<PAGE>
As filed with the Securities and Exchange Commission on July 19, 2000
Registration No.: 333-36304
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. 1 [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [_]
POST-EFFECTIVE AMENDMENT NO. 10 [X]
LINCOLN LIFE VARIABLE ANNUITY ACCOUNT N
Lincoln ChoicePlus Bonus
(Exact Name of Registrant)
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
(Name of Depositor)
1300 South Clinton Street
Post Office Box 1110
Fort Wayne, Indiana 46801
--------------------------------------------------------------------------------
(Address of Depositor's Principal Executive Offices)
Depositor's Telephone Number, including Area Code: (219)455-2000
Elizabeth A. Frederick, Esq.
The Lincoln National Life Insurance Company
1300 S. Clinton St.
Post Office Box 1110
Fort Wayne, Indiana 46802
--------------------------------------------------------------------------------
(Name and Address of Agent for Service)
Copy to:
Mary Jo Ardington, Esq.
The Lincoln National Life Insurance Company
1300 S. Clinton St.
Fort Wayne, Indiana 46802
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after the effective date of the Registration Statement.
Title of securities being registered:
Interests in a separate account under individual flexible premium deferred
variable annuity contracts.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
SHALL DETERMINE.
<PAGE>
Lincoln ChoicePlus Bonus
Lincoln Life Variable Annuity Account N
individual variable annuity contracts
Home Office:
Lincoln National Life Insurance Company
1300 South Clinton Street
Fort Wayne, IN 46802
www.lincolnlife.com
This Prospectus describes the individual flexible premium deferred variable an-
nuity contract that is issued by The Lincoln National Life Insurance Company
(Lincoln Life). It is primarily for use with nonqualified plans and retirement
plans under Section 408 (IRAs) and 408A (Roth IRAs) of the tax code. Generally,
you do not pay federal income tax on the contract's growth until it is paid
out. The contract is designed to accumulate contract value and to provide re-
tirement income that you cannot outlive or for an agreed upon time. These bene-
fits may be a variable or fixed amount or a combination of both. If you die be-
fore the annuity commencement date, we will pay your beneficiary a death bene-
fit. In the alternative, you may choose to receive a death benefit on the death
of the annuitant.
The minimum initial purchase payment for the contract is $10,000. Additional
purchase payments may be made to the contract and must be at least $100 per
payment ($25 if transmitted electronically), and at least $300 annually.
You choose whether your contract value accumulates on a variable or a fixed
(guaranteed) basis or both. If all your purchase payments, bonus credits and
persistency credits are in the fixed account, we guarantee your principal and a
minimum interest rate. We limit withdrawals and transfers from the fixed side
of the contract. A market value adjustment (MVA) may be applied to any surren-
der or transfer from the fixed account before the expiration date of a guaran-
teed period.
All purchase payments, bonus credits and persistency credits for benefits on a
variable basis will be placed in Lincoln Life Variable Annuity Account N (vari-
able annuity account [VAA]). The VAA is a segregated investment account of Lin-
coln Life. You take all the investment risk on the contract value and the re-
tirement income for amounts placed into one or more of the contract's variable
options. If the subaccounts you select make money, your contract value goes up;
if they lose money, it goes down. How much it goes up or down depends on the
performance of the subaccounts you select. We do not guarantee how any of the
variable options or their funds will perform. Also, neither the U.S. Government
nor any federal agency insures or guarantees your investment in the contract.
The available funds are listed below:
AIM Variable Insurance Funds:
AIM V.I. Capital Appreciation Fund
AIM V.I. Growth Fund
AIM V.I. International Equity Fund
AIM V.I. Value Equity Fund
Alliance Variable Products Series Fund (Class B):
Alliance Growth and Income Portfolio
Alliance Growth Portfolio
Alliance Premier Growth Portfolio
Alliance Technology Portfolio
American Funds Insurance Series (AFIS) also known as American Variable Insur-
ance Series (AVIS) (Class 2):
AFIS Global Small Capitalization Fund
AFIS Growth Fund
AFIS Growth-Income Fund
AFIS International Fund
Delaware Group Premium Fund (Service Class):
Delaware Premium Emerging Markets Series
Delaware Premium Growth & Income Series
Delaware Premium High Yield Series (formerly Delchester)
Delaware Premium REIT Series
Delaware Premium Select Growth Series
Delaware Premium Small Cap Value Series
Delaware Premium Social Awareness Series
Delaware Premium Trend Series
Deutsche Asset Management VIT Funds (formerly BT Insurance Funds Trust):
Deutsche VIT Equity 500 Index Fund
1
<PAGE>
Franklin Templeton Variable Insurance Products Trust (Class 2):
Franklin Mutual Shares Securities Fund
Franklin Small Cap Securities Fund
Templeton Growth Securities Fund (formerly Global Growth)
Templeton International Securities Fund
Liberty Variable Investment Trust:
Newport Tiger Fund
Lincoln National:
Bond Fund
Money Market Fund
MFS(R) Variable Insurance Trust (Service Class):
MFS Emerging Growth Series
MFS Research Series
MFS Total Return Series
MFS Utilities Series
Variable Insurance Products Fund (Service Class 2):
Fidelity VIP Equity-Income Portfolio
Fidelity VIP Growth Portfolio
Fidelity VIP Overseas Portfolio
Variable Insurance Products Fund III (Service Class 2):
Fidelity VIP III Growth Opportunities Portfolio
This Prospectus gives you information about the contracts that you should know
before you decide to buy a contract and make purchase payments. You should
also review the prospectuses for the funds that are attached, and keep all
prospectuses for reference.
Neither the SEC nor any state securities commission has approved this contract
or determined that this Prospectus is accurate or complete. Any representation
to the contrary is a criminal offense.
Lincoln Life offers variable annuity contracts that do not have bonus and per-
sistency credits, and have lower fees. Expenses for bonus contracts may be
higher than similar contracts without a bonus. Because of this, the amount of
the bonus credits may, over time, be offset by additional fees and charges.
You should carefully consider whether or not this contract is the best product
for you.
You can obtain a current Statement of Additional Information (SAI), dated the
same date as this Prospectus, about the contracts which has more information.
Its terms are made part of this Prospectus. For a free copy, write: Lincoln
National Life Insurance Company, P.O. Box 7866, Fort Wayne, Indiana 46801, or
call1-888-868-2583. The SAI and other information about Lincoln Life and Ac-
count N are also available on the SEC's web site (http://www.sec.gov). There
is a table of contents for the SAI on the last page of this Prospectus.
, 2000
2
<PAGE>
Table of contents
<TABLE>
<CAPTION>
Page
-------------------------------------------------
<S> <C>
Special terms 3
-------------------------------------------------
Expense tables 4
-------------------------------------------------
Summary 8
-------------------------------------------------
Condensed financial information 9
-------------------------------------------------
Investment results 9
-------------------------------------------------
Financial statements 9
-------------------------------------------------
Lincoln National Life Insurance Co. 9
-------------------------------------------------
Variable annuity account (VAA) 9
-------------------------------------------------
Investments of the variable annuity account 9
-------------------------------------------------
Charges and other deductions 13
-------------------------------------------------
The contracts 15
-------------------------------------------------
Annuity payouts 20
-------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Page
------------------------------------------------------------------------
<S> <C>
Fixed side of the contract 21
------------------------------------------------------------------------
Federal tax matters 23
------------------------------------------------------------------------
Voting rights 26
------------------------------------------------------------------------
Distribution of the contracts 26
------------------------------------------------------------------------
Return privilege 26
------------------------------------------------------------------------
State regulation 27
------------------------------------------------------------------------
Records and reports 27
------------------------------------------------------------------------
Other information 27
------------------------------------------------------------------------
Statement of additional information table of contents for Variable
Annuity Account N Lincoln ChoicePlus Bonus 28
------------------------------------------------------------------------
</TABLE>
Special terms
(We have italicized the terms that have special meaning throughout this Pro-
spectus.)
Account or variable annuity account (VAA) -- The segregated investment ac-
count, Account N, into which Lincoln Life sets aside and invests the assets
for the variable side of the contract offered in this Prospectus.
Accumulation unit -- A measure used to calculate contract value for the vari-
able side of the contract before the annuity commencement date.
Annuitant -- The person on whose life the annuity benefit payments are based
and upon whose life a death benefit may be paid.
Annuity commencement date -- The valuation date when funds are withdrawn or
converted into annuity units or fixed dollar payout for payment of retirement
income benefits under the annuity payout option you select.
Annuity payout -- An amount paid at regular intervals after the annuity com-
mencement date under one of several options available to the annuitant and/or
any other payee. This amount may be paid on a variable or fixed basis, or a
combination of both.
Annuity unit -- A measure used to calculate the amount of annuity payouts for
the variable side of the contract after the annuity commencement date.
Beneficiary -- The person you choose to receive the death benefit that is paid
if you die before the annuity commencement date.
Bonus credit -- The additional amount credited to the contract for each pur-
chase payment.
Contractowner (you, your, owner) -- The person who has the ability to exercise
the rights within the contract (decides on investment allocations, transfers,
payout option, designates the beneficiary, etc.). Usually, but not always, the
owner is the annuitant.
Contract value -- At a given time before the annuity commencement date, the
total value of all accumulation units for a contract plus the value of the
fixed side of the contract.
Contract year -- Each one-year period starting with the effective date of the
contract and starting with each contract anniversary after that.
Death benefit -- The amount payable to your designated beneficiary if the
owner dies before the annuity commencement date or, if selected, to the owner
if the annuitant dies.
Earnings -- The excess of contract value over the sum of bonus credits, per-
sistency credits and purchase payments which have not yet been withdrawn from
the contract.
Free amount -- The amount that may be withdrawn each contract year without in-
curring a surrender charge.
Lincoln Life (we, us, our) -- The Lincoln National Life Insurance Company.
Persistency credits -- The additional amount credited to the contract after
the fifteenth contract anniversary.
Purchase payments -- Amounts paid into the contract other than bonus credits
and persistency credits.
Subaccount -- The portion of the VAA that reflects investments in accumulation
and annuity units of a class of a particular fund available under the con-
tracts. There is a separate subaccount which corresponds to each class of a
fund.
Valuation date -- Each day the New York Stock Exchange (NYSE) is open for
trading.
Valuation period -- The period starting at the close of trading (currently,
normally, 4:00 p.m. New York time) on each day that the NYSE is open for trad-
ing (valuation date) and ending at the close of such trading on the next valu-
ation date.
3
<PAGE>
Expense tables
Summary of Contractowner expenses:
The maximum surrender charge (contingent deferred sales charge)
(as a percentage of purchase payments surrendered/withdrawn): 8.5%
The surrender charge percentage is reduced over time. The later the redemption
occurs, the lower the surrender charge with respect to that surrender or with-
drawal. We may waive this charge in certain situations. See Surrender charges.
Account fee: $35
--------------------------------------------------------------------------------
Account N annual expenses for Lincoln ChoicePlus Bonus subaccounts:
(as a percentage of average daily net assets):
<TABLE>
<CAPTION>
With Enhanced
Guaranteed
Minimum With 5%
Death Benefit Step-Up
(EGMDB) Death Benefit
<S> <C> <C>
Mortality and expense risk charge 1.45% 1.60%
Administrative charge .15% .15%
----- -----
Total annual charge for each subaccount 1.60% 1.75%
</TABLE>
Annual expenses of the funds for the year ended December 31, 1999:
(as a percentage of each fund's average net assets):
<TABLE>
<CAPTION>
Management Other Total
Fees (after any Expenses (after Expenses (after
waivers/ 12b-1 any waivers/ any waivers/
reimbursements) + Fees + reimbursements) = reimbursements)
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AFIS Global Small Capitalization Fund (class 2) 0.78% 0.25 0.03% 1.06%
-------------------------------------------------------------------------------------------------------------
AFIS Growth Fund (class 2) 0.38 0.25 0.01 0.64
-------------------------------------------------------------------------------------------------------------
AFIS Growth-Income Fund (class 2) 0.34 0.25 0.01 0.60
-------------------------------------------------------------------------------------------------------------
AFIS International Fund (class 2) 0.55 0.25 0.05 0.85
-------------------------------------------------------------------------------------------------------------
AIM V.I. Capital Appreciation Fund 0.62 N/A 0.11 0.73
-------------------------------------------------------------------------------------------------------------
AIM V.I. Growth Fund 0.63 N/A 0.10 0.73
-------------------------------------------------------------------------------------------------------------
AIM V.I. International Equity Fund 0.75 N/A 0.22 0.97
-------------------------------------------------------------------------------------------------------------
AIM V.I. Value Fund 0.61 N/A 0.15 0.76
-------------------------------------------------------------------------------------------------------------
Alliance Growth Portfolio (class B) 0.75 0.25 0.12 1.12
-------------------------------------------------------------------------------------------------------------
Alliance Growth and Income Portfolio (class B) 0.63 0.25 0.09 0.97
-------------------------------------------------------------------------------------------------------------
Alliance Premier Growth Portfolio (class B) 1.00 0.25 0.04 1.29
-------------------------------------------------------------------------------------------------------------
Alliance Technology Portfolio (class B) 0.71 0.25 0.24 1.20
-------------------------------------------------------------------------------------------------------------
Delaware Premium Emerging Markets Series
(Service class)/1/ 1.19 0.15 0.28 1.62
-------------------------------------------------------------------------------------------------------------
Delaware Premium Growth and Income Series
(Service class)/1/ 0.60 0.15 0.11 0.86
-------------------------------------------------------------------------------------------------------------
Delaware Premium High Yield Series (formerly
Delchester) (Service class)/1/ 0.65 0.15 0.07 0.87
-------------------------------------------------------------------------------------------------------------
Delaware Premium REIT Series (Service class)/1/ 0.64 0.15 0.21 1.00
-------------------------------------------------------------------------------------------------------------
Delaware Premium Select Growth Series (Service 0.75 0.15 0.06 0.96
class)/1/
-------------------------------------------------------------------------------------------------------------
Delaware Premium Small Cap Value Series
(Service class)/1/ 0.75 0.15 0.10 1.00
-------------------------------------------------------------------------------------------------------------
Delaware Premium Social Awareness Series
(Service class)/1/ 0.70 0.15 0.15 1.00
-------------------------------------------------------------------------------------------------------------
Delaware Premium Trend Series (Service 0.15 0.07 0.97
class)/1/ 0.75
-------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Management Other Total
Fees (after any Expenses (after Expenses (after
waivers/ 12b-1 any waivers/ any waivers/
reimbursements) + Fees + reimbursements) = reimbursements)
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Deutsche VIT Equity 500 Index Fund/2/ 0.14% N/A 0.16% 0.30%
-------------------------------------------------------------------------------------------------------------
Fidelity VIP Equity-Income Portfolio (Service 0.48 0.25 0.10 0.83
class 2)/3/
-------------------------------------------------------------------------------------------------------------
Fidelity VIP Growth Portfolio (Service class 0.58 0.25 0.10 0.93
2)/3/
-------------------------------------------------------------------------------------------------------------
Fidelity VIP Overseas Portfolio (Service class 0.73 0.25 0.18 1.16
2)/3/
-------------------------------------------------------------------------------------------------------------
Fidelity VIP III Growth Opportunities Portfolio 0.58 0.25 0.13 0.96
(Service class 2)/3/
-------------------------------------------------------------------------------------------------------------
Franklin Mutual Shares Securities Fund (class 0.60 0.25 0.19 1.04
2)/4/,/9/
-------------------------------------------------------------------------------------------------------------
Franklin Small Cap Securities Fund (class 0.55 0.25 0.27 1.07
2)/5/,/9/
-------------------------------------------------------------------------------------------------------------
Liberty Variable Trust Newport Tiger Fund 0.49 N/A 0.31 1.21
-------------------------------------------------------------------------------------------------------------
Lincoln National Bond Fund 0.45 N/A 0.08 0.53
-------------------------------------------------------------------------------------------------------------
Lincoln National Money Market Fund 0.48 N/A 0.11 0.59
-------------------------------------------------------------------------------------------------------------
MFS Variable Trust Emerging Growth Series 0.75 0.20 0.09 1.04
(Service class)/6/
-------------------------------------------------------------------------------------------------------------
MFS Variable Trust Research Series (Service 0.75 0.20 0.11 1.06
class)/6/
-------------------------------------------------------------------------------------------------------------
MFS Variable Trust Total Return Series (Service 0.75 0.20 0.15 1.10
class)/6/
-------------------------------------------------------------------------------------------------------------
MFS Variable Trust Utilities Series (Service 0.75 0.20 0.16 1.11
class)/6/
-------------------------------------------------------------------------------------------------------------
Templeton Growth Securities Fund formerly 0.83 0.25 0.05 1.13
Global Growth (class 2)/7/,/8/,/9/
-------------------------------------------------------------------------------------------------------------
Templeton International Securities Fund (class 0.69 0.25 0.19 1.13
2)/9/,/10/
-------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Effective May 1, 2000 through October 31, 2000, Delaware Management Compa-
ny, "DMC" has voluntarily agreed to waive its management fee and reimburse
the Series for expenses such that total expenses (excluding any taxes, in-
terest, brokerage fees, extraordinary expenses and 12b-1 fees) will not ex-
ceed 0.80% for High Yield and Growth and Income; 0.85% for REIT, Select
Growth, Small Cap Value, Social Awareness and Trend; 1.50% for Emerging
Markets. Without such an arrangement, such total operating expenses would
have been 0.96% for REIT, 0.90% for Social Awareness, and 1.53% for Emerg-
ing Markets. DMC voluntarily elected to cap its management fee for the
Growth and Income Series at 0.60% indefinitely. The Service class shares
are subject to an annual 12b-1 fee of not more than 0.30% (currently set at
0.15%).
(2) Under the Advisory Agreement with Bankers Trust Company (the "Advisor"),
the fund will pay an advisory fee at an annual percentage rate of 0.20% 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 its fee and to reimburse the fund for certain expenses so that the
fund's total operating expenses will not exceed 0.30% of average daily net
assets. Without the reimbursement to the Funds for the year ended 12/31/99
total expenses would have been 0.43% for the Equity 500 Index Fund.
(3) Service class 2 expenses are based on estimated expenses for the first
year.
(4) On 2/8/00, a merger and reorganization was approved that combined the as-
sets of the fund with a similar fund of the Templeton Variable Products Se-
ries Fund, effective 5/01/00. The table shows restated total expenses based
on the new fees and assets of the fund as of 12/31/99, and not the assets
of the combined fund. However, if the table reflected both the new fees and
the combined assets, the fund's expenses after 5/1/00 would be estimated
as: Management Fees 0.60%, Distribution and Service Fees 0.25%, Other Ex-
penses 0.19% and Total Fund Operating Expenses 1.04%.
(5) On 2/8/00, a merger and reorganization was approved that combined the as-
sets of the fund with a similar fund of the Templeton Variable Products Se-
ries Fund, effective 5/01/00. On 2/8/00, fund shareholders approved new
management fees, which apply to the combined fund effective 5/1/00. The ta-
ble shows restated total expenses based on the new fees and assets of the
fund as of 12/31/99, and not the assets of the combined fund. However, if
the table reflected both the new fees and the combined assets, the fund's
expenses after 5/1/00 would be estimated as: Management Fees 0.55%, Distri-
bution and Service Fees 0.25%, Other Expenses 0.27% and Total Fund Operat-
ing Expenses 1.07%.
(6) Each series has an expense offset arrangement which reduces the series'
custodian fee based on the amount of cash maintained by the series with its
custodian and dividend disbursing agent. Each series may enter into other
such arrangement and directed brokerage arrangements, which would also have
the effect of reducing the series' expenses. "Other Expenses" do not take
into account these expense reductions, and are therefore higher than the
actual expenses of the series. Had the fee reductions been taken into ac-
count, "Net Expenses" would be lower for certain series and would equal:
1.03% for Emerging Growth Series; 1.05% for Research Series; 1.09% for To-
tal Return Series; 1.10% for Utilities Series.
(7) On 2/8/00, a merger and reorganization was approved that combined the as-
sets of the fund with a similar fund of the Templeton Variable Products Se-
ries Fund, effective 5/01/00. The table shows restated total expenses based
on the new fees and assets of the fund as of 12/31/99, and not the assets
of the combined fund. However, if the table reflected both the new fees and
the combined assets, the fund's expenses after 5/1/00 would be estimated
as: Management Fees 0.80%, Distribution and Service Fees 0.25%, Other Ex-
penses 0.05% and Total Fund Operating Expenses 1.10%.
(8) The Fund administration fee is paid indirectly through the management fee.
(9) The fund's class 2 distribution plan or "rule 12b-1 plan" is described in
the fund's prospectus. While the maximum amount payable under the fund's
class 2 rule 12b-1 plan is 0.35% per year of the fund's average daily net
assets, the Board of Trustees of Franklin Templeton Variable Insurance
Products Trust has set the current rate at 0.25% per year.
(10) On 2/8/00, a merger and reorganization was approved that combined the as-
sets of the fund with a similar fund of the Templeton International Equity
Fund, effective 5/01/00. The shareholders of that fund approved new man-
agement fees, which apply to the combined fund effective 5/1/00. The table
shows restated total expenses based on the new fees and assets of the fund
as of 12/31/99, and not the assets of the combined fund. However, if the
table reflected both the new fees and the combined assets, the fund's ex-
penses after 5/1/00 would be estimated as: Management Fees 0.65%, Distri-
bution and Service Fees 0.25%, Other Expenses 0.20% and Total Fund Operat-
ing Expenses 1.10%.
5
<PAGE>
Examples
(expenses of the subaccounts and of the funds):
If you surrender your contract at the end of the time period shown, you would
pay the following expenses on a $1,000 investment, assuming a 5% annual return:
<TABLE>
<CAPTION>
1 year 3 years
-------------------------------------------------------------------------------
<S> <C> <C>
AFIS Global Small Cap (Class 2) $114 $168
-------------------------------------------------------------------------------
AFIS Growth (Class 2) 110 155
-------------------------------------------------------------------------------
AFIS Growth-Income (Class 2) 109 153
-------------------------------------------------------------------------------
AFIS International (Class 2) 111 161
-------------------------------------------------------------------------------
AIM V.I. Capital Appreciation 110 157
-------------------------------------------------------------------------------
AIM V.I. Growth 110 157
-------------------------------------------------------------------------------
AIM V.I. International Equity 113 164
-------------------------------------------------------------------------------
AIM V.I. Value 110 158
-------------------------------------------------------------------------------
Alliance Growth (Class B) 114 169
-------------------------------------------------------------------------------
Alliance Growth and Income (Class B) 113 164
-------------------------------------------------------------------------------
Alliance Premier Growth (Class B) 116 174
-------------------------------------------------------------------------------
Alliance Technology (Class B) 115 171
-------------------------------------------------------------------------------
Delaware Emerging Markets (Service Class) 119 184
-------------------------------------------------------------------------------
Delaware Growth and Income (Service Class) 111 161
-------------------------------------------------------------------------------
Delaware High-Yield Bond (Service Class) 112 161
-------------------------------------------------------------------------------
Delaware REIT (Service Class) 113 165
-------------------------------------------------------------------------------
Delaware Select Growth (Service Class) 112 164
-------------------------------------------------------------------------------
Delaware Small Cap Value (Service Class) 113 165
-------------------------------------------------------------------------------
Delaware Social Awareness (Service Class) 113 165
-------------------------------------------------------------------------------
Delaware Trend (Service Class) 113 164
-------------------------------------------------------------------------------
Deutsche VIT Equity 500 Index 106 144
-------------------------------------------------------------------------------
Fidelity VIP Equity-Income (Service Class 2) 111 160
-------------------------------------------------------------------------------
Fidelity VIP Growth (Service Class 2) 112 163
-------------------------------------------------------------------------------
Fidelity VIP Overseas (Service Class 2) 112 164
-------------------------------------------------------------------------------
Fidelity VIP III Growth Opportunities (Service Class 2) 114 170
-------------------------------------------------------------------------------
Franklin Mutual Shares Securities (Class 2) 113 166
-------------------------------------------------------------------------------
Franklin Small Cap Securities (Class 2) 113 166
-------------------------------------------------------------------------------
Liberty Variable Trust Newport Tiger 115 172
-------------------------------------------------------------------------------
Lincoln National Bond 108 151
-------------------------------------------------------------------------------
Lincoln National Money Market 109 153
-------------------------------------------------------------------------------
MFS Variable Trust Emerging Growth (Service Class) 113 166
-------------------------------------------------------------------------------
MFS Variable Trust Research (Service Class) 113 167
-------------------------------------------------------------------------------
MFS Variable Trust Total Return (Service Class) 114 168
-------------------------------------------------------------------------------
MFS Variable Trust Utilities (Service Class) 114 169
-------------------------------------------------------------------------------
Templeton Growth (Class 2) 114 169
-------------------------------------------------------------------------------
Templeton International (Class 2) 114 169
-------------------------------------------------------------------------------
</TABLE>
We provide these examples to help you understand the direct and indirect costs
and expenses of the contract. These examples assume that the 5% Step-Up death
benefit is in effect. Without this benefit, expenses would be lower. These ex-
amples do not reflect bonus credits and persistency credits. For more informa-
tion, see Charges and other deductions in this Prospectus, and the prospectuses
for the funds. Premium taxes may also apply, although they do not appear in the
examples. This example should not be considered a representation of past or fu-
ture expenses. Actual expenses may be more or less than those shown.
6
<PAGE>
If you do not surrender your contract, you would pay the following expenses on
a $1,000 investment, assuming a 5% annual return:
<TABLE>
<CAPTION>
1 year 3 years
-------------------------------------------------------------------------------
<S> <C> <C>
AFIS Global Small Capitalization Fund $29 $88
-------------------------------------------------------------------------------
AFIS Growth Fund 25 75
-------------------------------------------------------------------------------
AFIS Growth-Income Fund 24 73
-------------------------------------------------------------------------------
AFIS International Fund 26 81
-------------------------------------------------------------------------------
AIM V.I. Capital Appreciation Fund 25 77
-------------------------------------------------------------------------------
AIM V.I. Growth Fund 25 77
-------------------------------------------------------------------------------
AIM V.I. International Equity Fund 28 84
-------------------------------------------------------------------------------
AIM V.I. Value Fund 25 78
-------------------------------------------------------------------------------
Alliance Growth Portfolio 29 89
-------------------------------------------------------------------------------
Alliance Growth and Income Portfolio 28 84
-------------------------------------------------------------------------------
Alliance Premier Growth Portfolio 31 94
-------------------------------------------------------------------------------
Alliance Technology Portfolio 30 91
-------------------------------------------------------------------------------
Delaware Premium Emerging Markets Series 34 104
-------------------------------------------------------------------------------
Delaware Premium Growth and Income Series 26 81
-------------------------------------------------------------------------------
Delaware Premium High Yield Series (formerly Delchester) 27 81
-------------------------------------------------------------------------------
Delaware Premium REIT Series 28 85
-------------------------------------------------------------------------------
Delaware Premium Select Growth Series 27 84
-------------------------------------------------------------------------------
Delaware Premium Small Cap Value Series 28 85
-------------------------------------------------------------------------------
Delaware Premium Social Awareness Series 28 85
-------------------------------------------------------------------------------
Delaware Premium Trend Series 28 84
-------------------------------------------------------------------------------
Deutsche VIT Equity 500 Index Fund 21 64
-------------------------------------------------------------------------------
Fidelity VIP Equity-Income Portfolio 26 80
-------------------------------------------------------------------------------
Fidelity VIP Growth Portfolio 27 83
-------------------------------------------------------------------------------
Fidelity VIP Overseas Portfolio 27 84
-------------------------------------------------------------------------------
Fidelity VIP III Growth Opportunities Portfolio 29 90
-------------------------------------------------------------------------------
Franklin Mutual Shares Securities Fund 28 86
-------------------------------------------------------------------------------
Franklin Small Cap Securities Fund 28 86
-------------------------------------------------------------------------------
Liberty Variable Trust Newport Tiger Fund 30 92
-------------------------------------------------------------------------------
Lincoln National Bond Fund 23 71
-------------------------------------------------------------------------------
Lincoln National Money Market Fund 24 73
-------------------------------------------------------------------------------
MFS Variable Trust Emerging Growth Series 28 86
-------------------------------------------------------------------------------
MFS Variable Trust Research Series 28 87
-------------------------------------------------------------------------------
MFS Variable Trust Total Return Series 29 88
-------------------------------------------------------------------------------
MFS Variable Trust Utilities Series 29 89
-------------------------------------------------------------------------------
Templeton Growth Securities Fund (formerly Global Growth) 29 89
-------------------------------------------------------------------------------
Templeton International Securities Fund 29 89
-------------------------------------------------------------------------------
</TABLE>
We provide these examples to help you understand the direct and indirect costs
and expenses of the contract. These examples assume that the 5% Step-Up death
benefit is in effect. Without this benefit, expenses would be lower. These ex-
amples do not reflect bonus credits and persistency credits. For more informa-
tion, see Charges and other deductions in this Prospectus, and the prospectuses
for the funds. Premium taxes may also apply, although they do not appear in the
examples. This example should not be considered a representation of past or fu-
ture expenses. Actual expenses may be more or less than those shown.
7
<PAGE>
Summary
What kind of contract am I buying? It is an individual variable and/or market
value adjusted annuity contract between you and Lincoln Life. This Prospectus
describes the variable side of the contract. See The contracts.
What is the variable annuity account (VAA)? It is a separate account we estab-
lished under Indiana insurance law, and registered with the SEC as a unit in-
vestment trust. VAA assets are allocated to one or more subaccounts, according
to your investment choices. VAA assets are not chargeable with liabilities
arising out of any other business which Lincoln Life may conduct. See Variable
annuity account.
What are my investment choices? Based upon your instruction for purchase pay-
ments, the VAA applies your purchase payments, bonus credits and persistency
credits to buy shares in one or more of the investment options. See Invest-
ments of the variable annuity account--Description of the funds.
Who invests my money? Several different investment advisors manage the invest-
ment options. See Investments of the variable annuity account--Investment ad-
visors.
How does the contract work? If we approve your application, we will send you a
contract. When you make purchase payments during the accumulation phase, you
receive bonus credits and you buy accumulation units. If you decide to receive
retirement income payments, your accumulation units are converted to annuity
units. Your retirement income payments will be based on the number of annuity
units you received and the value of each annuity unit on payout days. See The
contracts.
What charges do I pay under the contract? If you withdraw purchase payments,
you pay a surrender charge from 0% to 8.5% of the surrendered or withdrawn
purchase payment, depending upon how long those payments have been invested in
the contract. We may waive surrender charges in certain situations. See The
contracts--surrenders and withdrawals.
We will deduct any applicable premium tax from purchase payments or contract
value at the time the tax is incurred or at another time we choose.
We charge an account fee of $35 on any contract anniversary if the contract
value is less than $100,000.
We apply an annual charge totaling 1.60% to the daily net asset value of the
VAA. This charge includes 0.15% as an administrative charge and 1.45% as a
mortality and expense risk charge. If the 5% Step-Up death benefit is in ef-
fect, the mortality and expense risk charge is 1.60%, for an annual charge to-
taling 1.75%. See Charges and other deductions.
The funds' investment management fees, expenses and expense limitations, if
applicable, are more fully described in the prospectuses for the funds.
What purchase payments do I make, and how often? Subject to the minimum and
maximum payment amounts, your payments are completely flexible. See The con-
tracts--Purchase payments.
What is a bonus credit and a persistency credit? When purchase payments are
made, Lincoln Life will credit an additional amount to the contract, known as
a bonus credit. The amount of the bonus credit is calculated as a percentage
of the purchase payments. The bonus credit percentage will vary based on the
owner's cumulative purchase payments, as defined in this Prospectus. All bonus
credits become part of the contract value at the same time as the correspond-
ing purchase payments. Bonus credits are not considered to be purchase pay-
ments. See The contracts--Bonus credits.
A persistency credit of .05% of contract value less purchase payments that
have been in the contract less than fifteen years will be credited on a quar-
terly basis after the fifteenth anniversary. See The contracts--Persistency
credits.
Lincoln Life offers a variety of variable annuity contracts. Other annuity
contracts that we offer have no provision for bonus credits but may have lower
mortality and expense risk charges and/or lower surrender charges. The amount
of the bonus credits may, over time, be fully or partially offset by addi-
tional fees and charges. However, the persistency credits are designed to off-
set these additional fees and charges. We encourage you to talk with your fi-
nancial advisor and determine which annuity contract is most appropriate for
you.
How will my annuity payouts be calculated? If you decide to annuitize, you may
select an annuity option and start receiving retirement income payments from
your contract as a fixed option or variable option or a combination of both.
See Annuity payouts--Annuity options. Remember that participants in the VAA
benefit from any gain, and take a risk of any loss, in the value of the secu-
rities in the funds' portfolios.
What happens if I die before I annuitize? Your beneficiary will receive either
the enhanced death benefit or the 5% Step-Up death benefit, depending on which
death benefit is in effect at the time of your death. Your beneficiary has op-
tions as to how the death benefit is paid. In the alternative, you may choose
to receive a death benefit on the death of the annuitant. See The contracts--
Death benefit before the annuity commencement date.
8
<PAGE>
May I transfer contract value between variable options and between the fixed
side of the contract? Yes, with certain limits. See The contracts--Transfers
between subaccounts on or before the annuity commencement date, Transfer after
the annuity commencement date and Transfers to and from a fixed account on or
before the annuity commencement date.
May I surrender the contract or make a withdrawal? Yes, subject to contract re-
quirements and to the restrictions of any qualified retirement plan for which
the contract was purchased. See The contracts--Surrenders and withdrawals. If
you surrender the contract or make a withdrawal, certain charges may apply. See
Charges and other deductions. A portion of surrender/withdrawal proceeds may be
taxable. In addition, if you decide to take a distribution before age 59 1/2, a
10% Internal Revenue Service (IRS) tax penalty may apply. A surrender or a
withdrawal also may be subject to 20% withholding. See Federal tax matters.
Do I get a free look at this contract? Yes. You can cancel the contract within
ten days (in some states longer) of the date you first receive the contract.
You need to return the contract, postage prepaid, to our home office. In most
states you assume the risk of any market drop on purchase payments you allocate
to the variable side of the contract. We will not refund any bonus credits
credited to your contract value if you elect to cancel your contract; however,
we will assume the risk of investment loss on the bonus credits. See Return
privilege.
Condensed financial information for the variable annuity account
Because the subaccounts which are available under the contracts did not begin
operation before the date of this Prospectus, financial information for the
subaccounts is not included in this Prospectus or in the SAI.
Investment results
At times, the VAA may compare its investment results to various unmanaged indi-
ces or other variable annuities in reports to shareholders, sales literature
and advertisements. The results will be calculated on a total return basis for
various periods, with or without contingent deferred sales charges. Total re-
turns include the reinvestment of all distributions, which are reflected in
changes in unit value. See the SAI for further information.
Financial statements
The financial statements of the VAA and the statutory-basis financial state-
ments of Lincoln Life are located in the SAI. If you would like a free copy of
the SAI, complete and mail the enclosed card, or call 1-888-868-2583.
The Lincoln National Life Insurance Co.
Lincoln Life was founded in 1905 and is organized under Indiana law. 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.
Variable annuity account (VAA)
On November 3, 1997, the VAA was established as an insurance company separate
account under Indiana law. It is registered with the SEC as a unit investment
trust under the provisions of the Investment Company Act of 1940 (1940 Act).
The SEC does not supervise the VAA or Lincoln Life. The VAA is a segregated in-
vestment account, meaning that its assets may not be charged with liabilities
resulting from any other business that we may conduct. Income, gains and loss-
es, whether realized or not, from assets allocated to the VAA are, in accor-
dance with the applicable annuity contracts, credited to or charged against the
VAA. They are credited or charged without regard to any other income, gains or
losses of Lincoln Life. The VAA satisfies the definition of a separate account
under the federal securities laws. We do not guarantee the investment perfor-
mance of the VAA. Any investment gain or loss depends on the investment perfor-
mance of the funds. You assume the full investment risk for all amounts placed
in the VAA.
The VAA is used to support other annuity contracts offered by Lincoln Life in
addition to the contracts described in this Prospectus. The other annuity con-
tracts supported by the VAA generally invest in the same funds as the contracts
described in this Prospectus. These other annuity contracts may have different
charges that could affect performance of the subaccount.
Investments of the variable annuity account
You decide the subaccount(s) to which you allocate purchase payments. Bonus
credits are allocated to the subaccounts at the same time and at the same
percentage as the purchase payments being made. There is a separate subaccount
which corresponds to each class of each fund. You may change your allocation
without penalty or charges. Shares of the funds will be sold at
9
<PAGE>
net asset value with no initial sales charge to the VAA in order to fund the
contracts. The funds are required to redeem fund shares at net asset value upon
our request. We reserve the right to add, delete or substitute funds.
Investment advisors
The investment advisors of the funds are:
AIM Variable Insurance Funds, Inc. ("AIM V.I. Funds"), managed by A I M Advi-
sors, Inc.
Alliance Variable Products Series Fund managed by Alliance Capital Management,
L.P.
American Funds Insurance Series, managed by Capital Research and Management
Company.
Delaware Group Premium Fund Inc. ("Delaware Group"), managed by Delaware Man-
agement Company. The Social Awareness Series is sub-advised by Vantage Invest-
ment Advisors. The REIT Series is sub-advised by Lincoln Investment Management.
The Emerging Markets Series is managed by Delaware International Advisers Ltd.
Deutsche Asset Management VIT Funds (formerly BT Insurance Funds Trust), man-
aged by Bankers Trust Company.
Franklin Templeton Variable Insurance Products Trust--Franklin Small Cap is
managed by Franklin Advisers, Inc.; Mutual Shares Securities is managed by
Franklin Mutual Advisers, LLC; Templeton Growth Securities is managed by Tem-
pleton Global Advisors Limited; Templeton International Securities is managed
by Templeton Investment Counsel, Inc.
Liberty Variable Investment Trust ("Liberty Variable Trust"), managed by Lib-
erty Advisory Series Corp., and sub-advised by Colonial Management Associates,
Inc. and Newport Fund Management, Inc.
Lincoln National Bond Fund, Inc., and Lincoln National Money Market Fund, Inc.,
managed by Lincoln Investment Management, Inc. ("LIM"). LIM has informed the
funds to which it provides advisory services that it intends to merge into a
newly created series of its affiliate, Delaware Management Business Trust, dur-
ing the fourth quarter of 2000 or the first quarter of 2001. LIM does not ex-
pect the merger to result in any change in the level of advisory services that
it currently provides to these funds, although there may be some changes in,
and additions to, personnel. See the prospectuses for these funds for more in-
formation.
MFS--Variable Insurance Trust ("MFS Variable Trust"), managed by Massachusetts
Financial Services Company.
Variable Insurance Products Fund ("Fidelity VIP") and Variable Insurance Prod-
ucts Fund III ("Fidelity VIP III"), managed by Fidelity Management & Research
Company.
As compensation for their services to the fund, the investment advisors receive
a fee from the fund, which is accrued daily and paid monthly. This fee is based
on the net assets of each fund, as defined under the Purchase and Redemption of
Shares, in the prospectus for the fund.
With respect to a fund, the advisor and/or distributor, or an affiliate there-
of, may compensate Lincoln Life (or an affiliate) for administrative, distribu-
tion, or other
services. Some funds may compensate us more than other funds. It is anticipated
that such compensation will be based on assets of the particular fund attribut-
able to the contracts along with certain other variable contracts issued or ad-
ministered by Lincoln Life (or an affiliate). As of the date of this Prospec-
tus, we were receiving compensation from each fund company except Delaware.
The funds' shares are issued and redeemed only in connection with variable an-
nuity contracts and variable life insurance policies (mixed funding) issued
through separate accounts of Lincoln Life and other life insurance companies
(shared funding). The funds do not foresee any disadvantage to contractowners
arising out of mixed or shared funding. Nevertheless, the funds' 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 ac-
counts might withdraw its investment in a fund. This might force a fund to sell
portfolio securities at disadvantageous prices.
Description of the funds
Each of the subaccounts of the VAA is invested solely in shares of one of the
funds available under the contract. Each fund is registered as a diversified,
open-end management investment company under the 1940 Act, except for the Dela-
ware Premium REIT Series and Delaware Premium Emerging Market Series, which are
non-diversified. Diversified means not owning too great a percentage of the se-
curities of any one company. An open-end company is one which, in this case,
permits Lincoln Life to sell its shares back to the fund when you make a with-
drawal, surrender the contract or transfer from one fund to another. Management
investment company is the legal term for a mutual fund. These definitions are
very general. The precise legal definitions for these terms are contained in
the 1940 Act.
Certain funds offered as part of this contract have similar investment objec-
tives and policies to other portfolios managed by the advisor. The investment
results of the funds, however, may be higher or lower than the other portfolios
that are managed by the advisor or sub-advisor. 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 managed by the
advisor or sub-advisor.
10
<PAGE>
Following are brief summaries of the investment objectives and policies of the
funds. Each fund is subject to certain investment policies and restrictions
which may not be changed without a majority vote of shareholders of that fund.
More detailed information may be obtained from the current prospectus for the
fund which is included in this booklet. Please be advised that there is no as-
surance that any of the funds will achieve their stated objectives.
AFIS Global Small Capitalization Fund: Seeks to make your investment grow over
time by investing primarily in stocks of smaller companies located around the
world that typically have market capitalizations of $50
million to $1.5 billion. The fund is designed for investors seeking capital
appreciation through stocks. Investors in the fund should have a long-term
perspective and be able to tolerate potentially wide price fluctuations.
AFIS Growth Fund: Seeks to make your investment grow by investing primarily in
common stocks of companies that appear to offer superior opportunities for
growth of capital. The fund is designed for investors seeking capital appreci-
ation through stocks. Investors in the fund should have a long-term perspec-
tive and be able to tolerate potentially wide price fluctuations.
AFIS Growth-Income Fund: Seeks to make your investment grow and provide you
with income over time by investing primarily in common stocks or other securi-
ties which demonstrate the potential for appreciation and/or dividends. The
fund is designed for investors seeking both capital appreciation and income.
AFIS International Fund: Seeks to make your investment grow over time by in-
vesting primarily in common stocks of companies located outside the United
States. The fund is designed for investors seeking capital appreciation
through stocks. Investors in the fund should have a long-term perspective and
be able to tolerate potentially wide price fluctuations.
AIM V.I. Capital Appreciation Fund: Seeks growth of capital through investment
in common stocks, with emphasis on medium- and small-sized growth companies.
The investment advisor will be particularly interested in companies that are
likely to benefit from new or innovative products, services or processes as
well as those that have experienced above average, long-term growth in earn-
ings and have excellent prospects for future growth.
AIM V.I. Growth Fund: Seeks growth of capital primarily by investing in sea-
soned and better capitalized companies considered to have strong earnings mo-
mentum.
AIM V.I. International Equity Fund: Seeks to provide long-term growth of capi-
tal by investing in a diversified portfolio of international equities whose
issuers are considered to have strong earnings momentum.
AIM V.I. Value Fund: Seeks to achieve long-term growth of capital by investing
primarily in equity securities judged by its investment advisor to be under-
valued relative to the investment advisor's appraisal of the current or pro-
jected earnings of the companies issuing the securities, or relative to the
current market values of assets owned by the companies issuing the securities
or relative to the equity market generally. Income is a secondary objective.
Alliance Growth and Income Portfolio: Seeks reasonable current income and rea-
sonable appreciation through investments primarily in dividend-paying common
stocks of good quality. The portfolio also may invest in fixed-income securi-
ties and convertible securities.
Alliance Growth Portfolio: Seeks to provide long-term growth of capital. Cur-
rent income is only an incidental consideration. The portfolio invests primar-
ily in equity securities of companies with favorable earnings outlooks, which
have long-term growth rates that are expected to exceed that of the U.S. econ-
omy over time.
Alliance Premier Growth Portfolio: Seeks long-term growth of capital by pursu-
ing aggressive investment policies. The portfolio invests predominantly in the
equity securities of a limited number of large, carefully selected, high-qual-
ity U.S. companies that are judged likely to achieve superior earnings growth.
Alliance Technology Portfolio: Seeks to emphasizes growth of capital and in-
vests for capital appreciation. Current income is only an incidental consider-
ation. The portfolio may seek income by writing listed call options. The port-
folio invests primarily in securities of companies expected to benefit from
technological advances and improvements (i.e., companies that use technology
extensively in the development of new or improved products or processes).
Delaware Premium Emerging Markets Series: Seeks long-term growth by investing
primarily in stocks of companies located or operating in emerging or develop-
ing countries.
Delaware Premium Growth and Income Series: Seeks the highest possible total
return by investing in stocks that exhibit the potential for growth while pro-
viding higher than average dividend income.
Delaware Premium High Yield Series (formerly Delchester): Seeks total return
and, as a secondary objective, high current income. The series invests in
rated and unrated corporate bonds (including high-risk, high-yield bonds com-
monly known as junk bonds), foreign bonds, U.S. government securities and com-
mercial paper. An investment in this series may involve greater risks than an
investment in a portfolio comprised primarily of investment-grade bonds.
Delaware Premium REIT Series: Seeks to achieve maximum long-term total return
by investing primarily in the securities of real estate investment trusts and
real estate operating companies.
11
<PAGE>
Delaware Premium Select Growth Series: Seeks long-term capital appreciation by
primarily investing in common stocks of companies that have the potential for
high earnings growth. Companies of any size are considered, as long as they
are larger than $300 million in market capitalization.
Delaware Premium Small Cap Value Series: Seeks growth by investing primarily
in stocks of small cap companies whose market values appear low relative to
underlying value or future earnings and growth potential.
Delaware Premium Social Awareness Series: Seeks long-term growth by investing
in stocks of mid-size and large companies expected to grow over time that also
meet certain criteria of social responsibility.
Delaware Premium Trend Series: Seeks long-term growth by investing primarily
in stocks of small companies and convertible securities of emerging and other
growth-oriented companies.
Deutsche VIT Equity 500 Index Fund: Seeks to match the performance of the
stock market as represented by Standard & Poor's 500 Index, before fund ex-
penses.
Fidelity VIP Equity-Income Portfolio: Seeks reasonable income by investing
primarily in income-producing equity securities, with some potential for capi-
tal appreciation, seeking a yield that exceeds the composite yield on the se-
curities comprising the Standard and Poor's 500 Index (S&P 500).
Fidelity VIP Growth Portfolio: Seeks long-term capital appreciation. The port-
folio normally purchases common stocks.
Fidelity VIP Overseas Portfolio: Seeks long-term growth of capital by invest-
ing primarily in foreign securities.
Fidelity VIP III Growth Opportunities Portfolio: Seeks capital growth by in-
vesting primarily in common stocks.
Franklin Mutual Shares Securities Fund: Seeks capital appreciation with income
as a secondary goal. It invests primarily in equity securities of companies
that the manager believes are available at market prices less than their ac-
tual value based on certain recognized or objective criteria.
Franklin Small Cap Securities Fund: Seeks long-term capital growth. It invests
primarily in equity securities of U.S. small cap growth companies. Small cap
companies are generally those with market cap values of less than $1.5 billion
at time of purchase.
Liberty Variable Trust Newport Tiger Fund: Seeks capital growth by investing
primarily in the stocks of high quality international companies located in the
nine "Tigers" of Asia: Hong Kong, China, Singapore, Malaysia, Thailand, Indo-
nesia, the Philippines, South Korea and Taiwan.
Lincoln National Bond Fund: Seeks maximum current income consistent with pru-
dent investment strategy. The fund invests primarily in medium- and long-term
corporate and government bonds.
Lincoln National Money Market Fund: 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 chartered
banks and U.S. branches of foreign banks.
MFS Variable Trust Emerging Growth Series: Seeks to provide long-term growth
by investing primarily in the common stocks of companies the managers believe
are in the early stages of their life cycle but which have the potential to
become major enterprises.
MFS Variable Trust Research Series: Seeks long-term growth and future income
by investing primarily in equity companies believed to possess better than av-
erage prospects for long-term growth. A committee of investment research ana-
lysts selects the securities for the fund, with individual analysts responsi-
ble for choosing securities within an assigned industry.
MFS Variable Trust Total Return Series: Seeks to provide above-average income
consistent with the prudent employment of capital and to provide a reasonable
opportunity for capital growth and income. The fund invests in a broad range
of securities, including short-term obligations, and may be diversified not
only by company and industry, but also by security type.
MFS Variable Trust Utilities Series: Seeks capital growth and current income
by investing the majority of its assets in equity and debt securities of both
domestic and foreign companies in the utilities industry.
Templeton Growth Securities Fund: Seeks long-term capital growth. It invests
primarily in equity securities of companies in various nations throughout the
world, including the U.S. and emerging markets.
Templeton International Securities Fund: Seeks long-term capital growth. It
invests primarily in equity securities of companies outside the United States,
including emerging markets.
Fund shares
We will purchase shares of the funds at net asset value and direct them to the
appropriate subaccounts of the VAA. We will redeem sufficient shares of the
appropriate funds to pay annuity payouts, death benefits, surrender/withdrawal
proceeds or for other purposes described in the contract. If you want to
transfer all or part of your investment from one subaccount to another, we may
redeem shares held in the first and purchase shares of the other. Redeemed
shares are retired, but they may be reissued later.
Shares of the funds are not sold directly to the general public. They are sold
to Lincoln Life, and may be sold to other insurance companies, for investment
of the assets of the subaccounts established by those insurance companies to
fund variable annuity and variable life insurance contracts.
12
<PAGE>
Reinvestment of dividends and capital gain distributions
All dividends and capital gain distributions of the funds are automatically re-
invested in shares of the distributing funds at their net asset value on the
date of distribution. Dividends are not paid out to contractowners as addi-
tional units, but are reflected as changes in unit values.
Addition, deletion or substitution of investments
We reserve the right, within the law, to add, delete and substitute series
and/or funds within the VAA. We may also add, delete, or substitute series or
funds only for certain classes of contractowners. New or substitute funds may
have different fees and expenses, and may only be offered to certain classes of
contractowners. This substitution might occur if shares of a fund should no
longer be available, or if investment in any fund's shares should become inap-
propriate, in the judgment of our management, for the purposes of the contract.
We cannot substitute shares of one fund for another without the approval by the
SEC. We will also notify you.
Charges and other
deductions
We will deduct the charges described below to cover our costs and expenses,
services provided and risks assumed under the contracts. We incur certain costs
and expenses for the distribution and administration of the contracts and for
providing the benefits payable thereunder. More particularly, our administra-
tive services include: processing applications for and issuing the contracts,
processing purchases and redemptions of fund shares as required (including dol-
lar cost averaging, cross-reinvestment, portfolio rebalancing, and automatic
withdrawal services --See Additional services and the SAI for more information
on these programs), maintaining records, administering annuity payouts, fur-
nishing accounting and valuation services (including the calculation and moni-
toring of daily subaccount values), reconciling and depositing cash receipts,
providing contract confirmations, providing toll-free inquiry services and fur-
nishing telephone fund transfer services. The risks we assume include: the risk
that annuitants receiving annuity payouts under contract live longer than we
assumed when we calculated our guaranteed rates (these rates are incorporated
in the contract and cannot be changed); the risk that death benefits paid under
the EGMDB or the 5% Step-Up death benefit, will exceed the actual contract val-
ue; and the risk that our costs in providing the services will exceed our reve-
nues from contract charges (which we cannot change). The amount of a charge may
not necessarily correspond to the costs associated with providing the services
or benefits indicated by the description of the charge. For example, the con-
tingent deferred sales charge collected may not fully cover all of the sales
and distribution expenses actually incurred by us. A portion of the mortality
and expense risk and administrative charge and a portion of the surrender
charges are assessed to fully or partially recoup bonus credits paid into the
contract by Lincoln Life when purchase payments are made.
Deductions from the VAA for Lincoln ChoicePlus Bonus
We deduct from the VAA an amount, computed daily, which is equal to an annual
rate of 1.60% (1.75% for contracts with the 5% Step-Up death benefit) of the
daily net asset value. The charge consists of a 0.15% administrative charge and
a 1.45% (1.60% for contracts with the 5% Step-Up death benefit) mortality and
expense risk charge.
Surrender charge
A surrender charge applies (except as described below) to surrenders and with-
drawals of other purchase payments that have been invested for the periods in-
dicated as follows:
<TABLE>
<CAPTION>
Number of contract anniversaries
since purchase payment was
invested
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Less than At least
2 years 2 3 4 5 6 7 8 9+
Surrender charge as a percentage of
the surrendered or withdrawn
purchase payments 8.5% 8 7 6 5 4 3 2 0
</TABLE>
A surrender charge does not apply to:
1. A surrender or withdrawal of a purchase payment beyond the ninth anniversary
since the purchase payment was invested.
2. Withdrawals of contract value during a contract year to the extent that the
total contract value withdrawn during the current contract year does not ex-
ceed the free amount which is equal to the greater of 10% of the current
contract value or 10% of the total purchase payments;
3. Any purchase payments applied to an annuity payout option available within
the contract that have been invested at least 12 months.
4. A surrender or withdrawal of any purchase payments, if such purchase pay-
ments were received more than 12 months prior to the onset of a permanent
and total disability of the contractowner as defined in Section 22(e)(3) of
the tax code, after the effective date of the contract and before the 65th
birthday of the contractowner. For contracts issued in the State of New Jer-
sey, a different definition of permanent and total disability applies.
5. When the surviving spouse assumes ownership of the contract as a result of
the death of the original owner;
6. A surrender or withdrawal of any purchase payments, if such purchase pay-
ments were received more than 12 months prior to admittance of the
contractowner
13
<PAGE>
to an accredited nursing home or equivalent health care facility, where the
admittance into the nursing home occurs after the effective date of the con-
tract and the owner has been confined for at least 90 consecutive days.
7. A surrender or withdrawal of any purchase payments, if such purchase pay-
ments were received more than 12 months prior to the diagnosis date of a
terminal illness that is after the effective date of the contract and re-
sults in a life expectancy of less than one year as determined by a quali-
fied professional medical practitioner.
8. A surrender of the contract as a result of the death of the contractowner
or annuitant. However if an annuitant is changed for any reason other than
death of a prior annuitant the surrender charge is not waived. See The con-
tracts--Death benefit before annuity commencement date.
9. A surrender or withdrawal of a purchase payment beyond the fifth anniver-
sary since the purchase payment was invested for any contract issued to em-
ployees and registered representatives of any member of the selling group
and their spouses and minor children, or to officers, directors, trustees
or bona-fide full-time employees and their spouses and minor children, of
Lincoln Financial Group, or any of the investment advisors of the funds
currently being offered, or their affiliated or managed companies (based
upon the contractowner's status at the time the contract was purchased),
provided the contract was not issued with the assistance of a sales repre-
sentative under contract with Lincoln Life. For the individuals described
above, a reduced schedule of surrender charges applies.
10. A surrender or annuitization of bonus credits and persistency credits.
For purposes of calculating the surrender charge on withdrawals, Lincoln Life
assumes that:
a. The free amount will be withdrawn from purchase payments on a "first in-
first out (FIFO)" basis.
b. Prior to the ninth anniversary of the contract, any amount withdrawn above
the free amount during a contract year will be withdrawn in the following
order:
1. from purchase payments (on a FIFO basis) until exhausted; then
2. from earnings until exhausted; then
3. from bonus credits.
c.On or after the ninth anniversary of the contract, any amount withdrawn
above the free amount during a contract year will be withdrawn in the follow-
ing order:
1. from purchase payments (on a FIFO basis) to which a surrender charge no
longer applies until exhausted; then
2. from earnings and persistency credits until exhausted; then
3. from bonus credits attributable to purchase payments to which a surrender
charge no longer applies until exhausted; then
4. from purchase payments (on a FIFO basis) to which a surrender charge still
applies until exhausted; then
5. from bonus credits attributable to purchase payments to which a surrender
charge still applies.
The surrender charge is calculated separately for each purchase payment. The
surrender charges associated with surrender or withdrawal are paid to us to
compensate us for the loss we experience on contract distribution costs when
contractowners surrender or withdraw before distribution costs have been re-
covered.
If the contractowner is a corporation or other non-individual (non-natural
person), the annuitant or joint annuitant will be considered the contractowner
or joint owner for purposes of determining when a surrender charge does not
apply.
Account fee
During the accumulation period, we will deduct $35 from the contract value on
each contract anniversary to compensate us for the administrative services
provided to you; this $35 account fee will also be deducted from the contract
value upon surrender. This fee may be lower in certain states, if required.
The account fee will be waived for any contract with a contract value that is
equal to or greater than $100,000 on the contract anniversary.
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.
Deductions for premium taxes
Any premium tax or other tax levied by any governmental entity as a result of
the existence of the contracts or the VAA will be deducted from the contract
value when incurred, or at another time of our choosing.
The applicable premium tax rates that states and other governmental entities
impose on the purchase of an annuity are subject to change by legislation, by
administrative interpretation or by judicial action. These premium taxes gen-
erally depend upon the law of your state of residence. The tax ranges from
zero to 5.0%.
Other charges and deductions
There are deductions from and expenses paid out of the assets of the under-
lying funds that are more fully described in the prospectuses for the funds.
Among these deductions and expenses are 12b-1 fees which reimburse Lincoln
Life for certain expenses incurred in connection with certain administrative
and distribution support services provided to the funds.
14
<PAGE>
Additional information
The administrative charge, surrender charges and account fee described previ-
ously may be reduced or eliminated for any particular contract. However, these
charges will be reduced only to the extent that we anticipate lower distribu-
tion and/or administrative expenses, or that we perform fewer sales or admin-
istrative services than those originally contemplated in establishing the
level of those charges. Lower distribution and administrative expenses may be
the result of economies associated with (1) the use of mass enrollment proce-
dures, (2) the performance of administrative or sales functions by the employ-
er, (3) the use by an employer of automated techniques in submitting deposits
or information related to deposits on behalf of its employees or (4) any other
circumstances which reduce distribution or administrative expenses. The exact
amount of charges and fees applicable to a particular contract will be stated
in that contract.
The contracts
Purchase of contracts
If you wish to purchase a contract, you must apply for it through a sales rep-
resentative authorized by us. The completed application is sent to us and we
decide whether to accept or reject it. If the application is accepted, a con-
tract is prepared and executed by our legally authorized officers. The con-
tract is then sent to you through your sales representative. See Distribution
of the contracts.
When a completed application and all other information necessary for process-
ing a purchase order is received, an initial purchase payment and its corre-
sponding bonus credit will be priced no later than two business days after we
receive the order. While attempting to finish an incomplete application, we
may hold the initial purchase payment for no more than five business days. If
the incomplete application cannot be completed within those five days, you
will be informed of the reasons, and the purchase payment will be returned im-
mediately. Once the application is complete, the initial purchase payment and
its corresponding bonus credit must be priced within two business days.
Who can invest
To apply for a contract, you must be of legal age in a state where the con-
tracts may be lawfully sold and also be eligible to participate in any of the
qualified or nonqualified plans for which the contracts are designed. The
contractowner, joint owner and annuitant cannot be older than age 85.
Purchase payments
Purchase payments are payable to us at a frequency and in an amount selected
by you in the application. The minimum initial purchase payment is $10,000.
The minimum annual amount for additional purchase payments is $300. The mini-
mum payment to the contract at any one time must be at least $100 ($25 if
transmitted electronically). Purchase payments in total may not exceed $2 mil-
lion for an owner or $1 million for each joint owner without Lincoln Life ap-
proval. If you stop making purchase payments, the contract will remain in
force as a paid-up contract. However, we may terminate the contract as allowed
by your state's non-forfeiture law for individual deferred annuities. Purchase
payments may be made or, if stopped, resumed at any time until the annuity
commencement date, the surrender of the contract, maturity date or the payment
of any death benefit, whichever comes first. Lincoln Life reserves the right
to limit purchase payments made to the contract.
Bonus credits
In some states, the term bonus credit may be referred to as value enhancement
or a similar term in the contract.
For each purchase payment made into the contract, Lincoln Life will credit the
contract with a bonus credit. The amount of the bonus credit will be added to
the value of the contract at the same time and allocated in the same
percentage as the purchase payment. The amount of the bonus credit is
calculated as a percentage of the purchase payment made. The bonus credit
percentage is based on the owner's cumulative purchase payment at the time
each purchase payment is made according to the following scale:
Cumulative Purchase Payments Bonus Credit %
Less than $100,000 3.0%
$100,000-$999,999 4.0%
$1,000,000 or greater 5.0%
Owner's cumulative purchase payments at the time of a purchase payment is
equal to the sum of (1) all prior purchase payments made to this contract;
plus (2) the current purchase payment made to this contract; minus (3) all
prior withdrawals of purchase payments from this contract.
If you make an additional purchase payment prior to the first anniversary of
the contract date and that purchase payment increases the owner's cumulative
purchase payments to a level that qualifies for a higher bonus credit percent-
age, then we will contribute an additional bonus credit into your contract at
the time the subsequent purchase payment is made (it will not be contributed
retroactively). The additional bonus credit is determined by multiplying the
sum of the prior purchase payments by the additional bonus credit percentage
(the difference between the percentage applicable to the subsequent purchase
payment and the percentage applicable to prior purchase payments). This addi-
tional bonus credit is not available after the first anniversary of the con-
tract date.
Lincoln Life offers a variety of variable annuity contracts. Similar products
that do not offer bonus credits and have lower fees and charges may provide
larger cash surrender values, depending on the level of the bonus credits and
the performance of the owner's chosen subaccounts. We encourage you to talk
with
15
<PAGE>
your financial advisor and determine which annuity contract is most
appropriate for you.
Persistency credits
Contractowners will also receive a persistency credit on a quarterly basis af-
ter the fifteenth contract anniversary. The amount of the persistency credit
is calculated by multiplying the contract value, less any purchase payments
that have not been invested in the contract for at least 15 years, by 0.05%.
This persistency credit will be allocated to the variable subaccounts and the
fixed account in proportion to the contract value in each variable subaccount
and fixed account at the time the persistency credit is paid into the con-
tract.
There is no additional charge to receive this persistency credit, and in no
case will the persistency credit be less than zero.
Valuation date
Accumulation and annuity units will be valued once daily at the close of
trading (currently, normally, 4:00 p.m., New York time) on each day the New
York Stock Exchange is open (valuation date). On any date other than a
valuation date, the accumulation unit value and the annuity unit value will
not change.
Allocation of purchase payments and bonus credits
Purchase payments allocated to the variable account are placed into the VAA's
subaccounts, each of which invests in shares of the class of its corresponding
fund, according to your instructions. Corresponding bonus credits will be al-
located to the subaccount(s) and/or the fixed side of the contract in the same
proportion in which you allocated purchase payments.
The minimum amount of any purchase payment which can be put into any one
subaccount is $20. Upon allocation to a subaccount, purchase payments and bo-
nus credits are converted into accumulation units. The number of accumulation
units credited is determined by dividing the amount allocated to each
subaccount by the value of an accumulation unit for that subaccount on the
valuation date on which the purchase payment is received at our home office if
received before 4:00 p.m., New York time. If the purchase payment is received
at or after 4:00 p.m., New York time, we will use the accumulation unit value
computed on the next valuation date. The number of accumulation units deter-
mined in this way is not changed by any subsequent change in the value of an
accumulation unit. However, the dollar value of an accumulation unit will vary
depending not only upon how well the underlying fund's investments perform,
but also upon the expenses of the VAA and the underlying funds.
Valuation of accumulation units
Purchase payments and bonus credits allocated to the VAA are converted into
accumulation units. This is done by dividing the amount allocated by the value
of an accumulation unit for the valuation period during which the purchase
payments and bonus credits are allocated to the VAA. The accumulation unit
value for each subaccount was or will be established at the inception of the
subaccount. It may increase or decrease from valuation period to valuation pe-
riod. The accumulation unit value for a subaccount for a later valuation pe-
riod is determined as follows:
(1) The total value of the fund shares held in the subaccount is calculated by
multiplying the number of fund shares owned by the subaccount at the be-
ginning 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 valua-
tion period; minus
(2) The liabilities of the subaccount at the end of the valuation period;
these liabilities include daily charges imposed on the subaccount, and may
include a charge or credit with respect to any taxes paid or reserved for
by us that we determine result from the operations of the VAA; and
(3) The result of (2) is divided by the number of subaccount units outstanding
at the beginning of the valuation period.
The daily charges imposed on a subaccount 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. Be-
cause a different daily charge is made for contracts with different death ben-
efit options, each of the two types of contracts will have different corre-
sponding accumulation unit values on any given day.
Transfers between subaccounts on or before the annuity commencement date
You may transfer all or a portion of your investment from one subaccount to
another. A transfer involves the surrender of accumulation units in one
subaccount and the purchase of accumulation units in the other subaccount. A
transfer will be done using the respective accumulation unit values determined
at the end of the valuation date on which the transfer request is received.
There is no charge for a transfer.
Transfers are limited to twelve (12) per contract year unless otherwise autho-
rized by Lincoln Life. This limit does not apply to transfers made under the
automatic transfer programs of dollar cost averaging, cross re-investment or
portfolio rebalancing programs elected on forms available from us. (See Addi-
tional services and the SAI for more information on these programs.)
The minimum amount which may be transferred between subaccounts is $300 (or
the entire amount in the subaccount, if less than $300). If the transfer from
a subaccount would leave you with less than $300 in the subaccount, we may
transfer the total balance of the subaccount.
16
<PAGE>
A transfer may be made by writing to our home office or, if a Telephone Ex-
change Authorization form (available from us) is on file with us, by a toll-
free telephone call or by the Lincoln Life internet site. In order to prevent
unauthorized or fraudulent telephone transfers, we may require the caller to
provide certain identifying information before we will act upon his or her in-
structions. We may also assign the contractowner a Personal Identification
Number (PIN) to serve as identification. We will not be liable for following
telephone instructions we reasonably believe are genuine. Telephone requests
may be recorded and written confirmation of all transfer requests will be
mailed to the contractowner on the next valuation date. Telephone transfers
will be processed on the valuation date that they are received when they are
received at our customer service center before 4 p.m. New York time.
When thinking about a transfer of contract value, you should consider the in-
herent risk involved. Frequent transfers based on short-term expectations may
increase the risk that a transfer will be made at an inopportune time. 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
subaccounts, and should Lincoln Life become aware of such disruptive practic-
es, Lincoln Life may refuse to permit such transfers.
Payment or transfer may be delayed as permitted by the 1940 Act.
Transfers to and from a fixed account on or before the annuity commencement
date
You may transfer all or any part of the contract value from the subaccount(s)
to the fixed side of the contract. The minimum amount which can be transferred
to a fixed account is $2,000 or the total amount in the subaccount if less
than $2,000. However, if a transfer from a subaccount would leave you with
less than $300 in the subaccount, we may transfer the total amount to the
fixed side of the contract.
You may also transfer part of the contract value from a fixed account to the
various subaccount(s) subject to the following restrictions: (1) the sum of
the percentages of fixed value transferred is limited to 25% of the value of
that fixed account in any twelve month period; and (2) the minimum amount
which can be transferred is $300 or the amount in the fixed account.
There is no charge to you for a transfer. Transfers are limited to twelve (12)
per contract year unless otherwise authorized by Lincoln Life. Transfers made
as a part of an automatic transfer program will not be counted against these
twelve transfers. Transfers of all or a portion of a fixed account (other than
automatic transfer programs) may be subject to a market value adjustment.
Payment or transfer may be delayed as permitted by the 1940 Act.
Transfers after the annuity commencement date
You may transfer all or a portion of your investment in one subaccount to an-
other subaccount or to the fixed side of the contract. Those transfers will be
limited to three times per contract year. You may also transfer from a vari-
able annuity payment to a fixed annuity payment. No transfers are allowed from
the fixed side of the contract to the subaccounts.
Additional services
There are four additional services available to you under your contract: dol-
lar-cost averaging (DCA), automatic withdrawal service (AWS), cross-reinvest-
ment service and portfolio rebalancing. In order to take advantage of one of
these services, you will need to complete the election form for the service
that is available from us. For further detailed information on these services,
please see Advertising and sales literature in the SAI.
Dollar-cost averaging allows you to transfer amounts from the DCA fixed ac-
count or certain variable subaccounts into the variable subaccounts on a
monthly basis. The minimum amount that can be dollar cost averaged is $1,500.
The automatic withdrawal service (AWS) provides for an automatic periodic
withdrawal of your contract value. The minimum contract value required to es-
tablish an AWS is $10,000.
The cross-reinvestment service allows you to automatically transfer the ac-
count value in a designated variable subaccount that exceeds a baseline amount
to another specific variable subaccount at specific intervals. The minimum
contract value required for this service is $10,000.
Portfolio rebalancing is an option that restores to a pre-determined level the
percentage of contract value allocated to each variable account subaccount.
The rebalancing may take place monthly, quarterly, semi-annually or annually.
Death benefit before the annuity commencement date
You may designate a beneficiary during your lifetime and change the benefi-
ciary by filing a written request with our home office. Each change of benefi-
ciary revokes any previous designation. We reserve the right to request that
you send us the contract for endorsement of a change of beneficiary.
Upon the death of the contractowner, a death benefit will be paid to the bene-
ficiary. Upon the death of a joint owner, the death benefit will be paid to
the surviving joint owner. Upon the death of an annuitant who is not the
contractowner or joint owner, a death benefit may be paid
17
<PAGE>
to the contractowner (and joint owner, if applicable, in equal shares). If the
contractowner is a corporation or other non-individual (non-natural person),
the death of the annuitant will be treated as death of the contractowner.
Death benefits are taxable. See Federal tax matters.
If the death occurs before the annuity commencement date and the enhanced
guaranteed minimum death benefit (EGMDB) is in effect, the death benefit paid
will be the greatest of: (1) the contract value as of the day on which Lincoln
Life approves the payment of the claim; (2) the sum of all purchase payments
less the sum of all withdrawals, partial annuitization and premium tax in-
curred; or (3) the highest contract value which the contract attains on any
contract anniversary date (including the inception date) (determined before
the allocation of any purchase payments on that contract anniversary) for ages
up to, and including, the deceased's age 80. The highest contract value is in-
creased by purchase payments and is decreased by partial withdrawals, partial
annuitizations, and any premium taxes incurred on or subsequent to the anni-
versary date on which the highest contract value is obtained. If the 5% Step-
Up death benefit is in effect, the death benefit paid will be the greater of
the death benefit under the EGMDB or the accumulation of all purchase payments
minus the accumulation of all withdrawals, partial annuitizations, and premium
tax incurred. These purchase payments, withdrawals, partial annuitizations and
premium tax incurred are accumulated at an annual rate of 5% from the date of
the transaction to the earlier of the date of death of the deceased person or
the contract anniversary immediately preceding the deceased person's 81st
birthday. Each transaction is accumulated separately to a maximum of 200% of
the transaction.
If the beneficiary is the spouse of the contractowner, then the spouse may
elect to continue the contract as owner.
If there are joint owners, upon the death of the first contractowner, Lincoln
Life will pay a death benefit to the surviving joint owner. The surviving
joint owner will be treated as the primary, designated beneficiary. Any other
beneficiary designation on record at the time of death will be treated as a
contingent beneficiary. If the surviving joint owner is the spouse of the de-
ceased joint owner he/she may continue the contract as sole contractowner.
Upon the death of the spouse who continues the contract, Lincoln Life will pay
a death benefit to the designated beneficiary(s).
Upon the death of a contractowner, joint owner or annuitant, if the surviving
spouse continues the contract, any portion of the death benefit that would
have been payable (if the contract had not been continued) that exceeds the
current contract value will be credited to the contract. This provision ap-
plies only one time for each contract.
If an annuitant who is not the contractowner or joint owner dies, then the
contingent annuitant, if named, becomes the annuitant and no death benefit is
payable on the death of the annuitant. If no contingent annuitant is named,
the contractowner (or younger of joint owners) becomes the annuitant. Alterna-
tively, a death benefit may be paid to the contractowner (and joint owner, if
applicable, in equal shares) if the annuitant named on this contract has not
been changed, unless the change occurred because of the death of a prior annu-
itant.
Notification of the election of this death benefit must be received by Lincoln
Life within 75 days of the death of the annuitant. If no contractowner is liv-
ing on the date of death of the annuitant, the death benefit will be available
to the beneficiary. The contract terminates when any death benefit is paid due
to the death of the annuitant. A death benefit payable on the death of the an-
nuitant will not be paid if the annuitant has been changed subsequent to the
effective date of this contract unless the change occurred because of the
death of a prior annuitant.
The value of the death benefit will be determined as of the date on which the
death claim is approved for payment. This payment of the death benefit will
occur upon receipt of: (1) proof (e.g. an original certified death certifi-
cate), or any other proof of death satisfactory to us, of the death; (2) writ-
ten authorization for payment; and (3) our receipt of all required claim
forms, fully completed. If the beneficiary is a minor, court documents ap-
pointing the guardian/custodian must be submitted.
Notwithstanding any provision of this contract to the contrary, the payment of
death benefits provided under this contract must be made in compliance with
Code Section 72(s) or 401(a)(9) as applicable, as amended from time to time.
Death benefits may be taxable. See Federal tax matters.
If a lump sum settlement is elected, the proceeds will be mailed within seven
days of approval by us of the claim subject to the laws, regulations and tax
code governing payment of death benefits. This payment may be postponed as
permitted by the Investment Company Act of 1940.
Unless otherwise provided in the beneficiary designation, one of the following
procedures will take place on the death of a beneficiary:
1. If any beneficiary dies before the contractowner, that beneficiary's inter-
est will go to any other beneficiaries named, according to their respective
interests; and/or
2. If no beneficiary survives the contractowner, the proceeds will be paid to
the contractowner's estate.
Unless the contractowner has already selected a settlement option, the benefi-
ciary may choose the method of payment of the death benefit. The death benefit
payable to the beneficiary or joint owner must be distributed within five
years of the contractowner's date of death un-
18
<PAGE>
less the beneficiary begins receiving within one year of the contractowner's
death the distribution in the form of a life annuity or an annuity for a des-
ignated period not extending beyond the beneficiary's life expectancy.
The death benefit payable on the death of the annuitant will be distributed in
either a lump sum settlement or under an annuity payout. The annuity payout
must be selected within 60 days after Lincoln Life has approved the death
claim.
When applying for a contract, an applicant can request a contract with the 5%
Step-Up death benefit. The 5% Step-Up death benefit is not available under
contracts issued to a contractowner, joint owner or annuitant who is age 80 or
older at the time of issuance.
After a contract is issued, the contractowner may discontinue the 5% Step-Up
death benefit at any time by completing the Death Benefit Discontinuance form
and sending it to Lincoln Life. The benefit will be discontinued as of the
valuation date we receive the request, and we will stop deducting the charge
for the benefit as of that date. See Charges and other deductions. If you dis-
continue the benefit, it cannot be reinstated.
Joint ownership
If a contract has joint owners, the joint owners shall be treated as having
equal undivided interests in the contract. Either owner, independently of the
other, may exercise any ownership rights in this contract. Not more than two
owners (an owner and joint owner) may be named and contingent owners are not
permitted.
Surrenders and withdrawals
Before the annuity commencement date, we will allow the surrender of the con-
tract or a withdrawal of the contract value upon your written request, subject
to the rules discussed below. Surrender or withdrawal rights after the annuity
commencement date are not available at this time, but may be available in the
future.
The amount available upon surrender/withdrawal is the contract value less any
applicable charges, fees, and taxes at the end of the valuation period during
which the written request for surrender/withdrawal is received at the home of-
fice. The minimum amount which can be withdrawn is $300. Unless a request for
withdrawal specifies otherwise, withdrawals will be made from all subaccounts
within the VAA and from the fixed account in the same proportion that the
amount of withdrawal bears to the total contract value. Surrenders and with-
drawals from the fixed account may be subject to a market value adjustment.
See Fixed side of the contract. Unless prohibited, surrender/withdrawal pay-
ments will be mailed within seven days after we receive a valid written re-
quest at the home office. The payment may be postponed as permitted by the
1940 Act.
There are charges associated with surrender of a contract or withdrawal of
contract value. You may specify whether these charges are deducted from the
amount you request to be withdrawn or from the remaining contract value. See
Charges and other deductions.
The tax consequences of a surrender/withdrawal are discussed later in this
booklet. See Federal tax matters.
Lincoln Life reserves the right to surrender this contract if any withdrawal
reduces the total contract value to a level at which this contract may be sur-
rendered in accordance with applicable law for individual deferred annuities.
Delay of payments
Contract proceeds from the VAA will be paid within seven days, except (i) when
the NYSE is closed (other than weekends and holidays); (ii) times when market
trading is restricted or the SEC declares an emergency, and we cannot value
units or the funds cannot redeem shares; or (iii) when the SEC so orders to
protect contractowners.
Reinvestment privilege
You may elect to make a reinvestment purchase with any part of the proceeds of
a surrender/withdrawal, and we will recredit that portion of the
surrender/withdrawal charges attributable to the amount returned. This elec-
tion must be made within 30 days of the date of the surrender/withdrawal, and
the repurchase must be of a contract covered by this Prospectus. A representa-
tion must be made that the proceeds being used to make the purchase have re-
tained their tax-favored status under an arrangement for which the contracts
offered by this Prospectus are designed. The number of accumulation units
which will be credited when the proceeds are reinvested will be based on the
value of the accumulation unit(s) on the next valuation date. This computation
will occur following receipt of the proceeds and request for reinvestment at
the home office. You may utilize the reinvestment privilege only once. No bo-
nus credits will apply when a reinvestment purchase occurs. For tax reporting
purposes, we will treat a surrender/withdrawal and a subsequent reinvestment
purchase as separate transactions. You should consult a tax advisor before you
request a surrender/withdrawal or subsequent reinvestment purchase.
Amendment of contract
We reserve the right to amend the contract to meet the requirements of the
1940 Act or other applicable federal or state laws or regulations. You will be
notified in writing of any changes, modifications or waivers.
Commissions
Commissions are paid to dealers under different commission options. The maxi-
mum commission paid as a percentage of each purchase payment is 7.50%. Alter-
nate commission schedules are available with lower initial commission amounts
based on purchase payments plus ongoing annual compensation of up to 1.00%.
19
<PAGE>
Upon annuitization, the commissions paid to dealers are a maximum of 4.00% of
account annuitized and/or an annual continuing commission of up to 1.00% of
statutory reserves. These commissions are not deducted from purchase payments,
bonus credits or contract value; they are paid by us.
Ownership
As contractowner, you have all rights under the contract. According to Indiana
law, the assets of the VAA are held for the exclusive benefit of all
contractowners and their designated beneficiaries; and the assets of the VAA
are not chargeable with liabilities arising from any other business that we
may conduct. Qualified contracts may not be assigned or transferred except as
permitted by applicable law and upon written notification to us. Non-qualified
contracts may not be collaterally assigned. We assume no responsibility for
the validity or effect of any assignment. Consult your tax advisor about the
tax consequences of an assignment.
Contractowner questions
The obligations to purchasers under the contracts are those of Lincoln Life.
Questions about your contract should be directed to us at 1-888-868-2583.
Annuity payouts
When you apply for a contract, you may select any annuity commencement date
permitted by law.
The contract provides optional forms of payouts of annuities (annuity op-
tions), each of which is payable on a variable basis, a fixed basis or a com-
bination of both as you specify. The contract provides that all or part of the
contract value may be used to purchase an annuity.
You may elect annuity payouts in monthly, quarterly, semiannual or annual in-
stallments. If the payouts from any subaccount would be or become less than
$50, we have the right to reduce their frequency until the payouts are at
least $50 each. Following are explanations of the variable annuity options
available.
Annuity options
Life Annuity. This option offers a periodic payout during the lifetime of the
annuitant and ends with the last payout before the death of the annuitant.
This option offers the highest periodic payout since there is no guarantee of
a minimum number of payouts or provision for a death benefit for beneficia-
ries. However, there is the risk under this option that the recipient would
receive no payouts if the annuitant dies before the date set for the first
payout; only one payout if death occurs before the second scheduled payout,
and so on.
Life Income with Payouts Guaranteed for Designated Period. This option guaran-
tees periodic payouts during a designated period, usually 10 or 20 years, and
then continues throughout the lifetime of the annuitant. The designated period
is selected by the contractowner.
Joint Life Annuity. This option offers a periodic payout during the joint
lifetime of the annuitant and a designated joint annuitant. The payouts con-
tinue during the lifetime of the survivor.
Joint Life Annuity with Guaranteed Period. This option guarantees periodic
payouts during a designated period, usually 10 or 20 years, and continues dur-
ing the joint lifetime of the annuitant and a designated joint annuitant. The
payouts continue during the lifetime of the survivor. The designated period is
selected by the contractowner.
Joint Life and Two Thirds to Survivor Annuity. This option provides a periodic
payout during the joint lifetime of the annuitant and a designated joint annu-
itant. When one of the joint annuitants dies, the survivor receives two thirds
of the periodic payout made when both were alive.
Joint Life and Two-Thirds Survivor Annuity with Guaranteed Period. This option
provides a periodic payout during the joint lifetime of the annuitant and a
joint annuitant. When one of the joint annuitants dies, the survivor receives
two-thirds of the periodic payout made when both were alive. This option fur-
ther provides that should one or both of the annuitants dies during the
elected guaranteed period, usually 10 or 20 years, full benefit payment will
continue for the rest of the guaranteed period.
Unit Refund Life Annuity. This option offers a periodic payout during the
lifetime of the annuitant with the guarantee that upon death a payout will be
made of the value of the number of annuity units (see Variable annuity
payouts) equal to the excess, if any, of: (a) the total amount applied under
this option divided by the annuity unit value for the date payouts begin, mi-
nus (b) the annuity units represented by each payout to the annuitant multi-
plied by the number of payouts paid before death. The value of the number of
annuity units is computed on the date the death claim is approved for payment
by the home office.
General information
Under the annuity options listed above, you may not make withdrawals. Other
options, with or without withdrawal features, may be made available by us. You
may pre-select an annuity payout option as a method of paying the death bene-
fit to a beneficiary. If you do, the beneficiary cannot change this payout op-
tion. At death, options are only available to the extent they are consistent
with the requirements of the contract as well as Sections 72(s) and 401(a)(9)
of the tax code, if applicable. The mortality and expense risk charge of 1.25%
and the charge for administrative services of .15% will be assessed on all
variable annuity payouts, including
20
<PAGE>
options that may be offered that do not have a life contingency and therefore
no mortality risk.
The annuity commencement date is usually on or before the contractowner's 90th
birthday. You may change the annuity commencement date, change the annuity op-
tion or change the allocation of the investment among subaccounts up to 30
days before the scheduled annuity commencement date, upon written notice to
the home office. You must give us at least 30 days notice before the date on
which you want payouts to begin. If proceeds become available to a beneficiary
in a lump sum, the beneficiary may choose any annuity payout option.
Unless you select another option, the contract automatically provides for a
life annuity with annuity payouts guaranteed for 10 years (on a fixed, vari-
able or combination fixed and variable basis, in proportion to the account al-
locations at the time of annuitization) except when a joint life payout is re-
quired by law. Under any option providing for guaranteed period payouts, the
number of payouts which remain unpaid at the date of the annuitant's death (or
surviving annuitant's death in case of joint life annuity) will be paid to
your beneficiary as payouts become due.
Variable annuity payouts
Variable annuity payouts will be determined using:
1. The contract value on the annuity commencement date, less any surrender
charges on purchase payments made within twelve months of annuitization and
any applicable premium taxes;
2. The annuity tables contained in the contract;
3. The annuity option selected; and
4. The investment performance of the fund(s) selected.
To determine the amount of payouts, we make this calculation:
1. Determine the dollar amount of the first periodic payout; then
2. Credit the contract with a fixed number of annuity units equal to the first
periodic payout divided by the annuity unit value; and
3. Calculate the value of the annuity units each period thereafter.
Annuity payouts assume an investment return of 3%, 4%, 5% or 6% per year, as
applied to the applicable mortality table. The higher the assumed interest
rate you choose, the higher your initial annuity payment will be. The amount
of each payout after the initial payout will depend upon how the underlying
fund(s) perform, relative to the assumed rate. If the actual net investment
rate (annualized) exceeds the assumed rate, the payment will increase at a
rate proportional to the amount of such excess. Conversely, if the actual rate
is less than the assumed rate, annuity payments will decrease. The higher the
assumed interest rate, the less likely future annuity payments are to in-
crease, or the payments will increase more slowly than if a lower assumed rate
was used. There is a more complete explanation of this calculation in the SAI.
Fixed side of the contract
Purchase payments allocated to the fixed side of the contract become part of
Lincoln Life's general account, and do not participate in the investment expe-
rience of the VAA. The general account is subject to regulation and supervi-
sion by the Indiana Insurance Department as well as the insurance laws and
regulations of the jurisdictions in which the contracts are distributed.
In reliance on certain exemptions, exclusions and rules, Lincoln Life has not
registered interests in the general account as a security under the Securities
Act of 1933 and has not registered the general account as an investment com-
pany under the 1940 Act. Accordingly, neither the general account nor any in-
terests in it are regulated under the 1933 Act or the 1940 Act. Lincoln Life
has been advised that the staff of the SEC has not made a review of the dis-
closures which are included in this Prospectus which relate to our general ac-
count and to the fixed account under the contract. These disclosures, however,
may be subject to certain provisions of the federal securities laws relating
to the accuracy and completeness of statements made in prospectuses. This Pro-
spectus is generally intended to serve as a disclosure document only for as-
pects of the contract involving the VAA, and therefore contains only selected
information regarding the fixed side of the contract. Complete details regard-
ing the fixed side of the contract are in the contract.
We guarantee an interest rate of not less than 3.0% per year on amounts held
in a fixed account. Any amount withdrawn from or transferred out of a fixed
account prior to the expiration of the guaranteed period is subject to a mar-
ket value adjustment (see Market value adjustment below) and other charges.
The MVA will NOT reduce the amount available for a surrender, withdrawal or
transfer to an amount less than the initial amount allocated or transferred to
a fixed account plus interest of 3.0% per year, and account fees, if any.
ANY INTEREST IN EXCESS OF 3.0% WILL BE DECLARED IN ADVANCE AT LINCOLN LIFE'S
SOLE DISCRETION, CONTRACTOWNERS BEAR THE RISK THAT NO INTEREST IN EXCESS OF
3.0% WILL BE DECLARED.
Guaranteed periods
The portion of the fixed account which accepts allocations for a guaranteed
period at a guaranteed interest rate is called a fixed subaccount. There is a
fixed subaccount for each particular guaranteed period and dollar cost averag-
ing holding account.
21
<PAGE>
The owner may allocate purchase payments to one or more fixed subaccounts with
guaranteed periods of 1, 3, 5, 7, or 10 years. Lincoln Life may offer a fixed
subaccount for a period of less than one year for the purpose of dollar cost
averaging. Each purchase payment and corresponding bonus credits allocated to
a fixed subaccount will start its own guaranteed period and will earn a guar-
anteed interest rate. The duration of the guaranteed period affects the guar-
anteed interest rate of the fixed subaccount. A fixed subaccount guarantee pe-
riod ends on the date after the number of calendar years in the fixed
subaccount's guaranteed period. Interest will be credited daily at a guaran-
teed rate that is equal to the effective annual rate determined on the first
day of the fixed subaccount guaranteed period. Amounts surrendered, trans-
ferred or withdrawn from a fixed subaccount prior to the end of the guaranteed
period will be subject to the MVA. Each guaranteed period purchase payment and
corresponding bonus credits will be treated separately for purposes of deter-
mining any applicable MVA. Any amount withdrawn from a fixed subaccount may be
subject to any applicable surrender charges, account fees and premium taxes.
Lincoln Life will notify the contractowner in writing at least 60 days prior
to the expiration date for any guaranteed period amount. A new fixed
subaccount guaranteed period of the same duration as the previous fixed
subaccount guaranteed period will begin automatically at the end of the previ-
ous guaranteed period, unless Lincoln Life receives, prior to the end of a
guaranteed period, a written election by the contractowner. The written elec-
tion may request the transfer of the guaranteed period amount to a different
fixed subaccount or to a variable subaccount from among those being offered by
Lincoln Life. Transfers of any guaranteed period amount which become effective
upon the date of expiration of the applicable guaranteed period are not sub-
ject to the limitation of twelve transfers per contract year or the additional
fixed account transfer restrictions.
Market value adjustment
Any surrender, withdrawal or transfer of a fixed subaccount guaranteed period
amount before the end of the guaranteed period (other than dollar cost averag-
ing transfers) will be subject to a MVA. A surrender, withdrawal or transfer
effective upon the expiration date of the guaranteed period will not be sub-
ject to an MVA. The MVA will be applied to the amount being surrendered, with-
drawn or transferred. The MVA will be applied after the deduction of any ap-
plicable account fees and before any applicable transfer charges. In general,
the MVA reflects the relationship between the yield rate in effect at the time
a purchase payment is allocated to a fixed subaccount's guaranteed period un-
der the contract and the yield rate in effect at the time of the purchase pay-
ment's surrender, withdrawal or transfer. It also reflects the time remaining
in the fixed subaccount's guaranteed period. If the yield rate at the time of
the surrender, withdrawal or transfer is lower than the yield rate at the time
the purchase payment was allocated, then the application of the MVA will gen-
erally result in a higher payment at the time of the surrender, withdrawal or
transfer. Similarly, if the yield rate at the time of surrender, withdrawal or
transfer is higher than the yield rate at the time of the allocation of the
purchase payment, then the application of the MVA will generally result in a
lower payment at the time of the surrender, withdrawal or transfer. The yield
rate is published by the Federal Reserve Board.
The MVA is calculated by multiplying the transaction amount by:
(1+A)n
---- -1
(1+B)n
where:
A = yield rate for a security with time to maturity equal to the subaccount's
guaranteed period, determined at the beginning of the guaranteed period.
B = yield rate for a security with time to maturity equal to the subaccount's
guaranteed period, determined at the time of surrender or transfer, plus a
0.50% adjustment (unless otherwise limited by applicable state law). If yield
rates "A" and "B" are within .25% of each other when the yield rate is deter-
mined, no such percentage adjustment to "B" will be made, unless required by
state law. This adjustment builds into the formula a factor representing di-
rect 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 antici-
pated that a substantial portion of applicable general account portfolio as-
sets will be in relatively illiquid securities. Thus, in addition to direct
transaction costs, if such securities must be sold (e.g., because of surren-
ders), the market price may be lower. Accordingly, even if interest rates de-
cline, 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, there will be no MVA.
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 SAI for examples of the application of the MVA.
22
<PAGE>
Federal tax matters
Introduction
The Federal income tax treatment of the contract is complex and sometimes un-
certain. The Federal income tax rules may vary with your particular circum-
stances. This discussion does not include all the Federal income tax rules
that may affect you and your contract. This discussion also does not address
other Federal tax consequences, or state or local tax consequences, associated
with the contract. As a result, you should always consult a tax advisor about
the application of tax rules to your individual situation.
Taxation of nonqualified annuities
This part of the discussion describes some of the Federal income tax rules ap-
plicable to nonqualified annuities. A nonqualified annuity is a contract not
issued in connection with a qualified retirement plan receiving special tax
treatment under the tax code, such as an IRA or a section 403(b) plan.
Tax deferral on earnings
The Federal income tax law generally does not tax any increase in your con-
tract value until you receive a contract distribution. However, for this gen-
eral rule to apply, certain requirements must be satisfied:
. An individual must own the contract (or the tax law must treat the contract
as owned by the individual).
. The investments of the VAA must be "adequately diversified" in accordance
with IRS regulations.
. Your right to choose particular investments for a contract must be limited.
. The annuity commencement date must not occur near the end of the annuitant's
life expectancy.
Contracts not owned by the individual
If a contract is owned by an entity (rather than an individual) the tax code
generally does not treat it as an annuity contract for Federal income tax pur-
poses. This means that the entity owning the contract pays tax currently on
the excess of the contract value over the purchase payments for the contract.
Examples of contracts where the owner pays current tax on the contract's earn-
ings, bonus credits, and persistency credits are contracts issued to a corpo-
ration or a trust. Exceptions to this rule exist. For example, the tax code
treats a contract as owned by an individual if the named owner is a trust or
other entity that holds the contract as an agent for an individual. However,
this exception does not apply in the case of any employer that owns a contract
to provide deferred compensation for its employees.
Investments in the VAA must be diversified
For a contact to be treated as an annuity for Federal income tax purposes, the
investments of the VAA must be "adequately diversified." IRS regulations de-
fine standards for determining whether the investments of the VAA are ade-
quately diversified. If the VAA fails to comply with these diversification
standards, you could be required to pay tax currently on the excess of the
contract value over the contract purchase payments. Although we do not control
the investments of the underlying investment options, we expect that the un-
derlying investment options will comply with the IRS regulations so that the
VAA will be considered "adequately diversified."
Restrictions
Federal income tax law limits your right to choose particular investments for
the contract. Because the IRS has not issued guidance specifying those limits,
the limits are uncertain and your right to allocate contract value among
subaccounts may exceed those limits. If so, you would be treated as the owner
of the assets of the VAA and thus subject to current taxation on the income,
bonus credits, persistency credits and gains from those assets. We do not know
what limits may be set by the IRS in any guidance that it may issue and
whether any such limits will apply to existing contracts. We reserve the right
to modify the contract without your consent to try to prevent the tax law from
considering you as the owner of the assets of the VAA.
Age at which annuity payouts begin
Federal income tax rules do not expressly identify a particular age by which
annuity payouts must begin. However, those rules do require that an annuity
contract provide for amortization, through annuity payouts, of the contract's
purchase payments, bonus credits, persistency credits and earnings. If annuity
payouts under the contract begin or are scheduled to begin on a date past the
annuitant's 85th birthday, it is possible that the tax law will not treat the
contract as an annuity for Federal income tax purposes. In that event, you
would be currently taxed on the excess of the contract value over the purchase
payments of the contract.
Tax treatment of payments
We make no guarantees regarding the tax treatment of any contract or of any
transaction involving a contract. However, the rest of this discussion assumes
that your contract will be treated as an annuity for Federal income tax pur-
poses and that the tax law will not tax any increase in your contract value
until there is a distribution from your contract.
Taxation of withdrawals and surrenders
You will pay tax on withdrawals to the extent your contract value exceeds your
purchase payments in the contract. This income (and all other income from your
contract) is considered ordinary income. A higher rate of tax is paid on ordi-
nary income than on capital gains. You will pay tax on a surrender to the ex-
tent the amount you receive exceeds your purchase payments. In certain circum-
stances, your purchase payments are re -
23
<PAGE>
duced by amounts received from your contract that were not included in income.
Taxation of annuity payouts
The tax code imposes tax on a portion of each annuity payout (at ordinary in-
come tax rates) and treats a portion as a nontaxable return of your purchase
payments in the contract. We will notify you annually of the taxable amount of
your annuity payout. Once you have recovered the total amount of the purchase
payment in the contract, you will pay tax on the full amount of your annuity
payouts. If annuity payouts end because of the annuitant's death and before the
total amount of the purchase payments in the contract has been received, the
amount not received generally will be deductible.
Taxation of death benefits
We may distribute amounts from your contract because of the death of a
contractowner or an annuitant. The tax treatment of these amounts depends on
whether you or the annuitant dies before or after the annuity commencement
date.
. Death prior to the annuity commencement date--
. If the beneficiary receives death benefits under an annuity payout option,
they are taxed in the same manner as annuity payouts.
. If the beneficiary does not receive death benefits under an annuity payout
option, they are taxed in the same manner as withdrawal.
. Death after the annuity commencement date--
. If death benefits are received in accordance with the existing annuity
payout option, they are excludible from income if they do not exceed the
purchase payments not yet distributed from the contract. All annuity
payouts in excess of the purchase payments not previously received are
includible in income.
. If death benefits are received in a lump sum, the tax law imposes tax on
the amount of death benefits which exceeds the amount of purchase payments
not previously received.
Penalty taxes payable on withdrawals, surrenders, or annuity payouts
The tax code may impose a 10% penalty tax on any distribution from your con-
tract which you must include in your gross income. The 10% penalty tax does not
apply if one of several exceptions exists. These exceptions include withdraw-
als, surrenders or annuity payouts that:
. you receive on or after you reach age 59 1/2,
. you receive because you became disabled (as defined in the tax law),
. a beneficiary receives on or after your death, or
. you receive as a series of substantially equal periodic payments for your
life (or life expectancy).
Special rules if you own more than one annuity contract
In certain circumstances, you must combine some or all of the nonqualified an-
nuity contracts you own in order to determine the amount of an annuity payout,
a surrender or a withdrawal that you must include in income. For example, if
you purchase two or more deferred annuity contracts from the same life insur-
ance company (or its affiliates) during any calendar year, the tax code treats
all such contracts as one contract. Treating two or more contracts as one con-
tract could affect the amount of a surrender, withdrawal or an annuity payout
that you must include in income and the amount that might be subject to the
penalty tax described above.
Loans and assignments
Except for certain qualified contracts, the tax code treats any amount received
as a loan under a contract, and any assignment or pledge (or agreement to as-
sign or pledge) any portion of your contract value, as a withdrawal of such
amount or portion.
Gifting a contract
If you transfer ownership of your contract to a person other than your spouse
(or to your former spouse incident to divorce), and receive a payment less than
your contract's value, you will pay tax on your contract value to the extent it
exceeds your purchase payments not previously received. The new owner's pur-
chase payments in the contract would then be increased to reflect the amount
included in income.
Charges for a contract's death benefit
Your contract may provide an additional death benefit for which you pay an an-
nual charge, computed daily. It is possible that the tax law may treat all or a
portion of the additional charge as a contract withdrawal.
Loss of interest deduction
After June 8, 1997, if a contract is issued to a taxpayer that is not an indi-
vidual, or if a contract is held for the benefit of an entity, the entity will
lose a portion of its deduction for otherwise deductible interest expenses.
This disallowance does not apply if you pay tax on the annual increase in the
contract value. Entities that are considering purchasing a contract, or enti-
ties that will benefit from someone else's ownership of a contract, should con-
sult a tax advisor.
Qualified retirement plans
We also designed the contracts for use in connection with certain types of re-
tirement plans that receive favorable treatment under the tax code. Contracts
issued to or in connection with a qualified retirement plan are called "quali-
fied contracts." We issue contracts for use with different types of qualified
plans. The Federal income tax rules applicable to those plans are complex and
varied. As a result, this Prospectus does not at-
24
<PAGE>
tempt to provide more than general information about use of the contract with
various types of qualified plans. Persons planning to use the contract in con-
nection with a qualified plan should obtain advice from a competent tax advi-
sor.
Types of qualified contracts and terms of contracts
Currently, we may issue contracts in connection with the following types of
qualified plans:
. Individual Retirement Accounts and Annuities ("Traditional IRAs")
. Roth IRAs
. Simplified Employee Pensions ("SEPs")
. Savings Incentive Matched Plan for Employees ("SIMPLE 401(k) plans")
. Public school system and tax-exempt organization annuity plans ("403(b)
plans")
. Qualified corporate employee pension and profit sharing plans ("401(a)
plans") and qualified annuity plans ("403(a) plans")
. Self-employed individual plans ("H.R. 10 plans" or "Keogh Plans")
. Deferred compensation plans of state and local governments and tax-exempt
organizations ("457 plans").
We will amend contracts to be used with a qualified plan as generally neces-
sary to conform to tax law requirements for the type of plan. However, the
rights of a person to any qualified plan benefits may be subject to the plan's
terms and conditions, regardless of the contract's terms and conditions. In
addition, we are not bound by the terms and conditions of qualified plans to
the extent such terms and conditions contradict the contract, unless we con-
sent.
Tax treatment of qualified contracts
The Federal income tax rules applicable to qualified plans and qualified con-
tracts vary with the type of plan and contract. For example,
. Federal tax rules limit the amount of purchase payments that can be made,
and the tax deduction or exclusion that may be allowed for the purchase pay-
ments. These limits vary depending on the type of qualified plan and the
plan participant's specific circumstances, e.g., the participant's compensa-
tion.
. Under Traditional IRAs, the annuitant must begin receiving payments from the
contract in certain minimum amounts by a certain age, typically age 70 1/2.
However, these "minimum distribution rules" do not apply to a Roth IRA.
Tax treatment of payments
Federal income tax rules generally include distributions from a qualified con-
tract in the recipient's income as ordinary income. These taxable distribu-
tions will include purchase payments that were deductible or excludible from
income. Thus, under many qualified contracts the total amount received is in-
cluded in income since a deduction or exclusion from income was taken for pur-
chase payments. There are exceptions. For example, you do not include amounts
received from a Roth IRA in income if certain conditions are satisfied.
Failure to comply with the minimum distribution rules applicable to certain
qualified plans, such as Traditional IRAs, will result in the imposition of an
excise tax. This excise tax generally equals 50% of the amount by which a min-
imum required distribution exceeds the actual distribution from the qualified
plan.
Federal penalty taxes payable on distributions
The tax code may impose a 10% penalty tax on the amount received from the
qualified contract that must be included in income. The tax code does not im-
pose the penalty tax if one of several exceptions applies. The exceptions vary
depending on the type of qualified contract you purchase. For example, in the
case of an IRA, exceptions provide that the penalty tax does not apply to a
withdrawal, surrender or annuity payout:
. received on or after the annuitant reaches age 59 1/2,
. received on or after the annuitant's death or because of the annuitant's
disability (as defined in the tax law),
. received as a series of substantially equal periodic payments for the
annuitant's life (or life expectancy), or
. received as reimbursement for certain amounts paid for medical care.
These exceptions, as well as certain others not described here, generally ap-
ply to taxable distributions from other qualified plans. However, the specific
requirements of the exception may vary.
Transfers and direct rollovers
In many circumstances, money may be moved between qualified contracts and
qualified plans by means of a rollover or transfer. Special rules apply to
such rollovers and transfers. If the applicable rules are not followed, you
may suffer adverse Federal income tax consequences, including paying taxes
which might not otherwise have had to be paid. A qualified advisor should al-
ways be consulted before you move or attempt to move funds between any quali-
fied plan or contract and another qualified plan or contract.
The direct rollover rules apply to certain payments (called "eligible rollover
distributions") from section 401(a) plans, section 403(a) or (b) plans, H.R.
10 plans and contracts used in connection with these types of plans. (The di-
rect rollover rules do not apply to distributions from IRAs or section 457
plans.) The direct rollover rules require that we withhold Federal income tax
equal to 20% of the eligible rollover distribution
25
<PAGE>
from the distribution amount, unless you elect to have the amount directly
transferred to certain qualified plans or contracts. Before we send a rollover
distribution, we will provide the recipient with a notice explaining these re-
quirements and how the 20% withholding can be avoided by electing a direct
rollover.
Death benefit and IRAs
Pursuant to IRS regulations, IRAs may not invest in life insurance contracts.
We do not believe that these regulations prohibit the EGMDB or the 5% Step-Up
death benefit from being provided under the contracts when we issue the con-
tract as Traditional IRAs or Roth IRAs. However, the law is unclear and it is
possible that the presence of these death benefits under a contract issued as
a Traditional IRA or Roth IRA could result in increased taxes to you.
Federal income tax withholding
We will withhold and remit to the IRS a part of the taxable portion of each
distribution made under a contract unless the distributee notifies us at or
before the time of the distribution that tax is not to be withheld. In certain
circumstances, Federal income tax rules may require us to withhold tax. At the
time a withdrawal, surrender or annuity payout is requested, we will give the
recipient an explanation of the withholding requirements.
Tax status of Lincoln Life
Under existing Federal income tax laws, Lincoln Life does not pay tax on in-
vestment income and realized capital gains of the VAA. Lincoln Life does not
expect that it will incur any Federal income tax liability on the income and
gains earned by the VAA. We, therefore, do not impose a charge for Federal in-
come taxes. If Federal income tax law changes and we must pay tax on some or
all of the income and gains earned by the VAA, we may impose a charge against
the VAA to pay the taxes.
Changes in law
The above discussion is based on the tax code, IRS regulations and interpreta-
tions existing on the date of this Prospectus. However, Congress, The IRS and
the courts may modify these authorities, sometimes retroactively.
Voting rights
As required by law, we will vote the fund shares held in the VAA at meetings
of the shareholders of the funds. The voting will be done according to the in-
structions of contractowners who have interests in any subaccounts which in-
vest in classes of the funds. If the 1940 Act or any regulation under it
should be amended or if present interpretations should change, and if as a re-
sult we determine that we are permitted to vote the fund shares in our own
right, we may elect to do so.
The number of votes which you have the right to cast will be determined by ap-
plying your percentage interest in a subaccount to the total number of votes
attributable to the subaccount. In determining the number of votes, fractional
shares will be recognized.
Fund shares of a class held in a subaccount for which no timely instructions
are received will be voted by us in proportion to the voting instructions
which are received for all contracts participating in that subaccount. Voting
instructions to abstain on any item to be voted on will be applied on a pro-
rata basis to reduce the number of votes eligible to be cast.
Whenever a shareholders meeting is called, each person having a voting inter-
est in a subaccount will receive proxy voting material, reports and other ma-
terials relating to the funds. Since the funds engage in shared funding, other
persons or entities besides Lincoln Life may vote fund shares. See Investments
of the variable annuity account--Fund shares.
Distribution of the contracts
Lincoln Life is the distributor and principal underwriter of the contracts.
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 func-
tions in support of the selling group. The contracts will be sold by our prop-
erly licensed registered representatives of independent broker-dealers which
in turn have selling agreements with Lincoln Life and have been licensed by
state insurance departments to represent us. Included among these broker-deal-
ers is Lincoln Financial Advisors (LFA). LFA is affiliated with us and in ad-
dition to selling our contracts, may also act as a principal underwriter for
certain other contracts issued by us. Lincoln Life will offer the contracts in
all states it is licensed to do business.
Return privilege
Within the free-look period after you receive the contract, you may cancel it
for any reason by delivering or mailing it postage prepaid, to the home office
at P.O. Box 7866, 1300 South Clinton Street, Fort Wayne, Indiana, 46801. A
contract canceled under this provision will be void. Except as explained in
the following paragraph, we will return the contract value as of the valuation
date on which we receive the cancellation request, plus any premium taxes plus
mortality and expense risk charges and administrative charges proportionately
attributable to the bonus credits, less any bonus credits paid into the con-
tract by us. In addition, if the contract value on the date of cancellation is
less than the sum of purchase payments minus withdrawals, we will also return
both the investment loss and fund management fees, each in an amount that is
proportionately attribut-
26
<PAGE>
able to the bonus credits. No market value adjustment will apply. A purchaser
who participates in the VAA is subject to the risk of a market loss during the
free-look period.
For contracts written in those states whose laws require that we assume this
market risk during the free-look period, a contract may be canceled, subject
to the conditions explained before, except that we will return only the pur-
chase payment(s).
State regulation
As a life insurance company organized and operated under Indiana law, we are
subject to provisions governing life insurers and to regulation by the Indiana
Commissioner of Insurance.
Our books and accounts are subject to review and examination by the Indiana
Insurance Department at all times. A full examination of our operations is
conducted by that Department at least every five years.
Records and reports
As presently required by the 1940 Act and applicable regulations, we are re-
sponsible for maintaining all records and accounts relating to the VAA. We
have entered into an agreement with the Delaware Management Company, 2005 Mar-
ket Street, Philadelphia, PA 19203, to provide accounting services to the VAA.
We will mail to you, at your last known address of record at the home office,
at least semiannually after the first contract year, reports containing infor-
mation required by that Act or any other applicable law or regulation.
Other information
A Registration Statement has been filed with the SEC, under the Securities Act
of 1933 as amended, for the contracts being offered here. This Prospectus does
not contain all the information in the Registration Statement, its amendments
and exhibits. Please refer to the Registration Statement for further informa-
tion about the VAA, Lincoln Life and the contracts offered. Statements in this
Prospectus about the content of contracts and other legal instruments are sum-
maries. For the complete text of those contracts and instruments, please refer
to those documents as filed with the SEC.
We are a member of the Insurance Marketplace Standards Association ("IMSA")
and may include the IMSA logo and information about IMSA membership in our ad-
vertisements. Companies that belong to IMSA subscribe to a set of ethical
standards covering the various aspects of sales and services for individually
sold life insurance and annuities.
Legal proceedings
Lincoln Life is involved in various pending or threatened legal proceedings
arising from the conduct of its business. Most of those proceedings are rou-
tine and in the ordinary course of business. In some instances they include
claims for unspecified or substantial punitive damages and similar types of
relief in addition to amounts 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 ad-
verse effect on the financial position of Lincoln Life.
With the recent filing of a lawsuit alleging fraud in the sale of interest-
sensitive universal and whole life policies, Lincoln Life now has three such
actions pending. As of the date of this Prospectus, the courts have not certi-
fied a class in any of the suits. In each of these lawsuits, 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 discovery stages of litigation, and it is premature to make assessments
about potential loss, if any. Management is defending these suits vigorously.
The amount of liability, if any, which may ultimately arise as a result of
these lawsuits cannot be reasonably estimated at this time. In a fourth law-
suit a settlement has been preliminarily approved by the court, and a class
has been conditionally certified for settlement purposes. Two similar lawsuits
were previously resolved and dismissed.
27
<PAGE>
Statement of additional information table of contents for Separate Account N
<TABLE>
<CAPTION>
Item
----------------------------------------------------
<S> <C>
General information and history of Lincoln Life B-2
----------------------------------------------------
Special terms B-2
----------------------------------------------------
Services B-2
----------------------------------------------------
Principal underwriter B-2
----------------------------------------------------
Purchase of securities being offered B-2
</TABLE>
<TABLE>
<CAPTION>
Item
---------------------------------------
<S> <C>
Calculation of investment results B-2
---------------------------------------
Annuity payouts B-8
---------------------------------------
Advertising and sales literature B-9
---------------------------------------
Financial statements B-11
</TABLE>
For a free copy of the SAI please see page one of this booklet.
28
<PAGE>
The Lincoln National Life Insurance Company
Attn: ChoicePlus Customer Service
P. O. Box 7866
Fort Wayne, IN 46801
7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7
PLACE
STAMP
HERE
POSTAL SERVICES
WILL NOT
DELIVER
UNLESS STAMPED
<PAGE>
7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7
STATEMENT OF ADDITIONAL INFORMATION REQUEST CARD
Lincoln ChoicePlus Bonus
Lincoln Life Variable Annuity Account N
Please send me a copy of the current Statement of Additional Information
for Lincoln Life Variable Annuity Account N (ChoicePlus Bonus).
(Please Print)
Name _______________________________ Social Security No. _______________
Address __________________________________________________________________
City _________________________________________________________ State Zip
Mail to Lincoln National Life Insurance Company, P.O. Box 7866, Fort
Wayne, Indiana 46801
<PAGE>
Lincoln ChoicePlus Bonus
Lincoln Life Variable Annuity Account N (Registrant)
The Lincoln National Life Insurance Company (Depositor)
Statement of Additional Information (SAI)
This Statement of Additional Information should be read in conjunction with the
Lincoln ChoicePlus Bonus Prospectus of Lincoln Life Variable Annuity Account N
dated . You may obtain a copy of the Lincoln ChoicePlus
Bonus Prospectus on request and without charge. Please write Lincoln ChoicePlus
Customer Service, The Lincoln National Life Insurance Company, P.O. Box 7866,
Fort Wayne, Indiana 46801 or call 1-888-868-2583.
Table of Contents
<TABLE>
<CAPTION>
Item Page
------------------------------------------
<S> <C>
General information and history
of Lincoln Life B-2
------------------------------------------
Special terms B-2
------------------------------------------
Services B-2
------------------------------------------
Principal underwriter B-2
------------------------------------------
Purchase of securities being offered B-2
------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Item Page
<S> <C>
Calculation of investment results B-2
Annuity payouts B-8
Advertising and sales literature B-9
Financial statements B-11
</TABLE>
This SAI is not a Prospectus.
The date of this SAI is .
<PAGE>
General information and
history of The
Lincoln National Life
Insurance Company (Lincoln Life)
The Lincoln National Life Insurance Company (Lincoln Life), organized in 1905,
is an Indiana stock insurance corporation, engaged primarily in the direct in-
surance of life and health insurance contracts and annuities, and is also a
professional reinsurer. Lincoln Life is wholly owned by Lincoln National Cor-
poration (LNC), a publicly held insurance and financial services holding com-
pany domiciled in Indiana.
Special terms
The special terms used in this SAI are the ones defined in the Prospectus. In
connection with the term, valuation date, the New York Stock Exchange is cur-
rently closed on weekends and on these holidays: New Year's Day, Martin Luther
King's Birthday, President's Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day, and Christmas Day. If any of these holidays oc-
curs on a weekend day, the Exchange may also be closed on the business day oc-
curring just before or just after the holiday.
Services
Independent auditors
The financial statements of the VAA and the statutory-basis financial state-
ments of Lincoln Life appearing in this SAI and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
reports also appearing elsewhere in this document and in the Registration
Statement. The financial statements audited by Ernst & Young LLP have been in-
cluded in this document in reliance on their reports given on their authority
as experts in accounting and auditing.
Keeper of records
All accounts, books, records and other documents which are required to be
maintained for the VAA are maintained by Lincoln Life or by third parties re-
sponsible to Lincoln Life. We have entered into an agreement with the Delaware
Management Company, 2005 Market Street, Philadelphia, PA 19203, to provide ac-
counting services to the VAA. No separate charge against the assets of the VAA
is made by Lincoln Life for this service.
Principal underwriter
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.
Purchase of securities being offered
The variable annuity contracts are offered to the public through licensed in-
surance agents who specialize in selling Lincoln Life products; through inde-
pendent insurance brokers; and through certain securities brokers/dealers se-
lected by Lincoln Life whose personnel are legally authorized to sell annuity
products. There are no special purchase plans for any class of prospective
buyers. However, under certain limited circumstances described in the Prospec-
tus under the section Charges and other deductions, the account fee and/or the
surrender charge may be reduced or waived.
Both before and after the annuity commencement date, there are exchange privi-
leges between subaccounts, and from the VAA to the general account subject to
restrictions set out in the Prospectus. See The contracts, in the Prospectus.
No exchanges are permitted between the VAA and other separate accounts.
The offering of the contracts is continuous.
Calculation of investment results
The seven-day yield is determined by calculating the change in unit value for
the base period (the 7-day period ended December 31, 1999); then dividing this
figure by the account value at the beginning of the period; then annualizing
this result by the factor of 365/7. This yield includes all deductions charged
to the contractowner's account, and excludes any realized gains and losses
from the sale of securities.
Standard investment results:
Standard performance is based on a formula to calculate performance that is
prescribed by the SEC. Under rules issued by the SEC, standard performance
must be included in any marketing material that discusses the performance of
the VAA and the subaccounts. This information represents past performance and
does not indicate or represent future performance.
Average annual return for each period is determined by finding the average an-
nual compounded rate of return over each period that would equate the initial
B-2
<PAGE>
amount invested to the ending redeemable value for that period, according to
the following formula:
P(1 + T)n = ERV
Where: P = a hypothetical initial purchase payment of $1,000
T = average annual total return for the period in question
N = number of years
ERV = ending redeemable value (as of the end of the period in question)
of a hypothetical $1,000 purchase payment made at the beginning of
the 1-year, 5-year, or 10-year period in question (or fractional
period thereof)
The formula assumes that: (1) all recurring fees have been charged to the
contractowner accounts; and (2) there will be a complete redemption upon the
anniversary of the 1-year, 5-year, or 10-year period in question.
In accordance with SEC guidelines, we will report standard performance back to
the first date that the fund became available in the VAA. Because standard
performance reporting periods of less than one year could be misleading, we
may report "N/A's" for standard performance until one year after the option
became available in the separate account.
Standard Performance Data:
Period Ending December 31, 1999
<TABLE>
<CAPTION>
Since
1-Year 5-Years Inception
Subaccount With With With
Commenced 5% Step Up 5% Step Up 5% Step Up
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AFIS Global Small Cap 2/22/00 N/A N/A N/A
AFIS Growth 2/22/00 N/A N/A N/A
AFIS Growth-Income 2/22/00 N/A N/A N/A
AFIS International 2/22/00 N/A N/A N/A
AIM V.I. Cap Appreciation 2/22/00 N/A N/A N/A
AIM V.I. Growth Fund 11/20/98 24.32% N/A 34.77%
AIM V.I. International Equity Fund 11/20/98 43.77 N/A 42.57
AIM V.I. Value Equity Fund 11/20/98 19.04 N/A 27.65
Alliance Growth 2/22/00 N/A N/A N/A
Alliance Growth & Income 2/22/00 N/A N/A N/A
Alliance Premier Growth 2/22/00 N/A N/A N/A
Alliance Technology 2/22/00 N/A N/A N/A
Delaware Emerging Markets Series 11/20/98 36.94 N/A 23.47
Delaware Growth and Income Series 11/20/98 -13.42 N/A -12.10
Delaware High Yield Series 11/20/98 -12.96 N/A -12.17
Delaware REIT Series 11/20/98 -12.98 N/A -10.84
Delaware Select Growth 2/22/00 N/A N/A N/A
Delaware Small Cap Value Series 11/20/98 -15.19 N/A -9.72
Delaware Social Awareness Series 11/20/98 2.26 N/A 8.56
Delaware Trend Series 11/20/98 58.69 N/A 64.17
Deutsche VIT Equity 500 Index Fund 11/20/98 9.84 N/A 12.57
Fidelity VIP Equity-Income Portfolio 11/20/98 -4.35 N/A -3.05
Fidelity VIP Growth Portfolio 11/20/98 26.05 N/A 30.43
Fidelity VIP Overseas Portfolio 11/20/98 31.22 N/A 29.13
Fidelity VIP III Growth Opportunities Portfolio 11/20/98 -6.39 N/A -2.25
Franklin Mutual Shares 2/24/00 N/A N/A N/A
Franklin Small Cap 2/25/00 N/A N/A N/A
Lincoln National Bond Fund 11/20/98 -13.47 N/A -11.49
Lincoln National Money Market Fund 11/20/98 -5.61 N/A -4.81
MFS(R) Emerging Growth Series 11/20/98 64.46 N/A 75.28
MFS(R) Research Series 11/20/98 12.91 N/A 17.91
MFS(R) Total Return Series 11/20/98 -7.45 N/A -5.57
MFS(R) Utilities Series 11/20/98 19.73 N/A 20.43
Newport Tiger Fund, Variable Series 11/20/98 56.55 N/A 48.91
Templeton Growth 2/22/00 N/A N/A N/A
Templeton International 2/23/00 N/A N/A N/A
</TABLE>
The performance figures shown reflect the cost of the 5% Step-Up death
benefit. If contractowners had chosen to eliminate the 5% Step-Up death
benefit, their returns would have been higher.
B-3
<PAGE>
Non-standard investment results:
The VAA may report its results over various periods -- daily, monthly, three-
month, six-month, year-to-date, yearly (fiscal year), three, five, ten years
or more and lifetime -- and compare its results to indices and other variable
annuities in sales materials including advertisements, brochures and reports.
Performance information for the periods prior to the date that a fund became
available in the VAA will be calculated based on (1) the performance of the
fund adjusted for contract charges (ie: mortality and expense risk fees, any
applicable administrative charges, and the management and other expenses of
the fund) and (2) the assumption that the subaccounts were in existence for
the same periods as indicated for the fund. It may or may not reflect charges
for any options (ie: 5% Step-Up) that were in effect during the time periods
shown. This performance is referred to as non-standardized performance data.
Such results may be computed on a cumulative and/or annualized basis. We may
also report performance assuming that you deposited $10,000 into a subaccount
at inception of the underlying fund or 10 years ago (whichever is less). This
non-standard performance may be shown as a graph illustrating how that deposit
would have increased or decreased in value over time based on the performance
of the underlying fund adjusted for contract charges. This information repre-
sents past performance and does not indicate or represent future performance.
The investment return and value of a contract will fluctuate so that
contractowner's investment may be worth more or less than the original invest-
ment. Cumulative quotations are arrived at by calculating the change in accu-
mulation unit value between the first and last day of the base period being
measured, and expressing the difference as a percentage of the unit value at
the beginning of the base period. Annualized quotations are arrived at by ap-
plying a formula which reflects the level rate of return, which if earned over
the entire base period, would produce the cumulative return.
Non-Standard Performance Data (adjusted for contract expense charges):
Period Ending December 31, 1999
<TABLE>
<CAPTION>
YTD 1-year 3-year 5-year 10-year
With With With With With
5% Step-Up 5% Step-Up 5% Step-Up 5% Step-Up 5% Step-Up Lifetime
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AFIS Global Small Cap 88.05% 88.05% N/A N/A N/A 46.85%
AFIS Growth 54.54 54.54 37.85% 30.63% 18.98% 17.58
AFIS Growth-Income 9.27 9.27 16.08 18.88 12.39 13.57
AFIS International 72.92 72.92 30.00 22.84 N/A 14.46
AIM V.I. Cap Appreciation 42.13 42.13 22.95 23.44 N/A 20.22
AIM V.I. Growth Fund 32.86 32.86 29.72 27.38 N/A 20.77
AIM V.I. International Equity Fund 52.32 52.32 22.01 19.80 N/A 16.74
AIM V.I. Value Equity Fund 27.58 27.58 26.35 25.00 N/A 20.91
Alliance Growth 31.80 31.80 28.45 28.75 N/A 28.05
Alliance Growth & Income 9.17 9.17 17.76 21.46 N/A 13.18
Alliance Premier Growth 29.69 29.69 35.14 33.33 N/A 23.82
Alliance Technology 72.35 72.35 42.40 N/A N/A 33.24
Delaware Emerging Markets Series 45.49 45.49 N/A N/A N/A -6.11
Delaware Growth and Income Series -4.88 -4.88 10.14 16.21 9.87 9.65
Delaware High Yield Series -4.42 -4.42 0.83 5.15 6.71 6.32
Delaware REIT Series -4.44 -4.44 N/A N/A N/A -8.73
Delaware Select Growth N/A N/A N/A N/A N/A 41.11
Delaware Small Cap Value Series -6.65 -6.65 4.38 10.69 N/A 8.98
Delaware Social Awareness Series 10.80 10.80 N/A N/A N/A 19.01
Delaware Trend Series 67.25 67.25 31.38 27.56 N/A 22.36
Deutsche VIT Equity 500 Index Fund 18.38 18.38 N/A N/A N/A 20.42
Fidelity VIP Equity-Income Portfolio 4.19 4.19 12.70 16.25 12.21 11.51
Fidelity VIP Growth Portfolio 34.60 34.60 30.60 27.14 17.54 16.39
Fidelity VIP Overseas Portfolio 39.76 39.76 19.08 15.04 9.22 8.70
Fidelity VIP III Growth Opportunities Portfolio 2.16 2.16 16.69 N/A N/A 19.12
Franklin Mutual Shares 11.67 11.67 8.23 N/A N/A 8.86
Franklin Small Cap 92.95 92.95 27.40 N/A N/A 26.58
Lincoln National Bond Fund -4.93 -4.93 3.19 5.28 5.59 8.30
Lincoln National Money Market Fund 2.93 2.93 3.17 3.30 3.11 4.69
MFS Emerging Growth 73.01 73.01 39.63 N/A N/A 33.75
MFS Research 21.46 21.46 20.14 N/A N/A 20.46
MFS Total Return 1.09 1.09 9.82 N/A N/A 13.18
MFS Utilities 28.28 28.28 24.24 N/A N/A 24.01
Newport Tiger Fund 65.10 65.10 0.87 N/A N/A 5.44
Templeton Growth 18.85 18.85 12.21 13.23 N/A 11.62
Templeton International 21.13 21.13 13.29 14.85 N/A 13.11
</TABLE>
The performance figures shown reflect the cost of the 5% Step-Up death
benefit. If contractowners had chosen to eliminate the 5% Step-Up death
benefit, their returns would have been higher.
B-4
<PAGE>
Market Value Adjustment
The following example illustrates the
detailed calculations for a $50,000
deposit plus a 3% bonus credit 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 "MVA" and
the 3% minimum guarantee under vari-
ous interest rates on the calculation
of the cash surrender (withdrawal)
values. Any charges for optional
death benefit risks are not taken
into account in the example. The ef-
fect of the MVA is reflected in the
yield rate factor in column (2) and
the minimum 3% guarantee is shown un-
der column (4) under the "Surrender
Value Calculation". The "Market Value
Adjustment Tables" and "Minimum Value
Calculation" contain the explicit
calculation of the yield factors and
the 3% minimum guarantee respective-
ly. The "Annuity Value Calculation"
and "Minimum Value" calculations as-
sume the imposition of the annual $35
account fee, 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 in the states where the an-
nual fee is less than $35.
SAMPLE CALCULATIONS FOR MALE 35 ISSUE
<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
Yield Rate A................................. 5.00%
Yield 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 Index Rate B........ 0.50%
</TABLE>
SURRENDER VALUE CALCULATION
<TABLE>
<CAPTION>
(5)
(2) (3) Greater
(1) Yield Adjusted (4) of (6) (7)
Annuity Rate Annuity Minimum (3) & Surrender Surrender
Contract Year Value Factor Value Value (4) Charge Value
------------- ------- -------- -------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1....................... $53,783 0.944841 $50,816 $53,010 $53,010 $4,250 $48,760
2....................... $56,168 0.971964 $54,593 $54,565 $54,593 $4,250 $50,343
3....................... $58,660 1.000000 $58,660 $56,167 $58,660 $4,000 $54,660
4....................... $61,265 1.004785 $61,558 $57,817 $61,558 $3,500 $58,058
5....................... $63,987 NA $63,987 $59,517 $63,987 $3,000 $60,987
</TABLE>
ANNUITY VALUE CALCULATION
<TABLE>
<CAPTION>
Contract Year
-------------
<S> <C>
1.............................. $(50,000 + $1,500) X 1.045 - $35 = $53,783
2.............................. $53,783 X 1.045 - $35 = $56,168
3.............................. $56,168 X 1.045 - $35 = $58,660
4.............................. $58,660 X 1.045 - $35 = $61,265
5.............................. $61,265 X 1.045 - $35 = $63,987
</TABLE>
B-5
<PAGE>
SURRENDER CHARGE CALCULATION
<TABLE>
<S> <C> <C> <C>
Contract Year SC factor Deposit Surrender Chg
-------------
1..................................... 8.5% X $50,000 = $4,250
2..................................... 8.5% X $50,000 = $4,250
3..................................... 8.0% X $50,000 = $4,000
4..................................... 7.0% X $50,000 = $3,500
5..................................... 6.0% X $50,000 = $3,000
</TABLE>
YIELD RATE FACTOR CALCULATION
<TABLE>
<CAPTION>
Adj-
Yield Yield Yield
Contract Year A B 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% 5.00% 2 1.000000
4.......................................... 5.00% 4.00% 4.50% 1 1.004785
5.......................................... 5.00% N/A N/A N/A N/A
</TABLE>
MINIMUM VALUE CALCULATION
<TABLE>
<CAPTION>
Contract Year
-------------
<S> <C>
1............................... ($50,000 + $1,500) X 1.03 - $35 = $53,010
2............................... $53,010 X 1.03 - $35 = $54,565
3............................... $54,565 X 1.03 - $35 = $56,167
4............................... $56,167 X 1.03 - $35 = $57,817
5............................... $57,817 X 1.03 - $35 = $59,517
</TABLE>
Annuity payouts
Variable annuity payouts
Variable annuity payouts will be determined on the basis of: (1) the dollar
value of the contract on the annuity commencement date less any applicable
premium tax; (2) the annuity tables contained in the contract; (3) the type of
annuity option selected; and (4) the investment results of the fund(s) select-
ed. In order to determine the amount of variable annuity payouts, Lincoln Life
makes the following calculation: first, it determines the dollar amount of the
first payout; second, it credits the contract with a fixed number of annuity
units based on the amount of the first payout; and third, it calculates the
value of the annuity units each period thereafter. These steps are explained
below.
The dollar amount of the first periodic variable annuity payout is determined
by applying the total value of the accumulation units credited under the con-
tract valued as of the annuity commencement date (less any premium taxes) to
the annuity tables contained in the contract. The first variable annuity pay-
out will be paid 14 days after the annuity commencement date. This day of the
month will become the day on which all future annuity payouts will be paid.
Amounts shown in the tables are based on the 1983 Table "a" Individual Annuity
Mortality Tables, modified, with an assumed investment return at the rate of
3%, 4%, 5% or 6% per annum. The first annuity payout is determined by multi-
plying the benefit per $1,000 of value shown in the contract tables by the
number of thousands of dollars of value accumulated under the contract. These
annuity tables vary according to the form of annuity selected and the age of
the annuitant at the annuity commencement date. The assumed interest rate is
the measuring point for subsequent annuity payouts. If the actual net invest-
ment rate (annualized) exceeds the assumed interest rate, the payout will in-
crease at a rate equal to the amount of such excess. Conversely, if the actual
rate is less than the assumed interest rate, annuity payouts will decrease. If
the assumed rate of interest were to be increased, annuity payouts would start
at a higher level but would decrease more rapidly or increase more slowly.
Lincoln Life may use sex distinct annuity tables in contracts that are not as-
sociated with employer sponsored plans and where not prohibited by law.
At an annuity commencement date, the contract is credited with annuity units
for each subaccount on which variable annuity payouts are based. The number of
annuity units to be credited is determined by dividing the amount of the first
periodic payout by the value of an annuity unit in each subaccount selected.
Although the number of annuity units is fixed by this process, the value of
such units will vary with the value of the underlying fund.
B-6
<PAGE>
The amount of the second and subsequent periodic payouts is determined by mul-
tiplying the contractowner's fixed number of annuity units in each subaccount
by the appropriate annuity unit value for the valuation date ending 14 days
prior to the date that payout is due.
The value of each subaccount's annuity unit will be set initially at $1.00.
The annuity unit value for each subaccount at the end of any valuation date is
determined by multiplying the subaccount annuity unit value for the immedi-
ately preceding valuation date by the product of:
(a) The net investment factor of the subaccount for the valuation period for
which the annuity unit value is being determined, and
(b) A factor to neutralize the assumed investment return in the annuity table.
The value of the annuity units is determined as of a valuation date 14 days
prior to the payment date in order to permit calculation of amounts of annuity
payouts and mailing of checks in advance of their due dates. Such checks will
normally be issued and mailed at least three days before the due date.
Proof of age, sex and survival
Lincoln Life may require proof of age, sex, or survival of any payee upon
whose age, sex, or survival payments depend.
Advertising and sales
literature
As set forth in the Prospectus, Lincoln Life may refer to the following orga-
nizations (and others) in its marketing materials:
A.M. Best's Rating System is designed to evaluate the various factors affect-
ing the overall performance of an insurance company in order to provide an
opinion as to an insurance company's relative financial strength and ability
to meet its contractual obligations. The procedure includes both a quantita-
tive and qualitative review of each company. A.M. Best also provides certain
rankings, to which Lincoln Life intends to refer.
Duff & Phelps insurance company claims paying ability (CPA) service provides
purchasers of insurance company policies and contracts with analytical and
statistical information on the solvency and liquidity of major U.S. licensed
insurance companies, both mutual and stock.
EAFE Index is prepared by Morgan Stanley Capital International (MSCI). It mea-
sures performance of equity securities in Europe, Australia and the Far East.
The index reflects the movements of world stock markets by representing the
evolution of an unmanaged portfolio. The EAFE Index offers international di-
versification representing over 1,000 companies across 20 different countries.
Lipper Variable Insurance Products Performance Analysis Service is a publisher
of statistical data covering the investment company industry in the United
States and overseas. Lipper is recognized as the leading source of data on
open-end and closed-end funds. Lipper currently tracks the performance of over
5,000 investment companies and publishes numerous specialized reports, includ-
ing reports on performance and portfolio analysis, fee and expense analysis.
Moody's insurance financial strength rating is an opinion of an insurance
company's financial strength and ability to meet financial obligations. The
purpose of Moody's ratings is to provide investors with a simple system of
gradation by which the relative quality of insurance companies may be noted.
Morningstar is an independent financial publisher offering comprehensive sta-
tistical and analytical coverage of open-end and closed-end funds and variable
annuities.
Standard & Poor's insurance claims-paying ability rating is an opinion of an
operating insurance company's financial capacity to meet obligations under an
insurance policy in accordance with the terms. The likelihood of a timely flow
of funds from the insurer to the trustee for the bondholders is a key element
in the rating determination for such debt issues.
VARDS (Variable Annuity Research and Data Service) provides a comprehensive
guide to variable annuity contract features and historical fund performance.
The service also provides a readily understandable analysis of the comparative
characteristics and market performance of funds inclusive in variable con-
tracts.
Standard & Poor's 500 Index -- A broad-based measurement of U.S. stock-market
performance based on the weighted average performance of 500 common stocks of
leading company's and leading industries; commonly known as the Standard &
Poor's 500 (S&P 500). The selection of stocks, their relative weightings to
reflect differences in the number of outstanding shares, and publication of
the index itself are services of Standard & Poor's Corporation, a financial
advisory, securities rating, and publishing firm.
NASDAQ-OTC Price Index -- this index is based on the National Association of
Securities Dealers Automated Quotations (NASDAQ) and represents all domestic
over-the-counter stocks except those traded on exchanges and those having only
one market maker, a total of some 3,500 stocks. It is market value- weighted
and was introduced with a base of 100.00 on February 5, 1971.
Dow Jones Industrial Average (DJIA) -- price-weighted average of 30 actively
traded blue chip stocks, primarily industrials but currently including Ameri-
can
B-7
<PAGE>
Express Company and American Telephone and Telegraph Company. Prepared and
published by Dow Jones & Company, it is the oldest and most widely quoted of
all the market indicators. The average is quoted in points, not dollars.
Russell 1000 Index--Measures the performance of the 1,000 largest companies in
the Russell 3000 Index, which represents approximately 90% of the total market
capitalization of the Russell 3000 that measures 3,000 of the largest U.S.
companies.
Russell 2000 Index--Measures the performance of the 2,000 smallest companies
in the Russell 3000 Index, which represents approximately 10% of the total
market capitalization of the Russell 3000 that measures 3,000 of the largest
U.S. companies.
Lehman Brothers Aggregate Bond Index--Composed of securities from Lehman
Brothers Government/Corpo-rate Bond Index, Mortgage-Backed Securities Index,
and the Asset-Backed Securities Index. Indexes are rebalanced monthly by mar-
ket capitalization.
Lehman Brothers Government/Corporate Bond Index--This is a measurement of the
movement of approximately 4,200 corporate, publicly traded, fixed-rate, non-
convertible, domestic debt securities, as well as the domestic debt securities
issued by the U.S. government or its agencies.
Lehman Brothers Government Intermediate Bond Index--Composed of all bonds cov-
ered by the Lehman Brothers Government Bond Index (all publicly issued, non-
convertible, domestic debt of the U.S. government or any agency thereof, qua-
si-federal corporations, or corporate debt guaranteed by the U.S. government)
with maturities between one and 9.99 years.
Merrill Lynch High Yield Master Index--This is an index of high yield debt se-
curities. High yield securities are those below the top four quality rating
categories and are considered more risky than investment grade. Issues must be
rated by Standard & Poor's or by Moody's Investors Service as less than in-
vestment grade (i.e., BBB or Baa) but not in default (i.e. DDD1 or less). Is-
sues must be in the form of publicly placed nonconvertible, coupon-bearing
U.S. domestic debt and must carry a term to maturity of at least one year.
Morgan Stanley Emerging Markets Free Index--A market capitalization weighted
index composed of companies representative of the market structure of 22
Emerging Market countries in Europe, Latin America, and the Pacific Basin.
This index excludes closed markets and those shares in otherwise free markets,
which are not purchasable by foreigners.
Morgan Stanley World Capital International World Index--A market capitaliza-
tion weighted index composed of companies representative of the market struc-
ture of 22 Developed Market countries in North America, Europe and the
Asia/Pacific Region.
Morgan Stanley Pacific Basin (Ex-Japan) Index--An arithmetic, market value-
weighted average of the performance of securities listed on the stock ex-
changes of the following Pacific Basin Countries: Australia, Hong Kong, Malay-
sia, New Zealand and Singapore.
Nareit Equity Reit Index--All of the data is based on the last closing price
of the month for all tax-qualified REITs listed on the New York Stock Ex-
change, American Stock Exchange, and the NASDAQ National Market System. The
data is market weighted.
Salomon Brothers World Government Bond (Non US) Index--A market capitalization
weighted index consisting of government bond markets of the following 13 coun-
tries: Australia, Austria, Belgium, Canada, Denmark, France, Germany, Italy,
Japan, The Netherlands, Spain, Sweden, and The United Kingdom.
Salomon Brothers 90 Day Treasury-Bill Index--Equal dollar amounts of three-
month Treasury bills are purchased at the beginning of each of three consecu-
tive months. As each bill matures, all proceeds are rolled over or reinvested
in a new three-month bill.
Standard and Poor's Index (S&P 400)--Consists of 400 domestic stocks chosen
for market size, liquidity, and industry representations.
Standard and Poor's Utilities Index--The utility index is one of several in-
dustry groups within the broader S&P 500. Utility stocks include electric,
natural gas, and telephone companies included in the S&P 500.
In its advertisements and other sales literature for the VAA and the funds,
Lincoln Life intends to illustrate the advantages of the contracts in a number
of ways:
Compound Interest Illustrations. These will emphasize several advantages of
the variable annuity contract. For example, but not by way of illustration,
the literature may emphasize the potential tax savings through tax deferral;
the potential advantage of the variable annuity account over the fixed ac-
count; and the compounding effect when a client makes regular deposits to his
or her contract.
Internet. An electronic communications network which may be used to provide
information regarding Lincoln Life, performance of the subaccounts and adver-
tisement literature.
Dollar-Cost Averaging. (DCA) -- You may systematically transfer on a monthly
basis amounts from the DCA Fixed Account or certain variable subaccounts into
the variable subaccounts or the fixed side of the contract. You may elect to
participate in the DCA program at the time of application or at anytime before
the annuity commencement date by completing an election form available from
us. The minimum amount to be dollar cost averaged is $2,000 over any period
between six and 60 months. Once elected, the program will remain in effect un-
til the earlier of: (1) the annuity commencement date; (2) the value of the
amount being DCA'd is depleted; or (3) you cancel the program by written re-
quest
B-8
<PAGE>
or by telephone if we have your telephone authorization on file. If you have
cancelled the DCA program prior to the end of the selected DCA period, any re-
maining contract value in the DCA holding account within the fixed account,
will automatically be transferred to the variable subaccounts selected by you.
A transfer under this program is not considered a transfer for purposes of
limiting the number of transfers that may be made. We reserve the right to
discontinue this program at any time. DCA does not assure a profit or protect
against loss.
Automatic Withdrawal Service. (AWS) -- AWS provides an automatic, periodic
withdrawal of contract value to you. You may elect to participate in AWS at
the time of application or at any time before the annuity commencement date by
sending a written request to our home office. The minimum contract value re-
quired to establish AWS is $10,000. You may cancel or make changes to your AWS
program at any time by sending a written request to our home office. If tele-
phone authorization has been elected, certain changes may be made by tele-
phone. Notwithstanding the requirements of the program, any withdrawal must be
permitted by Section 401(a)(9) of the code for qualified plans or permitted
under Section 72 for non-qualified contracts. We reserve the right to discon-
tinue this service at any time.
Cross-Reinvestment Service. -- Under this option, account value in a desig-
nated variable subaccount of the contract that exceeds a certain baseline
amount is automatically transferred to another specific variable subaccount(s)
of the contract at specific intervals. You may elect to participate in cross-
reinvestment at the time of application or at any time before the annuity com-
mencement date by sending a written request to our home office or by telephone
if we have your telephone authorization on file. You designate the holding ac-
count, the receiving account(s), and the baseline amount. Cross-reinvestment
will continue until we receive authorization to terminate the program.
The minimum holding account value required to establish cross-reinvestment is
$10,000. A transfer under this program is not considered a transfer for pur-
poses of limiting the number of transfers that may be made. We reserve the
right to discontinue this service at any time.
Portfolio Rebalancing. -- Portfolio rebalancing is an option which, if elected
by the contractowner, restores to a pre-determined level the percentage of
contract value allocated to each variable account subaccount. This pre-deter-
mined level will be the allocation initially selected when the contract was
purchased, unless subsequently changed. The portfolio rebalancing allocation
may be changed at any time by submitting a written request to Lincoln Life or
by telephone if we have your telephone authorization on file.
If portfolio rebalancing is elected, all purchase payments and corresponding
bonus credits allocated to the variable account subaccounts must be subject to
portfolio rebalancing.
Portfolio rebalancing may take place on either a monthly, quarterly, semi-an-
nual or annual basis, as selected by the contractowner. Once the portfolio
rebalancing option is activated, any variable account subaccount transfers ex-
ecuted outside of the portfolio rebalancing option will terminate the portfo-
lio rebalancing option. Any subsequent purchase payment or withdrawal that
modifies the account balance within each variable account subaccount may also
cause termination of the portfolio rebalancing option. Any such termination
will be confirmed to the contractowner. The contractowner may terminate the
portfolio rebalancing option or re-enroll at any time by writing Lincoln Life,
or by calling, if we have your telephone authorization on file. The portfolio
rebalancing program is not available following the annuity commencement date.
Lincoln Financial Group. Lincoln Financial Group is the marketing name for
Lincoln National Corporation (NYSE:LNC) and its affiliates. With headquarters
in Philadelphia, Lincoln Financial Group has consolidated assets of over $103
billion and annual consolidated revenues of $6.8 billion. Through its wealth
accumulation and protection businesses, the company provides annuities, life
insurance, 401(k) plans, life-health reinsurance, mutual funds, institutional
investment management and financial planning and advisory services.
Lincoln Life's customers. Sales literature for the VAA and the funds may refer
to the number of employers and the number of individual annuity clients which
Lincoln Life serves. As of the date of this SAI, Lincoln Life was serving over
15,000 employers and more than 1.5 million individuals.
Lincoln Life's assets, size. Lincoln Life may discuss its general financial
condition (see, for example, the reference to A.M. Best Company above); it may
refer to its assets; it may also discuss its relative size and/or ranking
among companies in the industry or among any sub-classification of those com-
panies, based upon recognized evaluation criteria (see reference to A.M. Best
Company above). For example, at year-end 1999 Lincoln Life had statutory ad-
mitted assets of over $79 billion.
Financial statements
Financial statements of the VAA and the statutory-basis financial statements
of Lincoln Life appear on the following pages.
B-9
<PAGE>
Lincoln Life Variable Annuity Account N
Statement of assets and liability
December 31, 1999
<TABLE>
<CAPTION>
AIM V.I.
AIM V.I. International AIM V.I.
Growth Equity Value
Combined Subaccount Subaccount Subaccount
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Investments at Market--
Affiliated (Cost
$82,346,295) $ 84,769,470 $ -- $ -- $ --
Investments at Market--
Unaffiliated (Cost
$273,154,463) 307,782,922 24,440,659 10,773,504 44,211,097
------------ ----------- ----------- -----------
Total Investments 392,552,392 24,440,659 10,773,504 44,211,097
Dividend Receivable 19,912 -- -- --
Total Assets 392,572,304 24,440,659 10,773,504 44,211,097
Liability--Payable to
The Lincoln National
Life Insurance Company 15,012 937 411 1,684
------------ ----------- ----------- -----------
NET ASSETS $392,557,292 $24,439,722 $10,773,093 $44,209,413
============ =========== =========== ===========
Percent of net assets 100.00% 6.23% 2.74% 11.26%
============ =========== =========== ===========
Net assets are
represented by:
. Units in accumulation
period 1,642,369 685,744 3,157,111
-----------------------
. Annuity reserve units 7,233 -- --
-----------------------
. Unit value $ 14.816 $ 15.710 $ 14.003
-----------------------
. Value in accumulation
period 24,332,560 10,773,093 44,209,413
-----------------------
. Annuity reserves 107,162 -- --
----------------------- ----------- ----------- -----------
NET ASSETS $24,439,722 $10,773,093 $44,209,413
=========== =========== ===========
</TABLE>
See accompanying notes.
N-2
<PAGE>
<TABLE>
<CAPTION>
Liberty Delaware Delaware Delaware
Bankers Liberty Colonial Premium Delaware Delaware Premium Premium
Trust Equity Colonial NewPort Growth Premium Premium Emerging International
500 Index US Stock Tiger and Income Delchester Devon Markets Equity
Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount
--------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <S>
$ -- $ -- $ -- $7,717,650 $6,075,240 $8,911,265 $1,345,552 $3,630,230
46,396,762 4,440,325 3,055,654 -- -- -- -- --
----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
46,396,762 4,440,325 3,055,654 7,717,650 6,075,240 8,911,265 1,345,552 3,630,230
-- -- -- -- 19,912 -- -- --
46,396,762 4,440,325 3,055,654 7,717,650 6,095,152 8,911,265 1,345,552 3,630,230
1,775 171 117 297 233 346 51 143
----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
$46,394,987 $4,440,154 $3,055,537 $7,717,353 $6,094,919 $8,910,919 $1,345,501 $3,630,087
=========== ========== ========== ========== ========== ========== ========== ==========
11.82% 1.13% 0.78% 1.97% 1.55% 2.27% 0.34% 0.92%
=========== ========== ========== ========== ========== ========== ========== ==========
3,760,973 388,245 185,849 800,420 636,545 974,029 99,293 313,631
11,164 -- -- 5,142 -- 1,099 -- --
$ 12.299 $ 11.436 $ 16.441 $ 9.580 $ 9.575 $ 9.138 $ 13.551 $ 11.574
46,257,680 4,440,154 3,055,537 7,668,097 6,094,919 8,900,879 1,345,501 3,630,087
137,307 -- -- 49,256 -- 10,040 -- --
----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
$46,394,987 $4,440,154 $3,055,537 $7,717,353 $6,094,919 $8,910,919 $1,345,501 $3,630,087
=========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
N-3
<PAGE>
Lincoln Life Variable Annuity Account N
Statement of assets and liability (continued)
December 31, 1999
<TABLE>
<CAPTION>
Delaware Delaware Delaware
Premium Premium Premium Delaware
Real Small Cap Social Premium
Estate Value Awareness Trend
Subaccount Subaccount Subaccount Subaccount
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Investments at Market--
Affiliated (Cost $82,346,295) $710,962 $3,137,177 $7,254,574 $16,014,847
Investments at Market--
Unaffiliated (Cost
$273,154,463) -- -- -- --
-------- ---------- ---------- -----------
Total Investments 710,962 3,137,177 7,254,574 16,014,847
Dividend Receivable -- -- -- --
Total Assets 710,962 3,137,177 7,254,574 16,014,847
Liability--Payable to The
Lincoln National Life
Insurance Company 27 119 277 603
-------- ---------- ---------- -----------
NET ASSETS $710,935 $3,137,058 $7,254,297 $16,014,244
======== ========== ========== ===========
Percent of net assets 0.18% 0.80% 1.85% 4.08%
======== ========== ========== ===========
Net assets are represented by:
. Units in accumulation period 73,159 318,790 611,167 877,800
------------------------------
. Annuity reserve units -- -- -- --
------------------------------
. Unit value $ 9.718 $ 9.841 $ 11.870 $ 18.244
------------------------------
. Value in accumulation period 710,936 3,137,058 7,254,297 16,014,244
------------------------------
. Annuity reserves -- -- -- --
------------------------------ -------- ---------- ---------- -----------
NET ASSETS $710,936 $3,137,058 $7,254,297 $16,014,244
======== ========== ========== ===========
</TABLE>
See accompanying notes.
N-4
<PAGE>
<TABLE>
<CAPTION>
Fidelity Fidelity Lincoln
VIP Fidelity Fidelity VIP III Kemper Kemper National
Dreyfus Equity VIP VIP Growth Small Cap Government Money
Small Cap Income Growth Overseas Opportunities Growth Securities Market
Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount
----------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <S>
$ -- $ -- $ -- $ -- $ -- $ -- $ -- $17,841,217
3,850,015 15,591,893 38,112,319 8,924,980 18,902,615 5,918,750 12,138,816 --
---------- ----------- ----------- ---------- ----------- ---------- ----------- -----------
3,850,015 15,591,893 38,112,319 8,924,980 18,902,615 5,918,750 12,138,816 17,841,217
-- -- -- -- -- -- -- --
3,850,015 15,591,893 38,112,319 8,924,980 18,902,615 5,918,750 12,138,816 17,841,217
145 598 1,453 342 731 223 466 683
---------- ----------- ----------- ---------- ----------- ---------- ----------- -----------
$3,849,870 $15,591,295 $38,110,866 $8,924,638 $18,901,884 $5,918,527 $12,138,350 $17,840,534
========== =========== =========== ========== =========== ========== =========== ===========
0.98% 3.97% 9.71% 2.27% 4.82% 1.51% 3.09% 4.54%
========== =========== =========== ========== =========== ========== =========== ===========
295,868 1,463,500 2,642,177 628,052 1,770,295 405,316 1,218,517 1,721,360
-- 9,081 11,862 -- -- -- -- --
$ 13.012 $ 10.588 $ 14.360 $ 14.210 $ 10.677 $ 14.602 $ 9.962 $ 10.364
3,849,870 15,495,149 37,940,538 8,924,638 18,901,884 5,918,527 12,138,350 17,840,534
-- 96,146 170,328 -- -- -- -- --
---------- ----------- ----------- ---------- ----------- ---------- ----------- -----------
$3,849,870 $15,591,295 $38,110,866 $8,924,638 $18,901,884 $5,918,527 $12,138,350 $17,840,534
========== =========== =========== ========== =========== ========== =========== ===========
</TABLE>
N-5
<PAGE>
Lincoln Life Variable Annuity Account N
Statement of assets and liability (continued)
December 31, 1999
<TABLE>
<CAPTION>
Lincoln MFS
National Emerging MFS total
Bond Growth Return
Subaccount Subaccount Subaccount
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Investments at Market--Affiliated
(Cost $82,346,295) $12,130,756 $ -- $ --
Investments at Market--
Unaffiliated (Cost $273,154,463) -- 23,707,760 13,097,966
----------- ----------- -----------
Total Investments 12,130,756 23,707,760 13,097,966
Dividend Receivable -- -- --
Total Assets 12,130,756 23,707,760 13,097,966
Liability--Payable to The Lincoln
National Life Insurance Company 466 894 506
----------- ----------- -----------
NET ASSETS $12,130,290 $23,706,866 $13,097,460
=========== =========== ===========
Percent of net assets 3.09% 6.04% 3.34%
=========== =========== ===========
Net assets are represented by:
. Units in accumulation period 1,259,559 1,212,170 1,271,214
--------------------------------
. Annuity reserve units -- -- --
--------------------------------
. Unit value $ 9.631 $ 19.557 $ 10.303
--------------------------------
. Value accumulation period 12,130,290 23,706,866 13,097,460
--------------------------------
. Annuity reserves -- -- --
-------------------------------- ----------- ----------- -----------
NET ASSETS $12,130,290 $23,706,866 $13,097,460
=========== =========== ===========
</TABLE>
See accompanying notes.
N-6
<PAGE>
<TABLE>
<CAPTION>
OCC
Accumulation OCC
MFS MFS Global Accumulation
Utilities Research Equity Managed
Subaccount Subaccount Subaccount Subaccount
-------------------------------------------------------
<C> <C> <C> <C> <S>
$ -- $ -- $ -- $ --
16,877,359 8,152,328 3,693,596 5,496,524
----------- ---------- ---------- ----------
16,877,359 8,152,328 3,693,596 5,496,524
-- -- -- --
16,877,359 8,152,328 3,693,596 5,496,524
646 312 143 213
----------- ---------- ---------- ----------
$16,876,713 $8,152,016 $3,693,453 $5,496,311
=========== ========== ========== ==========
4.30% 2.08% 0.94% 1.40%
=========== ========== ========== ==========
1,273,358 630,578 294,211 536,721
3,927 -- -- 4,147
$ 13.213 $ 12.928 $ 12.554 $ 10.162
16,824,825 8,152,016 3,693,453 5,454,168
51,888 -- -- 42,143
----------- ---------- ---------- ----------
$16,876,713 $8,152,016 $3,693,453 $5,496,311
=========== ========== ========== ==========
</TABLE>
N-7
<PAGE>
Lincoln Life Variable Annuity Account N
Statement of operations
Year Ended December 31, 1999
<TABLE>
<CAPTION>
AIM V.I.
AIM V.I. International
Growth Equity
Combined Subaccount Subaccount
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Investment Income (Loss):
. Dividends from investment income $ 2,584,493 $ 45,712 $ 67,998
---------------------------------------
. Dividends from net realized gains on
investments 3,257,711 801,307 285,352
---------------------------------------
Mortality and expense guarantees (2,289,189) (122,442) (45,924)
----------- ---------- ----------
Net Investment Income (Loss) 3,553,015 724,577 307,426
Net Realized and Unrealized Gain (Loss)
on Investments:
. Net realized gain (loss) on
investments 2,717,979 61,437 646,152
---------------------------------------
. Net change in unrealized appreciation
or depreciation on investments 36,814,991 3,164,157 1,915,792
--------------------------------------- ----------- ---------- ----------
Net Realized and Unrealized Gain (Loss)
on Investments 39,532,970 3,225,594 2,561,944
----------- ---------- ----------
Net Increase (Decrease) in Net Assets
Resulting from Operations $43,085,985 $3,950,171 $2,869,370
--------------------------------------- =========== ========== ==========
</TABLE>
See accompanying notes.
N-8
<PAGE>
<TABLE>
<CAPTION>
Bankers Liberty Delaware Delaware
Trust Liberty Colonial Premium Delaware Delaware Premium
AIM V.I. Equity 500 Colonial NewPort Growth and Premium Premium Emerging
Value Index US Stock Tiger Income Delchester Devon Markets
Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount
------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <S>
$ 114,307 $ 294,359 $ 22,377 $ 16,547 $ 106,334 $ 374,019 $ 14,831 $ 1,151
597,748 138,424 203,260 -- 81,959 -- 28,673 --
(237,428) (286,852) (24,198) (12,104) (56,690) (51,250) (83,545) (6,100)
---------- ---------- -------- -------- --------- --------- --------- --------
474,627 145,931 201,439 4,443 131,603 322,769 (40,041) (4,949)
27,847 27,121 (65) 36,913 (41,512) (91,607) (87,211) 18,715
4,929,350 3,978,680 35,006 557,362 (486,668) (446,001) (473,024) 217,354
---------- ---------- -------- -------- --------- --------- --------- --------
4,957,197 4,005,801 34,941 594,275 (528,180) (537,608) (560,235) 236,069
---------- ---------- -------- -------- --------- --------- --------- --------
$5,431,824 $4,151,732 $236,380 $598,718 $(396,577) $(214,839) $(600,276) $231,120
========== ========== ======== ======== ========= ========= ========= ========
</TABLE>
N-9
<PAGE>
Lincoln Life Variable Annuity Account N
Statement of operations (continued)
Year Ended December 31, 1999
<TABLE>
<CAPTION>
Delaware Delaware Delaware Delaware
Premium Premium Premium Premium
International Real Small Cap Social
Equity Estate Value Awareness
Subaccount Subaccount Subaccount Subaccount
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Investment Income (Loss):
. Dividends from investment
income $ 5,420 $ 2,773 $ 6,315 $ 6,284
------------------------------
. Dividends from net realized
gains on investments 396 -- 2,591 --
------------------------------
Mortality and expense
guarantees (16,076) (4,637) (20,889) (54,088)
-------- -------- -------- --------
Net Investment Income (Loss) (10,260) (1,864) (11,983) (47,804)
Net Realized and Unrealized
Gain (Loss) on Investments:
. Net realized gain (loss) on
investments 151,449 (14,359) (4,116) 15,441
------------------------------
. Net change in unrealized
appreciation or depreciation
on investments 159,885 (5,062) (56,317) 697,762
------------------------------ -------- -------- -------- --------
Net Realized and Unrealized
Gain (Loss) on Investments 311,334 (19,421) (60,433) 713,203
-------- -------- -------- --------
Net Increase (Decrease) in Net
Assets Resulting from
Operations $301,074 $(21,285) $(72,416) $665,399
======== ======== ======== ========
</TABLE>
See accompanying notes.
N-10
<PAGE>
<TABLE>
<CAPTION>
Fidelity Fidelity
Delaware VIP Fidelity Fidelity VIP III Kemper Kemper
Premium Dreyfus Equity VIP VIP Growth Small Cap Government
Trend Small Cap Income Growth Overseas Opportunities Growth Securities
Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 34 $ 373 $ 18,297 $ 1,460 $ 4,516 $ 23,068 $ -- $120,036
-- -- 40,446 91,781 7,284 43,128 -- --
(48,447) (21,163) (101,983) (187,107) (47,462) (137,343) (30,630) (70,809)
---------- -------- --------- ---------- ---------- --------- ---------- --------
(48,413) (20,790) (43,240) (93,866) (35,662) (71,147) (30,630) 49,227
56,040 9,870 2,348 29,798 1,798,129 15,981 17,423 (7,808)
3,490,733 501,638 (92,622) 5,913,522 1,027,670 390,823 1,428,512 (79,830)
---------- -------- --------- ---------- ---------- --------- ---------- --------
3,546,773 511,508 (90,274) 5,943,320 2,825,799 406,804 1,445,935 (87,638)
---------- -------- --------- ---------- ---------- --------- ---------- --------
$3,498,360 $490,718 $(133,514) $5,849,454 $2,790,137 $ 335,657 $1,415,305 $(38,411)
========== ======== ========= ========== ========== ========= ========== ========
</TABLE>
N-11
<PAGE>
Lincoln Life Variable Annuity Account N
Statement of operations (continued)
Year Ended December 31, 1999
<TABLE>
<CAPTION>
Lincoln
National Lincoln MFS
Money National Emerging
Market Bond Growth
Subaccount Subaccount Subaccount
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Net Investment Income (Loss):
. Dividends from investment income $ 527,238 $ 627,973 $ --
------------------------------------------
. Dividends from net realized gains on
investments -- -- --
------------------------------------------
Mortality and expense guarantees (156,983) (82,828) (89,179)
--------- --------- ----------
Net Investment Income (Loss) 370,255 545,145 (89,179)
Net Realized and Unrealized Gain (Loss) on
Investments:
. Net realized gain (loss) on investments -- (21,107) 11,337
------------------------------------------
. Net change in unrealized appreciation or
depreciation on investments -- (743,442) 7,351,580
------------------------------------------ --------- --------- ----------
Net Realized and Unrealized Gain (Loss) on
Investments -- (764,549) 7,362,917
--------- --------- ----------
Net Increase (Decrease) in Net Assets
Resulting from Operations $ 370,255 $(219,404) $7,273,738
========= ========= ==========
</TABLE>
See accompanying notes.
N-12
<PAGE>
<TABLE>
<CAPTION>
OCC
Accumulation OCC
MFS Total MFS MFS Global Accumulation
Return Utilities Research Equity Managed
Subaccount Subaccount Subaccount Subaccount Subaccount
-----------------------------------------------------------------
<C> <C> <C> <C> <C> <S>
$ 72,777 $ 50,478 $ 3,908 $ 48,989 $ 6,919
134,957 253,805 20,650 510,423 15,527
(92,471) (97,333) (48,150) (20,158) (34,920)
--------- ---------- ---------- --------- --------
115,263 206,950 (23,592) 539,254 (12,474)
(5,716) 34,684 16,494 12,556 1,745
(104,598) 2,510,113 1,162,825 (176,948) 46,739
--------- ---------- ---------- --------- --------
(110,314) 2,544,797 1,179,319 (164,392) 48,484
--------- ---------- ---------- --------- --------
$ 4,949 $2,751,747 $1,155,727 $ 374,862 $ 36,010
========= ========== ========== ========= ========
</TABLE>
N-13
<PAGE>
Lincoln Life Variable Annuity Account N
Statement of changes in net assets
Period from November 24, 1998 to December 31, 1998 and the Year Ended
December 31, 1999
<TABLE>
<CAPTION>
AIM V.I.
AIM V.I. International AIM V.I.
Growth Equity Value
Combined Subaccount Subaccount Subaccount
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Changes From Operations:
. Net investment income
(loss) $ 37,847 $ 11,123 $ 287 $ 11,483
-----------------------
. Net realized gain
(loss) on investments 46 -- -- 1
-----------------------
. Net change in
unrealized
appreciation or
depreciation on
investments 236,643 8,483 2,328 10,765
------------------------ ------------- ----------- ----------- -----------
Net Increase (Decrease)
in Net Assets Resulting
from Operations 274,536 19,606 2,615 22,249
Change From Unit
Transactions:
Accumulation Units:
. Contract purchases 11,651,639 258,564 74,145 382,502
----------------------
. Terminated contracts
and transfers to
annuity reserves (67,297) -- -- --
------------------------ ------------- ----------- ----------- -----------
11,584,342 258,564 74,145 382,502
Net Increase in Net
Assets Resulting from
Unit Transactions 11,584,342 258,564 74,145 382,502
------------------------ ------------- ----------- ----------- -----------
Total Increase in Net
Assets 11,858,878 278,170 76,760 404,751
------------------------ ------------- ----------- ----------- -----------
Net Assets at December
31, 1998 11,858,878 278,170 76,760 404,751
------------------------
Changes From Operations:
. Net investment income
(loss) 3,553,015 724,577 307,426 474,627
-----------------------
. Net realized gain
(loss) on investments 2,717,979 61,437 646,152 27,847
-----------------------
. Net change in
unrealized
appreciation or
depreciation on
investments 36,814,991 3,164,157 1,915,792 4,929,350
------------------------ ------------- ----------- ----------- -----------
Net Increase (Decrease)
in Net Assets Resulting
from Operations 43,085,985 3,950,171 2,869,370 5,431,824
Change From Unit
Transactions:
Accumulation Units:
. Contract purchases 670,494,798 21,455,422 16,257,693 41,495,564
----------------------
. Terminated contracts
and transfers to
annuity reserves (333,494,545) (1,336,014) (8,430,730) (3,113,531)
---------------------- ------------- ----------- ----------- -----------
337,000,253 20,119,408 7,826,963 38,382,033
Annuity Reserves:
. Transfer from
accumulation units
and between accounts 648,678 96,307 -- (7,138)
----------------------
. Annuity Payments (27,650) (1,979) -- (2,057)
----------------------
. Receipt
(reimbursement) of
mortality guarantee
adjustments (8,852) (2,355) -- --
------------------------ ------------- ----------- ----------- -----------
612,176 91,973 -- (9,195)
Net Increase in Net
Assets Resulting from
Unit Transactions 337,612,429 20,211,381 7,826,963 38,372,838
------------------------ ------------- ----------- ----------- -----------
Total Increase in Net
Assets 380,698,414 24,161,552 10,696,333 43,804,662
------------------------ ------------- ----------- ----------- -----------
Net Assets at December
31, 1999 $ 392,557,292 $24,439,722 $10,773,093 $44,209,413
------------------------ ============= =========== =========== ===========
</TABLE>
See accompanying notes.
N-14
<PAGE>
<TABLE>
<CAPTION>
Bankers Liberty Delaware Delaware Delaware
Trust Liberty Colonial Premium Delaware Delaware Premium Premium
Equity Colonial NewPort Growth and Premium Premium Emerging International
500 Index US Stock Tiger Income Delchester Devon Markets Equity
Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount
-----------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <S>
$ 3,989 $ 749 $ 304 $ (129) $ 2,426 $ (331) $ (10) $ (7)
1 -- -- 1 (1) -- -- --
28,725 250 (512) 3,753 (3,741) 18,543 80 102
----------- ---------- ---------- ----------- ----------- ----------- ---------- ------------
32,715 999 (208) 3,625 (1,316) 18,212 70 95
915,708 18,120 17,001 227,487 414,557 437,808 14,632 18,130
(2,886) -- -- -- -- -- -- --
----------- ---------- ---------- ----------- ----------- ----------- ---------- ------------
912,822 18,120 17,001 227,487 414,557 437,808 14,632 18,130
912,822 18,120 17,001 227,487 414,557 437,808 14,632 18,130
----------- ---------- ---------- ----------- ----------- ----------- ---------- ------------
945,537 19,119 16,793 231,112 413,241 456,020 14,702 18,225
----------- ---------- ---------- ----------- ----------- ----------- ---------- ------------
945,537 19,119 16,793 231,112 413,241 456,020 14,702 18,225
145,931 201,439 4,443 131,603 322,769 (40,041) (4,949) (10,260)
27,121 (65) 36,913 (41,512) (91,607) (87,211) 18,715 151,449
3,978,680 35,006 557,362 (486,668) (446,001) (473,024) 217,354 159,885
----------- ---------- ---------- ----------- ----------- ----------- ---------- ------------
4,151,732 236,380 598,718 (396,577) (214,839) (600,276) 231,120 301,074
43,792,048 4,453,154 2,857,126 8,948,171 7,883,137 10,892,783 1,328,042 22,564,199
(2,628,346) (268,499) (417,100) (1,118,560) (1,986,620) (1,847,328) (228,363) (19,253,411)
----------- ---------- ---------- ----------- ----------- ----------- ---------- ------------
41,163,702 4,184,655 2,440,026 7,829,611 5,896,517 9,045,455 1,099,679 3,310,788
137,629 -- -- 55,484 -- 9,782 -- --
(542) -- -- (2,087) -- (62) -- --
(3,071) -- -- (190) -- -- -- --
----------- ---------- ---------- ----------- ----------- ----------- ---------- ------------
134,016 -- -- 53,207 -- 9,720 -- --
41,297,718 4,184,655 2,440,026 7,882,818 5,896,517 9,055,175 1,099,679 3,310,788
----------- ---------- ---------- ----------- ----------- ----------- ---------- ------------
45,449,450 4,421,035 3,038,744 7,486,241 5,681,678 8,454,899 1,330,799 3,611,862
----------- ---------- ---------- ----------- ----------- ----------- ---------- ------------
$46,394,987 $4,440,154 $3,055,537 $ 7,717,353 $ 6,094,919 $ 8,910,919 $1,345,501 $ 3,630,087
=========== ========== ========== =========== =========== =========== ========== ============
</TABLE>
N-15
<PAGE>
Lincoln Life Variable Annuity Account N
Statement of changes in net assets (continued)
Period from November 24, 1998 to December 31, 1998 and the Year Ended
December 31, 1999
<TABLE>
<CAPTION>
Delaware Delaware Delaware
Premium Premium Premium Delaware
Real Small Cap Social Premium
Estate Value Awareness Trend
Subaccount Subaccount Subaccount Subaccount
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Changes From Operations:
. Net investment income
(loss) $ (76) $ (150) $ (288) $ (43)
---------------------------
. Net realized gain (loss)
on investments -- 1 1 --
---------------------------
. Net change in unrealized
appreciation or
depreciation on
investments 1,802 9,528 33,401 4,330
----------------------------- --------- ---------- ---------- -----------
Net Increase (Decrease) in
Net Assets Resulting from
Operations 1,726 9,379 33,114 4,287
Change From Unit
Transactions:
Accumulation Units:
. Contract purchases 94,050 169,957 551,993 69,109
-------------------------
. Terminated contracts
and transfers to
annuity reserves -- -- (2,866) --
----------------------------- --------- ---------- ---------- -----------
94,050 169,957 549,127 69,109
Net Increase in Net Assets
Resulting from Unit
Transactions 94,050 169,957 549,127 69,109
----------------------------- --------- ---------- ---------- -----------
Total Increase in Net Assets 95,776 179,336 582,241 73,396
----------------------------- --------- ---------- ---------- -----------
Net Assets at December 31,
1998 95,776 179,336 582,241 73,396
-----------------------------
Changes From Operations:
. Net investment income
(loss) (1,864) (11,983) (47,804) (48,413)
---------------------------
. Net realized gain (loss)
on investments (14,359) (4,116) 15,441 56,040
---------------------------
. Net change in unrealized
appreciation or
depreciation on
investments (5,062) (56,317) 697,762 3,490,733
----------------------------- --------- ---------- ---------- -----------
Net Increase (Decrease) in
Net Assets Resulting from
Operations (21,285) (72,416) 665,399 3,498,360
Change From Unit
Transactions:
Accumulation Units:
. Contract purchases 935,293 3,343,131 6,648,953 13,315,433
-------------------------
. Terminated contracts
and transfers to
annuity reserves (298,849) (312,993) (642,296) (872,945)
------------------------- --------- ---------- ---------- -----------
636,444 3,030,138 6,006,657 12,442,488
Annuity Reserves:
. Transfer from
accumulation units and
between accounts -- -- -- --
-------------------------
. Annuity Payments -- -- -- --
-------------------------
. Receipt (reimbursement)
of mortality guarantee
adjustments -- -- -- --
----------------------------- --------- ---------- ---------- -----------
-- -- -- --
Net Increase in Net Assets
Resulting from Unit
Transactions 636,444 3,030,138 6,006,657 12,442,488
----------------------------- --------- ---------- ---------- -----------
Total Increase in Net Assets 615,159 2,957,722 6,672,056 15,940,848
----------------------------- --------- ---------- ---------- -----------
Net Assets at December 31,
1999 $ 710,935 $3,137,058 $7,254,297 $16,014,244
----------------------------- ========= ========== ========== ===========
</TABLE>
See accompanying notes.
N-16
<PAGE>
<TABLE>
<CAPTION>
Fidelity Fidelity Lincoln
VIP Fidelity Fidelity VIP III Kemper Kemper National
Dreyfus Equity VIP VIP Growth Small Cap Government Money
Small Cap Income Growth Overseas Opportunities Growth Securities Market
Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount
---------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <S>
$ (96) $ (209) $ (347) $ (88) $ (370) $ (23) $ (365) $ 5,451
-- 2 6 -- 3 -- -- --
10,278 14,833 27,814 3,051 23,185 3,603 1,207 --
---------- ----------- ----------- ------------- ----------- ---------- ----------- -------------
10,182 14,626 27,473 2,963 22,818 3,580 842 5,451
125,342 363,261 424,157 132,461 645,222 45,784 772,499 3,541,676
-- -- -- -- (2,863) -- -- (55,850)
---------- ----------- ----------- ------------- ----------- ---------- ----------- -------------
125,342 363,261 424,157 132,461 642,359 45,784 772,499 3,485,826
125,342 363,261 424,157 132,461 642,359 45,784 772,499 3,485,826
---------- ----------- ----------- ------------- ----------- ---------- ----------- -------------
135,524 377,887 451,630 135,424 665,177 49,364 773,341 3,491,277
---------- ----------- ----------- ------------- ----------- ---------- ----------- -------------
135,524 377,887 451,630 135,424 665,177 49,364 773,341 3,491,277
(20,790) (43,240) (93,866) (35,662) (71,147) (30,630) 49,227 370,255
9,870 2,348 29,798 1,798,129 15,981 17,423 (7,808) --
501,638 (92,622) 5,913,522 1,027,670 390,823 1,428,512 (79,830) --
---------- ----------- ----------- ------------- ----------- ---------- ----------- -------------
490,718 (133,514) 5,849,454 2,790,137 335,657 1,415,305 (38,411) 370,255
3,444,710 16,232,359 33,766,701 124,051,106 19,894,319 4,698,037 12,710,322 173,967,280
(221,082) (983,739) (2,112,197) (118,052,029) (1,993,269) (244,179) (1,306,902) (159,988,278)
---------- ----------- ----------- ------------- ----------- ---------- ----------- -------------
3,223,628 15,248,620 31,654,504 5,999,077 17,901,050 4,453,858 11,403,420 13,979,002
-- 107,541 160,535 -- -- -- -- --
-- (9,039) (2,668) -- -- -- -- --
-- (200) (2,589) -- -- -- -- --
---------- ----------- ----------- ------------- ----------- ---------- ----------- -------------
-- 98,302 155,278 -- -- -- -- --
3,223,628 15,346,922 31,809,782 5,999,077 17,901,050 4,453,858 11,403,420 13,979,002
---------- ----------- ----------- ------------- ----------- ---------- ----------- -------------
3,714,346 15,213,408 37,659,236 8,789,214 18,236,707 5,869,163 11,365,009 14,349,257
---------- ----------- ----------- ------------- ----------- ---------- ----------- -------------
$3,849,870 $15,591,295 $38,110,866 $ 8,924,638 $18,901,884 $5,918,527 $12,138,350 $ 17,840,534
========== =========== =========== ============= =========== ========== =========== =============
</TABLE>
N-17
<PAGE>
Lincoln Life Variable Annuity Account N
Statement of changes in net assets (continued)
Period from November 24, 1998 to December 31, 1998 and the Year Ended
December 31, 1999
<TABLE>
<CAPTION>
Lincoln MFS
National Emerging MFS Total
Bond Growth Return
Subaccount Subaccount Subaccount
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Changes From Operations:
. Net investment income (loss) $ (229) $ (44) $ (270)
--------------------------------------
. Net realized gain (loss) on
investments -- 1 2
--------------------------------------
. Net change in unrealized
appreciation or depreciation on
investments 157 5,891 9,731
---------------------------------------- ----------- ----------- -----------
Net Increase (Decrease) in Net Assets
Resulting from Operations (72) 5,848 9,463
Change From Unit Transactions:
Accumulation Units:
. Contract purchases 465,808 58,984 506,443
------------------------------------
. Terminated contracts and transfers
to annuity reserves -- -- --
---------------------------------------- ----------- ----------- -----------
465,808 58,984 506,443
Net Increase in Net Assets Resulting
from Unit Transactions 465,808 58,984 506,443
---------------------------------------- ----------- ----------- -----------
Total Increase in Net Assets 465,736 64,832 515,906
---------------------------------------- ----------- ----------- -----------
Net Assets at December 31, 1998 465,736 64,832 515,906
----------------------------------------
Changes From Operations:
. Net investment income (loss) 545,145 (89,179) 115,263
--------------------------------------
. Net realized gain (loss) on
investments (21,107) 11,337 (5,716)
--------------------------------------
. Net change in unrealized
appreciation or depreciation on
investments (743,442) 7,351,580 (104,598)
---------------------------------------- ----------- ----------- -----------
Net Increase (Decrease) in Net Assets
Resulting from Operations (219,404) 7,273,738 4,949
Change From Unit Transactions:
Accumulation Units:
. Contract purchases 13,178,516 17,118,654 13,987,800
------------------------------------
. Terminated contracts and transfers
to annuity reserves (1,294,558) (750,358) (1,413,417)
------------------------------------ ----------- ----------- -----------
11,883,958 16,368,296 12,574,383
Annuity Reserves:
. Transfer from accumulation units
and between accounts -- -- 4,656
------------------------------------
. Annuity Payments -- -- (2,434)
------------------------------------
. Receipt (reimbursement) of
mortality guarantee adjustments -- -- --
---------------------------------------- ----------- ----------- -----------
-- -- 2,222
Net Increase in Net Assets Resulting
from Unit Transactions 11,883,958 16,368,296 12,576,605
---------------------------------------- ----------- ----------- -----------
Total Increase in Net Assets 11,664,554 23,642,034 12,581,554
---------------------------------------- ----------- ----------- -----------
Net Assets at December 31, 1999 $12,130,290 $23,706,866 $13,097,460
---------------------------------------- =========== =========== ===========
</TABLE>
See accompanying notes.
N-18
<PAGE>
<TABLE>
<CAPTION>
OCC
Accumulation OCC
MFS MFS Global Accumulation
Utilities Research Equity Managed
Subaccount Subaccount Subaccount Subaccount
--------------------------------------------------------
<S> <C> <C> <C>
$ (290) $ (62) $ 5,503 $ (41)
26 1 1 --
15,394 5,147 (1,722) 237
----------- ---------- ---------- ----------
15,130 5,086 3,782 196
675,517 82,339 110,158 38,225
(2,832) -- -- --
----------- ---------- ---------- ----------
672,685 82,339 110,158 38,225
672,685 82,339 110,158 38,225
----------- ---------- ---------- ----------
687,815 87,425 113,940 38,421
----------- ---------- ---------- ----------
687,815 87,425 113,940 38,421
206,950 (23,592) 539,254 (12,474)
34,684 16,494 12,556 1,745
2,510,113 1,162,825 (176,948) 46,739
----------- ---------- ---------- ----------
2,751,747 1,155,727 374,862 36,010
14,460,042 7,300,548 3,469,829 6,044,426
(1,055,770) (391,684) (265,178) (666,320)
----------- ---------- ---------- ----------
13,404,272 6,908,864 3,204,651 5,378,106
37,836 -- -- 46,046
(4,716) -- -- (2,066)
(241) -- -- (206)
----------- ---------- ---------- ----------
32,879 -- -- 43,774
13,437,151 6,908,864 3,204,651 5,421,880
----------- ---------- ---------- ----------
16,188,898 8,064,591 3,579,513 5,457,890
----------- ---------- ---------- ----------
$16,876,713 $8,152,016 $3,693,453 $5,496,311
=========== ========== ========== ==========
</TABLE>
N-19
<PAGE>
Lincoln Life Variable Annuity Account N
Notes to financial statements
1. Accounting policies and account information
The Variable Account: Lincoln Life Variable Annuity Account N (Variable Ac-
count) is a segregated investment account of The Lincoln National Life Insur-
ance Company (the Company) and is registered with the Securities and Exchange
Commission under the Investment Company Act of 1940, as amended, as a unit in-
vestment trust. The operations of the Variable Account, which commenced on No-
vember 24, 1998, are part of the operations of the Company.
The assets of the Variable Account are owned by the Company. The portion of
the Variable Account's assets supporting the annuity contracts may not be used
to satisfy liabilities arising from any other business of the Company.
Basis of Presentation: The accompanying financial statements have been pre-
pared in accordance with accounting principles generally accepted in the
United States for unit investment trusts.
Investments: The assets of the Variable Account are divided into variable sub-
accounts each of which is invested in shares of thirty portfolios (the Funds)
of eleven diversified open-end management investment companies, each portfolio
with its own investment objective. The Funds are:
AIM Variable Insurance Funds:
AIM V.I. Growth Fund
AIM V.I. International Equity Fund
AIM V.I. Value Fund
Bankers Trust Insurance Fund Trust:
Bankers Trust Equity 500 Index Fund
Liberty Variable Investment Trust:
Liberty Colonial US Stock Fund
Liberty Colonial Newport Tiger Fund
Delaware Group Premium Funds:
Delaware Premium Growth and Income Series
Delaware Premium Delchester Series
Delaware Premium Devon Series
Delaware Premium Emerging Markets Series
Delaware Premium International Equity Series
Delaware Premium Real Estate Series
Delaware Premium Small Cap Value Series
Delaware Premium Social Awareness Series
Delaware Premium Trend Series
Dreyfus Variable Investment Fund:
Dreyfus Small Cap Portfolio
Fidelity Variable Insurance Products Fund:
Fidelity VIP Equity Income Portfolio
Fidelity VIP Growth Portfolio
Fidelity VIP Overseas Portfolio
Fidelity Variable Insurance Products Fund III:
Fidelity VIP III Growth Opportunities Portfolio
Investors Fund Series:
Kemper Small Cap Growth Portfolio
Kemper Government Securities Portfolio
Lincoln National:
Lincoln National Money Market Fund
Lincoln National Bond Fund
MFS Variable Insurance Trust:
MFS Emerging Growth Series
MFS Total Return Series
MFS Utilities Series
MFS Research Series
OCC Accumulation Trust:
OCC Accumulation Global Equity Portfolio
OCC Accumulation Managed Portfolio
Investments in the Funds are stated at the closing net asset value per share
on December 31, 1999, which approximates fair value. The difference between
cost and fair value is reflected as unrealized appreciation and depreciation
of investments.
Investment transactions are accounted for on a trade date basis. The cost of
investments sold is determined by the average cost method.
Dividends: Dividends paid to the Variable Account are automatically reinvested
in shares of the Funds on the payable date. Dividend income is recorded on the
ex-dividend date.
Federal Income Taxes: Operations of the Variable Account form a part of and
are taxed with operations of the Company, which is taxed as a "life insurance
company" under the Internal Revenue Code. The Variable Account will not be
taxed as a regulated investment company under Subchapter M of the Internal
Revenue Code. Using current federal income tax law, no federal income taxes
are payable with respect to the Variable Account's net investment income and
the net realized gain on investments.
Annuity Reserves: Reserves on contracts not involving life contingencies are
calculated using an assumed investment rate of 4%. Reserves on contracts in-
volving life contingencies are calculated using a modification of the 1971 In-
dividual Annuitant Mortality Table and an assumed investment rate of 4%.
2. Mortality and expense guarantees and other transactions with affiliate
Amounts are paid to the Company for mortality and expense guarantees at an ef-
fective annual rate of 1.40% of each portfolio's average daily net assets
within the Variable Account. In addition, amounts retained by the
N-20
<PAGE>
Lincoln Life Variable Annuity Account N
Notes to financial statements (continued)
2. Mortality and expense guarantees and other transactions with affiliate
(continued)
Company for processing sales of annuity contracts for contract charges and sur-
render charges were as follows during 1999.
<TABLE>
<S> <C>
AIM V.I. Growth Fund $ 15,463
AIM V.I. International Equity Fund 72
AIM V.I. Value Fund 8,597
Bankers Trust Equity 500 Index Fund 7,631
Liberty Colonial US Stock Fund 2,426
Liberty Colonial Newport Tiger Fund 10,652
Delaware Premium Growth and Income Series 5,943
Delaware Premium Delchester Series 333
Delaware Premium Devon Series 10,079
Delaware Premium Emerging Market Series 10,034
Delaware Premium International Equity Series 5,598
Delaware Premium Real Estate Series 13
Delaware Premium Small Cap Value Series 454
Delaware Premium Social Awareness Series 1,116
Delaware Premium Trend Series 21,323
Dreyfus Small Cap Portfolio 763
Fidelity VIP Equity Income Portfolio 6,320
Fidelity VIP Growth Portfolio 11,380
Fidelity VIP Overseas Portfolio 3,078
Fidelity VIP III Growth Opportunities Portfolio 15,701
Kemper Small Cap Growth Portfolio 40
Kemper Government Securities Portfolio 20
Lincoln National Money Market Fund 2,001
Lincoln National Bond Fund 205
MFS Emerging Growth Series 7,440
MFS Total Return Series 10,751
MFS Utilities Series 7,405
MFS Research Series 2,637
OCC Accumulation Global Equity Portfolio 2,650
OCC Accumulation Managed Portfolio 6,316
----------------------------------------------- --------
$176,441
========
</TABLE>
Accordingly, the Company is responsible for all sales, general and administra-
tive expenses applicable to the Variable Account.
N-21
<PAGE>
LINCOLN LIFE VARIABLE ANNUITY ACCOUNT N
Notes to financial statements (continued)
3. NET ASSETS
The following is a summary of net assets owned at December 31, 1999.
<TABLE>
<CAPTION>
AIM V.I.
AIM V.I. International AIM V.I.
Growth Equity Value
Combined Subaccount Subaccount Subaccount
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Unit Transactions:
. Accumulation units $348,584,595 $20,377,972 $ 7,901,108 $38,764,535
-------------------------
. Annuity Reserves: 612,176 91,973 -- (9,195)
------------------------- ------------ ----------- ----------- -----------
349,196,771 20,469,945 7,901,108 38,755,340
Accumulated net investment
income (loss) 3,590,862 735,700 307,713 486,110
--------------------------
Accumulated net realized
gain (loss) on
investments 2,718,025 61,437 646,152 27,848
--------------------------
Net unrealized
appreciation or
depreciation on
investments 37,051,634 3,172,640 1,918,120 4,940,115
-------------------------- ------------ ----------- ----------- -----------
$392,557,292 $24,439,722 $10,773,093 $44,209,413
============ =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Delaware Delaware Delaware
Premium Premium Premium Delaware
Real Small Cap Social Premium
Estate Value Awareness Trend
Subaccount Subaccount Subaccount Subaccount
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Unit Transactions:
. Accumulation units $730,494 $3,200,095 $6,555,784 $12,511,597
-----------------------------
. Annuity Reserves: -- -- -- --
----------------------------- -------- ---------- ---------- -----------
730,494 3,200,095 6,555,784 12,511,597
Accumulated net investment
income (loss) (1,940) (12,133) (48,092) (48,456)
------------------------------
Accumulated net realized gain
(loss) on investments (14,359) (4,115) 15,442 56,040
------------------------------
Net unrealized appreciation or
depreciation on investments (3,260) (46,789) 731,163 3,495,063
------------------------------ -------- ---------- ---------- -----------
$710,935 $3,137,058 $7,254,297 $16,014,244
======== ========== ========== ===========
</TABLE>
N-22
<PAGE>
<TABLE>
<CAPTION>
Liberty Delaware Delaware Delaware
Bankers Liberty Colonial Premium Delaware Delaware Premium Premium
Trust Equity Colonial NewPort Growth Premium Premium Emerging International
500 Index US Stock Tiger and Income Delchester Devon Markets Equity
Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$42,076,524 $4,202,775 $2,457,027 $8,057,098 $6,311,074 $9,483,263 $1,114,311 $3,328,918
134,016 -- -- 53,207 -- 9,720 -- --
----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
42,210,540 4,202,775 2,457,027 8,110,305 6,311,074 9,492,983 1,114,311 3,328,918
149,920 202,188 4,747 131,474 325,195 (40,372) (4,959) (10,267)
27,122 (65) 36,913 (41,511) (91,608) (87,211) 18,715 151,449
4,007,405 35,256 556,850 (482,915) (449,742) (454,481) 217,434 159,987
----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
$46,394,987 $4,440,154 $3,055,537 $7,717,353 $6,094,919 $8,910,919 $1,345,501 $3,630,087
=========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Lincoln
Fidelity Fidelity Fidelity VIP Kemper Kemper National
Dreyfus VIP Equity Fidelity VIP III Growth Small Cap Government Money
Small Cap Income VIP Growth Overseas Opportunities Growth Securities Market
Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$3,348,970 $15,611,881 $32,078,661 $6,131,538 $18,543,409 $4,499,642 $12,175,919 $17,464,828
-- 98,302 155,278 -- -- -- -- --
---------- ----------- ----------- ---------- ----------- ---------- ----------- -----------
3,348,970 15,710,183 32,233,939 6,131,538 18,543,409 4,499,642 12,175,919 17,464,828
(20,886) (43,449) (94,213) (35,750) (71,517) (30,653) 48,862 375,706
9,870 2,350 29,804 1,798,129 15,984 17,423 (7,808) --
511,916 (77,789) 5,941,336 1,030,721 414,008 1,432,115 (78,623) --
---------- ----------- ----------- ---------- ----------- ---------- ----------- -----------
$3,849,870 $15,591,295 $38,110,866 $8,924,638 $18,901,884 $5,918,527 $12,138,350 $17,840,534
========== =========== =========== ========== =========== ========== =========== ===========
</TABLE>
N-23
<PAGE>
Lincoln Life Variable Annuity Account N
Notes to financial statements (continued)
3. Net Assets
The following is a summary of net assets owned at December 31, 1999.
<TABLE>
<CAPTION>
Lincoln MFS
National Emerging MFS Total MFS
Bond Growth Return Utilities
Subaccount Subaccount Subaccount Subaccount
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Unit Transactions:
. Accumulation units $12,349,766 $16,427,280 $13,080,826 $14,076,957
------------------------
. Annuity Reserves: -- -- 2,222 32,879
------------------------ ----------- ----------- ----------- -----------
12,349,766 16,427,280 13,083,048 14,109,836
Accumulated net
investment income (loss) 544,916 (89,223) 114,993 206,660
-------------------------
Accumulated net realized
gain (loss) on
investments (21,107) 11,338 (5,714) 34,710
-------------------------
Net unrealized
appreciation or
depreciation on
investments (743,285) 7,357,471 (94,867) 2,525,507
------------------------- ----------- ----------- ----------- -----------
$12,130,290 $23,706,866 $13,097,460 $16,876,713
=========== =========== =========== ===========
<CAPTION>
OCC
Accumulation OCC
MFS Global Accumulation
Research Equity Managed
Subaccount Subaccount Subaccount
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Unit Transactions:
. Accumulation units $ 6,991,203 $ 3,314,809 $ 5,416,331
------------------------
. Annuity Reserves: -- -- 43,774
------------------------ ----------- ----------- -----------
6,991,203 3,314,809 5,460,105
Accumulated net
investment income (loss) (23,654) 544,757 (12,515)
-------------------------
Accumulated net realized
gain (loss) on
investments 16,495 12,557 1,745
-------------------------
Net unrealized
appreciation or
depreciation on
investments 1,167,972 (178,670) 46,976
------------------------- ----------- ----------- -----------
$ 8,152,016 $ 3,693,453 $ 5,496,311
=========== =========== ===========
</TABLE>
N-24
<PAGE>
Lincoln Life Variable Annuity Account N
Notes to financial statements (continued)
4. Purchases and sales of investments
The aggregate cost of investments purchased and the aggregate proceeds from in-
vestments sold were as follows for 1999.
<TABLE>
<CAPTION>
Aggregate Aggregate
Cost of Proceeds
Purchases from Sales
--------------------------------------------------------------------------
<S> <C> <C>
AIM V.I. Growth Fund $ 21,738,721 $ 801,836
-----------------------------------------------
AIM V.I. International Equity Fund 16,072,630 7,937,833
-----------------------------------------------
AIM V.I. Value Fund 39,412,211 563,076
-----------------------------------------------
Bankers Trust Equity 500 Index Fund 43,072,412 1,627,024
-----------------------------------------------
Liberty Colonial US Stock Fund 4,627,123 240,859
-----------------------------------------------
Liberty Colonial Newport Tiger Fund 2,954,805 510,219
-----------------------------------------------
Delaware Premium Growth and Income Series 8,941,768 927,059
-----------------------------------------------
Delaware Premium Delchester Series 7,819,027 1,618,417
-----------------------------------------------
Delaware Premium Devon Series 10,587,237 1,571,774
-----------------------------------------------
Delaware Premium Emerging Market Series 1,493,795 399,014
-----------------------------------------------
Delaware Premium International Equity Series 22,465,347 19,164,677
-----------------------------------------------
Delaware Premium Real Estate Series 928,426 293,823
-----------------------------------------------
Delaware Premium Small Cap Value Series 3,279,409 261,142
-----------------------------------------------
Delaware Premium Social Awareness Series 6,407,467 448,358
-----------------------------------------------
Delaware Premium Trend Series 12,826,043 431,368
-----------------------------------------------
Dreyfus Small Cap Portfolio 3,396,869 193,891
-----------------------------------------------
Fidelity VIP Equity Income Portfolio 15,959,243 654,978
-----------------------------------------------
Fidelity VIP Growth Portfolio 32,402,501 685,149
-----------------------------------------------
Fidelity VIP Overseas Portfolio 123,690,645 117,726,893
-----------------------------------------------
Fidelity VIP III Growth Opportunities Portfolio 19,435,722 1,605,111
-----------------------------------------------
Kemper Small Cap Growth Portfolio 4,629,842 206,392
-----------------------------------------------
Kemper Government Securities Portfolio 12,272,988 819,905
-----------------------------------------------
Lincoln National Money Market Fund 167,251,052 152,901,243
-----------------------------------------------
Lincoln National Bond Fund 13,384,302 954,751
-----------------------------------------------
MFS Emerging Growth Series 16,642,282 362,274
-----------------------------------------------
MFS Total Return Series 13,927,832 1,235,478
-----------------------------------------------
MFS Utilities Series 14,338,237 693,515
-----------------------------------------------
MFS Research Series 7,168,208 282,627
-----------------------------------------------
OCC Accumulation Global Equity Portfolio 3,927,521 183,478
-----------------------------------------------
OCC Accumulation Managed Portfolio 5,789,329 379,711
----------------------------------------------- ------------ ------------
$656,842,994 $315,681,875
============ ============
</TABLE>
N-25
<PAGE>
Lincoln Life Variable Annuity Account N
Notes to financial statements (continued)
5. Investments
The following is a summary of investments owned at December 31, 1999.
<TABLE>
<CAPTION>
Net
Shares Asset Value of Cost of
Outstanding Value Shares Shares
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AIM V.I. Growth Fund 757,850 $32.25 $ 24,440,659 $ 21,268,019
---------------------------------
AIM V.I. International Equity
Fund 367,822 29.29 10,773,504 8,855,384
---------------------------------
AIM V.I. Value Fund 1,319,734 33.50 44,211,097 39,270,982
---------------------------------
Bankers Trust Equity 500 Index
Fund 3,056,440 15.18 46,396,762 42,389,357
---------------------------------
Liberty Colonial US Stock Fund 223,694 19.85 4,440,325 4,405,069
---------------------------------
Liberty Colonial Newport Tiger
Fund 1,166,280 2.62 3,055,654 2,498,804
---------------------------------
Delaware Premium Growth and
Income Series 453,446 17.02 7,717,650 8,200,565
---------------------------------
Delaware Premium Delchester
Series 818,766 7.42 6,075,240 6,524,982
---------------------------------
Delaware Premium Devon Series 654,278 13.62 8,911,265 9,365,746
---------------------------------
Delaware Premium Emerging Market
Series 160,185 8.40 1,345,552 1,128,118
---------------------------------
Delaware Premium International
Equity Series 194,859 18.63 3,630,230 3,470,243
---------------------------------
Delaware Premium Real Estate
Series 82,003 8.67 710,962 714,222
---------------------------------
Delaware Premium Small Cap Value
Series 204,243 15.36 3,137,177 3,183,966
---------------------------------
Delaware Premium Social Awareness
Series 443,434 16.36 7,254,574 6,523,411
---------------------------------
Delaware Premium Trend Series 475,783 33.66 16,014,847 12,519,784
---------------------------------
Dreyfus Small Cap Portfolio 58,035 66.34 3,850,015 3,338,099
---------------------------------
Fidelity VIP Equity Income
Portfolio 606,452 25.71 15,591,893 15,669,682
---------------------------------
Fidelity VIP Growth Portfolio 693,834 54.93 38,112,319 32,170,983
---------------------------------
Fidelity VIP Overseas Portfolio 325,254 27.44 8,924,980 7,894,259
---------------------------------
Fidelity VIP III Growth
Opportunities Portfolio 816,528 23.15 18,902,615 18,488,607
---------------------------------
Kemper Small Cap Growth Portfolio 2,230,167 2.65 5,918,750 4,486,635
---------------------------------
Kemper Government Securities
Portfolio 10,495,531 1.16 12,138,816 12,217,439
---------------------------------
Lincoln National Money Market
Fund 1,784,122 10.00 17,841,217 17,841,217
---------------------------------
Lincoln National Bond Fund 1,060,789 11.44 12,130,756 12,874,041
---------------------------------
MFS Emerging Growth Series 624,875 37.94 23,707,760 16,350,289
---------------------------------
MFS Total Return Series 737,914 17.75 13,097,966 13,192,833
---------------------------------
MFS Utilities Series 698,566 24.16 16,877,359 14,351,852
---------------------------------
MFS Research Series 349,286 23.34 8,152,328 6,984,356
---------------------------------
OCC Accumulation Global Equity
Portfolio 223,043 16.56 3,693,596 3,872,266
---------------------------------
OCC Accumulation Managed
Portfolio 125,923 43.65 5,496,524 5,449,548
--------------------------------- ------------ ------------
$392,552,392 $355,500,758
============ ============
</TABLE>
6. Fund name change
During 1999, the Delaware Decatur Total Return Series changed its name to the
Delaware Growth and Income Series.
N-26
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
Board of Directors of The Lincoln National Life Insurance Company
and
Contract Owners of Lincoln Life Variable Annuity Account N
We have audited the accompanying statement of assets and liability of Lincoln
Life Variable Annuity Account N ("Variable Account") (comprised of the AIM V.I.
Growth, AIM V.I. International Equity, AIM V.I. Value, Banker's Trust Equity
500 Index, Liberty Colonial U.S. Stock, Liberty Colonial NewPort Tiger, Dela-
ware Premium Growth and Income, Delaware Premium Delchester, Delaware Premium
Devon, Delaware Premium Emerging Markets, Delaware Premium International Equi-
ty, Delaware Premium Real Estate, Delaware Premium Small Cap Value, Delaware
Premium Social Awareness, Delaware Premium Trend, Dreyfus Small Cap, Fidelity
VIP Equity-Income, Fidelity VIP Growth, Fidelity VIP Overseas, Fidelity VIP III
Growth Opportunities, Kemper Small Cap Growth, Kemper Government Securities,
Lincoln National Money Market, Lincoln National Bond, MFS Emerging Growth, MFS
Total Return, MFS Utilities, MFS Research, OCC Accumulation Global Equity, and
OCC Accumulation Managed subaccounts) as of December 31, 1999, and the related
statement of operations for the year then ended and the statements of changes
in net assets for the year ended December 31, 1999 and for the period from No-
vember 24, 1998 to December 31, 1998. These financial statements are the re-
sponsibility of the Variable Account's management. Our responsibility is to ex-
press an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the au-
dit 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.
Our procedures included confirmation of investments owned as of December 31,
1999, by correspondence with the custodian. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of each of the respective
subaccounts constituting the Lincoln Life Variable Annuity Account N at Decem-
ber 31, 1999, the results of their operations for the year then ended, and
changes in their net assets for the year ended December 31, 1999 and for the
period from November 24, 1998 to December 31, 1998, in conformity with account-
ing principles generally accepted in the United States.
Fort Wayne, Indiana
March 24, 2000
N-27
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
BALANCE SHEETS -- STATUTORY BASIS
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
--------- ---------
(IN MILLIONS)
---------------------
<S> <C> <C>
ADMITTED ASSETS
CASH AND INVESTMENTS:
Bonds $22,985.0 $23,830.9
------------------------------------------------------------
Preferred stocks 253.8 236.0
------------------------------------------------------------
Unaffiliated common stocks 166.9 259.3
------------------------------------------------------------
Affiliated common stocks 604.7 322.1
------------------------------------------------------------
Mortgage loans on real estate 4,211.5 3,932.9
------------------------------------------------------------
Real estate 254.0 473.8
------------------------------------------------------------
Policy loans 1,652.9 1,606.0
------------------------------------------------------------
Other investments 426.6 434.4
------------------------------------------------------------
Cash and short-term investments 1,409.2 1,725.4
------------------------------------------------------------ --------- ---------
Total cash and investments 31,964.6 32,820.8
------------------------------------------------------------
Premiums and fees in course of collection 115.8 33.3
------------------------------------------------------------
Accrued investment income 435.3 432.8
------------------------------------------------------------
Reinsurance recoverable 199.0 171.6
------------------------------------------------------------
Funds withheld by ceding companies 73.5 53.7
------------------------------------------------------------
Federal income taxes recoverable from parent company 61.6 64.7
------------------------------------------------------------
Goodwill 43.1 49.5
------------------------------------------------------------
Other admitted assets 66.7 89.3
------------------------------------------------------------
Separate account assets 46,105.1 36,907.0
------------------------------------------------------------ --------- ---------
Total admitted assets $79,064.7 $70,622.7
------------------------------------------------------------ ========= =========
LIABILITIES AND CAPITAL AND SURPLUS
LIABILITIES:
Future policy benefits and claims $12,184.0 $12,310.6
------------------------------------------------------------
Other policyholder funds 16,589.5 16,647.5
------------------------------------------------------------
Amounts withheld or retained by Company as agent or trustee 364.0 897.6
------------------------------------------------------------
Funds held under reinsurance treaties 796.9 795.8
------------------------------------------------------------
Asset valuation reserve 490.9 484.5
------------------------------------------------------------
Interest maintenance reserve 72.3 159.7
------------------------------------------------------------
Other liabilities 627.0 504.5
------------------------------------------------------------
Short-term loan payable to parent company 205.0 140.0
------------------------------------------------------------
Net transfers due from separate accounts (896.5) (789.0)
------------------------------------------------------------
Separate account liabilities 46,105.1 36,907.0
------------------------------------------------------------ --------- ---------
Total liabilities 76,538.2 68,058.2
------------------------------------------------------------
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
------------------------------------------------------------
Surplus notes due to Lincoln National Corporation 1,250.0 1,250.0
------------------------------------------------------------
Paid-in surplus 1,942.6 1,930.1
------------------------------------------------------------
Unassigned surplus -- deficit (691.1) (640.6)
------------------------------------------------------------ --------- ---------
Total capital and surplus 2,526.5 2,564.5
------------------------------------------------------------ --------- ---------
Total liabilities and capital and surplus $79,064.7 $70,622.7
------------------------------------------------------------ ========= =========
</TABLE>
See accompanying notes. S-1
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
--------- --------- --------
(IN MILLIONS)
--------------------------------
<S> <C> <C> <C>
PREMIUMS AND OTHER REVENUES:
Premiums and deposits $ 7,273.6 $12,737.6 $5,589.0
------------------------------------------------------------
Net investment income 2,203.2 2,107.2 1,847.1
------------------------------------------------------------
Amortization of interest maintenance reserve 29.1 26.4 41.5
------------------------------------------------------------
Commissions and expense allowances on reinsurance ceded 472.3 179.9 99.7
------------------------------------------------------------
Expense charges on deposit funds 146.5 134.6 119.3
------------------------------------------------------------
Separate account investment management and administration
service fees 473.9 396.3 325.5
------------------------------------------------------------
Other income 88.8 31.3 21.3
------------------------------------------------------------ --------- --------- --------
Total revenues 10,687.4 15,613.3 8,043.4
------------------------------------------------------------
BENEFITS AND EXPENSES:
Benefits and settlement expenses 8,504.9 13,964.1 4,522.1
------------------------------------------------------------
Underwriting, acquisition, insurance and other expenses 1,618.3 2,919.4 3,053.9
------------------------------------------------------------ --------- --------- --------
Total benefits and expenses 10,123.2 16,883.5 7,576.0
------------------------------------------------------------ --------- --------- --------
Gain (loss) from operations before dividends to
policyholders, income taxes and net realized gain on
investments 564.2 (1,270.2) 467.4
------------------------------------------------------------
Dividends to policyholders 80.3 67.9 27.5
------------------------------------------------------------ --------- --------- --------
Gain (loss) from operations before federal income taxes and
net realized gain on investments 483.9 (1,338.1) 439.9
------------------------------------------------------------
Federal income taxes (credit) 85.4 (141.0) 78.3
------------------------------------------------------------ --------- --------- --------
Gain (loss) from operations before net realized gain on
investments 398.5 (1,197.1) 361.6
------------------------------------------------------------
Net realized gain on investments, net of income tax expense
and excluding net transfers to the interest maintenance
reserve 114.4 46.8 31.3
------------------------------------------------------------ --------- --------- --------
Net income (loss) $ 512.9 $(1,150.3) $ 392.9
------------------------------------------------------------ ========= ========= ========
</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
1999 1998 1997
-------- -------- --------
(IN MILLIONS)
------------------------------
<S> <C> <C> <C>
Capital and surplus at beginning of year $2,564.5 $2,968.4 $1,868.0
------------------------------------------------------------
CAPITAL AND SURPLUS INCREASE (DECREASE):
Net income (loss) 512.9 (1,150.3) 392.9
------------------------------------------------------------
Difference in cost and admitted investment amounts (101.9) (304.8) (36.2)
------------------------------------------------------------
Nonadmitted assets (22.9) (17.1) (0.4)
------------------------------------------------------------
Regulatory liability for reinsurance 26.0 (35.2) (3.9)
------------------------------------------------------------
Gain on reinsurance of disability income business 71.8 -- --
------------------------------------------------------------
Life policy reserve valuation basis -- (0.4) (0.9)
------------------------------------------------------------
Asset valuation reserve (6.4) (34.5) (36.9)
------------------------------------------------------------
Proceeds from surplus notes from shareholder -- 1,250.0 --
------------------------------------------------------------
Paid-in surplus, including contribution of common stock of
affiliated company in 1997 12.5 108.4 938.4
------------------------------------------------------------
Separate account receivable due to change in valuation -- -- (2.6)
------------------------------------------------------------
Dividends to shareholder (530.0) (220.0) (150.0)
------------------------------------------------------------ -------- -------- --------
Capital and surplus at end of year $2,526.5 $2,564.5 $2,968.4
------------------------------------------------------------ ======== ======== ========
</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
1999 1998 1997
--------- ---------- ---------
(IN MILLIONS)
----------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums, policy proceeds and other considerations received $ 7,671.1 $ 13,495.2 $ 6,364.3
------------------------------------------------------------
Allowances and reserve adjustments paid on reinsurance ceded (19.9) (632.4) (649.2)
------------------------------------------------------------
Investment income received 2,168.6 2,003.9 1,798.8
------------------------------------------------------------
Separate account investment management and administration
service fees 470.6 396.3 325.5
------------------------------------------------------------
Benefits paid (8,699.4) (7,395.8) (5,345.2)
------------------------------------------------------------
Insurance expenses paid (1,734.5) (2,909.7) (3,193.0)
------------------------------------------------------------
Proceeds related to sale of disability income business 71.8 -- --
------------------------------------------------------------
Federal income taxes recovered (paid) (81.2) 84.2 (87.0)
------------------------------------------------------------
Dividends to policyholders (82.8) (12.9) (28.4)
------------------------------------------------------------
Other income received and expenses paid, net 252.1 207.0 (8.7)
------------------------------------------------------------ --------- ---------- ---------
Net cash provided by (used in) operating activities 16.4 5,235.8 (822.9)
------------------------------------------------------------
INVESTING ACTIVITIES
Sale, maturity or repayment of investments 6,557.7 10,926.5 12,142.6
------------------------------------------------------------
Purchase of investments (5,940.8) (16,950.0) (10,345.0)
------------------------------------------------------------
Other sources (uses) including reinsured policy loans (497.0) (778.3) 529.1
------------------------------------------------------------ --------- ---------- ---------
Net cash provided by (used in) investing activities 119.9 (6,801.8) 2,326.7
------------------------------------------------------------
FINANCING ACTIVITIES
Surplus paid-in 12.5 108.4 --
------------------------------------------------------------
Proceeds from surplus notes from shareholder -- 1,250.0 --
------------------------------------------------------------
Proceeds from borrowings from shareholder 205.0 140.0 120.0
------------------------------------------------------------
Repayment of borrowings from shareholder (140.0) (120.0) (100.0)
------------------------------------------------------------
Dividends paid to shareholder (530.0) (220.0) (150.0)
------------------------------------------------------------ --------- ---------- ---------
Net cash provided by (used in) financing activities (452.5) 1,158.4 (130.0)
------------------------------------------------------------ --------- ---------- ---------
Net increase (decrease) in cash and short-term investments (316.2) (407.6) 1,373.8
------------------------------------------------------------
Cash and short-term investments at beginning of year 1,725.4 2,133.0 759.2
------------------------------------------------------------ --------- ---------- ---------
Cash and short-term investments at end of year $ 1,409.2 $ 1,725.4 $ 2,133.0
------------------------------------------------------------ ========= ========== =========
</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 (the "Company") is a wholly
owned subsidiary of Lincoln National Corporation ("LNC") and is domiciled in
Indiana. As of December 31, 1999, the Company owned 100% of the outstanding
common stock of four insurance company subsidiaries and four non-insurance
subsidiaries. The Company also owned 85% of the common stock of an Internet
distributor of variable annuities.
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 ("Insurance Department"), which practices differ from accounting
principles generally accepted in the United States ("GAAP"). The more
significant variances from GAAP are as follows:
INVESTMENTS
Bonds and preferred stocks 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 and preferred stocks 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. Real estate owned and occupied by the Company is
classified as a real estate investment rather than reported as an operating
asset, and investment income and operating expenses include rent for the
Company's occupancy of those properties. 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 a 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 in which the asset giving rise to the gain or loss is sold and
writedowns 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
insurance subsidiaries are carried at their statutory-basis net equity and
the non-insurance subsidiaries are carried at their GAAP-basis net equity,
adjusted for certain items which would be non-admitted under statutory
accounting principles. Both insurance subsidiaries and non-insurance
subsidiaries are presented in the balance sheet as investments in affiliated
common stocks.
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
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 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
Revenues for universal life policies consist of the entire premium received.
Under GAAP, premiums received in excess of policy charges are not recognized
as premium revenue.
Premiums and deposits with respect to 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 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 Insurance 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. Business
assumed under 100% indemnity reinsurance agreements is accounted for as a
purchase for GAAP reporting purposes and the ceding commission represents
the purchase price. Under purchase accounting, assets acquired and
liabilities assumed are reported at fair value at the date of the
transaction and the excess of the purchase price over the sum of the amounts
assigned to assets acquired less liabilities assumed is recorded as
goodwill. On a statutory-basis, the ceding commission is expensed when paid
and reinsurance premiums and benefits are accounted for on bases consistent
with those used in accounting for the original policies issued and the terms
of the reinsurance contracts.
Certain reinsurance contracts meeting risk transfer requirements under
statutory-basis accounting practices have been accounted for using
traditional reinsurance accounting; whereas, such contracts are accounted
for using deposit accounting under GAAP.
S-6
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
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.
SURPLUS NOTES DUE TO LNC
Surplus notes due to LNC are reported as surplus rather than as liabilities.
On a statutory-basis, interest on surplus notes is not accrued until
approval is received from the Indiana Insurance Commissioner; whereas, under
GAAP, interest would be accrued periodically based on the outstanding
principal and the interest rate.
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.
A reconciliation of the Company's net income (loss) and capital and surplus
determined on a statutory-basis with amounts determined in accordance with
GAAP is as follows:
<TABLE>
<CAPTION>
CAPITAL AND SURPLUS NET INCOME (LOSS)
----------------------------------------------------------------------
DECEMBER 31 YEAR ENDED DECEMBER 31
1999 1998 1999 1998 1997
----------------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amounts reported on a statutory-basis $ 2,526.5 $ 2,564.5 $ 512.9 $(1,150.3) $392.9
-----------------------------------------
GAAP adjustments:
Deferred policy acquisition costs,
present value of future profits and
non-admitted goodwill 3,628.2 3,085.2 135.0 48.5 (98.9)
--------------------------------------
Policy and contract reserves (1,943.1) (2,299.9) (97.9) 1,743.4 (48.6)
--------------------------------------
Interest maintenance reserve 72.3 159.7 (86.6) 24.4 58.7
--------------------------------------
Deferred income taxes 244.5 181.6 (117.4) (218.6) 70.3
--------------------------------------
Policyholders' share of earnings and
surplus on participating business (122.7) (132.8) (1.8) 3.2 5.3
--------------------------------------
Asset valuation reserve 490.9 484.5 -- -- --
--------------------------------------
Net realized gain (loss) on investments (186.4) (174.1) (32.4) (116.7) (20.4)
--------------------------------------
Unrealized gain (loss) on investments (555.2) 1,335.1 -- -- --
--------------------------------------
Nonadmitted assets, including
nonadmitted investments 139.6 119.1 -- -- --
--------------------------------------
Investments in subsidiary companies 460.9 490.4 39.1 41.3 (80.5)
--------------------------------------
Surplus notes and related interest (1,250.0) (1,251.5) 1.5 (1.5) --
--------------------------------------
Other, net (61.0) (120.1) 129.8 103.6 (35.0)
-------------------------------------- --------- --------- --------- --------- ------
Net increase (decrease) 918.0 1,877.2 (30.7) 1,627.6 (149.1)
----------------------------------------- --------- --------- --------- --------- ------
Amounts on a GAAP basis $ 3,444.5 $ 4,441.7 $ 482.2 $ 477.3 $243.8
----------------------------------------- ========= ========= ========= ========= ======
</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
Bonds not backed by loans are principally stated at amortized cost and the
discount or premium is amortized using the interest method.
Mortgage-backed bonds are valued at amortized cost and income is recognized
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 or deferred in IMR, where
applicable, and are amortized over the remaining lives of the hedged items
as adjustments to investment income. 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 amortized 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 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 are
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 cash collateral received which is
typically greater than the market value of the related securities loaned. In
other instances, the Company will hold as collateral securities with a
market value at least equal to the securities loaned. Securities held as
collateral are not recorded in the Company's balance sheet in accordance
with accounting guidance for secured borrowings and collateral. 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, subject to certain limitations, of
the ceding commission over statutory-basis net assets of business purchased
S-8
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
under an assumption reinsurance agreement, is amortized on a straight-line
basis over ten years.
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
Insurance 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 reserves released and 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, benefits 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
investments managed by the Company are reported in net investment income.
PENSION BENEFITS
Costs associated with the Company's defined benefit pension plans are
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 and certain LNC subsidiaries.
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
S-9
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
LNC's common stock at the grant date, or other measurement date, over the
amount an employee or agent must pay to acquire the stock.
ASSETS HELD IN SEPARATE ACCOUNTS AND LIABILITIES RELATED TO SEPARATE
ACCOUNTS
Separate account assets and liabilities reported in the accompanying balance
sheets represent funds that are separately administered for variable life
and variable annuity contracts and for which the contractholder, rather than
the Company, bears the investment risk. Separate account assets are reported
at fair value. The operations of the separate accounts are not included in
the accompanying financial statements. Policy administration and investment
management fees charged on separate account policyholder deposits are
included in income from separate account investment management and
administration service fees. Mortality charges on variable universal life
contracts are included in income from expense charges on deposit funds. Fees
charged relative to variable annuity and variable universal life
administration agreements for separate account products sold by other
insurance companies and not recorded on the Company's financial statements
are included in income from separate account investment management and
administration service fees.
2. PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company's statutory-basis financial statements are prepared in
accordance with accounting practices prescribed or permitted by the
Insurance Department. "Prescribed" statutory accounting practices are
interspersed throughout state insurance laws and regulations, the NAIC's
ACCOUNTING PRACTICES AND PROCEDURES MANUAL and a variety of other NAIC
publications. "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.
In 1998, the NAIC adopted codified statutory accounting principles
("Codification") effective January 1, 2001. 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 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 Insurance Department. At this time, it is anticipated that
Indiana will adopt Codification, however, based on current guidance,
management believes that the impact of Codification will not be material to
the Company's statutory-basis financial statements.
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
1999 1998 1997
--------------------------------------
(IN MILLIONS)
--------------------------------------
<S> <C> <C> <C>
Income:
Bonds $1,840.6 $1,714.3 $1,524.4
------------------------------------------------------------
Preferred stocks 20.3 19.7 23.5
------------------------------------------------------------
Unaffiliated common stocks 6.3 10.6 8.3
------------------------------------------------------------
Affiliated common stocks 7.8 5.2 15.0
------------------------------------------------------------
Mortgage loans on real estate 321.0 323.6 257.2
------------------------------------------------------------
Real estate 57.8 81.4 92.2
------------------------------------------------------------
Policy loans 101.7 86.5 37.5
------------------------------------------------------------
Other investments 50.6 26.5 28.2
------------------------------------------------------------
Cash and short-term investments 95.9 104.7 70.3
------------------------------------------------------------ -------- -------- --------
Total investment income 2,502.0 2,372.5 2,056.6
------------------------------------------------------------
Expenses:
Depreciation 14.4 19.3 21.0
------------------------------------------------------------
Other 284.4 246.0 188.5
------------------------------------------------------------ -------- -------- --------
Total investment expenses 298.8 265.3 209.5
------------------------------------------------------------ -------- -------- --------
Net investment income $2,203.2 $2,107.2 $1,847.1
------------------------------------------------------------ ======== ======== ========
</TABLE>
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, 1999:
Corporate $17,758.4 $ 229.6 $763.0 $17,225.0
------------------------------------------------
U.S. government 316.8 29.6 21.5 324.9
------------------------------------------------
Foreign government 984.5 49.8 39.9 994.4
------------------------------------------------
Mortgage-backed 3,913.7 46.2 139.0 3,820.9
------------------------------------------------
State and municipal 11.6 -- .5 11.1
------------------------------------------------ --------- -------- ------ ---------
$22,985.0 $ 355.2 $963.9 $22,376.3
========= ======== ====== =========
At December 31, 1998:
Corporate $17,658.4 $1,159.8 $148.2 $18,670.0
------------------------------------------------
U.S. government 900.7 88.8 3.4 986.1
------------------------------------------------
Foreign government 947.8 59.9 61.2 946.5
------------------------------------------------
Mortgage-backed 4,312.1 171.6 33.4 4,450.3
------------------------------------------------
State and municipal 11.9 .7 -- 12.6
------------------------------------------------ --------- -------- ------ ---------
$23,830.9 $1,480.8 $246.2 $25,065.5
========= ======== ====== =========
</TABLE>
The carrying amounts of bonds in the balance sheets at
December 31, 1999 and 1998 reflect adjustments of
$38,900,000 and $11,800,000, respectively, to decrease
amortized cost as a result of the Securities Valuation
Office of the NAIC ("SVO") designating certain investments
as in or near default.
A summary of the cost or amortized cost and fair value of
investments in bonds at December 31, 1999, by contractual
maturity, is as follows:
<TABLE>
<CAPTION>
COST OR
AMORTIZED FAIR
COST VALUE
-------------------------
(IN MILLIONS)
-------------------------
<S> <C> <C>
Maturity:
In 2000 $ 598.0 $ 599.2
------------------------------------------------------------
In 2001-2004 4,359.8 4,313.4
------------------------------------------------------------
In 2005-2009 6,636.0 6,392.9
------------------------------------------------------------
After 2009 7,477.5 7,249.9
------------------------------------------------------------
Mortgage-backed securities 3,913.7 3,820.9
------------------------------------------------------------ --------- ---------
Total $22,985.0 $22,376.3
------------------------------------------------------------ ========= =========
</TABLE>
S-12
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
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.
Proceeds from sales of investments in bonds during 1999,
1998 and 1997 were $5,351,400,000, $9,395,000,000 and
$9,715,000,000, respectively. Gross gains during 1999, 1998
and 1997 of $95,400,000, $186,300,000 and $218,100,000,
respectively, and gross losses of $195,500,000, $138,000,000
and $78,000,000, respectively, were realized on those sales.
At December 31, 1999 and 1998, investments in bonds, with an
admitted asset value of $116,500,000 and $97,800,000,
respectively, were on deposit with state insurance
departments to satisfy regulatory requirements.
Unrealized gains and losses on investments in unaffiliated
common stocks are reported directly in unassigned surplus
and are not reported in the statutory-basis Statements of
Operations. 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, 1999:
Preferred stocks $253.8 $ 1.3 $31.5 $223.6
----------------------------------------
Unaffiliated common stocks 150.4 34.2 17.7 166.9
----------------------------------------
At December 31, 1998:
Preferred stocks $236.0 $ 8.9 $ 2.4 $242.5
----------------------------------------
Unaffiliated common stocks 223.3 62.0 26.0 259.3
----------------------------------------
</TABLE>
The carrying amount of preferred stocks in the balance
sheets at December 31, 1999 and 1998 reflects adjustments of
$4,100,000 and $5,800,000, respectively, to decrease
amortized cost as a result of the SVO designating certain
investments as low or lower quality.
During 1999, the minimum and maximum lending rates for
mortgage loans were 6.5% and 11.5%, respectively. At the
issuance of a loan, the percentage of loan to value on any
one loan does not exceed 75%. 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.
S-13
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
Components of the Company's investments in real estate are
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-------------------
(IN MILLIONS)
-------------------
<S> <C> <C>
Occupied by the Company:
Land $ 2.5 $ 2.5
------------------------------------------------------------
Buildings 11.1 9.0
------------------------------------------------------------
Less accumulated depreciation (2.2) (1.7)
------------------------------------------------------------ ------ ------
Net real estate occupied by the Company 11.4 9.8
------------------------------------------------------------
Other:
Land 46.2 93.2
------------------------------------------------------------
Buildings 226.8 413.0
------------------------------------------------------------
Other 4.7 7.9
------------------------------------------------------------
Less accumulated depreciation (35.1) (50.1)
------------------------------------------------------------ ------ ------
Net other real estate 242.6 464.0
------------------------------------------------------------ ------ ------
Net real estate $254.0 $473.8
------------------------------------------------------------ ====== ======
</TABLE>
Net realized capital gains are reported net of federal
income taxes and amounts transferred to the IMR as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------
(IN MILLIONS)
--------------------------------
<S> <C> <C> <C>
Net realized capital gains $ 20.8 $179.7 $209.3
------------------------------------------------------------
Less amount transferred to IMR (net of related taxes
(credits) of ($31.4), $27.3 and $54.0 in 1999, 1998 and
1997, respectively) (58.3) 50.8 100.2
------------------------------------------------------------ ------ ------ ------
79.1 128.9 109.1
Less federal income taxes (credits) on realized gains (35.3) 82.1 77.8
------------------------------------------------------------ ------ ------ ------
Net realized capital gains after transfer to IMR and taxes
(credits) $114.4 $ 46.8 $ 31.3
------------------------------------------------------------ ====== ====== ======
</TABLE>
4. SUBSIDIARIES
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 ("LNY"). The Company also owns 100% of
the outstanding common stock of four non-insurance company
subsidiaries: Lincoln National Insurance Associates
("LNIA"), Sagemark Consulting, Inc. ("Sagemark"), Wakefield
Tower Alpha Limited ("Wakefield"), and Lincoln Realty
Capital
S-14
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
4. SUBSIDIARIES (CONTINUED)
Corporation ("LRCC"). The Company also owns 85% of one
non-insurance company subsidiary, AnnuityNet, Inc.
(AnnuityNet). Statutory-basis financial information related
to the insurance subsidiaries is summarized as follows (in
millions):
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------
FIRST
PENN LNH&C LNRAC LNY
----------------------------------
<S> <C> <C> <C> <C>
Cash and invested assets $1,318.7 $434.6 $443.6 $1,888.6
---------------------------------------------------------
Other assets 40.6 55.5 492.6 403.1
--------------------------------------------------------- -------- ------ ------ --------
Total admitted assets $1,359.3 $490.1 $936.2 $2,291.7
--------------------------------------------------------- ======== ====== ====== ========
Insurance reserves $1,242.2 $394.4 $261.4 $1,802.4
---------------------------------------------------------
Other liabilities 44.3 27.9 614.4 25.6
---------------------------------------------------------
Liabilities related to separate accounts -- -- -- 328.8
---------------------------------------------------------
Capital and surplus 72.8 67.8 60.4 134.9
--------------------------------------------------------- -------- ------ ------ --------
Total liabilities and capital and surplus $1,359.3 $490.1 $936.2 $2,291.7
--------------------------------------------------------- ======== ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
-----------------------------------------------
FIRST
PENN LNH&C LNRAC LNY
-----------------------------------------------
<S> <C> <C> <C> <C>
Revenues $332.7 $263.3 $ 88.4 $ 313.3
-----------------------------------------------------------
Expenses 329.0 346.9 75.4 291.4
-----------------------------------------------------------
Net realized gains (losses) -- -- .2 (2.0)
----------------------------------------------------------- ------ ------ ------ --------
Net income (loss) $ 3.7 $(83.6) $ 13.2 $ 19.9
----------------------------------------------------------- ====== ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------
FIRST
PENN LNH&C LNRAC LNY
----------------------------------
<S> <C> <C> <C> <C>
Cash and invested assets $1,221.1 $333.9 $403.6 $1,938.0
----------------------------------------------------------
Other assets 40.3 31.3 490.0 270.2
---------------------------------------------------------- -------- ------ ------ --------
Total admitted assets $1,261.4 $365.2 $893.6 $2,208.2
---------------------------------------------------------- ======== ====== ====== ========
Insurance reserves $1,149.8 $266.3 $281.8 $1,814.5
----------------------------------------------------------
Other liabilities 42.0 24.0 553.7 45.1
----------------------------------------------------------
Liabilities related to separate accounts -- -- -- 236.9
----------------------------------------------------------
Capital and surplus 69.6 74.9 58.1 111.7
---------------------------------------------------------- -------- ------ ------ --------
Total liabilities and capital and surplus $1,261.4 $365.2 $893.6 $2,208.2
---------------------------------------------------------- ======== ====== ====== ========
</TABLE>
S-15
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
4. SUBSIDIARIES (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
---------------------------------
FIRST
PENN LNH&C LNRAC LNY
---------------------------------
<S> <C> <C> <C> <C>
Revenues $310.4 $ 165.0 $150.3 $1,402.6
-----------------------------------------------------------
Expenses 310.6 164.4 139.5 1,656.1
-----------------------------------------------------------
Net realized gains (losses) (0.3) 0.9 (0.1) (0.7)
----------------------------------------------------------- ------ ------- ------ --------
Net income (loss) $ (0.5) $ 1.5 $10.7 $ (254.2)
----------------------------------------------------------- ====== ======= ====== ========
</TABLE>
AnnuityNet was formed in 1998 for the distribution of
variable annuities over the Internet and is valued on the
equity method (at 85% of GAAP equity) with an admitted asset
value of $2,400,000 at December 31, 1999. LNIA was purchased
in 1998 for $600,000 and is valued on the equity method with
an admitted asset value of $800,000 at December 31, 1999.
Sagemark is a broker dealer and was acquired in connection
with a reinsurance transaction completed in 1998. Sagemark
is valued on the equity method with an admitted asset value
of $6,400,000 at December 31, 1999. Wakefield was formed in
1999 to engage in the ownership and management of
investments and is valued on the equity method with an
admitted asset value of $248,300,000. Wakefield's assets as
of December 31, 1999 consist entirely of investments in
bonds. LRCC was formed in 1999 to engage in the management
of certain real estate investments. It was capitalized with
cash and three real estate investments of $12,700,000 and is
valued on the equity method with an admitted asset value of
$10,900,000.
The carrying value of all affiliated common stocks, was
$604,700,000 and $322,100,000 at December 31, 1999 and 1998,
respectively. The insurance affiliates are carried at
statutory-basis net equity while other affiliates are
recorded at GAAP-basis net equity, adjusted for certain
items which would be non-admitted under statutory accounting
principles. The cost basis of investments in subsidiaries as
of December 31, 1999 and 1998 was $970,700,000 and
$631,100,000, respectively.
During 1999, 1998 and 1997 the Company's insurance
subsidiaries paid dividends of $5,200,000, $5,200,000 and
$15,000,000, respectively.
5. FEDERAL INCOME TAXES
The effective federal income tax rate in the accompanying
Statements of Operations differs from the prevailing
statutory tax rate principally due to tax-exempt investment
income, dividends received tax deductions and differences
between statutory accounting and tax return recognition
relative to policy acquisition costs, policy and contract
liabilities and reinsurance ceding commissions.
In 1999, 1998 and 1997, federal income tax expense (benefit)
incurred totaled $85,400,000, ($141,000,000) and
$78,300,000, respectively. In 1999, capital losses of
$151,700,000 were incurred, and carried back to recover
taxes paid in prior years.
The Company paid $45,300,000, $2,300,000 and $164,500,000 to
LNC in 1999, 1998 and 1997, respectively, in federal income
taxes.
Under prior income tax law, one-half of the excess of a life
insurance company's income from operations over its taxable
investment income was not taxed, but was set aside in a
special tax account designated as "Policyholders' Surplus."
The Company has approximately $187,000,000 of untaxed
"Policyholders' Surplus" on which no payment of federal
S-16
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
5. FEDERAL INCOME TAXES (CONTINUED)
income taxes will be required unless it is distributed as a
dividend, or under other specified conditions. Barring the
passage of unfavorable legislation, the Company does not
believe that any significant portion of the account will be
taxed in the foreseeable future and no related tax liability
has been recognized. If the entire balance of the account
became taxable under the current federal income tax rate,
the tax would be approximately $65,500,000.
6. SUPPLEMENTAL FINANCIAL DATA
The balance sheet caption "Reinsurance recoverable" includes
amounts recoverable from other insurers for claims paid by
the Company. The balance sheet caption, "Future policy
benefits and claims," and the balance sheet caption "Other
policyholder funds" have been reduced for insurance ceded as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-----------------------
(IN MILLIONS)
-----------------------
<S> <C> <C>
Insurance ceded $5,340.0 $4,081.8
------------------------------------------------------------
Amounts recoverable from other insurers 81.2 79.9
------------------------------------------------------------
</TABLE>
Reinsurance transactions, excluding assumption reinsurance,
included in the income statement caption, "Premiums and
deposits," are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
------------------------------------
(IN MILLIONS)
------------------------------------
<S> <C> <C> <C>
Insurance assumed $2,606.5 $9,018.9 $727.2
------------------------------------------------------------
Insurance ceded 1,675.1 877.1 302.9
------------------------------------------------------------ -------- -------- ------
Net amount included in premiums $ 931.4 $8,141.8 $424.3
------------------------------------------------------------ ======== ======== ======
</TABLE>
The income statement caption, "Benefits and settlement
expenses," is net of reinsurance recoveries of
$2,609,000,000, $2,098,800,000 and $1,240,500,000 for 1999,
1998 and 1997, respectively.
Details underlying the balance sheet caption "Other
policyholder funds" are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-------------------------
(IN MILLIONS)
-------------------------
<S> <C> <C>
Premium deposit funds $16,208.3 $16,285.2
------------------------------------------------------------
Undistributed earnings on participating business 346.9 348.4
------------------------------------------------------------
Other 34.3 13.9
------------------------------------------------------------ --------- ---------
$16,589.5 $16,647.5
========= =========
</TABLE>
S-17
<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, 1999
---------------------------------
NET OF
GROSS LOADING LOADING
---------------------------------
(IN MILLIONS)
---------------------------------
<S> <C> <C> <C>
Ordinary new business $10.8 $ 7.3 $ 3.5
------------------------------------------------------------
Ordinary renewal 54.2 6.8 47.4
------------------------------------------------------------
Group life 13.7 .1 13.6
------------------------------------------------------------ ----- ----- -----
$78.7 $14.2 $64.5
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------
NET OF
GROSS LOADING LOADING
---------------------------------
(IN MILLIONS)
---------------------------------
<S> <C> <C> <C>
Ordinary new business $ 9.5 $ 3.4 $ 6.1
------------------------------------------------------------
Ordinary renewal (13.7) 11.3 (25.0)
------------------------------------------------------------
Group life 14.2 .2 14.0
------------------------------------------------------------ ----- ----- -----
$10.0 $14.9 $(4.9)
===== ===== =====
</TABLE>
7. ANNUITY RESERVES
At December 31, 1999, the Company's annuity reserves and
deposit fund liabilities, including separate accounts, that
are subject to discretionary withdrawal with adjustment,
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 $ 2,427.7 4%
------------------------------------------------------------
At book value, less surrender charge 2,237.3 3
------------------------------------------------------------
At market value 44,076.2 68
------------------------------------------------------------ --------- ---
48,741.2 75
Subject to discretionary withdrawal without adjustment at
book value with minimal or no charge or adjustment 13,486.5 21
------------------------------------------------------------
Not subject to discretionary withdrawal 2,622.4 4
------------------------------------------------------------ --------- ---
Total annuity reserves and deposit fund 64,850.1 100%
------------------------------------------------------------ ===
Less reinsurance 1,548.0
------------------------------------------------------------ ---------
Net annuity reserves and deposit fund liabilities, including
separate accounts $63,302.1
------------------------------------------------------------ =========
</TABLE>
S-18
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
8. CAPITAL AND SURPLUS
In 1998, the Company issued two surplus notes to LNC in return for cash of
$1,250,000,000. The first note for $500,000,000 was issued to LNC in
connection with the CIGNA Corporation ("CIGNA")indemnity reinsurance
transaction on January 5, 1998. This note calls for the Company to pay the
principal amount of the notes on or before March 31, 2028 and interest to be
paid quarterly at an annual rate of 6.56%. Subject to approval by the
Indiana Insurance Commissioner, LNC also has a right to redeem the note for
immediate repayment in total or in part once per year on the anniversary
date of the note, but not before January 5, 2003. Any payment of interest or
repayment of principal may be paid only out of the Company's earnings, only
if the Company's surplus exceeds specified levels ($2,315,700,000 at
December 31, 1999), and subject to approval by the Indiana Insurance
Commissioner.
The second note for $750,000,000 was issued on December 18, 1998 to LNC in
connection with the Aetna, Inc. ("Aetna") indemnity reinsurance transaction.
This note calls for the Company to pay the principal amount of the notes on
or before December 31, 2028 and interest to be paid quarterly at an annual
rate of 6.03%. Subject to approval by the Indiana Insurance Commissioner,
LNC also has a right to redeem the note for immediate repayment in total or
in part once per year on the anniversary date of the note, but not before
December 18, 2003. Any payment of interest or repayment of principal may be
paid only out of the Company's earnings, only if the Company's surplus
exceeds specified levels ($2,379,600,000 at December 31, 1999), and subject
to approval by the Indiana Insurance Commissioner.
A summary of the terms of these surplus notes follows (in millions):
<TABLE>
<CAPTION>
PRINCIPAL INCEPTION ACCRUED
OUTSTANDING AT TO DATE INTEREST AT
PRINCIPAL DECEMBER 31, CURRENT YEAR INTEREST DECEMBER 31,
DATE ISSUED AMOUNT OF NOTE 1999 INTEREST PAID PAID 1999
----------- -------------- -------------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
January 5, 1998 $ 500.0 $ 500.0 $ 32.8 $ 65.1 $ --
-------------------------------
December 18, 1998 750.0 750.0 46.7 46.7 --
-------------------------------
</TABLE>
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,
1999, 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 January 1998, the Company assumed a block of
individual life insurance and annuity business from CIGNA and in
October 1998, the Company assumed a block of individual life insurance
business from Aetna (SEE NOTE 10). The statutory accounting regulations do
not allow goodwill to be recognized on indemnity reinsurance transactions
and therefore, the related ceding commission was expensed in the
accompanying Statement of Operations and resulted in the reduction of
unassigned surplus. As a result of these transactions, the Company's
statutory-basis unassigned surplus is negative as of December 31, 1999 and
it will be necessary for the Company to obtain prior approval of the Indiana
Insurance Commissioner before paying any dividends to LNC until such time as
statutory-basis unassigned surplus is positive. The time frame for
unassigned surplus to return to a positive position is dependent upon future
statutory earnings and dividends paid to LNC. Although no assurance can be
given, management believes that the approvals for the payment of such
dividends in amounts consistent with those paid in the past can be obtained.
S-19
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
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). Effective July 1, 1999, the
agents' postretirement plan was changed to require agents retiring on or
after that date to pay the full premium costs. This change to the plan
resulted in a one-time curtailment gain of $1,400,000 in 1999. 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 Operations 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. Options issued subsequent to 1991
are exercisable in 25% increments on the option issuance anniversary in the
four years following issuance.
As of December 31, 1999, there were 2,072,087 and 1,397,005 shares of LNC
common stock subject to options granted to Company employees and agents,
respectively, under the stock option incentive plans of which 919,749 and
241,097, respectively, were exercisable on that date. The exercise prices of
the outstanding options range from $12.50 to $56.75. During 1999, 1998 and
1997, there were 318,421, 136,469 and 170,789 options exercised,
respectively, and 82,024, 18,288 and 1,846 options 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, 1999 and 1998 is
$221,600,000 and $670,100,000, respectively. This liability is based on the
assumption that the recent experience will continue in the future. If
incidence levels and/or claim termination rates fluctuate significantly from
the assumptions underlying reserves, adjustments to reserves could be
required in the future. Accordingly, this liability may prove to be
deficient or excessive. The Company reviews reserve levels on an ongoing
basis. However, it is management's opinion that such future development will
not materially affect the financial position of the Company.
During 1997, the Company conducted an in-depth review of loss experience on
its disability income business. 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 reserves by $80,000,000 in
1997.
PERSONAL ACCIDENT PROGRAMS
In the past, the Company and its wholly owned subsidiary, LNH&C, accepted
personal accident reinsurance programs from other insurance companies. Most
of these programs were presented by independent brokers who represented the
ceding companies. Certain excess-of-loss personal accident reinsurance
programs created in the London market during 1993 through 1996 have produced
and have potential to produce significant losses. The liabilities for these
programs, net of related assets recoverable from reinsurers, were
$174,700,000 and $177,400,000 at December 31, 1999 and 1998, respectively.
Settlement activities relating to the Company's participation in workers'
compensation carve-out (i.e., life and health risks associated with workers'
compensation coverage) programs managed by Unicover Managers, Inc. have
allowed the Company to evaluate the possibility of settlements and to
estimate its potential costs to settle Unicover-related exposures. As of
December 31, 1999, a liability of $62,200,000 has been established for the
S-20
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
settlement of the Company's exposure to the Unicover programs.
These amounts are based on various estimates that are subject to
considerable uncertainty. Accordingly, the liabilities may prove to be
deficient or excessive. However, it is management's opinion that future
developments in these programs will not materially affect the financial
position of the Company.
HMO EXCESS-OF-LOSS REINSURANCE PROGRAMS
In light of the continued volatility in the HMO excess-of-loss line of
business, LNH&C discontinued writing new HMO excess-of-loss reinsurance
programs in the third quarter of 1999. The liability for HMO claims, net of
the related assets for amounts recoverable from reinsurers, was $101,900,000
and $55,900,000 at December 31, 1999 and 1998, respectively. LNH&C reviews
reserve levels on an ongoing basis. The liability is based on the assumption
that recent experience will continue in the future. If claims and loss
ratios fluctuate significantly from the assumptions underlying the reserves,
adjustments to reserves could be required in the future. Accordingly, the
liability may prove to be deficient or excessive. However, it is
management's opinion that such future developments will not materially
affect the financial position of the Company.
MARKETING AND COMPLIANCE MATTERS
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 1999, 1998 and 1997 was
$38,900,000, $34,000,000 and $29,300,000, respectively. Future minimum
rental commitments are as follows (in millions):
<TABLE>
<S> <C>
2000 $ 28.7
--------------------------------
2001 28.8
--------------------------------
2002 27.5
--------------------------------
2003 26.2
--------------------------------
2004 26.5
--------------------------------
Thereafter 123.5
-------------------------------- ------
$261.2
======
</TABLE>
INFORMATION TECHNOLOGY COMMITMENT
In February 1998, the Company signed a seven-year contract with IBM Global
Services for information technology services for the Fort Wayne
S-21
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
operations. Total costs incurred in 1999 and 1998 were $67,400,000 and
$54,800,000, respectively. Future minimum annual costs range from
$33,600,000 to $56,800,000, however future costs are dependent on usage and
could exceed these amounts.
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. The Company limits its maximum coverage that
it retains on an individual to $10,000,000. Portions of the Company's
deferred annuity business have also been coinsured with other companies to
limit its exposure to interest rate risks. At December 31, 1999, the
reserves associated with these reinsurance arrangements totaled
$1,422,800,000. 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.
Proceeds from the sale of common stock of American States Financial
Corporation ("American States") and proceeds from the January 5, 1998
surplus note, were used to finance an indemnity reinsurance transaction
whereby the Company and LNY reinsured 100% of a block of individual life
insurance and annuity business from CIGNA. The Company paid $1,264,400,000
to CIGNA on January 2, 1998 under the terms of the reinsurance agreement and
recognized a ceding commission expense of $1,127,700,000 in 1998, which is
included in the Statement of Operations line item "Underwriting,
acquisition, insurance and other expenses." At the time of closing, this
block of business had statutory liabilities of $4,780,300,000 that became
the Company's obligation. The Company also received assets, measured on a
historical statutory-basis, equal to the liabilities.
In connection with the completion of the CIGNA reinsurance transaction, the
Company recorded a charge of $31,000,000 to cover certain costs of
integrating the existing operations with the new block of business.
In 1999, the Company and CIGNA reached an agreement through arbitration on
the final statutory-basis values of the assets and liabilities reinsured. As
a result, the Company's ceding commission for this transaction was reduced
by $58.6 million.
Subsequent to this transaction, the Company and LNY announced that they had
reached an agreement to sell the administration rights to a variable annuity
portfolio that had been acquired as part of the block of business assumed on
January 2, 1998. This sale closed on October 12, 1998 with an effective date
of September 1, 1998.
On October 1, 1998, the Company and LNY entered into an indemnity
reinsurance transaction whereby the Company and LNY reinsured 100% of a
block of individual life insurance business from Aetna. The Company paid
$856,300,000 to Aetna on October 1, 1998 under the terms of the reinsurance
agreement and recognized a ceding commission expense of $815,300,000 in
1998, which is included in the Statement of Operations line item
"Underwriting, acquisition, insurance and other expenses." At the time of
closing, this block of business had statutory liabilities of $2,813,800,000
that became the Company's obligation. The Company also received assets,
measured on a historical statutory-basis, equal to the liabilities. The
Company financed this reinsurance transaction with proceeds from short-term
debt borrowings from LNC until the December 18, 1998 surplus note was
approved by the Insurance Department. Subsequent to the Aetna transaction,
the Company and LNY announced that they had reached an agreement to
retrocede the sponsored life business assumed for $87,600,000. The
retrocession agreement closed on October 14, 1998 with an effective date of
October 1, 1998.
On November 1, 1999, the Company closed its previously announced agreement
to transfer a block of disability income business to MetLife. Under this
indemnity reinsurance agreement, the Company transferred $490,800,000 of
cash to MetLife representing the statutory reserves transferred on this
business less $17,800,000 of purchase price consideration. A gain on the
reinsurance transaction of $71,800,000 was recorded directly in unassigned
S-22
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
surplus and will be recognized in statutory earnings over the life of the
business.
The Company assumes insurance from other companies, including certain
affiliates. At December 31, 1999, the Company provided $270,000,000 of
statutory-basis surplus relief to other insurance companies under
reinsurance transactions. The Company retroceded 100% of this accepted
surplus relief to its off-shore reinsurance affiliates. 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 $17,300,000 and $43,400,000 at December 31, 1999
and 1998, respectively.
VULNERABILITY FROM CONCENTRATIONS
At December 31, 1999, the Company did not have a material concentration of
financial instruments in a single investee or industry. The Company's
investments in mortgage loans principally involve commercial real estate. At
December 31, 1999, 29% of such mortgages ($1,212,700,000) involved
properties located in Texas and California. Such investments consist of
first mortgage liens on completed income-producing properties and the
mortgage outstanding on any individual property does not exceed $70,000,000.
At December 31, 1999, 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 certain claims in excess of $5,000,000. The
degree of applicability of this coverage will depend 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
proceedings will not have a material adverse affect on the financial
position of the Company.
With the recent filing of a lawsuit alleging fraud in the sale of interest
sensitive universal and whole life insurance policies, the Company now has
several such actions pending. While each of these lawsuits seeks class
action status, the court has not certified a class in any of them. In each
of these lawsuits, plaintiffs seek unspecified damages and penalties for
themselves and on behalf of the putative class. While relief sought in these
lawsuits is substantial, they are in the discovery stages of litigation, and
it is premature to make assessments about potential loss, if any. Management
intends to defend these lawsuits vigorously. The amount of liability, if
any, which may arise as a result of these lawsuits cannot be reasonably
estimated at this time. In another lawsuit, a settlement has been
preliminarily approved by the court, and a class has been conditionally
certified for settlement purposes. Two other similar lawsuits previously
have been resolved and dismissed.
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
S-23
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
credit exposure. Outstanding guarantees with off-balance-sheet risks at
December 31, 1999 relate to mortgage loan pass-through certificates. The
Company has sold commercial mortgage loans through grantor trusts that
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. The outstanding guarantees as of
December 31, 1999 and 1998 were $25,900,000 and $30,900,000, respectively.
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, 1999 and 1998.
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, commodity risk, credit risk 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:
<TABLE>
<CAPTION>
ASSETS (LIABILITIES)
---------------------------------
NOTIONAL OR CARRYING FAIR CARRYING FAIR
CONTRACT AMOUNTS VALUE VALUE VALUE VALUE
-----------------------------------------------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1999 1998 1999 1999 1998 1998
-----------------------------------------------------
(IN MILLIONS)
-----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate derivatives:
Interest rate cap agreements $2,508.8 $4,108.8 $ 5.2 $ 3.2 $ 9.3 $ .9
---------------------------------
Swaptions 1,837.5 1,899.5 12.2 10.8 16.2 2.5
---------------------------------
Interest rate swaps 630.9 258.3 -- (19.5) -- 9.9
---------------------------------
Put options 21.3 21.3 -- 1.9 -- 2.2
--------------------------------- -------- -------- ----- ------ ----- -----
4,998.5 6,287.9 17.4 (3.6) 25.5 15.5
Foreign currency derivatives:
Forward contracts -- 1.5 -- -- -- --
---------------------------------
Foreign currency swaps 44.2 47.2 -- (.4) -- .3
--------------------------------- -------- -------- ----- ------ ----- -----
44.2 48.7 -- (.4) -- .3
Commodity derivatives:
Commodity swaps -- 8.1 -- -- -- 2.4
--------------------------------- -------- -------- ----- ------ ----- -----
$5,042.7 $6,344.7 $17.4 $ (4.0) $25.5 $18.2
======== ======== ===== ====== ===== =====
</TABLE>
S-24
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
A reconciliation of the notional or contract amounts for the significant
programs using derivative agreements and contracts at December 31 is as
follows:
<TABLE>
<CAPTION>
INTEREST RATE CAPS SWAPTIONS
-----------------------------------------------------
1999 1998 1999 1998
-----------------------------------------------------
(IN MILLIONS)
-----------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $4,108.8 $4,900.0 $1,899.5 $1,752.0
-------------------------------------------------------
New contracts -- 708.8 -- 218.3
-------------------------------------------------------
Terminations and maturities (1,600.0) (1,500.0) (62.0) (70.8)
------------------------------------------------------- -------- -------- -------- --------
Balance at end of year $2,508.8 $4,108.8 $1,837.5 $1,899.5
------------------------------------------------------- ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
INTEREST RATE SWAPS
-----------------------
1999 1998
-----------------------
<S> <C> <C>
Balance at beginning of year $ 258.3 $ 10.0
------------------------------------------------------------
New contracts 482.4 2,226.6
------------------------------------------------------------
Terminations and maturities (109.8) (1,978.3)
------------------------------------------------------------ ------- ---------
Balance at end of year $ 630.9 $ 258.3
------------------------------------------------------------ ======= =========
</TABLE>
<TABLE>
<CAPTION>
COMMODITY
PUT OPTIONS SWAPS
----------------------------------------
1999 1998 1999 1998
----------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $21.3 $ -- $ 8.1 $ --
------------------------------------------------------------
New contracts -- 21.3 -- 8.1
------------------------------------------------------------
Terminations and maturities -- -- (8.1) --
------------------------------------------------------------ ----- ----- ----- ----
Balance at end of year $21.3 $21.3 $ -- $8.1
------------------------------------------------------------ ===== ===== ===== ====
</TABLE>
<TABLE>
<CAPTION>
FOREIGN CURRENCY DERIVATIVES
(FOREIGN INVESTMENTS)
-------------------------------------------
FOREIGN CURRENCY
SWAPS
FOREIGN EXCHANGE
-------------------------------------------
FORWARD CONTRACTS
1999 1998 1999 1998
-------------------------------------------
(IN MILLIONS)
-------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $ 1.5 $ 163.1 $47.2 $15.0
------------------------------------------------------------
New contracts 2.7 419.8 -- 39.2
------------------------------------------------------------
Terminations and maturities (4.2) (581.4) (3.0) (7.0)
------------------------------------------------------------ ----- ------- ----- -----
Balance at end of year $ -- $ 1.5 $44.2 $47.2
------------------------------------------------------------ ===== ======= ===== =====
</TABLE>
INTEREST RATE CAP AGREEMENTS
The interest rate cap agreements, which expire in 2000 through 2006, 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
S-25
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
premium paid for the interest rate caps is included in other investments
(amortized costs of $5.2 million as of December 31, 1999) and is being
amortized over the terms of the agreements. This amortization is included in
net investment income.
SWAPTIONS
Swaptions, which expire in 2000 through 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 rising
interest rates. The premium paid for the swaptions is included in other
investments (amortized cost of $12.2 million as of December 31, 1999) and is
being amortized over the terms of the agreements. This amortization is
included in net investment income.
SPREAD LOCK AGREEMENTS
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 security 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. While spreadlocks are
used periodically, there are no spreadlock agreements outstanding at
December 31, 1999.
INTEREST RATE SWAP AGREEMENTS
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 agreement the stream of variable interest
payments based on the coupon payments hedged 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. The Company also uses interest rate swap agreements to
hedge its exposure to interest rate fluctuations related to the anticipated
purchase of assets to support newly acquired blocks of business or to extend
the duration of certain portfolios of assets. Once the assets are purchased
the gains (losses) resulting from the termination of the swap agreements
will be applied to the basis of the assets. The gains (losses) will be
recognized in earnings over the life of the assets. The anticipated purchase
of assets related to extending the duration of certain portfolios of assets
is expected to be completed in 2000.
PUT OPTIONS
The Company uses put options, combined with various perpetual fixed income
securities, and interest rate swaps to replicate fixed income, fixed
maturity investments. The risk being hedged is a drop in bond prices due to
credit concerns with international bond issuers. The put options allow the
Company to put the bonds back to the counterparties at original par.
FOREIGN CURRENCY DERIVATIVES
The Company uses a combination of foreign exchange forward contracts and
foreign currency swaps, 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. A foreign currency swap is a contractual
agreement to exchange the currencies of two different countries at a fixed
rate of exchange in the future.
COMMODITY SWAPS
The Company used a commodity swap to hedge its exposure to fluctuations in
the price of gold. A commodity swap is a contractual agreement to exchange a
certain amount of a particular commodity for a fixed amount of cash. The
Company owned a fixed income security that met its coupon
S-26
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
payment obligations in gold bullion. The Company is obligated to pay to the
counterparty the gold bullion, and in return, receives from the counterparty
a stream of fixed income payments. The fixed income payments were the
product of the swap notional multiplied by the fixed rate stated in the swap
agreement. The net receipts or payments from commodity swaps were recorded
in net investment income. The fixed income security was called in the third
quarter of 1999 and the commodity swap expired.
ADDITIONAL DERIVATIVE INFORMATION
Expenses for the agreements and contracts described above amounted to
$6,200,000, $10,000,000 and $7,000,000 in 1999, 1998 and 1997, respectively.
Deferred gains of $100,000 as of December 31, 1999, were the result of
terminated interest rate swaps. These gains are included with the related
fixed maturity securities to which the hedge applied or as deferred
liabilities 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 various derivative contracts. 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 less collateral held for such agreements with each
counterparty if the net market value is in the Company's favor. At
December 31, 1999, the exposure was $8,500,000.
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.
PREFERRED STOCK
Fair values of preferred stock are based on quoted market
prices, where available. For preferred stock not actively
traded, fair values are based on values of issues of
comparable yield and quality.
MORTGAGE LOANS ON REAL ESTATE
The estimated fair value of mortgage loans on real estate
was established using a discounted cash flow method based on
credit rating, maturity and future income. The ratings 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.
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.,
S-27
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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.
SHORT-TERM DEBT
For short-term debt, the carrying value approximates fair
value.
SURPLUS NOTES DUE TO LNC
Fair values for surplus notes are estimated using discounted
cash flow analysis based on the Company's current
incremental borrowing rate for similar types of borrowing
arrangements.
GUARANTEES
The Company's guarantees include guarantees related to
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
zero.
DERIVATIVES
The Company employs several different methods for
determining the fair value of its derivative instruments.
Fair values for these contracts are based on current
settlement values. These values are based on quoted market
prices for the foreign currency exchange contracts and
industry standard models that are commercially available for
interest rate cap agreements, swaptions, spread lock
agreements, interest rate swaps, commodity swaps and put
options.
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.
SEPARATE ACCOUNTS
Assets held in separate accounts are reported in the
accompanying statutory-basis balance sheets at fair value.
The related liabilities are also reported at fair value in
amounts equal to the separate account assets.
S-28
<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
-------------------------------------------------------------
1999 1998
-------------------------------------------------------------
CARRYING CARRYING
ASSETS (LIABILITIES) VALUE FAIR VALUE VALUE FAIR VALUE
--------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Bonds $ 22,985.0 $ 22,376.3 $ 23,830.9 $ 25,065.5
-----------------------------------------------
Preferred stocks 253.8 223.6 236.0 242.5
-----------------------------------------------
Unaffiliated common stocks 166.9 166.9 259.3 259.3
-----------------------------------------------
Mortgage loans on real estate 4,211.5 4,104.0 3,932.9 4,100.1
-----------------------------------------------
Policy loans 1,652.9 1,770.5 1,606.0 1,685.9
-----------------------------------------------
Other investments 426.6 426.6 434.4 434.4
-----------------------------------------------
Cash and short-term investments 1,409.2 1,409.2 1,725.4 1,725.4
-----------------------------------------------
Investment-type insurance contracts:
Deposit contracts and certain guaranteed
interest contracts (17,730.4) (17,364.3) (17,845.8) (17,486.4)
--------------------------------------------
Remaining guaranteed interest and similar
contracts (454.7) (465.1) (714.4) (738.2)
--------------------------------------------
Short-term debt (205.0) (205.0) (140.0) (140.0)
-----------------------------------------------
Surplus notes due to LNC (1,250.0) (1,022.1) (1,250.0) (1,335.1)
-----------------------------------------------
Derivatives 17.4 (4.0) 25.5 18.2
-----------------------------------------------
Investment commitments -- (0.8) -- (.6)
-----------------------------------------------
Separate account assets 46,105.1 46,105.1 36,907.0 36,907.0
-----------------------------------------------
Separate account liabilities (46,105.1) (46,105.1) (36,907.0) (36,907.0)
-----------------------------------------------
</TABLE>
12. ACQUISITIONS AND SALES OF SUBSIDIARIES
In 1997, LNC contributed 25,000,000 shares of common stock of 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 the stock at fair value. The proceeds from this sale
of stock were used to partially finance the CIGNA indemnity reinsurance
transaction.
13. TRANSACTIONS WITH AFFILIATES
A wholly owned subsidiary of LNC, Lincoln Life and Annuity
Distributors, Inc. ("LLAD"), has a nearly exclusive general agent's 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 LLAD override commissions of $60,400,000 and
$76,700,000 in 1999 and 1998, respectively, and override commissions and
operating expense allowances of $61,600,000 in 1997. LLAD incurred expenses
of $113,400,000, $102,400,000 and
S-29
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
13. TRANSACTIONS WITH AFFILIATES (CONTINUED)
$5,500,000 in 1999, 1998 and 1997, 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 LLAD agreed to increase the override commission expense and
eliminate the operating expense allowance.
Cash and short-term investments at December 31, 1999 and 1998 include the
Company's participation in a short-term investment pool with LNC of
$390,300,000 and $383,600,000, respectively. Related investment income
amounted to $16,700,000, $16,800,000 and $15,500,000 in 1999, 1998 and 1997,
respectively. Short-term loan payable to parent company at December 31, 1999
and 1998 represent notes payable to LNC.
The Company provides services to and receives services from affiliated
companies which resulted in a net payment of $49,400,000, $92,100,000 and
$48,500,000 in 1999, 1998 and 1997, 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
1999 1998 1997
------------------------
(IN MILLIONS)
------------------------
<S> <C> <C> <C>
Insurance assumed $ 19.7 $ 13.7 $ 11.9
----------------------
Insurance ceded 777.6 290.1 100.3
</TABLE>
The balance sheets include reinsurance balances with affiliated companies as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-----------------------
(IN MILLIONS)
-----------------------
<S> <C> <C>
Future policy benefits
and claims assumed
$ 413.7 $ 197.3
------------------------
Future policy benefits
and claims ceded 1,680.4 1,125.0
------------------------
Amounts recoverable on
paid and unpaid losses 146.4 84.2
------------------------
Reinsurance payable on
paid losses 8.8 6.0
------------------------
Funds held under
reinsurance treaties --
net liability 2,106.4 1,375.4
------------------------
</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 $917,300,000 and $318,300,000 at December 31, 1999 and 1998,
respectively. The letters of credit are issued by banks and represent
guarantees of performance under the reinsurance agreement. At December 31,
1999 and 1998, LNC had guaranteed $818,900,000 and $237,000,000,
respectively, of these letters of credit. At December 31, 1999 and 1998, the
Company has a receivable (included in the foregoing amounts) from affiliated
insurance companies in the amount of $118,800,000 and $122,400,000,
respectively, for statutory surplus relief received under financial
reinsurance ceded agreements.
14. SEPARATE ACCOUNTS
Separate account assets held by the Company consist primarily of long-term
bonds, common stocks, short-term investments and mutual funds and are
carried at market value. Substantially none of the separate accounts have
any minimum guarantees and the investment risks associated with market
S-30
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
14. SEPARATE ACCOUNTS (CONTINUED)
value changes are borne entirely by the policyholder.
Separate account premiums, deposits and other considerations amounted to
$4,572,600,000, $3,953,300,000 and $4,821,800,000 in 1999, 1998 and 1997,
respectively. Reserves for separate accounts with assets at fair value were
$45,198,900,000 and $36,145,900,000 at December 31, 1999 and 1998,
respectively. All reserves are subject to discretionary withdrawal at market
value.
A reconciliation of transfers to (from) separate accounts is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
-----------------------------------
(IN MILLIONS)
-----------------------------------
<S> <C> <C> <C>
Transfers as reported in the Summary of Operations of the
various separate accounts:
Transfers to separate accounts $ 4,573.2 $ 3,954.9 $ 4,824.0
------------------------------------------------------------
Transfers from separate accounts (4,933.8) (4,069.8) (2,943.8)
------------------------------------------------------------ --------- --------- ---------
Net transfers to (from) separate accounts as reported in the
Summary of Operations $ (360.6) $ (114.9) $ 1,880.2
------------------------------------------------------------ ========= ========= =========
</TABLE>
15. CENTURY COMPLIANCE (UNAUDITED)
The Year 2000 issue was complex and affected many aspects of the Company's
business. The Company was particularly concerned with Year 2000 issues that
related to the Company's computer systems and interfaces with the computer
systems of vendors, suppliers, customers and business partners. From 1996
through 1999 the Company and its operating subsidiaries redirected a large
portion of internal Information Technology ("IT") efforts and contracted
with outside consultants to update systems to address Year 2000 issues.
Experts were engaged to assist in developing work plans and cost estimates
and to complete remediation activities.
For the year ended December 31, 1999, the Company identified expenditures of
$39,500,000 to address this issue. This brings the expenditures for 1996
through 1999 to $75,300,000. Because updating systems and procedures is an
integral part of the Company's on-going operations, most of the expenditures
shown above are expected to continue after all Year 2000 issues have been
resolved. All Year 2000 expenditures have been funded from operating cash
flows.
The scope of the overall Year 2000 program included the following four major
project areas: 1) addressing the readiness of business applications,
operating systems and hardware on mainframe, personal computer and local
area network platforms (IT); 2) addressing the readiness of non-IT embedded
software and equipment (non-IT); 3) addressing the readiness of key business
partners and 4) establishing Year 2000 contingency plans. The Company
completed these projects prior to year-end.
The Company's businesses have not identified any major problems in their
business processing. Minor problems have been resolved quickly. The
Company's businesses have not experienced any significant interruption in
service to clients or business partners or in reporting to regulators.
S-31
<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 (the "Company"),
a wholly owned subsidiary of Lincoln National Corporation, as of
December 31, 1999 and 1998, and the related statutory-basis
statements of operations, changes in capital and surplus and
cash flows for each of the three years in the period ended
December 31, 1999. 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 auditing standards
generally accepted in the United States. 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 accounting principles
generally accepted in the United States. The variances between
such practices and accounting principles generally accepted in
the United States 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 accounting
principles generally accepted in the United States, the
financial position of The Lincoln National Life Insurance
Company at December 31, 1999 and 1998, or the results of its
operations or its cash flows for each of the three years in the
period ended December 31, 1999.
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, 1999 and 1998, and the results of its operations
and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting practices
prescribed or permitted by the Indiana Department of Insurance.
January 31, 2000
S-32
<PAGE>
LINCOLN LIFE VARIABLE ANNUITY ACCOUNT N
REGISTRATION STATEMENT ON FORM N-4
PART C--OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) List of Financial Statements
1. Part A The Table of Condensed Financial Information is included in
Part A of this Registration Statement.
2. Part B The following Financial Statements for the Variable Account are
included in Part B of this Registration Statement.
Statement of Assets and Liability -- December 31, 1999
Statement of Operations -- Year ended December 31, 1999
Statements of Changes of Net Assets -- Year ended December 31, 1999
and 1998
Notes to Financial Statements -- December 31, 1999
Report of Ernst & Young LLP, Independent Auditors
3. Part B The following Statutory-Basis Financial Statements of The
Lincoln National Life Insurance Company are included in the SAI:
Balance Sheets--Statutory Basis--December 31, 1999 and 1998
Statements of Operations--Statutory Basis--Years ended December 31,
1999, 1998 and 1997
Statements of Changes in Capital and Surplus--Statutory Basis--Years
ended December 31, 1999, 1998 and 1997
Statements of Cash Flows-- Statutory Basis--Years ended December 31,
1999, 1998 and 1997
Notes to Statutory-Basis Financial Statements--December 31, 1999
Report of Ernst & Young LLP, Independent Auditors
<PAGE>
Item 24. (Continued)
(b) List of Exhibits
(1) Resolutions of the Board of Directors of The Lincoln National Life
Insurance Company establishing Separate Account N are incorporated herein
by reference to Registration Statement on Form N-4 (333-40937) filed on
November 24, 1997.
(2) None.
(3)(a) Selling Group Agreement incorporated herein by reference to Registration
Statement on Form N-4 (333-40937) filed on April 29, 1999.
(3)(b) Amendment to Selling Group Agreement incorporated herein by reference to
Registration Statement on Form N-4 (333-40937) filed on April 29, 1999.
(3)(c) Amendment to Schedule A of Selling Group dated February 14, 2000 is
incorporated herein by reference to Post-Effective Amendment No. 5 (333-
40937) filed on April 19, 2000.
(3)(d) Wholesale Agreement between Lincoln National Life Insurance Company and
Delaware Management Holdings is incorporated herein by reference to Post-
Effective Amendment No. 3 (333-40937).
(3)(e) Form of Amendment to Wholesaling Agreement is incorporated herein by
reference to Post Effective Amendment No. 5 (333-40937) filed on
April 19, 2000.
(4)(a) Variable Annuity Contract
(5) Application
(6)(a) Articles of Incorporation of The Lincoln National Life Insurance Company
are incorporated herein by reference to Registration Statement on Form
N-4 (333-40937) filed on November 9, 1998
(b) By-laws of The Lincoln National Life Insurance Company are incorporated
herein by reference to Registration Statement on Form N-4 (333-40937)
filed on November 9, 1998.
(7) Not applicable.
(8)(a) Agreements and Amendments between The Lincoln National Life Insurance
Company and:
(i) AIM Variable Insurance Funds, Inc. is hereby incorporated by
reference to filing on Form N-4 (333-36304) filed May 4, 2000.
(ii) BT Insurance Funds Trust is hereby incorporated by
reference to filing on Form N-4 (333-36304) filed May 4, 2000.
(iii) Delaware Group Premium Fund, Inc. is hereby incorporated by
reference to filing on Form N-4 (333-36304) filed May 4, 2000.
(iv) Liberty Variable Investment Trust is incorporated herein by
reference to Post-Effective Amendment No. 3 (333-40937) filed
on April 29, 1999.
(v) Lincoln National Bond Fund, Inc. is hereby incorporated by
reference to filing on Form N-4 (333-36304) filed May 4, 2000.
(vi) Lincoln National Money Market Fund, Inc. is hereby incorporated
by reference to filing on Form N-4 (333-36304) filed May 4, 2000.
(vii) Fidelity Variable Insurance Products Fund is hereby
incorporated by reference to filing on Form N-4 (333-36304) filed May
4, 2000.
(viii) MFS-Registered Trademark-Variable Insurance Trust is hereby
incorporated by reference to filing on Form N-4 (333-36304) filed May
4, 2000.
(ix) OCC Accumulation Trust is hereby incorporated by
reference to filing on Form N-4 (333-36304) filed May 4, 2000.
(x) American Variable Insurance Series (To be filed by amendment)
(xi) Alliance FPA. (To be filed by amendment)
(xii) Templeton FPA is hereby incorporated by
reference to filing on Form N-4 (333-36304) filed May 4, 2000.
(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 Growth & Income Fund, Form N-1A 2-80741,
Amendment No. 21 filed on April 10, 2000.
(9) Opinion and consent of Mary Jo Ardington, Counsel of The Lincoln National
Life Insurance Company as to legality of securities being issued.
(10) Consent of Ernst & Young LLP, Independent Auditors
(11) Not applicable.
(12) Not applicable.
(13) Schedule for Computation for Performance Quotations
(14) Not applicable
(15) Other Exhibits:
(a) Organizational Chart of the Lincoln National Insurance
Holding Company System is incorporated herein by reference
to filing on Form N-4 (File No. 333-36304 filed on May 4,
2000)
(b) Books and Records Report is incorporated herein by
reference to Post-Effective Amendment No. 5 on Form N-4
(File No. 333-40937) filed on April 19, 2000.
Item 25.
DIRECTORS AND OFFICERS OF THE DEPOSITOR
Name Positions and Offices with LNL
---- ------------------------------
Jon A. Boscia** President and Director
Lorry J. Stensrud* Executive Vice President, Chief Executive Officer of
Annuities and Director
John H. Gotta**** Executive Vice President, Chief Executive Officer of
Life Insurance and Director
Stephen H. Lewis* Senior Vice President and Director
Cynthia A. Rose* Secretary and Assistant Vice President
Lawrence T. Rowland*** Executive Vice President and Director
Keith J. Ryan* Vice President, Controller and Chief Accounting Officer
Eldon J. Summers* Second Vice President and Treasurer
Richard C. Vaughan** Director
Diane Dillman* Interim Director of Compliance for Annuities
Janet Chrzan** Senior Vice President, Chief Financial Officer and
Director
Charles E. Haldeman***** Director
*Principal business address is 1300 South Clinton Street, Fort Wayne, Indiana
46802-3506
**Principal business address is Center Square West Tower, 1500 Market Street-
Suite 3900, Philadelphia, PA 19102-2112.
***Principal business address is One Reinsurance Place, 1700 Magnavox Way,
Fort Wayne, Indiana 46804-1538.
****Principal business address is 350 Church Street, Hartford, CT 06103
*****Principal business address is 1 Commerce Square, 2005 Market Street,
Philadelphia, PA 19103-3682
<PAGE>
Item 26.
PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
WITH THE DEPOSITOR OR REGISTRANT
See Exhibit 15(a): Organizational Chart of the Lincoln National Insurance
Holding Company System.
Item 27.
NUMBER OF CONTRACTOWNERS
As of June 30, 2000, there were 7,874 Contract Owners under Account N.
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 act 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.
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 Life Flexible Premium Variable Life Account F; Lincoln Life
Flexible Premium Variable Life Account J; Lincoln Life Flexible Premium
Variable Life Account K; Lincoln Life Variable Annuity Account N;
Lincoln Life Flexible Premium Variable Life Account M; Lincoln Life
Flexible Premium Variable Life Account R; Lincoln Life Flexible Premium
Variable Life Account S; Lincoln Life Variable Annuity Account Q;
Lincoln National Variable Annuity Account 53.
(b) See Item 25.
(c) Commissions and other compensations received by The Lincoln National
Life Insurance Company from Lincoln Life Variable Annuity Account N
during the fiscal year which ended December 31, 1999.
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Net Underwriting
Name of Principal Discounts and Compensation Brokerage
Underwriter Commissions on Redemption Commissions Compensation
----------------- ------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
The Lincoln National
Life Insurance Company None $176,441 None $2,289,189
</TABLE>
<PAGE>
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 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 (1) as part of any
application to purchase a Certificate or an Individual Contract offered
by the Prospectus, a space that an applicant can check to request a
Statement of Additional Information, or (2) a post card or a similar
written communication affixed to or included in the Prospectus that the
applicant can remove to send for a Statement of Additional Information.
(c) Registrant undertakes to deliver any Statement of Additional Information
and any financial statements required to be made available under this Form
promptly upon written or oral request to Lincoln Life at the address or
phone number listed in the Prospectus.
(d) The Lincoln National Life Insurance Company hereby represents that the fees
and charges deducted under the contract, 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 hereby 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.
<PAGE>
SIGNATURES
(a) As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant has duly caused this Pre-Effective Amendment to the
Registration Statement to be signed on its behalf, in the City of Fort Wayne and
the State of Indiana on this 19th day of July, 2000.
LINCOLN NATIONAL VARIABLE ANNUITY
ACCOUNT N -- Lincoln ChoicePlus Bonus
(Registrant)
/s/ Jeffrey K. Dellinger
By: ___________________________
Jeffrey K. Dellinger
Vice President, Lincoln Life
(Title)
By: THE LINCOLN NATIONAL LIFE
INSURANCE COMPANY
(Depositor)
/s/ Lorry J. Stensrud
By: ___________________________
Lorry J. Stensrud
(Signature-Officer of Depositor)
Executive Vice President, Lincoln Life
(Title)
(b) As required by the Securities Act of 1933, this Pre-Effective Amendment to
the Registration Statement has been signed for the Depositor by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Jon A. Boscia President and Director July 19, 2000
---------------------- (Principal Executive Officer)
Jon A. Boscia
/s/ Lorry J. Stensrud Executive Vice President, Chief
---------------------- Executive Officer of Annuities and Director July 19, 2000
Lorry J. Stensrud
/s/ Keith J. Ryan Vice President and Controller July 19, 2000
---------------------- (Principal Accounting Officer)
Keith J. Ryan
/s/ Janet Chrzan Senior Vice President, Chief July 19, 2000
---------------------- Financial Officer and Director
Janet Chrzan (Principal Financial Officer)
/s/ Stephen H. Lewis Senior Vice President and Director July 19, 2000
----------------------
Stephen H. Lewis
/s/ John H. Gotta Executive Vice President, Chief Executive July 19, 2000
---------------------- Officer of Life Insurance and Director
John H. Gotta
/s/ Lawrence T. Rowland Executive Vice President and July 19, 2000
---------------------- Director
Lawrence T. Rowland
/s/ Richard C. Vaughan Director July 19, 2000
----------------------
Richard C. Vaughan
Director
---------------------- -------------
Charles E. Haldeman
</TABLE>
