
TAX TREATMENT OF WITHDRAWALS --
QUALIFIED CONTRACTS
Section 72(t) of the Code imposes a 10% penalty tax on the
taxable portion of any distribution from qualified
retirement plans, including Contracts issued and qualified
45
<PAGE>
under Code Sections 401, 403(b) and 408. To the extent
amounts are not includable in gross income because they have
been properly rolled over to an IRA or to another eligible
Qualified Plan, no tax penalty will be imposed. The tax
penalty will not apply to the following distributions: (a)
if distribution is made on or after the date on which the
Payee reaches age 59 1/2; (b) distributions following the
death of the Contract Owner or Annuitant (as applicable) or
disability of the Payee (for this purpose disability is as
defined in Section 72(m)(7) of the Code); (c) after
separation from service, distributions that are part of
substantially equal periodic payments made not less
frequently than annually for the life (or life expectancy)
of the Payee or the joint lives (or joint life expectancies)
of such Payee and his/her designated beneficiary; (d)
distributions to a Payee who has separated from service
after attaining age 55; (e) distributions made to the extent
such distributions do not exceed the amount allowable as a
deduction under Code Section 213 to the Payee for amounts
paid during the taxable year for medical care: and (f)
distributions made to an alternate payee pursuant to a
qualified domestic relations order.
The exceptions stated in items (d) and (f) above do not
apply in the case of an Individual Retirement Annuity.
Additional exceptions to the tax penalty are available for
the following distributions from an Individual Retirement
Annuity: (a) Payee is unemployed and uses the money to pay
health insurance premiums; and (b) for tax years after
December 31, 1997, Payee uses the distribution for higher
education expenses or a qualified first-time home purchase.
OTHER CONTRACTS
Lincoln Life and the Variable Account offer other flexible
payment deferred variable annuity contracts which invest in
the same Funds. These contracts may impose different charges
that could affect Sub-Account performance, and may offer
different benefits.
FINANCIAL STATEMENTS
The Statutory-basis financial statements and schedules of
Lincoln Life are located in the Statement of Additional
Information. You may obtain a free copy by writing Lincoln
National Life Insurance Co., P.O. Box 7866, Fort Wayne,
Indiana 46801, or calling 1-888-868-2583.
PREPARING FOR THE YEAR 2000
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. The year 2000 issue affects
virtually all companies and organizations.
LINCOLN LIFE, as part of its year 2000 updating process, is
responsible for the updating of the VAA-related computer
systems. An affiliate of LINCOLN LIFE, Delaware Service
Company (Delaware), provides substantially all of the
necessary accounting and valuation services for the VAA.
Delaware, for its part, is responsible for updating all of
its computer systems, including those which service the VAA,
to accommodate the year 2000. LINCOLN LIFE and Delaware (the
"Companies") have each been redirecting a large portion of
their internal information technology efforts and
contracting with outside consultants as part of this
updating process. Meanwhile, they have been coordinating
with each other as part of the process.
The year 2000 issue is pervasive and complex and affects
virtually every aspect of the businesses of both Lincoln
Life and Delaware (the "Companies"). The computer systems of
the Companies and their interfaces with the computer systems
of vendors,
46
<PAGE>
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 engage in normal business
activities for the Variable Account. The Companies
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. The Companies 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 the Companies are making
substantial efforts to address their own systems and the
systems with which they interface, it is not possible to
provide assurance that operational problems will not occur.
The Companies presently believe that, assuming 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 or Delaware, or
both.
The cost of addressing year 2000 issues and the timeliness
of completion will be closely monitored by management of the
respective Companies. Nevertheless, there can be no
guarantee either by Lincoln Life or by Delaware 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.
LEGAL PROCEEDINGS
Lincoln Life is involved in various pending or threatened
legal proceedings arising from the conduct of its business.
Most of these proceedings are routine and in the ordinary
course of business. In some instances these proceedings
include claims for unspecified or substantial punitive
damages and similar types of relief in addition to amounts
for alleged contractual liability or requests for equitable
relief. After consultation with legal counsel and a review
of available facts, it is management's opinion that the
ultimate liability, if any, under these suits will not have
a material adverse effect on the financial position of
Lincoln Life.
During the 1990's class action lawsuits alleging sales
practices fraud have been filed against many life insurance
companies, and Lincoln Life has not been immune. Several
suits involve alleged fraud in the sale of
interest-sensitive universal and whole life insurance
policies. Certain of these suits have been filed as class
actions against Lincoln Life, although as of the date of
this Prospectus the court had not certified a class in any
of them. Plaintiffs seek unspecified damages and penalties
for themselves and on behalf of the putative class. Although
the relief sought in these cases is substantial, the cases
are in the early stages of litigation, and it is premature
to make assessments about potential loss, if any. Management
denies the allegations and intends to defend these suits
vigorously. The amount of the liability, if any, which may
arise as a result of these suits (exclusive of any
indemnification from professional liability insurers) cannot
be reasonably estimated at this time.
47
<PAGE>
TABLE OF CONTENTS OF THE
STATEMENT OF ADDITIONAL INFORMATION
A Statement of Additional Information which contains more details concerning
some subjects discussed in this Prospectus is available (at no cost) by calling
or writing Lincoln Life's Home Office. The following is the Table of Contents
for that Statement:
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
<S> <C>
THE CONTRACTS-GENERAL PROVISIONS................ 3
The Contracts................................. 3
Loans......................................... 3
Non-Participating Contracts................... 3
Misstatement of Age........................... 3
CALCULATION OF VARIABLE ACCOUNT VALUES.......... 3
Variable Accumulation Unit Value.............. 3
SAMPLE CALCULATIONS AND TABLES.................. 4
Variable Account Unit Value Calculations...... 4
Withdrawal Charge and Market Value Adjustment
Tables....................................... 5
<CAPTION>
TABLE OF CONTENTS PAGE
<S> <C>
STATE REGULATION OF LINCOLN LIFE................ 6
ADMINISTRATION.................................. 6
ACCOUNT INFORMATION............................. 6
DISTRIBUTION OF THE CONTRACTS................... 7
CUSTODY OF ASSETS............................... 7
HISTORICAL PERFORMANCE DATA..................... 7
Money Market Sub-Account Yield................ 7
Total Returns................................. 7
Other Performance Data........................ 8
INDEPENDENT AUDITORS............................ 8
STATUTORY-BASIS FINANCIAL STATEMENTS AND
SCHEDULES...................................... 8
</TABLE>
48
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
BALANCE SHEETS -- STATUTORY BASIS
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------- ---------
(IN MILLIONS)
--------------------
<S> <C> <C>
ADMITTED ASSETS
CASH AND INVESTMENTS:
Bonds $18,560.7 $19,389.6
- ------------------------------------------------------------------------------------
Preferred stocks 257.3 239.7
- ------------------------------------------------------------------------------------
Unaffiliated common stocks 436.0 358.3
- ------------------------------------------------------------------------------------
Affiliated common stocks 412.1 241.5
- ------------------------------------------------------------------------------------
Mortgage loans on real estate 3,012.7 2,976.7
- ------------------------------------------------------------------------------------
Real estate 584.4 621.3
- ------------------------------------------------------------------------------------
Policy loans 660.5 626.5
- ------------------------------------------------------------------------------------
Other investments 335.5 282.7
- ------------------------------------------------------------------------------------
Cash and short-term investments 2,133.0 759.2
- ------------------------------------------------------------------------------------ --------- ---------
Total cash and investments 26,392.2 25,495.5
- ------------------------------------------------------------------------------------
Premiums and fees in course of collection 42.4 60.9
- ------------------------------------------------------------------------------------
Accrued investment income 343.5 343.6
- ------------------------------------------------------------------------------------
Funds withheld by ceding companies 44.1 25.8
- ------------------------------------------------------------------------------------
Other admitted assets 216.0 355.7
- ------------------------------------------------------------------------------------
Separate account assets 31,330.9 23,735.1
- ------------------------------------------------------------------------------------ --------- ---------
Total admitted assets $58,369.1 $50,016.6
- ------------------------------------------------------------------------------------ --------- ---------
--------- ---------
LIABILITIES AND CAPITAL AND SURPLUS
LIABILITIES:
Future policy benefits and claims $ 5,872.9 $ 5,954.0
- ------------------------------------------------------------------------------------
Other policyholder funds 16,360.1 17,262.4
- ------------------------------------------------------------------------------------
Amounts withheld or retained by Company as agent or trustee 878.2 250.2
- ------------------------------------------------------------------------------------
Funds held under reinsurance treaties 720.4 564.6
- ------------------------------------------------------------------------------------
Asset valuation reserve 450.0 375.5
- ------------------------------------------------------------------------------------
Interest maintenance reserve 135.4 76.7
- ------------------------------------------------------------------------------------
Other liabilities 413.9 490.9
- ------------------------------------------------------------------------------------
Federal income taxes 0.8 4.3
- ------------------------------------------------------------------------------------
Net transfers due from separate accounts (761.9) (659.7)
- ------------------------------------------------------------------------------------
Separate account liabilities 31,330.9 23,735.1
- ------------------------------------------------------------------------------------ --------- ---------
Total liabilities 55,400.7 48,054.0
- ------------------------------------------------------------------------------------
CAPITAL AND SURPLUS:
Common stock, $2.50 par value:
Authorized, issued and outstanding shares -- 10 million (owned by Lincoln National
Corporation) 25.0 25.0
- ------------------------------------------------------------------------------------
Paid-in surplus 1,821.8 883.4
- ------------------------------------------------------------------------------------
Unassigned surplus 1,121.6 1,054.2
- ------------------------------------------------------------------------------------ --------- ---------
Total capital and surplus 2,968.4 1,962.6
- ------------------------------------------------------------------------------------ --------- ---------
Total liabilities and capital and surplus $58,369.1 $50,016.6
- ------------------------------------------------------------------------------------ --------- ---------
--------- ---------
</TABLE>
See accompanying notes. S-1
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF INCOME -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
--------- --------- ---------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
PREMIUMS AND OTHER REVENUES:
Premiums and deposits $ 5,589.0 $ 7,268.5 $ 4,899.1
- -----------------------------------------------------------------------------
Net investment income 1,847.1 1,756.3 1,772.2
- -----------------------------------------------------------------------------
Amortization of interest maintenance reserve 41.5 27.2 34.0
- -----------------------------------------------------------------------------
Commissions and expense allowances on reinsurance ceded 99.7 90.9 98.3
- -----------------------------------------------------------------------------
Expense charges on deposit funds 119.3 100.7 83.2
- -----------------------------------------------------------------------------
Other income 21.3 16.8 14.5
- ----------------------------------------------------------------------------- --------- --------- ---------
Total revenues 7,717.9 9,260.4 6,901.3
- -----------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Benefits and settlement expenses 4,522.1 5,989.9 4,184.0
- -----------------------------------------------------------------------------
Underwriting, acquisition, insurance and other expenses 2,728.4 2,878.5 2,345.7
- ----------------------------------------------------------------------------- --------- --------- ---------
Total benefits and expenses 7,250.5 8,868.4 6,529.7
- ----------------------------------------------------------------------------- --------- --------- ---------
Gain from operations before dividends to policyholders, income taxes and net
realized gain on investments 467.4 392.0 371.6
- -----------------------------------------------------------------------------
Dividends to policyholders 27.5 27.3 27.3
- ----------------------------------------------------------------------------- --------- --------- ---------
Gain from operations before federal income taxes and net realized gain on
investments 439.9 364.7 344.3
- -----------------------------------------------------------------------------
Federal income taxes 78.3 83.6 103.7
- ----------------------------------------------------------------------------- --------- --------- ---------
Gain from operations before net realized gain on investments 361.6 281.1 240.6
- -----------------------------------------------------------------------------
Net realized gain on investments, net of income tax expense and excluding net
transfers to the interest maintenance reserve 31.3 53.3 43.9
- ----------------------------------------------------------------------------- --------- --------- ---------
Net income $ 392.9 $ 334.4 $ 284.5
- ----------------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
S-2
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
--------- --------- ---------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Capital and surplus at beginning of year $ 1,962.6 $ 1,732.9 $ 1,679.6
- -----------------------------------------------------------------------------
Correction of prior years' asset valuation reserve (Note 15) (37.6) -- --
- -----------------------------------------------------------------------------
Correction of prior year's admitted assets (Note 15) (57.0) -- --
- ----------------------------------------------------------------------------- --------- --------- ---------
1,868.0 1,732.9 1,679.6
CAPITAL AND SURPLUS INCREASE (DECREASE):
Net income 392.9 334.4 284.5
- -----------------------------------------------------------------------------
Difference in cost and admitted investment amounts (36.2) 38.6 143.2
- -----------------------------------------------------------------------------
Nonadmitted assets (0.4) (3.0) 2.9
- -----------------------------------------------------------------------------
Regulatory liability for reinsurance (3.9) 0.6 (2.0)
- -----------------------------------------------------------------------------
Life policy reserve valuation basis (0.9) (0.4) 2.9
- -----------------------------------------------------------------------------
Asset valuation reserve (36.9) (105.5) (112.5)
- -----------------------------------------------------------------------------
Mortgage loan, real estate and other investment reserves -- -- 2.2
- -----------------------------------------------------------------------------
Paid-in surplus, including contribution of common stock of affiliated
company in 1997 938.4 100.0 15.1
- -----------------------------------------------------------------------------
Separate account receivable due to change in valuation (2.6) -- 27.0
- -----------------------------------------------------------------------------
Dividends to shareholder (150.0) (135.0) (310.0)
- ----------------------------------------------------------------------------- --------- --------- ---------
Capital and surplus at end of year $ 2,968.4 $ 1,962.6 $ 1,732.9
- ----------------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes. S-3
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
---------- ---------- ----------
(IN MILLIONS)
----------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums, policy proceeds and other considerations received $ 6,364.3 $ 8,059.4 $ 5,430.9
- -----------------------------------------------------------------------
Allowances and reserve adjustments paid on reinsurance ceded (649.2) (767.5) (383.6)
- -----------------------------------------------------------------------
Investment income received 1,798.8 1,700.6 1,713.2
- -----------------------------------------------------------------------
Benefits paid (5,345.2) (4,050.4) (3,239.6)
- -----------------------------------------------------------------------
Insurance expenses paid (2,867.5) (2,972.2) (2,513.5)
- -----------------------------------------------------------------------
Federal income taxes recovered (paid) (87.0) (72.3) 38.4
- -----------------------------------------------------------------------
Dividends to policyholders (28.4) (27.7) (16.5)
- -----------------------------------------------------------------------
Other income received and expenses paid, net (42.7) 6.3 14.4
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net cash provided by (used in) operating activities (856.9) 1,876.2 1,043.7
- -----------------------------------------------------------------------
INVESTING ACTIVITIES
Sale, maturity or repayment of investments 12,142.6 12,542.0 13,183.9
- -----------------------------------------------------------------------
Purchase of investments (10,345.0) (14,175.4) (14,049.6)
- -----------------------------------------------------------------------
Other sources (uses) 563.1 (266.5) (64.0)
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net cash provided by (used in) investing activities 2,360.7 (1,899.9) (929.7)
- -----------------------------------------------------------------------
FINANCING ACTIVITIES
Surplus paid-in -- 100.0 15.1
- -----------------------------------------------------------------------
Proceeds from borrowings from shareholder 120.0 100.0 63.0
- -----------------------------------------------------------------------
Repayment of borrowings from shareholder (100.0) (63.0) (63.0)
- -----------------------------------------------------------------------
Dividends paid to shareholder (150.0) (135.0) (310.0)
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net cash provided by (used in) financing activities (130.0) 2.0 (294.9)
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net increase (decrease) in cash and short-term investments 1,373.8 (21.7) (180.9)
- -----------------------------------------------------------------------
Cash and short-term investments at beginning of year 759.2 780.9 961.8
- ----------------------------------------------------------------------- ---------- ---------- ----------
Cash and short-term investments at end of year $ 2,133.0 $ 759.2 $ 780.9
- ----------------------------------------------------------------------- ---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes.
S-4
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
ORGANIZATION AND OPERATIONS
The Lincoln National Life Insurance Company ("Company") is a wholly owned
subsidiary of Lincoln National Corporation ("LNC") and is domiciled in
Indiana. As of December 31, 1997, the Company owns 100% of the outstanding
common stock of four insurance company subsidiaries: First Penn-Pacific Life
Insurance Company ("First Penn"), Lincoln National Health & Casualty
Insurance Company ("LNH&C"), Lincoln National Reassurance Company ("LNRAC")
and Lincoln Life & Annuity Company of New York ("LLANY").
The Company's principal businesses consist of underwriting annuities,
deposit-type contracts and life and health insurance through multiple
distribution channels and the reinsurance of individual and group life and
health business. The Company is licensed and sells its products in 49
states, Canada and several U.S. territories.
USE OF ESTIMATES
The nature of the insurance and investment management businesses requires
management to make estimates and assumptions that affect the amounts
reported in the statutory-basis financial statements and accompanying notes.
Actual results could differ from those estimates.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity with
accounting practices prescribed or permitted by the Indiana Department of
Insurance ("Department"), which practices differ from generally accepted
accounting principles ("GAAP"). The more significant variances from GAAP are
as follows:
INVESTMENTS
Bonds are reported at cost or amortized cost or fair value based on their
National Association of Insurance Commissioners ("NAIC") rating. For GAAP,
the Company's bonds are classified as available-for-sale and, accordingly,
are reported at fair value with changes in the fair values reported directly
in shareholder's equity after adjustments for related amortization of
deferred acquisition costs, additional policyholder commitments and deferred
income taxes.
Investments in real estate are reported net of related obligations rather
than on a gross basis.
Changes between cost and admitted asset investment amounts are credited or
charged directly to unassigned surplus rather than to a separate surplus
account.
Under a formula prescribed by the NAIC, the Company defers the portion of
realized capital gains and losses on sales of fixed income investments,
principally bonds and mortgage loans, attributable to changes in the general
level of interest rates and amortizes those deferrals over the remaining
period to maturity of the individual security sold. The net deferral is
reported as the Interest Maintenance Reserve ("IMR") in the accompanying
balance sheets. Realized capital gains and losses are reported in income net
of federal income tax and transfers to the IMR. The asset valuation reserve
("AVR") is determined by an NAIC prescribed formula and is reported as a
liability rather than unassigned surplus. Under GAAP, realized capital gains
and losses are reported in the income statement on a pre-tax basis in the
period that the asset giving rise to the gain or loss is sold and valuation
allowances are provided when there has been a decline in value deemed other
than temporary, in which case, the provision for such declines are charged
to income.
SUBSIDIARIES
The accounts and operations of the Company's subsidiaries are not
consolidated with the accounts and operations of the Company as would be
required by GAAP. Under statutory accounting principles, the Company's
subsidiaries are carried at their statutory basis net equity and presented
in the balance sheet as affiliated common stocks.
POLICY ACQUISITION COSTS
The costs of acquiring and renewing business are expensed when incurred.
Under GAAP, acquisition costs related to traditional life insurance, to the
extent recoverable from future policy revenues, are deferred and amortized
over the premium-paying period of the related policies using assumptions
consistent with those used in computing policy benefit reserves. For
universal life insurance, annuity and other investment-type products,
deferred
S-5
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
policy acquisition costs, to the extent recoverable from future gross
profits, are amortized generally in proportion to the present value of
expected gross profits from surrender charges and investment, mortality and
expense margins.
NONADMITTED ASSETS
Certain assets designated as "nonadmitted," principally furniture and
equipment and certain receivables, are excluded from the accompanying
balance sheets and are charged directly to unassigned surplus.
PREMIUMS
Premiums and deposits with respect to universal life policies and annuity
and other investment-type contracts are reported as premium revenues;
whereas, under GAAP, such premiums and deposits are treated as liabilities
and policy charges represent revenues.
BENEFIT RESERVES
Certain policy reserves are calculated based on statutorily required
interest and mortality assumptions rather than on estimated expected
experience or actual account balances as would be required under GAAP.
Death benefits paid, policy and contract withdrawals, and the change in
policy reserves on universal life policies, annuity and other
investment-type contracts are reported as benefits and settlement expenses
in the accompanying statements of income; whereas, under GAAP, withdrawals
are treated as a reduction of the policy or contract liabilities and
benefits would represent the excess of benefits paid over the policy account
value and interest credited to the account values.
REINSURANCE
Premiums, claims and policy benefits and contract liabilities are reported
in the accompanying financial statements net of reinsurance amounts. For
GAAP, all assets and liabilities related to reinsurance ceded contracts are
reported on a gross basis.
A liability for reinsurance balances has been provided for unsecured policy
and contract liabilities and unearned premiums ceded to reinsurers not
authorized by the Department to assume such business. Changes to those
amounts are credited or charged directly to unassigned surplus. Under GAAP,
an allowance for amounts deemed uncollectible is established through a
charge to income.
Commissions on business ceded are reported as income when received rather
than deferred and amortized with deferred policy acquisition costs.
Certain reinsurance contracts meeting risk transfer requirements under
statutory-basis accounting practices have been accounted for using
traditional reinsurance accounting whereas such contracts would be accounted
for using deposit accounting under GAAP.
INCOME TAXES
Deferred income taxes are not provided for differences between financial
statement amounts and tax bases of assets and liabilities.
POLICYHOLDER DIVIDENDS
Policyholder dividends are recognized when declared rather than over the
term of the related policies.
STATEMENTS OF CASH FLOWS
Cash and short-term investments in the statements of cash flows represent
cash balances and investments with initial maturities of one year or less.
Under GAAP, the corresponding captions of cash and cash equivalents include
cash balances and investments with initial maturities of three months or
less.
S-6
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
A reconciliation of the Company's net income and capital and surplus
determined on a statutory accounting basis with amounts determined in
accordance with GAAP is as follows:
<TABLE>
<CAPTION>
CAPITAL AND SURPLUS NET INCOME
-----------------------------------------------------
DECEMBER 31 YEAR ENDED DECEMBER 31
1997 1996 1997 1996 1995
-----------------------------------------------------
(IN MILLIONS)
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amounts reported on a statutory basis $ 2,968.4 $ 1,962.6 $ 392.9 $ 334.4 $ 284.5
- ---------------------------------------------
GAAP adjustments:
Deferred policy acquisition costs and
present value of future profits 958.3 1,119.1 (98.9) 66.7 (63.0)
------------------------------------------
Policy and contract reserves (1,672.9) (1,405.3) (48.6) (57.1) (55.3)
------------------------------------------
Interest maintenance reserve 135.4 76.7 58.7 (39.7) 60.9
------------------------------------------
Deferred income taxes (13.0) (27.4) 70.3 1.8 38.3
------------------------------------------
Policyholders' share of earnings and
surplus on participating business (79.8) (81.9) 5.3 (.3) .2
------------------------------------------
Asset valuation reserve 450.0 375.5 -- -- --
------------------------------------------
Net realized gain (loss) on investments (91.5) (72.0) (20.4) 78.7 30.0
------------------------------------------
Unrealized gain on investments 1,245.5 825.2 -- -- --
------------------------------------------
Nonadmitted assets, including nonadmitted
investments 61.0 (7.1) -- -- --
------------------------------------------
Investments in subsidiary companies 188.8 156.6 (80.5) 29.9 34.3
------------------------------------------
Other, net (162.5) (99.0) (35.0) (82.6) (7.3)
------------------------------------------ --------- --------- --------- --------- ---------
Net increase (decrease) 1,019.3 860.4 (149.1) (2.6) 38.1
- --------------------------------------------- --------- --------- --------- --------- ---------
Amounts on a GAAP basis $ 3,987.7 $ 2,823.0 $ 243.8 $ 331.8 $ 322.6
- --------------------------------------------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
S-7
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Other significant accounting practices are as follows:
INVESTMENTS
The discount or premium on bonds is amortized using the interest method. For
mortgage-backed bonds, the Company recognizes income using a constant
effective yield based on anticipated prepayments and the estimated economic
life of the securities. When actual prepayments differ significantly from
anticipated prepayments, the effective yield is recalculated to reflect
actual payments to date and anticipated future payments. The net investment
in the securities is adjusted to the amount that would have existed had the
new effective yield been applied since the acquisition of the securities.
Short-term investments include investments with maturities of less than one
year at the date of acquisition. The carrying amounts for these investments
approximate their fair values.
Preferred stocks are reported at cost or amortized cost.
Unaffiliated common stocks are reported at fair value as determined by the
Securities Valuation Office of the NAIC and the related unrealized gains
(losses) are reported in unassigned surplus without adjustment for federal
income taxes.
Policy loans are reported at unpaid balances.
The Company uses various derivative instruments as part of its overall
liability-asset management program for certain investments and life
insurance and annuity products. The Company values all derivative
instruments on a basis consistent with that of the hedged item. Upon
termination, gains and losses on those instruments are included in the
carrying values of the underlying hedged items and are amortized over the
remaining lives of the hedged items as adjustments to investment income or
benefits from the hedged items through the IMR. Any unamortized gains or
losses are recognized when the underlying hedged items are sold. The
premiums paid for interest rate caps and swaptions are deferred and
amoritized to net investment income on a straight-line basis over the term
of the respective derivative.
Hedge accounting is applied as indicated above after the Company determines
that the items to be hedged expose the Company to interest rate
fluctuations, the widening of bond yield spreads over comparable maturity
U.S. Government obligations, increased liabilities associated with certain
reinsurance agreements and foreign exchange risk. Moreover, the derivatives
used are designated as a hedge and reduce the indicated risk by having a
high correlation between changes in the value of the derivatives and the
items being hedged at both the inception of the hedge and throughout the
hedge period. Should such criteria not be met or if the hedged items have
been sold, terminated or matured, the change in value of the derivatives is
included in net income.
Mortgage loans on real estate are reported at unpaid balances, less
allowances for impairments. Real estate is reported at depreciated cost.
Realized investment gains and losses on investments sold are determined
using the specific identification method. Changes in admitted asset carrying
amounts of bonds, mortgage loans and common and preferred stocks are
credited or charged directly in unassigned surplus.
LOANED SECURITIES
Securities loaned are treated as collateralized financing transactions and a
liability is recorded equal to the amount to be paid to reacquire the
security. It is the Company's policy to take possession of securities with a
market value at least equal to the value of the securities loaned.
Securities loaned are recorded at amortized cost as long as the value of the
related collateral is sufficient. The Company's agreements with third
parties generally contain contractual provisions to allow for additional
collateral to be obtained when necessary. The Company values collateral
daily and obtains additional collateral when deemed appropriate.
GOODWILL
Goodwill, which represents the excess of the ceding commission over
statutory-basis net assets of business purchased under an assumption
reinsurance agreement, is amortized on a straight-line basis over ten years.
S-8
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
PREMIUMS
Life insurance and annuity premiums are recognized as revenue when due.
Accident and health premiums are earned pro rata over the contract term of
the policies.
BENEFITS
Life, annuity and accident and health benefit reserves are developed by
actuarial methods and are determined based on published tables using
statutorily specified interest rates and valuation methods that will
provide, in the aggregate, reserves that are greater than or equal to the
minimum or guaranteed policy cash values or the amounts required by the
Department. The Company waives deduction of deferred fractional premiums on
the death of life and annuity policy insureds and returns any premium beyond
the date of death, except for policies issued prior to March 1977. Surrender
values on policies do not exceed the corresponding benefit reserves.
Additional reserves are established when the results of cash flow testing
under various interest rate scenerios indicate the need for such reserves.
If net premiums exceed the gross premiums on any insurance in-force,
additional reserves are established. Benefit reserves for policies
underwritten on a substandard basis are determined using the multiple table
reserve method.
The tabular interest, tabular less actual reserve released and the tabular
cost have been determined by formula or from the basic data for such items.
Tabular interest funds not involving life contingencies were determined
using the actual interest credited to the funds plus the change in accrued
interest.
Liabilities related to guaranteed investment contracts and policyholder
funds left on deposit with the Company generally are equal to fund balances
less applicable surrender charges.
CLAIMS AND CLAIM ADJUSTMENT EXPENSES
Unpaid claims and claim adjustment expenses on accident and health policies
represent the estimated ultimate net cost of all reported and unreported
claims incurred during the year. The Company does not discount claims and
claim adjustment expense reserves. The reserves for unpaid claims and claim
adjustment expenses are estimated using individual case-basis valuations and
statistical analyses. Those estimates are subject to the effects of trends
in claim severity and frequency. Although considerable variability is
inherent in such estimates, management believes that the reserves for claims
and claim adjustment expenses are adequate. The estimates are continually
reviewed and adjusted as necessary as experience develops or new information
becomes known; such adjustments are included in current operations.
REINSURANCE CEDED AND ASSUMED
Reinsurance premiums and claims and claim adjustment expenses are accounted
for on bases consistent with those used in accounting for the original
policies issued and the terms of the reinsurance contracts. Certain business
is transacted on a funds withheld basis and investment income on funds
withheld are reported in net investment income.
PENSION BENEFITS
Costs associated with the Company's defined benefit pension plans is
systematically accrued during the expected period of active service of the
covered employees.
INCOME TAXES
The Company and eligible subsidiaries have elected to file consolidated
federal and state income tax returns with LNC. Pursuant to an intercompany
tax sharing agreement with LNC, the Company provides for income taxes on a
separate return filing basis. The tax sharing agreement also provides that
the Company will receive benefit for net operating losses, capital losses
and tax credits which are not usable on a separate return basis to the
extent such items may be utilized in the consolidated income tax returns of
LNC.
STOCK OPTIONS
The Company recognizes compensation expense for its stock option incentive
plans using the intrinsic value method of accounting. Under the terms of the
intrinsic value method, compensation cost is the excess, if any, of the
quoted market price of LNC's common stock at the grant date, or other
S-9
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
measurement date, over the amount an employee must pay to acquire the stock.
ASSETS HELD IN SEPARATE ACCOUNTS AND LIABILITIES RELATED TO SEPARATE
ACCOUNTS
These assets and liabilities represent segregated funds administered and
invested by the Company for the exclusive benefit of pension and variable
life and annuity contractholders. The fees received by the Company for
administrative and contractholder maintenance services performed for these
separate accounts are included in the Company's statements of income.
2. PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company's statutory-basis financial statements are prepared in
accordance with accounting practices prescribed or permitted by the
Department. "Prescribed" statutory accounting practices include state laws,
regulations and general administrative rules, as well as a variety of
publications of the NAIC. "Permitted" statutory accounting practices
encompass all accounting practices that are not prescribed; such practices
may differ from state to state, may differ from company to company within a
state and may change in the future. The NAIC currently is in the process of
recodifying statutory accounting practices ("Codification"). Codification
will likely change, to some extent, prescribed statutory accounting
practices and may result in changes to the accounting practices that the
Company uses to prepare its statutory-basis financial statements.
Codification, which is expected to be approved by the NAIC in 1998, will
require adoption by the various states before it becomes the prescribed
statutory-basis of accounting for insurance companies domesticated within
those states. Accordingly, before Codification becomes effective for the
Company, the state of Indiana must adopt Codification as the prescribed
basis of accounting on which domestic insurers must report their
statutory-basis results to the Department. At this time, it is unclear
whether Indiana will adopt Codification. However, based on the current draft
guidance, management believes that the impact of Codification will not be
material to the Company's statutory-basis financial statements.
The Company has received written approval from the Department to record
surrender charges applicable to separate account liabilities for variable
life and annuity products as a liability in the separate account financial
statements payable to the Company's general account. In the accompanying
financial statements, a corresponding receivable is recorded with the
related income impact recorded in the accompanying statement of operations
as a change in reserves or change in premium and other deposit funds.
S-10
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS
The major categories of net investment income are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Income:
Bonds $ 1,524.4 $ 1,442.2 $ 1,457.4
----------------------------------------------------------------
Preferred stocks 23.5 9.6 6.4
----------------------------------------------------------------
Unaffiliated common stocks 8.3 6.5 5.2
----------------------------------------------------------------
Affiliated common stocks 15.0 9.5 12.6
----------------------------------------------------------------
Mortgage loans on real estate 257.2 269.3 252.0
----------------------------------------------------------------
Real estate 92.2 114.4 110.0
----------------------------------------------------------------
Policy loans 37.5 35.0 32.1
----------------------------------------------------------------
Other investments 28.2 22.4 62.6
----------------------------------------------------------------
Cash and short-term investments 70.3 48.9 53.2
---------------------------------------------------------------- --------- --------- ---------
Total investment income 2,056.6 1,957.8 1,991.5
- -------------------------------------------------------------------
Expenses:
Depreciation 21.0 25.0 25.9
----------------------------------------------------------------
Other 188.5 176.5 193.4
---------------------------------------------------------------- --------- --------- ---------
Total investment expenses 209.5 201.5 219.3
- ------------------------------------------------------------------- --------- --------- ---------
Net investment income $ 1,847.1 $ 1,756.3 $ 1,772.2
- ------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</TABLE>
Nonadmitted accrued investment income at December 31, 1997
and 1996 amounted to $2,600,000 and $2,500,000,
respectively, consisting principally of interest on bonds in
default and mortgage loans.
S-11
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
The cost or amortized cost, gross unrealized gains and
losses and the fair value of investments in bonds are
summarized as follows:
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------------------------------------------
(IN MILLIONS)
----------------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1997:
Corporate $13,003.8 $ 942.2 $ 60.1 $13,885.9
------------------------------------------------
U.S. government 436.3 67.9 -- 504.2
------------------------------------------------
Foreign government 1,202.1 104.9 5.4 1,301.6
------------------------------------------------
Mortgage-backed 3,874.3 215.2 27.1 4,062.4
------------------------------------------------
State and municipal 44.2 .3 -- 44.5
------------------------------------------------ --------- ----------- ----------- ---------
$18,560.7 $ 1,330.5 $ 92.6 $19,798.6
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
At December 31, 1996:
Corporate $12,548.1 $ 586.5 $ 66.6 $13,068.0
------------------------------------------------
U.S. government 1,088.7 43.2 18.0 1,113.9
------------------------------------------------
Foreign government 1,234.0 105.1 1.4 1,337.7
------------------------------------------------
Mortgage-backed 4,478.4 183.3 27.4 4,634.3
------------------------------------------------
State and municipal 40.4 .1 -- 40.5
------------------------------------------------ --------- ----------- ----------- ---------
$19,389.6 $ 918.2 $ 113.4 $20,194.4
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
</TABLE>
The carrying amount of bonds in the balance sheets at
December 31, 1997 and 1996 reflects NAIC adjustments of
$5,500,000 and $2,700,000, respectively, to decrease
amortized cost.
Fair values for bonds are based on quoted market prices,
where available. For bonds not actively traded, fair values
are estimated using values obtained from independent pricing
services or, in the case of private placements, are
estimated by discounting expected future cash flows using a
current market rate applicable to the coupon rate, credit
quality and maturity of the investments.
S-12
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
A summary of the cost or amortized cost and fair value of
investments in bonds at December 31, 1997, by contractual
maturity, is as follows:
<TABLE>
<CAPTION>
COST OR
AMORTIZED FAIR
COST VALUE
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Maturity:
In 1998 $ 490.1 $ 494.9
--------------------------------------------------------------------------
In 1999-2002 3,088.7 3,185.4
--------------------------------------------------------------------------
In 2003-2007 4,762.7 4,971.0
--------------------------------------------------------------------------
After 2007 6,344.9 7,084.9
--------------------------------------------------------------------------
Mortgage-backed securities 3,874.3 4,062.4
-------------------------------------------------------------------------- --------- ---------
Total $18,560.7 $19,798.6
- ----------------------------------------------------------------------------- --------- ---------
--------- ---------
</TABLE>
The expected maturities may differ from the contractual
maturities in the foregoing table because certain borrowers
may have the right to call or prepay obligations with or
without call or prepayment penalties.
At December 31, 1997, the Company did not have a material
concentration of financial instruments in a single investee,
industry or geographic location.
Proceeds from sales of investments in bonds during 1997,
1996 and 1995 were $9,715,000,000, $10,996,900,000 and
$12,234,100,000, respectively. Gross gains during 1997, 1996
and 1995 of $218,100,000, $169,700,000 and $225,600,000,
respectively, and gross losses of $78,000,000, $177,000,000
and $83,100,000, respectively, were realized on those sales.
At December 31, 1997 and 1996, investments in bonds, with an
admitted asset value of $76,200,000 and $70,700,000,
respectively, were on deposit with state insurance
departments to satisfy regulatory requirements.
The cost or amortized cost, gross unrealized gains and
losses and the fair value of investments in unaffiliated
common stocks and preferred stocks are as follows:
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------------------------
(IN MILLIONS)
--------------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1997:
Preferred stocks $257.3 $12.1 $ .7 $268.7
- ----------------------------------------
Unaffiliated common stocks 357.0 98.5 19.5 436.0
- ----------------------------------------
At December 31, 1996:
Preferred stocks $239.7 $10.5 $ 1.7 $248.5
- ----------------------------------------
Unaffiliated common stocks 289.9 84.6 16.2 358.3
- ----------------------------------------
</TABLE>
The carrying amount of preferred stocks in the balance
sheets at December 31, 1997 and 1996 reflects NAIC
adjustments of $4,000,000 and $700,000, respectively, to
decrease amortized cost.
S-13
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
During 1997, the minimum and maximum lending rates for
mortgage loans were 7.09% and 9.25%, respectively. At the
issuance of a loan, the percentage of loan to value on any
one loan does not exceed 75%. At December 31, 1997, the
Company did not hold any mortgages with interest overdue
beyond one year. All properties covered by mortgage loans
have fire insurance at least equal to the excess of the loan
over the maximum loan that would be allowed on the land
without the building.
Realized capital gains are reported net of federal income
taxes and amounts transferred to the IMR as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Realized capital gains $ 209.3 $ 69.3 $ 186.8
- ------------------------------------------------------------------------
Less amount transferred to IMR (net of related taxes (credit) of $54.0,
$(6.7) and $51.1 in 1997, 1996 and 1995, respectively) 100.2 (12.4) 94.8
- ------------------------------------------------------------------------ --------- --------- ---------
109.1 81.7 92.0
Less federal income taxes on realized gains 77.8 28.4 48.1
- ------------------------------------------------------------------------ --------- --------- ---------
Net realized capital gains $ 31.3 $ 53.3 $ 43.9
- ------------------------------------------------------------------------ --------- --------- ---------
--------- --------- ---------
</TABLE>
4. SUBSIDIARIES
Statutory-basis financial information related to the
Company's four wholly-owned subsidiaries is summarized as
follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
--------------------------------------------
<S> <C> <C> <C> <C>
Cash and invested assets $ 1,154.4 $ 284.8 $ 399.0 $ 796.3
- -----------------------------------------------------------
Other assets 36.9 77.3 481.6 130.8
- ----------------------------------------------------------- --------- ----------- --------- ---------
Total admitted assets $ 1,191.3 $ 362.1 $ 880.6 $ 972.1
- ----------------------------------------------------------- --------- ----------- --------- ---------
--------- ----------- --------- ---------
Insurance reserves $ 1,072.2 $ 266.7 $ 279.3 $ 588.7
- -----------------------------------------------------------
Other liabilities 48.4 21.7 546.4 5.8
- -----------------------------------------------------------
Liabilities related to separate accounts -- -- -- 164.7
- -----------------------------------------------------------
Capital and surplus 70.7 73.7 54.9 212.9
- ----------------------------------------------------------- --------- ----------- --------- ---------
Total liabilities and capital and surplus $ 1,191.3 $ 362.1 $ 880.6 $ 972.1
- ----------------------------------------------------------- --------- ----------- --------- ---------
--------- ----------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 267.6 $ 135.4 $ 125.3 $ 230.0
- ------------------------------------------------------------
Expenses 262.6 244.2 114.6 224.4
- ------------------------------------------------------------
Net realized gains (losses) .1 .6 (.1) (.1)
- ------------------------------------------------------------ --------- --------- --------- ---------
Net income $ 5.1 $ (108.2) $ 10.6 $ 5.5
- ------------------------------------------------------------ --------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
S-14
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
4. SUBSIDIARIES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
------------------------------------------------
<S> <C> <C> <C> <C>
Cash and invested assets $ 1,090.7 $ 146.4 $ 406.7 $ 664.3
- -----------------------------------------------------------
Other assets 31.8 17.7 503.1 9.1
- ----------------------------------------------------------- --------- ----------- ----------- -----------
Total admitted assets $ 1,122.5 $ 164.1 $ 909.8 $ 673.4
- ----------------------------------------------------------- --------- ----------- ----------- -----------
--------- ----------- ----------- -----------
Insurance reserves $ 1,013.5 $ 72.7 $ 261.8 $ 601.1
- -----------------------------------------------------------
Other liabilities 41.3 18.7 597.2 22.1
- -----------------------------------------------------------
Capital and surplus 67.7 72.7 50.8 50.2
- ----------------------------------------------------------- --------- ----------- ----------- -----------
Total liabilities and capital and surplus $ 1,122.5 $ 164.1 $ 909.8 $ 673.4
- ----------------------------------------------------------- --------- ----------- ----------- -----------
--------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 246.5 $ 104.9 $ 120.8 $ 642.7
- -------------------------------------------------------------
Expenses 247.1 97.1 114.1 661.3
- -------------------------------------------------------------
Net realized gains (losses) (.6) -- -- --
- ------------------------------------------------------------- --------- ----------- ----------- -----------
Net income (loss) $ (1.2) $ 7.8 $ 6.7 $ (18.6)
- ------------------------------------------------------------- --------- ----------- ----------- -----------
--------- ----------- ----------- -----------
</TABLE>
The carrying value of affiliated common stocks, representing
their statutory-basis net equity, was $412,100,000 and
$241,500,000 at December 31, 1997 and 1996, respectively.
The cost basis of investments in subsidiaries as of December
31, 1997 and 1996 was $466,200,000 and $194,000,000,
respectively.
During 1997 and 1996, the Company's insurance subsidiaries
paid dividends of $15,000,000 and $10,500,000, respectively.
5. FEDERAL INCOME TAXES
The effective federal income tax rate for financial
reporting purposes differs from the prevailing statutory tax
rate principally due to tax-exempt investment income,
dividends-received tax deductions, differences in policy
acquisition costs and policy and contract liabilities for
tax return and financial statement purposes.
Federal income taxes incurred of $78,300,000, $83,600,000
and $103,700,000 in 1997, 1996 and 1995, respectively, would
be subject to recovery in the event that the Company incurs
net operating losses within three years of the years for
which such taxes were paid.
Prior to 1984, a portion of the Company's current income was
not subject to current income tax, but was accumulated for
income tax purposes in a memorandum account designated as
"policyholders' surplus." The Company's balance in the
"policyholders' surplus" account at December 31, 1983 of
$187,000,000 was "frozen" by the Tax Reform Act of 1984 and,
accordingly, there have been no additions to the accounts
after that date. That portion of current income on which
income taxes have been paid will continue to be accumulated
in a memorandum account designated as "shareholder's
surplus," and is available for dividends to the shareholder
without additional payment of tax by the Company. The
December 31, 1997 memorandum account balance for
"shareholder's surplus"
S-15
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
5. FEDERAL INCOME TAXES (CONTINUED)
was $1,905,000,000. Should dividends to the shareholder
exceed its respective "shareholder's surplus," amounts would
need to be transferred from the "policyholders' surplus" and
would be subject to federal income tax at that time. Under
existing or foreseeable circumstances, the Company neither
expects nor intends that distributions will be made that
will result in any such tax.
6. SUPPLEMENTAL FINANCIAL DATA
The balance sheet caption, "Other Admitted Assets", includes
amounts recoverable from other insurers for claims paid by
the Company, and the balance sheet caption, "Future Policy
Benefits and Claims," has been reduced for insurance ceded
as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Insurance ceded $ 1,431.0 $ 1,154.5
- -------------------------------------------------------------------------------
Amounts recoverable from other insurers 35.9 16.0
- -------------------------------------------------------------------------------
</TABLE>
Reinsurance transactions included in the income statement
caption, "Premiums and Deposits," are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Insurance assumed $ 727.2 $ 241.3 $ 667.7
- ------------------------------------------------------------------------
Insurance ceded 302.9 193.3 453.1
- ------------------------------------------------------------------------ --------- --------- ---------
Net amount included in premiums $ 424.3 $ 48.0 $ 214.6
- ------------------------------------------------------------------------ --------- --------- ---------
--------- --------- ---------
</TABLE>
The income statement caption, "Benefits and Settlement
Expenses," is net of reinsurance recoveries of
$1,240,500,000, $787,900,000 and $1,407,000,000 for 1997,
1996 and 1995, respectively.
S-16
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
6. SUPPLEMENTAL FINANCIAL DATA (CONTINUED)
Deferred and uncollected life insurance premiums and annuity
considerations included in the balance sheet caption,
"Premiums and Fees in Course of Collection," are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------
NET OF
GROSS LOADING LOADING
-----------------------------------
(IN MILLIONS)
-----------------------------------
<S> <C> <C> <C>
Ordinary new business $ 3.2 $ 2.4 $ .8
- ------------------------------------------------------------------------
Ordinary renewal 17.8 3.2 14.6
- ------------------------------------------------------------------------
Group life 10.6 .2 10.4
- ------------------------------------------------------------------------ --------- --- -----
$ 31.6 $ 5.8 $ 25.8
--------- --- -----
--------- --- -----
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------
NET OF
GROSS LOADING LOADING
-----------------------------------
(IN MILLIONS)
-----------------------------------
<S> <C> <C> <C>
Ordinary new business $ 3.9 $ 1.9 $ 2.0
- ------------------------------------------------------------------------
Ordinary renewal 35.1 3.0 32.1
- ------------------------------------------------------------------------
Group life 9.4 (.1) 9.5
- ------------------------------------------------------------------------ --------- --- -----
$ 48.4 $ 4.8 $ 43.6
--------- --- -----
--------- --- -----
</TABLE>
The Company has entered into non-exclusive managing general
agent agreements with International Benefit Services Corp.,
HRM Claim Management, Inc. and Pediatrics Insurance
Consultants, Inc. to write group life and health business.
Direct premiums written related to the agreements amounted
to $2,000,000, $2,600,000 and $8,800,000 in 1997 and
$26,200,000, $3,800,000 and $8,600,000 in 1996,
respectively. During 1996, LNC Administrative Services
Corporation entered into a similar agreement with the
Company with direct premiums written amounting to $7,200,000
and 6,200,000 in 1997 and 1996, respectively. Authority
granted by the managing general agents agreements include
underwriting, claims adjustment and claims payment services.
7. ANNUITY RESERVES
At December 31, 1997, the Company's annuity reserves and
deposit fund liabilities, including separate accounts, that
are subject to discretionary withdrawal with adjustment,
S-17
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
7. ANNUITY RESERVES (CONTINUED)
subject to discretionary withdrawal without adjustment and
not subject to discretionary withdrawal provisions are
summarized as follows:
<TABLE>
<CAPTION>
AMOUNT PERCENT
----------------------
(IN MILLIONS)
----------------------
<S> <C> <C>
Subject to discretionary withdrawal with adjustment:
With market value adjustment $ 2,426.3 5%
-----------------------------------------------------------------------------
At book value, less surrender charge 4,225.8 8
-----------------------------------------------------------------------------
At market value 30,064.7 59
----------------------------------------------------------------------------- --------- ---
36,716.8 72
Subject to discretionary withdrawal without adjustment at book value with
minimal or no charge or adjustment 11,657.7 23
- --------------------------------------------------------------------------------
Not subject to discretionary withdrawal 2,531.1 5
- -------------------------------------------------------------------------------- --------- ---
Total annuity reserves and deposit fund liabilities -- before reinsurance 50,905.6 100%
- -------------------------------------------------------------------------------- ---
---
Less reinsurance 1,797.5
- -------------------------------------------------------------------------------- ---------
Net annuity reserves and deposit fund liabilities, including separate accounts $49,108.1
- -------------------------------------------------------------------------------- ---------
---------
</TABLE>
8. CAPITAL AND SURPLUS
Life insurance companies are subject to certain Risk-Based Capital ("RBC")
requirements as specified by the NAIC. Under those requirements, the amount
of capital and surplus maintained by a life insurance company is to be
determined based on the various risk factors related to it. At December 31,
1997, the Company exceeds the RBC requirements.
The payment of dividends by the Company is limited and cannot be made except
from earned profits. The maximum amount of dividends that may be paid by
life insurance companies without prior approval of the Indiana Insurance
Commissioner is subject to restrictions relating to statutory surplus and
net gain from operations. In 1998, the Company can pay dividends of
$361,600,000 without prior approval of the Indiana Insurance Commissioner.
9. EMPLOYEE BENEFIT PLANS
LNC maintains defined benefit pension plans for its employees (including
Company employees) and a defined contribution plan for the Company's agents.
LNC also maintains 401(k) plans, deferred compensation plans and
postretirement medical and life insurance plans for its employees and agents
(including the Company's employees and agents). The aggregate expenses and
accumulated obligations for the Company's portion of these plans are not
material to the Company's statutory-basis financial statements of income or
financial position for any of the periods shown.
LNC has various incentive plans for key employees, agents and directors of
LNC and its subsidiaries that provide for the issuance of stock options,
stock appreciation rights, restricted stock awards and stock incentive
awards. These plans are comprised primarily of stock option incentive plans.
Stock options granted under the stock option incentive plans are at the
market value at the date of grants and, subject to termination of
employment, expire ten years from the date of grant. Such options are
transferable only upon death and are exercisable one year from the date of
grant for options issued prior to 1992. Option issued subsequent to 1991 are
exercisable in 25% increments on the option issuance anniversary in the four
years following issuance.
As of December 31, 1997, 716,211 shares of LNC common stock were subject to
options granted to Company employees and agents under the stock option
incentive plans of which 370,239 were exercisable on that date. The exercise
prices of the outstanding options range from $23.50 to $75.66. During 1997,
1996 and 1995, 170,789, 72,405 and
S-18
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
117,806 options were exercised, respectively, and 1,846, 10,950 and 11,473
options were forfeited, respectively.
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES
DISABILITY INCOME CLAIMS
The liability for disability income claims net of the related asset for
amounts recoverable from reinsurers at December 31, 1997 and 1996 is a net
liability of $516,900,000 and $572,000,000, respectively. This liability is
based on the assumption that the recent experience will continue in the
future. If incidence levels or claim termination rates fluctuate
significantly from the assumptions underlying reserves, adjustments to
reserves may be required in the future. Accordingly, this liability may
prove to be deficient or excessive. However, it is management's opinion that
such future development will not materially affect the financial position of
the Company. The Company reviews reserve levels on an ongoing basis.
During 1995, the Company completed an in-depth review of the experience of
its disability income business. As a result of this study, and based on the
assumption that recent experience will continue in the future, net income
decreased by $15,200,000 as a result of strengthening the disability income
reserve.
Because of continuing adverse experience and worsening projections of future
experience, the Company conducted an additional in-depth review of loss
experience on its disability income business during 1997. As a result of
this study, the reserve level was deemed to be inadequate to meet future
obligations if current incident levels were to continue in the future. In
order to address this situation, the Company strengthened its disability
income reserve by $80,000,000 (pre-tax).
MARKETING AND COMPLIANCE ISSUES
Regulators continue to focus on market conduct and compliance issues. Under
certain circumstances companies operating in the insurance and financial
services markets have been held responsible for providing incomplete or
misleading sales materials and for replacing existing policies with policies
that were less advantageous to the policyholder. The Company's management
continues to monitor the Company's sales materials and compliance procedures
and is making an extensive effort to minimize any potential liability. Due
to the uncertainty surrounding such matters, it is not possible to provide a
meaningful estimate of the range of potential outcomes at this time;
however, it is management's opinion that such future development will not
materially affect the financial position of the Company.
GROUP PENSION ANNUITIES
The liabilities for guaranteed interest and group pension annuity contracts,
which are no longer being sold by the Company, are supported by a single
portfolio of assets that attempts to match the duration of these
liabilities. Due to the long-term nature of group pension annuities and the
resulting inability to exactly match cash flows, a risk exists that future
cash flows from investments will not be reinvested at rates as high as
currently earned by the portfolio.
Accordingly, these liabilities may prove to be deficient or excessive.
However, it is management's opinion that such future development will not
materially affect the financial position of the Company.
LEASES
The Company leases its home office properties through sale-leaseback
agreements. The agreements provide for a 25 year lease period with options
to renew for six additional terms of five years each. The agreements also
provide the Company with the right of first refusal to purchase the
properties during the term of the lease, including renewal periods, at a
price as defined in the agreements. The Company also has the option to
purchase the leased properties at fair market value as defined in the
agreements on the last day of the initial 25-year lease ending in 2009 or on
the last day of any of the renewal periods.
Total rental expense on operating leases in 1997, 1996 and 1995 was
$29,300,000, $26,400,000 and
S-19
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
$22,500,000, respectively. Future minimum rental commitments are as follows
(in millions):
<TABLE>
<S> <C>
1998 $ 18.5
- --------------------------------------
1999 18.9
- --------------------------------------
2000 20.1
- --------------------------------------
2001 20.4
- --------------------------------------
2002 20.7
- --------------------------------------
Thereafter 152.2
- -------------------------------------- ---------
$ 250.8
---------
---------
</TABLE>
The future commitments include amounts for space and equipment to be used by
the personnel that were added on January 2, 1998 as a result of the purchase
of a block of individual life and annuity business (see NOTE 12).
INFORMATION TECHNOLOGY COMMITMENT
In February 1998, the Company signed a seven-year contract with IBM Global
Services for providing information technology services for the Fort Wayne
operations. Annual costs are estimated to range from $33,600,000 to
$56,800,000.
INSURANCE CEDED AND ASSUMED
The Company cedes insurance to other companies, including certain
affiliates. The portion of risks exceeding the Company's retention limit is
reinsured with other insurers. Industry regulations prescribe the maximum
coverage that the Company can retain on an individual insured. Prior to
December 31, 1997, the Company limited its maximum coverage that it retained
on an individual to $3,000,000. Based on a review of the capital and
business in-force (including the addition of the block of business described
in NOTE 12), effective in January 1998, the Company changed the amount it
will retain on an individual to $10,000,000. Portions of the Company's
deferred annuity business have also been reinsured with other companies to
limit its exposure to interest rate risks. At December 31, 1997, the
reserves associated with these reinsurance arrangements totaled
$1,760,000,000. To cover products other than life insurance, the Company
acquires other insurance coverages with retentions and limits that
management believes are appropriate for the circumstances. The Company
remains liable if its reinsurers are unable to meet their contractual
obligations under the applicable reinsurance agreements.
The Company assumes insurance from other companies, including certain
affiliates. At December 31, 1997, the Company has provided $12,400,000 of
statutory surplus relief to other insurance companies under reinsurance
transactions. Generally, such amounts are offset by corresponding
receivables from the ceding company, which are secured by future profits on
the reinsured business. However, the Company is subject to the risk that the
ceding company may become insolvent and the right of offset would not be
permitted.
The regulatory required liability for unsecured reserves ceded to
unauthorized reinsurers was $8,200,000 and $4,300,000 at December 31, 1997
and 1996, respectively.
VULNERABILITY FROM CONCENTRATIONS
At December 31, 1997, the Company did not have a concentration of: 1)
business transactions with a particular customer, lender or distributor; 2)
revenues from a particular product or service; 3) sources of supply of labor
or services used in the business; or 4) a market or geographic area in which
business is conducted that makes it vulnerable to an event that is at least
reasonably possible to occur in the near term and which could cause a severe
impact to the Company's financial condition.
OTHER CONTINGENCY MATTERS
The Company is involved in various pending or threatened legal proceedings
arising from the conduct of business. Most of these proceedings are routine
in the ordinary course of business. The Company maintains professional
liability insurance coverage for claims in excess of $5,000,000. The degree
of applicability of this coverage depends on the specific facts of each
proceeding. In some instances, these proceedings include claims for
compensatory and punitive damages and similar types of relief in addition to
amounts for alleged contractual liability or requests for equitable relief.
After consultation with legal counsel and a review of available facts, it is
management's opinion that the ultimate liability, if any, under these suits
will
S-20
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
not have a material adverse affect on the financial position or results of
operations of the Company.
Two lawsuits involve alleged fraud in the sale of interest sensitive
universal life and whole life insurance policies. These two suits have been
filed as class actions against the Company, although the court has not
certified a class in either case. Plaintiffs seek unspecified damages and
penalties for themselves and on behalf of the putative class while the
relief sought in these cases in substantial, the cases are in the early
stages of litigation, and it is premature to make assessments about
potential loss, if any. Management intends to defend these suits vigorously.
The amount of liability, if any, which may arise as a result of these suits
cannot be reasonably estimated at this time.
The number of insurance companies that are under regulatory supervision has
resulted, and is expected to continue to result, in assessments by state
guaranty funds to cover losses to policyholders of insolvent or
rehabilitated companies. Mandatory assessments may be partially recovered
through a reduction in future premium taxes in some states. The Company has
accrued for expected assessments net of estimated future premium tax
deductions.
GUARANTEES
The Company has guarantees with off-balance-sheet risks whose contractual
amounts represent credit exposure. Outstanding guarantees with off-
balance-sheet risks, shown in notional or contract amounts, are as follows:
<TABLE>
<CAPTION>
NOTIONAL OR
CONTRACT AMOUNTS
--------------------
DECEMBER 31
--------------------
1997 1996
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Mortgage loan pass-through
certificates $ 41.6 $ 50.3
- ------------------------------
Real estate partnerships -- .5
- ------------------------------ --------- ---------
$ 41.6 $ 50.8
--------- ---------
--------- ---------
</TABLE>
The Company has invested in real estate partnerships that use conventional
mortgage loans to finance their projects. In some cases, the terms of these
arrangements involve guarantees by each of the partners to indemnify the
mortgagor in the event a partner is unable to pay its principal and interest
payments. In addition, the Company has sold commercial mortgage loans
through grantor trusts which issued pass-through certificates. The Company
has agreed to repurchase any mortgage loans which remain delinquent for 90
days at a repurchase price substantially equal to the outstanding principal
balance plus accrued interest thereon to the date of repurchase. It is
management's opinion that the value of the properties underlying these
commitments is sufficient that in the event of default the impact would not
be material to the Company. Accordingly, both the carrying value and fair
value of these guarantees is zero at December 31, 1997 and 1996.
DERIVATIVES
The Company has derivatives with off-balance-sheet risks whose notional or
contract amounts exceed the credit exposure. The Company has entered into
derivative transactions to reduce its exposure to fluctuations in interest
rates, the widening of bond yield spreads over comparable maturity U.S.
Government obligations, increased liabilities associated with reinsurance
agreements and foreign exchange risks. In addition, the Company is subject
to the risks associated with changes in the value of its derivatives;
however, such changes in value generally are offset by changes in the value
of the items being hedged by such contracts. Outstanding derivatives with
off-balance-sheet risks, shown in notional or contract amounts along with
their carrying value and estimated fair values, are as follows:
S-21
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
<TABLE>
<CAPTION>
NOTIONAL OR ASSETS (LIABILITIES)
CONTRACT AMOUNTS -----------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------------------------------------------------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1997 1996 1997 1997 1996 1996
-------------------------------------------------------
(IN MILLIONS)
-------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate derivatives:
Interest rate cap agreements $4,900.0 $5,500.0 $13.9 $ .9 $20.8 $ 8.2
---------------------------------
Swaptions 1,752.0 672.0 6.9 6.9 11.0 10.6
---------------------------------
Financial futures contracts -- 147.7 -- -- (2.4) (2.4)
---------------------------------
Interest rate swaps 10.0 -- -- (1.8) -- --
--------------------------------- -------- -------- -------- ----- -------- ------
6,662.0 6,319.7 20.8 6.0 29.4 16.4
Foreign currency derivatives:
Forward contracts 163.1 251.5 5.4 5.4 .2 (.2)
---------------------------------
Foreign currency options -- 43.9 -- -- .6 .4
---------------------------------
Foreign currency swaps 15.0 15.0 -- (2.1) -- (2.1)
--------------------------------- -------- -------- -------- ----- -------- ------
178.1 310.4 5.4 3.3 .8 (1.9)
-------- -------- -------- ----- -------- ------
$6,840.1 $6,630.1 $26.2 $ 9.3 $30.2 $ 14.5
-------- -------- -------- ----- -------- ------
-------- -------- -------- ----- -------- ------
</TABLE>
A reconciliation and discussion of the notional or contract amounts for the
significant programs using derivative agreements and contracts at December
31 is a follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------
INTEREST RATE CAPS SPREAD LOCKS SWAPTIONS
1997 1996 1997 1996 1997 1996
----------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $ 5,500.0 $ 5,110.0 $ -- $ 600.0 $ 672.0 $ --
- -----------------------------------
New contracts -- 390.0 50.0 15.0 1,080.0 672.0
- -----------------------------------
Terminations and maturities (600.0) -- (50.0) (615.0) -- --
- ----------------------------------- --------- --------- --------- --------- --------- ---------
Balance at end of year $ 4,900.0 $ 5,500.0 $ -- $ -- $ 1,752.0 $ 672.0
- ----------------------------------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL FUTURES INTEREST RATE SWAPS
CONTRACTS
------------------------------------------
1997 1996 1997 1996
------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $ 147.7 $ -- $ -- $ 5.0
- ------------------------------------------------------------
New contracts 88.3 7,918.8 10.0 --
- ------------------------------------------------------------
Terminations and maturities (236.0) (7,771.1) -- (5.0)
- ------------------------------------------------------------ --------- --------- --------- ---------
Balance at end of year $ -- $ 147.7 $ 10.0 $ --
- ------------------------------------------------------------ --------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
S-22
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
<TABLE>
<CAPTION>
FOREIGN CURRENCY DERIVATIVES
----------------------------------------------------------------
FOREIGN EXCHANGE FOREIGN CURRENCY FOREIGN CURRENCY
FORWARD CONTRACTS OPTIONS SWAPS
1997 1996 1997 1996 1997 1996
----------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $ 251.5 $ 15.7 $ 43.9 $ 99.2 $ 15.0 $ 15.0
- --------------------------------------
New contracts 833.1 406.9 -- 1,168.8 -- --
- --------------------------------------
Terminations and maturities (921.6) (171.1) (43.9) (1,224.1) -- --
- -------------------------------------- --------- --------- --------- --------- --------- ---------
Balance at end of year $ 163.1 $ 251.5 $ -- $ 43.9 $ 15.0 $ 15.0
- -------------------------------------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
INTEREST RATE CAPS
The interest rate cap agreements, which expire in 1998 through 2003, entitle
the Company to receive quarterly payments from the counterparties on
specified future reset dates, contingent on future interest rates. For each
cap, the amount of such payments, if any, is determined by the excess of a
market interest rate over a specified cap rate multiplied by the notional
amount divided by four. The purpose of the Company's interest rate cap
agreement program is to protect its annuity line of business from the effect
of rising interest rates. The premium paid for the interest rate caps is
included in other assets ($13,900,000 as of December 31, 1997) and is being
amortized over the terms of the agreements. This amortization is included in
net investment income.
SWAPTIONS
Swaptions, which expire in 2002 and 2003, entitle the Company to receive
settlement payments from the counterparties on specified expiration dates,
contingent on future interest rates. For each swaption, the amount of such
settlement payments, if any, is determined by the present value of the
difference between the fixed rate on a market rate swap and the strike rate
multiplied by the notional amount. The purpose of the Company's swaption
program is to protect its annuity line of business from the effect of
fluctuating interest rates. The premium paid for the swaptions is included
in other assets ($6,900,000 as of December 31, 1997) and is being amortized
over the terms of the agreements. This amortization is included in net
investment income.
SPREAD LOCKS
Spread-lock agreements provide for a lump sum payment to or by the Company,
depending on whether the spread between the swap rate and a specified
Government note is larger or smaller than a contractually specified spread.
Cash payments are based on the product of the notional amount, the spread
between the swap rate and the yield of an equivalent maturity Government
security and the price sensitivity of the swap at that time. The purpose of
the Company's spread-lock program is to protect a portion of its fixed
maturity securities against widening of spreads.
FINANCIAL FUTURES
The Company uses exchange-traded financial futures contracts to hedge
against interest rate risks and to manage duration of a portion of its fixed
maturity securities. Financial futures contracts obligate the Company to buy
or sell a financial instrument at a specified future date for a specified
price. They may be settled in cash or through delivery of the financial
instrument. Cash settlements on the change in market values of financial
futures contracts are made daily.
INTEREST RATE SWAPS
The Company uses interest rate swap agreements to hedge its exposure to
floating rate bond coupon payments, replicating a fixed rate bond. An
interest rate swap is a contractual agreement to exchange payments at one or
more times based on the actual or expected price, level, performance or
value of one or more underlying interest rates. The Company is required to
pay the counterparty to the
S-23
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
agreements the stream of variable coupon payments generated from the bonds,
and in turn, receives a fixed payment from the counterparty at a
predetermined interest rate. The net receipts/payments from interest rate
swaps are recorded in net investment income.
FOREIGN CURRENCY DERIVATIVES
The Company uses a combination of foreign exchange forward contracts,
foreign currency options and foreign currency swaps, all of which are traded
over-the-counter, to hedge some of the foreign exchange risk of investments
in fixed maturity securities denominated in foreign currencies. The foreign
currency forward contracts obligate the Company to deliver a specified
amount of currency at a future date at a specified exchange rate. Foreign
currency options give the Company the right, but not the obligation, to buy
or sell a foreign currency at a specific exchange rate during a specified
time period. A foreign currency swap is a contractual agreement to exchange
the currencies of two different countries pursuant to an agreement to
re-exchange the two currencies at the same rate of exchange at a specified
future date.
ADDITIONAL DERIVATIVE INFORMATION
Expenses for the agreements and contracts described above amounted to
$7,000,000, $6,900,000 and $5,600,000 in 1997, 1996 and 1995, respectively.
Deferred losses of $2,600,000 as of December 31, 1997, were the result of:
1) terminated and expired spread-lock agreements and; 2) financial futures
contracts. These losses are included with the related fixed maturity
securities to which the hedge applied and are being amortized over the life
of such securities.
The Company is exposed to credit loss in the event of nonperformance by
counterparties on interest rate cap agreements, swaptions, spread-lock
agreements, interest rate swaps, foreign exchange forward contracts, foreign
currency options and foreign currency swaps. However, the Company does not
anticipate nonperformance by any of the counterparties. The credit risk
associated with such agreements is minimized by purchasing such agreements
from financial institutions with long-standing, superior performance
records. The amount of such exposure is essentially the net replacement cost
or market value for such agreements with each counterparty if the net market
value is in the Company's favor. At December 31, 1997, the exposure was
$11,700,000.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following discussion outlines the methodologies and assumptions used to
determine the estimated fair values of the Company's financial instruments.
Considerable judgment is required to develop these fair values. Accordingly,
the estimates shown are not necessarily indicative of the amounts that would
be realized in a one-time, current market exchange of all of the Company's
financial instruments.
BONDS AND UNAFFILIATED COMMON STOCK
Fair values of bonds are based on quoted market prices, where available. For
bonds not actively traded, fair values are estimated using values obtained
from independent pricing services. In the case of private placements, fair
values are estimated by discounting expected future cash flows using a
current market rate applicable to the coupon rate, credit quality and
maturity of the investments. The fair values of unaffiliated common stocks
are based on quoted market prices.
MORTGAGE LOANS ON REAL ESTATE
The estimated fair values of mortgage loans on real estate are established
using a discounted cash flow method based on credit rating, maturity and
future income. The rating for mortgages in good standing are based on
property type, location, market conditions, occupancy, debt service
coverage, loan to value, caliber of tenancy, borrower and payment record.
Fair values for impaired mortgage loans are based on: 1) the present value
of expected future cash flows discounted at the loan's effective interest
rate; 2) the loan's market price; or 3) the fair value of the collateral if
the loan is collateral dependent.
POLICY LOANS
The estimated fair values of investments in policy loans are calculated on a
composite discounted cash flow basis using Treasury interest rates
consistent with the maturity durations assumed. These durations are based on
historical experience.
S-24
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
OTHER INVESTMENTS AND CASH AND SHORT-TERM INVESTMENTS
The carrying values for assets classified as other investments and cash and
short-term investments in the accompanying statutory-basis balance sheets
approximate their fair value.
INVESTMENT-TYPE INSURANCE CONTRACTS
The balance sheet captions, "Future Policy Benefits and Claims" and "Other
Policyholder Funds," include investment type insurance contracts (i.e.,
deposit contracts and guaranteed interest contracts). The fair values for
the deposit contracts and certain guaranteed interest contracts are based on
their approximate surrender values. The fair values for the remaining
guaranteed interest and similar contracts are estimated using discounted
cash flow calculations. These calculations are based on interest rates
currently offered on similar contracts with maturities that are consistent
with those remaining for the contracts being valued.
The remainder of the balance sheet captions "Future Policy Benefits and
Claims" and "Other Policyholder Funds," that do not fit the definition of
"investment-type insurance contracts" are considered insurance contracts.
Fair value disclosures are not required for these insurance contracts and
have not been determined by the Company. It is the Company's position that
the disclosure of the fair value of these insurance contracts is important
because readers of these financial statements could draw inappropriate
conclusions about the Company's capital and surplus determined on a fair
value basis. It could be misleading if only the fair value of assets and
liabilities defined as financial instruments are disclosed. The Company and
other companies in the insurance industry are monitoring the related actions
of the various rule-making bodies and attempting to determine an appropriate
methodology for estimating and disclosing the "fair value" of their
insurance contract liabilities.
SHORT-TERM DEBT
Fair values of short-term debt approximates carrying values.
GUARANTEES
The Company's guarantees include guarantees related to real estate
partnerships and mortgage loan pass-through certificates. Based on
historical performance where repurchases have been negligible and the
current status, which indicates none of the loans are delinquent, the fair
value liability for the guarantees related to the mortgage loan pass-through
certificates is insignificant.
DERIVATIVES
The Company's derivatives include interest rate cap agreements, swaptions,
spread-lock agreements, foreign currency exchange contracts, financial
futures contracts, interest rate swaps, foreign currency options and foreign
currency swaps. Fair values for these contracts are based on current
settlement values. These values are based on: 1) quoted market prices for
the foreign currency exchange contracts and financial future contracts and;
2) brokerage quotes that utilize pricing models or formulas using current
assumptions for all other swaps and agreements.
INVESTMENT COMMITMENTS
Fair values for commitments to make investment in fixed maturity securities
(primarily private placements), mortgage loans on real estate and real
estate are based on the difference between the value of the committed
investments as of the date of the accompanying balance sheets and the
commitment date. These estimates would take into account changes in interest
rates, the counterparties' credit standing and the remaining terms of the
commitments.
S-25
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying values and estimated fair values of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------
1997 1996
----------------------------------------------
CARRYING CARRYING
ASSETS (LIABILITIES) VALUE FAIR VALUE VALUE FAIR VALUE
- -----------------------------------------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------
<S> <C> <C> <C> <C>
Bonds $ 18,560.7 $ 19,798.6 $ 19,389.6 $ 20,194.4
- -----------------------------------------------
Preferred stock 257.3 268.7 239.7 248.5
- -----------------------------------------------
Unaffiliated common stock 436.0 436.0 358.3 358.3
- -----------------------------------------------
Mortgage loans on real estate 3,012.7 3,179.2 2,976.7 3,070.9
- -----------------------------------------------
Policy loans 660.5 648.3 626.5 612.7
- -----------------------------------------------
Other investments 335.5 335.5 282.7 282.7
- -----------------------------------------------
Cash and short-term investments 2,133.0 2,133.0 759.2 759.2
- -----------------------------------------------
Investment-type insurance contracts:
Deposit contracts and certain guaranteed
interest contracts (17,324.2) (16,887.6) (17,871.6) (17,333.0)
--------------------------------------------
Remaining guaranteed interest and similar
contracts (1,267.0) (1,294.6) (1,799.7) (1,835.4)
--------------------------------------------
Short-term debt (120.0) (120.0) (100.0) (100.0)
- -----------------------------------------------
Derivatives 26.2 9.3 26.5 13.8
- -----------------------------------------------
Investment commitments -- (.5) -- (.6)
- -----------------------------------------------
</TABLE>
12. ACQUISITIONS AND SALES OF SUBSIDIARIES
In October 1996, the Company and LLANY purchased a block of group
tax-qualified annuity business from UNUM Corporation's affiliate. The
transaction was completed in the form of a reinsurance transaction, which
resulted in a ceding commission of $71,800,000. The ceding commission has
been recorded as admissible goodwill of $62,300,000, which is to be
amortized on a straight-line basis over 10 years. LLANY was required by the
New York Department of Insurance to expense its portion of the ceding
commission in 1996. Policy liabilities and related accruals of the Company
and its wholly owned subsidiary increased by $3,200,000,000 as a result of
this transaction.
In 1997, LNC contributed 25,000,000 shares of common stock of American
States Financial Corporation ("American States") to the Company. American
States is a property casualty insurance holding company of which LNC owned
83.3%. The contributed common stock was accounted for as a capital
contribution equal to the fair value of the common stock received by the
Company. Subsequently, the American States common stock owned by the
Company, along with all other American States common stock owned by LNC and
its affiliates, was sold. The Company received proceeds from the sale in the
amount of $1,175,000,000. The Company recognized no gain or loss on the sale
of its portion of the common stock due to the receipt of such stock at fair
value.
On January 2, 1998, the Company issued a surplus note to LNC in return for
$500,000,000 in cash. The note calls for the Company to pay, on or before
March 31, 2028, the principal amount of the note and interest quarterly at a
6.56% annual rate. LNC also has a right to redeem the note for immediate
repayment in total or in part once per year on the
S-26
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
12. ACQUISITIONS AND SALES OF SUBSIDIARIES (CONTINUED)
anniversary date of the note, but not before January 2, 2003. Any payment of
interest or repayment of principal may be paid only out of excess surplus
(as defined in the note) and is subject to the approval of the Commissioner
of the Indiana Department of Insurance.
Proceeds from the sale of the Company's American States common stock, as
well as proceeds from the surplus note, were used to finance an indemnity
reinsurance transaction whereby the Company reinsured 100% of a block of
individual life insurance and annuity business from CIGNA Corporation. The
Company paid $1,264,400,000 to CIGNA on January 2, 1998 under the terms of
the reinsurance agreement, which will result in a decrease to surplus in
1998 of approximately $1,000,000,000. Operating results generated by this
block of business after the closing date will be included in the Company
financial statements from the closing date. At the time of closing, this
block of business had statutory liabilities of $4,658,200,000 that became
the Company's obligation. The company also received assets, measured on a
historical statutory basis, equal to the liabilities. During 1997, this
block produced premiums, fees and deposits of $1,051,000,000 and earnings of
$87,200,000 on a statutory basis. The Company also expects to pay
$30,000,000 to cover expenses associated with the reinsurance agreement and
to record a charge of approximately $12,000,000 during 1998 to cover certain
costs of integrating the existing operations with the new block of business.
13. TRANSACTIONS WITH AFFILIATES
A wholly owned subsidiary of LNC, Lincoln Financial Group, Inc. ("LFGI"),
has a nearly exclusive general agents contract with the Company under which
it sells the Company's products and provides the service that otherwise
would be provided by a home office marketing department and regional
offices. For providing these selling and marketing services, the Company
paid LFGI override commissions and operating expense allowances of
$61,600,000, $56,300,000 and $43,300,000 in 1997, 1996 and 1995,
respectively. LFGI incurred expenses of $5,500,000, $15,700,000 and
$10,400,000 in 1997, 1996 and 1995, respectively, in excess of the override
commissions and operating expense allowances received from the Company,
which the Company is not required to reimburse. Effective in January 1998,
the Company and LFGI agreed to increase the override commission expense and
eliminate the operating expense allowance.
Cash and short-term investments at December 31, 1997 and 1996 include the
Company's participation in a short-term investment pool with LNC of
$325,600,000 and $175,100,000, respectively. Related investment income
amounted to $15,500,000, $15,300,000 and $21,100,000 in 1997, 1996 and 1995,
respectively. Other liabilities at December 31, 1997 and 1996 include
$120,000,000 and $100,000,000, respectively, of notes payable to LNC.
The Company provides services to and receives services from affiliated
companies which resulted in a net payment of $48,500,000, $34,100,000 and
$24,900,000 in 1997, 1996 and 1995, respectively.
The Company cedes and accepts reinsurance from affiliated companies.
Premiums in the accompanying statements of income include premiums on
insurance business accepted under reinsurance contracts and exclude premiums
ceded to other affiliated companies, as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Insurance assumed $ 11.9 $ 17.9 $ 17.6
- ----------------------
Insurance ceded 100.3 302.8 214.4
- ----------------------
</TABLE>
S-27
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
13. TRANSACTIONS WITH AFFILIATES (CONTINUED)
The balance sheets include reinsurance balances with affiliated companies as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Future policy benefits
and claims assumed $ 245.5 $ 312.7
- ------------------------
Future policy benefits
and claims ceded 997.2 891.8
- ------------------------
Amounts recoverable on
paid and unpaid losses 30.4 31.2
- ------------------------
Reinsurance payable on
paid losses 5.3 2.7
- ------------------------
Funds held under
reinsurance treaties --
net liability 1,115.4 1,062.4
- ------------------------
</TABLE>
Substantially all reinsurance ceded to affiliated companies is with
unauthorized companies. To take a reserve credit for such reinsurance, the
Company holds assets from the reinsurer, including funds held under
reinsurance treaties, and is the beneficiary on letters of credit
aggregating $280,900,000 and $314,200,000 at December 31, 1997 and 1996,
respectively. The letters of credit are issued by banks and represent
guarantees of performance under the reinsurance agreement. At December 31,
1997 and 1996, LNC had guaranteed $229,100,000 and $239,200,000,
respectively, of these letters of credit. At December 31, 1997, the Company
has a receivable (included in the foregoing amounts) from affiliated
insurance companies in the amount of $130,700,000 for statutory surplus
relief received under financial reinsurance ceded agreements.
14. SEPARATE ACCOUNTS
Separate account assets and liabilities reported in the accompanying balance
sheets represent funds that are separately administered, principally for
annuity contracts, and for which the contractholder, rather than the
Company, bears the investment risk. Separate account contractholders have no
claim against the assets of the general account of the Company. Separate
account assets are reported at fair value and consist primarily of long-term
bonds, common stocks, short-term investments and mutual funds. The detailed
operations of the separate accounts are not included in the accompanying
financial statements. Fees charged on separate account policyholder deposits
are included in other income.
Separate account premiums, deposits and other considerations amounted to
$4,821,800,000, $4,148,700,000 and $3,068,200,000 in 1997, 1996 and 1995,
respectively. Reserves for separate accounts with assets at fair value were
$30,560,700,000 and $23,047,800,000 at December 31, 1997 and 1996,
respectively. All reserves are subject to discretionary withdrawal at market
value. Substantially all of the Company's separate accounts are
nonguaranteed.
S-28
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
14. SEPARATE ACCOUNTS (CONTINUED)
A reconciliation of transfers to (from) separate accounts are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996
------------------------
(IN MILLIONS)
------------------------
<S> <C> <C>
Transfers as reported in the Summary of Operations of
various Separate Accounts:
Transfers to separate accounts $ 4,824.0 $ 4,149.6
- ------------------------------------------------------------
Transfers from separate accounts (2,943.8) (2,058.5)
- ------------------------------------------------------------ --------- ---------
Net transfer to separate accounts as reported in the
Company's NAIC Annual Statement -- Summary of Operations $ 1,880.2 $ 2,091.1
- ------------------------------------------------------------ --------- ---------
--------- ---------
</TABLE>
15. RECONCILIATION OF ANNUAL STATEMENT TO AUDITED FINANCIAL STATEMENTS
In 1997, certain errors were identified by the Illinois
Insurance Department in the calculation of the AVR as of
December 31, 1996 and 1995. The effects of the AVR errors
also resulted in the need for revisions in the calculation
of certain investment limitation thresholds, the results of
which indicated that additional assets should have been
nonadmitted as of December 31, 1996. As discussed by the
Company with the Indiana and Illinois Insurance Departments,
corrections were made to affected pages of the Company's
NAIC Annual Statement which were refiled with various state
insurance departments. However, due to immateriality of the
corrections in relation to the financial statements taken as
a whole, the audited 1996 and 1995 statutory-basis financial
statements were not corrected and re-issued.
The Company's 1997 NAIC Annual Statement, as filed with
various state insurance departments, also includes the
corrected balances for 1996 and 1995. The following is a
reconciliation of total admitted assets, total liabilities
and capital and surplus as of December 31, 1996 as presented
in the 1997 NAIC Annual Statement (as corrected) to the
accompanying audited financial statements.
<TABLE>
<CAPTION>
TOTAL CAPITAL
ADMITTED TOTAL AND
ASSETS LIABILITIES SURPLUS
---------------------------------
<S> <C> <C> <C>
Balance as of December 31, 1996 as
reported in the accompanying audited
financial statements $50,016.6 $ 48,054.0 $ 1962.6
- ----------------------------------------
Effect of AVR errors -- 37.6 (37.6)
- ----------------------------------------
Effect of change in investment
limitations (57.0) -- (57.0)
- ---------------------------------------- --------- ----------- --------
Balance as of December 31, 1996 as
reported in the 1997 NAIC Annual
Statement $49,959.6 $ 48,091.6 $1,868.0
- ---------------------------------------- --------- ----------- --------
--------- ----------- --------
</TABLE>
16. IMPACT OF YEAR 2000 (UNAUDITED)
The Year 2000 Issue is pervasive and complex and affects virtually every
aspect of the Company's business. The Company's computer systems and
interfaces with the computer systems of vendors, suppliers, customers and
business partners are particularly vulnerable. The inability to properly
recognize date sensitive electronic information and transfer data between
systems could cause errors or even a complete systems failure which would
result in a temporary inability to process transactions correctly and engage
in normal business
S-29
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
16. IMPACT OF YEAR 2000 (UNAUDITED) (CONTINUED)
activities. The Company is redirecting a large portion of its internal
information technology efforts and contracting with outside consultants to
update its systems to accommodate the year 2000. Also, the Company has
initiated formal communications with critical parties that interface with
the Company's systems to gain an understanding of their progress in
addressing Year 2000 Issues. While the Company is making every effort to
address its own systems and the systems with which it interfaces, it is not
possible to provide assurance that operational problems will not occur. The
Company presently believes 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 operational problems for its
computer systems. In addition, the Company is developing contingency plans
in the event that, despite its best 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 Company's business.
During 1997 and 1996, the Company incurred expenditures of approximately
$5,500,000 ($3,600,000 after-tax) to address this issue. The Company's
financial plans for 1998 through 2000 include expected expenditures of an
additional $20,000,000 ($13,000,000 after-tax) on this issue. The cost of
addressing Year 2000 Issues and the timeliness of completion will be closely
monitored by management and are based on managements's current best
estimates which were 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 that these 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.
S-30
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The Lincoln National Life Insurance Company
We have audited the accompanying statutory-basis balance sheets
of The Lincoln National Life Insurance Company (a wholly owned
subsidiary of Lincoln National Corporation) as of December 31,
1997 and 1996, and the related statutory-basis statements of
income, changes in capital and surplus and cash flows for each
of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
As described in Note 1 to the financial statements, the Company
presents its financial statements in conformity with accounting
practices prescribed or permitted by the Indiana Department of
Insurance, which practices differ from generally accepted
accounting principles. The variances between such practices and
generally accepted accounting principles and the effects on the
accompanying financial statements are also described in Note 1.
In our opinion, because of the effects of the matter described
in the preceding paragraph, the financial statements referred to
above do not present fairly, in conformity with generally
accepted accounting principles, the financial position of The
Lincoln National Life Insurance Company at December 31, 1997 and
1996, or the results of its operations or its cash flows for
each of the three years in the period ended December 31, 1997.
However, in our opinion, the financial statements referred to
above present fairly, in all material respects, the financial
position of The Lincoln National Life Insurance Company at
December 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with accounting practices
prescribed or permitted by the Indiana Department of Insurance.
February 5, 1998
S-31
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA
DECEMBER 31, 1997 (IN MILLIONS)
<TABLE>
<S> <C> <C>
Investment income earned:
Government bonds $ 52.8
-----------------------------------------------------------------------------------------
Other bonds (unaffiliated) 1,471.6
-----------------------------------------------------------------------------------------
Preferred stocks (unaffiliated) 23.5
-----------------------------------------------------------------------------------------
Common stocks (unaffiliated) 8.3
-----------------------------------------------------------------------------------------
Common stocks of affiliates 15.0
-----------------------------------------------------------------------------------------
Mortgage loans 257.2
-----------------------------------------------------------------------------------------
Real estate 92.2
-----------------------------------------------------------------------------------------
Premium notes, policy loans and liens 37.5
-----------------------------------------------------------------------------------------
Cash on hand and on deposit 1.0
-----------------------------------------------------------------------------------------
Short-term investments 69.3
-----------------------------------------------------------------------------------------
Other invested assets 21.9
-----------------------------------------------------------------------------------------
Derivative instruments (10.0)
-----------------------------------------------------------------------------------------
Aggregate write-ins for investment income 16.3
----------------------------------------------------------------------------------------- ---------
Gross investment income $ 2,056.6
- ---------------------------------------------------------------------------------------------------- ---------
---------
Real estate owned (cost, less encumbrances) $ 585.2
- ---------------------------------------------------------------------------------------------------- ---------
---------
Mortgage loans (unpaid balance):
Farm mortgages $ 0.1
-----------------------------------------------------------------------------------------
Residential mortgages 3.1
-----------------------------------------------------------------------------------------
Commercial mortgages 3,009.5
----------------------------------------------------------------------------------------- ---------
Total mortgage loans $ 3,012.7
- ---------------------------------------------------------------------------------------------------- ---------
---------
Mortgage loans by standing (unpaid balance):
Good standing $ 2,974.1
----------------------------------------------------------------------------------------- ---------
---------
Good standing with restructured terms $ 38.5
----------------------------------------------------------------------------------------- ---------
---------
Interest overdue more than three months, not in foreclosure $ --
----------------------------------------------------------------------------------------- ---------
---------
Foreclosure in process $ 0.1
----------------------------------------------------------------------------------------- ---------
---------
Other long-term assets (statement value) $ 281.5
- ---------------------------------------------------------------------------------------------------- ---------
---------
</TABLE>
S-32
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA (CONTINUED)
DECEMBER 31, 1997 (IN MILLIONS)
<TABLE>
<S> <C>
Bonds and stocks of parent, subsidiaries and affiliates (cost):
Common stocks of subsidiaries $ 466.2
- ----------------------------------------------------------------------------------------------- ---------
---------
Bonds and short-term investments by class and maturity:
Bonds by maturity (statement value):
Due within one year or less $ 3,140.1
------------------------------------------------------------------------------------------
Over 1 year through 5 years 5,182.8
------------------------------------------------------------------------------------------
Over 5 years through 10 years 5,772.8
------------------------------------------------------------------------------------------
Over 10 years through 20 years 3,275.3
------------------------------------------------------------------------------------------
Over 20 years 3,270.6
------------------------------------------------------------------------------------------ ---------
Total by maturity $20,641.6
-------------------------------------------------------------------------------------------- ---------
---------
Bonds by class (statement value):
Class 1 $13,879.0
------------------------------------------------------------------------------------------
Class 2 5,215.6
------------------------------------------------------------------------------------------
Class 3 848.0
------------------------------------------------------------------------------------------
Class 4 668.8
------------------------------------------------------------------------------------------
Class 5 23.6
------------------------------------------------------------------------------------------
Class 6 6.6
------------------------------------------------------------------------------------------ ---------
Total by class $20,641.6
-------------------------------------------------------------------------------------------- ---------
---------
Total bonds publicly traded $16,457.1
- ----------------------------------------------------------------------------------------------- ---------
---------
Total bonds privately placed $ 4,184.5
- ----------------------------------------------------------------------------------------------- ---------
---------
Preferred stocks (statement value) $ 257.3
- ----------------------------------------------------------------------------------------------- ---------
---------
Unaffiliated common stocks (market value) $ 436.0
- ----------------------------------------------------------------------------------------------- ---------
---------
Short-term investments (cost or amortized cost) $ 2,080.9
- ----------------------------------------------------------------------------------------------- ---------
---------
Financial options and caps owned (statement value) $ 20.8
- ----------------------------------------------------------------------------------------------- ---------
---------
Financial options and caps written (statement value) $ --
- ----------------------------------------------------------------------------------------------- ---------
---------
Swap and forward agreements open (statement value) $ 5.4
- ----------------------------------------------------------------------------------------------- ---------
---------
Futures contracts open (current value) $ --
- ----------------------------------------------------------------------------------------------- ---------
---------
Cash on deposit $ 52.1
- ----------------------------------------------------------------------------------------------- ---------
---------
Life insurance in-force:
Ordinary $ 108.6
------------------------------------------------------------------------------------------ ---------
---------
Group life $ 31.2
------------------------------------------------------------------------------------------ ---------
---------
</TABLE>
S-33
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA (CONTINUED)
DECEMBER 31, 1997 (IN MILLIONS)
<TABLE>
<S> <C>
Amount of accidental death insurance in-force under ordinary policies $ 5.3
- ----------------------------------------------------------------------------------------------- ---------
---------
Life insurance policies with disability provisions in-force:
Ordinary $ 5.5
------------------------------------------------------------------------------------------ ---------
---------
Group life $ --
------------------------------------------------------------------------------------------ ---------
---------
Supplementary contracts in-force:
Ordinary -- not involving life contingencies:
Amount on deposit $ --
------------------------------------------------------------------------------------------ ---------
---------
Income payable $ 0.8
------------------------------------------------------------------------------------------ ---------
---------
Ordinary -- involving life contingencies:
Income payable $ 3.0
------------------------------------------------------------------------------------------ ---------
---------
Group -- not involving life contingencies:
Income payable $ 1.1
------------------------------------------------------------------------------------------ ---------
---------
Group -- involving life contingencies:
Income payable $ --
------------------------------------------------------------------------------------------ ---------
---------
Annuities:
Ordinary:
Immediate -- amount of income payable $ 71.8
------------------------------------------------------------------------------------------ ---------
---------
Deferred -- fully paid account balance $ 0.7
------------------------------------------------------------------------------------------ ---------
---------
Deferred -- not fully paid account balance $ 264.0
------------------------------------------------------------------------------------------ ---------
---------
Group:
Amount of income payable $ 0.3
------------------------------------------------------------------------------------------ ---------
---------
Fully paid account balance $ 0.1
------------------------------------------------------------------------------------------ ---------
---------
Not fully paid account balance $ 72.3
------------------------------------------------------------------------------------------ ---------
---------
Accident and health insurance -- premiums in-force:
Ordinary $ 166.0
------------------------------------------------------------------------------------------ ---------
---------
Group $ 77.7
------------------------------------------------------------------------------------------ ---------
---------
Deposit funds and dividend accumulations:
Deposit funds account balance $16,507.3
------------------------------------------------------------------------------------------ ---------
---------
Dividend accumulations -- account balance $ 114.4
------------------------------------------------------------------------------------------ ---------
---------
</TABLE>
S-34
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTE TO SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA
NOTE -- BASIS OF PRESENTATION
The accompanying schedule presents selected statutory-basis
financial data as of December 31, 1997 and for the year then
ended for purposes of complying with paragraph 9 of the Annual
Audited Financial Reports in the General Section of the National
Association of Insurance Commissioners' Annual Statement
Instructions and agrees to or is included in the amounts
reported in The Lincoln National Life Insurance Company's 1997
Statutory Annual Statement as filed with the Indiana Department
of Insurance.
S-35
<PAGE>
REPORT OF INDEPENDENT AUDITORS ON
OTHER FINANCIAL INFORMATION
Board of Directors
The Lincoln National Life Insurance Company
Our audits were conducted for the purpose of forming an opinion
on the statutory-basis financial statements taken as a whole.
The accompanying supplemental schedule of selected statutory
basis financial data is presented to comply with the National
Association of Insurance Commissioners' Annual Statement
Instructions and is not a required part of the statutory-basis
financial statements. Such information has been subjected to the
auditing procedures applied in our audit of the statutory-basis
financial statements and, in our opinion, is fairly stated in
all material respects in relation to the statutory-basis
financial statements taken as a whole.
February 5, 1998
S-36
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
FLEXIBLE PAYMENT DEFERRED VARIABLE ANNUITY CONTRACTS
Issued through
LINCOLN LIFE VARIABLE ANNUITY ACCOUNT N
Offered by
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
TELEPHONE: (888) 868-2583
This Statement of Additional Information ("Statement") expands upon subjects
discussed in the current Prospectus for the Variable Annuity Contracts (the
"Contracts") offered by The Lincoln National Life Insurance Company through
Lincoln Life Variable Annuity Account N. You may obtain a copy of the Prospectus
dated November 9, 1998, by calling (888) 868-2583, or by writing to The Lincoln
National Life Insurance Company at P.O. Box 7866, Fort Wayne, Indiana 46802.
Terms used in the current Prospectus for the Contracts are incorporated in this
Statement.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND SHOULD BE
READ ONLY IN CONJUNCTION WITH THE PROSPECTUS FOR THE CONTRACTS AND LINCOLN LIFE
VARIABLE ANNUITY ACCOUNT N.
Dated: November 9, 1998
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
THE CONTRACTS -- GENERAL PROVISIONS........................................................................ 3
The Contracts............................................................................................ 3
Loans.................................................................................................... 3
Non-Participating Contracts.............................................................................. 3
Misstatement of Age...................................................................................... 3
CALCULATION OF VARIABLE ACCOUNT VALUES..................................................................... 3
Variable Accumulation Unit Value......................................................................... 3
SAMPLE CALCULATIONS AND TABLES............................................................................. 4
Variable Account Unit Value Calculations................................................................. 4
Withdrawal Charge and Market Value Adjustment Tables..................................................... 5
STATE REGULATION OF LINCOLN LIFE........................................................................... 6
ADMINISTRATION............................................................................................. 6
ACCOUNT INFORMATION........................................................................................ 6
DISTRIBUTION OF THE CONTRACTS.............................................................................. 7
CUSTODY OF ASSETS.......................................................................................... 7
HISTORICAL PERFORMANCE DATA................................................................................ 7
Money Market Sub-Account Yield........................................................................... 7
Total Returns............................................................................................ 7
Other Performance Data................................................................................... 8
INDEPENDENT AUDITORS....................................................................................... 8
STATUTORY-BASIS FINANCIAL STATEMENTS AND SCHEDULES......................................................... 8
</TABLE>
2
<PAGE>
In order to supplement the description in the Prospectus, the following
provides additional information about The Lincoln National Life Insurance
Company ("Lincoln Life") and the Contracts which may be of interest to an Owner.
Terms have the same meaning as in the Prospectus, unless otherwise indicated.
THE CONTRACTS -- GENERAL PROVISIONS
THE CONTRACTS
A Contract, attached riders, amendments and any application, form the entire
contract. Only the President, a Vice President, a Secretary, a Director, or an
Assistant Director of Lincoln Life may change or waive any provision in a
Contract. Any changes or waivers must be in writing. Lincoln Life may change or
amend the Contracts if such change or amendment is necessary for the Contracts
to comply with or take advantage of any state or federal law, rule or
regulation.
LOANS
Under the Contracts, loans are not permitted.
NON-PARTICIPATING CONTRACTS
The Contracts do not participate or share in the profits or surplus earnings
of Lincoln Life.
MISSTATEMENT OF AGE
If the age of the Annuitant is misstated, any amounts payable by Lincoln
Life under the Contract will be adjusted to be those amounts which the Premium
Payments would have purchased for the correct age, according to Lincoln Life's
rates in effect on the Date of Issue. Any overpayment by Lincoln Life, with
interest at the rate of 6% per year, compounded annually, will be charged
against the payments to be made next succeeding the adjustment. Any underpayment
by Lincoln Life will be paid in a lump sum.
If the age or sex of the Owner is misstated, Lincoln Life will adjust the
charge associated with any Optional Death Benefits elected to the charges that
would have been assessed for the correct age and sex.
CALCULATION OF VARIABLE ACCOUNT VALUES
On any Valuation Date, the Variable Account value is equal to the totals of
the values allocated to the Contracts in each Sub-Account. The portion of an
Owner's Annuity Account Value held in any Variable Account Sub-Account is equal
to the number of Sub-Account units allocated to a Contract multiplied by the
Sub-Account accumulation unit value as described below.
VARIABLE ACCUMULATION UNIT VALUE
Upon receipt of a Premium Payment by Lincoln Life at its Home Office, all or
that portion, if any, of the Premium Payment to be allocated to the Variable
Account Sub-Accounts will be credited to the Variable Account in the form of
Variable Accumulation Units. The number of particular Variable Accumulation
Units to be credited is determined by dividing the dollar amount allocated to
the particular Variable Account Sub-Account by the Variable Accumulation Unit
Value for the particular Variable Account Sub-Account for the Valuation Period
during which the Premium Payment is received at Lincoln Life's Home Office (for
the initial Premium Payment, for the Valuation Period during which the Premium
Payment is accepted).
The Variable Accumulation Unit Value for each Variable Account Sub-Account
was set at an arbitrary amount for the first Valuation Period of the particular
Variable Account Sub-Account. The Variable Account commenced operations on
September 30, 1998. The Accumulation Unit value for a Sub-Account for any later
Valuation Period is determined as follows:
(1) The total value of Fund shares held in the Sub-Account is calculated by
multiplying the number of Fund shares owned by the Sub-Account at the
beginning of the Valuation Period by the net asset value per share of the
Fund at the end of the Valuation Period, and adding any dividend or other
distribution of the Fund if an ex-dividend date occurs during the
Valuation Period; minus
3
<PAGE>
(2) The liabilities of the Sub-Account at the end of the Valuation Period;
such liabilities include daily charges imposed on the Sub-Account, and
may include a charge or credit with respect to any taxes paid or reserved
for by Lincoln Life that Lincoln Life determines result from the
operations of the Variable Account; and
(3) The result of (2) is divided by the number of Sub-Account units
outstanding at the beginning of the Valuation Period.
The daily charges imposed on a Sub-Account for any Valuation Period are
equal to the daily mortality and expense risk charge and the daily
administrative charge multiplied by the number of calendar days in the Valuation
Period.
The Variable Account portion of the Annuity Account Value, if any, for any
Valuation Period is equal to the sum of the value of all Variable Accumulation
Units of each Variable Account Sub-Account credited to the Contract for such
Valuation Period. The value in a Contract of each Variable Account Sub-Account
is determined by multiplying the number of Variable Accumulation Units, if any,
credited to such Variable Account Sub-Account in a Contract by the Variable
Accumulation Unit Value of the particular Variable Account Sub-Account for such
Valuation Period.
SAMPLE CALCULATIONS AND TABLES
VARIABLE ACCOUNT UNIT VALUE CALCULATIONS
VARIABLE ACCUMULATION UNIT VALUE CALCULATION. Assume the net asset value of
a Fund share at the end of the current Valuation Period is $15.50; the total
number of shares owned by the sub-account at the start of the current Valuation
Period is 300.000 shares; and the number of outstanding units of the sub-account
at the start of the Valuation Period is 2,000,000 units. Also assume that the
Valuation Period is one day; no dividends or distributions caused Fund shares to
go "ex-dividend" during the current Valuation Period and the net asset value of
the Fund share at the end of the immediately preceding Valuation Period is
$15.33.
Multiplying the one day mortality and expense risks and the administrative
expense charge of .00003835616 (the daily equivalent of the current charge of
1.40% on an annual basis) by the account asset value of the sub-account at the
start of the current Valuation Period derives a daily mortality expense of
$176.40 [.00003835616 x (15.33 x 300,000)]. Subtracting the daily mortality
expense from the sub-account assets at the end of the current Valuation Period
derives the sub-account net assets of $4,649,823.60 [($15.50 x 300,000) -
$176.40)]. Dividing the sub-account net assets by the number of outstanding
units at the start of the current valuation period derives the Variable
Accumulation Unit Value of $2.324912 [4,649,823.60/2,000,000].
VARIABLE ANNUITY UNIT VALUE CALCULATION. Assume that the Accumulation Unit
Value at the end of the immediately preceding Valuation Period is $2.299413; and
the assumptions in the above example exist. Divide the current Accumulation Unit
Value by the previous day's Accumulation Unit Value to derive the net investment
factor of 1.0110894 [($2.324912/$.299413]. Also, assume that the value of an
Annuity Unit for the immediately preceding Valuation Period had been $7.686895.
As the first variable annuity payment is determined by using an assumed interest
rate of 4% per year, the value of the Annuity Unit for the current Valuation
Period would be $1.604320 [$1.586895 x 1.00110894 (net investment factor) x
.9998926]. .9998926 is the factor, for a one day Valuation Period, that
neutralizes the assumed interest ratio of four percent (4%) per year used to
establish the Annuity Purchase Rates found in the Contract.
VARIABLE ANNUITY PAYMENT CALCULATION. Assume that a Participant's Variable
Annuity Account is credited with 30,000,000 Variable Accumulation Units of a
particular sub-account; that the Variable Accumulation Unit Value and the
Annuity Unit Value for the particular sub-account for the Valuation Period which
ends immediately preceding the Annuity Date are $2.324912 and $1.604320
respectively; that the Annuity Purchase Rate for the age and option elected is
$5.30 per $1,000; and that the Annuity Unit Value at the end of the Valuation
Period 14 days prior to the second variable annuity payment date is $1.620252.
The first variable annuity payment would be $369.66 (30,000,000 x $2.324912 x
$5.30 divided by 1,000). The number of Annuity units credited would be 230.415
($369.66 divided by $1.604320) and the second variable annuity payment would be
$373.33 (230.415 x $1.620252).
4
<PAGE>
WITHDRAWAL CHARGE AND MARKET VALUE ADJUSTMENT TABLES
The following example illustrates the detailed calculations for a $50,000
deposit into the Fixed Account with a guaranteed rate of 4.5% for a duration of
five years. The intent of the example is to show the effect of the Market Value
Adjustment ("MVA") and the 3% minimum guarantee under various interest rates on
the calculation of the cash surrender (withdrawal) value. Any charges for
optional death benefit risks are not taken into account in the example. The
effect of the MVA is reflected in the index rate factor in column (2) and the
minimum 3% guarantee is shown under column (4) under the "Surrender Value
Calculation". The "Surrender Charge Calculation" assumes there have been no
prior withdrawals and illustrates the operation of the Fifteen Percent Free
provision of the Contract. The "Market Value Adjustment Tables" and "Minimum
Value Calculation" contain the explicit calculation of the index factors and the
3% minimum guarantee respectively. The "Annuity Value Calculation" and "Minimum
Value" calculations assume the imposition of the annual $35 Annuity Account Fee
charge, but that fee is waived if the Annuity Account Value at the end of a
Contract Year is $100,000 or more. The results would be slightly different for
New York Contracts which have a $30 annual Account Fee.
WITHDRAWAL CHARGE TABLES
SAMPLE CALCULATIONS FOR MALE 35 ISSUE
CASH SURRENDER VALUES
<TABLE>
<S> <C>
Single Premium............................... $50,000
Premium taxes................................ None
Withdrawals.................................. None
Guaranteed Period............................ 5 years
Guaranteed Interest Rate..................... 4.50%
Annuity Date................................. Age 70
Index Rate A................................. 5.00%
Index Rate B................................. 6.00% End of contract year 1
5.50% End of contract year 2
5.00% End of contract year 3
4.00% End of contract year 4
Percentage adjustment to B................... 0.50%
</TABLE>
SURRENDER VALUE CALCULATION
<TABLE>
<CAPTION>
(3)
(1) (2) ADJUSTED (4) (5) (6) (7)
ANNUITY INDEX RATE ANNUITY MINIMUM GREATER OF SURRENDER SURRENDER
CONTRACT YEAR VALUE FACTOR VALUE VALUE (3)&(4) CHARGE VALUE
- -------------------- --------- ---------- ------------ --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1................... $ 52,215 0.944841 $ 49,335 $ 51,465 $ 51,465 $ 3,500 $ 47,965
2................... $ 54,530 0.971964 $ 53,001 $ 52,974 $ 53,001 $ 3,500 $ 50,001
3................... $ 56,949 0.890544 $ 56,410 $ 54,528 $ 58,410 $ 2,500 $ 53,910
4................... $ 59,476 1.004785 $ 59,761 $ 56,129 $ 59,761 $ 2,000 $ 57,761
5................... $ 62,118 NA $ 62,118 $ 57,778 $ 62,118 $ 1,500 $ 60,618
</TABLE>
ANNUITY VALUE CALCULATION
<TABLE>
<CAPTION>
CONTRACT YEAR
- --------------------
<S> <C>
1................... $50,000 X 1.045 - $35 = $52,215
2................... $52,215 X 1.045 - $35 = $54,530
3................... $54,530 X 1.045 - $35 = $56,949
4................... $56,949 X 1.045 - $35 = $59,476
5................... $59,476 X 1.045 - $35 = $62,118
</TABLE>
5
<PAGE>
SURRENDER CHARGE CALCULATION
<TABLE>
<CAPTION>
CONTRACT YEAR SC FACTOR SURRENDER CHG
- -------------------- ----------- -------------
<S> <C> <C>
1................... 0.07 $ 3,500
2................... 0.06 $ 3,000
3................... 0.05 $ 2,500
4................... 0.04 $ 2,000
5................... 0.03 $ 1,500
</TABLE>
MARKET VALUE ADJUSTMENT TABLES
INTEREST RATE FACTOR CALCULATION
<TABLE>
<CAPTION>
CONTRACT YEAR INDEX A INDEX B ADJ INDEX B N RESULT
- -------------------- --------- --------- ----------- --- ----------
<S> <C> <C> <C> <C> <C>
1................... 5.00% 6.00% 6.50% 4 0.944841
2................... 5.00% 5.50% 6.00% 3 0.971964
3................... 5.00% 5.00% 5.50% 2 0.990544
4................... 5.00% 4.00% 4.50% 1 1.004785
5................... 5.00% NA NA NA NA
</TABLE>
MINIMUM VALUE CALCULATION
<TABLE>
<CAPTION>
CONTRACT YEAR
- --------------------
<S> <C>
1................... $50,000 X 1.03 - $35 = $51,465
2................... $51,465 X 1.03 - $35 = $52,974
3................... $52,974 X 1.03 - $35 = $54,528
4................... $54,528 X 1.03 - $35 = $56,129
5................... $56,129 X 1.03 - $35 = $57,778
</TABLE>
STATE REGULATION OF LINCOLN LIFE
Lincoln Life, an Indiana corporation, is subject to regulation by the
Indiana Department of Insurance. An annual statement is filed with the Indiana
Department of Insurance each year covering the operations and reporting on the
financial condition of Lincoln Life as of December 31 of the preceding year.
Periodically, the Indiana Department of Insurance or other authorities examine
the liabilities and reserves of Lincoln Life and the Variable Account, and a
full examination of Lincoln Life's operations is conducted periodically by the
Indiana Department of Insurance. In addition, Lincoln Life is subject to the
insurance laws and regulations of other states within which it is licensed to
operate. Generally, the Insurance Department of any other state applies the laws
of the state of domicile in determining permissible investments.
A Contract is governed by the laws of the state in which it is delivered.
The values and benefits of each Contract are at least equal to those required by
such state.
ADMINISTRATION
All accounts, books, records and other documents which are required to be
maintained for the Variable Account are maintained by Lincoln Life. No separate
charge against the assets of the Variable Account is made by Lincoln Life for
this service. We have entered into an agreement with Delaware Service Co., 2005
Market Street, Philadelphia, PA 19203, to provide accounting services to the
Variable Account.
ACCOUNT INFORMATION
At least once during each Calendar Year, Lincoln Life will furnish the Owner
with a report showing the Annuity Account Value at the end of the preceding
Calendar Year, all transactions during the reporting period, the current Annuity
Account Value, the number of Accumulation Units in each Variable Account
Sub-Account Accumulation Account and the applicable Accumulation Unit Value as
of the date of the
6
<PAGE>
report. In addition, each person having voting rights in the Variable Account
and a Fund or Funds will receive each such reports or prospectuses as may be
required by the Investment Company Act of 1940 and the Securities Act of 1933.
Lincoln Life will also send each Owner such statements reflecting transactions
in the Owner's Annuity Account as may be required by applicable laws, rules and
regulations.
Upon request to its Administrative Office, Lincoln Life will provide an
Owner with information regarding fixed and variable accumulation values.
DISTRIBUTION OF THE CONTRACTS
Lincoln Life is the principal underwriter for the Contracts, which are
offered continuously. Delaware Distributors, L.P. will perform certain marketing
and other ancillary functions as described in the Prospectus.
Sales charges on and exchange privileges under the Contracts are described
in the Prospectus. There are no variations in the prices at which the Contracts
are offered for certain types of purchasers.
CUSTODY OF ASSETS
Lincoln Life is the custodian of the assets of the Variable Account. Lincoln
Life will purchase Fund shares at net asset value in connection with amounts
allocated to the Variable Account Sub-Accounts in accordance with the
instructions of the Purchasers and redeem Fund shares at net asset value for the
purpose of meeting the contractual obligations of the Variable Account, paying
charges relative to the Variable Account or making adjustments for annuity
reserves held in the Variable Account. The assets of the Sub-Accounts of the
Variable Account are held separate and apart from the assets of any other
segregated asset accounts of Lincoln Life and separate and apart from Lincoln
Life's general account assets. Lincoln Life maintains records of all purchases
and redemptions of shares of each Fund held by each of the Sub-Accounts of the
Variable Account.
HISTORICAL PERFORMANCE DATA
MONEY MARKET SUB-ACCOUNT YIELD
There currently is no yield for the Money Market Sub-Account, as it has not
commenced operations as of the date of the Statement of Additional Information.
TOTAL RETURNS
Lincoln Life may from time to time advertise or disclose annual average
total returns for one or more of the Sub-Accounts of the Variable Account for
various periods of time. When a Sub-Account has been in operation for 1, 5 and
10 years, respectively, the total return for these periods will be provided.
Total returns for other periods of time may from time to time also be disclosed.
Total returns represent the average annual compounded rates of return that would
equate the initial amount invested to the redemption value of that investment as
of the last day of each of the periods.
Total returns will be calculated using Sub-Account Unit Values which Lincoln
Life calculates on each Valuation Period based on the performance of the
Sub-Account's underlying Fund, and the deductions for the mortality and expense
risk charge, the administrative expense charge, and the Account Fee. The Account
Fee is reflected by dividing the total amount of such charges collected during
the year that are attributable to the Variable Account by the total average net
assets of all the Variable Sub-Accounts. The resulting percentage is deducted
from the return in calculating the ending redeemable value. These
7
<PAGE>
figures will not reflect any premium taxes. Total return calculations will
reflect the effect of deferred sales charges that may be applicable to a
particular period. The total return will then be calculated according to the
following formula:
P(1+T)to the power of n = ERV
Where: P = A hypothetical initial Premium Payment of $1,000.
T = Average annual total return.
n = Number of years in the period.
ERV = Ending redeemable value of a hypothetical $1,000
payment made at the beginning of the one, five or
ten-year period, at the end of the one, five or
ten-year period (or fractional portion thereof).
OTHER PERFORMANCE DATA
Lincoln Life may from time to time also disclose average annual total
returns in a non-standard format in conjunction with the standard format
described above. The non-standard format will be identical to the standard one
except that the deferred sales charge percentage will be assumed to be 0%.
Lincoln Life may from time to time disclose cumulative total returns in
conjunction with the standard format described above. The cumulative returns
will be calculated using the following formula assuming that the deferred sales
charge percentage will be 0%.
CTR = (ERV/P) - 1
Where: CTR = The cumulative total return net of Sub-Account
recurring charges for the period.
ERV = The ending redeemable value of the hypothetical
investment made at the beginning of the one, five
or ten-year period, at the end of the one, five or
ten-year period (or fractional portion thereof).
P = A hypothetical initial payment of $10,000
All non-standard performance data will only be advertised if the standard
performance data is also disclosed.
Lincoln Life may also from time to time use advertising which includes
hypothetical illustrations to compare the difference between the growth of a
taxable investment and a tax-deferred investment in a variable annuity.
INDEPENDENT AUDITORS
The Statutory-basis financial statements and schedules of Lincoln Life
appearing in this Statement of Additional Information and Registration Statement
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report which also appears elsewhere in this document and in the
Registration Statement. The statutory-basis financial statements and schedules
audited by Ernst & Young LLP have been included in this document in reliance on
their report given on their authority as experts in accounting and auditing.
FINANCIAL STATEMENTS
Statutory-basis Financial Statements and Schedules for Lincoln Life appear
on the following pages. The Variable Account has no Financial Statements, as it
has not commenced operations as of the date of this Statement of Additional
Information.
8
<PAGE>
PART C
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements provided in the Statement of Additional Information.
The following statutory-basis financial statements and schedules of Lincoln
National Life Insurance Co. are included in the SAI:
Balance Sheets -- Statutory Basis -- Years ended December 31, 1997 and
1996
Statements of Income -- Statutory Basis -- Years ended December 31,
1997, 1996 and 1995
Statements of Capital and Surplus -- Statutory Basis -- Years ended
December 31, 1997, 1996 and 1995
Notes to Statutory-basis Financial Statements -- December 31, 1997
Supplemental Schedule of Selected Statutory Basis Financial Data --
December 31, 1997
Report of Ernst & Young LLP, Independent Auditors
(b) Exhibits
(1)
Resolution of Board of Directors and Memorandum from the President Of The
Lincoln National Life Insurance Company authorizing establishment of the
Variable Account are incorporated herein by reference to Registration
Statement on Form N-4 (333-40937) filed on November 24, 1997.
(2)
Not Applicable.
(3)
(a) Form of Selling Agreement is incorporated herein by reference to
Pre-Effective Amendment No. 1 to the Registration Statement on Form
N-4 (333-40937) filed on September 3, 1998.
(b) Form of Wholesale Agreement
(4)
The Lincoln National Life Insurance Company Variable Annuity Contract is
incorporated herein by reference to Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-4 (333-40937) filed on September 3,
1998.
(a) Form of Settlement Contract Rider is incorporated herein by reference
to Pre-Effective Amendment No. 1 to the Registration Statement on
Form N-4 (333-40937) filed on September 3, 1998.
(b) Form of Income Contract Rider is incorporated herein by reference to
Pre-Effective Amendment No. 1 to the Registration Statement on Form
N-4 (333-40937) filed on September 3, 1998.
(5)
Form of Application for the Contract is incorporated herein by reference
to Registration Statement on Form N-4 (333-40937) filed on November 24,
1997.
(6)
(a) Articles of Incorporation of The Lincoln National Life Insurance
Company are incorporated herein by reference to Registration
Statement on Form N-4 (33-27783) filed on December 5, 1996.
(b) By-Laws of The Lincoln National Life Insurance Company.
(7)
Not Applicable.
(8)
(a) Forms of Fund Participation Agreements are incorporated herein by
reference to Pre-Effective Amendment No. 1 to the Registration Statement
on Form N-4 (333-40937) filed on September 3, 1998 unless otherwise noted.
Agreements between The Lincoln National Life Insurance Company and:
(i) AIM Variable Insurance Funds, Inc.
(ii)BT Insurance Funds Trust
C-1
<PAGE>
(iii)
Delaware Group Premium Fund, Inc. is incorporated herein by reference
to Registration Statement on Form N-4 (File No. 33-25990) filed on
April 22, 1998.
(iv)Dreyfus Variable Investment Fund is incorporated herein by reference
to Registration Statement on Form N-4 (333-05815) filed on September
26, 1996.
(v) Investors Fund Series
(a) Kemper Government Securities Fund
(b) Kemper Small Cap Growth Fund
(vi)Liberty Variable Investment Trust
(a) Newport Tiger Fund
(b) U.S. Stock Fund
(vii)
Lincoln National Bond Fund, Inc.
(viii)
Lincoln National Money Market Fund, Inc.
(ix)Variable Insurance Products Fund is incorporated herein by reference
to Registration Statement on Form N-4 (File No. 333-04999) filed on
September 26, 1996.
(x) Variable Insurance Products Fund III
(xi)MFS-Registered Trademark- Variable Insurance Trust
(xii)
OCC Accumulation Trust
(b) Service agreement between Delaware Management Holdings, Inc.,
Delaware Services Company, Inc. and Lincoln National Life Insurance
Company is incorporated herein by reference to the registration
statement of Lincoln National Flexible Premium Variable Life Account
F, Form S-6 (333-40745) filed November 21, 1997.
(9)
Opinion and Consent of Jeremy Sachs, Senior Counsel of The Lincoln
National Life Insurance Company are incorporated herein by reference to
Pre-Effective Amendment No. 1 to the Registration Statement on Form N-4
(333-40937) filed on September 3, 1998.
(10)
Consent of Ernst & Young LLP, Independent Auditors.
(11)
Not Applicable.
(12)
Not Applicable.
(13)
Schedule for Computation of Performance Results are incorporated herein
by reference to Pre-Effective Amendment No. 1 to the Registration
Statement on Form N-4 (333-40937) filed on September 3, 1998.
(14)
Not Applicable.
(15)
(a) Organizational Chart of The Lincoln National Insurance Holding
Company System.
(b) Books and Records Report are incorporated herein by reference to
Pre-Effective Amendment No. 1 to the Registration Statement on Form
N-4 (333-40937) filed on September 3, 1998.
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
NAME POSITIONS AND OFFICES WITH DEPOSITOR
- ------------------------------ ---------------------------------------------
President, Chief Executive Officer and
Gabriel L. Shaheen* Director
Jon A. Boscia** Director
John H. Gotta**** Senior Vice President
Stephen H. Lewis* Senior Vice President
C-2
<PAGE>
<TABLE>
<S> <C>
H. Thomas McMeekin** Director
Lawrence T. Rowland*** Executive Vice President and Director
Keith J. Ryan* Senior Vice President, Chief Financial
Officer and Assistant Treasurer
Richard C. Vaughan** Director
Roy V. Washington* Vice President and Chief Compliance Officer
Janet C. Chrzan** Vice President and Treasurer
C. Suzanne Womack** Secretary and Assistant Vice President
</TABLE>
* Principal business address is 1300 South Clinton Street, Fort
Wayne, Indiana 46802.
** Principal business address is 200 East Berry Street, Fort Wayne,
Indiana 46802-2706.
*** Principal business address is 1700 Magnovox Way, One Reinsurance
Place, Fort Wayne, Indiana 46804.
**** Principal business address is 900 Cottage Grove Road, Bloomfield,
CT 06152-2321.
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
REGISTRANT
See Exhibit 15(a): Organizational Chart of The Lincoln National Life
Insurance Holding Company System.
ITEM 27. NUMBER OF PURCHASERS
Not applicable, since this separate account had not yet commenced
operations.
ITEM 28. INDEMNIFICATION
(a) Brief description of indemnification provisions.
In general, Article VII of the By-Laws of The Lincoln National Life
Insurance Company (LNL) provides that LNL will indemnify certain persons
against expenses, judgments and certain other specified costs incurred by
any such person if he/she is made a party or is threatened to be made a
party to a suit or proceeding because he/she was a director, officer, or
employee of LNL, as long as he/she acted in good faith and in a manner he/
she reasonably believed to be in the best interests of, or not opposed to
the best interests of, LNL. Certain additional conditions apply to
indemnification in criminal proceedings.
In particular, separate conditions govern indemnification of directors,
officers, and employees of LNL in connection with suits by, or in the right
of, LNL.
Please refer to Article VII of the By-Laws of LNL (Exhibit No. 6(b) hereto)
for the full text of the indemnification provisions. Indemnification is
permitted by, and is subject to the requirements of, Indiana law.
(b) Undertaking pursuant to Rule 484 of Regulation C under the Securities Act of
1933.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions described in Item 28(a) above 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 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 the successful defense
of any such action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities 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 Act and will be governed by the
final adjudication of such issue.
C-3
<PAGE>
ITEM 29. PRINCIPAL UNDERWRITER
(a) Lincoln National Variable Annuity Fund A (Group); Lincoln National Variable
Annuity Fund A (Individual); Lincoln National Variable Annuity Account C;
Lincoln National Flexible Premium Variable Life Account D; Lincoln National
Flexible Premium Variable Life Account F; Lincoln Life Flexible Premium
Variable Life Account J; Lincoln Life Flexible Premium Variable Life Account
K; Lincoln National Variable Annuity Account L; Lincoln Life Flexible
Premium Variable Life Account M; Lincoln Life Flexible Premium Variable Life
Account R; Lincoln Life Variable Annuity Account Q; Lincoln National
Variable Annuity Account 53.
(b) See Item 25.
(c) Lincoln Life received no commissions nor other compensation from the
Variable Account during the fiscal year which ended December 31, 1997
because the Variable Account had not yet commenced operations.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
See Exhibit 15(b): Books and Records Report.
ITEM 31. MANAGEMENT SERVICES
Not applicable.
ITEM 32. UNDERTAKINGS
(a) Registrant undertakes that it will file a post effective amendment to this
registration statement under the Securities Act of 1933 as frequently as
necessary to ensure that the audited financial statements in the
registration statement are never more than 16 months old for so long as
Payments under the variable annuity contracts may be accepted.
(b) Registrant undertakes that it will include either (i) a postcard or similar
written communication affixed to or included in the Prospectus that the
applicant can remove to send for a Statement of Additional Information or
(ii) a space in the Contract application or order to purchase that an
applicant can check to request a Statement of Additional Information.
(c) Registrant undertakes to deliver promptly, upon written or oral request made
to The Lincoln National Life Insurance Company at the address or phone
number listed in the Prospectus, any Statement of Additional Information and
any financial statements required by Form N-4 to be made available to
applicants or owners.
(d) The Lincoln National Life Insurance Company hereby represents that the fees
and charges deducted under the Contracts, in the aggregate, are reasonable
in relation to the services rendered, the expenses expected to be incurred,
and the risks assumed by The Lincoln National Life Insurance Company.
(e) Registrant represents that it is relying on the American Council of Life
Insurance (avail. Nov. 28, 1988) no-action letter with respect to Contracts
used in connection with retirement plans meeting the requirements of Section
403(b) of the Internal Revenue Code, and represents further that it will
comply with the provisions of paragraphs (1) through (4) set forth in that
no-action letter.
(f) For Contracts sold in connection with the Texas Optional Retirement Program,
Registrant is relying on Rule 6c-7 and represents that paragraphs (a)
through (d) of that rule have been complied with.
C-4
<PAGE>
SIGNATURES
(a) As required by the Securities Act of 1933 and the Investment Company Act
of 1940, the Registrant certifies that it meets the requirements of Securities
Act Rule 485(b) for effectiveness of this Amendment and has caused the Amendment
to the Registration Statement to be signed on its behalf, in the City of Fort
Wayne and State of Indiana on the 9th day of November, 1998.
LINCOLN LIFE VARIABLE ANNUITY
ACCOUNT N (Delaware-Lincoln Choice
Plus)
(Registrant)
By: /s/ STEPHEN H. LEWIS
-----------------------------------
Stephen H. Lewis
(SIGNATURE-OFFICER OF DEPOSITOR)
SENIOR VICE PRESIDENT, LNL
(TITLE)
By: THE LINCOLN NATIONAL LIFE
INSURANCE COMPANY
(Depositor)
By: /s/ GABRIEL L. SHAHEEN
-----------------------------------
Gabriel L. Shaheen
CHIEF EXECUTIVE OFFICER
(TITLE)
<PAGE>
(b) As required by the Securities Act of 1933, this Amendment to the
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- -------------------------------------- --------------------
<C> <S> <C>
/s/ GABRIEL L. SHAHEEN Chief Executive Officer, President and November 9, 1998
------------------------------------ Director (Principal Executive
Gabriel L. Shaheen Officer)
/s/ LAWRENCE T. ROWLAND
------------------------------------
Lawrence T. Rowland Executive Vice President and Director November 9, 1998
Senior Vice President, Chief Financial November 9, 1998
/s/ KEITH J. RYAN Officer and Assistant Treasurer
------------------------------------ (Principal Accounting Officer and
Keith J. Ryan Principal Financial Officer)
/s/ H. THOMAS MCMEEKIN
------------------------------------
H. Thomas McMeekin Director November 9, 1998
/s/ RICHARD C. VAUGHAN
------------------------------------
Richard C. Vaughan Director November 9, 1998
/s/ JON A. BOSCIA
------------------------------------
Jon A. Boscia Director November 9, 1998
</TABLE>
<PAGE>
WHOLESALING AGREEMENT
AGREEMENT dated as of October _________, 1999, by and between The Lincoln
National Life Insurance Company ("Lincoln"), in its capacity as principal
underwriter for one or more of its insurance and/or annuity separate
accounts, and DELAWARE DISTRIBUTORS, L.P., a Delaware limited partnership
(hereinafter referred to as "DELAWARE").
WITNESSETH:
WHEREAS, Lincoln issues and sells certain variable annuity and variable life
insurance contracts acting as its own principal underwriter for such
contracts; and
WHEREAS, Lincoln and DELAWARE desire to establish an arrangement whereby
DELAWARE will act as a wholesaler for such variable annuity contracts and
variable life insurance contracts and, as such, will recruit business firms
to distribute such contracts;
NOW, THEREFORE, in consideration of their mutual promises, Lincoln, and
DELAWARE hereby agree as follows:
1. DEFINITIONS
a. 1933 ACT -- The Securities Act of 1933, as amended.
b. 1934 ACT -- The Securities Exchange Act of 1934, as amended.
c. 1940 ACT -- The Investment Company Act of 1940, as amended.
d. ACCOUNT -- Each and any separate account established by Lincoln and
listed on Schedule 1.a to this Agreement, as amended from time to
time in accordance with Section 2.e of this Agreement. The phrase
"Account supporting the Contracts" or "Account supporting a class of
Contracts" shall mean the separate account identified in such
Contracts as the separate account to which the Purchase Payments
made under such Contracts are allocated and as to which income,
gains and losses, whether or not realized, from assets allocated to
such separate account,
<PAGE>
are, in accordance with such Contracts, credited to or charged
against such separate account without regard to other income,
gains, or losses of Lincoln or any other separate account
established by Lincoln.
e. ASSOCIATED PERSON -- This term as used in this Agreement shall have
the meaning assigned to it in the 1934 Act.
f. BROKER -- An entity registered as a broker-dealer and licensed as a
life insurance agent or associated with an entity so licensed in
accordance with any applicable SEC no-action letter, and recruited
by DELAWARE and subsequently authorized by Lincoln to distribute the
Contracts pursuant to a sales agreement with Lincoln entered into in
accordance with Section 3 of this Agreement.
g. CONTRACTS -- The variable annuity contracts or variable life
insurance contracts described more specifically on Schedule 1.b to
this Agreement, as amended from time to time pursuant to Section
2.e. The term "Contracts" shall include any riders to such
contracts and any other contracts offered in connection therewith or
any contracts for which such Contracts may be exchanged or
converted. The phrase "a class of Contracts" shall mean those
variable annuity contracts or variable life insurance contracts, as
the case may be, issued on the same policy form or forms and covered
by the same Registration Statement, as shown on Schedule 1.b to this
Agreement.
h. DISTRIBUTOR -- The Lincoln National Life Insurance Company,
principal underwriter for the Contracts.
i. FUND -- Any fund or series thereof in which an Account supporting
the Contracts invests. (Plural, "Funds")
j. FUND PROSPECTUS -- At any time while this Agreement is in effect,
the prospectus for a Fund most recently filed with the SEC pursuant
to Rule 497 under the 1933 Act. (For purposes of Section 11 of this
Agreement, however, the term "Fund Prospectus" means any document
that is or at any time was a Fund Prospectus within the meaning of
this Section l.g.)
k. FUND REGISTRATION STATEMENT -- At any time while this Agreement is
in effect, the
<PAGE>
currently effective registration statement filed with the SEC
under the 1933 Act, or currently effective post-effective
amendment thereto, for shares of a Fund. (For purposes of Section
11 of this Agreement, however, the term "Fund Registration
Statement" means any document that is or at any time was a Fund
Registration Statement within the meaning of this Section 1.f.)
l. NASD -- The National Association of Securities Dealers, Inc.
m. PARTICIPATION AGREEMENT -- An agreement between Lincoln and a Fund
relating to the investment of assets of Lincoln separate accounts in
such Fund.
n. PROCEDURES -- The administrative procedures prepared and distributed
by Lincoln, as such may be amended or supplemented from time to
time, relating to the solicitation, sale and delivery of the
Contracts.
o. PROSPECTUS -- At any time while this Agreement is in effect, the
current prospectus most recently filed with the SEC pursuant to Rule
497 of the 1933 Act. (For purposes of Sections 5.a and 11 of this
Agreement, however, the term "any Prospectus" means any document
that is or at any time was a Prospectus within the meaning of this
Section 1.d.)
p. PURCHASE PAYMENT -- A payment made under a Contract by an applicant
or purchaser to purchase benefits under the Contract.
q. REGISTRATION STATEMENT -- At any time while this Agreement is in
effect, the pending registration statement filed with the SEC under
the 1933 Act, the currently effective registration statement, or
currently effective post-effective amendment thereto, as applicable,
relating to a class of Contracts, including financial statements
included in, and all exhibits to, such registration statement or
post-effective amendment. (For
purposes of Sections 5.a and 11 of this Agreement, however, the term
"Registration Statement" means any document that is or at any time
was a Registration Statement within the meaning of this Section
1.c.) REGISTRATION STATEMENT -- At any time while this
<PAGE>
Agreement is in effect, the pending registration statement filed
with the SEC under the 1933 Act, the currently effective
registration statement, or currently effective post-effective
amendment thereto, as applicable, relating to a class of
Contracts, including financial statements included in, and all
exhibits to, such registration statement or post-effective
amendment. (For
purposes of Sections 5.a and 11 of this Agreement, however, the term
"Registration Statement" means any document that is or at any time
was a Registration Statement within the meaning of this Section
1.c.)
r. REGULATIONS -- The rules and regulations promulgated by the SEC
under the 1933 Act, the 1934 Act and the 1940 Act as in effect at
the time this Agreement is executed or thereafter promulgated, and
as they may be amended from time to time.
s. REPRESENTATIVE -- An Associated Person of DELAWARE or a Broker
registered with the NASD as a registered representative or principal
of DELAWARE or Broker, as the case may be.
t. SEC -- The Securities and Exchange Commission
u. STATE -- any state or commonwealth of the United States, the
District of Columbia or any other territory of the United States.
v. TERRITORY -- Any State or territory of the United States (including
the District of Columbia) where the contracts have been filed and
approved for sale by the appropriate regulatory authorities.
w. WHOLESALER -- Delaware Distributors, L.P., when it performs the
functions assigned to it in this agreement (including, but not by
way of limitation, those functions set forth in Sections 2, 3 and 4
hereof).
2. APPOINTMENT AND WHOLESALING DUTIES
<PAGE>
a. Lincoln hereby authorizes DELAWARE under applicable securities laws to
engage in the activities contemplated in this Agreement relating to the
wholesaling of the Contracts for which Lincoln acts as principal
underwriter.
b. DELAWARE undertakes to use its best efforts to, contact, recruit, screen,
and recommend Brokers in accordance with Section 3 of this Agreement,
consistent with market conditions and compliance with its responsibilities
under the federal securities laws and NASD rules and regulations.
c. (1) The appointment and authorization of DELAWARE to engage in
wholesaling activities pursuant to this Agreement is not exclusive as to
the Contracts listed on Schedule 1.b, as amended from time to time in
accordance with Section 2.e of this Agreement, and Lincoln may authorize
any other person (as principal underwriter or otherwise) to engage in
wholesaling or distribution activities with respect to the Contracts or to
recruit business firms to engage in wholesaling or distribution activities
with respect to the Contracts, including business firms recommended by
DELAWARE pursuant to Section 3 of this Agreement, and Lincoln may
separately engage in wholesaling and distribution activities relating to
the Contracts.
(2) To the extent that any Contract offers a general account option,
Lincoln shall, if required, register that option under the 1933 Act.
(3) Lincoln shall register each Account with the SEC. The subaccounts
of each Account available under the Contracts or a class of Contracts are
listed on Schedule 1.a to this Agreement, as amended from time to time in
accordance with Section 2.e of this Agreement.
d. Lincoln shall obtain appropriate authorizations, to the extent necessary,
whether by registration, qualification, approval or otherwise, for the
issuance and sale of the Contracts in each State (provided, however, that
it shall be within Lincoln's discretion
<PAGE>
whether to obtain such authorization in Hawaii, Guam, the U.S. Virgin
Islands, Puerto Rico or American Samoa, or for any U.S. military base).
From time to time Lincoln shall notify DELAWARE in writing of all States
in which each class of Contracts may then lawfully be offered.
e. The parties to this Agreement may amend Schedules 1.a and 1.b to this
Agreement from time to time by mutual agreement to reflect changes in or
relating to the Contracts and the Accounts and to add new classes of
variable annuity contracts and variable life insurance contracts to be
issued by Lincoln for which DELAWARE will act as wholesaler. The
provisions of this Agreement shall be equally applicable to each such class
of Contracts, unless the context otherwise requires. Schedule 9.a to this
Agreement may be amended only by mutual agreement of the parties to this
Agreement pursuant to Section 9 of this Agreement.
f. The responsibility for selecting, eliminating, and substituting underlying
funding options for each Account rests exclusively with Lincoln.
3. RECRUITMENT OF BROKERS AND RELATED RESPONSIBILITIES
a. Lincoln hereby authorizes DELAWARE to contact, recruit, screen, and
recommend to Lincoln business firms appropriate to act as Brokers for the
sale of the Contracts, and Delaware agrees to do so. Delaware will use its
best efforts, upon diligent inquiry to recruit only brokers which are
members in good standing of the NASD, and which are under no legal
restriction that would prevent them from selling the Contracts. Lincoln
shall have the right to reject any such recommendation, but shall not do so
arbitrarily or unreasonably.
b. Lincoln shall have the responsibility for and bear the cost of: (i)
executing appropriate sales agreements with the business firms recommended
by DELAWARE; and (ii) appointing, with the assistance of DELAWARE (see
Paragraph 3 (d) below), such business firms, and/or Associated Persons of
such firms, as insurance agents of Lincoln in those States where such
business firms and/or Associated Persons possess insurance
<PAGE>
agent licenses. Neither DELAWARE nor Lincoln shall have responsibility
for, or bear the cost of, any registration or licensing of Brokers or
any of their Associated Persons with the SEC, NASD or any state
insurance governmental or regulatory agency. The costs of appointment
shall be borne as provided in Section 9.c hereof. Lincoln shall
maintain the appointment records of all agents appointed by Lincoln to
distribute the Contracts contemplated by this Agreement.
c. Any sales agreement entered into by Lincoln with a Broker shall provide
that:
(1) The Broker (or an affiliated person duly registered as a
broker-dealer with the SEC) shall train, supervise, and be solely
responsible for the conduct of, all of its Associated Persons in the
proper method of solicitation, sale and delivery of the Contracts for
the purpose of complying on a continuous basis with the NASD Conduct
Rules and with federal and state securities and insurance law
requirements applicable in connection with the offering and sale of the
Contracts;
(2) Purchase Payments shall be made payable to Lincoln and shall be
delivered together with all applications and related information in
accordance with the Procedures;
(3) The Broker shall be solely responsible for all compensation paid to
its Representatives and all related tax reporting that may be required
under applicable law;
(4) The Broker and its Representatives shall not use, develop or
distribute any promotional, sales or advertising material that has not
been approved in writing by Lincoln and filed with the appropriate
governmental or regulatory agencies; and
(5) The Broker shall not have authority, on behalf of Lincoln or
DELAWARE, to make, alter or discharge any Contract or other contract
entered into pursuant to a Contract; to waive any Contract forfeiture
provision; to extend the time of paying any Purchase Payment; to receive
any monies or Purchase Payments (except for the sole purpose of
forwarding monies or Purchase Payments to Lincoln); or to expend, or
<PAGE>
contract for the expenditure of, funds of Lincoln or DELAWARE.
d. DELAWARE shall provide assistance to Lincoln in the appointment procedure
applicable to Brokers and their Representatives as may be reasonably
acceptable to Lincoln.
e. DELAWARE shall train, supervise, and be solely responsible for the conduct
of, all of its Associated Persons (but not Brokers or their Representatives
unaffiliated with DELAWARE), for the purpose of complying on a continuous
basis with the NASD Conduct Rules and with federal securities laws and
state securities and insurance laws applicable to the wholesaling
activities contemplated in this Agreement. DELAWARE shall be responsible
for the maintenance and updating of broker-dealer or agent registrations
that they determine to be necessary for themselves and/or their Associated
Persons pursuant to any federal or state securities law or state insurance
law.
f. Neither DELAWARE nor Lincoln will have any supervisory responsibility (as
such supervision is contemplated by the 1934 Act or the NASD's Conduct
Rules) with respect to Brokers or their Representatives. Under no
circumstances will DELAWARE be responsible for Brokers' or their
Representatives' failure to comply with applicable law or the Procedures,
except where that failure arises out of the negligence or intentional
misfeasance of DELAWARE.
g. DELAWARE shall not have authority on behalf of Lincoln to make, alter or
discharge any Contract or other contract entered into pursuant to a
Contract; to waive any Contract forfeiture provision; to extend the time of
paying any Purchase Payment; or to receive any monies or Purchase Payments.
DELAWARE shall not expend, nor contract for the expenditure of, funds of
Lincoln; nor shall DELAWARE possess or exercise any authority on behalf of
Lincoln other than that expressly conferred on DELAWARE by this Agreement.
h. DELAWARE shall act as an independent contractor in the performance of its
duties and obligations under this Agreement, and nothing contained in this
Agreement shall constitute DELAWARE or its respective Associated Persons
employees of Lincoln in
<PAGE>
connection with the wholesaling activities contemplated by this
Agreement or otherwise.
i. DELAWARE shall not purchase Contracts from, nor sell Contracts for,
Lincoln, nor shall it have any direct or indirect participation in such
undertakings, and nothing contained in this Agreement shall constitute
DELAWARE a "principal underwriter" of any of the Contracts, as those terms
are defined in the 1933, 1934 or 1940 Acts.
j. The Distributor of the Contracts, as the term "Distributor" is customarily
used in the variable insurance products industry, shall be Lincoln, and
Lincoln shall be identified as such in all sales, promotional, and
advertising materials for the Contracts.
4. MARKETING AND SALES MATERIAL
a. (1) Lincoln and DELAWARE shall cooperate fully in the drafting and
design of all promotional, sales and advertising material developed for
filing pursuant to Section 4.a (3). However, Lincoln shall have the
ultimate responsibility at all stages for approval of all promotional,
sales and advertising materials, regardless of who develops them. Such
material shall not be used until the necessary NASD clearance has been
obtained.
(2) Lincoln shall have ultimate control over the text and design of any
Internet or World Wide Web site(s) developed by DELAWARE for use, in whole
or in part, for the distribution of the Contracts. DELAWARE shall
guarantee that, without prior authorization in writing from Lincoln, there
shall be no hyperlinks or other electronic connections between the Web
site(s) described in the preceding sentence and any current or future Web
site(s) in use or to be used for or in connection with any other Lincoln
products or services.
(3) a. DELAWARE shall be responsible for filing with the NASD, as
required, all promotional, sales and advertising material whether developed
by Lincoln or by DELAWARE. Lincoln shall be responsible for filing, as
required, all such material (whether developed by Lincoln or DELAWARE) with
any other federal or state securities
<PAGE>
governmental or regulatory agencies, or with any state insurance
governmental or regulatory agencies.
(4) With respect to all promotional, sales and advertising material
developed by DELAWARE, Lincoln shall be afforded no less than five
business days for review and approval at each iteration of copy and
layout.
b. DELAWARE acknowledges that Lincoln shall have the unconditional right to
reject, in whole or in part, any application for a Contract. In the event
an application is rejected, any Purchase Payment submitted will be returned
by or on behalf of Lincoln. Lincoln will notify the Broker/Dealer which
submitted the Purchase Payment of such action. In the event that a
purchaser exercises the free look right under the Contract, any amount to
be refunded as provided in such Contract will be so refunded to the
purchaser by or on behalf of Lincoln. Lincoln will notify the
Broker/Dealer which solicited the sale of the Contract of such action.
c. Lincoln and DELAWARE shall equally share the costs (other than any borne by
a Fund pursuant to the relevant Participation Agreement) for printing all
preliminary and definitive Fund and Contract Prospectuses and any
supplements thereto.
d. DELAWARE will pay the following expenses contemplated by this Agreement
for: (i) the compensation, if any, of its Associated Persons; (ii) expenses
associated with the initial and ongoing NASD licensing and training of its
Associated Persons involved in the wholesaling activities; (iii) the
drafting, design, printing and mailing of all promotional, sales or
advertising material for use in connection with the distribution of the
Contracts; (iv) expenses associated with telecommunications with Lincoln at
the sites of DELAWARE or its Associated Persons, including site
installations and purchases, leases or rentals of modems, terminals and
other hardware, and lease line telephone charges for their Associated
Persons and for all Brokers; (v) continuing education courses sponsored by
Delaware for all Brokers and relating to the Contracts; (vi) fees
associated with NASD filings; (vii) development and maintenance of
DELAWARE's Internet Web sites and
<PAGE>
related functions; (viii) media advertising and promotion (e.g., broker
trade journals); and (ix) any other expenses incurred by DELAWARE or its
Associated Persons for the purpose of carrying out the obligations of
DELAWARE hereunder.
e. Lincoln will pay all expenses in connection with: (i) the preparation and
filing with appropriate governmental or regulatory agencies of the
Registration Statement and each preliminary Prospectus and definitive
Prospectus; (ii) the preparation and issuance of the Contracts; (iii) any
authorization, registration, qualification or approval of the Contracts
required under the securities, blue-sky laws or insurance laws of the
States; (iv) registration fees for the Contracts payable to the SEC or to
any other governmental or regulatory agency except NASD; (v) the mailing of
Prospectuses for the Contracts and Fund Prospectuses and any supplements
thereto, as required by federal securities laws, and proxy soliciting
materials and periodic reports relating to a Fund or the Accounts to
Contract owners; (vi) the printing of applications, the Procedures and any
other administrative forms utilized in connection with the servicing of the
Contracts; (vii) compensation as provided in Section 9 hereof; (viii) the
design and maintenance of any product-specific Web site for the contracts,
if Lincoln determines that such a Web site is necessary or advisable; and
(ix) any other expenses related to the distribution of the Contracts except
those set forth in Section 4.c of this Agreement and except as provided in
Section 4.d of this Agreement.
f. Except to the extent for which DELAWARE is responsible under section 6.5
hereof, Lincoln alone shall be responsible for and bear the cost of
administration of the Contracts following their issuance, including all
Contractowner service and communication activities.
g. Lincoln will confirm to each owner of a Contract, in accordance with Rule
10b-10 under the 1934 Act, its acceptance of Purchase Payments and such
other transactions as are
<PAGE>
required by Rule 10b-10 or administrative interpretations thereunder and
in accordance with Release 8389 under the 1934 Act. Except for material
which is required by law to accompany these confirmations, nothing shall
be included with them that has not been approved in advance by Lincoln
and DELAWARE.
5. REPRESENTATIONS AND WARRANTIES
a. Lincoln represents and warrants to DELAWARE, on the effective date of each
Registration Statement for the Contracts (or class of Contracts) and at
each time that a Contract is sold and on the date of this Agreement, as
follows:
(1) The Registration Statement has been declared effective by the SEC or
has become effective in accordance with the Regulations.
(2) The Registration Statement and the Prospectus each comply in all
material respects with the provisions of the 1933 Act and the 1940 Act and
the Regulations, and neither the Registration Statement nor the Prospectus
contains an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, in light of the circumstances in which
they were made; provided, however, that none of the representations and
warranties in this Section 5.a(2) shall apply to statements in or omissions
from the Registration Statement or Prospectus made in reliance upon and in
conformity with information furnished to Lincoln in writing by DELAWARE
expressly for use in the Registration Statement.
(3) Lincoln has not received notice from the SEC with respect to the
Registration Statement or the Account supporting the Contracts described in
the Registration Statement pursuant to Section 8(e) of the 1940 Act and no
stop order under the 1933 Act has been issued and no proceeding therefor
has been instituted or threatened by the SEC.
(4) The accountants who certified the financial statements included in
the Registration Statement and Prospectus are independent public
accountants as required by the 1933 Act, the 1940 Act and the Regulations.
(5) The financial statements included in the Registration Statement
present fairly the
<PAGE>
respective financial positions of Lincoln and the Account supporting the
Contracts described in the Registration Statement as of the dates
indicated; and such financial statements have been prepared in
conformity with generally accepted accounting principles in the United
States applied on a consistent basis.
(6) Subsequent to the respective dates as of which information is given
in the Registration Statement or the Prospectus, there has not been any
material adverse change in the condition, financial or otherwise, of
Lincoln or the Account supporting the Contracts described in the
Registration Statement that would cause such information to be materially
misleading.
(7) Lincoln has been duly organized and is validly existing as a
corporation in good standing under the laws of Indiana, with full power and
authority to own, lease and operate its properties and conduct its business
in the manner described in the Prospectus, is duly qualified to transact
the business of a life insurance company and is validly existing or in good
standing in each State in which the Contracts are or will be offered.
(8) Each Account supporting the Contracts described in the Registration
Statement has been duly authorized and established and is validly existing
as an insurance company separate account under the laws of Indiana and is
duly registered with the SEC as a unit investment trust under the 1940 Act.
(9) The form of the Contracts has been (or, before it is offered for
sale, will be) approved to the extent required by the Indiana Insurance
Commissioner and by the governmental agency responsible for regulating
insurance companies in each other State in which the Contracts are offered.
(10) The execution and delivery of this Agreement and the consummation of
the transactions contemplated in this Agreement have been duly authorized
by all necessary corporate action by Lincoln and when so executed and
delivered this Agreement will be
<PAGE>
the valid and binding obligation of Lincoln enforceable in accordance
with its terms.
(11) Lincoln has filed with the SEC all statements and other documents
required for registration under the provisions of the 1940 Act and the
Regulations thereunder of the Account supporting the Contracts described in
the Registration Statement, and such registration has been, or, prior to
being offered to the public, will be, effected; there are no agreements or
documents required by the 1933 Act, the 1940 Act or the Regulations to be
filed with the SEC as exhibits to the Registration Statement, that have not
been so filed; and Lincoln has obtained all exemptive or other orders of
the SEC necessary to make the public offering and consummate the sale of
the Contracts pursuant to this Agreement and to permit the operation of the
Account supporting the Contracts described in the Registration Statement,
as contemplated in the Prospectus.
(12) The Contracts have been duly authorized by Lincoln and conform to
the descriptions thereof in the Registration Statement and the Prospectus
and, when issued as contemplated by the Registration Statement, will
constitute legal, validly issued and binding obligations of Lincoln in
accordance with their terms.
b. DELAWARE represents and warrants to Lincoln on the date hereof as
follows:
(1) DELAWARE has been duly organized and is validly existing as a
corporation in good standing under the laws of with full power and
authority to own, lease and operate its properties and conduct its
business as a broker-dealer registered with the SEC and with the
securities commission of every State where such registration is
required, and is a member in good standing of the NASD.
(2) DELAWARE has taken all action including, without limitation, those
necessary under its limited partnership agreement, by-laws and
applicable state law, necessary to authorize the execution,
delivery and performance of this Agreement
<PAGE>
and all transactions contemplated hereunder.
(3) DELAWARE is and during the term of this Agreement shall remain duly
registered as a broker-dealer under the 1934 Act, a member in good
standing with the NASD, and duly registered as a broker-dealer under
applicable state securities laws.
6. ADDITIONAL RESPONSIBILITIES OF LINCOLN
a. Lincoln shall:
(1) maintain the registration of the Contracts with the SEC and any
state securities commissions of any State where the securities or blue-sky
laws of such State require registration of the Contracts, including without
limitation using its best efforts to prevent a stop order from being issued
or if a stop order has been issued using its best efforts to cause such
stop order to be withdrawn;
(2) maintain the approval or other authorization of the Contract forms
where required under the insurance laws and regulations of each State
(provided, however, that it shall be within Lincoln's discretion whether to
obtain such approval or authorization in Hawaii, Guam, the U.S. Virgin
Islands, Puerto Rico, and American Samoa);
(3) keep such registration, approval and authorization in effect
thereafter so long as the Contracts are outstanding; and
(4) build, maintain and pay for the illustration and asset allocation
software programs for the Contracts.
b. During the term of this Agreement, Lincoln shall take all action required
to cause each class of Contracts to comply, and to continue to comply, as
annuity contracts or life insurance contracts, as the case may be, and to
cause the Registration Statement and the Prospectus for each class of
Contracts to comply, and to continue to comply, with all applicable federal
laws and regulations and all applicable laws and regulations of each State.
c. Lincoln, during the term of this Agreement, shall notify DELAWARE
immediately:
<PAGE>
(1) When each Registration Statement (or amendment or supplement to it)
has become effective;
(2) Of the initiation of any legal proceeding commenced by any
regulatory body or by any third party alleging that any material statement
made in a Registration Statement or a Prospectus is untrue in any material
respect or results in a material omission in a Registration Statement or a
Prospectus;
(3) Of the issuance by the SEC of any stop order with respect to a
Registration Statement or any amendment thereto; or the initiation of any
proceedings for that purpose or for any other purpose relating to the
registration and/or offering of the Contracts (or class of Contracts);
(4) Of all those States in which registration of the Contracts (or
class of Contracts) is required under the securities or blue-sky laws, and
the date on which such registrations have become effective.
d. Lincoln shall furnish to DELAWARE without charge, promptly after filing,
one copy of each Registration Statement as originally filed, including
financial statements and all exhibits (including exhibits incorporated
therein by reference).
e. Lincoln shall file in a timely manner all reports, statements and
amendments required to be filed by or for each Account or class of
Contracts under the 1933 Act and/or the 1940 Act or the Regulations.
f. Lincoln shall provide DELAWARE access to such records, officers and
employees of Lincoln and of each Account at reasonable times as is
necessary to enable DELAWARE to fulfill its obligations under the federal
securities laws, Regulations and NASD rules.
6.5 ADDITIONAL RESPONSIBILITIES OF DELAWARE
DELAWARE shall:
a. assist Lincoln with certain administrative activities relating to the
Contracts, to the extent
<PAGE>
agreed upon from time to time by Lincoln and DELAWARE.
b. provide Lincoln access to such of its records, officers and employees at
reasonable times as is necessary to enable Lincoln to fulfill its
obligations under the federal securities laws, Regulations and NASD rules.
7. INTELLECTUAL PROPERTY RIGHTS OF DELAWARE AND LINCOLN
The intellectual property rights of the parties are set forth in Exhibits B and
C of this Agreement, which are hereby incorporated herein by this reference.
8. RECORDS. Lincoln and DELAWARE each shall maintain such accounts, books and
other documents as are required to be maintained by each of them by applicable
laws and regulations and shall preserve such accounts, books and other documents
for the periods prescribed by such laws and regulations. The accounts, books
and records of Lincoln, the Account and DELAWARE as to all transactions
hereunder shall be maintained so as to clearly and accurately disclose the
nature and details of the transactions, including such accounting information as
necessary to support the reasonableness of the amounts paid by Lincoln
hereunder. Each party shall have the right to inspect and audit such accounts,
books and records of the other party during normal business hours upon
reasonable written notice to the other party. Each party shall keep
confidential all information obtained pursuant to such an inspection or audit,
and shall disclose such information to third parties only upon receipt of
written authorization from the other party, except as required under compulsion
of law.
9. COMPENSATION
a. BASIS. (1) Lincoln shall compensate DELAWARE for sales of the Contracts by
the Brokers pursuant to Schedule 9.a to this Agreement, as such Schedule
may be amended from time to time upon mutual agreement of the parties to
this Agreement. Such compensation shall be based on Purchase Payments
received and accepted by Lincoln for all Contracts issued on applications
obtained by the Brokers or any of their respective Representatives.
Lincoln will pay compensation due DELAWARE in accordance with the
procedures set forth on Schedule 9.a. The compensation provided for in this
Section 9
<PAGE>
shall cease after the termination date of the Agreement.
(2) If Lincoln informs DELAWARE that any State by insurance rule,
regulation or statute, prohibits any payment of compensation by Lincoln
to a class of business entities including DELAWARE, DELAWARE shall
designate in writing a business entity or natural person, including an
insurance agency affiliate of DELAWARE meeting the requirements of such
State, to receive any amounts that may otherwise be payable to DELAWARE
hereunder, and Lincoln shall have the right to rely upon the legality of
all such designations. DELAWARE may change such designation from time
to time, upon prior written notice to Lincoln. Any payments made by
Lincoln to any person or entity so designated by DELAWARE shall
discharge Lincoln's liability to DELAWARE hereunder.
(3) If a purchaser rescinds a Contract or exercises a right to surrender
a contract for return of all Purchase Payments, DELAWARE will repay to
Lincoln, on demand, the amount of any compensation it received on the
Purchase Payments returned.
b. INDEBTEDNESS. Nothing in this Agreement shall be construed as giving
DELAWARE the right to incur any indebtedness on behalf of Lincoln.
c. APPOINTMENT FEES. TO BE DETERMINED.
d. REPORTING. DELAWARE shall be responsible for all tax reporting information
that DELAWARE is required to provide under applicable tax law to its
Associated Persons with respect to the Contracts. Nothing contained in
this Agreement or any sales agreement with a Broker is to be construed to
require DELAWARE to provide any tax reporting information directly or
indirectly to any unaffiliated Broker or its Representatives.
10. INVESTIGATION AND PROCEEDINGS
a. Lincoln and DELAWARE will cooperate fully in any securities or insurance
<PAGE>
governmental or regulatory investigation or proceeding or judicial
proceeding arising in connection with the offering, sale or distribution of
the Contracts for which DELAWARE acts as wholesaler pursuant to this
Agreement. Without limiting the foregoing, DELAWARE agrees to notify
Lincoln promptly of any customer complaint or notice of any governmental or
regulatory investigation or proceeding or judicial proceeding, relating to
the Contracts, received by DELAWARE and involving Lincoln, DELAWARE or any
of their respective Associated Persons or that may affect Lincoln's
issuance of any Contract for which DELAWARE acts as wholesaler pursuant to
this Agreement.
b. In the case of a substantive customer complaint DELAWARE will provide
Lincoln with all available information and will cooperate generally in
Lincoln's investigation of the complaint.
11. INDEMNIFICATION.
a. Lincoln shall indemnify and hold harmless DELAWARE and any officer,
director, employee or agent of DELAWARE, against any and all losses,
claims, damages or liabilities (including reasonable investigative, and
legal expenses incurred in connection with any action, suit or proceeding,
or any amount paid in settlement thereof with the prior approval of
Lincoln), to which DELAWARE and/or such person may become subject, under
any statute or regulation, at common law or otherwise, insofar as such
losses, claims, damages or liabilities:
(1) arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact contained in any Registration
Statement, Prospectus, Blue Sky application or other document executed
by Lincoln specifically for the purpose of qualifying any or all of the
Contracts for sale under the securities laws of the United States or any
State; promotional, sales or advertising material for the Contracts; or
the Contracts themselves (or any amendment or supplement to any of the
foregoing), or 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 in
light of the
<PAGE>
circumstances in which they were made; provided that this obligation to
indemnify shall not apply if such untrue statement or omission or such
alleged untrue statement or alleged omission was made in reliance upon
and in conformity with information furnished in writing to Lincoln by
DELAWARE
(2) arise out of or are based upon any untrue statement or alleged
untrue statement or omission or alleged omission of a material fact by
or on behalf of Lincoln (other than statements or representations
contained in any Fund Registration Statement, Fund Prospectus or
promotional, sales or advertising material of a Fund that were not
supplied by Lincoln or by persons under its control) or the gross
negligence or intentional misconduct of Lincoln or persons under its
control with respect to the sale or distribution of the Contracts; or
(3) result because of the terms of any Contract or because of any
material breach by Lincoln of any terms of this Agreement or of any
Contract or that proximately result from any activities of Lincoln's
officers, directors, employees or agents or their failure to take action
in connection with the sale of a Contract, to the extent of Lincoln's
obligations under this Agreement or otherwise, or the processing or
administration of the Contracts. This indemnification obligation will be
in addition to any liability that Lincoln may otherwise have; provided,
however, that no person shall be entitled to indemnification pursuant to
this Section 11.a if such loss, claim, damage or liability is due to the
willful misfeasance, bad faith, gross negligence or reckless disregard
of duty by the person seeking indemnification.
b. DELAWARE shall indemnify and hold harmless Lincoln and any officer,
director, employee or agent of Lincoln, against any and all losses, claims,
damages or liabilities, joint or several (including any investigative,
legal and other expenses reasonably incurred in connection with, and any
amounts paid in settlement of, any action, suit or proceeding
<PAGE>
or any claim asserted), to which Lincoln and/or any such person may
become subject under any statute or regulation, at common law or
otherwise, insofar as such losses, claims, damages or liabilities arise
out of or are based upon:
(1) any untrue statement or alleged untrue statement of a material
fact contained in any Registration Statement, Prospectus or blue-sky
application or other document executed by Lincoln specifically for the
purposes of qualifying any or all of the Contracts for sale under the
securities law of any State (or any amendment or supplement to the
foregoing), or omission or alleged omission to state therein a material
fact required to be stated therein or necessary in order to make the
statements therein not misleading, in light of the circumstances in
which they were made, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in conformity
with information furnished in writing to Lincoln by DELAWARE
specifically for use in the preparation of any such Registration
Statement, Prospectus, such blue-sky application or other document (or
any such amendment or supplement thereto); or
(2) any use of promotional, sales or advertising material for the
Contracts not authorized by Lincoln pursuant to Section 4.a(2) of this
Agreement or any verbal or written misrepresentations or any unlawful sales
practices concerning the Contracts by DELAWARE under federal securities
laws or NASD regulations (but not including state insurance laws,
compliance with which is a responsibility of Lincoln under this Agreement
or otherwise); or
(3) claims by agents, representatives or employees of DELAWARE for
commissions or other compensation or remuneration of any type; or
(4) any material breach by DELAWARE of any provision of this Agreement.
This indemnification obligation will be in addition to any liability that
DELAWARE may otherwise have; provided, however, that no person shall be
entitled to indemnification pursuant to this Section 11.b if such loss,
claim, damage or liability is due to the willful
<PAGE>
misfeasance, bad faith, gross negligence or reckless disregard of duty
by the person seeking indemnification.
c. After receipt by a party entitled to indemnification ("indemnified party")
under this Section 11 of notice of the commencement of any action, if a
claim in respect thereof is to be made by the indemnified party against any
person obligated to provide indemnification under this Section 11
("indemnifying party"), such indemnified party will notify the indemnifying
party in writing of the commencement thereof as soon as practicable
thereafter, provided that the omission to so notify the indemnifying party
will not relieve it from any liability under this Section 11, except to the
extent that the omission results in a failure of actual notice to the
indemnifying party and such indemnifying party is damaged solely as a
result of the failure to give such notice. The indemnifying party, upon
the request of the indemnified party, shall retain counsel reasonably
satisfactory to the indemnified party to represent the indemnified party
and any others the indemnifying party may designate in such proceeding and
shall pay the fees and disbursements of such counsel related to such
proceeding. In any such proceeding, any indemnified party shall have the
right to retain its own counsel, but the fees and expenses of such counsel
shall be at the expense of such indemnified party unless (i) the
indemnifying party and the indemnified party shall have mutually agreed to
the retention of such counsel, or (ii) the named parties to any such
proceeding (including any impleaded parties) include both the indemnifying
party and the indemnified party and representation of both parties by the
same counsel would be inappropriate due to actual or potential differing
interests between them. The indemnifying party shall not be liable for any
settlement of any proceeding effected without its written consent, but if
settled with such consent or if there be a final judgment for the
plaintiff, the indemnifying party shall indemnify the indemnified party
from and against any loss or liability by reason of such
<PAGE>
settlement or judgment.
d. The indemnification provisions contained in this Section 11 shall remain
operative in full force and effect, regardless of (i) any investigation
made by or on behalf of Lincoln or by or on behalf of any controlling
person thereof, (ii) delivery of any Contracts and Purchase Payments
therefor, or (iii) any termination of this Agreement. A successor by law
of DELAWARE or Lincoln, as the case may be, shall be entitled to the
benefits of the indemnification provisions contained in this Section 11.
12. TERMINATION
a. This Agreement may be terminated at the option of any party upon 90
calendar days' advance written notice to the other party;
b. This Agreement shall terminate automatically if it is assigned; provided,
however, that a transaction will not be deemed an assignment if it does not
result in a change of actual control or management of a party. This
Agreement may be terminated at the option of one party upon the other
party's material breach of any provision of this Agreement.
c. Upon termination of this Agreement all authorizations, rights and
obligations shall cease except: (i) the obligation to settle accounts
hereunder, including incurred compensation; and (ii) the provisions
contained in Sections 7 and 11 of this Agreement, except that Section 11
shall survive only for acts which occurred prior to termination.
13. RIGHTS, REMEDIES, ETC, ARE CUMULATIVE. The rights, remedies and
obligations contained in this Agreement are cumulative and are in addition to
any and all rights, remedies and obligations, at law or in equity, which the
parties to this Agreement are entitled to under state and federal laws. Failure
of one party to insist upon strict compliance by the other party with any of the
conditions of this Agreement in any one instance shall not be construed as a
waiver of any of the conditions for any subsequent instance, but the same shall
remain in full force and effect. No waiver of any of the provisions of this
Agreement shall be deemed, or shall constitute, a waiver
<PAGE>
of any other provisions, whether or not similar, nor shall any waiver
constitute a continuing waiver.
14. NOTICES. All notices hereunder are to be in writing and shall be given,
if to Lincoln, to:
if to DELAWARE:
Daniel J. O'Brien
Delaware Distributors, L.P.
1818 Market Street
Philadelphia, PA 19103
Any party may specify another address in writing. Each such notice to a
party shall be hand-delivered; or transmitted by postage prepaid registered
or certified United States mail, with return receipt requested; or sent by an
overnight courier service; or sent by facsimile or similar electronic means
of delivery (with confirming copy by first class postage pre-paid U.S. mail.)
Notices shall be effective upon receipt.
15. INTERPRETATION, JURISDICTION, ETC. This Agreement constitutes the
whole agreement between the parties to this Agreement relating to the
wholesaling activities contemplated in this Agreement, and supersedes all
prior oral or written negotiations between the parties to this Agreement with
respect to the subject matter of this Agreement. The parties acknowledge
that Lincoln and the Funds have entered into Participation Agreements and
that it may be necessary to construe the terms of such Participation
Agreements and this Agreement together. This Agreement shall be construed and
the provisions of this Agreement interpreted under and in accordance with the
internal laws of the State of Indiana without giving effect to principles of
conflict of laws.
16. HEADINGS. The headings in this Agreement are included for convenience
of reference only and in no way define or delineate any of the provisions of
this Agreement or otherwise affect their construction or effect.
<PAGE>
17. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
18. SEVERABILITY. This is a severable agreement and in the event that any part
or parts of this Agreement shall be held to be unenforceable to its or their
full extent, then it is the intention of the parties to this Agreement that such
part or parts shall be enforced to the extent permitted under the law, and, in
any event, that all other parts of this Agreement shall remain valid and duly
enforceable as if the unenforceable part or parts had never been a part of this
Agreement.19. REGULATION. This Agreement shall be subject to all applicable
provisions of state law and to the 1933 Act; 1934 Act; 1940 Act; and the
Regulations and the rules and regulations of the NASD, from time to time in
effect; including such exemptions from the 1940 Act as the SEC may grant. The
terms of this Agreement shall be interpreted and construed in accordance
therewith. Without limiting the generality of the foregoing, the term
"assigned" shall not include any transaction exempted from Section 15(b)(2) of
the 1940 Act.
IN WITNESS WHEREOF, each party hereto represents that the officer
signing this Agreement on the party's behalf is duly authorized to execute
this Agreement; and each party has caused this Agreement to be duly executed
by such authorized officer as of the date first set forth above.
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
By:
-------------------------------
Name:
Title:
DELAWARE DISTRIBUTORS, INC.
as General Partner and on behalf
of DELAWARE DISTRIBUTORS, L.P.
By:
-------------------------------
<PAGE>
Name:
Title:
<PAGE>
Schedule 1.a
Separate Account Subaccounts
Available under the Contracts
Effective ___________ __, 1998
NAME OF SEPARATE ACCOUNT SUBACCOUNTS
<PAGE>
Schedule 1.b
Contracts Subject to Wholesaling Agreement
Effective ______________ __, 1998
<TABLE>
<CAPTION>
SEC
MARKETING POLICY REGISTRATION NAME OF
NAME OF CONTRACT FORM NO. NO. SEPARATE ACCOUNT
- ---------------- -------- ------------ ----------------
<S> <C> <C> <C>
</TABLE>
<PAGE>
SCHEDULE 9.a
COMPENSATION SCHEDULE
EFFECTIVE __________ __, 1998
COMPENSATION PAYABLE BY LINCOLN TO DELAWARE FOR WHOLESALING ACTIVITY
All initial and subsequent ____%
Purchase Payments received
and accepted by Lincoln, while this Agreement remains in force.
Compensation will be paid to DELAWARE according to then current Lincoln
practice, but no less frequently than weekly.
<PAGE>
Exhibit A (DISCUSSION DRAFT)
DELAWARE-LINCOLN CHOICEPLUS DISTRIBUTION OF RESPONSIBILITIES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
TASK Delaware is Lincoln is Delaware Lincoln Delaware Lincoln
the Driver the Driver Pays Pays Maintains Maintains
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PROSPECTUS RELATED:
- -----------------------------------------------------------------------------------------------------------------------------------
Prepare Initial Registration Statement
- -----------------------------------------------------------------------------------------------------------------------------------
File Initial registration Statement
- -----------------------------------------------------------------------------------------------------------------------------------
Prepare Initial Prospectus cover page
- -----------------------------------------------------------------------------------------------------------------------------------
Printing Initial Prospectus Cover Page
- -----------------------------------------------------------------------------------------------------------------------------------
Prepare Initial Product Prospectus & SAI
Printing of Initial Product Prospectus & SAI
- -----------------------------------------------------------------------------------------------------------------------------------
Distribution of Initial Product Prospectus & SAI
- -----------------------------------------------------------------------------------------------------------------------------------
Prepare Initial Mutual Fund Prospectuses & SAI
- -----------------------------------------------------------------------------------------------------------------------------------
Printing of initial Mutual Fund Prospectuses & SAI
- -----------------------------------------------------------------------------------------------------------------------------------
Distribution of Initial Mutual fund Prospectuses & SAI
- -----------------------------------------------------------------------------------------------------------------------------------
File & Obtain California Certificate of Authority Approval
- -----------------------------------------------------------------------------------------------------------------------------------
prepare On-going Registration Statements
- -----------------------------------------------------------------------------------------------------------------------------------
File On-going Registration Statements
- -----------------------------------------------------------------------------------------------------------------------------------
Prepare On-going Prospectus Cover Page
- -----------------------------------------------------------------------------------------------------------------------------------
Printing On-going Prospectus Cover Page
- -----------------------------------------------------------------------------------------------------------------------------------
Prepare On-going Product Prospectus & SAI
- -----------------------------------------------------------------------------------------------------------------------------------
Printing On-going Product Prospectus & SAI
- -----------------------------------------------------------------------------------------------------------------------------------
Distribution of On-going Product Prospectuses & SAI
- -----------------------------------------------------------------------------------------------------------------------------------
Prepare On-going Product Mutual Fund Prospectuses & SAI
- -----------------------------------------------------------------------------------------------------------------------------------
Printing of On-going Mutual Fund Prospectuses & SAI
Prepare Proxy
- -----------------------------------------------------------------------------------------------------------------------------------
Printing of Proxy
- -----------------------------------------------------------------------------------------------------------------------------------
Distribution of Proxy
- -----------------------------------------------------------------------------------------------------------------------------------
CONTRACT AND APPLICATION
- -----------------------------------------------------------------------------------------------------------------------------------
Prepare & file the Contract with the States and Obtain
Approval
- -----------------------------------------------------------------------------------------------------------------------------------
Printing and Mailing of the Contracts
- -----------------------------------------------------------------------------------------------------------------------------------
Delivery of the contracts
- -----------------------------------------------------------------------------------------------------------------------------------
Develop the Application
- -----------------------------------------------------------------------------------------------------------------------------------
File and Print the Application
- -----------------------------------------------------------------------------------------------------------------------------------
SEMI-ANNUAL AND ANNUAL REPORTS:
- -----------------------------------------------------------------------------------------------------------------------------------
Preparation of Semi-Annual & Annual Reports
- -----------------------------------------------------------------------------------------------------------------------------------
printing of Semi-Annual & Annual Reports
- -----------------------------------------------------------------------------------------------------------------------------------
Distribution of Semi-Annual & annual Reports
- -----------------------------------------------------------------------------------------------------------------------------------
Letters and Fund Managers Comments (annuals & semi-annuals)
- -----------------------------------------------------------------------------------------------------------------------------------
QUARTERLY PERFORMANCE REPORTS (PROFILE BOOK):
- -----------------------------------------------------------------------------------------------------------------------------------
Size Definition
- -----------------------------------------------------------------------------------------------------------------------------------
Layout
- -----------------------------------------------------------------------------------------------------------------------------------
General Copy (not product related)
- -----------------------------------------------------------------------------------------------------------------------------------
Fund/Manager Page Layout
- -----------------------------------------------------------------------------------------------------------------------------------
SMR, Compliance and NASD Approvals
- -----------------------------------------------------------------------------------------------------------------------------------
<PAGE>
- -----------------------------------------------------------------------------------------------------------------------------------
Management Approval
- -----------------------------------------------------------------------------------------------------------------------------------
Request Data from Fund Managers
- -----------------------------------------------------------------------------------------------------------------------------------
Re-State Data
- -----------------------------------------------------------------------------------------------------------------------------------
Input Adjusted Data into Page Layout Format
- -----------------------------------------------------------------------------------------------------------------------------------
Final Approval of Quarterly Performance Report (Profile Book)
- -----------------------------------------------------------------------------------------------------------------------------------
Printing of Quarterly Performance Report (Profile Book)
- -----------------------------------------------------------------------------------------------------------------------------------
Distribution of Quarterly Performance Report (Profile Book)
- -----------------------------------------------------------------------------------------------------------------------------------
MONTHLY PERFORMANCE REPORTS:
- -----------------------------------------------------------------------------------------------------------------------------------
Layout
- -----------------------------------------------------------------------------------------------------------------------------------
General Copy
- -----------------------------------------------------------------------------------------------------------------------------------
SMR & Compliance Approvals
- -----------------------------------------------------------------------------------------------------------------------------------
management Approval
- -----------------------------------------------------------------------------------------------------------------------------------
Obtain Data from Fund Managers
- -----------------------------------------------------------------------------------------------------------------------------------
Re-State Data
- -----------------------------------------------------------------------------------------------------------------------------------
Input Adjusted Data into Page Layout format
- -----------------------------------------------------------------------------------------------------------------------------------
Final Approval of Monthly Performance Report
- -----------------------------------------------------------------------------------------------------------------------------------
Printing of Monthly Performance Report
- -----------------------------------------------------------------------------------------------------------------------------------
Distribution of Monthly Performance Report
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit B
INTELLECTUAL PROPERTY RIGHTS OF DELAWARE
DELAWARE. Delaware Management Holdings, Inc. owns all right, title and
interest, including the good will associated therewith, in and to the marks
DELAWARE, DELAWARE GROUP, DELAWARE INVESTMENTS and DELAWARE GROUP PREMIUM
FUND, which may be used in connection with one or more of the underlying
investment mediums for the Contracts, and in and to the name DELAWARE in
whatever manner used in connection with the performance of this Agreement
(such marks are hereinafter referred to as "Delaware Licensed Marks").
Delaware Management Holdings, Inc. has granted to DELAWARE the right and
license to use the Delaware Licensed Marks and the right to sub-license
others. DELAWARE hereby grants to Lincoln a non-exclusive right and limited
license to use the Delaware Licensed Marks in connection with the Contracts
and Lincoln's performance of the services as set forth under this Agreement.
(1) TERM. The grant of limited license as specified in this
Section 7.b shall terminate with respect to a Delaware Licensed Mark on the
earlier of the following events: (A) a change of name of such Delaware
Licensed Mark to a name that does not include the term "Delaware": or (B)
solely at the option of DELAWARE, and respecting only new business, upon a
termination of this Agreement. In all other cases the grant of limited
license as specified in this Section 7.b shall survive the termination of the
Agreement. Upon termination of the grant of limited license, Lincoln shall,
within a reasonable time, cease to issue new Contracts or to use or
disseminate any promotional, sales or advertising material relating to the
Contracts under such Delaware Licensed Mark, and shall likewise cease any new
business activity that suggests that it has any right under such Delaware
Licensed Mark or that it has any association with DELAWARE in connection with
any such Contracts with respect to such Delaware Licensed Mark.
(2) PRE-RELEASE APPROVAL OF TRADEMARK-BEARING MATERIALS. (a)
Lincoln agrees that it will display the Delaware Licensed Marks only in such
form and manner as are specifically approved by DELAWARE and that it will
cause them to appear on all promotional, sales or advertising material used
in connection with the Contracts or related services with such legends,
markings and notices as DELAWARE may request in order to give appropriate
notice of service mark registration when effected. All such materials will
be submitted by Lincoln to Delaware for the purpose of service mark reviews
at least ten business days before their intended use by Lincoln . DELAWARE
shall have ten business days from the date of mailing of this material to
request modification. If DELAWARE makes no such request, the service mark
presentation in the materials as submitted will be deemed approved by
DELAWARE. (As indicated in Section 4 (a) (1), Lincoln retains ultimate
responsibility for approval of the materials as a whole.)
(b) During the term of this grant of limited license, DELAWARE may request that
Lincoln submit samples of any material bearing any of the Delaware Licensed
Marks that were previously approved by DELAWARE but, due to changed
circumstances, DELAWARE may wish to reconsider, or that were not previously
approved in the manner set forth above. If, on reconsideration or on initial
review, respectively, any such sample fails to meet with the written approval of
DELAWARE, then Lincoln shall immediately cease using or disseminating such
disapproved material. Lincoln shall obtain the prior written approval of
DELAWARE for the use of any new material developed to replace
<PAGE>
the disapproved material, in the manner set forth above. All costs
associated with any such reconsideration will be borne by DELAWARE.
(3) ASSIGNMENT. This limited license is personal to Lincoln and
may not be assigned without the prior written consent of DELAWARE.
(4) BREACH. If Lincoln shall violate or fail to perform any of
its obligations under this limited license, DELAWARE shall have the right to
terminate this limited license upon 120 days written notice, and such notice
of termination shall become effective unless Lincoln shall completely remedy
the default within such 120-day period. Termination of the license under the
provisions of this paragraph shall be without prejudice to any other rights
that DELAWARE may have against Lincoln.
(5) DELAWARE'S RIGHTS. All rights in the Delaware Licensed Marks
other than those specifically granted herein are reserved by DELAWARE for its
own use and benefit. Upon the termination of this limited license, for any
reason whatsoever, all rights in the Delaware Licensed Marks and any service
mark registrations pertaining thereto shall automatically revert to DELAWARE.
Lincoln shall at any time, whether during or after the term of this limited
license, execute any documents reasonably required by DELAWARE to confirm
DELAWARE's ownership of all such rights.
<PAGE>
Exhibit C
INTELLECTUAL PROPERTY RIGHTS OF LINCOLN
<PAGE>
BYLAWS
OF
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
AS LAST AMENDED MAY 20, 1997
ARTICLE I
STOCKHOLDERS
SECTION 1. -- ANNUAL MEETINGS.
An annual meeting of the stockholders shall be held on the fourth Wednesday
of May, or such earlier date as the board of directors may select, in each
year for the purpose of electing directors and for the transaction of such
other business as may come before the meeting. If the day fixed for an
annual meeting shall be a legal holiday in the State of Indiana, such
meeting shall be held on the next succeeding full business day.
SECTION 2. -- SPECIAL MEETINGS.
Special meetings of the stockholders may be called by the chairman of the
board, by the president, by the board of directors, or by stockholders
holding not less than one-fourth of all of the outstanding shares.
SECTION 3. -- PLACE OF MEETINGS.
All meetings of stockholders shall be held at the principal office of the
company in Fort Wayne, Indiana or at such other place as may be designated
by the board of directors in accordance with the Articles of Incorporation.
SECTION 4. -- NOTICE OF MEETINGS.
A written or printed notice, stating the place, day and hour of the
meeting, and in the case of a special meeting, the purpose or purposes for
which the meeting is called, shall be delivered or mailed by the secretary,
or by the officer calling the meeting, at least thirty days before the date
of the meeting, to each stockholder of record at such address as appears
upon the stock records of the company.
SECTION 5. -- QUORUM.
Except as hereinafter provided and as otherwise provided by law, at any
meeting of the stockholders a majority of all the capital stock issued and
outstanding represented by stockholders of record in person or by proxy,
shall constitute a quorum; but a lesser interest may adjourn any meeting,
and the meeting may be held as adjourned without further notice. When a
quorum is present at any meeting, a majority of the stock represented
thereat shall decide any question
<PAGE>
brought before such meeting, unless the question is one upon which by
express provision of law or of the Articles of Incorporation or of these
bylaws a larger or different vote is required, in which case such express
provision shall govern and control the decision of such question.
SECTION 6. -- PROXIES.
At all meetings of stockholders, a stockholder may vote by proxy executed
in writing by the stockholder or a duly authorized attorney in fact. No
proxy shall be valid which shall have been granted more than forty days
before the meeting named therein, and such proxy shall not be valid after
the final adjournment of such meeting.
SECTION 7. -- VOTING OF SHARES.
Every stockholder shall have the right, at every stockholders' meeting, to
one vote for each share of stock standing in his name on the books of the
company on the date established by the board of directors as the record
date for determination of stockholders entitled to vote at such meeting. No
share shall be voted at any meeting which shall have been transferred on
the books of the company subsequent to such record date, and no share which
belongs to the company shall be voted at any meeting.
SECTION 8. -- ORDER OF BUSINESS.
The order of business at each annual stockholders' meeting and, as far as
possible, at all other meetings of stockholders, shall be as follows:
1. Reading minutes of preceding meeting.
2. Reports of officers and committees.
3. Report of attendance at directors' meetings.
4. Election of directors.
5. Unfinished business.
6. New business.
7. Adjournment.
The order of business may be changed by vote of a majority of stockholders
present.
SECTION 9. -- SECRETARY OF MEETING.
The secretary of the company shall act as secretary of meetings of
stockholders and in his absence the chairman of the meeting may appoint any
person to act as
<PAGE>
secretary of the meeting.
ARTICLE II
BOARD OF DIRECTORS
SECTION 1. -- GENERAL POWERS, NUMBER, TENURE AND QUALIFICATIONS.
The property and business of the company shall be managed by a board of
directors, not less than five nor more than sixteen in number, which board
shall be constituted in conformity with the laws of the State of Indiana.
The number of directors to serve for each year shall be determined by a
resolution at the annual stockholders' meeting; however, the board of
directors may, in its discretion, at any regular or special meeting,
increase or decrease the number of directors between annual stockholders'
meetings to a number within the minimum and maximum as stated in this
section. Except in the case of vacancies, each director shall be elected
for a term of one year and shall hold office until a successor is elected
and has qualified. (AMENDED 10/28/96)
SECTION 2. -- REGULAR MEETINGS.
The annual meeting of the board of directors shall be the first meeting
following its election and shall be held, without notice, immediately after
the adjournment of the annual stockholders' meeting, or within ten days
thereafter upon notice in the manner provided by these bylaws for calling
special meetings of the board. Additional regular meetings may be held at
such times as the board may designate.
SECTION 3. -- SPECIAL MEETINGS.
Special meetings of the board of directors may be called by the chairman of
the board, or in his absence or incapacity, or if such office be vacant, by
the president. The secretary shall call special meetings of the board of
directors when requested in writing to do so by any five members thereof.
SECTION 4. -- NOTICE OF MEETINGS.
Notice of any meeting of the board of directors other than the annual
meeting held immediately after the adjournment of the annual stockholders'
meeting, shall be served not less than three days before the date fixed for
such meeting, by oral, telegraphic, telephonic, electronic or written
communication stating the time and place thereof and, if by mail or
telegraph, addressed to each member of the board of directors at his or her
address as it appears on the books of the company. Any director may waive
notice of any meeting. The attendance of a director at a meeting shall
constitute a waiver of notice of such meeting, except when a
<PAGE>
director attends a meeting for the express purpose of objecting to the
transaction of any business because the meeting is not lawfully called or
convened.
SECTION 5. -- QUORUM.
A majority of the whole board of directors shall be necessary to constitute
a quorum for the transaction of any business, but if less than such
majority is present at a meeting, a majority of the directors present may
adjourn the meeting from time to time without further notice.
SECTION 6. -- MANNER OF ACTING.
The act of a majority of the directors present at any meeting at which a
quorum is present shall be the act of the board of directors, unless a
greater number is required by law, or by the Articles of Incorporation or
these bylaws. Unless otherwise provided in the Articles of Incorporation,
an action required or permitted to be taken at a meeting of the board of
directors may be taken without a meeting, if before the action is taken, a
written consent to the action is signed by all members of the board of
directors and the written consent is filed with the minutes of proceedings
of the board of directors. Unless otherwise provided by the Articles of
Incorporation, a member of the board of directors may participate in a
meeting of the board of directors by means of a conference telephone or
similar communications equipment by which all persons participating in the
meeting can communicate with each other, and participation by these means
constitutes presence in person at the meeting.
SECTION 7. -- VACANCIES.
Vacancies in the board may be filled by the remaining directors in the
manner provided by law.
SECTION 8. -- OATH.
Every director, when elected, shall take and subscribe an oath that he
will, insofar as the duty devolves upon him, faithfully, honestly and
diligently administer the affairs of the company, and that he will not
knowingly violate or willingly permit to be violated any law applicable to
the company.
ARTICLE III
OFFICERS
SECTION 1. -- ELECTED OFFICERS.
The elected officers of the company shall be a president, a secretary, and
a treasurer, and may also include a chairman of the board, a chief
operating officer, a chief financial officer, one or more vice presidents
of a class or classes as the
<PAGE>
board of directors may determine, and such other officers as the board of
directors may determine. The chairman of the board and the president shall
be chosen from among the directors. Any two or more offices may be held by
the same person, except that the offices of president and secretary may not
be held by the same person. (AMENDED 5/20/97.)
SECTION 2. -- APPOINTED OFFICERS.
The appointed officers of the company shall be one or more second vice
presidents, assistant vice presidents, assistant treasurers, and assistant
secretaries.
SECTION 3. -- ELECTION OR APPOINTMENT AND TERM OF OFFICE.
The elected officers of the company shall be elected annually by the board
of directors at the first meeting of the board of directors held after each
annual meeting of the shareholders. The appointed officers of the company
shall be appointed annually by the chief executive officer immediately
following the first meeting of the board of directors held after each
annual meeting of the shareholders. Additional elected officers may be
elected at any regular or special meeting of the board of directors, to
serve until the regular meeting of the board held after the next annual
meeting of shareholders, and additional appointed officers may be appointed
by the chief executive officer at any time to serve until the next annual
appointment of officers. Each officer shall hold office until he shall
resign or retire or shall have been removed.
SECTION 4. -- REMOVAL.
Any officer may be removed by the board of directors and any appointed
officer may be removed by the chief executive officer, whenever in their
judgment the best interests of the company will be served thereby, but such
removal shall be without prejudice to the contract rights, if any, of the
person so removed.
SECTION 5. -- VACANCIES.
A vacancy in the office of president or treasurer or secretary because of
death, resignation, removal or otherwise, shall be filled by the board of
directors, and a vacancy in any other elected office may be filled by the
board of directors.
SECTION 6. -- CHIEF EXECUTIVE OFFICER.
If the elected officers of the company include both a chairman of the board
and a president, the board of directors shall designate one of such
officers to be the chief
<PAGE>
executive officer of the company. If the office of chairman of the board be
vacant, the president shall be the chief executive officer of the company.
The chief executive officer of the company shall be, subject to the board
of directors, in general charge of the affairs of the company.
SECTION 7. -- CHAIRMAN OF THE BOARD.
The chairman of the board shall preside at all meetings of the stockholders
and of the board of directors at which he may be present and shall have
such other powers and duties as may be determined by the board of
directors.
SECTION 8. -- PRESIDENT.
The president shall have such powers and duties as may be determined by the
board of directors. In the absence of the chairman of the board, or if such
office be vacant, the president shall have all the powers of the chairman
of the board and shall perform all his duties.
SECTION 9. -- CHIEF OPERATING OFFICER.
The chief operating officer shall be, subject to the chief executive
officer, in general charge of the business operations of the company and
shall have those powers and duties as are incident to the office and as may
be determined by the board of directors or the president. (ADDED 2-9-96)
SECTION 10. -- CHIEF FINANCIAL OFFICER.
The chief financial officer shall be in general charge of the financial
affairs of the company and shall have those powers and duties as are
incident to the office and as may be determined by the board of directors
or the president. (ADDED 2-9-96)
SECTION 11. -- VICE PRESIDENTS.
A vice president shall perform such duties as may be assigned by the
chairman of the board, the president or the board of directors, and, in the
absence of the president, he may perform the duties and exercise the
authority of the president.
SECTION 12. -- SECRETARY.
The secretary shall: (a) keep the minutes of the stockholders' and board of
directors' meetings in one or more books provided for the purpose; (b) see
that all notices are duly given in accordance with the provisions of these
bylaws or as required by law; -C- be custodian of the seal of the company
and see that the seal of
<PAGE>
the company is affixed to all documents the execution of which on behalf of
the company under its seal is duly authorized; and (d) in general perform
all duties incident to the office of secretary and such other duties as
from time to time may be assigned to him by the chairman of the board, the
president or the board of directors.
SECTION 13. -- TREASURER.
The treasurer shall: (a) have the custody of the corporate funds and
securities; (b) deposit all moneys that may come into his hands to the
credit of the company in such depositories as are authorized or approved by
the board of directors; c) see that all expenditures are duly authorized
and evidenced by proper receipts and vouchers; (d) give such bonds as may
be required by the board of directors, subject to the approval of the
board; and (e) in general perform all duties incident to the office of
treasurer and such other duties as from time to time may be assigned to him
by the chairman of the board, the president or the board of directors.
SECTION 14. -- ASSISTANT SECRETARIES.
One or more assistant secretaries may be elected by the board of directors
or appointed by the chief executive officer. In the absence of the
secretary, an assistant secretary shall have the power to perform his
duties including the certification, execution and attestation of
corporation records and corporate instruments. Assistant secretaries shall
perform such other duties as may be assigned to them by the chief executive
officer or the board of directors.
SECTION 15. -- ASSISTANT TREASURERS.
One or more assistant treasurers may be elected by the board of directors
or appointed by the chief executive officer. In the absence of the
treasurer, an assistant treasurer shall have the power to perform his
duties. Assistant treasurers shall perform such other duties as may be
assigned to them by the chief executive officer or the board of directors.
SECTION 16. -- POSITIONS AND TITLES.
The chief executive officer may establish such positions and appoint
persons to them with such titles as he may deem necessary. He may also fix
the duties of such positions and may discharge persons from them.
ARTICLE IV
COMMITTEES
SECTION 1. -- BOARD COMMITTEES.
<PAGE>
In addition to committees specifically authorized by this Article, the
board of directors may, by resolution adopted by a majority of the whole
board of directors, from time to time designate (i) from among its members
one or more other committees each of which, to the extent provided in such
resolution and except as otherwise provided by law, shall have and exercise
all the authority of the board of directors, and (ii) one or more advisory
committees, a majority of whose members shall be directors. Each such
committee shall have one or more members who serve at the pleasure of the
board of directors. The designation of any such committee and the
delegation thereto of authority shall not operate to relieve the board of
directors, or any member thereof, of any responsibility imposed by law.
Each such committee shall keep a record of its proceedings and shall adopt
its own rules of procedure. It shall make such reports to the board of
directors of its actions as may be required by the board.
SECTION 2. -- EXECUTIVE COMMITTEE.
The board of directors, by resolution adopted by a majority of the whole
board, may elect from among its members an executive committee which shall
consist of the chief executive officer and such other member or members of
the board, not less than one, as may be designated in such resolution. The
term of office of the members of the executive committee shall be
established in such resolution.
SUBSECTION 1. -- GENERAL POWERS. The executive committee shall have and may
exercise all of the authority of the board of directors in the management
of the property and business of the company during the interval between the
meetings of the board, except that the executive committee shall not have
authority to:
(1) Declare dividends or distributions.
(2) Approve on behalf of this company an agreement of merger or
consolidation, or a plan of exchange of the stock of this company.
(3) Recommend to shareholders the amendment of the articles of
incorporation, the voluntary dissolution of the company, or the sale,
lease, exchange, mortgage, pledge or other disposition of all or
substantially all of the property and assets of the company.
(4) Fill vacancies in the board of directors or the executive committee, or
remove members of the board or executive committee.
(5) Fix compensation for members of the executive committee.
(6) Exercise any of the power delegated to the investment committee
pursuant to Section 3 of this Article.
(7) Amend, alter or repeal these bylaws.
<PAGE>
(8) Amend, alter or repeal any resolution of the whole board of directors
which by its terms provides that it shall not be amended, altered or
repealed by the executive committee.
No member of the board of directors shall be liable for any action taken by
the executive committee if he or she is not a member of the committee and
has acted in good faith and in a manner he or she reasonably believes to be
in or not opposed to the best interests of the company; provided, that the
establishment of the executive committee and the delegation thereto of the
authority described in this subsection shall not operate to relieve the
board of directors or any member thereof of any responsibility imposed on
it, him or her by law.
SUBSECTION 2. -- MEETINGS. Meetings of the executive committee may be
called at any time by the chief executive officer or by any two members of
the executive committee. Meetings may be held at such time and at such
place, either within or without the state of Indiana, as may be designated
in the notice of the meeting.
SUBSECTION 3. -- NOTICE OF MEETINGS. Notice of any meeting of the executive
committee shall be served, not less than one hour prior to the time fixed
for the meeting, by oral, telegraphic, telephonic, electronic or written
communication stating the time and place thereof and, if by mail or
telegraph, addressed to each member of the executive committee at his or
her address as it appears on the books of the company. Any member of the
executive committee may waive notice of any meeting. Attendance at a
meeting of the executive committee shall constitute a waiver of notice of
such meeting.
SUBSECTION 4. -- QUORUM. A majority of the members of the executive
committee shall constitute a quorum for the transaction of business, and
the vote of a majority of the members present at any meeting at which a
quorum is present shall be the act of the executive committee.
SUBSECTION 5. -- MANNER OF ACTING. The executive committee may adopt rules
for the regulation of its proceedings. Minutes shall be kept of the
proceedings of the executive committee and shall be read and approved at
the next succeeding regular or special meeting of the whole board of
directors. Unless otherwise provided in the Articles of Incorporation, an
action required or permitted to be taken at a meeting of the executive
committee may be taken without a meeting, if before the action is taken, a
written consent to the action is signed by all members of the executive
committee and the written consent is filed with the minutes of proceedings
of the executive committee. Unless otherwise provided by the Articles of
Incorporation, a member of the executive committee may participate in a
meeting of the executive committee by means of a conference telephone or
similar communications equipment by which all persons participating in the
meeting can communicate with each other, and participation by these means
<PAGE>
constitutes presence in person at the meeting.
SUBSECTION 6. -- VACANCIES. If any member of the executive committee shall
cease to be a director of the company prior to the expiration of his or her
term of service on the executive committee, then his or her membership on
the executive committee shall be deemed to have terminated and a vacancy
deemed to have existed as of the date of termination of membership on the
board of directors. Any vacancy occurring in the executive committee may be
filled by the board of directors at any regular or special meeting by
resolution adopted by a majority of the whole board.
SUBSECTION 7. -- REMOVAL OF EXECUTIVE COMMITTEE MEMBERS. Any member of the
executive committee may be removed, with or without cause, by the board of
directors at any regular or special meeting by resolution adopted by a
majority of the whole board.
SECTION 3. -- INVESTMENT COMMITTEE.
The board of directors, by resolution adopted by a majority of the whole
board, may elect from among its members an investment committee. In
addition to the chairman of the board and the president, who, by virtue of
their offices, shall each be a member, the investment committee shall
consist of such other members as shall be designated in the resolution, to
serve until the next meeting of the board of directors held after each
annual meeting of the shareholders.
The investment committee shall have and possess all the rights and powers
of the board of directors to make, supervise and direct the investments of
the company, to sell, assign, exchange, lease, or otherwise dispose of such
investments, and to do and perform all things deemed necessary and proper
in relation to such investments. The investment committee shall have the
further right and power to delegate its powers and duties to such officers,
employees and agents, including investment advisers, of the company as it
may select and appoint in its discretion, subject to such policies, plans,
standards, limitations and objectives as the investment committee may
prescribe from time to time.
The investment committee shall keep a record of its proceedings, shall make
reports to the board of directors of its actions as may be required by law
or by the board, shall adopt its own rules of procedure, and shall take
such other actions as may be required from time to time by Indiana Code
Section 27-1-12-2 or any other law of the State of Indiana relating to
investments by life insurance companies. (AMENDED 3-11-93)
ARTICLE V
STOCK CERTIFICATES, TRANSFER OF
SHARES, STOCK RECORDS
<PAGE>
SECTION 1. -- CERTIFICATES FOR SHARES.
Certificates representing shares of the company shall be in such form, not
inconsistent with the laws of the State of Indiana, as shall be determined
by the board of directors. Such certificates shall be signed by the
president or a vice president and by the secretary or an assistant
secretary. Where such certificate is also signed by a transfer agent or
registrar, or both, the signatures of the president, vice president and the
secretary or assistant secretary may be in facsimile form. All certificates
for shares shall be consecutively numbered or otherwise identified. The
name and address of the person to whom the shares represented thereby are
issued, with the number of shares and date of issue, shall be entered on
the stock transfer records of the company. All certificates surrendered to
the company for transfer shall be cancelled and no new certificate shall be
issued until the former certificate for a like number of shares shall have
been surrendered and cancelled.
SECTION 2. -- TRANSFER OF SHARES.
Transfer of shares of the company shall be made only on the stock transfer
records of the company by the holder of record thereof or by his legal
representative, who shall furnish proper evidence of authority to transfer,
or by his attorney thereunto authorized by power of attorney duly executed
and filed with the company, and on surrender for cancellation of the
certificate for such shares.
SECTION 3. -- LOST CERTIFICATES.
Any person claiming a certificate of stock to have been lost, stolen or
destroyed and desiring a new certificate in lieu thereof shall make an
affidavit of such fact, reciting the circumstances attending such loss or
destruction and shall give the company an open penalty bond of indemnity,
with a surety company as surety thereon, satisfactory to the president or
treasurer of the company (excepting that the board of directors may, by
resolution, authorize the acceptance of a bond of different amount, or a
bond with personal surety thereon) whereupon in the discretion of the
president or the treasurer a new certificate may be issued of the same
tenor and for the same number of shares as the one alleged to have been
lost, stolen or destroyed.
SECTION 4. -- TRANSFER AGENTS AND REGISTRAR.
The board of directors may appoint a transfer agent or agents and/or a
registrar of transfer, and may require all certificates to bear the
signatures of such transfer agent or agents, or any one of such agents,
and/or of such registrar. The board of directors may select the treasurer
of the company and one or more assistant treasurers to serve as transfer
agent or agents.
SECTION 5. -- REGULATIONS.
<PAGE>
The board of directors shall have power and authority to make all such
rules and regulations as it may deem expedient concerning issues, transfer
and registration of certificates for shares of the capital stock of the
company.
SECTION 6. -- RECORD DATE.
The board of directors shall fix in advance a date, not exceeding thirty
days preceding the date of any meeting of stockholders, or the date for the
payment of any dividend, or the date for the allotment of rights, or the
date when any change or conversion or exchange of stock shall go into
effect, as a record date for the determination of the stockholders entitled
to notice of, and to vote at, any such meeting, or entitled to receive
payment of any such dividend, or to any such allotment of rights, or to
exercise the rights in respect of any such change, conversion or exchange
of stock, and in such case only such stockholders as shall be stockholders
of record on the date so fixed shall be entitled to such notice of and to
vote at such meeting, or to receive payment of such dividend, or to receive
such allotment or rights, or to exercise such rights, as the case may be,
notwithstanding any transfer of any stock on the books of the company after
any such record date fixed as aforesaid.
ARTICLE VI
LIABILITY
SECTION 1. -- LIABILITY.
No person or his personal representatives shall be liable to the company
for any loss or damage suffered by it on account of any action taken or
omitted to be taken by such person in good faith as an officer or employee
of the company, or as a director, officer, partner, trustee, employee, or
agent of another foreign or domestic company, partnership, joint venture,
trust, employee benefit plan, or other enterprise, whether for profit or
not, which he serves or served at the request of the company, if such
person (a) exercised and used the same degree of care and skill as a
prudent man would have exercised and used under like circumstances, charged
with a like duty, or (b) took or omitted to take such action in reliance
upon advice of counsel for the company or such enterprise or upon
statements made or information furnished by persons employed or retained by
the company or such enterprise upon which he had reasonable grounds to
rely. The foregoing shall not be exclusive of other rights and defenses to
which such person or his personal representatives may be entitled under
law.
ARTICLE VII
INDEMNIFICATION
<PAGE>
SECTION 1. -- ACTIONS BY A THIRD PARTY.
The company shall indemnify any person who is or was a party, or is
threatened to be made a defendant or respondent, to a proceeding, including
any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than actions by or
in the right of the company), and whether formal or informal, who is or was
a director, officer, or employee of the company or who, while a director,
officer, or employee of the company, is or was serving at the company's
request as a director, officer, partner, trustee, employee, or agent of
another foreign or domestic company, partnership, joint venture, trust,
employee benefit plan, or other enterprise, whether for profit or not,
against:
(a) any reasonable expenses (including attorneys' fees) incurred with
respect to a proceeding, if such person is wholly successful on the merits
or otherwise in the defense of such proceeding, or
(b) judgments, settlements, penalties, fines (including excise taxes
assessed with respect to employee benefit plans) and reasonable expenses
(including attorneys' fees) incurred with respect to a proceeding where
such person is not wholly successful on the merits or otherwise in the
defense of the proceeding if:
(i) the individual's conduct was in good faith; and
(ii) the individual reasonably believed:
(A) in the case of conduct in the individual's capacity as a
director, officer or employee of the company, that the
individual's conduct was in the company's best interests; and
(B) in all other cases, that the individual's conduct was at
least not opposed to the company's best interests; and
(iii) in the case of any criminal proceeding, the individual either:
(A) had reasonable cause to believe the individual's conduct was
lawful; or
(B) had no reasonable cause to believe the individual's conduct
was unlawful.
The termination of a proceeding by a judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent is not, of
itself, determinative that
<PAGE>
the director, officer, or employee did not meet the standard of conduct
described in this section.
SECTION 2. -- ACTIONS BY OR IN THE RIGHT OF THE COMPANY.
The company shall indemnify any person who is or was a party or is
threatened to be made a defendant or respondent, to a proceeding, including
any threatened, pending or completed action, suit or proceeding, by or in
the right of the company to procure a judgment in its favor, by reason of
the fact that such person is or was a director, officer, or employee of the
company or is or was serving at the request of the company as a director,
officer, partner, trustee, employee, or agent of another foreign or
domestic company, partnership, joint venture, trust, employee benefit plan,
or other enterprise, whether for profit or not, against any reasonable
expenses (including attorneys' fees):
(a) if such person is wholly successful on the merits or otherwise in the
defense of such proceeding, or
(b) if not wholly successful:
(i) the individual's conduct was in good faith; and
(ii) the individual reasonably believed:
(A) in the case of conduct in the individual's capacity as a
director, officer or employee of the company, that the
individual's conduct was in the company's best interests; and
(B) in all other cases, that the individual's conduct was at
least not opposed to the company's best interests,
except that no indemnification shall be made in respect of any claim,
issue, or matter as to which such person shall have been adjudged to be
liable to the company unless and only to the extent that the court in which
such action or suit was brought shall determine upon application, that
despite the adjudication of liability but in view of all circumstances of
the case, such person is fairly and reasonably entitled to indemnification
for such expenses which such court shall deem proper.
SECTION 3. -- METHODS OF DETERMINING WHETHER STANDARDS FOR INDEMNIFICATION HAVE
BEEN MET.
Any indemnification under Sections 1 or 2 of this Article (unless ordered
by a court) shall be made by the company only as authorized in the specific
case upon a determination that indemnification of the director, officer, or
employee is proper in the circumstances because he has met the applicable
standards of conduct set
<PAGE>
forth in Section 1 or 2. In the case of directors of the company, such
determination shall be made by any one of the following procedures:
(a) by the board of directors by a majority vote of a quorum consisting of
directors not at the time parties to the proceeding;
(b) if a quorum cannot be obtained under (a), by majority vote of a
committee duly designated by the board of directors (in which designation
directors who are parties may participate), consisting solely of two or
more directors not at the time parties to the proceeding;
(c) by special legal counsel:
(i) selected by the board of directors or a committee thereof in the
manner prescribed in (a) or (b); or
(ii) if a quorum of the board of directors cannot be obtained under
(a) and a committee cannot be designated under (b), selected by a
majority vote of the full board of directors (in which selection
directors who are parties may participate).
In the case of persons who are not directors of the company, such
determination shall be made (a) by the chief executive officer of the
company or (b) if the chief executive officer so directs or in his absence,
in the manner such determination would be made if the person were a
director of the company.
SECTION 4. -- ADVANCEMENT OF DEFENSE EXPENSES.
The company may pay for or reimburse the reasonable expenses incurred by a
director, officer, or employee who is a party to a proceeding described in
Section 1 or 2 of this Article in advance of the final disposition of said
proceeding if:
(a) the director, officer, or employee furnishes the company a written
affirmation of his good faith belief that he has met the standard of
conduct described in Section 1 or 2; and
(b) the director, officer, or employee furnishes the company a written
undertaking, executed personally or on his behalf, to repay the advance if
it is ultimately determined that the director, officer, or employee did not
meet the standard of conduct; and
(c) a determination is made that the facts then known to those making the
determination would not preclude indemnification under Section 1 or 2.
The undertaking required by this Section must be an unlimited general
obligation of the director, officer, or employee but need not be secured
and may be accepted by the company without reference to the financial
ability of such person to make repayment.
<PAGE>
SECTION 5. -- NON-EXCLUSIVENESS OF INDEMNIFICATION.
The indemnification and advancement of expenses provided for or authorized
by this Article does not exclude any other rights to indemnification or
advancement of expenses that a person may have under:
(a) the company's articles of incorporation or bylaws;
(b) any resolution of the board of directors or the shareholders of the
company;
(c) any other authorization adopted by the shareholders; or
(d) otherwise as provided by law, both as to such person's actions in his
capacity as a director, officer, or employee of the company and as to
actions in another capacity while holding such office.
Such indemnification shall continue as to a person who has ceased to be a
director, officer, or employee, and shall inure to the benefit of the heirs
and personal representatives of such person.
ARTICLE VIII
AMENDMENTS
SECTION 1. -- These bylaws may be amended at any annual stockholders' meeting,
or at any special stockholders' meeting, provided that if amended at a special
stockholders' meeting, notice specifying the amendments proposed to be made
shall be mailed each stockholder at least thirty days before such special
meeting. Also, these bylaws may be amended at any regular or special meeting of
the board of directors by the vote of the majority of the total number of
directors.
PCDOC #53581
<PAGE>
Exhibit 10
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Independent
Auditors" in the Post Effective Amendment No. 1 to the Registration Statement
(Form N-4 No. 333-40937) and the related Statement of Additional Information
appearing therein and pertaining to Lincoln Life Variable Annuity Account N,
and to the use therein of our report dated February 5, 1998, with respect to
the statutory-basis financial statements of The Lincoln National Life
Insurance Company.
/s/ Ernst & Young LLP
Fort Wayne, Indiana
November 4, 1998
<PAGE>
EXHIBIT A
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.
<TABLE>
<S><C>
--------------------------------
| |
| Lincoln National Corporation |
| Indiana - Holding Company |
--------------------------------
| ---------------------------------------------
|--| City Financial Partners Ltd. |
| | 100% - England/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 |
| | --------------------------------------
1
<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 Life and Annuity Distributors, Inc. |
|--| (formerly Lincoln Financial Group, Inc.) |
| | 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 |
| | --------------------------------------------
2
<PAGE>
-------------------------------
| |
| 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 |
| | | | | | | -------------------------------------------
3
<PAGE>
--------------------------------
| |
| 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 Securities Corp. |
| | | | | 100% - Delaware - Securities Broker |
| | | ----------------------------------------
| | |
| | | ----------------------------------------------------
| | | | Vantage Global Advisors, Inc. |
| | |--| (formerly Modern Portfolio Theory Associates, Inc.)|
| | | | 100% - Delaware - Investment Adviser |
| | | ----------------------------------------------------
4
<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|
| | --------------------------------------------------
| | |
| | | -------------------------------------
| | |--| AnnuityNet Insurance Agency, Inc. |
| | | | 100% - Indiana - Insurance Agency |
| | | -------------------------------------
| |
| | -------------------------------------------
| |--|Lincoln National Insurance Associates, Inc.|
| | | (fka Cigna Associates, Inc.) |
| | | 100% - Connecticut - Insurance Agency |
| | -------------------------------------------
| | |
| | | --------------------------------------------------------
| | |--|Lincoln National Insurance Associates of Alabama, Inc. |
| | | | 100% - Alabama - Insurance Agency |
| | | --------------------------------------------------------
| | |
| | | -------------------------------------------------------------
| | | | Lincoln National Insurance Associates of Massachusetts, Inc.|
| | | |(formerly Cigna Associates of Massachusetts, Inc.) |
| | |--| 100% - Massachusetts - Insurance Agency |
| | | -------------------------------------------------------------
| |
| | -------------------------------------------
| |--|Sagemark Consulting, Inc. |
| | | (fka 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 |
| | ------------------------------------------------------
5
<PAGE>
--------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
--------------------------------
|
| -----------------------------------------------
|--| The Lincoln National Life Insurance Company |
| | 100% - Indiana |
| -----------------------------------------------
| |
| | ------------------------------------------------
| | | Lincoln National Growth and Income Fund, Inc. |
| |--| (formerly Lincoln National Growth Fund, Inc.) |
| | | 100% - Maryland - Mutual Fund |
| | ------------------------------------------------
| |
| | --------------------------------------------------------
| |--| 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 |
| ----------------------------------------------
6
<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.) |
| | ---------------------------------------------------------
| |
| |
| | --------------------------------------------------------
| | | 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 |
| | | ----------------------------------------------------
7
<PAGE>
--------------------------------
| 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 |
| | ------------------------------------------
8
<PAGE>
--------------------------------
| 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 |
| | | | --------------------------
9
<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 |
| | -------------------------------------------------
10
<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 |
| --------------------------------------------
</TABLE>
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.
11
<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) 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)
12
<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 Aoff 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.
13
<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.
14
<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 Partners 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.
b. Removal of Lynch & Mayer Asia, Inc. which was dissolved December 24,
1997.
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.
15
<PAGE>
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.
JUNE 1998
a. Name Change of CIGNA Financial Advisors, Inc. to Sagemark Consulting,
Inc. effective June 1, 1998.
b. Name Change of CIGNA Associates, Inc. to Lincoln National Insurance
Associates, Inc. effective June 1, 1998.
c. Addition of Lincoln National Insurance Associates of Alabama, Inc.,
incorporated as a wholly-owned subsidiary of Lincoln National Insurance
Associates, Inc. as an Alabama domiciled corporation.
d. Dissolution of LUTM Nominees Limited effective June 10, 1998.
JULY 1998
a. Name change of CIGNA Associates of Massachusetts, Inc. to Lincoln
National Insurance Associates of Massachusetts, Inc. effective July 22,
1998.
SEPTEMBER 1998
a. Removal of Lincoln Financial Group of Michigan, Inc., voluntarily
dissolved September 15, 1998.
b. Name change of Lincoln Financial Group, Inc. to Lincoln Life and Annuity
Distributors, Inc. on September 29, 1998.
c. Removal of Lincoln European Reinsurance S.A. -- company dissolved
September 30, 1998.
OCTOBER 1998
a. Addition of AnnuityNet Insurance Agency, Inc., incorporated as an
Indiana corporation October 2, 1998., a wholly-owned subsidiary of
AnnuityNet, Inc.
16
