<PAGE>
As filed with the Securities and Exchange Commission on April 28, 1995.
Registration No. 33-25990
-------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 11
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 23
(Check appropriate box or boxes.)
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT C
-------------------------------------------
(Exact Name of Registrant)
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
-------------------------------------------
(Name of Depositor)
1300 South Clinton Street
-------------------------
Fort Wayne, Indiana 46802
--------------------------
(Address of Depositor's Principal Executive Offices) (Zip Code)
Depositor's Telephone Number, including Area Code: (219)455-2000
Jack D. Hunter, Esq.
200 East Berry Street
Fort Wayne, Indiana 46802
Telephone No. (219)455-2000
--------------------------------------------
(Name and Address of Agent for Service)
The Registrant has registered an indefinite amount of securities under the
Securities Act of 1933 pursuant to Rule 24f-2 of the Investment Company Act of
1940. Pursuant to Rule 24f-2(b)(2), the Registrant filed a Rule 24f-2 Notice
for the last fiscal year (1994) on February 21, 1995.
It is proposed that this filing will become effective:.
___ immediately upon filing pursuant to paragraph (b)
X on 4/29/95 pursuant to paragraph (b)
---
___ 60 days after filing pursuant to paragraph (a) (1)
___ on _________ pursuant to paragraph (a) (1)
___ 75 days after filing pursuant to paragraph (a) (2)
___ on _________ pursuant to paragraph (a) (2) of Rule 485.
<PAGE>
ACCOUNT C
CROSS REFERENCE SHEET TO ITEMS REQUIRED BY FORM N-4
N-4 ITEM CAPTION IN PROSPECTUS (PART A)
- -------- ------------------------------
1. Cover Page
2. Special Terms
3.(a) Expense Table plus Supplement
(b) Not Applicable
(c) Not Applicable
(d) For Your Information
4.(a)Condensed Financial Information
(b)b) Condensed Financial Information
(c) Financial Statements
5.(a) Cover Page; The Lincoln National Life
Insurance Company
(b) Cover Page; Variable Annuity Account;
Investments of the Variable Annuity
Account
(c) Investments of the Variable Account
(d) Cover Page
(e) Voting Rights
(f) Not Applicable
6.(a)For Your Information; Charges and
Other Deductions
(b) Charges and Other Deductions
(c) Charges and Other Deductions
(d) Charges and Other Deductions
(e) Charges and Other Deductions
(f) Charges and other Deductions
(g) Not Applicable
7.(a) The Contracts; Investments of the Variable
Account; Annuity Payments; Voting Rights;
Return Privilege
(b) Investments of the Variable Account;
The Contracts; Cover Page
(c) The Contracts
(d) The Contracts
L4U03721/4/LCT
<PAGE>
CROSS REFERENCE SHEET TO ITEMS REQUIRED BY FORM N-4
N-4 ITEM CAPTION IN PROSPECTUS (PART A)
- -------- ------------------------------
8. (a) Annuity Payments
(b) Annuity Payments
(c) Annuity Payments
(d) Annuity payments
(e) Cover Page; Annuity Payments
(f) The Contracts; Annuity Payments
9.(a) The Contracts; Annuity Payments
(b) The Contracts; Annuity Payments
10.(a) The Contracts; Cover Page; Charges
and Other Deductions
(b) The Contracts; Investments of the
Variable Account
(c) The Contracts
(d) Distribution of the Contracts
11.(a) The Contracts
(b) Restrictions Under the Texas
Optional Retirement Program
(c) The Contracts
(d) The Contracts
(e) Return Privilege
12.(a) Federal Tax Status
(b) Cover Page; Federal Tax Status
(c) Federal Tax Status
13. Legal Proceedings
14. Table of Contents to the Statement
of Additional Information (SAI)
for Lincoln National Variable
Annuity Account C
<PAGE>
CROSS REFERENCE SHEET TO ITEMS REQUIRED BY FORM N-4
CAPTION IN STATEMENT OF ADDITIONAL
----------------------------------
N-4 ITEM INFORMATION (PART B)
- -------- ---------------------
15. Cover Page for Part B
16. Cover Page for Part B
17.(a) Not Applicable
(b) Not Applicable
(c) General Information and History
of The Lincoln National Life
Insurance Company (LNL)
18.(a) Not Applicable
(b) Not Applicable
(c) Services
(d) Not Applicable
(e) Not Applicable
(f) Services
19.(a) Purchase of Securities Being
Offered
(b) Not Applicable
20.(a) Underwriters
(b) Underwriters
(c) Underwriters
(d) Underwriters
21. Calculation of Performance Data
plus Supplement
22. 22. Annuity Payments [reference to
Prospectus]
23.(a) Financial Statements -- Lincoln
National Variable Annuity
Account C
(b) Consolidated Financial Statements --
-The Lincoln National Life
Insurance Company
<PAGE>
Lincoln National Variable Annuity Account C
individual variable annuity contracts
issued by
Lincoln National Life Insurance Company
1300 South Clinton Street
Fort Wayne, Indiana 46802
This Prospectus describes to you individual Variable Annuity Contracts issued
by Lincoln National Life Insurance Company (Lincoln Life). They are for use
with the following retirement plans qualified for special tax treatment
(Qualified Contracts) under the Internal Revenue Code of 1986, as amended (the
Code):
1. Public school systems and 501(c)(3) tax-exempt organizations;
2. Qualified corporate employee pension and profit-sharing trusts and qualified
annuity plans;
3.Corresponding plans of self-employed individuals (H.R. 10 or Keogh);
4. Individual retirement annuities (IRA);
5. Government deferred compensation plans (457); and/or
6. Simplified employee pension plans (SEP).
The Contracts described in this Prospectus are also offered to plans
established by persons who are not entitled to participate in one of the
previously mentioned plans (Non-qualified Contracts).
This Prospectus offers you, as Contract Owner, Contracts of the following
types:
1. Single Premium Deferred Annuity;
2. Flexible Premium Deferred Annuity; and
3. Periodic Premium Deferred Annuity.
The Contracts offer you the accumulation of Contract Value and payment of
periodic annuity benefits. These benefits may be on a variable or fixed basis
or a combination of both. Benefits start at an Annuity Commencement Date on or
prior to the Annuitant,s 85th birthday as selected by you. If the Annuitant
dies before the Annuity Commencement Date, the Contract Value will be paid to
your Beneficiary.
The minimum purchase amounts for the three types of Contracts are:
1. Single Premium Deferred Contract: $1,000 for IRAs and SEPs; $3,000 for all
others;
2. Flexible Premium Deferred Contract: $1,000 for IRAs and SEPs; $3,000 for all
others (subsequent Purchase Payments: $100); and
3. Periodic Premium Deferred Contract: $600 per Contract Year (minimum $25 per
Purchase Payment).
All investments (Purchase Payments) for benefits on a variable basis will be
placed in Lincoln National Variable Annuity Account C (the Variable Annuity
Account [VAA]). The VAA is a segregated investment account of Lincoln Life,
which is the Depositor. The VAA invests Purchase Payments (at net asset value)
in specified mutual funds (the Fund or Funds) based upon your instructions.
Both the value of a Contract before the Annuity Commencement Date and the
amount of payouts afterward will depend upon the investment performance of the
Fund(s) selected.
Purchase Payments for benefits on a fixed basis will be placed in the fixed
side of the Contract, which is part of our General Account. However, this
Prospectus deals only with those elements of the Contracts relating to the VAA,
except where reference to the fixed side is made.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (SEC) NOR HAS THE SEC PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
A Statement of Additional Information (SAI), dated April 29, 1995, concerning
the VAA has been filed with the SEC and is incorporated by this reference into
this Prospectus. If you would like a free copy, write Kim Oakman, Lincoln
National Life Insurance Co., P.O. Box 2340, Fort Wayne, Indiana 46801, or call
1-800-348-1212, Ext. 4912. A table of contents for the SAI appears on the last
page of this Prospectus.
This Prospectus details the information regarding the VAA that you should know
before investing. This booklet also includes a current Prospectus for each of
the Funds: Lincoln National Aggressive Growth Fund, Inc., Lincoln National Bond
Fund, Inc., Lincoln National Capital Appreciation Fund, Inc., Lincoln National
Equity-Income Fund, Inc., Lincoln National Global Asset Allocation Fund, Inc.
(former name Lincoln National Putnam Master Fund, Inc.), Lincoln National
Growth and Income Fund, Inc. (former name Lincoln National Growth Fund, Inc.),
Lincoln National International Fund, Inc., Lincoln National Managed Fund, Inc.,
Lincoln National Money Market Fund, Inc., Lincoln National Social Awareness
Fund, Inc., and Lincoln National Special Opportunities Fund, Inc. Please read
all Prospectuses carefully and keep them for future reference.
This Prospectus is dated April 29, 1995.
1
<PAGE>
For your information:
If you surrender your Contract or withdraw Contract Value, a Surrender Charge
of up to 8% may be deducted. The amount of the Surrender Charge depends on the
type of Contract and its duration. However, no Surrender Charge is assessed
when Annuity Payouts begin or at the Annuitant,s death. See Charges and other
deductions.
Also, you may be subject to a penalty tax under section 72 (q) of the Code (See
Federal tax status) should you withdraw Contract Value or Surrender the
Contract before the Annuity Commencement Date.
These Contracts contain a Free-Look provision. See the section on Return
privilege.
<TABLE>
<CAPTION>
Table of contents
<S> <C> <C> <C>
Page Page
Special terms 3 Federal tax status 17
Expense tables 4 Voting rights 18
Condensed financial information 7 Distribution of the contracts 19
Financial statements 9 Return privilege 19
Lincoln National Life Insurance State regulation 19
Company 9 Restrictions under the Texas
Variable annuity account 9 Optional Retirement Program 19
Investments of the variable Records and reports 19
annuity account 9 Other information 19
Charges and other deductions 11 Statement of Additional Information table
The contracts 13 of contents for Separate Account C 20
Annuity payouts 16
</TABLE>
2
<PAGE>
Special terms
(Throughout this Prospectus, in order to make the following documents more
understandable to you, we have italicized the Special Terms.)
Account or Variable Annuity Account (VAA)- The segregated investment account,
Account C, into which Lincoln Life sets aside and invests the assets for the
Variable Annuity Contracts offered in this Prospectus.
Accumulation Unit- A measure used to calculate Contract Value prior to the
Annuity Commencement Date for the variable side of the Contract. See The
contracts.
Advisor or Investment Advisor- Lincoln National Investment Management Company,
which provides investment management services to each of the Funds. See
Investment advisor.
Annuitant- The person to whom Annuity Payouts are or may be paid.
Annuity Commencement Date- The date you choose for Annuity Payouts to begin to
the Annuitant.
Annuity Option- One of the optional forms of payment of the annuity available
within the Contract. See Annuity payouts.
Annuity Payout- An amount paid at regular intervals under one of several options
available to the Contract Owner 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 after the Annuity Commencement Date to calculate
the amount of Annuity Payouts. See Annuity payouts.
Beneficiary- The person designated by you to receive the Death Benefit in case
of the Annuitant,s death
Cash Surrender Value- Upon Surrender, the Contract Value less any applicable
charges, fees, and taxes.
Code- The Internal Revenue Code of 1986, as amended.
Contract (Variable Annuity Contract)- The agreement between you and us providing
a variable annuity for the Annuitant.
Contract Owner (You, Your)- The person who has the ability to exercise the
rights within the Contract (decides on investment allocations, transfers, payout
options; designates the Beneficiary, etc.). Usually, but not always, the owner
is also the Annuitant.
Contract Value- At a given time, 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
Annuitant dies before the Annuity Commencement Date. See the contracts.
Flexible Premium Deferred Contract- An annuity Contract with an initial Purchase
Payment, allowing additional Purchase Payments to be made, and with Annuity
Payouts beginning at a future date.
Fund- Any of the mutual funds in which your Purchase Payments are invested.
Home Office- The headquarters of Lincoln National Life Insurance, located at
1300 South Clinton Street, Fort Wayne, Indiana 46802.
Lincoln Life (We, Us, Our)- Lincoln National Life Insurance.
LNIMC- Lincoln National Investment Management Company.
Lump Sum- A one-time Purchase Payment of $5,000 or more ($1,000 for IRAs and
SEPs) made to a Periodic Premium Deferred Contract.
Periodic Premium Deferred Contract- An annuity Contract with Purchase Payments
due periodically and with Annuity Payouts beginning at a future date.
Purchase Payments- Amounts paid to purchase an annuity for an Annuitant.
Single Premium Deferred Contract- An annuity Contract with a single Purchase
Payment and with Annuity Payouts beginning at a future date.
Statement of Additional Information (SAI)- A document required by the SEC to be
provided upon request to a prospective purchaser of a Contract or to you. This
free document gives more information about Lincoln Life, the VAA, and the
Variable Annuity Contract.
Sub-Account- That portion of the VAA that reflects investments in Accumulation
Units of a particular Fund. There is a separate Sub-Account which corresponds to
each Fund.
Surrender- A Contract right that allows you to terminate your Contract and
receive your Cash Surrender Value. See the contracts.
Surrender Charge- The term that refers to what is known in the industry as a
Contingent Deferred Sales Charge. See Charges and other deductions.
Valuation Date- Each day the New York Stock Exchange (NYSE) is open for trading.
Valuation Period- The period starting at the close of business on a particular
Valuation Date and ending at the close of business on the next Valuation Date.
Withdrawal- A Contract right that allows you to obtain a portion of your Cash
Surrender Value.
3
<PAGE>
Expense tables
Contract owner transaction expenses-single premium and periodic premium deferred
contracts:
Surrender Charge (as a percentage
of Contact Value surrendered/withdrawn) 7% (Single Premium)
8% (Periodic Premium)
(Note: Upon the first Withdrawal of Contract Value in any Contract Year, up to
15% of Contract Value may be withdrawn free of this charge.)
Reduced Surrender Charges over time:
The Surrender Charge percentages listed above are the maximum percentages
charged as a percentage of Contract Value withdrawn. The later a
Surrender/Withdrawal occurs, the lower the Surrender Charge percentage applied,
according to the following table:
Contract type Contract year
- ----------------------------------------------------------------------------
1 2 3 4 5 6 7 8 9 10 11+
Single Premium 7% 6 5 4 3 2 1 0 0 0 0
Periodic Premium 8% 8 8 8 8 4 4 4 4 4 0
- ----------------------------------------------------------------------------
Contract owner transaction expenses-flexible premium deferred contract:
Surrender Charge (as a percentage of Purchase
Payments surrendered/withdrawn) 7% (Flexible Premium)
(Note: Upon the first Withdrawal of Purchase Payments in any Contract Year, up
to 15% of those Purchase Payments may be withdrawn free of this charge.)
Reduced Surrender Charge over time:
The Surrender Charge percentage listed above is the maximum percentage charged
as a percentage of Purchase Payments withdrawn. The later a Surrender/Withdrawal
occurs, the lower the Surrender Charge percentage applied, according to the
following table:
Completed Contract Years between date of
Contract type Purchase Payments and date of Surrender/Withdrawal*
- ------------------------------------------------------------------------------
0 1 2 3 4 5 6 7+
Flexible Premium 7% 6 5 4 3 2 1 0
Annual contract fee
$-0- (Single Premium)
$25 (Periodic and Flexible Premium)[This fee is a single charge assessed against
Contract Value on the anniversary date and upon full Surrender; it is not a
separate charge for each Sub-Account.]
Variable annuity account C annual expenses
(as a percentage of average account value for each Sub-Account):
For each Sub-Account**
Mortality and expense risk fees 1.00%
Total Account C annual expenses 1.00%
*Calculated separately for each Contract Year's Purchase Payments.
**The VAA is divided into 11 separately-named Sub-Accounts,
each of which, in turn, invests Purchase Payments in its
respective Fund.
4
<PAGE>
<TABLE>
<CAPTION>
Annual expenses of the Funds
(as a percentage of each Fund's average net assets):
Management + Other = Total
fees expenses expenses
<S> <C> <C> <C>
1. Aggressive Growth (AG) .75% .36% 1.11%
- ------------------------------------------------------------------------
2. Bond Fund (B) .47 .03 .50
- ------------------------------------------------------------------------
3. Capital Appreciation (CA) .80 .38 1.18
- ------------------------------------------------------------------------
4. Equity-Income (EI) .95 .32 1.27
- ------------------------------------------------------------------------
5. Global Asset Allocation (GAA) .75 .31 1.06
- ------------------------------------------------------------------------
6. Growth and Income (GI) .35 .02 .37
- ------------------------------------------------------------------------
7. International (I) .87 .37 1.24
- ------------------------------------------------------------------------
8. Managed (M) .42 .02 .44
- ------------------------------------------------------------------------
9. Money Market (MM) .48 .04 .52
- ------------------------------------------------------------------------
10.Social Awareness (SA) .48 .05 .53
11.Special Opportunities(SO) .45 .03 .48
</TABLE>
Examples
(reflecting expenses both of the VAA and of the Funds):
If you surrender your Contract at the end of the applicable time period:
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return:
<TABLE>
<CAPTION>
1 Year 3 Years
-------------------------- --------------------------
Single Flexible Periodic Single Flexible Periodic
- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1. AG $93 $91 $104 $120 $116 $153
- -----------------------------------------------------------------
2. B 88 85 98 103 97 136
- -----------------------------------------------------------------
3. CA 94 92 104 122 118 155
- -----------------------------------------------------------------
4. EI 95 93 105 123 121 157
- -----------------------------------------------------------------
5. GAA 93 91 103 119 115 152
- -----------------------------------------------------------------
6. GI 87 84 97 99 93 132
- -----------------------------------------------------------------
7. I 95 93 105 124 120 157
- -----------------------------------------------------------------
8. M 87 85 98 101 96 134
- -----------------------------------------------------------------
9. MM 88 85 98 103 98 137
- -----------------------------------------------------------------
10. SA 88 86 98 104 98 137
- -----------------------------------------------------------------
11. SO 88 85 98 102 97 135
- -----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
5 Year 10 Years
-------------------------- --------------------------
Single Flexible Periodic Single Flexible Periodic
- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1. AG $148 $143 $205 $243 $243 $296
- -----------------------------------------------------------------
2. B 117 112 177 179 179 235
- -----------------------------------------------------------------
3. CA 151 147 208 251 251 251
- -----------------------------------------------------------------
4. EI 152 151 212 250 259 311
- -----------------------------------------------------------------
5. GAA 145 141 203 238 238 291
- -----------------------------------------------------------------
6. GI 111 105 170 164 164 221
- -----------------------------------------------------------------
7. I 154 150 211 257 257 309
- -----------------------------------------------------------------
8. M 114 109 174 172 172 228
- -----------------------------------------------------------------
9. MM 118 113 177 181 181 237
- -----------------------------------------------------------------
10. SA 119 113 178 182 182 238
- -----------------------------------------------------------------
11. SO 116 111 176 176 176 233
</TABLE>
<PAGE>
If you do not surrender your Contract (or if you annuitize):
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return:
<TABLE>
<CAPTION>
1 Year 3 Years
-------------------------- --------------------------
Single Flexible Periodic Single Flexible Periodic
- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1. AG $21 $21 $21 $66 $66 $66
2. B 15 15 15 47 47 47
3. CA 22 22 22 68 68 68
4. EI 23 23 23 69 71 71
5. GAA 21 21 21 65 65 65
6. GI 14 14 14 43 43 43
7. I 23 23 23 70 70 70
8. M 15 15 15 46 46 46
9. MM 15 15 15 48 48 48
10. SA 16 16 16 48 48 48
11. SO 15 15 15 47 47 47
</TABLE>
<TABLE>
<CAPTION>
5 Year 10 Years
-------------------------- --------------------------
Single Flexible Periodic Single Flexible Periodic
- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1. Ag $113 $113 $113 $243 $243 $243
2. B 82 82 82 179 179 179
3. CA 117 117 117 251 251 251
4. EI 117 121 121 250 259 259
5. GAA 111 111 111 238 238 238
6. GI 75 75 75 164 164 164
7. I 120 120 120 257 257 257
8. M 79 79 79 172 172 172
9. MM 83 83 83 181 181 181
10. SA 83 83 83 182 182 182
11. SO 81 81 81 176 176 176
</TABLE>
This table is provided to assist you in understanding the various costs and
expenses that you will bear directly or indirectly. The table reflects expenses
both of the VAA and of the 11 Funds. For more complete descriptions of the
various costs and expenses involved, see Charges and other deductions in this
Prospectus, and Management of the funds in the Appendix to the Funds'
Prospectuses. Premium taxes may also be applicable, although they do not appear
in the table. The examples should not be considered a representation of past or
future expenses. Actual expenses may be more or less than those shown. This
table is unaudited.
6
<PAGE>
Condensed financial information for the variable annuity account
Accumulation Unit values
The following information relating to Accumulation Unit values and number of
Accumulation Units for each of the 10 years in the period ended December 31,
1994 is derived from the VAA's financial statements. The information relating to
Accumulation Units values and number of Accumulation Units should be read in
conjunction with the VAA's financial statements and notes included in the SAI.
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
000,000 000,000 000,000 000,000 000,000 00,000 00,000 00,000 00,000 00,000
Aggressive Growth Sub-Account
Accumulation Unit value
- -Beginning of period $1.000 1.000*
- -End of period $ .896 1.000* N/A-this account began trading in 1994
Number of Accumulation Units
- -End of period (000,s omitted) 67,547 110
- ---------------------------------------------------------------------------------------------------------------------------------
Bond Sub-Account
Accumulation Unit value
- -Beginning of period $3.780 3.398 3.181 2.737 2.591 2.312 2.162 2.156 1.855 1.539
- -End of period $3.585 3.780 3.398 3.181 2.737 2.591 2.312 2.162 2.156 1.855
Number of Accumulation Units
- -End of period (000,s omitted) 57,900 62,765 52,842 46,830 40,983 37,671 28,146 25,879 29,727 20,293
- ---------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Sub-Account
Accumulation Unit value
- -Beginning of period $1.000 1.000*
- -End of period $1.017 1.000* N/A-this account began trading in 1994
Number of Accumulation Units
- -End of period (000,s omitted) 52,125 110
- ---------------------------------------------------------------------------------------------------------------------------------
Equity-Income Sub-Account
Accumulation Unit value
- -Beginning of period $1.000 1.000*
- -End of period $1.046 1.000* N/A-this account began trading in 1994
Number of Accumulation Units
- -End of period (000,s omitted) 75,383 110
- ---------------------------------------------------------------------------------------------------------------------------------
Global Asset Allocation Sub-Account
Accumulation Unit value
- -Beginning of period $1.689 1.453 1.378 1.174 1.175 1.005 .914 1.000*
- -End of period $1.642 1.689 1.453 1.378 1.174 1.175 1.005 .914* N/A-this
account began
Number of Accumulation Units trading in 1987
- -End of period (000,s omitted) 122,061 92,778 67,873 57,199 50,149 39,835 27,750 23,120
- ---------------------------------------------------------------------------------------------------------------------------------
Growth and Income Sub-Account
Accumulation Unit value
- -Beginning of period $4.579 4.084 4.050 3.125 3.126 2.611 2.436 2.130 1.835 1.409
- -End of period $4.593 4.579 4.084 4.050 3.125 3.126 2.611 2.436 2.130 1.835
Number of Accumulation Units
- -End of period (000,somitted) 253,621 226,072 188,659 144,515 114,974 96,161 81,066 73,488 50,821 31,814
- ---------------------------------------------------------------------------------------------------------------------------------
International Sub-Account
Accumulation Unit value
- -Beginning of period $1.243 .901 .990 1.000*
- -End of period $1.271 1.243 .901 .990* N/A-this account began trading in 1991
Number of Accumulation Units
- -End of period (000,s omitted) 248,639 129,551 50,718 21,088
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*The unit values are calculated for the period from commencement of investment
activity of the accounts, through December 31; accordingly, the values do not
reflect a full years's experience.
7
<PAGE>
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Managed Sub-Account Accumulation
Unit value
- -Beginning of period $2.827 2.558 2.492 2.065 2.015 1.737 1.609 1.495 1.319 1.076
- -End of period $2.747 2.827 2.558 2.492 2.065 2.015 1.737 1.609 1.495 1.319
Number of Accumulation Units
- -End of period (000,somitted) 167,184 162,485 139,606 115,929 104,011 95,285 84,586 78,432 54,994 31,299
- ---------------------------------------------------------------------------------------------------------------------------------
Money Market Sub-Account
Accumulation Unit value
- -Beginning of period $2.079 2.044 1.996 1.907 1.783 1.651 1.553 1.472 1.395 1.305
- -End of period $2.137 2.079 2.044 1.996 1.907 1.783 1.651 1.553 1.472 1.395
Number of Accumulation Units
- -End of period (000,s omitted) 37,106 39,763 46,993 77,812 57,377 53,287 37,890 37,132 33,160 33,124
- ---------------------------------------------------------------------------------------------------------------------------------
Social Awareness Sub-Account
Accumulation Unit value
- -Beginning of period $2.021 1.796 1.750 1.285 1.357 1.042 1.000* N/A-this account began
- -End of period $2.005 2.021 1.796 1.750 1.285 1.357 1.042* trading in 1988
Number of Accumulation Units
- -End of period (000,s omitted) 83,069 69,006 50,838 30,735 19,486 7,127 1,984
- ---------------------------------------------------------------------------------------------------------------------------------
Special Opportunities Sub-Account
Accumulation Unit value
- -Beginning of period $4.392 3.740 3.519 2.481 2.710 2.054 1.997 1.867 1.936 1.390
- -End of period $4.303 4.392 3.740 3.519 2.481 2.710 2.054 1.997 1.867 1.936
Number of Accumulation Units
- -End of period (000,s omitted) 73,673 62,314 51,056 37,798 33,837 27,789 31,068 29,240 23,463 20,556
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*The unit values are calculated for the period from commencement of investment
activity of the accounts, through December 31; accordingly, the values do not
reflect a full years's experience.
Additional information for the money market sub-account:
Seven-day yield: 5.16%; Length of base period-7 days; Date of last day of base
period: December 31, 1994.
Performance data:
At times the VAA may advertise the money market Sub-Account,s yield. The yield
refers to the income generated by an investment in the Sub-Account over a seven-
day period. This income is then annualized. The process of annualizing results
when the amount of income generated by the investment during that week is
assumed to be generated each week over a 52-week period and is shown as a
percentage of the investment. The yield figure is based on historical earnings
and is not intended to indicate future performance.
The VAA advertises the annual performance of the Sub-Accounts for the Funds on
both a Standardized and Non-Standardized basis.
The Standardized calculation measures average annual total return. This is based
on a hypothetical $1,000 payment made at the beginning of a one-year, a
five-year, and a 10-year period. This calculation reflects all fees and charges
that are or could be imposed on all Contract Owner accounts.
The Non-Standardized calculation compares changes in Accumulation Unit values
from the beginning of the most recently completed calendar year to the end of
that year. It may also compare changes in Accumulation Unit values over shorter
or longer time periods. This calculation reflects mortality and expense risk
fees. It also reflects management fees and other expenses of the Fund. It does
not include Surrender Charges or the Account Charge; if included, they would
decrease the performance.
For additional information about performance calculations, please refer to the
SAI.
8
<PAGE>
Financial statements
The financial statements for the VAA and Lincoln Life are located in the SAI.
You may obtain a free copy by writing Kim Oakman, Lincoln National Life
Insurance Co., P.O. Box 2340, Fort Wayne, Indiana 46801 or calling 1-800-348-
1212, Ext. 4912.
Lincoln Life
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 serve as
the principal underwriter for the Contracts. We are owned by Lincoln National
Corp.(LNC) which is also organized under Indiana law. LNC,s primary businesses
are the issuing of annuities, life insurance, property-casualty insurance and
reinsurance, and the providing of investment management services.
Variable annuity account
(VAA)
On June 3, 1981, 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
investment account, meaning that its assets may not be charged with liabilities
resulting from any other business that we may conduct. Income, gains, and
losses, whether realized or not, from assets allocated to the VAA, are in
accordance 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 separate account
under the federal securities laws. We do not guarantee the investment
performance of the VAA. Any investment gain or loss depends on the investment
performance of the Funds. You assume the full investment risk for all amounts
placed in the VAA.
Investments of the variable
annuity account
You decide the Sub-Account(s) to which you allocate your Purchase Payments.
There is a separate Sub-Account which corresponds to each Fund. You may change
your allocations without penalty or charges. Shares of the Funds will be sold at
net asset value (See the Appendix to the Funds, Prospectuses for an explanation
of net asset value) to the VAA in order to fund the Contracts. The Funds are
required to redeem their shares at net asset value upon our request. We reserve
the option to add, delete, or substitute Funds.
Investment advisor
Lincoln National Investment Management Co.(LNIMC), the Advisor for each of the
Funds, is a wholly-owned subsidiary of LNC. The services it provides are
explained in the Prospectuses of the Funds. Under Advisory Agreements with each
Fund, LNIMC provides portfolio management and investment advice to that Fund,
subject to the supervision of the Fund,s Board of Directors. Additional
information about LNIMC and its six Sub-Advisors may be found under Additional
investment advisor information.
Funds
Following are brief summaries of the investment objectives and policies of the
Funds. The year in which each Fund started trading is in parentheses. More
detailed information may be obtained from the current prospectus for each of the
Funds which are included in this booklet.
All of the Funds with the exception of the Special Opportunities Fund are
diversified, open-end management investment companies. Diversified means not
owning too great a percentage of the securities 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 withdraw money, surrender the Contract or transfer from one
Fund to another; and management investment company is the legal term for a
mutual fund. The Special Opportunities Fund is open-end, but is non-diversified.
Non-diversified means the Fund may own a larger percentage of the securities of
particular companies than will a diversified company. These definitions are very
general. The precise legal definitions for these terms are contained in the 1940
Act. Please be advised that there is no assurance that any of the Funds will
achieve their stated objectives.
1. Aggressive Growth Fund (1994)- The investment objective is to maximize
capital appreciation. The Fund invests in stocks of smaller, lesser-known
companies which have a chance to grow significantly in a short time.
2. Bond Fund (1981)- The investment objective is maximum current income
consistent with prudent investment strategy. The Fund invests primarily in
medium-and long-term corporate and government bonds.
9
<PAGE>
3. Capital Appreciation Fund (1994)- The investment objective is long-term
growth of capital in a manner consistent with preservation of capital. The
Fund primarily buys stocks in a large number of companies of all sizes if
the companies are competing well and if their products or services are in
high demand. It may also buy some money market securities and bonds,
including junk (high-risk) bonds.
4. Equity-Income Fund (1994)- The investment objective is to achieve reasonable
income by investing primarily in income-producing equity securities. The
Fund invests mostly in high-income stocks and some high-yielding bonds
(including junk bonds).
5. Global Asset Allocation Fund (former name Putnam Master Fund) (1987)- The
investment objective is long-term total return consistent with preservation
of capital. The Fund allocates its assets among several categories of equity
and fixed-income securities, both of U.S. and foreign issuers.
6. Growth and Income Fund (former name Growth Fund) (1981)- The investment
objective is long-term capital appreciation. The Fund buys stocks of
established companies.
7. International Fund (1991)- The investment objective is long-term capital
appreciation. The Fund trades in securities issued outside the United
States--mostly stocks, with an occasional bond or money market security.
8. Managed Fund (1983)- The investment objective is maximum long-term total
return (capital gains plus income) consistent with prudent investment
strategy. The Fund invests in a mix of stocks, bonds, and money market
securities, as determined by an investment committee.
9. Money Market Fund (1981)- The investment objective is 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.
10. Social Awareness Fund (1988)- The investment objective is long-term capital
appreciation. The Fund buys stocks of established companies which adhere to
certain specific social criteria.
11. Special Opportunities Fund (1981)- The investment objective is maximum
capital appreciation. The Fund primarily invests in mid-size companies
whose stocks have significant growth potential. Current income is a
secondary consideration.
Shares of the Funds are sold to us for investment of the assets of the VAA and
of Lincoln Life Flexible Premium Variable Life Account K, for variable life
insurance contracts. Shares of some, but not all, of the Funds are also sold to
us for investment of the assets of Lincoln National Flexible Premium Variable
Life Accounts D and G, also to fund variable life insurance contracts. See Other
Information. Shares of the Funds are not sold directly to the general public.
We will purchase shares of the Funds at net asset value and direct them to the
appropriate Sub-Accounts of the VAA. We will redeem sufficient shares of the
appropriate Funds to pay Annuity Payouts, Death Benefits, Surrender/Withdrawal
proceeds, or for purposes described in the Contract. If you desire to transfer
all or part of your investment from one Sub-Account to another, we may redeem
shares held in the first and purchase shares for the other Sub-Account. The
shares are retired, but they may be reissued later.
Investment objectives, policies,
restrictions, and social criteria
All of the investment objectives of the Funds are fundamental which means that
no changes may be made without the affirmative vote of a majority of the
outstanding voting securities of each respective Fund. The extent to which the
particular investment policies, practices, or restrictions for each Fund are
fundamental or non-fundamental depends on the particular Fund. If they are non-
fundamental, they may be changed by the Board of Directors of the Funds without
shareholder approval.
You are urged to consult the Prospectuses in this booklet and SAIs for each
individual Fund for additional information regarding the fundamental and non-
fundamental policies, practices, and restrictions of each of the Funds.
Additional investment advisor
information
LNIMC remains primarily responsible for investment decisions affecting the
Funds. However, LNIMC currently has Sub-Advisory agreements with six companies.
Under these agreements, the Sub-Advisor may perform some, or all, of the
investment advisory services required by those respective Funds.
No additional compensation from the assets of those Funds will be assessed as a
result of the Sub-Advisory Agreements.
10
<PAGE>
Following is a chart that shows the Fund names, the six Sub-Advisors under LNIMC
(the Advisor), and the ratio of the Advisor's compensation to average net assets
for each Fund in operation in 1994.
<TABLE>
<CAPTION>
Fund Sub-Advisor Ratio %
<S> <C> <C>
1. Aggressive Growth Lynch & Mayer, Inc. .75%
2. Bond None. .47
3. Capital Appreciation Janus Capital Corp. .80
4. Equity-Income Fidelity Management Trust Co. .94
5. Global Asset Allocation Putnam Investment Management, Inc. .75
6. Growth and Income Vantage Global Advisors, Inc. .35
7. International Clay Finlay Inc. .87
8. Managed Vantage Gloabl Advisors, Inc.
(for stock portfolio) .42
9. Money Market None. .48
10. Social Awareness Vantage Global Advisors, Inc. .48
11. Special Opportunities Vantage Global Advisors, Inc. .45
</TABLE>
Reinvestment
All dividend and capital gain distributions of the Funds will be automatically
reinvested in shares of the distributing Funds at their net asset value on the
date of distribution. In other words, dividends are not paid out to the
shareholder, but are reflected in charges in unit values.
Addition, deletion, or substitution of investments
We reserve the right, subject to compliance with current or future law, to make
additions, deletions, and substitutions for the Funds held by the VAA. If shares
of any of the Funds should no longer be available, or if investment in any
Fund,s shares should become inappropriate, in the judgment of our management,
for the purposes of the Contract, then we may substitute shares of another Fund
for shares already purchased, or to be purchased in the future, under the
Contract. No substitution in your account may take place without notice to you
and prior approval of the SEC, in accordance with the 1940 Act.
Charges and other
deductions
Deductions from purchase payments
There are no front-end deductions for sales charges made from Purchase Payments.
However, we will deduct premium taxes, when applicable.
Account charge
There is no account charge for Single Premium Deferred Contracts. For Periodic
and Flexible Premium Deferred Contracts, we will deduct $25 from the Contract
Value on the last Valuation Date of each Contract Year to compensate us for the
administrative services provided to you; this $25 account charge will also be
deducted from the Contract Value upon Surrender.
Surrender charges
There are charges associated with the Surrender of a Contract or the Withdrawal
of Contract Value (or of Purchase Payments, for Flexible Contracts) prior to the
Annuity Commencement Date. Charges are the same for Surrenders/Withdrawals
except that, for the first Withdrawal in a Contract Year, up to 15% of Contract
Value (Purchase Payments for Flexible Contracts) may be withdrawn free of
charges.
A. Periodic premium deferred contract
For the first Withdrawal in a Contract Year in excess of 15%, for any subsequent
Withdrawals in the same Contract Year, or for Surrender of the Contract, there
will be a Surrender Charge of 8% for years 1-5; 4% in years 6- 10; and no charge
after the Contract has been in force for 10 years. In addition, as explained
previously, an account charge will be deducted for a Surrender.
Surrender Charges will be waived in the event of the death of the Annuitant. If
between the effective date of the Contract and the Annuitant,s 65th birthday,
the Annuitant should become totally and permanently disabled, Surrender Charges
will also be waived. In addition, for 403(b) and 457 Contracts only, Surrender
Charges will be waived in the event the annuitant: (1) has terminated employment
with the employer that sponsored the Contract; and (2) has been in the Contract
for at least five years (the five year date beginning either November 1, 1991 or
the date of the Contract, whichever is later); and (3) is at least age 55.
11
<PAGE>
B. Single premium deferred contract or non-recurring Lump Sum payment to
periodic premium deferred contract
For a Single Premium Deferred Contract or a non-recurring Lump Sum payment made
to a Periodic Premium Deferred Contract, the Surrender/Withdrawal Charges (when
applicable as described previously) will be:
Contract year in which surrender/withdrawal occurs
- -----------------------------------------------------------------------------
1 2 3 4 5 6 7 8+
Charge as a 7% 6 5 4 3 2 1 0
percent of
proceeds withdrawn
Investment gains attributable to a non-recurring Lump Sum payment made to a
Periodic Premium Deferred Contract will be subject to Surrender Charges of 8% in
years 1-5, 4% in years 6-10, and no charge after the Contract has been in force
for 10 years.
Lump Sum payments may be deposited into a Periodic Premium Deferred Contract
within 12 months of the effective date of the Contract. After the 12-month
period, a new Contract must be established for a Lump Sum payment.
For Periodic Premium Deferred Contracts under which a non-recurring Lump Sum has
been received, Withdrawals will be made first from any amount subject to the
lowest charge until that amount is gone.
Surrender Charges will be waived in the event of the death of the Annuitant. If
between the effective date of the Contract and the Annuitant,s 65th birthday,
the Annuitant should become totally and permanently disabled, Surrender Charges
will also be waived.
C. Flexible premium deferred contract
For a Flexible Premium Deferred Contract, the Surrender/Withdrawal charges (when
applicable as described previously) will be:
Completed Contract Years between date of Purchase
Payments and date or Surrender/Withdrawal*
- -----------------------------------------------------------------------------
0 1 2 3 4 5 6 7+
Charge as a %
of total purchase
payments surrendered/
withdrawn in a contract
year 7% 6 5 4 3 2 1 0
*The Surrender Charge is calculated separately for each Contract Year's Purchase
Payments.
For the first Withdrawal of Purchase Payments in each Contract Year, up to 15%
of Purchase Payments will be free of these charges. Withdrawals will be
calculated on a first-in first-out basis.
Surrender Charges will be waived in the event of the death of the Annuitant. If
between the effective date of the Contract and the Annuitant,s 65th birthday,
the Annuitant should become totally and permanently disabled, Surrender Charges
will also be waived.
Deductions from the VAA for assumption
of mortality and expense risks
We deduct from the daily net asset value of the VAA an amount, computed daily,
which is equal to an annual rate of 1.002%, to compensate us for our assumption
of certain risks described below. This charge is made up of two parts: (1) Our
assumption of mortality risks (0.900%) and (2) our assumption of expense risks
(0.102%). The level of this charge is guaranteed and will not change.
Our assumption of mortality risks guarantees that the Annuity Payouts made to
our Contract Owners will not be affected by the mortality experience (life span)
either of persons receiving those payments or of the general population. We
assume this mortality risk through guaranteed annuity rates incorporated into
the Contract which cannot be changed.
We also assume the risk that the charges for administrative expenses, which
cannot be increased by us, will be insufficient to cover actual administrative
costs. The administrative services which we provide to you include processing of
applications for and issuance of the Contracts; processing purchases and
redemptions of Fund shares as required; maintenance of records; administration
of Annuity Payouts; accounting and valuation services; and regulatory and
reporting services.
If the 1.002% charge proves insufficient to cover underwriting and
administrative costs in excess of the charges made for administrative expenses,
the loss will be borne by us; however, if the amount deducted proves more than
sufficient, the excess will be a profit to us.
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 will
depend upon, among other things, the law (including the insurance law) of your
state of residence. The tax ranges from .5%(.005) to 4.0% (.040).
Other charges and deductions
There are deductions from and expenses paid out of the assets of the Funds that
are described later in this booklet in the Appendix to the Funds' Prospectuses.
Additional information
Participants in the Texas Optional Retirement Program should refer to
Restrictions Under the Texas Optional Retirement Program, later in this
Prospectus booklet.
The charges associated with Surrender/Withdrawal are paid to us to compensate us
for the cost of distributing
12
<PAGE>
the Contracts. As required by the 1940 Act, in no event will the aggregate
Surrender Charges under a Contract exceed 9% of your total Purchase Payments.
The Surrender and account charges described previously may be reduced or
eliminated for any particular Contract but only to the extent that we estimate
that we will incur lower distribution and/or administrative expenses or perform
fewer sales or administrative 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 procedures, (2) the performance of administrative or sales functions
by the employer, (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 Surrender and account charges
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 one of our
authorized sales representatives. The completed application is sent to us and we
decide whether to accept or reject it.If the application is accepted, a Contract
is prepared and executed by our legally authorized officers. The Contract is
then sent to you through your sales representative. See Distribution of the
contracts for additional information.
If a completed application and all other information necessary for processing a
purchase order are received, an initial Purchase Payment 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 five days, you will be informed of the reasons, and the Purchase Payment
will be returned immediately (unless you specifically authorize us to keep the
Purchase Payment until the application is complete). Once the application is
complete, the initial Purchase Payment must be priced within two business days.
Who can invest
To apply for a Periodic Premium Deferred Contract, you must be not only of legal
age in a state where the Contracts may be lawfully sold, but also be eligible to
participate in any of the qualified or non-qualified plans for which the
Contracts are designed. The Annuitant cannot be older than age 74.
To apply for a Flexible Premium Deferred Contract, a Single Premium Deferred
Contract, or to make a non-recurring Lump Sum payment to a Periodic Premium
Deferred Contract, you must meet the same requirements as for an application of
a Periodic Premium Deferred Contract, except that the Annuitant cannot be older
than age 84.
Purchase payments
Purchase Payments are payable to us at a frequency and amount selected by you in
the application. The minimum Purchase Payment for a Single Premium Deferred
Contract is $3,000 ($1,000 for IRAs and SEPs). The minimum initial Purchase
Payment for a Flexible Premium Deferred Contract is $3,000 ($1,000 for IRAs and
SEPs), and subsequent Purchase Payments must be at least $100. For a Periodic
Premium Deferred Contract, the minimum amount of any scheduled Purchase Payment
is $25, and the scheduled Purchase Payments must total at least $600 per year.
Purchase Payments in any one Contract Year which exceed twice the amount of
Purchase Payments made in the first Contract Year may be made only with our
permission. If you stop making Purchase Payments when due, the Contract will
remain in force as a paid-up Contract as long as the total Contract Value is at
least $600. Payments may be resumed at any time until the Annuity Commencement
Date, the Surrender of the Contract, or the death of the Annuitant, whichever
comes first.
Valuation date
Accumulation and Annuity Units will be valued once daily at the close of each
Valuation Date (currently 4:00 p.m., New York time). On any date other than a
Valuation Date, the Accumulation Unit value or the Annuity Unit value will be
the same as that on the next following Valuation Date.
Allocation of purchase payments
Purchase Payments are placed into Sub-Accounts, each of which invests in shares
of its corresponding Fund, within the VAA. This is done according to your
instructions.
The minimum amount of any Purchase Payment which can be put into any one Sub-
Account is $20 under Periodic Premium Deferred Contracts and $1,000 under Single
Premium Deferred Contracts and Flexible Premium Deferred Contracts. Upon
allocation to the appropriate Sub-Account, Purchase Payments are converted into
Accumulation Units. The number of Accumulation Units credited is determined by
dividing the amount allocated to each Sub-Account by the value of an
Accumulation Unit for that Sub-Account on the Valuation Date on which the
Purchase Payment is received at our Home Office before 4:00 p.m., E.S.T. If the
Purchase Payment is received after 4:00 p.m., E.S.T., we will use the value
computed on the next Valuation Date. The number of Accumulation Units determined
in this way shall not be 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 investments perform, but also upon the
related expenses of the corresponding Funds.
Valuation of accumulation units
Accumulation Units for each Sub-Account are valued separately. Initially, the
value of each Accumulation Unit
13
<PAGE>
was set at $1.00. Thereafter, the value of an Accumulation Unit in any
Sub-Account on any Valuation Date equals the value of an Accumulation Unit in
that Sub-Account as of the preceding Valuation Date multiplied by the net
investment factor of that Sub-Account for the current Valuation Period. To
determine the net investment factor, a gross investment rate is established for
each Fund for the Valuation Period. This rate is equal to (a) the investment
income of the Fund for the Valuation Period (plus capital gains and minus
capital losses for the period, realized or unrealized); minus (b) a daily charge
against net assets for investment advisory services and other expenses accrued
by the Fund for each day of the Valuation Period; divided by (c) the net asset
value of the Fund at the beginning of the Valuation Period. The gross investment
rate may be positive or negative.
The net investment rate with respect to each Sub-Account is then equal to the
gross investment rate for the Fund minus a daily charge at an annual rate of
1.002% for each day of the Valuation Period.
The net investment factor for each Sub-Account is equal to 1.000000 plus the net
investment rate for the Valuation Period.
Transfers of accumulation units between
sub-accounts
Before the Annuity Commencement Date, you may transfer all or a portion of your
investment from one Sub-Account to another. A transfer involves the surrender
of Accumulation Units in one Sub-Account and the purchase of Accumulation Units
in the other Sub-Account. A transfer will be done using Accumulation Unit values
as of the Valuation Date immediately following receipt of the transfer request.
There is no charge to you for a transfer; however, we reserve the right to
impose a charge in the future for transfers between Sub- Accounts, subject to
approval of the SEC.
Transfers between Sub-Accounts are restricted to once every 30 days; although,
we may elect to waive this 30-day period. The minimum amount which may be
transferred between Sub-Accounts is $500 (or the entire amount in the Sub-
Account, if less than $500). If the transfer from a Sub-Account would leave you
with less than $100 in the Sub-Account, we may transfer the total balance of the
Sub-Account. A transfer may be made by writing to our Home Office or, if a
telephone exchange authorization form (available from us) is on file with us, by
a toll-free telephone call.
You may also transfer all or any part of the Contract Value from the Sub-
Account(s) to the fixed side of the Contract. Transfers from the fixed side of
the Contract to the various Sub-Account(s) are allowed subject to the following
restrictions: (1) no more than 25% of the value of the fixed side may be
transferred to the Sub-Account in any 12 month period; and (2) the minimum
amount which can be transferred is $500 or the amount in the fixed account.
When thinking about a transfer of Contract Value, you should consider the
inherent risk involved. Frequent transfers based on short-term expectations may
increase the risk that a transfer will be made at an inopportune time.
On or after the Annuity Commencement Date, you may transfer all or a portion of
your investment in one Sub-Account to another Sub-Account or to the fixed side
of the Contract. Those transfers will be limited to three times per Contract
Year. On or after the Annuity Commencement Date, no transfers are allowed from
the fixed side of the Contract to the Sub-Accounts.
Death benefit prior to annuity
commencement date
If the Annuitant dies before the Annuity Commencement Date, a Death Benefit
equal to the current value of the Contract will be paid to your designated
Beneficiary. The Death Benefit does not involve any element of insurance and it
will be determined as of the Valuation Period on or next following the date on
which we receive at our Home Office satisfactory proof of the death of the
Annuitant and written authorization for us to pay.
At any time during a 60-day period beginning with the death of the Annuitant,
the Beneficiary may elect to receive payment either in the form of a single-sum
settlement or an Annuity Payout.
If a single sum settlement is requested, the proceeds will be mailed within
seven days of receipt of the request and of proof of death, subject to the laws
and regulations governing payment of Death Benefits. If an election has not been
made by the end of the 60-day period, a single sum settlement will be made to
the Beneficiary at that time. Any single sum payment may be postponed as
permitted by the 1940 Act.
If an Annuity Payout is elected, the Annuity Commencement Date shall be the date
specified in the request but no later than 60 days after we receive notification
of death. Payment will be made in accordance with applicable laws and
regulations governing payment of Death Benefits.
You may designate a Beneficiary during the life of the Annuitant and change the
Beneficiary by filing a written request with our Home Office. Each change of
Beneficiary revokes any previous designation. We reserve the right to request
that you send us the Contract for endorsement of a change of Beneficiary.
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 Annuitant, that Beneficiary,s interest
will go to any other Beneficiaries named, according to their respective
interests, and/or
2. If no Beneficiary survives the Annuitant, the proceeds will be paid to the
Contract Owner or to his/her estate, as applicable. There are no
restrictions on the Beneficiary,s use of the proceeds.
14
<PAGE>
Joint/contingent ownership
If a Joint Owner is named in the application, the Joint Owners shall be treated
as having equal undivided interests in the Contract. Either owner, independent
of the other, may exercise any ownership rights in this Contract.
A Contingent Owner may exercise ownership rights in this Contract only after the
Contract Owner dies.
Death of contract owner
If the Contract Owner of a Non-qualified Contract dies before the Annuity
Commencement Date, then, in compliance with the Code, the Cash Surrender Value
of the Contract will be paid as follows:
1. Upon the death of a non-annuitant Contract Owner, the proceeds shall be paid
to any surviving Joint or Contingent Owner(s). If no Joint or Contingent
Owner has been named, then the proceeds shall be paid to the Annuitant
named in the Contract; and
2. Upon the death of a Contract Owner, who is also the Annuitant, the death will
be treated as death of the Annuitant and the provisions of this Contract
regarding death of Annuitant will control. If the recipient of the proceeds
is the surviving spouse of the Contract Owner, the Contract may be continued
in the name of that spouse as the new Contract Owner.
The Code requires that any distribution be paid within five years of the death
of the Contract Owner unless the Beneficiary begins receiving, within one year
of the Contract Owner,s death, the distribution in the form of a life annuity
for a period not exceeding the Beneficiary's life expectancy.
Surrenders and withdrawals
Before the Annuity Commencement Date (not after), we will allow the Surrender of
the Contract or a Withdrawal of the Contract Value upon your written request.
Special restrictions on Surrenders/Withdrawals apply if your Contract is
purchased as part of a retirement plan of a public school system or 501(c)(3)
organization under Section 403(b) of the Code. Beginning January 1, 1989, in
order for a Contract to retain its tax-qualified status, Section 403(b)
prohibits a Withdrawal from a 403(b) Contract of post-1988 contributions (and
earnings on those contributions) pursuant to a salary reduction agreement.
However, this restriction does not apply if the Annuitant:
1. Attains age 59 1/2;
2. Separates from service;
3. Dies;
4. Becomes totally and permanently disabled; and/or
5. Experiences financial hardship (in which event the income attributable to
such contribution may not be withdrawn).
Pre-1989 contributions and earnings through December 31, 1988, are not subject
to the previously stated restriction.
The Contract Value available upon Surrender/Withdrawal is the value of the
Contract at the end of the Valuation Period during which the written request for
Surrender/Withdrawal is received at our Home Office. Unless a request for
Withdrawal specifies otherwise, Withdrawals will be made from all Sub-Accounts
within the VAA in the same proportion that the amount of Withdrawal bears to the
total Contract Value. The minimum amount which can be withdrawn is $100, and the
remaining Contract Value must be at least $300. Where permitted by contract,
Surrender/Withdrawal payments will be mailed within seven days after we receive
a valid written request at our 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 before the Annuity Commencement Date. See Charges and other
deductions.
The tax consequences of Surrender/Withdrawal are discussed later. See Federal
tax status.
If the total Contract Value is less than $600, and if no Purchase Payments have
been made for at least two years, we have the right to terminate the Contract.
Reinvestment privilege
You may elect to make a reinvestment purchase with any part of the proceeds of a
Surrender/Withdrawal, and we will recredit the Surrender/Withdrawal charges
previously deducted. This election must be made within 30 days of the date of
the Surrender/Withdrawal, and the purchase must be of a Contract covered by this
Prospectus. A representation must be made that the proceeds being used to make
the purchase have retained 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 our Home Office. You may utilize the reinvestment privilege only
once. For tax reporting purposes, a Surrender/Withdrawal and a subsequent
reinvestment purchase will be treated by us as separate transactions. Prior to a
Surrender/Withdrawal or subsequent reinvestment purchase, you should consult a
tax advisor.
Amendment of contract
We reserve the right to amend the Contracts 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.
15
<PAGE>
Commissions
The commissions paid to dealers are a maximum of 9% in the first Contract Year
and 4% in renewal Contract Years, or an equivalent schedule.
Ownership
As Contract Owner, you have all rights under the Contract. According to Indiana
law, the assets of the VAA are held for the exclusive benefit of all Contract
Owners and their designated Beneficiaries. The assets of the VAA are not
chargeable with liabilities arising from any other business that we may conduct.
Contracts may not be assigned or transferred except as permitted by the Employee
Retirement Income Security Act of 1974 and upon written notification to us. We
assume no responsibility for the validity or effect of any assignment. Consult
your tax advisor about the tax consequences of an assignment.
Contract owner questions
The obligations to purchasers under the Contracts are those of Lincoln Life.
Your questions and concerns should be directed to us at 1-800-348-1212.
Annuity payouts
You select any Annuity Commencement Date permitted by law and not later than the
Annuitant,s 85th birthday. [PLEASE NOTE THIS EXCEPTION: Contracts issued under
qualified employee pension and profit-sharing trusts (described in Section
401(a) and tax exempt under Section 501(a) of the Code) and qualified annuity
plans (described in Section 403(a) of the Code), including H.R. 10 trusts and
plans covering self-employed individuals and their employees, provide for
Annuity Payouts to start at the date and under the option specified in the
plan.]
The Contract provides optional forms of payouts of annuities (Annuity Options),
each of which is payable on a variable basis, a fixed basis, or a combination of
both. We may choose to make other Annuity Options available in the future.
You may elect Annuity Payouts in monthly, quarterly, semi-annual, or annual
installments. If the payouts from any Sub-Account 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 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 payout since there is no guarantee of a minimum number
of payouts or provision for a Death Benefit for Beneficiaries. However, there is
the risk under this option that the Annuitant would receive no payouts if he/she
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
guarantees periodic payouts during a designated period and then continuing
throughout the lifetime of the Annuitant. The designated period may be 10 or 20
years.
Joint-and-Survivor Annuity. This option offers a periodic payout during the
joint lifetime of the Annuitant and a designated Joint Annuitant. The payouts
continue during the lifetime of the survivor.
Joint-and-Two-Thirds Survivor Annuity. This option provides a periodic payout
during the joint lifetime of the Annuitant and a designated Joint Annuitant.
When one of the Joint Annuitants dies, the survivor, during his/her lifetime,
receives two thirds of the periodic payout made when both were alive.
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 commence, divided by (b)
the Annuity Units represented by each payout to the Annuitant multiplied by the
number of payouts paid prior to death. The value of the number of Annuity Units
is computed on the date our Home Office receives written notice of the
Annuitant,s death if received prior to 4:00 p.m. E.S.T. Otherwise, the
computation shall be made on the next Valuation Date.
Other options may be made available by us. The mortality and expense risk charge
and the charge for administrative services will be assessed on all Annuity
Payouts, including those that do not have a life contingency and therefore no
mortality risk.
You may change your Annuity Commencement Date, change your annuity option, or
change the allocation of your investment among Sub-Accounts up to 30 days before
your scheduled Annuity Commencement Date, upon written notice to our 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 120 monthly payouts guaranteed, except when a joint and survivor
payout is required by law. Under any option providing for guaranteed payouts,
the number of payouts which remain unpaid at the date of the Annuitant,s death
will be paid to your Beneficiary as payouts become due.
Options are only available to the extent they are consistent with the
requirements of Section 72(s), of the Code, if applicable.
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<PAGE>
Variable annuity payouts
Variable Annuity Payouts will be determined by:
1. The Contract Value before the Annuity Commencement Date;
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 Annuitant 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 month thereafter.
We assume an investment return of 5% per year, as applied to the applicable
mortality table. The amount of each payout after the initial payout will depend
upon how the underlying Fund(s) perform, relative to the 5% assumed rate. There
is a more complete explanation of this calculation in the SAI.
Federal tax status
This section is a discussion of the Federal income tax rules applicable to the
Contracts as of the date of this Prospectus. More information is provided in the
SAI. THESE DISCUSSIONS AND THOSE IN THE SAI ARE NOT INTENDED AS TAX ADVICE. This
section does not discuss the Federal tax consequences resulting from every
possible situation. No attempt has been made to consider any applicable state,
local, or foreign tax law, other than the imposition of any state premium taxes
(See Charges and other deductions). If you are concerned about the tax
implications with respect to the Contracts, you should consult a tax advisor.
The following discussion is based upon our understanding of the present Federal
income tax laws as they are currently interpreted by the Internal Revenue
Service. No representation is made as to the likelihood of continuation of the
present Federal income tax laws or the current interpretations by the IRS.
Taxation of non-qualified contracts
You are generally not taxed on increases in the value of your Contract until a
distribution occurs. This can be in the form of a Lump Sum payment received by
requesting all or part of the cash value (i.e. Surrenders/Withdrawals) or as
Annuity Payouts. For this purpose, the assignment or pledge of, or the agreement
to assign or pledge, any portion of the value of a Contract will be treated as a
distribution. A transfer of ownership of a Contract, or designation of an
Annuitant (or other Beneficiary) who is not also the Contract Owner, may also
result in tax consequences. The taxed portion of a distribution (in the form of
a Lump Sum payment or an annuity) is taxed as ordinary income. For Purchase
Payments made after February 28, 1986, an owner of a Contract who is not a
natural person (for example, a corporation) [subject to limited exceptions] will
be taxed on any increase in the Contract,s cash value over the investment in the
Contract during the taxable year, even if no distribution occurs. The next
discussion applies to Contracts owned by natural persons.
In the case of a Surrender under the Contract or Withdrawal of Contract Value,
generally amounts received are first treated as taxable income to the extent
that the cash value of the Contract immediately before the Surrender exceeds the
investment in the Contract at that time. Any additional amount withdrawn is not
taxable. In the case of a Surrender under a Contract issued before August 14,
1982, and allocable to an investment in the Contract made before that date,
amounts received are treated as taxable income only to the extent that they
exceed the investment in the Contract. The investment in the Contract generally
equals the portion, if any, of any premium paid by or on behalf of an individual
under a Contract which is not excluded from the individual,s gross income.
Even though the tax consequences may vary depending on the form of Annuity
Payout selected under the Contract, the recipient of an Annuity Payout generally
is taxed on the portion of such payout that exceeds the investment in the
Contract. For variable Annuity Payouts, the taxable portion is determined by a
formula that establishes a specific dollar amount of each payout that is not
taxed. The dollar amount is determined by dividing the investment in the
Contract by the total number of expected periodic payouts. For fixed Annuity
Payouts, there generally is no tax on the portion of each payout that represents
the same ratio that the investment in the Contract bears to the total expected
value of payouts for the term of the annuity; the remainder of each payout is
taxable. For individuals whose annuity starting date is after December 31, 1986,
the entire distribution (whether fixed or variable) will be fully taxable once
the recipient is deemed to have recovered the dollar amount of the investment in
the Contract.
There may be imposed a penalty tax on distributions equal to 10% of the amount
treated as taxable income. The penalty tax is not imposed in certain
circumstances, which generally are distributions:
1. Received on or after age 59 1/2;
2. Made as a result of death or disability;
3. Received in substantially equal installments as a life annuity (subject to
special recapture rules if the series of payouts is subsequently modified);
4. Allocable to the investment in the Contract before August 14, 1982;
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<PAGE>
5. Under a qualified funding asset in a structured settlement;
6. Under an Immediate Annuity Contract as defined in the Code; and/or
7. Under a Contract purchased in connection with the termination of certain
retirement plans.
Qualified contracts
The Contracts may be purchased in connection with the following types of tax-
favored retirement plans:
1. Contracts purchased for employees of public school systems and certain tax-
exempt organizations, qualified under Section 403(b) of the Code;
2. Pension and profit-sharing plans of self-employed individuals (H.R. 10 or
Keogh plans) or corporations, qualified under Section 401(a) or 403(a) of
the Code;
3. Individual retirement annuities, qualified under Section 408 of the Code;
4. Deferred compensation plans of state or local governments, qualified under
Section 457 of the Code; and/or
5. Simplified employee pension plans, qualified under Section 408(k) of the
Code.
The tax rules applicable to these plans, including restrictions on contributions
and benefits, taxation of distributions, and any tax penalties, vary according
to the type of plan and its terms and conditions. Participants under such plans,
as well as Contract Owners, Annuitants, and Beneficiaries, should be aware that
the rights of any person to any benefits under such plans may be subject to the
terms and conditions of the plans themselves, regardless of the terms and
conditions of the Contracts. Purchasers of Contracts for use with any qualified
plan, as well as plan participants and Beneficiaries, should consult counsel and
other advisors as to the suitability of the Contracts to their specific needs,
and as to applicable Code limitations and tax consequences.
Multiple contracts
All Contracts entered into after October 21, 1988, and issued by the same
insurance company (or its affiliates) to the same Contract Owner during any
calendar year will be treated as a single Contract for tax purposes.
Investor control
The Treasury Department has indicated that guidelines may be issued under which
a Variable Annuity Contract will not be treated as an annuity Contract for tax
purposes if the Contract Owner has excessive control over the investments
underlying the Contract. The issuance of those guidelines may require us to
impose limitations on your right to control the investment. We do not know
whether any such guidelines would have a retroactive effect.
Withholding
Pension and annuity distributions generally are subject to withholding for the
recipient,s Federal income tax liability at rates that vary according to the
type of distribution and the recipient,s tax status. Recipients, however,
generally are provided the opportunity to elect not to have tax withheld from
distributions. Under the Unemployment Compensation Amendments of 1992 (UCA), 20%
income tax withholding may apply to eligible rollover distributions. All taxable
distributions from qualified plans and Section 403(b) annuities are eligible
rollover distributions, except (1) annuities paid out over life or life
expectancy, (2) installments paid for a period spanning 10 years or more, and
(3) required minimum distributions. The UCA imposes a mandatory 20% income tax
withholding on any eligible rollover distribution that the Contract Owner does
not elect to have paid in a direct rollover to another qualified plan, Section
403(b) annuity, or individual retirement account. Distributions from Section 457
plans are subject to the general wage withholding rules.
Voting rights
As required by law, we will vote the Fund shares held in the VAA at meetings of
the shareholder of the various Funds. The voting will be done according to the
instructions of Contract Owners who have interests in any Sub-Accounts which
invest in a Fund or Funds. If the 1940 Act or any regulation under it should be
amended or if present interpretations should change, and if as a result 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
applying your percentage interest in a Sub-Account to the total number of votes
attributable to the Sub-Account. In determining the number of votes, fractional
shares will be recognized. After the Annuity Commencement Date, the votes
attributable to a Contract will decrease.
Fund shares held in a Sub-Account 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 Sub-Account. 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.
Maryland law and the Bylaws of each Fund allow investment companies registered
under the 1940 Act to dispense with annual meetings of shareholders in certain
cases where the meetings are only a formality. The Board of Directors of each
Fund will decide each year whether or not to hold the shareholder,s annual
meeting for that year.
The dispensing with annual meetings of the shareholder in effect results in
retaining the existing Directors in office. Consequently, the SEC requires the
Funds to
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<PAGE>
assure Contract Owners that a majority of those Directors have at some point
been elected by the shareholder. The SEC also requires that the Funds comply
with Section 16(c) of the 1940 Act, concerning procedures by which shareholders
may remove Directors. For a more detailed explanation of this procedure, see
Description of shares in the Appendix to the Prospectuses for the Funds.
Annual meetings of each Fund normally will not be held, unless the Board of
Directors decides to hold them. Special meetings of the shareholder may be
called for any valid purpose. Whenever a shareholder,s meeting is called, each
person having a voting interest in a Sub-Account will receive proxy material,
reports, and other materials relating to the Fund.
Distribution of the contracts
We are the distributor of the Contracts. They will be sold by our registered
representatives who have been licensed by state insurance departments. The
Contracts will also be sold by independent broker-dealers who have been licensed
by state insurance departments to represent us and who have selling agreements
with us. We are registered with the SEC under the Securities Exchange Act of
1934 as a broker-dealer and are a member of the National Association of Security
Dealers (NASD). We will offer Contracts in all states except New York.
Return privilege
Within the free-look period after you first receive the Contract, you may cancel
it for any reason by delivering or mailing it postage pre-paid, to our Home
Office at P.O. Box 2348, 1300 South Clinton Street, Fort Wayne, IN., 46801. [A
Contract canceled under this provision will be void.] With respect to the fixed
portion of a Contract, we will return Purchase Payments. With respect to the
VAA, except as explained in the following paragraph, we will return the Contract
Value as of the date of receipt of the cancellation, plus any account charge and
any premium taxes which had been deducted. No Surrender Charge will be made. 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 Purchase
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 the National Association of Insurance Commissioners (NAIC) at least
once every five years.
Restrictions under the
Texas Optional Retirement
Program
Title 8, Section 830.105 of the Texas Government Code, consistent with prior
interpretations of the Attorney General of the State of Texas, permits
participants in the Texas Optional Retirement Program (ORP) to redeem their
interest in a Variable Annuity Contract issued under the ORP only upon:
1. Termination of employment in all institutions of higher education as
defined in Texas law;
2. Retirement; and/or
3. Death.
Accordingly, a participant in the ORP will be required to obtain a certificate
of termination from his/her employer before the account can be redeemed.
Records and reports
We will maintain all records and accounts relating to the VAA. As presently
required by the 1940 Act and applicable regulations, we will mail to you, at
your last known address of record at our Home Office, at least semi-annually
after the first Contract Year, reports containing information 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 information
about the VAA, Lincoln Life, and the Contracts offered. Statements in this
Prospectus about the content of Contracts and other legal instruments are
summaries. Therefore, for the complete text of those Contracts and instruments,
please refer to those documents as filed with the SEC.
Lincoln National Flexible Premium Variable Life Accounts D, G and K, segregated
investment accounts of ours registered under the 1940 Act, are authorized to
invest their assets in the following Funds: Bond, Growth and Income, Managed,
Money Market, and Special Opportunities (for Account D); Growth and Income and
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Special Opportunities (for Account G) and all Funds for Account K. Therefore,
we, through the VAA and the Variable Life Accounts, are the sole shareholder in
the Funds. Collectively, the VAA and the Variable Life Accounts may be referred
to in this booklet and in the SAI as the Variable Accounts.
Due to differences in redemption rates, tax treatment, or other considerations,
the interests of Contract Owners under the Variable Life Accounts could conflict
with those of Contract Owners under the VAA. In those cases where assets from
variable life and Variable Annuity separate are invested in the same Fund or
Funds (i.e., where mixed funding occurs), the Boards of Directors of the Funds
involved will monitor for any material conflicts and determine what action, if
any, may be taken. Refer to the prospectus for each Fund for more information
about mixed funding.
In the future, we may purchase shares in the Funds for one or more unregistered
segregated investment accounts.
Advertisements/sales literature
In marketing the Variable Annuity Contracts, we and our various sales
representatives may refer to certain ratings assigned to us under the Rating
System of the A.M. Best Company, Oldwick, New Jersey. The objective of Best,s
Rating System is to evaluate the various factors affecting the overall
performance of an insurance company in order to provide Best,s opinion about
that company,s relative financial strength and ability to meet its contractual
obligations. The procedure includes both a quantitative and qualitative review
of the insurance company. In marketing the Contracts and the underlying Funds,
we may at times use data published by other nationally-known independent
statistical services. These service organizations provide relative measures of
such factors as an insurer,s claim-paying ability, the features of particular
Contracts, and the comparative investment performance of the Funds with other
funds having similar objectives. A few such services are: Duff & Phelps, the
Lipper Group, Moody,s, Morningstar, Standard and Poor,s, and VARDS. There is
more information about each of these services under Advertising and Sales
Literature in the SAI. Marketing materials may employ illustrations of compound
interest and dollar- cost averaging; discuss automatic withdrawal services; and
describe our customer base, assets, and our relative size in the industry. They
may also discuss other features of Lincoln Life, the VAA, the Funds, and their
investment management.
Statement of Additional
Information table of
contents for Separate
Account C
Item Item
- ----------------------------------- ---------------------------------
General information and history of Calculation of performance data
Lincoln Life Annuity payments
Special terms Federal tax status
Services Determination of net asset value
Purchase of securities being offered Advertising and sales literature/graphics
Underwriters Financial statements
For a free copy of the Statement of Additional
information write Kim Oakman, Lincoln
National Life Insurance Co., P.O. Box 2340, Fort
Wayne, Indiana 46801, or call 1-800-348-1212,
Ext. 4912.
20
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION (SAI)
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT C
(REGISTRANT)
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
(DEPOSITOR)
This Statement of Additional Information should be read in conjunction with the
Prospectus of Lincoln National Variable Annuity Account C dated April 29, 1995.
You may obtain a copy of the Account C Prospectus on request and without charge.
Please write Kim Oakman, The Lincoln National Life Insurance Company, P.O. Box
2340, Fort Wayne, Indiana 46801 or call 1-800-348-1212, Extension 4912.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS.
TABLE OF CONTENTS
ITEM Page
General Information and History of LNL
Special Terms
Services
Purchase of Securities Being Offered
Underwriters
Calculation of Performance Data
Annuity Payments
Federal Tax Status
Determination of Net Asset Value
Advertising and Sales Literature
Financial Statements
____________
THE DATE OF THIS STATEMENT OF ADDITIONAL INFORMATION IS APRIL 29, 1995.
1
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION (SAI)
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT C
GENERAL INFORMATION AND HISTORY OF
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY (LNL)
The Prior Depositor of the Account, Lincoln National Pension Insurance Company,
was merged into LNL, effective January 1, 1989. LNL, organized in 1905, is an
Indiana stock insurance corporation, engaged primarily in the direct issuance of
life insurance contracts and annuities, and is also a professional reinsurer.
LNL is wholly owned by Lincoln National Corporation, a publicly held insurance
holding company domiciled in Indiana.
SPECIAL TERMS
The Special terms used in this SAI are the ones defined in the Prospectus.
SERVICES
CUSTODIAN
The Custodian for the securities purchased by the Bond, Growth and Income,
Managed, Money Market, Social Awareness and Special Opportunities Funds is
Bankers Trust Company, 14 Wall Street, 4th Floor, New York, New York 10005.
These six funds expect to change custodian to Chase Manhattan Bank, New York,
New York, in mid-1995. For the Aggressive Growth, Capital Appreciation, Equity-
Income, International and Global Asset Allocation Funds, the Custodian is State
Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110.
The Custodian, as authorized by each Fund, will hold, transfer, exchange,
deliver or loan the Fund's securities, and will maintain certain cash accounts
in support of those functions.
INDEPENDENT AUDITORS
The financial statements of the Variable Annuity Account and the consolidated
financial statements and schedules of LNL appearing in this Statement of
Additional Information and Registration Statement have been audited by Ernst &
Young LLP, independent auditors, to the extent indicated in their reports
thereon also appearing elsewhere herein and in the Registration Statement. Such
financial statements and schedules have been included herein in reliance upon
such reports given upon the authority of such firm as experts in accounting and
auditing.
KEEPER OF RECORDS
All accounts, books, records and other documents which are required to be
maintained for the Variable Annuity Account are maintained by LNL. No separate
charge against the assets of the Variable Annuity Account is made by LNL for
this service.
PRINCIPAL UNDERWRITER
LNL is the principal underwriter for the Variable Annuity Contracts.
2
<PAGE>
PURCHASE OF SECURITIES BEING OFFERED
The Variable Annuity Contracts are offered to the public through licensed
insurance agents who specialize in selling LNL products; through independent
insurance "brokers"; and through certain securities broker/dealers selected by
LNL whose personnel are legally authorized to sell annuity products. There are
no special purchase plans for any class of prospective buyers.
There are exchange privileges between sub-accounts, and between the Variable
Annuity Account and LNL's general account (See Transfers of Accumulation Units
Between Sub-Accounts, in the Prospectus.) No exchanges are permitted between
the Variable Annuity Account and other separate accounts.
UNDERWRITERS
LNL has contracted with some broker/dealers, and may contract with others, to
sell the Variable Contracts through certain legally authorized persons and
organizations. These dealers are compensated under a standard Compensation
Schedule.
LNL is the principal underwriter for the Variable Contracts. The offering of
the Contracts is continuous. LNL retains no underwriting commissions from the
sale of the variable contracts.
CALCULATION OF PERFORMANCE DATA
(a) MONEY MARKET FUNDED SUB-ACCOUNTS:
1) Seven-day yield: 5.16%
Length of Base Period used in computing the yield: 7 days
Last Day in the Base Period: December 31, 1994
2) The yield reported above and in the table of Condensed Financial
Information in the Prospectus is determined by calculating the change in
unit value for the base period (the 7-day period ended December 31,
1994); 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 Contract Owner's
account, and excludes any realized gains and losses from the sale of
securities.
(b) OTHER SUB-ACCOUNTS:
1) TOTAL RETURN--the table below shows, for the various Sub-Accounts of
the Variable Annuity Account, an Average Annual Total Return as of
the stated periods, based upon a hypothetical initial purchase payment
of $1,000, calculated according to the formula set out after the table.
3
<PAGE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
PERIOD ENDING DECEMBER 31, 1994
<S> <C> <C> <C> <C> <C> <C>
1-YEAR PERIOD 5-YEAR PERIOD 10-YEAR PERIOD
PERIODIC SINGLE & FLEXIBLE PERIODIC SINGLE & FLEXIBLE PERIODIC SINGLE & FLEXIBLE
CONTRACTS PREM. CONTRACTS PYMT. CONTRACTS PREM. CONTRACTS PYMT.CONTRACTS PREM. CONTRACTS
1
BA -12.83% -10.94% 5.75% 6.18% 8.71% 8.71%
1
GA -7.78 -5.77 7.02 7.47 12.43 12.43
2
IA -5.97 -3.92 N/A N/A N/A N/A
3
MA -10.68 -8.74 5.44 5.87 9.71 9.71
4
PMA -10.66 -8.72 5.96 6.40 6.22 6.81
5
SAA -8.82 -6.83 7.14 7.59 10.21 10.72
1
SOA -9.91 -7.96 8.71 9.15 11.85 11.85
6
AG -17.61 -16.71 N/A N/A N/A N/A
6
CA -6.50 -5.48 N/A N/A N/A N/A
6
EI -3.79 -2.75 N/A N/A N/A N/A
</TABLE>
KEY: BA=Bond Account; GA=Growth Account; IA=International Account; MA=Managed
Account; PMA=Putnam Master Account; SAA=Social Awareness Account;
SOA=Special Opportunities Account; AG=Aggressive Growth Account;
CA=Capital Appreciation Account; EI=Equity-Income Account
*The lifetime of this sub-account is less than the complete period indicated.
See the date the sub-account commenced activity under the notation "Footnotes".
Footnotes:
1
Sub-Account commenced activity on December 21, 1981
2
Sub-Account commenced activity on May 1, 1991
3
Sub-Account commenced activity on April 29, 1983
4
Sub-Account commenced activity on August 3, 1987
5
Sub-Account commenced activity on May 2, 1988
6
Sub-Account commenced activity on Jan. 3, 1994
N/A=not applicable.
4
<PAGE>
The length of the periods and the last day of each period used in
the above table are set out in the table heading and in the
footnotes above. The Average Annual Total Return for each period
was determined by finding the average annual compounded rate of
return over each period that would equate the initial amount
invested to the ending redeemable value for that period, according
to the following formula--
n
P(1+T) =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= 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 portion thereof)
The formula assumes that: 1) all recurring fees have been charged
to Contract Owner accounts; 2) all applicable non-recurring
charges are deducted at the end of the period in question; and 3)
there will be a complete redemption at the end of the period in
question. The performance figures shown in the table above relate
to the contract form containing the highest level of charges.
(c) NON-STANDARDIZED PERFORMANCE DATA
The Variable Annuity Account advertises the performance of its
various Sub-Accounts by observing how they perform over various
time periods--monthly, year-to-date, yearly (fiscal year); and
over periods of two years and more. Monthly, year-to-date, and
yearly performance are computed on a "cumulative" basis;
performance for a two-year period and for greater periods is
computed both on a cumulative and on an "annualized" basis.
"Cumulative" quotations are arrived at by calculating the change
in the Accumulation 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.
5
<PAGE>
"Annualized" quotations are arrived at by applying a formula which
determines the level rate of return which, if earned over the
entire base period, would produce the cumulative return.
The table below sets out representative performance quotations,
according to the definitions above, for each of the Sub-Accounts,
for the following base periods: 1) monthly; 2) year-to-date; 3)
yearly; and 4) a two-year period. For all quotations except 2),
the end of the base period is December 31, 1994. For no. two, the
end of the base period is November 30, 1994. (The year-to-date
quotation would equal the yearly quotation if the end of the base
period selected for the former were December 31.) In addition,
the Account may advertise by quotations with base periods of more
than two years. These will be calculated in an identical manner
to the method used to calculate the quotation for the two-year
period; the only difference is that the base period utilized in
the formula will be longer.
6
<PAGE>
NON-STANDARDIZED PERFORMANCE DATA
SUB-ACCOUNTS OF ACCOUNT C*
<TABLE>
<CAPTION>
TYPE OF SUB-ACCOUNT
PERFORMANCE DATA LNBF LNGF LNIN LNMF LNMM LNPM LNSA LNSO
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Monthly (12/31/94) .63% 1.49% 0.32% 1.16% .36% .80% 1.06% 2.24%
Year-to-Date (11/30/94) -5.78 -1.16 1.92 -3.96 2.42 -3.60 -1.85 -4.15
Yearly (12/31/94) -5.18 .32 2.28 -2.85 2.78 -2.82 -0.81 -2.01
3-Year (Cum.) 12.70 13.42 28.45 10.25 7.08 19.13 14.54 22.28
3-Year (Ann.) 4.07 4.29 8.71 3.31 2.31 6.01 4.63 6.94
</TABLE>
<TABLE>
<CAPTION>
TYPE OF SUB-ACCOUNT
PERFORMANCE DATA AGG GROWTH CAP. APP. EQ. INC
<S> <C> <C> <C>
Monthly (12/31/94) 1.65% 0.69% 0.99%
Year-to-Date (11/30/94) -14.26 -0.88 0.86
Yearly (12/31/94) -12.85 -0.20 1.86
3-Year (Cum.) N/A N/A N/A
3-Year (Ann.) N/A N/A N/A
</TABLE>
*-Table excludes surrender charges.
Key: LNAG=Aggressive Growth Sub-Account
LNBF=Bond Sub-Account
LNCA=Capital Appreciation Sub-Account
LNEI=Equity-Income Sub-Account
LNGF=Growth and Income Sub-Account
LNIN=International Sub-Account
LNMF=Managed Sub-Account
LNMM=Money Market Sub-Account
LNPM=Global Asset Allocation Sub-Account
LNSA=Social Awareness Sub-Account
LNSO=Special Opportunities Sub-Account
Cum.=Cumulative return
Ann.=Annualized return
N/A =Not Applicable
All performance quotations may be advertised on a cumulative basis; performance
quotations with a base period of two years or longer may also be advertised on
an "annualized" basis.
7
<PAGE>
ANNUITY PAYMENTS
VARIABLE ANNUITY PAYMENTS
Variable annuity payments will be determined on the basis of: (1) the value of
the Contract prior to the Annuity Commencement Date; (2) the annuity tables
contained in the Contract; (3) the type of Annuity Option selected; and (4) the
investment performance of the Eligible Fund(s)selected. In order to determine
the amount of variable annuity payments, LNL makes the following calculation:
first, it determines the dollar amount of the first payment; second, it credits
the Annuitant with a fixed number of Annuity Units based on the amount of the
first payment; and third, it calculates the value of the Annuity Units each
period thereafter. These steps are explained below.
The dollar amount of the first variable annuity payment is determined by
applying the total value of the Accumulation Units credited under the Contract
valued as of the fourteenth day prior to the Annuity Commencement Date (less any
premium taxes) to the annuitbles contained in the Contract. Amounts shown in the
tables are based on the 1971 Individual Annuity Mortality Tables, modified with
an assumed investment return at the rate of 5% per annum. The first annuity
payment is determined by multiplying 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
8
<PAGE>
annuity tables vary according to the form of annuity selected and the age of the
Annuitant at the Annuity Commencement Date. The 5% interest rate stated above
is the measuring point for subsequent annuity payments. If the actual Net
Investment Rate (annualized) exceeds 5%, the payment will increase at a rate
equal to the amount of such excess. Conversely, if the actual rate is less than
5%, annuity payments will decrease. If the assumed rate of interest were to be
increased, annuity payments would start at a higher level but would decrease
more rapidly or increase more slowly.
LNL may use sex distinct annuity tables in Contracts that are not associated
with employer sponsored plans where not prohibited by law.
At an Annuity Commencement Date, the Annuitant is credited with Annuity Units
for each sub-account on which variable annuity payments are based. The number of
Annuity Units to be credited is determined by dividing the amount of the first
payment by the value of an Annuity Unit in each sub-account 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 Eligible Funds. The amount of the
second and subsequent annuity payments is determined by multiplying the Contract
Owner's fixed number of Annuity Units in each sub-account by the appropriate
Annuity Unit value for the Valuation Date ending 14 days prior to the date that
payment is due.
The value of each sub-account Annuity Unit was set initially at 1.00. The
Annuity Unit value for each sub-account at the end of any Valuation Date is
determined by multiplying the sub-account Annuity Unit value for the immediately
preceding Valuation Date by the product of:
(a) The net investment factor of the sub-account 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
payments 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
LNL may require proof of age, sex, or survival of any payee upon whose age, sex,
or survival payments depend.
FEDERAL TAX STATUS
GENERAL
The operations of the Variable Annuity Account form a part of, and are taxed
with, the operations of LNL under the Internal Revenue Code of 1986, as amended
(the "Code"). Investment income and realized net capital gains on the assets of
the Variable Annuity Account are reinvested and taken into account in
determining the accumulation and annuity unit values. As a result, such
investment income and realized net capital gains are automatically retained as
part of the reserves under the Contract. Under existing federal income tax law,
LNL believes that Variable Annuity Account
9
<PAGE>
investment income and realized net capital gains are not taxed to the extent
they are retained as part of the reserves under the Contracts. Accordingly, LNL
does not anticipate that it will incur any federal income tax liability
attributable to the Variable Annuity Account, and therefore it does not intend
to make any provision for such taxes. However, if changes in the federal tax
laws or interpretations thereof result in LNL's being taxed on income or gains
attributable to the Variable Annuity Account, then LNL may impose a charge
against the Variable Annuity Account in order to make provision for payment of
such taxes.
TAX STATUS OF NON-QUALIFIED CONTRACTS
Section 817(h) of the Code provides that separate account investments (or the
investments of a mutual fund the shares of which are owned by separate accounts
of insurance companies) underlying the Contract be "adequately diversified" in
accordance with Treasury regulations in order for the Contract to qualify as an
annuity contract under section 72 of the Code. The Variable Account, through
each Fund, intends to comply with the diversification requirements prescribed in
the regulations, which affect how the assets in each Fund in which the Variable
Account invests may be invested. Although Lincoln National Investment
Management Company is an affiliate of LNL, LNL does not have control over the
Funds or their investments. However, LNL believes that each Fund in which the
Variable Account owns shares will meet the diversification requirements, and
therefore the Contracts will be treated as annuities under the Code.
The Treasury Department has indicated that guidelines may be forthcoming under
which a variable annuity contract will not be treated as an annuity contract for
tax purposes if the Contract Owner has excessive control over the investments
underlying the contract. The issuance of such guidelines may require the
Company to impose limitations on a Contract Owner's right to control the
investment. It is not known whether any such guidelines would have a
retroactive effect. For these reasons, LNL reserves the right to modify the
Contract as necessary to prevent the Contract Owner from being considered the
Owner of the assets for the Variable Account.
In addition to the requirements of section 817(h), the Code (section 72(s)
provides that Contracts issued after January 18, 1985, will not be treated as
annuity contracts for purposes of section 72 unless the Contract provides that
(A) if any Contract Owner dies on or after the annuity starting date but prior
to the time the entire interest in the Contract has been distributed, the
remaining portion of such interest must be distributed at least as rapidly as
under the method of distribution in effect at the time of the Contract Owner's
death; and (B) if any Contract Owner dies prior to the annuity starting date,
the entire interest must be distributed within five years after the death of the
Contract Owner. These requirements are considered satisfied if any portion of
the Contract Owner's interest that is payable to or for the benefit of a
"designated beneficiary" is distributed over that designated beneficiary's life,
or a period not extending beyond the designated beneficiary's life expectancy,
and if that distribution begins within one year of the Contract Owner's death.
The "designated beneficiary" must be a natural person. Contracts issued after
January 18, 1985 contain provisions intended to comply with these Code
requirements, although regulations interpreting these requirements have yet to
be issued. LNL intends to review such provisions and modify them if necessary
to assure that they comply with the requirements of section 72(s) when clarified
by regulation or otherwise.
10
<PAGE>
QUALIFIED CONTRACTS
The rules governing the tax treatment of contributions and distributions under
qualified plans, as set forth in the Code and applicable rulings and
regulations, are complex and subject to change. These rules also vary according
to the type of plan and the terms and conditions of the plan itself. Therefore,
no attempt is made herein to provide more than general information about the use
of Contracts with the various types of plans, based on LNL's understanding of
the current federal tax laws as interpreted by the Internal Revenue Service.
Purchasers of Contracts for use with such a plan and plan participants and
beneficiaries should consult counsel and other competent advisers as to the
suitability of the plan and the Contract to their specific needs, and as to
applicable Code limitations and tax consequences. Participants under such
plans, as well as Contract Owners, annuitants, and beneficiaries, should also be
aware that the rights of any person to any benefits under such plans may be
subject to the terms and conditions of the plans themselves regardless of the
terms and conditions of the Contract.
Following are brief descriptions of the various types of plans and of the use of
Contracts in connection therewith.
PUBLIC SCHOOL SYSTEMS AND SECTION 501(C)(3) ORGANIZATIONS
Payments made to purchase annuity contracts by public school systems or certain
Section 501(c)(3) organizations for their employees are excludable from the
gross income of the employee to the extent that aggregate payments for the
employee do not exceed the "exclusion allowance" provided by Section 403(b) of
the Code, the over-all limits for excludable contributions of Section 415 of the
Code or the limit on elective contributions. Furthermore, the investment
results of the Fund credited to the account are not taxable until benefits are
received either in the form of annuity payments or in a single sum.
If an employee's individual account is surrendered, usually the full amount
received would be includable in income for that year at ordinary rates.
QUALIFIED CORPORATE EMPLOYEE'S PENSION AND PROFIT-SHARING TRUSTS
AND QUALIFIED ANNUITY PLANS
Payments made by a corporate employer and the increments on all payments for
qualified corporate plans are not taxable as income to the employee until
distributed. However, the employee may be required to include these amounts in
gross income prior to distribution if the qualified plan or trust loses its
qualification. Corporate plans qualified under Sections 401(a) or 403(a) of the
Code are subject to extensive rules, including limitations on maximum
contributions or benefits.
Distributions of amounts in excess of nondeductible employee contributions
allocated to such distributions are generally taxable as ordinary income. If an
employee or beneficiary receives a "lump-sum distribution", that is, if the
employee or beneficiary receives in a single tax year the total amounts payable
with respect to that employee and the benefits are paid as a result of the
employee's death or separation from service or after the employee attains
59 1/2, taxable gain may be either eligible for special "lump sum averaging"
treatment or, if the recipient was age 50 before
11
<PAGE>
January 1, 1986, eligible for taxation at a 20% rate to the extent the
distribution reflects payments made prior to January 1, 1974. These special tax
rules are not available in all cases.
SELF-EMPLOYED INDIVIDUALS (H.R. 10 OR KEOGH)
Under Code provisions, self-employed individuals may establish plans commonly
known as "H.R. 10" or "Keogh plans" for themselves and their employees. The tax
consequences to participants under such plans depend upon the plan itself. Such
plans are subject to special rules in addition to those applicable to qualified
corporate plans, although certain of these rules have been repealed or modified
effective in 1984. Purchasers of the Contracts to use with H.R. 10 plans should
seek competent advice as to suitability of plan documents and the funding
contracts.
INDIVIDUAL RETIREMENT ANNUITIES (IRA)
Under Section 408 of the Code, individuals may participate in a retirement
program known as Individual Retirement Annuity (IRA). An individual may make an
annual IRA contribution of up to the lesser of $2,000 (or $2,250 if IRAs are
maintained for both the individual and his nonworking spouse) or 100% of
compensation. However, under rules effective for tax years beginning after
1986, IRA contributions may be nondeductible in whole or in part if (1) the
individual or his spouse is an active participant in certain other retirement
programs and (2) the income of the individual (or of the individual and his
spouse) exceeds a specified amount. Distributions from certain types of
retirement plans may be "rolled over" to an IRA on a tax-deferred basis if
certain requirements are met. Distributions from IRA's are subject to certain
restrictions. Deductible IRA contributions and all earnings will be taxed as
ordinary income when distributed. The failure to satisfy certain Code
requirements with respect to an IRA results in adverse tax consequences.
DEFERRED COMPENSATION PLANS (457 PLANS)
Under the Code provisions, employees and independent contractors (participants)
performing services for state and local governments and tax-exempt organizations
may establish deferred compensation plans. While participants in such plans may
be permitted to specify the form of investment in which their plan accounts will
participate, all such investments are owned by the sponsoring employer and are
subject to the claims of its creditors. The amounts deferred under a plan which
meet the requirements of Section 457 of the Code are not taxable as income to
the participant until paid or otherwise made available to the participant or
beneficiary. Deferrals are taxed as compensation from the employer when they
are actually or constructively received by the employee. As a general rule, the
maximum amount which can be deferred in any one year is the lesser of $7,500 or
33 1/3% of the participant's includable compensation. However, in the limited
circumstances, up to $15,000 may be deferred in each of the last three years
before retirement.
SIMPLIFIED EMPLOYEE PENSION PLANS
12
<PAGE>
An employer may make contributions on behalf of employees to a simplified
employee pension plan as provided by Section 408(k) of the Code. The
contributions and distribution dates are limited by the Code provisions. All
distributions from the plan will be taxed as ordinary income. Any distribution
before the employee attains age 59 1/2 (except in the event of death or
disability) or the failure to satisfy certain other Code requirements may result
in adverse tax consequences.
TAX ON DISTRIBUTIONS FROM QUALIFIED CONTRACTS
The following rules generally apply to distributions from contracts purchased in
connection with the plans discussed above, other than deferred compensation
plans.
The portion, if any, of any contribution under a contract made by or on behalf
of an individual which is not excluded from the employee's gross income
(generally, the employee's own non-deductible contributions) constitutes his
"investment in the contract." If a distribution is made in the form of annuity
payments, the employee's "investment in the contract" (adjusted for certain
refund provisions) divided by his life expectancy (or other period for which
annuity payments are expected to be made) constitutes a tax-free return of
capital each year. The dollar amount of annuity payments received in any year
in excess of such return is taxable as ordinary income. However, for
employees whose annuity starting date is after December 31, 1986, all
distributions will be fully taxable once the employee is deemed to have
recovered the dollar amount of his investment in the contract.
If a surrender of or withdrawal from the contract is effected and distribution
is made from the plan in a single payment, the proceeds may qualify for special
"lump-sum distribution" treatment under certain qualified plans, as discussed
above. Otherwise, the amount by which the payment exceeds the "investment in
the contract" (adjusted for any prior withdrawal) allocated to that payment, if
any, will be taxed as ordinary income in the year of receipt. For amounts
distributed after 1986, rules generally provide that all distributions which are
not received as an annuity will be taxed as a pro rata distribution of taxable
and nontaxable amounts (rather than as a distribution first of nontaxable
amounts).
Distributions from qualified plans, Keoghs, simplified employee pension plans,
403(b) plans and IRAs will be subject to (1) a 10% penalty tax if made before
age 59 1/2 unless certain other exceptions apply, and (2) a 15% penalty tax on
combined annual distributions in excess of $150,000 subject to various special
rules. Effective for taxable years beginning after 1988, failure to meet
certain minimum distribution requirements for the above plans, as well as for
Section 457 plans, will result in a 50% excise tax. Various other adverse tax
consequences may also be potentially applicable in certain circumstances to
these types of plans.
Upon an employee's death, the taxation of benefits payable to his beneficiary
generally follows these same principles, subject to a variety
13
<PAGE>
of special rules. In particular, tax on death benefits paid as a lump-sum may
be deferred if, within 60 days after the lump-sum becomes payable, the
beneficiary instead elects to receive annuity payments.
OTHER CONSIDERATIONS
It should be understood that the foregoing comments about the federal tax
consequences under these Contracts are not exhaustive and that special rules are
provided with respect to other tax situations not discussed herein. Further,
the foregoing discussion does not address any applicable state, local, or
foreign tax laws. Finally, in recent years numerous changes have been made in
the federal income tax treatment of Contracts and retirement plans, which are
not fully discussed above. Before an investment is made in any of the
Contracts, a competent tax adviser should be consulted.
DETERMINATION OF NET ASSET VALUE
A description of the days on which Variable Account's net asset value per share
will be determined is given in the Prospectus. The New York Stock Exchange's
most recent announcement (which is subject to change) states that in 1995 it
will be closed on President's Day, February 20; Good Friday, April 14; Memorial
Day, May 29; Independence Day, July 4; Labor Day, September 4; Thanksgiving Day,
November 23; and Christmas Day, December 25. It may also be closed on other
days.
Since the portfolios of some of the Eligible Funds will consist of securities
primarily listed on foreign exchanges or otherwise traded outside the United
States, those securities may be traded (and the net asset value of those Funds
and of the Variable Account could therefore be significantly affected) on days
when the investor has no access to those Funds.
14
<PAGE>
ADVERTISING AND SALES LITERATURE
As set forth in the Prospectus, LNL may refer to the following organizations
(and others) in its marketing materials:
A.M. BEST'S RATING SYSTEM evaluates the various factors affecting 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 quantitative and
qualitative review of each company.
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
measures performance of 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
diversification with over 1000 companies across 18 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, including
reports on performance and portfolio analysis, fee and expense analysis.
MOODY'S insurance claims-paying rating is a system of rating insurance company's
financial strength, market leadership, 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
statistical and analytical coverage of open-end and closed-end funds and
variable annuities.
STANDARD & POOR's insurance claims-paying ability rating is an assessment 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 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 contracts.
15
<PAGE>
STANDARD & POOR'S INDEX--broad-based measurement of changes in stock-market
conditions based on the average performance of 500 widely held common stocks;
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. The
index tracks 400 industrial company stocks, 20 transportation stocks, 40
financial company stocks, and 40 public utilities.
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 including American 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.
BOSTON SAFE INDEX--The Boston SAFE (South Africa-Free Equity) Index is a
benchmark developed by The Boston Company, Inc. to measure the effects of
divestiture and the relative performance of South Africa-Free portfolios. The
Boston SAFE Index includes only those stocks within the S&P 500 Stock Index
which meet the following criteria: companies which are not conducting business
in South Africa and banks which are not making loans to South Africa. The
composition of the Boston SAFE Index is adjusted quarterly to reflect new
information. The Index is capitalization-weighted based on shares outstanding
and current stock prices.
In its advertisements and other sales literature for the Variable Account and
the Eligible Funds, LNL 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 limitation, the
literature may emphasize the potential savings through tax deferral; the
potential advantage of the Variable Account over the fixed account; and the
compounding effect when a client makes regular deposits to its Account.
DOLLAR-COST AVERAGING ILLUSTRATIONS. These illustrations will generally discuss
the price-leveling effect of making regular purchases in the same Sub-Accounts
over a period of time, to take advantage of the trends in market prices of the
portfolio securities purchased for those Sub-Accounts.
AUTOMATIC WITHDRAWAL SERVICE. A service provided by LNL, through which a
Contract Owner may take any distribution allowed by Code Section 401(a)(9)
16
<PAGE>
in the case of qualified contracts, or permitted under Code Section 72 in the
case of non-qualified contracts, by way of an automatically generated payment.
LNL'S CUSTOMERS. Sales literature for the Variable Account and the Eligible
Funds may refer to the number of employers and the number of individual annuity
clients which LNL serves. As of the date of this Statement of Additional
Information, LNL was serving over 9,500 organizations and had more than 750,000
annuity clients.
LNL'S ASSETS, SIZE. LNL 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 companies, based upon
recognized evaluation criteria. For example, at year-end 1993 LNL was the
twelfth largest U.S. life insurance company based upon overall assets.
Sales literature may reference the Multi-Fund newsletter which is a newsletter
distributed quarterly to clients of the Multi-Fund.
The contents of the newsletter will be a commentary on general economic
conditions and, on some occasions, referencing matters in connection with the
Multi-Fund product.
Advertisements or sales literature may also describe an Earnings Sweep, which
allows a client to designate one of the variable Sub-Accounts or the Fixed
Account as a holding account, and to transfer earnings from that account to any
other variable Sub-Account. The Contract Owner chooses a specific fund as the
holding account. At specific intervals, account value in the holding account
fund that exceeds a certain designated baseline amount is automatically
transferred to another specified fund(s). The minimum account value required
for the Earnings Sweep feature is 10.000.
Sales literature and advertisements may reference these and other similar
reports from Best's or other similar publications which report on the insurance
and financial services industries.
17
<PAGE>
The Power of Tax-Deferred Growth
The graphs below compare accumulations attributable to contributions to
conventional savings vehicles such as savings accounts at a bank or credit
union, Non-Qualified contracts purchased with after tax contributions, and
qualified contracts purchased with pre-tax contributions under tax-favored
retirement programs.
<TABLE>
<CAPTION>
With Conventional After-Tax
Years Tax Deferral Savings Non-Qualified
- ----- ------------ ------------ -------------
<S> <C> <C> <C>
10 $25,017 $16,049 $18,013
15 46,890 28,143 33,761
20 79,028 44,145 56,900
With Tax
Deferral Conventional After Tax Non-
After All Savings With Qualified After
Years Penalties No Penalties All Penalties
- ----- --------- ------------ ---------------
10 $17,012 $16,049 $16,190
15 28,143 28,143 29,348
20 56,900 44,145 47,688
</TABLE>
The hypothetical chart above compares the results of contributing $1200 per year
($100 per month) during the time periods illustrated. Each graph assumes a 28%
tax rate and an *% fixed rate of return (before fees and charges). For tax
deferred annuities, the results are based on contributing $1,666.66 ($138.88 per
month) during the time periods illustrated. The contributing to the
conventional savings accounts or non-qualified contracts. In this example, it
has been invested by the contributors to the qualified contracts. The deduction
of fees and charges is also indicated in the graph. The dotted lines represent
the amount remaining after deducting any taxes due and all fees (including
surrender charges). Additionally, a 10% tax penalty (not included here) may
apply to withdrawals before age 59 1/2.
The contributions and interest earnings on conventional savings accounts are
usually taxed currently. For non-qualified contracts contributions are usually
taxed currently while earnings are not usually subject to income tax until
withdrawn. However, contributions to and earnings on qualified plans are
ordinarily not subject to income tax until withdrawn. Therefore, having greater
amounts re-invested in a qualified or non-qualified plan increases the
accumulation power of savings over time.
18
<PAGE>
As you can see, a tax-deferred plan can provide a much higher account value over
a long period of time. Therefore, it is an important savings plan for
retirement or for other long-term financial goals. (The above chart is for
illustrative purposes and should not be construed as representative of actual
results, which may be more or less.)
Tax Benefits Today
When you put a portion of your salary in a tax-deferred savings plan, your
savings dollars don't appear as taxable income on your W-2 form at the end of
the calendar year. So while you are saving money, you can reduce your taxes and
increase your take-home pay.
Here's an example: Let's assume you are single, your taxable income is $50,000,
and you are in the 28% tax bracket.
<TABLE>
<CAPTION>
Traditional Savings of
Savings Plan Pre-Tax Dollars
<S> <C> <C>
Your income $50,000 $50,000
Tax-deferred savings -0- $ 2,400
Taxable income $50,000 $47,500
*Estimated federal
income taxes $10,481 $ 9,809
Income after taxes $39,519 $37,791
After tax savings $ 2,400 -0-
Remaining income
after savings and
taxes $37,119 $37,791
</TABLE>
With a tax-deferred plan, you have $672 more spendable income each year because
you are paying less taxes.
*The above chart assumes a 28% marginal federal tax rate on conventional
contributions. TDA contributions are generally taxed as ordinary income when
withdrawn. Federal tax penalties generally apply to distributions prior to age
59 1/2. For illustrative purposes only.
19
<PAGE>
<TABLE>
<CAPTION>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT C
STATEMENT OF ASSETS AND LIABILITY
December 31, 1994
Percent Aggressive Capital Equity-
of Net Growth Bond Appreciation Income
Assets Combined Account Account Account Account
ASSETS ------- -------- ---------- ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Investments at net asset value:
Lincoln National Aggressive Growth Fund, Inc.-
6,694,594 shares at $9.05 per share
(cost-$61,847,612) ............................. 1.9% $60,571,464 $60,571,464
Lincoln National Bond Fund, Inc.-
17,789,207 shares at $10.94 per share
(cost-$210,708,994) ............................ 6.2 194,635,342 $194,635,342
Lincoln National Capital Appreciation Fund, Inc.-
5,195,560 shares at $10.15 per share
(cost-$52,410,495) ............................ 1.7 52,742,777 $52,742,777
Lincoln National Equity-Income Fund, Inc.-
7,605,622 shares at $10.34 per share
(cost-$78,440,704) ............................. 2.5 78,604,942 $78,604,942
Lincoln National Growth Fund, Inc.-
49,442,517 shares at $23.30 per share
(cost-$1,048,673,214) ......................... 36.9 1,151,825,561
Lincoln National International Fund, Inc.-
24,263,829 shares at $13.03 per share
(cost-$289,075,403) ........................... 10.1 316,151,937
Lincoln National Managed Fund, Inc.-
34,495,872 shares at $12.78 per share
(cost-$439,874,663) ........................... 14.1 440,963,799
Lincoln National Money Market Fund, Inc.-
7,629,689 shares at $10.00 per share
(cost-$76,296,871) ............................ 2.5 76,296,871
Lincoln National Putnam Master Fund, Inc.-
17,557,514 shares at $11.14 per share
(cost-$193,967,807) ........................... 6.3 195,654,236
Lincoln National Social Awareness Fund, Inc.-
9,824,114 shares at $16.64 per share
(cost-$155,477,647) ........................... 5.2 163,496,132
Lincoln National Special Opportunities Fund, Inc.-
14,003,011 shares at $22.16 per share
(cost-$317,475,491) ........................... 9.9 310,369,211
----- -------------- ----------- ------------ ----------- -----------
TOTAL INVESTMENTS (Cost-$2,924,248,901) 97.3 3,041,312,272 60,571,464 194,635,342 52,742,777 78,604,942
DIVIDENDS RECEIVABLE 2.8 86,529,660 65,756 13,466,382 351,812 912,700
----- -------------- ----------- ------------ ----------- -----------
TOTAL ASSETS 100.1 3,127,841,932 60,637,220 208,101,724 53,094,589 79,517,642
LIABILITY-Payable to The Lincoln National Life Insurance
Company ...................................... 0.1 2,611,537 48,267 176,398 42,902 63,862
----- -------------- ----------- ------------ ----------- -----------
NET ASSETS 100.0% $3,125,230,395 $60,588,953 $207,925,326 $53,051,687 $79,453,780
===== ============== =========== ============ =========== ===========
Net assets are represented by:
Units in accumulation period-Qualified 67,546,755 56,549,311 52,124,647 75,382,758
Units in accumulation period-Non-Qualified - 1,350,775 - -
Annuity reserves units 56,609 105,698 37,027 541,264
Unit value $0.896 $3.585 $1.017 $1.046
Value in accumulation period-Qualified $60,538,218 $202,704,508 $53,014,028 $78,887,352
Value in accumulation period-Non-Qualified - 4,841,937 - -
Annuity reserves 50,735 378,881 37,659 566,428
----------- ------------ ----------- -----------
$60,588,953 $207,925,326 $53,051,687 $79,453,780
=========== ============ =========== ===========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT C
STATEMENT OF ASSETS AND LIABILITY
December 31, 1994
Money
Growth International Managed Market
ASSETS Account Account Account Account
------- ------------- ------- -------
<S> <C> <C> <C> <C>
Investments at net asset value:
Lincoln National Aggressive Growth Fund, Inc.-
6,694,594 shares at $9.05 per share
(cost-$61,847,612) .............................
Lincoln National Bond Fund, Inc.-
17,789,207 shares at $10.94 per share
(cost-$210,708,994) ............................
Lincoln National Capital Appreciation Fund, Inc.-
5,195,560 shares at $10.15 per share
(cost-$52,410,495) ............................
Lincoln National Equity-Income Fund, Inc.-
7,605,622 shares at $10.34 per share
(cost-$78,440,704) .............................
Lincoln National Growth Fund, Inc.-
49,442,517 shares at $23.30 per share
(cost-$1,048,673,214) ......................... $1,151,825,561
Lincoln National International Fund, Inc.-
24,263,829 shares at $13.03 per share
(cost-$289,075,403) ........................... $316,151,937
Lincoln National Managed Fund, Inc.-
34,495,872 shares at $12.78 per share
(cost-$439,874,663) ........................... $440,963,799
Lincoln National Money Market Fund, Inc.-
7,629,689 shares at $10.00 per share
(cost-$76,296,871) ............................ $76,296,871
Lincoln National Putnam Master Fund, Inc.-
17,557,514 shares at $11.14 per share
(cost-$193,967,807) ...........................
Lincoln National Social Awareness Fund, Inc.-
9,824,114 shares at $16.64 per share
(cost-$155,477,647) ...........................
Lincoln National Special Opportunities Fund, Inc.-
14,003,011 shares at $22.16 per share
(cost-$317,475,491) ...........................
-------------- ------------ ------------ -----------
TOTAL INVESTMENTS (Cost-$2,924,248,901) 1,151,825,561 316,151,937 440,963,799 76,296,871
DIVIDENDS RECEIVABLE 31,465,212 651,758 20,127,726 3,162,544
-------------- ------------ ------------ -----------
TOTAL ASSETS 1,183,290,773 316,803,695 461,091,525 79,459,415
LIABILITY-Payable to The Lincoln National Life Insurance
Company ...................................... 990,603 261,126 389,649 68,773
-------------- ------------ ------------ -----------
NET ASSETS $1,182,300,170 $316,542,569 $460,701,876 $79,390,642
============== ============ ============ ===========
Net assets are represented by:
Units in accumulation period-Qualified 250,259,373 248,639,250 164,089,087 36,048,748
Units in accumulation period-Non-Qualified 3,361,541 - 3,094,840 1,057,089
Annuity reserves units 3,795,433 351,825 527,890 45,266
Unit value $4.593 $1.271 $2.747 $2.137
Value in accumulation period-Qualified $1,149,428,553 $316,095,294 $450,750,291 $77,034,947
Value in accumulation period-Non-Qualified 15,439,386 - 8,501,479 2,258,963
Annuity reserves 17,432,231 447,275 1,450,106 96,732
-------------- ------------ ------------ -----------
$1,182,300,170 $316,542,569 $460,701,876 $79,390,642
============== ============ ============ ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Putnam Social Special
Master Awareness Opportunities
Account Account Account
------- --------- -------------
<C> <C> <C>
Investments at net asset value:
Lincoln National Aggressive Growth Fund, Inc.-
6,694,594 shares at $9.05 per share
(cost-$61,847,612) .............................
Lincoln National Bond Fund, Inc.-
17,789,207 shares at $10.94 per share
(cost-$210,708,994) ............................
Lincoln National Capital Appreciation Fund, Inc.-
5,195,560 shares at $10.15 per share
(cost-$52,410,495) ............................
Lincoln National Equity-Income Fund, Inc.-
7,605,622 shares at $10.34 per share
(cost-$78,440,704) .............................
Lincoln National Growth Fund, Inc.-
49,442,517 shares at $23.30 per share
(cost-$1,048,673,214) .........................
Lincoln National International Fund, Inc.-
24,263,829 shares at $13.03 per share
(cost-$289,075,403) ...........................
Lincoln National Managed Fund, Inc.-
34,495,872 shares at $12.78 per share
(cost-$439,874,663) ...........................
Lincoln National Money Market Fund, Inc.-
7,629,689 shares at $10.00 per share
(cost-$76,296,871) ............................
Lincoln National Putnam Master Fund, Inc.-
17,557,514 shares at $11.14 per share
(cost-$193,967,807) ........................... $195,654,236
Lincoln National Social Awareness Fund, Inc.-
9,824,114 shares at $16.64 per share
(cost-$155,447,647) ........................... $163,496,132
Lincoln National Special Opportunities Fund, Inc.-
14,003,011 shares at $22.16 per share
(cost-$317,475,491) ........................... $310,369,211
------------ ------------ ------------
TOTAL INVESTMENTS (Cost-$2,924,248,901) 195,654,236 163,496,132 310,369,211
DIVIDENDS RECEIVABLE 5,639,442 3,407,946 7,278,382
------------ ------------ ------------
TOTAL ASSETS 201,293,678 166,904,078 317,647,593
LIABILITY-Payable to The Lincoln National Life Insurance
Company ...................................... 168,697 139,395 261,865
------------ ------------ ------------
NET ASSETS $201,124,981 $166,764,683 $317,385,728
============ ============ ============
Net assets are represented by:
Units in accumulation period-Qualified 119,249,084 82,231,222 72,648,315
Units in accumulation period-Non-Qualified 2,811,656 837,770 1,025,226
Annuity reserves units 443,950 117,630 78,084
Unit value $1.642 $2.005 $4.303
Value in accumulation period-Qualified $195,780,011 $164,849,386 $312,637,698
Value in accumulation period-Non-Qualified 4,616,104 1,679,483 4,412,000
Annuity reserves 728,866 235,814 336,030
------------ ------------ ------------
$201,124,981 $166,764,683 $317,385,728
============ ============ ============
See accompanying notes to financial statements.
</TABLE>
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT C
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1994
<TABLE>
<CAPTION>
Aggressive Capital Equity-
Growth Bond Appreciation Income
Combined Account Account Account Account
-------- ---------- ------- ------------ -------
<S> <C> <C> <C> <C> <C>
Net investment income(loss):
Dividends from investment income $ 86,529,660 $ 65,756 $ 13,466,382 $ 351,812 $ 912,700
Dividends from net realized gains
on investments 108,541,943 - 9,433,143 - -
Mortality and expense guarantees (28,835,549) (312,253) (2,173,259) (267,943) (372,574)
------------- ----------- ------------ --------- ---------
NET INVESTMENT INCOME(LOSS) 166,236,054 (246,497) 20,726,266 83,869 540,126
Net realized and unrealized
gain(loss) on investments:
Net realized gain(loss) on investments 1,969,702 (13,022) (683,555) 432 6,346
Net change in unrealized appreciation or
depreciation on investments (199,112,550) (1,276,148) (31,910,949) 332,282 164,238
------------- ----------- ------------ --------- ---------
NET GAIN(LOSS) ON INVESTMENTS (197,142,848) (1,289,170) (32,594,504) 332,714 170,584
------------- ----------- ------------ --------- ---------
NET INCREASE(DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $ (30,906,794) $(1,535,667) $(11,868,238) $ 416,583 $ 710,710
============= =========== ============ ========= =========
</TABLE>
<TABLE>
<CAPTION>
Money Putnam Social Special
Growth International Managed Market Master Awareness Opportunities
Account Account Account Account Account Account Account
------- ------------- ------- ------- ------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net investment income(loss):
Dividends from investment income $ 31,465,212 $ 651,758 $ 20,127,726 $3,162,544 $ 5,639,442 $ 3,407,946 $ 7,278,382
Dividends from net realized gains
on investments 45,597,133 - 17,799,671 - 10,629,009 7,339,542 17,743,445
Mortality and expense guarantees (11,216,851) (2,625,550) (4,633,932) (850,549) (1,873,663) (1,553,446) (2,955,529)
------------ ----------- ------------ ---------- ----------- ----------- -----------
NET INVESTMENT INCOME(LOSS) 65,845,494 (1,973,792) 33,293,465 2,311,995 14,394,788 9,194,042 22,066,298
Net realized and unrealized
gain(loss) on investments:
Net realized gain(loss) on investments 1,910,076 615,665 327,561 - 128,622 327,723 (650,146)
Net change in unrealized appreciation or
depreciation on investments (64,677,388) 3,692,172 (47,159,981) - (19,874,725) (10,984,286) (27,417,765)
------------ ----------- ------------ ---------- ----------- ----------- -----------
NET GAIN(LOSS) ON INVESTMENTS (62,767,312) 4,307,837 (46,832,420) - (19,746,103) (10,656,563) (28,067,911)
------------ ----------- ------------ ---------- ----------- ----------- -----------
NET INCREASE(DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $ 3,078,182 $ 2,334,045 $(13,538,955) $2,311,995 $(5,351,315) $(1,462,521) $(6,001,613)
============ =========== ============ ========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT C
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Years ended December 31, 1994 and 1993 Aggressive Capital Equity-
Growth Bond Appreciation Income
Combined Account Account Account Account
-------- ---------- ------- ------------ -------
<S> <C> <C> <C> <C> <C>
NET ASSETS AT JANUARY 1, 1993 $1,839,053,720 $ - $179,803,502 $ - $ -
Changes from operations:
Net investment income(loss) 113,763,544 - 14,277,626 - -
Net realized gain on
investments 5,103,619 - 511,737 - -
Net change in unrealized appreciation
or depreciation on investments 141,130,008 - 6,502,740 - -
-------------- ----------- ------------ ----------- -----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 259,997,171 - 21,292,103 - -
Net increase(decrease) from unit
transactions 463,452,869 110,000 36,634,503 110,000 110,000
-------------- ----------- ------------ ----------- -----------
TOTAL INCREASE(DECREASE) IN
NET ASSETS 723,450,040 110,000 57,926,606 110,000 110,000
-------------- ----------- ------------ ----------- -----------
NET ASSETS AT DECEMBER
31, 1993 2,562,503,760 110,000 237,730,108 110,000 110,000
Changes from operations:
Net investment income(loss) 166,236,054 (246,497) 20,726,266 83,869 540,126
Net realized gain(loss) on investments 1,969,702 (13,022) (683,555) 432 6,346
Net change in unrealized appreciation
or depreciation on investments (199,112,550) (1,276,148) (31,910,949) 332,282 164,238
-------------- ----------- ------------ ----------- -----------
NET INCREASE(DECREASE) IN
NET ASSETS RESULTING FROM
OPERATIONS (30,906,794) (1,535,667) (11,868,238) 416,583 710,710
Net increase(decrease) from unit
transactions 593,633,429 62,014,620 (17,936,544) 52,525,104 78,633,070
-------------- ----------- ------------ ----------- -----------
TOTAL INCREASE(DECREASE) IN
NET ASSETS 562,726,635 60,478,953 (29,804,782) 52,941,687 79,343,780
-------------- ----------- ------------ ----------- -----------
NET ASSETS AT DECEMBER
31, 1994 $3,125,230,395 $60,588,953 $207,925,326 $53,051,687 $79,453,780
============== =========== ============ =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Years ended December 31, 1994 and 1993 Money Putnam Social Special
Growth International Managed Market Master Awareness Opportunities
Account Account Account Account Account Account Account
------- ------------- ------- ------- ------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSETS AT JANUARY 1, 1993 $ 778,952,062 $ 45,722,238 $357,416,457 $96,076,282 $ 98,705,388 $ 91,330,087 $191,047,704
Changes from operations:
Net investment income(loss) 34,140,774 (773,258) 24,795,656 1,604,058 4,704,553 4,014,307 30,999,828
Net realized gain on
investments 2,438,946 304,973 413,002 - 158,221 761,322 515,418
Net change in unrealized appreciation
or depreciation on investments 68,572,705 26,143,331 15,136,119 - 13,406,070 8,619,897 2,749,146
-------------- ------------ ------------ ----------- ------------ ------------ ------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 105,152,425 25,675,046 40,344,777 1,604,058 18,268,844 13,395,526 34,264,392
Net increase(decrease) from unit
transactions 164,904,155 90,021,163 62,860,068 (14,915,484) 40,059,846 34,915,227 48,643,391
-------------- ------------ ------------ ----------- ------------ ------------ ------------
TOTAL INCREASE(DECREASE) IN
NET ASSETS 270,056,580 115,696,209 103,204,845 (13,311,426) 58,328,690 48,310,753 82,907,783
-------------- ------------ ------------ ----------- ------------ ------------ ------------
NET ASSETS AT DECEMBER
31, 1993 1,049,008,642 161,418,447 460,621,302 82,764,856 157,034,078 139,640,840 273,955,487
Changes from operations:
Net investment income(loss) 65,845,494 (1,973,792) 33,293,465 2,311,995 14,394,788 9,194,042 22,066,298
Net realized gain(loss) on investments 1,910,076 615,665 327,561 - 128,622 327,723 (650,146)
Net change in unrealized appreciation
or depreciation on investments (64,677,388) 3,692,172 (47,159,981) - (19,874,725) (10,984,286) (27,417,765)
-------------- ------------ ------------ ----------- ------------ ------------ ------------
NET INCREASE(DECREASE) IN
NET ASSETS RESULTING FROM
OPERATIONS 3,078,182 2,334,045 (13,538,955) 2,311,995 (5,351,315) (1,462,521) (6,001,613)
Net increase(decrease) from unit
transactions 130,213,346 152,790,077 13,619,529 (5,686,209) 49,442,218 28,586,364 49,431,854
-------------- ------------ ------------ ----------- ------------ ------------ ------------
TOTAL INCREASE(DECREASE) IN
NET ASSETS 133,291,528 155,124,122 80,574 (3,374,214) 44,090,903 27,123,843 43,430,241
-------------- ------------ ------------ ----------- ------------ ------------ ------------
NET ASSETS AT DECEMBER
31, 1994 $1,182,300,170 $316,542,569 $460,701,876 $79,390,642 $201,124,981 $166,764,683 $317,385,728
============== ============ ============ =========== ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT C
NOTES TO FINANCIAL STATEMENTS
December 31, 1994
1. ACCOUNTING POLICIES
The Account:
Lincoln National Variable Annuity Account C (the Account) is a segregated
investment account of The Lincoln National Life Insurance Company (the Company)
and is registered under the Investment Company Act of 1940, as amended, as a
unit investment trust.
Investments: The Account invests in Lincoln National Aggressive Growth Fund,
Inc., Lincoln National Bond Fund, Inc., Lincoln National Capital Appreciation
Fund, Inc., Lincoln National Equity-Income Fund, Inc., Lincoln National Growth
Fund, Inc., Lincoln National International Fund, Inc., Lincoln National Managed
Fund, Inc., Lincoln National Money Market Fund, Inc., Lincoln National Putnam
Master Fund, Inc., Lincoln National Social Awareness Fund, Inc., and Lincoln
National Special Opportunities Fund, Inc. (the Funds). Investments in the Funds
are stated at the closing net asset values per share on December 31, 1994. The
Funds are registered as open-end management investment companies.
Investment transactions are accounted for on a trade date basis and dividend
income is recorded on the ex-dividend date. The cost of investments sold is
determined by the average cost method.
Dividends:
Dividends paid to the Account are automatically reinvested in shares of the
Funds on the payable date.
Federal Income Taxes:
Operations of the 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. Using current law, no federal income taxes are payable with respect to the
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 5%. Reserves on contracts involving life
contingencies are calculated using a modification of the 1971 Individual
Annuitant Mortality Table and an assumed investment rate of 5%.
2. MORTALITY AND EXPENSE GUARANTEES AND OTHER TRANSACTIONS WITH AFFILIATE
Amounts are paid to the Company for mortality and expense guarantees at the rate
of .002745% of the current value of the Account per day (1.002% on an annual
basis).
Amounts retained during 1994 by the Company from the proceeds of sales of
annuity contracts for contract charges and for surrender charges were as
follows:
Aggressive Growth Account $ 26,872
Bond Account 392,399
Capital Appreciation Account 24,655
Equity-Income Account 31,660
Growth Account 2,178,275
International Account 336,995
Managed Account 831,180
Money Market Account 170,400
Putnam Master Account 330,648
Social Awareness Account 348,544
Special Opportunities Account 483,182
----------
$5,154,810
<PAGE>
3. NET ASSETS
Net assets at December 31, 1994 consisted of the following:
<TABLE>
<CAPTION>
Aggressive Capital Equity-
Growth Bond Appreciation Income Growth International
Combined Account Account Account Account Account Account
-------- ---------- ------- ------------ ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Unit Transactions:
Accumulation units $2,322,671,698 $62,068,385 $130,161,528 $52,597,562 $78,173,499 $ 834,447,969 $291,146,777
Annuity reserves 18,033,151 56,235 351,414 37,542 569,571 14,089,547 387,627
-------------- ----------- ------------ ----------- ----------- -------------- ------------
2,340,704,849 62,124,620 130,512,942 52,635,104 78,743,070 848,537,516 291,534,404
Accumulated net investment
income(loss) 625,514,655 (246,497) 93,547,538 83,869 540,126 220,244,400 (2,964,623)
Accumulated net realized gain
(loss) on investments 41,947,520 (13,022) (61,502) 432 6,346 10,365,907 896,254
Net unrealized appreciation
(depreciation) on investments 117,063,371 (1,276,148) (16,073,652) 332,282 164,238 103,152,347 27,076,534
-------------- ----------- ------------ ----------- ----------- -------------- ------------
$3,125,230,395 $60,588,953 $207,925,326 $53,051,687 $79,453,780 $1,182,300,170 $316,542,569
============== =========== ============ =========== =========== ============== ============
</TABLE>
<TABLE>
<CAPTION>
Money Putnam Social Special
Managed Market Master Awareness Opportunities
Account Account Account Account Account
------- ------- ------- --------- -------------
<S> <C> <C> <C> <C> <C>
Unit Transactions:
Accumulation units $315,642,038 $34,774,309 $164,881,244 $139,963,924 $218,814,463
Annuity reserves 1,311,920 81,717 653,407 223,133 271,038
------------ ----------- ------------ ------------ ------------
316,953,958 34,856,026 165,534,651 140,187,057 219,085,501
Accumulated net investment
income (loss) 141,304,515 44,534,616 33,269,599 15,502,405 79,698,707
Accumulated net realized gain
(loss) on investments 1,354,267 - 634,302 3,056,736 25,707,800
Net unrealized appreciation
(depreciation) on investments 1,089,136 - 1,686,429 8,018,485 (7,106,280)
------------ ----------- ------------ ------------ ------------
$460,701,876 $79,390,642 $201,124,981 $166,764,683 $317,385,728
============ =========== ============ ============ ============
</TABLE>
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT C
NOTES TO FINANCIAL STATEMENTS (Continued)
4. SUMMARY OF CHANGES FROM UNIT TRANSACTIONS
<TABLE>
<CAPTION>
Year Ended December 31
1994 1993
--------------------------- ---------------------------
Units Amount Units Amount
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Aggressive Growth Account
Accumulation Units:
Contract purchases 84,107,448 $76,068,218 110,000 $110,000
Terminated contracts and transfers to annuity reserves (16,670,693) (14,109,833) - -
----------- ----------- ----------- -----------
67,436,755 61,958,385 110,000 110,000
Annuity Reserves:
Transfers from accumulation units and between accounts 59,193 58,724 - -
Annuity payments (2,552) (2,460) - -
Reimbursement of mortality guarantee adjustment (32) (29) - -
----------- ----------- ----------- -----------
56,609 56,235 - -
Bond Account
Accumulation Units:
Contract purchases 16,354,396 58,570,949 23,984,980 86,960,714
Terminated contracts and transfers to annuity reserves (21,219,415) (76,460,665) (14,061,457) (50,510,114)
----------- ----------- ----------- -----------
(4,865,019) (17,889,716) 9,923,523 36,450,600
Annuity Reserves:
Transfers from accumulation units and between accounts 1,727 5,490 101,426 214,573
Annuity payments (15,095) (51,881) (55,018) (30,790)
Receipt (reimbursement) of mortality guarantee adjustment (122) (437) 32 120
----------- ----------- ----------- -----------
(13,490) (46,828) 46,440 183,903
Capital Appreciation Account
Accumulation Units:
Contract purchases 58,317,908 58,239,344 110,000 110,000
Terminated contracts and transfers to annuity reserves (6,303,261) (5,751,782) - -
----------- ----------- ----------- -----------
52,014,647 52,487,562 110,000 110,000
Annuity Reserves:
Transfers from accumulation units and between accounts 45,705 46,320 - -
Annuity payments (8,484) (8,581) - -
Receipt of mortality guarantee adjustment (194) (197) - -
----------- ----------- ----------- -----------
37,027 37,542 - -
Equity-Income Account
Accumulation Units:
Contract purchases 87,288,845 89,340,582 110,000 110,000
Terminated contracts and transfers to annuity reserves (12,016,087) (11,277,083) - -
----------- ----------- ----------- -----------
75,272,758 78,063,499 110,000 110,000
Annuity Reserves:
Transfers from accumulation units and between accounts 590,294 617,160 - -
Annuity payments (49,288) (47,859) - -
Receipt of mortality guarantee adjustment 258 270 - -
----------- ----------- ----------- -----------
541,264 569,571 - -
Growth Account
Accumulation Units:
Contract purchases 71,469,595 324,622,854 77,036,816 330,840,439
Terminated contracts and transfers to annuity reserves (43,920,709) (197,878,237) (39,623,920) (169,991,914)
----------- ----------- ----------- -----------
27,548,886 126,744,617 37,412,896 160,848,525
Annuity Reserves:
Transfers from accumulation units and between accounts 1,037,499 4,701,947 1,192,070 5,003,172
Annuity payments (296,140) (1,289,274) (240,854) (944,743)
Receipt (reimbursement) of mortality guarantee adjustment 12,205 56,056 (611) (2,799)
----------- ----------- ----------- -----------
753,564 3,468,729 950,605 4,055,630
International Account
Accumulation Units:
Contract purchases 194,314,664 246,895,222 115,621,447 127,505,178
Terminated contracts and transfers to annuity reserves (75,225,996) (94,146,874) (36,789,016) (37,819,695)
----------- ----------- ----------- -----------
119,088,668 152,748,348 78,832,431 89,685,483
Annuity Reserves:
Transfers from accumulation units and between accounts 116,964 126,298 358,720 391,489
Annuity payments (83,606) (84,058) (47,450) (52,075)
Reimbursement of mortality guarantee adjustment (402) (511) (3,004) (3,734)
----------- ----------- ----------- -----------
32,956 41,729 308,266 335,680
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Managed Account
Accumulation Units:
Contract purchases 36,109,775 $ 98,575,292 41,448,364 $111,891,488
Terminated contracts and transfers to annuity reserves (31,411,054) (85,243,976) (18,569,502) (49,881,084)
----------- ------------ ----------- ------------
4,698,721 13,331,316 22,878,862 62,010,404
Annuity Reserves:
Transfers from accumulation units and between accounts 188,209 486,300 356,462 944,846
Annuity payments (87,747) (198,953) (48,001) (94,666)
Reimbursement of mortality guarantee adjustment 315 866 (183) (516)
----------- ------------ ----------- ------------
100,777 288,213 308,278 849,664
Money Market Account
Accumulation Units:
Contract purchases 55,509,834 113,503,638 68,480,830 139,996,404
Terminated contracts and transfers to annuity reserves (58,167,403) (119,190,736) (75,710,506) (154,984,019)
----------- ------------ ----------- ------------
(2,657,569) (5,687,098) (7,229,676) (14,987,615)
Annuity Reserves:
Transfers from accumulation units and between accounts 66,325 33,184 40,728 84,246
Annuity payments (65,378) (31,558) (6,195) (12,828)
Receipt (reimbursement) of mortality guarantee adjustment (345) (737) 343 713
----------- ------------ ----------- ------------
602 889 34,876 72,131
Putnam Master Account
Accumulation Units:
Contract purchases 53,015,835 87,399,009 35,585,684 56,389,621
Terminated contracts and transfers to annuity reserves (23,733,003) (38,406,000) (10,681,256) (16,504,286)
----------- ------------ ----------- ------------
29,282,832 48,993,009 24,904,428 39,885,335
Annuity Reserves:
Transfers from accumulation units and between accounts 371,857 516,579 126,453 195,271
Annuity payments (97,734) (63,073) (17,391) (22,648)
Receipt (reimbursement) of mortality guarantee adjustment (2,617) (4,297) 1,118 1,888
----------- ------------ ----------- ------------
271,506 449,209 110,180 174,511
Social Awareness Account
Accumulation Units:
Contract purchases 30,523,160 61,205,129 32,034,651 61,048,162
Terminated contracts and transfers to annuity reserves (16,459,939) (32,685,698) (13,866,877) (26,254,061)
----------- ------------ ----------- ------------
14,063,221 28,519,431 18,167,774 34,794,101
Annuity Reserves:
Transfers from accumulation units and between accounts 48,369 98,958 69,821 135,317
Annuity payments (15,774) (31,992) (7,404) (11,495)
Reimbursement of mortality guarantee adjustment (17) (33) (1,334) (2,696)
----------- ------------ ----------- ------------
32,578 66,933 61,083 121,126
Special Opportunities Account
Accumulation Units:
Contract purchases 37,792,494 162,254,574 46,039,973 186,371,110
Terminated contracts and transfers to annuity reserves (26,432,618) (112,865,138) (34,782,242) (137,908,846)
----------- ------------ ----------- ------------
11,359,876 49,389,436 11,257,731 48,462,264
Annuity Reserves:
Transfers from accumulation units and between accounts 20,826 78,494 50,334 201,975
Annuity payments (10,796) (34,645) (5,550) (20,253)
Reimbursement of mortality guarantee adjustment (332) (1,431) (135) (595)
----------- ------------ ----------- ------------
9,698 42,418 44,649 181,127
------------ ------------
NET INCREASE FROM UNIT TRANSACTIONS $593,633,429 $463,452,869
============ ============
</TABLE>
5. PURCHASES AND SALES OF INVESTMENTS
The aggregate cost of investments purchased and the aggregate proceeds from
investments sold were as follows for 1994:
<TABLE>
<CAPTION>
Aggregate Aggregate
Cost of Proceeds
Purchases from Sales
------------ ------------
<S> <C> <C>
Aggressive Growth Account $62,143,316 $392,682
Bond Account 32,215,598 30,585,497
Capital Appreciation Account 52,389,624 89,561
Equity-Income Account 78,636,197 311,839
Growth Account 208,260,037 20,162,713
International Account 156,414,467 6,040,365
Managed Account 62,232,634 18,443,772
Money Market Account 68,515,610 72,506,966
Putnam Master Account 66,529,540 4,628,817
Social Awareness Account 40,804,767 4,258,487
Special Opportunities Account 114,741,473 45,409,579
------------ ------------
$942,883,263 $202,830,278
============ ============
</TABLE>
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP]
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors of The Lincoln National Life Insurance Company and
Contract Owners of Lincoln National Variable Annuity Account C
We have audited the accompanying statement of assets and liability of Lincoln
National Variable Annuity Account C as of December 31, 1994, and the related
statement of operations for the year then ended, and the statements of changes
in net assets for each of the two years in the period then ended. These
financial statements are the responsibility of the Account's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1994, 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 audits provide 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 Lincoln National Variable
Annuity Account C at December 31, 1994, the results of its operations for the
year then ended and the changes in its net assets for each of the two years in
the period then ended in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Fort Wayne, Indiana
March 10, 1995
<PAGE>
The Lincoln National Life Insurance Company
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1994 1993
------------------------
(000's omitted)
<S> <C> <C>
ASSETS
Investments:
Securities available-for-sale, at
fair value:
Fixed maturity (cost:
1994-$18,193,928;
1993-$18,177,467) $17,692,214 $19,579,414
Equity (cost: 1994-$416,351;
1993-$360,333) 456,333 426,363
Mortgage loans on real estate 2,795,914 3,238,965
Real estate 679,512 600,386
Policy loans 528,731 569,646
Other investments 158,196 140,102
------------------------
Total investments 22,310,900 24,554,876
Cash and invested cash 990,880 590,315
Property and equipment 54,989 108,820
Deferred acquisition costs 1,736,526 1,297,913
Premiums and fees receivable 123,494 160,129
Accrued investment income 367,370 341,692
Assets held in separate accounts 13,000,540 11,195,577
Amounts recoverable from reinsurers 2,069,292 1,213,622
Federal income taxes 134,463 -
Goodwill 3,385 76,322
Other assets 233,708 169,102
------------------------
Total assets $41,025,547 $39,708,368
========================
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31
1994 1993
-------------------------
<S> <C> <C>
(000's omitted)
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Policy liabilities and accruals:
Future policy benefits, claims
and claims expenses $ 7,540,772 $ 8,798,230
Unearned premiums 61,472 59,660
-------------------------
Total policy liabilities and accruals 7,602,244 8,857,890
Contractholder funds 17,028,628 14,862,876
Liabilities related to separate
accounts 13,000,540 11,195,577
Federal income taxes - 196,691
Short-term debt 68,789 66,113
Long-term debt 200 5,721
Other liabilities 1,404,191 1,751,724
-------------------------
Total liabilities 39,104,592 36,936,592
Shareholder's equity:
Common stock, $2.50 par value:
Authorized, issued and outstanding
shares--10 million (owned by Lincoln
National Corporation) 25,000 25,000
Paid-in surplus 791,605 791,444
Earned surplus 1,428,969 1,334,171
Net unrealized gain (loss) on
available-for-sale securities (324,619) 621,161
-------------------------
Total shareholder's equity 1,920,955 2,771,776
-------------------------
Total liabilities and shareholder's
equity $41,025,547 $39,708,368
=========================
</TABLE>
See accompanying notes.
3
<PAGE>
The Lincoln National Life Insurance Company
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
------------------------------------
(000's omitted)
<S> <C> <C> <C>
Revenues:
Insurance premiums $1,099,480 $1,972,630 $1,863,019
Insurance fees 390,384 425,083 359,859
Net investment income 1,673,981 1,823,459 1,650,824
Realized gain (loss) on investments (138,522) 92,150 89,537
Gain (loss) on sale of subsidiary 68,954 (98,500) -
Other 20,946 35,781 39,554
------------------------------------
Total revenues 3,115,223 4,250,603 4,002,793
Benefits and expenses:
Benefits and settlement expenses 2,194,047 3,033,139 2,825,378
Underwriting, acquisition, insurance
and other expenses 660,363 881,703 776,038
Interest expense 615 96 414
------------------------------------
Total benefits and expenses 2,855,025 3,914,938 3,601,830
Income before federal income taxes and
cumulative effect of accounting change 260,198 335,665 400,963
Federal income taxes 40,400 142,544 116,781
------------------------------------
Income before cumulative effect of
accounting change 219,798 193,121 284,182
Cumulative effect of accounting change
(postretirement benefits) - 45,582 -
------------------------------------
Net income $ 219,798 $ 147,539 $ 284,182
====================================
Earnings per share:
Income before cumulative effect of
accounting change $ 21.98 $ 19.31 $ 28.42
Cumulative effect of accounting
change (postretirement benefits) - (4.56) -
------------------------------------
Net income $ 21.98 $ 14.75 $ 28.42
====================================
</TABLE>
See accompanying notes.
4
<PAGE>
The Lincoln National Life Insurance Company
Consolidated Statements of Shareholder's Equity
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
------------------------------------
<S> <C> <C> <C>
(000's omitted)
Common stock--balance
at beginning and end of year $ 25,000 $ 25,000 $ 25,000
Paid-in surplus:
Balance at beginning of year 791,444 791,223 690,062
Contribution from Lincoln
National Corporation 161 221 101,161
------------------------------------
Balance at end of year 791,605 791,444 791,223
Earned surplus:
Balance at beginning of year 1,334,171 1,198,632 914,450
Net income 219,798 147,539 284,182
Dividends declared (125,000) (12,000) -
------------------------------------
Balance at end of year 1,428,969 1,334,171 1,198,632
Net unrealized gain (loss) on
securities available-for-sale:
Balance at beginning of year 621,161 47,303 80,881
Cumulative effect of accounting
change - 564,153 -
Other change during year (945,780) 9,705 (33,578)
------------------------------------
Balance at end of year (324,619) 621,161 47,303
------------------------------------
Total shareholder's equity at end of
year $1,920,955 $2,771,776 $2,062,158
====================================
</TABLE>
See accompanying notes.
5
<PAGE>
The Lincoln National Life Insurance Company
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
-------------------------------------------
<S> <C> <C> <C>
(000's omitted)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 219,798 $ 147,539 $ 284,182
Adjustments to reconcile net income
to net cash provided by operating
activities:
Deferred acquisition costs (171,063) (92,183) (154,143)
Premiums and fees receivable 10,755 80,582 60,226
Accrued investment income (54,434) (18,827) (36,395)
Policy liabilities and 114,038 345,142 120,525
accruals
Contractholder funds 1,769,240 1,248,058 698,561
Amounts recoverable from (884,388) (700,622) -
reinsurers
Federal income taxes 8,364 (130,308) (125,588)
Provisions for depreciation 38,870 41,516 41,014
Amortization of discount and 7,928 (100,274) (55,637)
premium
Realized loss (gain) on 219,682 (115,881) (89,537)
investments
Loss (gain) on sale of (68,954) 98,500 -
subsidiaries
Cumulative effect of - 45,582 -
accounting change
Other (4,599) 51,369 36,058
-------------------------------------------
Net adjustments 985,439 752,654 495,084
-------------------------------------------
Net cash provided by operating 1,205,237 900,193 779,266
activities
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available-for-sale:
Purchases (12,100,213) (7,171,684) (6,858,845)
Sales 9,326,809 7,139,781 6,615,714
Maturities 958,065 42,707 14,265
Fixed maturity securities held for
investment:
Purchases - (5,903,805) (6,705,560)
Sales - 2,805,980 3,619,999
Maturities - 1,639,739 1,446,447
Purchases of other investments (1,421,321) (1,936,013) (1,324,691)
Sales or maturity of other investments 1,457,157 1,142,872 1,008,666
Sale of subsidiaries 520,340 - -
Increase (decrease) in cash collateral
on loaned securities (163,872) (40,454) 307,360
Other (37,606) 83,751 (104,722)
-------------------------------------------
Net cash used in investing activities (1,460,641) (2,197,126) (1,981,367)
</TABLE>
6
<PAGE>
The Lincoln National Life Insurance Company
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
-----------------------------------------
<S> <C> <C> <C>
(000's omitted)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt $ (200) $ (1,138) $ (200)
Issuance of long-term debt - 10,314 -
Net increase (decrease) in short-term 3,629 13,047 (68,104)
debt
Universal life and investment contract 2,381,829 2,418,037 3,113,420
deposits
Universal life and
investment contract withdrawals (1,604,450) (1,503,105) (1,213,435)
Capital contribution from
Lincoln National Corporation 161 221 101,161
Dividends paid to shareholder (125,000) (12,000) -
-----------------------------------------
Net cash provided by financing
activities 655,969 925,376 1,932,842
-----------------------------------------
Net increase (decrease) in cash and
invested cash 400,565 (371,557) 730,741
Cash and invested cash at beginning of
year 590,315 961,872 231,131
-----------------------------------------
Cash and invested cash at end of year $ 990,880 $ 590,315 $ 961,872
=========================================
</TABLE>
See accompanying notes.
7
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements
December 31, 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements of Lincoln National Life
Insurance Company (the Company) and its majority owned subsidiaries have been
prepared in conformity with generally accepted accounting principles.
INVESTMENTS
Recognizing the need for the ability to respond to changes in market conditions
and tax position, the Company has classified its fixed maturity securities and
equity securities (common and non-redeemable preferred stocks) as available-for-
sale and, accordingly, such securities are carried at fair value. The cost of
fixed maturity securities is adjusted for amortization of premiums and
discounts. The cost of fixed maturity and equity securities is adjusted for
declines in value that are other than temporary.
For the mortgage-backed bond portion of the fixed maturity securities portfolio,
the Company recognizes income using a constant effective yield based on
anticipated prepayments and the estimated economic life of the securities. When
actual prepayments differ significantly from anticipated prepayments, the
effective yield is recalculated to reflect actual payments to date and
anticipated future payments. The net investment in the securities is adjusted
to an amount that would have existed had the new effective yield been applied
since the acquisition of the securities. This adjustment is reflected in net
investment income.
Mortgage loans on real estate are carried at outstanding principal balances less
unaccrued discounts. Property and equipment owned for company use are carried
at cost less allowances for depreciation. Policy loans are carried at the
aggregate unpaid balances. All such investments are carried net of reserves for
declines in value that are other than temporary. The change in these reserves
is reported as a realized gain (loss) on investments.
Investment real estate is carried at cost less allowances for depreciation.
Such real estate is carried net of reserves for declines in value that are other
than temporary. Real estate acquired through foreclosure proceedings is
recorded at fair value at the date of acquisition which establishes a new cost
basis. If a subsequent valuation of a foreclosed property indicates the fair
value less estimated costs to sell is lower than the value at acquisition, the
carrying value is adjusted to the lower amount.
8
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash and invested cash are carried at cost, which approximates fair value, and
consist of all highly liquid debt instruments purchased with a maturity of three
months or less, including participation in a short-term investment pool
administered by Lincoln National Corporation (LNC), the Company's parent.
Realized gains (losses) on investments are recognized in income, net of related
amortization (restoration) of deferred acquisition costs, using the specific-
identification method. Changes in the fair values of securities carried at fair
value are reflected directly in shareholder's equity after adjustments for
deferred acquisition costs and amounts required to satisfy policyholder
commitments that would have been recorded if these securities would have been
sold at their fair value, and after deferred taxes or credits to the extent
deemed recoverable.
DERIVATIVES
The Company hedges certain portions of its exposure to fluctuations in interest
and foreign exchange risks by entering into derivative transactions. The
premium paid for interest rate caps is deferred and amortized on a straight-line
basis as an adjustment to net investment income over the term of the interest
rate caps. Any settlement received in accordance with the terms of the interest
rate caps is recorded as investment income. Spread-lock agreements, interest
rate swaps, mortgage-backed securities total return swaps, financial futures
contracts, options on financial futures, and United Kingdom forward swaps, which
hedge fixed maturity securities available-for-sale, are carried at fair value
with changes in fair values reflected directly in shareholder's equity.
Realized gains (losses) from the settlement of such derivatives are deferred and
amortized over the life of the hedged assets as an adjustment to net investment
income.
PREMIUMS AND FEES
Group health premiums are prorated over the contract term of the policies.
Revenues for universal life and other interest-sensitive life insurance policies
consist of policy charges for cost of insurance, policy initiation and
administration and surrender charges that have been assessed. Traditional
individual life-health and annuity premiums are recognized as revenue over the
premium-paying period of the policies.
9
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ASSETS HELD IN SEPARATE ACCOUNTS AND LIABILITIES RELATED TO SEPARATE ACCOUNTS
Separate account assets and liabilities represent segregated funds administered
and invested by the Company for the exclusive benefit of pension and variable
life and annuity contractholders. The Company receives fees for such investment
services which are recorded as revenues.
DEFERRED ACQUISITION COSTS
Commissions and other costs of acquiring group health insurance, universal life
and other interest-sensitive life insurance and traditional life insurance and
annuities, which vary with and are primarily related to the production of new
business, have been deferred to the extent recoverable. Acquisition costs for
universal life and other interest-sensitive life insurance policies are
amortized over the lives of the policies in relation to the incidence of
estimated gross profits from surrender charges and investment, mortality,
expense margins, and actual realized gain (loss) on investments. That
amortization is adjusted retrospectively when estimates of current or future
gross profits to be realized from a group of policies are revised. The
traditional life-health and annuity acquisition costs are amortized over the
premium-paying period of the related policies using assumptions consistent with
those used in computing policy reserves.
EXPENSES
Expenses for universal life and other interest-sensitive life insurance policies
include interest credited to policy account balances and benefits incurred
during the period in excess of policy account balances. Interest crediting
rates associated with funds invested in the Company's general account during
1992 through 1994 ranged from 6.1% to 8.7%.
INTANGIBLE ASSETS
The costs of acquired subsidiaries in excess of the fair value of net assets
(goodwill) are amortized using the straight-line method over periods that
correspond with the benefits expected to be derived from the acquisition
(generally over 20-25 years). The carrying value of intangible assets is
reviewed regularly for indicators of impairment in value.
10
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
POLICY LIABILITIES AND ACCRUALS
The liabilities for future policy benefits and expenses for universal life and
other interest-sensitive life insurance policies consist of policy account
balances that accrue to the benefit of the policyholders, excluding surrender
charges. Liabilities for future policy benefits and expenses for traditional
life and health policies and annuities are computed using a net level premium
method and assumptions for investment yields, mortality, morbidity and
withdrawals based principally on Company experience projected at the time of
policy issue, with provision for possible adverse deviations. Interest
assumptions for traditional direct individual life reserves for all policies
range from 2.3% to 11.7% graded to 5.7% after 30 years depending on time of
policy issue. Interest rate assumptions from reinsurance reserves range from
5.0% to 11.0% graded to 8.0% after 20 years.
REINSURANCE
The Company enters into reinsurance agreements with other companies in the
normal course of their business. The Company may assume reinsurance from
unaffiliated companies and/or cede insurance to such companies. Assets and
liabilities from reinsurance agreements written on a funds withheld basis have
been netted in the balance sheet since there is a right of offset. Assets and
liabilities from other reinsurance agreements are reported on a gross basis.
Reinsurance agreements are reported gross in the accompanying income statement,
except that initial reserves are netted against premiums, when an in-force block
of business is reinsured.
DEPRECIATION
Provisions for depreciation of investment real estate and property and equipment
owned for Company use are computed principally on the straight-line method over
the estimated useful lives of the assets.
POSTRETIREMENT MEDICAL AND LIFE INSURANCE BENEFITS
Effective January 1, 1993, the Company changed its method of accounting for its
postretirement medical and life insurance benefits to the full accrual method
(see Note 2). Prior to January 1, 1993, the Company accounted for such benefits
on a pay-as-you-go method.
11
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company and eligible subsidiaries have elected to file consolidated federal
and state income tax returns with their parent, LNC. Pursuant to an
intercompany tax sharing agreement with LNC, the Company and its eligible
subsidiaries provide for income taxes on a separate return filing basis. The
tax sharing agreement also provides that the Company and eligible subsidiaries
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.
The Company uses the liability method of accounting for income taxes. Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax return purposes. The Company establishes a
valuation allowance for any portion of its deferred tax assets which are
unlikely to be realized.
2. CHANGES IN ACCOUNTING PRINCIPLES AND CHANGES IN ESTIMATES
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Effective January 1, 1993, the Company changed its method of accounting for
postretirement medical and life insurance benefits for its eligible active and
retired employees and agents from a pay-as-you-go method to a full accrual
method in accordance with Financial Accounting Standards No. 106 entitled
"Employers' Accounting for Postretirement Benefits Other Than Pensions" (FAS
106). This full accrual method recognizes the estimated obligation for retired
employees and agents and active employees and agents who are expected to retire
in the future. The effect of the change was to increase net periodic
postretirement benefit cost in 1993 by $7,800,000 and decrease income before
cumulative effect of accounting change by $5,100,000 ($0.51 per share). The
implementation of FAS 106 resulted in a one-time charge to 1993 net income of
$45,582,000 ($69,063,000 pretax) or $4.56 per share for the cumulative effect of
the accounting change. Prior year data has not been restated for the accounting
change. See Note 6 for additional disclosures regarding postretirement benefits
other than pensions.
12
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
2. CHANGES IN ACCOUNTING PRINCIPLES AND CHANGES IN ESTIMATES (CONTINUED)
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN
Financial Accounting Standards No. 114 entitled "Accounting by Creditors for
Impairment of a Loan" (FAS 114) issued in May 1993, was adopted by the Company
effective January 1, 1993. FAS 114 requires that if an impaired mortgage loan's
fair value is less than the recorded investment in the loan, the difference is
recorded in the mortgage loan allowance for losses account. The adoption of FAS
114 resulted in additions to the mortgage loan allowance for losses account and
reduced 1993 income before cumulative effect of accounting change and net income
by $37,700,000, or $3.77 per share ($57,175,000 pre-tax). Most of the effect of
this change in accounting was within the Life Insurance and Annuities segment.
See Note 3 for further mortgage loan disclosures.
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES
Financial Accounting Standards No. 115 entitled "Accounting for Certain
Investments in Debt and Equity Securities" (FAS 115) issued in May 1993, was
adopted by the Company as of December 31, 1993. In accordance with the new
rules, the prior year financial statements have not been restated to reflect the
change in accounting principle. Under FAS 115, securities can be classified as
available-for-sale, trading or held-to-maturity according to the holder's
intent. The Company classified its entire fixed maturity securities portfolio
as "available-for-sale." Securities classified as available-for-sale are
carried at fair value and unrealized gains and losses on such securities are
carried as a separate component of shareholder's equity. The ending balance of
shareholder's equity was increased by $564,153,000 (net of $377,450,000 of
related adjustments to deferred acquisition costs, $50,695,000 of policyholder
commitments and $303,703,000 in deferred income taxes, all of which would have
been recognized if those securities had been sold at their fair value, net of
amounts applicable to Security-Connecticut Corporation) to reflect the net
unrealized gain on fixed maturity securities classified as available-for-sale
previously carried at amortized cost. Prior to the adoption of FAS 115, the
Company carried a portion of its fixed maturity securities at fair value with
unrealized gains and losses included as a separate component of stockholder's
equity. The remainder of the Company's fixed income securities were carried at
amortized cost.
CHANGES IN ESTIMATE FOR NET INVESTMENT INCOME RELATED TO MORTGAGE-BACKED BONDS
At December 31, 1993, the Company had $5,942,132,000 invested in mortgage-backed
bonds. As indicated in Note 1, the Company recognizes income on these
securities using a constant effective yield based on anticipated prepayments.
With the implementation of new investment software in December 1993, the Company
was able to significantly refine its estimate of the
13
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
2. CHANGES IN ACCOUNTING PRINCIPLES AND CHANGES IN ESTIMATES (CONTINUED)
effective yield on such securities to better reflect actual prepayments and
estimates of future prepayments. This resulted in an increase in the
amortization of purchase discount on these securities of $58,036,000 and, after
related amortization of deferred acquisition costs ($18,279,000) and income
taxes ($14,257,000), increased 1993's income before cumulative effect of
accounting change and net income by $25,500,000 or $2.55 per share. Most of the
effect of this change in estimate was within the Life Insurance and Annuities
business segment.
CHANGE IN ESTIMATE FOR REINSURANCE DISABILITY INCOME RESERVES
During December 1993, income before cumulative effect of accounting change and
net income decreased by $15,535,000 or $1.55 per share as the result of
strengthening reinsurance disability income reserves by $23,900,000. The need
for this reserve increase within the Life-Health Reinsurance business segment
was identified as the result of management's assessment of current expectations
for morbidity trends and the impact of lower investment income due to lower
interest rates.
3. INVESTMENTS
The major categories of net investment income are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
------------------------------------
<S> <C> <C> <C>
(000's omitted)
Fixed maturity securities $1,357,402 $1,497,639 $1,346,524
Equity securities 7,384 4,267 5,015
Mortgage loans on real estate 271,344 294,166 289,883
Real estate 97,762 75,162 47,184
Policy loans 32,661 35,978 33,918
Invested cash 46,383 24,794 16,776
Other investments 7,315 8,055 21,898
------------------------------------
1,820,251 1,940,061 1,761,198
Investment expenses 146,270 116,602 110,374
------------------------------------
Net investment income $1,673,981 $1,823,459 $1,650,824
====================================
</TABLE>
14
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
Realized gain (loss) on investments is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
-----------------------------------
<S> <C> <C> <C>
(000's omitted)
Fixed maturity securities
available-for-sale:
Gross gain $ 69,621 $ 91,075 $ 82,650
Gross loss (294,180) (8,421) (34,847)
Equity securities available-for-sale:
Gross gain 50,238 88,368 46,692
Gross loss (50,485) (33,728) (23,511)
Fixed maturity securities held for
investment:
Gross gain - 209,877 194,546
Gross loss - (69,520) (40,843)
Other investments 5,124 (161,770) (135,150)
Related restoration (amortization)
of deferred acquisition costs (81,160) (23,731) -
-----------------------------------
$(138,522) $ 92,150 $ 89,537
===================================
</TABLE>
Write-downs and provisions for losses on investments, which are included in
realized gain (loss) shown above, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
-----------------------------
<S> <C> <C> <C>
(000's omitted)
Fixed maturity securities
(interest only mortgage-backed bonds) $ 704 $ 36,284 $ -
Other fixed maturity securities 13,505 19,354 19,392
Equity securities 6,845 7 -
Mortgage loans on real estate 19,464 136,717 67,643
Real estate 13,058 21,776 53,667
Other long-term investments 262 3,905 18,206
Guarantees 4,280 1,674 5,700
-----------------------------
$58,118 $219,717 $164,608
=============================
</TABLE>
15
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
The change in unrealized appreciation (depreciation) on investments in fixed
maturity and equity securities is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
--------------------------------------
<S> <C> <C> <C>
(000's omitted)
Fixed maturity securities $(1,903,661) $1,387,089 $ (49,658)
available-for-sale
Equity securities available-for-sale (26,048) 9,266 (1,208)
Fixed maturity securities held for - (959,714) (116,748)
investment
--------------------------------------
$(1,929,709) $ 436,641 $(167,614)
======================================
</TABLE>
The cost, gross unrealized gain, gross unrealized loss and fair value of
securities available-for-sale are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994
------------------------------------------------------
GROSS UNREALIZED
---------------------------- FAIR
COST GAIN LOSS VALUE
------------------------------------------------------
<S> <C> <C> <C> <C>
(000's omitted)
Corporate bonds $11,519,299 $143,284 $514,363 $11,148,220
U.S. government bonds 1,048,404 6,889 25,508 1,029,785
Foreign government bonds 541,179 4,700 12,554 533,325
Mortgage-backed bonds 5,017,332 88,929 192,789 4,913,472
State and municipal bonds 16,297 361 - 16,658
Redeemable preferred stocks 51,417 209 872 50,754
------------------------------------------------------
Total fixed maturity securities 18,193,928 244,372 746,086 17,692,214
Equity securities 416,351 56,434 16,452 456,333
------------------------------------------------------
$18,610,279 $300,806 $762,538 $18,148,547
======================================================
</TABLE>
16
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1993
----------------------------------------------------------
GROSS UNREALIZED
------------------------------- FAIR
COST GAIN LOSS VALUE
----------------------------------------------------------
(000's omitted)
<S> <C> <C> <C> <C>
Corporate bonds $11,046,342 $1,037,275 $ (67,254) $12,016,363
U.S. government bonds 1,096,837 29,329 (9,241) 1,116,925
Foreign government bonds 414,639 49,077 (3,741) 459,975
Mortgage-backed bonds 5,578,455 439,852 (76,175) 5,942,132
State and municipal bonds 6,784 737 - 7,521
Redeemable preferred stocks 34,410 12,485 (10,397) 36,498
----------------------------------------------------------
Total fixed maturity securities 18,177,467 1,568,755 (166,808) 19,579,414
Equity securities 360,333 75,777 (9,747) 426,363
----------------------------------------------------------
$18,537,800 $1,644,532 $ (176,555) $20,005,777
==========================================================
</TABLE>
Future maturities of fixed maturity securities available-for-sale are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994
--------------------------
FAIR
COST VALUE
--------------------------
(000's omitted)
<S> <C> <C>
Due in one year or less $ 190,091 $ 194,205
Due after one year through five years 3,226,481 3,168,937
Due after five years through ten years 5,052,886 4,883,436
Due after ten years 4,707,138 4,532,164
--------------------------
13,176,596 12,778,742
Mortgage-backed bonds 5,017,332 4,913,472
--------------------------
$18,193,928 $17,692,214
==========================
</TABLE>
The foregoing data is based on stated maturities. Actual maturities will differ
in some cases because borrowers may have the right to call or pre-pay
obligations.
17
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
At December 31, 1994, the par, amortized cost and estimated fair value of
investments in mortgage-backed bonds summarized by interest rates of the
underlying collateral are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994
------------------------------------
FAIR
PAR COST VALUE
------------------------------------
<S> <C> <C> <C>
(000's omitted)
Below 7% $ 88,581 $ 79,114 $ 74,858
7%-8% 1,330,538 1,296,444 1,210,303
8%-9% 1,642,115 1,582,083 1,535,659
Above 9% 2,157,721 2,059,691 2,092,652
------------------------------------
$5,218,955 $5,017,332 $4,913,472
====================================
</TABLE>
At December 31, 1994, the Company's fixed maturity portfolio consists of
securities with credit quality ratings in the following proportions.
<TABLE>
<CAPTION>
<S> <C>
Treasuries and AAA 35.8%
AA 7.4
A 25.8
BBB 23.9
BB 4.1
Less than BB 3.0
----------
100.0%
==========
</TABLE>
Mortgage loans on real estate are considered impaired when, based on current
information and events, it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. When the Company determines that a loan is impaired a provision for
loss is established for the difference between the carrying value of the
mortgage loan and the estimated value. Estimated value is based on either the
present value of expected future cash flows discounted at the loan's effective
interest rate, the loan's observable market price or the fair value of the
loan's collateral. The provision for losses is reported as realized gain (loss)
on investments. Mortgage loans deemed to be uncollectible are charged against
the provision for losses and subsequent recoveries, if any, are credited to the
provision for losses.
18
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
The provision for losses is maintained at a level believed adequate by
management to absorb estimated probable credit losses. Management's periodic
evaluation of the adequacy of the provision for losses is based on the Company's
past loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay (including the timing
of future payments), the estimated value of the underlying collateral,
composition of the loan portfolio, current economic conditions and other
relevant factors. This evaluation is inherently subjective as it requires
estimating the amounts and timing of future cash flows expected to be received
on impaired loans that may be susceptible to significant change.
Impaired loans along with the related provision for losses is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1994 1993
----------------------
<S> <C> <C>
(000's omitted)
Impaired loans with provision for losses $246,000 $ 703,900
Provision for losses (56,614) (220,671)
Impaired loans with no provision for
losses 2,200 7,800
----------------------
Net impaired loans $191,586 $ 491,029
======================
</TABLE>
Impaired loans without provision for losses are a result of direct write-downs
or for collateral dependent loans where the fair value of the collateral is
greater than the recorded investment in loans.
A reconciliation of the mortgage loan provision for losses for these impaired
mortgage loans is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
---------------------------------
<S> <C> <C> <C>
(000's omitted)
Balance at beginning of year $ 220,671 $129,093 $ 68,437
Provisions for losses 19,464 79,542 90,183
Provision for adoption of FAS 114 - 57,175 -
Releases due to sales (164,605) (12,253) (6,987)
Releases due to foreclosures (18,916) (32,886) (22,540)
---------------------------------
Balance at end of year $ 56,614 $220,671 $129,093
=================================
</TABLE>
19
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
The average recorded investment in impaired loans and the interest income
recognized on impaired loans were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993
------------------------
<S> <C> <C>
(000's omitted)
Average recorded investment in impaired
loans $467,500 $703,600
Interest income recognized on impaired
loans 36,100 47,300
</TABLE>
All interest income on impaired loans was recognized on the cash basis of income
recognition.
As of December 31, 1994 and 1993, the Company had restructured loans of
$36,209,000 and $88,913,000, respectively. The Company recorded $800,000 and
$6,610,000 interest income on these restructured loans in 1994 and 1993,
respectively. Interest income in the amount of $3,861,000 and $9,564,000 would
have been recorded on these loans according to their original terms in 1994 and
1993, respectively. As of December 31, 1993, the Company had commitments to
lend $132,000 on restructured loans. No such commitments were outstanding as of
December 31, 1994.
As of December 31, 1994, the Company's investment commitments for fixed maturity
securities (primarily private placements), mortgage loans on real estate and
real estate were $307,677,000.
Fixed maturity securities available-for-sale, mortgage loans on real estate and
real estate with a combined carrying value at December 31, 1994 of $38,571,000
were non-income producing for the year ended December 31, 1994.
20
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
The cost information for mortgage loans on real estate, real estate and other
long-term investments are net of provisions for losses. The balance sheet
account for other liabilities includes a reserve for guarantees of third-party
debt. The amount of provisions and reserves for such items is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1994 1993
--------------------
<S> <C> <C>
(000's omitted)
Mortgage loans on real estate $ 56,614 $220,671
Real estate 65,186 121,427
Other long-term investments 13,492 26,730
Guarantees - 1,804
--------------------
$135,292 $370,632
====================
</TABLE>
Details underlying the balance sheet caption "Net Unrealized Gain (Loss) on
Securities Available-for-Sale," are as follows:
<TABLE>
<CAPTION>
1994 1993
---------------------------
<S> <C> <C>
(000's omitted)
Fair value of securities
available-for-sale $18,148,547 $20,005,777
Cost of securities available-for-sale 18,610,279 18,537,800
---------------------------
Unrealized gain (loss) (461,732) 1,467,977
Adjustments to deferred acquisition
costs 158,223 (421,969)
Adjustments to amounts required
to satisfy policyholder commitments 8,590 (46,138)
Amounts related to disposal of
subsidiary included in other
liabilities - (30,051)
Deferred income credits (taxes) 105,900 (348,658)
Valuation allowance on deferred income
tax assets (135,600) -
---------------------------
Net unrealized gain (loss) on
securities available-for-sale $ (324,619) $ 621,161
===========================
</TABLE>
Adjustments to deferred acquisition costs and amounts required to satisfy
policyholder commitments are netted against the deferred acquisition costs and
included with the future policy benefits and claims liabilities in the balance
sheet, respectively.
21
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
4. FEDERAL INCOME TAXES
The federal income tax before cumulative effect of accounting change is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
--------------------------------
(000's omitted)
<S> <C> <C> <C>
Current income tax expense (credit) $(93,469) $ 261,334 $ 239,365
Deferred income tax expense (credit) 133,869 (118,790) (122,584)
--------------------------------
$ 40,400 $ 142,544 $ 116,781
================================
</TABLE>
Cash paid for federal income taxes in 1994, 1993 and 1992 was $41,373,000,
$272,637,000 and $241,753,000, respectively.
The Omnibus Reconciliation Act of 1993 (1993 Act) changed the Company's
prevailing corporate federal income tax rate from 34% to 35% effective January
1, 1993. The application of this new tax rate to the December 31, 1992 deferred
tax recoverable balance resulted in a decrease in federal income taxes of
$400,000 for 1993.
The effective tax rate on pre-tax income before cumulative effect of accounting
change is lower than the prevailing corporate federal income tax rate. A
reconciliation of this difference is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
------------------------------
(000's omitted)
<S> <C> <C> <C>
Tax rate times pre-tax income $ 91,069 $117,483 $136,327
Effect of:
Tax-exempt investment income (21,451) (16,165) (11,304)
Participating policyholders' share 3,378 4,149 (2,530)
Gain (loss) on sale of subsidiary (24,134) 34,475 -
Other items (8,462) 2,602 (5,712)
------------------------------
Provision for income taxes $ 40,400 $142,544 $116,781
==============================
Effective tax rate 15.5% 42.5% 29.1%
==============================
</TABLE>
22
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
4. FEDERAL INCOME TAXES (CONTINUED)
The federal income tax recoverable (liability) is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1994 1993
-------------------
(000's omitted)
<S> <C> <C>
Current $118,172 $ (29,243)
Deferred 16,291 (167,448)
-------------------
$134,463 $(196,691)
===================
</TABLE>
Significant components of the Company's net deferred tax asset (liability) are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1994 1993
-------------------
(000's omitted)
<S> <C> <C>
Deferred tax assets:
Policy liabilities and accruals and
contractholder funds $430,900 $ 532,700
Loss on investments 16,800 135,900
Net unrealized loss on securities
available-for-sale 161,600 -
Postretirement benefits other than
pensions 24,200 15,500
Other 34,600 70,100
-------------------
Total deferred tax assets 668,100 754,200
Valuation allowance for deferred tax
assets 135,600 -
-------------------
Net deferred tax assets 532,500 754,200
Deferred tax liabilities:
Deferred acquisition costs 475,500 325,400
Net unrealized gain on securities
available-for-sale - 509,000
Tax over book depreciation - 19,400
Other 40,709 67,848
-------------------
Total deferred tax liabilities 516,209 921,648
-------------------
Net deferred tax (liability) asset $ 16,291 $(167,448)
===================
</TABLE>
23
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
4. FEDERAL INCOME TAXES (CONTINUED)
The Company is required to establish a "valuation allowance" for any portion of
its deferred tax assets which are unlikely to be realized. At December 31,
1994, $161,600,000 of deferred tax assets relating to net unrealized capital
losses on fixed maturity and equity securities available-for-sale were available
to be recorded in shareholder's equity before considering a valuation allowance.
For federal income tax purposes, capital losses may only be used to offset
capital gains in the current year or during a three-year carryback and five-year
carryforward period. Due to these restrictions, and the uncertainty of future
capital gains, these deferred tax assets have been substantially offset by a
valuation allowance of $135,600,000. With the exception of the deferred tax
assets relating to unrealized capital losses on available-for-sale securities,
management believes it is more likely than not that the Company will realize the
benefit of its deferred tax assets. Accordingly, a valuation allowance was
established in shareholder's equity as of December 31, 1994 relating to
unrealized capital losses on available-for-sale securities.
Prior to 1984, a portion of the life companies' current income was not subject
to current income tax, but was accumulated for income tax purposes in a
memorandum account designated as "policyholders' surplus." The total of the life
companies' balances in their respective "policyholders' surplus" accounts at
December 31, 1983 of $204,800,000 was "frozen" by the Tax Reform Act of 1984
and, accordingly, there have been no additions to the accounts after that date.
That portion of current income on which income taxes have been paid will
continue to be accumulated in a memorandum account designated as "shareholder
surplus," and is available for dividends to the shareholder without additional
payment of tax. The December 31, 1994 total of the life companies' account
balances for their respective "shareholder surplus" was $1,455,100,000. Should
dividends to the shareholder for each life company exceed its respective
"shareholder surplus," amounts would need to be transferred from its respective
"policyholders' surplus" and would be subject to federal income tax at that
time. In connection with the 1993 sale of Security-Connecticut (see Note 10),
$8,800,000 was transferred from policyholders' surplus to shareholder surplus
and current income tax of $3,100,000 was paid. Under existing or foreseeable
circumstances, the Company neither expects nor intends that distributions will
be made from the remaining balance in "policyholders' surplus" of $196,000,000
that will result in any such tax. Accordingly, no provision for deferred income
taxes has been provided by the Company on its "policyholders' surplus" account.
In the event that such excess distributions were made, it is estimated that
income taxes of approximately $68,600,000 would be due.
24
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
5. SUPPLEMENTAL FINANCIAL DATA
The balance sheet captions, "Real Estate," "Other Investments" and "Property and
Equipment" are shown net of allowances for depreciation as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1994 1993
---------------------
(000's omitted)
<S> <C> <C>
Real estate $ 36,991 $ 31,541
Other investments 12,182 12,321
Property and equipment 104,657 144,046
</TABLE>
Details underlying the balance sheet caption, "Contractholder Funds," are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1994 1993
------------------------
(000's omitted)
<S> <C> <C>
Premium deposit funds $16,770,332 $14,546,622
Undistributed earnings on participating
business 63,575 88,009
Other 194,721 228,245
------------------------
$17,028,628 $14,862,876
========================
</TABLE>
Details underlying the balance sheet captions, "Short-term and Long-term Debt,"
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1994 1993
--------------------
(000's omitted)
<S> <C> <C>
Short-term debt:
Short-term notes $68,589 $64,775
Current portion of long-term debt 200 1,338
--------------------
Total short-term debt $68,789 $66,113
====================
Long-term debt less current portion:
12% notes payable, due 1996 $ 200 $ 400
6.17% notes payable, due 1998 - 5,321
--------------------
Total long-term debt $ 200 $ 5,721
====================
</TABLE>
25
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
5. SUPPLEMENTAL FINANCIAL DATA (CONTINUED)
Cash paid for interest for 1994, 1993 and 1992 was $615,000, $96,000 and
$414,000, respectively.
Reinsurance transactions included in the income statement caption, "Insurance
Premiums," are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
------------------------------
<S> <C> <C> <C>
(000's omitted)
Reinsurance assumed $910,838 $807,503 $907,293
Reinsurance ceded 716,768 568,612 620,978
------------------------------
Net reinsurance premiums $194,070 $238,891 $286,315
==============================
</TABLE>
The income statement caption, "Benefits and Settlement Expenses," is net of
reinsurance recoveries of $524,000, $438,000 and $508,000 for the years ended
December 31, 1994, 1993 and 1992, respectively.
The income statement caption, "Underwriting, Acquisition, Insurance and Other
Expenses," includes amortization of deferred acquisition costs of $115,174,000,
$240,989,000 and $186,251,000 for the years ended December 31, 1994, 1993 and
1992, respectively. An additional $81,160,000 and $(23,731,000) of deferred
acquisition costs was restored (amortized) and netted against "Realized Gain
(Loss) on Investments" for the years ended December 31, 1994 and 1993,
respectively.
26
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
6. EMPLOYEE BENEFIT PLANS
PENSION PLANS
LNC administers funded defined benefit pension plans for most of its eligible
employees and, prior to January 1, 1995, full-time agents. The benefits for
employees are based on total years of service and the highest 60 months of
compensation during the last 10 years of employment. The benefits for agents
were based on a percentage of each agent's yearly earnings. The plans are funded
by contributions to tax-exempt trusts. The Company's funding policy is
consistent with the funding requirements of federal laws and regulations.
Contributions are intended to provide not only the benefits attributed to
service to date, but also those expected to be earned in the future. Plan assets
consist principally of listed equity securities and corporate obligations and
Government bonds.
All benefits applicable to the funded defined benefit plan for agents were
frozen as of December 31, 1994. The curtailment of this plan did not have a
significant effect on net pension cost for 1994. Effective January 1, 1995,
pension benefits for agents will be provided by a new defined contribution plan.
Contributions to this plan will be based on 2.3% of an agent's earnings up to
the social security wage base and 4.6% of any excess.
LNC also administers two types of unfunded, nonqualified, defined benefit plans
for certain employees and agents. A supplemental retirement plan provides
defined benefit pension benefits in excess of limits imposed by federal tax law.
A salary continuation plan provides certain officers of the Company defined
pension benefits based on years of service and final monthly salary upon death
or retirement.
27
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
6. EMPLOYEE BENEFIT PLANS (CONTINUED)
The status of the funded defined benefit pension plans and the amounts
recognized on the balance sheets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1994 1993
-----------------------
<S> <C> <C>
(000's omitted)
Actuarial present value of benefit
obligation:
Vested benefits $(130,517) $(142,507)
Nonvested benefits (7,285) (6,680)
-----------------------
Accumulated benefit obligation (137,802) (149,187)
Effect of projected future compensation
increases (24,310) (40,955)
-----------------------
Projected benefit obligation (162,112) (190,142)
Plan assets at fair value 159,287 175,338
-----------------------
Projected benefit obligation in excess
of plan assets (2,825) (14,804)
Unrecognized transition asset - (2,666)
Unrecognized net loss (gain) (451) 8,720
Unrecognized prior service cost 1,063 3,259
-----------------------
Accrued pension cost included in other
liabilities $ (2,213) $ (5,491)
=======================
</TABLE>
The status of the unfunded defined benefit pension plans and the amounts
recognized on the balance sheets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1994 1993
--------------------
<S> <C> <C>
(000's omitted)
Actuarial present value of benefit
obligation:
Vested benefits $(5,430) $ (6,580)
Nonvested benefits (1,026) (1,616)
--------------------
Accumulated benefit obligation (6,456) (8,196)
Effect of projected future compensation
increases (2,479) (2,583)
--------------------
Projected benefit obligation (8,935) (10,779)
Unrecognized transition obligation 49 203
Unrecognized net loss (gain) (328) 1,395
Unrecognized prior service cost
(reduction in benefits) 849 (678)
--------------------
Accrued pension costs included in other
liabilities $(8,365) $ (9,859)
====================
</TABLE>
28
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
6. EMPLOYEE BENEFIT PLANS (CONTINUED)
The determination of the projected benefits obligation for the defined benefit
plans was based on the following assumptions:
<TABLE>
<CAPTION>
1994 1993 1992
----------------------------
<S> <C> <C> <C>
Weighted-average discount rate 8.0% 7.0% 7.5%
Rate of increase in compensation:
Salary continuation plan 6.5 6.0 6.5
Pension plans 5.0 5.0 5.5
Expected long-term rate of return on
plan assets 9.0 9.0 9.0
</TABLE>
The components of net pension cost for the defined benefit pension plans are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
-------------------------------
(000's omitted)
<S> <C> <C> <C>
Service cost-benefits earned during the year $ 8,912 $ 8,496 $ 6,592
Interest cost on projected benefit obligation 12,898 12,433 9,129
Actual return on plan assets 4,666 (20,069) (5,511)
Net amortization (deferral) (18,576) 6,065 (5,726)
-------------------------------
Net pension cost $ 7,900 $ 6,925 $ 4,484
===============================
</TABLE>
401K
LNC administers contributory defined contribution plans for eligible employees
and agents. The Company's contributions to the plans are equal to each
participant's pretax contribution, not to exceed 6% of base pay, multiplied by a
percentage, ranging from 25% to 150%, which varies according to certain
incentive criteria. Expense for these plans amounted to $13,185,000,
$11,770,000 and $6,005,000 in 1994, 1993 and 1992, respectively.
29
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
6. EMPLOYEE BENEFIT PLANS (CONTINUED)
POSTRETIREMENT MEDICAL AND LIFE INSURANCE BENEFIT PLANS
LNC administers unfunded defined benefit plans that provide postretirement
medical and life insurance benefits to full-time employees and agents who,
depending on the plan, have worked for the Company 10 to 15 years and attained
age 55 to 60. Medical benefits are also available to spouses and other
dependents of employees and agents. For medical benefits, limited contributions
are required from individuals retired prior to November 1, 1988; contributions
for later retirees, which can be adjusted annually, are based on such items as
years of service at retirement and age at retirement. The life insurance
benefits are noncontributory, although participants can elect supplemental
contributory benefits.
The status of the postretirement medical and life insurance benefit plans and
the amount recognized in the balance sheets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1994 1993
----------------------
(000's omitted)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $(34,881) $(37,121)
Fully eligible active plan participants (7,063) (8,967)
Other active plan participants (14,968) (25,959)
----------------------
Accumulated postretirement benefit obligation (56,912) (72,047)
Unrecognized net loss (gain) (5,487) 4,023
Unrecognized transition obligation -- --
----------------------
Accrued plan cost included in other liabilities $(62,399) $(68,024)
======================
</TABLE>
The components of periodic postretirement benefit cost are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
------------------------------
(000's omitted)
<S> <C> <C> <C>
Service cost $1,727 $2,584
Interest cost 4,155 4,628
Net amortization 130 --
------------------------------
Net periodic postretirement benefit cost $6,012 $7,212 $2,736
==============================
</TABLE>
30
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
6. EMPLOYEE BENEFIT PLANS (CONTINUED)
The costs for postretirement benefits for the year ended December 31, 1992 shown
above are prior to the adoption of FAS 106 (see Note 2) and, therefore,
represent the total amount of claims and premiums actually paid.
The calculation of the accumulated postretirement benefit obligation assumes a
weighted-average annual rate of increase in the per capita cost of covered
benefits (i.e., health care cost trend rate) of 10.0% for 1995 gradually
decreasing to 5.5% by 2004 and remaining at that level thereafter. The health
care cost trend rate assumption has a significant affect on the amounts
reported. For example, increasing the assumed health care cost trend rates by
one percentage point each year would increase the accumulated postretirement
benefit obligation as of December 1994 and 1993 by $4,088,000 and $6,878,000,
respectively, and the aggregate of the estimated service and interest cost
components of net periodic postretirement benefit cost for the year ended
December 31, 1994 by $483,000. The calculation assumes a long-term rate of
increase in compensation of 5.0% for both December 31, 1994 and 1993. The
weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 8.0% and 7.0% at December 31, 1994 and
1993, respectively.
7. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY RESTRICTIONS
Generally, the net assets available for transfer to LNC are limited to the
amounts that net assets, as determined in accordance with statutory accounting
practices, exceed minimum statutory capital requirements; however, payments of
such amounts as dividends may be subject to approval by regulatory authorities.
As of December 31, 1994, $350,000,000 of consolidated shareholder's equity
represents net assets that cannot be transferred in the form of dividends, loans
or advances to LNC.
Net income as determined in accordance with statutory accounting practices for
the Company and its insurance subsidiaries in 1994, 1993 and 1992 was
$366,724,000, $236,985,000 and $190,074,000, respectively. The Company's
shareholder's equity as determined in accordance with statutory accounting
practices at December 31, 1994 and 1993 was $1,679,667,000 and $1,302,513,000,
respectively.
31
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
ESTIMATES RELATED TO CERTAIN LIABILITIES
Included in the liability for future policy benefits, claims and claim expenses
and the asset for amounts recoverable from reinsurers at December 31, 1994 and
1993 is a net liability for disability income business of $441,700,000 and
$398,100,000, respectively (net of amounts ceded to LNC affiliates of
$368,600,000 and $329,700,000, respectively). If incidence levels do not
improve, or claim termination rates deteriorate, substantial reserve additions
may be required in the future. It is not possible to provide a meaningful range
of estimates of possible additional losses at this time. The Company reviews
and updates the level of these reserves on an on-going basis.
LEASES
The Company and certain of its subsidiaries lease their 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. In addition, the Company 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 period ending in 2009 or the last
day of any of the renewal periods.
Rental expense under operating leases in 1994, 1993 and 1992 was $21,679,000,
$27,051,000 and $30,043,000. Future minimum rental commitments are as follows
(000's omitted):
<TABLE>
<CAPTION>
<S> <C>
1995 $ 20,244,000
1996 20,156,000
1997 18,593,000
1998 17,329,000
1999 16,481,000
Thereafter 183,320,000
--------------
$276,123,000
==============
</TABLE>
32
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
REINSURANCE CEDED AND ASSUMED
The Company cedes reinsurance to other companies, including certain affiliates.
The portion of risks exceeding each company's retention limit is reinsured with
other insurers. The Company seeks reinsurance coverage within the business
segment that sell life insurance, that limits its liabilities on an individual
insured to $3,000,000. To cover products other than life insurance, the Company
acquires other reinsurance coverages with retentions and limits which management
believes are appropriate for the circumstances. The accompanying financial
statements reflect premiums, benefits and settlement expenses and deferred
acquisition costs, net of reinsurance ceded (see Note 5). The Company and its
subsidiaries remain liable if their reinsurers are unable to meet their
contractual obligations under the applicable reinsurance agreements.
The Company assumes reinsurance from other companies, including certain
affiliates. At December 31, 1994, the Company has granted $137,099,000 of
statutory surplus relief to other insurance companies under financial
reinsurance transactions. Generally, such amounts are offset by corresponding
receivables from the ceding company, which are secured by future profits on the
reinsured business. However, the Company is subject to the risk that the ceding
company may become insolvent and the right of offset would not be permitted.
OTHER CONTINGENCY MATTERS
The Company and its subsidiaries are involved in various pending or threatened
legal proceedings arising from the conduct of their business. In some
instances, these proceedings include claims for punitive damages and similar
types of relief in unspecified or substantial amounts, in addition to amounts
for alleged contractual liability or requests for equitable relief. After
consultation with counsel and a review of available facts, it is management's
opinion that these proceedings ultimately will be resolved without materially
affecting the consolidated financial statements of the Company.
Tax authorities have recently focused increased attention on compliance of
qualified annuity plans marketed by insurance companies. If sponsoring
employers cannot demonstrate compliance and the insurance company is held
responsible due to its marketing efforts, the Company and other insurers may be
subject to potential liability. It is not possible to provide a meaningful
estimate of the range of possible liability at this time. In addition, the
Company is analyzing the extent to which insurance coverage may offset any
liability which may develop. Management continues to monitor this matter and
to take steps to minimize any potential liability.
33
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 for companies known to be insolvent, net of estimated future premium
tax deductions.
GUARANTEES
The Company has guarantees with off-balance-sheet risks whose contractual
amounts represent credit exposure.
Outstanding guarantees with off-balance-sheet risks, shown in notional or
contract amounts along with their carrying values 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
1994 1993 1994 1994 1993 1993
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(000's omitted)
Real estate
partnerships $17,658 $ 16,355 $-- $-- $(1,804) $(1,803)
Mortgage loan pass-
through certificates 78,175 96,030 -- -- -- --
--------------------------------------------------------------------
$95,833 $112,385 $-- $-- $(1,804) $(1,803)
====================================================================
</TABLE>
The Company has invested in real estate partnerships that use conventional
mortgage loans. In some cases, the terms of these arrangements involve
guarantees by each of the partners to indemnify the mortgagor in the event a
partner is unable to pay its principal and interest payments. In addition, the
Company has sold commercial mortgage loans through grantor trusts which issued
pass-through certificates. The Company has agreed to repurchase any mortgage
loans which remain delinquent for 90 days at a repurchase price substantially
equal to the outstanding principal balance plus accrued interest thereon to the
date of repurchase. It is management's opinion that the value of the properties
underlying these commitments is sufficient that in the event of default the
impact would not be material to the Company.
34
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
DERIVATIVES
The Company has derivatives with off-balance-sheet risks whose notional or
contract amounts exceed credit exposure. The Company has entered into
derivative transactions to reduce its exposure to fluctuations in interest rates
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 the 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
1994 1993 1994 1994 1993 1993
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(000's omitted)
Interest Rate Derivatives:
Interest rate
cap agreements $4,400,000 $3,800,000 $23,361 $34,472 $24,367 $18,535
Spread-lock
agreements 1,300,000 1,700,000 3,199 3,199 -- (5,588)
Financial
futures contracts:
Portfolio
duration hedges 354,300 -- (7,400) (7,400) -- --
Other 28,200 33,100 (100) (100) -- --
Interest rate swaps 5,000 57,016 164 164 -- (1,180)
United Kingdom
forward swaps -- 20,000 -- -- -- 380
Mortgage-backed
securities
total return swaps -- 47,602 -- -- -- 864
----------------------------------------------------------------------
6,087,500 5,657,718 19,224 30,335 24,367 13,011
Foreign exchange
forward contracts 21,527 -- 168 168 -- --
----------------------------------------------------------------------
$6,109,027 $5,657,718 $19,392 $30,503 $24,367 $13,011
======================================================================
</TABLE>
35
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
A reconciliation of the notional or contract amounts for the significant
agreements and contracts is as follows:
<TABLE>
<CAPTION>
INTEREST RATE CAPS SPREAD LOCKS
----------------------------------------------------
DECEMBER 31 DECEMBER 31
1994 1993 1994 1993
----------------------------------------------------
<S> <C> <C> <C> <C>
(000's omitted)
Balance at beginning of year $3,800,000 $1,200,000 $1,700,000 $ 600,000
New contracts 600,000 2,600,000 - 2,000,000
Terminated contracts - - (400,000) (900,000)
----------------------------------------------------
Balance at end of year $4,400,000 $3,800,000 $1,300,000 $1,700,000
====================================================
</TABLE>
<TABLE>
<CAPTION>
OPTIONS ON
FINANCIAL FINANCIAL
FUTURES FUTURES
----------------------------------------------------
1994 1993 1994 1993
----------------------------------------------------
<S> <C> <C> <C> <C>
(000's omitted)
Balance at beginning of year $ -- $-- $ -- $--
New contracts 404,300 -- 308,000 --
Terminated contracts (50,000) -- (308,000) --
----------------------------------------------------
Balance at end of year $354,300 $-- $ -- $--
====================================================
</TABLE>
INTEREST RATE CAPS
The interest rate cap agreements, which expire in 1997 through 2003, entitle the
Company to receive payments from the counterparties on specified future reset
dates, contingent on future interest rates. For each cap, the amount of such
quarterly payments, if any, is determined by the excess of a market interest
rate over a specified cap rate times 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 fluctuating interest rates. The
premium paid for the interest rate caps is included in other assets ($23,400,000
as of December 31, 1994) and is being amortized over the terms of the agreements
and is included in net investment income.
36
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
The revenue that the Company receives from interest rate caps depends on the
future levels of interest rates on U.S. Treasury securities with maturities of
two, five, seven and ten years and on U.S. dollar swap rates for similar
maturities. The table below analyzes the amount of cap revenue the Company would
receive if those rates were 1%, 2%, 3%, or 4% higher than they were at December
31, 1994 and remain at those levels throughout the remaining lives of the caps
owned by the Company. In relation to the level of these rates at December 31,
1994, the cap rates were from .42% to 2.58% out of the money, i.e., higher.
Revenue from interest rate caps under these scenarios is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1996 1997 1998 1999 THEREAFTER
------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(000's omitted)
No Change $ -- $ -- $ -- $ -- $ -- $ --
Up 1% 7,100 4,200 1,500 500 -- --
Up 2% 30,100 28,300 24,200 15,500 3,700 --
Up 3% 66,500 67,000 62,300 44,200 16,500 6,400
Up 4% 104,800 107,500 102,500 76,400 34,000 17,600
</TABLE>
SPREAD-LOCKS
Spread-lock agreements in place as of December 31, 1994 will expire in 1995.
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 U.S.
Treasury note is larger or smaller than a contractually specified spread. Cash
payments are based on the product of the notional amount, the spread between the
swap rate and the yield of an equivalent maturity U.S. Treasury security and the
price sensitivity of the swap at that time, expressed in dollars per basis
point. The purpose of the Company's spread-lock program is to protect a portion
of its fixed maturity securities against widening of spreads.
Over the past five years, swap spreads have typically traded within an annual
range of 30 basis points, i.e., a range of plus or minus 15 basis points around
the mean level. At December 31, 1994, the cash-settlement value of the spread-
locks would have changed by approximately $11,200,000 for each 15 basis point
change in swap spreads.
37
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
FINANCIAL FUTURES AND OPTION ON FINANCIAL FUTURES
The Company uses exchange-traded financial futures contracts and options on
those financial futures to hedge against interest rate risks and to manage
duration of a portion of its fixed maturity securities. Short positions in
financial futures contracts obligate the Company to sell a financial instrument
at a specified future date for a specified price and may be settled in cash or
through delivery of the financial instrument. Cash settlements on the change in
market values of financial futures contracts are made daily. Options on
financial futures give the Company the right, but not the obligation, to assume
a short position in the underlying futures at a specified price during a
specified time period.
At December 31, 1994, the Company had short positions in the March 1995 five
year note, ten year note, and bond futures with an aggregate face amount of
$354,300,000. As the yields on the underlying Treasury securities rise (fall),
the value of these short positions to the Company will increase (decrease) by
approximately $2,700,000 for each 10 basis point parallel shift in the yield
curve.
ADDITIONAL DERIVATIVE INFORMATION
Expenses for the three agreements and contracts described in the preceding
subsections amounted to $5,356,000 and $3,562,000 in 1994 and 1993,
respectively. Deferred losses of $2,700,000 as of December 31, 1994, resulting
from (1) terminated and expired spread-lock agreements, (2) financial futures
contracts, and (3) options on financial futures, are included with the related
fixed maturity securities to which the hedge applied and are being amortized
over the life of such securities.
The Company is exposed to credit loss in the event of nonperformance by
counterparties on interest rate cap agreements, spread-lock agreements, interest
rate swaps, United Kingdom forward swaps, foreign exchange forward contracts and
mortgage-backed securities total return swaps, but the Company does not
anticipate nonperformance by any of these 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 their replacement cost, which is
approximated by the unrealized gains in such contracts, which was $38,000,000 at
December 31, 1994.
At December 31, 1994, the Company did not have a material concentration of
financial instruments in a single investee, industry or geographic location.
38
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
8. 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 and, 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.
FIXED MATURITY AND EQUITY SECURITIES
Fair values for fixed maturity securities are based on quoted market prices
where available. For fixed maturity securities not actively traded, fair values
are estimated using values obtained from independent pricing services or, in the
case of private placements, are estimated by discounting expected future cash
flows using a current market rate applicable to the coupon rate, credit quality,
and maturity of the investments. The fair values for equity securities are
based on quoted market prices.
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 rating, maturity and future income when
compared to the expected yield for mortgages having similar characteristics.
The rating for mortgages in good standing are based on property type, location,
market conditions, occupancy, debt service coverage, loan to value, caliber of
tenancy, borrower and payment record. Fair values for impaired mortgage loan
are measured based either on the present value of expected future cash flows
discounted at the loan's effective interest rate, at the loan's observable
market price or the fair value of the collateral if the loan is collateral
dependent.
POLICY LOANS
The estimated fair value of investments in policy loans was calculated on a
composite discounted cash flow basis using Treasury interest rates consistent
with the maturity durations assumed. These durations were based on historical
experience.
OTHER INVESTMENTS, AND CASH AND INVESTED CASH
The carrying value for assets classified as other investments, and cash and
invested cash in the accompanying balance sheet approximates their fair value.
39
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
8. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
INVESTMENT TYPE INSURANCE CONTRACTS
The balance sheet captions, "Future Policy Benefits and Claims" and
"Contractholder Funds," include investment type insurance contracts (i.e.,
deposit contracts and guaranteed interest contracts). The fair values for the
deposit contracts and certain guaranteed interest contracts are based on their
approximate surrender values. The fair values for the remaining guaranteed
interest and similar contracts are based on their approximate surrender values.
The fair values for the remaining guaranteed interest and similar contracts are
estimated using discounted cash flow calculations based on interest rates
currently being offered on similar contracts with maturities consistent with
those remaining for the contracts being valued.
The remainder of the balance sheet captions "Future Policy Benefits and Claims"
and "Contractholder 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 in that readers of these financial
statements could draw inappropriate conclusions about the Company's
shareholder's equity determined on a fair value basis if only the fair value of
assets and liabilities defined as financial instruments are disclosed. The
Company and other companies in the insurance industry are monitoring the related
actions of the various standard-setting bodies and attempting to determine an
appropriate methodology for estimating and disclosing the "fair value" of their
insurance contract liabilities.
SHORT-TERM AND LONG-TERM DEBT
Fair values for long-term debt issues are estimated using discounted cash flow
analysis based on the Company's current incremental borrowing rate for similar
types of borrowing arrangements. For short-term debt, the carrying value
approximates fair value.
40
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
8. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
GUARANTEES
The Company's guarantees include guarantees related to real estate partnerships
and mortgage loan pass-through certificates. Based on historical performance
where repurchases have been negligible and the current status, which indicates
none of the loans are delinquent, the fair value liability for the guarantees
related to the mortgage loan pass-through certificates is insignificant. Fair
values for all other guarantees are based on fees that would be charged
currently to enter into similar agreements, taking into consideration the
remaining terms of the agreements and the counterparties' credit standing.
DERIVATIVES
The Company's derivatives include interest rate cap agreements, spread-lock
agreements, foreign currency exchange contracts, financial futures contracts,
options on financial futures, interest rate swaps, United Kingdom forward swaps
and mortgage-backed securities total return swaps. Fair values for these
contracts is based on current settlement values. The current settlement values
are based on quoted market prices for the foreign currency exchange contracts
and financial future contracts, and options on financial futures, and on
brokerage quotes, which utilized pricing models or formulas using current
assumptions, for all other swaps and agreements.
INVESTMENT COMMITMENTS
Fair values for commitments to make investment in fixed maturity securities
(primarily private placements), mortgage loans on real estate and real estate
are based on the difference between the value of the committed investments as of
the date of the accompanying balance sheets and the commitment date, which would
take into account changes in interest rates, the counterparties' credit standing
and the remaining terms of the commitments.
41
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
8. 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
1994 1993
-----------------------------------------------------------
CARRYING FAIR CARRYING FAIR
ASSETS (LIABILITIES) VALUE VALUE VALUE VALUE
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(000's omitted)
Fixed maturity securities $ 17,692,214 $ 17,692,214 $ 19,579,414 $ 19,579,414
Equity securities 456,333 456,333 426,363 426,363
Mortgage loans on real estate 2,795,914 2,720,580 3,238,965 3,403,913
Policy loans 528,731 508,079 569,646 600,093
Other investments 158,196 158,196 140,102 140,102
Cash and invested cash 990,880 990,880 590,315 590,315
Investment type
insurance contracts:
Deposit contracts and
certain guaranteed
interest contracts (14,294,713) (14,052,479) (12,517,166) (11,960,400)
Remaining guaranteed
interest and
similar contracts (2,485,473) (2,423,880) (2,419,500) (2,564,300)
Short-term debt (68,789) (68,789) (66,113) (66,113)
Long-term debt (200) (200) (5,721) (5,743)
Guarantees -- -- (1,804) (1,803)
Derivatives 19,392 30,503 24,367 13,011
Investment commitments -- (500) -- (2,433)
</TABLE>
As of December 31, 1994 and 1993, the carrying values of the deposit contracts
and certain guaranteed contracts are net of deferred acquisition costs of
$399,016,000 and $297,825,000, respectively. The carrying values of these
contracts are stated net of deferred acquisition costs in order that they be
comparable with the fair value basis.
42
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
9. SEGMENT INFORMATION
The Company has three major business segments: Life Insurance and Annuities,
Life-Health Reinsurance and Employee Life-Health Benefits. The Life Insurance
and Annuities segment offers universal life, pension products and other
individual coverages through a network of career agents, independent general
agencies and insurance agencies located within a variety of financial
institutions. Life-Health Reinsurance sells reinsurance products and services
to life insurance companies, HMOs, self-funded employers and other primary risk
accepting organizations in the U.S. and economically attractive international
markets. Prior to the sale of 100% of the ownership of its primary underwriter
of employee life-health benefit coverages in 1994 (see Note 10), the Employee
Life-Health Benefits segment distributed group life and health insurance,
managed health care and other related coverages through career agents and
independent general agencies. Activity which is not included in the major
business segments is shown as "Other Operations."
"Other Operations" includes miscellaneous property-casualty business and certain
other operations not directly related to business segments and unallocated
corporate items (i.e., corporate investment income, interest expense on
corporate debt and unallocated corporate overhead expenses). Prior to 1993, all
realized gain (loss) on investments were included in "Other Operations" and
corporate investment income was net of amounts allocated to the business
segments in lieu of realized gain (loss) on investments.
The revenue, pretax income and assets by segment for 1992 through 1994 are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
-------------------------------------
<S> <C> <C> <C>
(000's omitted)
Revenues:
Life Insurance and Annuities $2,065,324 $2,341,848 $2,078,239
Life-Health Reinsurance 660,418 610,698 580,541
Employee Life-Health Benefits 314,932 1,326,827 1,241,572
Other Operations 74,549 (28,770) 102,441
-------------------------------------
$3,115,223 $4,250,603 $4,002,793
=====================================
Income (loss) before income taxes and
cumulative effect of accounting change:
Life Insurance and Annuities $ 75,619 $ 265,319 $ 183,168
Life-Health Reinsurance 93,838 31,609 61,387
Employee Life-Health Benefits 22,905 82,944 62,907
Other Operations 67,836 (44,207) 93,501
-------------------------------------
$ 260,198 $ 335,665 $ 400,963
=====================================
</TABLE>
43
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
9. SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31
1994 1993 1992
---------------------------------------
<S> <C> <C> <C>
(000's omitted)
Assets:
Life Insurance and Annuities $37,675,970 $36,020,977 $29,178,157
Life-Health Reinsurance 2,311,499 2,328,954 1,774,084
Employee Life-Health Benefits -- 588,455 553,856
Other Operations 1,038,078 769,982 697,103
---------------------------------------
$41,025,547 $39,708,368 $32,203,200
=======================================
</TABLE>
Provisions for depreciation and capital additions were not material.
10. SALE OF SUBSIDIARIES
In December 1993, the Company recorded a provision for loss of $98,500,000 (also
$98,500,000, after-tax) in the "Other Operations" segment for the sale of
Security-Connecticut Life Insurance Company (Security-Connecticut). The sale
was completed on February 2, 1994 through an initial public offering and the
Company received cash and notes, net of related expenses, totaling $237,700,000.
The loss on sale and disposal expenses did not differ materially from the
estimate recorded in the fourth quarter of 1993. For the years ended December
31, 1993 and 1992, Security-Connecticut, which operated in the Life Insurance
and Annuities segment, had revenues of $274,500,000 and $252,400,000,
respectively and net income of $24,000,000 and $26,200,000, respectively. As of
December 31, 1993, Security-Connecticut had assets of $1,830,600,000 and
liabilities of $1,504,900,000.
In 1994, the Company completed the sale of 100% of the common stock of EMPHESYS
(parent company of Employers Health Insurance Company, which comprised the
Employee Life-Health Benefits segment) $348,200,000 of cash, net of related
expenses, and a $50,000,000 promissory note. LNC retained 29% ownership of
EMPHESYS. A gain on sale of $68,954,000 (also $68,954,000 pretax) was
recognized in 1994 in "Other Operations". For the years ended December 31, 1993
and 1992, EMPHESYS had revenues of $1,304,700,000 and $1,247,600,000, and net
income of $55,300,000 and $43,900,000, respectively. EMPHESYS had revenues and
net income of $314,900,000 and $14,400,000, respectively, during the three
months of ownership in 1994. As of December 31, 1993, Employers Health had
assets of $793,700,000 and liabilities of $453,400,000.
44
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
11. SUBSEQUENT EVENTS
On February 13, 1995, the Company declared a dividend of $310,000,000 payable to
LNC. Approximately $195,000,000 of this amount is subject to approval by the
Indiana Department of Insurance.
12. TRANSACTIONS WITH AFFILIATES
A wholly owned subsidiary of LNC, Lincoln Financial Group, Inc. (LFGI), has a
nearly exclusive general agents contract with the Company under which it sells
the Company's products and provides the service that otherwise would be provided
by a home office marketing department and regional offices. For providing these
selling and marketing services, the Company paid LFGI override commissions and
operating expense allowances of $78,485,000, $74,514,000 and $65,640,000 in
1994, 1993 and 1992, respectively.
Cash and invested cash at December 31, 1994 and 1993 include the Company's
participation in a short-term investment pool with LNC of $428,312,000 and
$177,245,000, respectively. Related investment income amounted to $17,149,000,
$9,054,000 and $9,490,000 in 1994, 1993 and 1992, respectively. Short-term debt
at December 31, 1994 and 1993 includes $68,589,000 and $64,775,000,
respectively, borrowed from LNC. The Company paid interest to LNC of $8,000,
$137,000 and $365,000 in 1994, 1993 and 1992, respectively.
The Company provides services to and receives services from affiliated companies
which resulted in a net receipt (payment) of $13,883,000, $18,865,000 and
$(60,987,000) in 1994, 1993 and 1992, respectively.
45
<PAGE>
FINANCIAL SCHEDULES
The following consolidated financial statement schedules of The Lincoln
National Life Insurance Company and subsidiaries are included on Pages
through:
I--Summary of Investments--Other than Investments in Related Parties--
December 31, 1994
III--Supplementary Insurance Information--Years ended December 31, 1994,
1993 and 1992
IV--Reinsurance--Years ended December 31, 1994, 1993 and 1992
V--Valuation and Qualifying Accounts--Years ended December 31, 1994, 1993
and 1992
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions, are inapplicable, or the required information is included
in the consolidated financial statements, and therefore have been omitted.
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
Schedule I - Summary of Investments - Other Than Investments in Related Parties
December 31, 1994
(000's omitted)
<TABLE>
<CAPTION>
Column A Column B Column C Column D
- ---------------------------------------------------- ---------- ---------- -------------
Amount at
Which Shown
in the
Type of Investment Cost Value Balance Sheet
- ------------------ ----------- ---------- -------------
<S> <C> <C> <C>
Fixed maturity securities available-for-sale:
Bonds:
United States Government and government agencies
and authorities................................. $ 1,048,404 $1,029,785 $ 1,029,785
States, municipalities and political
subdivisions.................................... 16,297 16,658 16,658
Mortgage-backed securities........................ 5,017,332 4,913,472 4,913,472
Foreign governments............................... 541,179 533,325 533,325
Public utilities.................................. 2,622,718 2,500,127 2,500,127
Convertibles and bonds with warrants attached..... 115,539 117,591 117,591
All other corporate bonds......................... 8,781,042 8,530,502 8,530,502
Redeemable preferred stocks......................... 51,417 50,754 50,754
----------- ---------- -----------
Total fixed maturity securities....................... 18,193,928 17,692,214 17,692,214
Equity securities available-for-sale:
Common stocks:
Public utilities.................................. 11,244 12,155 12,155
Banks, trusts, and insurance companies............ 23,531 25,284 25,284
Industrial, miscellaneous and all other........... 299,899 335,683 335,683
Nonredeemable preferred stocks...................... 81,677 83,211 83,211
----------- ---------- -----------
Total equity securities............................... 416,351 456,333 456,333
Mortgage loans on real estate......................... 2,852,528 2,795,914 (A)
Real estate:
Investment properties............................... 544,532 544,532
Acquired in satisfaction of debt.................... 199,660 134,980 (A)
Policy loans.......................................... 528,731 528,731
Other investments..................................... 171,688 158,196 (A)
----------- -----------
Total investments................................... $22,907,418 $22,310,900
=========== ===========
</TABLE>
(A) Investments which are deemed to have declines in value that are other than
temporary are written down or reserved for to reduce their carrying value to
their estimated realizable value.
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
Schedule III - Supplementary Insurance Information
(000's omitted)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
- ---------------------------------------------- ----------- ------------- ------------ ---------- -----------
Future Policy Other
Benefits, Policy
Deferred Claims Claims and
Acquisition and Claim Unearned Benefits Premium
Segment Costs Expenses (A) Premiums (A) Payable Revenue (B)
- ---------------------------------------------- ----------- ------------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994:
Life Insurance and Annuities................ $1,427,692 $5,888,581 $11,201 $ -- $ 647,416
Life-Health Reinsurance..................... 304,913 1,626,033 51,618 -- 542,034
Employee Life-Health Benefits (D)........... -- -- -- -- $ 299,338
Other (including
consolidating adjustments)................ 3,921 26,158 (1,347) -- 1,076
---------- ---------- ------- ---------- ----------
Total....................................... $1,736,526 $7,540,772 $61,472 $ -- $1,489,864
========== ========== ======= ========== ==========
Year ended December 31, 1993:
Life Insurance and Annuities................ $ 999,126 $6,782,207 $ 5,188 $ -- $ 662,353
Life-Health Reinsurance..................... 298,787 1,616,088 54,157 -- 491,397
Employee Life-Health Benefits............... -- 228,892 -- -- 1,243,576
Other (including
consolidating adjustments)................ -- 171,043 315 -- 387
---------- ---------- ------- ---------- ----------
Total....................................... $1,297,913 $8,798,230 $59,660 $ -- $2,397,713
========== ========== ======= ========== ==========
Year ended December 31, 1992:
Life Insurance and Annuities................ $1,314,586 $6,245,514 $ 4,586 $ -- $ 572,163
Life-Health Reinsurance..................... 307,838 1,148,012 43,298 -- 466,264
Employee Life-Health Benefits............... -- 269,045 13 -- $1,184,183
Other (including
consolidating adjustments)................ 5,275 79,679 5 -- 268
---------- ---------- ------- ---------- ----------
Total....................................... $1,627,699 $7,742,250 $47,902 $ -- $2,222,878
========== ========== ======= ========== ==========
</TABLE>
(A) Following the adoption of FAS 113 in 1993, the 1993 and 1994 amounts are
presented on a gross-of-reinsurance basis; the 1992 amounts are presented on
a net-of-reinsurance basis.
(B) Includes insurance fees on universal life and other interest sensitive
products.
(C) The allocation of expenses between investments and other operations are
based on a number of assumptions and estimates. Results would change if
different methods were applied.
(D) Includes data through the March 21, 1994 date of sale of the direct writer
of employee life-health coverages.
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
Schedule III - Supplementary Insurance Information (continued)
(000's omitted)
<TABLE>
<CAPTION>
Column A Column G Column H Column I Column J Column K
- ------------------------------------ ---------- ---------- ------------ ------------ --------
Benefits,
Claims, Amortization
Net and of Deferred Other
Investment Claim Acquisition Operating Premiums
Segment Income (C) Expenses Costs Expenses (C) Written
- ------------------------------------- ---------- ---------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994:
Life Insurance and Annuities....... $1,542,552 $1,554,479 $ 85,697 $349,529 $ --
Life-Health Reinsurance............ 116,957 419,266 29,477 117,238 --
Employee Life-Health Benefits (D).. 10,838 218,672 -- 73,355 --
Other (including
consolidating adjustments)....... 3,634 1,630 -- 5,682 --
---------- ---------- -------- -------- --------
Total.............................. $1,673,981 $2,194,047 $115,174 $545,804 $ --
========== ========== ======== ======== ========
Year ended December 31, 1993:
Life Insurance and Annuities....... $1,676,163 $1,615,883 $197,363 $268,066 $ --
Life-Health Reinsurance............ 115,582 467,824 38,351 72,840 --
Employee Life-Health Benefits...... 54,513 943,235 -- 300,648 --
Other (including
consolidating adjustments)....... (22,799) 6,197 5,275 (840) --
---------- ---------- -------- -------- --------
Total.............................. $1,823,459 $3,033,139 $240,989 $640,714 $ --
========== ========== ======== ======== ========
Year ended December 31, 1992:
Life Insurance and Annuities....... $1,496,666 $1,542,268 $152,811 $201,437 $ --
Life-Health Reinsurance............ 105,649 374,278 23,819 120,922 --
Employee Life-Health Benefits...... 37,716 902,095 -- 276,569 --
Other (including
consolidating adjustments)....... 10,793 6,737 9,621 (9,141) --
---------- ---------- -------- -------- --------
Total.............................. $1,650,824 $2,825,378 $186,251 $589,787 $ --
========== ========== ======== ======== ========
</TABLE>
- -------------
(C) The allocation of expenses between investments and other operations are
based on a number of assumptions and estimates. Results would change if
different methods were applied.
(D) Includes data through the March 21, 1994 date of sale of the direct writer
of employee life-health coverages.
<PAGE>
<TABLE>
<CAPTION>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
Schedule IV - Reinsurance (A)
(000's omitted)
Column A Column B Column C Column D Column E Column F
- ---------------------------- ------------ ----------- ------------ ------------ -----------
Percentage
Ceded Assumed of Amount
Gross to Other from Other Net Assumed
Amount Companies Companies Amount to Net
------------ ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994:
Life insurance in force... $ 79,802,000 $45,822,000 $125,640,000 $159,620,000 78.7%
Premiums:
Health insurance........ $ 666,609 $ 496,090 $ 359,659 $ 530,178 67.8%
Life insurance (B)...... 626,591 220,678 553,773 959,686 57.7%
------------ ----------- ------------ ------------
Total..................... $ 1,293,200 $ 716,768 $ 913,432 $ 1,489,864
============ =========== ============ ============
Year ended December 31, 1993:
Life insurance in force... $135,401,000 $61,401,000 $109,257,000 $183,257,000 59.6%
Premiums:
Health insurance........ $ 1,387,414 $ 217,705 $ 262,171 $ 1,431,880 18.3%
Life insurance (B)...... 771,408 350,907 545,332 965,833 56.5%
------------ ----------- ------------ ------------
Total..................... $ 2,158,822 $ 568,612 $ 807,503 $ 2,397,713
============ =========== ============ ============
Year ended December 31, 1992:
Life insurance in force... $122,358,000 $57,897,000 $106,619,000 $171,080,000 62.3%
Premiums:
Health insurance........ $ 1,274,609 $ 204,988 $ 317,126 $ 1,386,747 22.9%
Life insurance (B)...... 661,954 415,990 590,167 836,131 70.6%
------------ ----------- ------------ ------------
Total..................... $ 1,936,563 $ 620,978 $ 907,293 $ 2,222,878
============ =========== ============ ============
(A) Special-purpose bulk reinsurance transactions have been excluded.
(B) Includes insurance fees on universal life and other interest sensitive products.
</TABLE>
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
Schedule V - Valuation and Qualifying Accounts
(000's omitted)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ------------------------------------------------ --------- ----------- ----------- ----------
Additions
(1) (2)
Charged to
Balance at Charged to Other Balance at
Beginning Costs & Accounts- Deductions- End of
Description Of Period Expenses Describe(A) Describe(B) Period
- ------------------------------------------------ ---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994:
Deducted from Asset Accounts:
Reserve for Mortgage Loans on Real Estate... $220,671 $19,464 $ -- ($183,521) $56,614
Reserve for Real Estate..................... 121,427 13,058 -- (69,299) 65,186
Reserve for Other Long-term
Investments............................... 26,730 262 -- (13,500) 13,492
Included in Other Liabilities:
Investment Guarantees....................... 1,804 4,280 -- (6,084) --
Year ended December 31, 1993:
Deducted from Asset Accounts:
Reserve for Mortgage Loans on Real Estate... $129,093 $136,717 $ -- ($45,139) $220,671
Reserve for Real Estate..................... 114,178 21,776 -- (14,527) 121,427
Reserve for Other Long-term
Investments............................... 31,582 3,905 -- (8,757) 26,730
Included in Other Liabilities:
Investment Guarantees....................... 12,550 1,674 -- (12,420) 1,804
Year ended December 31, 1992:
Deducted from Asset Accounts:
Reserve for Mortgage Loans on Real Estate... $68,437 $90,183 ($22,540) ($6,987) $129,093
Reserve for Real Estate..................... 80,025 31,127 22,540 (19,514) 114,178
Reserve for Other Long-term Investments..... 15,830 18,206 -- (2,454) 31,582
Included in Other Liabilities:
Investment Guarantees....................... 6,850 5,700 -- -- 12,550
(A) Transfer between investment classifications.
(B) Deductions reflect sales or foreclosures of the underlying holding.
</TABLE>
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP]
Report of Ernst & Young LLP, Independent Auditors
Board of Directors
The Lincoln National Life Insurance Company
We have audited the accompanying consolidated balance sheets of The Lincoln
National Life Insurance Company (a wholly owned subsidiary of Lincoln National
Corporation) as of December 31, 1994 and 1993, and the related consolidated
statements of income, shareholder's equity, and cash flows for each of the three
years in the period ended December 31, 1994. Our audits also included the
financial statement schedules listed on . These financial statements and
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedules based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Lincoln
National Life Insurance Company at December 31, 1994 and 1993, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic financial
statements as a whole, present fairly, in all material respects, the information
set forth therein.
As discussed in Note 2 to the consolidated financial statements, in 1993 the
Company changed its method of accounting for postretirement benefits other than
pensions, accounting for impairment of loans, and accounting for certain
investments in debt and equity securities.
/s/Ernst & Young LLP
February 8, 1995, except for
Note 11, as to which the
date is February 13, 1995
1
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT C
Post-Effective Amendment No. 11 on Form N-4
PART C--OTHER INFORMATION
Item 24.
- -------
(a) LIST OF FINANCIAL STATEMENTS
(1) Part A The Table of Condensed Financial Information is included in
Part A of this Registration Statement.
(2) The following financial statements of Account C are
included in the SAI:
Statement of Assets and Liability -- December 31, 1994
Statement of Operations -- Year ended December 31, 1994
Statements of Changes in Net Assets -- Years ended
December 31, 1994 and 1993
Note to Financial Statements -- December 31, 1994
Report of Ernst & Young LLP, Independent Auditors
(3) Part B The following Consolidated Financial Statements and Schedules
of The Lincoln National Life Insurance Company are included in the
SAI:
Consolidated Balance Sheets -- December 31, 1994 and 1993
Consolidated Statements of Income -- Years Ended
December 31, 1994, 1993 and 1992
Consolidated Statements of Shareholder's Equity -- Years Ended
December 31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows -- Years Ended
December 31, 1994, 1993 and 1992
Notes to Consolidated Financial Statements -- December 31, 1994
Schedule I -- Summary of Investments -- Other than Investments
in Related Parties -- December 31, 1994
Schedule III -- Supplementary Insurance Information -- Years
Ended December 31, 1994, 1993 and 1992
Schedule IV -- Reinsurance -- Years Ended December 31, 1994,
1993 and 1992
Schedule V -- Valuation and Qualifying Accounts -- Years
Ended December 31, 1994, 1993 and 1992
Report of Ernst & Young LLP, Independent Auditors
(b) LIST OF EXHIBITS
(10) Consent of Ernst & Young LLP, Independent Auditors
(14) (a) Organization Chart of The Lincoln National Life Insurance Holding
Company System
1
<PAGE>
(14) (b) Memorandum Concerning Books and Records
Item 25.
- -------
DIRECTORS AND OFFICERS OF THE DEPOSITOR
Name Positions and Offices with LNL
- ---- ------------------------------
Ian M. Rolland** Chairman, Chief Executive Officer and Director
Robert A. Anker** President, Chief Operating Officer and Director
Carolyn P. Brody* Second Vice President
Thomas L. Clagg* Vice President and Associate General Counsel
Kelly D. Clevenger* Vice President
William J. Cooper* Vice President
Jerry Danielson* Chief Compliance Officer
P. Kenneth Dunsire** Executive Vice President and Director
Jack D. Hunter* Executive Vice President and General Counsel
Gary R. McPhail* Executive Vice President
Robert A. Nikels* Senior Vice President
Max A. Roesler* Vice President and Treasurer
John L. Steinkamp* Vice President and Associate General Counsel
Thomas M. West*** Executive Vice President and Director
C. Suzanne Womack** Assistant Vice President and Secretary
O. Douglas Worthington* Vice President, Controller and Assistant
Treasurer
* Principal business address of each person is 1300 South Clinton
Street, Fort Wayne, Indiana 46802.
** Principal business address is 200 East Berry Street, Fort Wayne,
Indiana 46802-2706.
*** Principal business address is 1700 Magnavox Way, One Reinsurance
Place, Fort Wayne, Indiana 46804.
2
<PAGE>
Item 26.
- -------
PERSONS CONTROLLED BY OR UNDER COMMON
CONTROL WITH THE DEPOSITOR OR REGISTRANT
See Exhibit 14(a): The Organizational Chart of the Lincoln National Insurance
Holding Company System (4/5/95) is hereby incorporated herein by this reference.
Item 27.
- -------
NUMBER OF CONTRACT OWNERS
As of March 31, 1995, there were 358,018 Contract Owners under Account C.
Item 28.
- -------
INDEMNIFICATION--UNDERTAKING
Refer to the initial Registration Statement.
Item 29.
- -------
PRINCIPAL UNDERWRITER
(a) Lincoln National Variable Annuity Fund A (Group); Lincoln
NationalVariable Annuity Fund A (Individual); Lincoln National Variable
Annuity Fund B (Group and Individual); Lincoln National Flexible Premium
Variable Life Account D; Lincoln National Variable Annuity Account E;
Lincoln National Flexible Premium Variable Life Account F; Lincoln
National Flexible Premium Variable Life Account G; Lincoln National
Variable Annuity Account H; Lincoln Life Flexible Premium Variable Life
Account K; Lincoln National Variable Annuity Accounts 50 and 51;
(b) See Item 25.
(c) Commissions and Other Compensation Received by LNL from Account C during
the fiscal year which ended December 31, 1994:
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Net Underwriting
Name of Principal Discounts and Compensation Brokerage
Underwriter Commissions or Redemption Commission Compensation
- ----------------- ---------------- ------------- ---------- ------------
<S> <C> <C> <C> <C>
The Lincoln
National Life
Insurance
Company a b
None $5,154,810 None $28,835,549
</TABLE>
Notes:
(a) These figures represent compensation received by LNL for surrender,
withdrawal and contract charges. See Charges and Other Deductions, in the
Prospectus.
(b) These figures represent compensation received by LNL for mortality
and expense guarantees. See Charges and Other Deductions, in the Prospectus.
Item 30.
- -------
LOCATION OF ACCOUNTS AND RECORDS
Exhibit 14(b) is hereby expressly incorporated herein by this reference.
Item 31.
- -------
NOT APPLICABLE
3
<PAGE>
Item 32.
- -------
UNDERTAKINGS
Refer to the initial Registration Statement.
4
<PAGE>
Item 33.
- -------
(Additional Item) - Undertaking Concerning the Texas Optional Retirement
Program
Refer to the initial Registration Statement.
Item 34.
- -------
(Additional Item) - Undertaking Concerning Withdrawal Restrictions on IRC
Section 403(b) Plan Participants
Refer to the initial Registration Statement.
5
<PAGE>
EXHIBIT INDEX
Exhibit Number Exhibit Name
- -------------- ------------
10 Consent of Ernst & Young LLP,
Independent Auditors
14(a) Organization Chart of The Lincoln National Life Insurance
Holding Company System
14(b) Memorandum Concerning Books and Records
1
<PAGE>
Exhibit 10
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Independent Auditors"
in the Registration Statement (Form N-4 No. 33-25990) and related Statement of
Additional Information pertaining to the Lincoln National Variable Annuity
Account C for the registration of securities of unit investment trusts and to
the use therein of our reports (a) dated February 8, 1995, except for Note 11,
as to which the date is February 13, 1995, with respect to the consolidated
financial statements of The Lincoln National Life Insurance Company included
therein and (b) dated March 10, 1995 with respect to the financial statements of
Lincoln National Variable Annuity Account C included therein.
/s/ Ernst & Young LLP
Fort Wayne, Indiana
April 24, 1995
<PAGE>
Exhibit 14(a)
ORGANIZATIONAL CHART OF THE
LINCOLN NATIONAL INSURANCE HOLDING COMPANY SYSTEM
All the members of the holding company system are corporations, with the
exception of American States Lloyds Insurance Company, Delaware Distributors,
L.P., Founders CBO, L.P., Lincoln National Mezzanine Fund, L.P., and Servicios
de Evalucion de Riesgos, S. de R.L. de C.V.
Lincoln National Corporation
Indiana -- Holding Company
American States Insurance Company
100% -- Indiana -- Property/Casualty
American Economy Insurance Company
100% -- Indiana -- Property/Casualty
American States Insurance Company of Texas
100% -- Texas -- Property/Casualty
American States Life Insurance Company
100% -- Indiana -- Life/Health
American States Lloyds Insurance Company
Lloyds Plan -- * -- Texas -- Property/Casualty
American States Preferred Insurance Company
100% -- Indiana -- Property/Casualty
City Insurance Agency, Inc.
100% -- Indiana
EMPHESYS Financial Group, Inc.
29.3% -- Delaware -- Holding Company
The Barrington Group, LTD
(formerly Plan Management Administrators, Inc.)
100% -- Wisconsin -- Cafeteria Plan Sales & Services
Centerstone Insurance and Financial Services
100% -- California
EMPHESYS Administrators, Inc.
100% -- Wisconsin
EMPHESYS Sales Corporation
100% -- Wisconsin
Employers Health Insurance Company
89% -- Wisconsin
EMPHESYS Wisconsin Insurance Company
100% -- Wisconsin
HMO California
100% -- California -- HMO
1
<PAGE>
Lincoln National Corporation
Indiana - Holding Company
American States Insurance Company
100% - Indiana - Property/Casualty
EMPHESYS Financial Group, Inc.
29.3% - Delaware - Holding Company
Local Health Alliance Administrators, Inc.
100% - Wisconsin
Wisconsin Employers Group, Inc.
100% - Wisconsin - Holding Company
Employers Health Insurance Company
11% - Wisconsin
Insurance Company of Illinois
100% - Illinois - Fire & Casualty Insurance
Corporate Benefit Systems Services Corporation
100% - Delaware - Insurance Agency
Delaware Management Holdings, Inc.
100% - Delaware - Holding Company
DMH Corp.
100% - Delaware - Holding Company
Delaware Distributors, Inc.
100% - Delaware - General Partner
Delaware Distributors, L.P.
100% - Delaware - Mutual Fund Distributor & Broker/Dealer
Delaware International Advisers Ltd.
81.1% - Delaware - Investment Advisor
Delaware International Holdings Ltd.
100% - Delaware - Marketing Services
Delaware International Advisers Ltd.
18.9% - Delaware - Investment Advisor
Delaware Investment Counselors, Inc.
100% - Delaware - Investment Advisor
2
<PAGE>
Lincoln National Corporation
Indiana - Holding Company
Delaware Management Holdings, Inc.
100% - Delaware - Holding Company
DMH Corp.
100% - Delaware - Holding Company
Delaware Management Company, Inc.
100% - Delaware - Investment Advisor
Founders Holdings, Inc.
100% - Delaware - General Partner
Founders CBO, L.P.
100% - Delaware - Investment Partnership
Founders CBO Corporation
100% - Delaware - Co-Issuer with Founders CBO
Delaware Management Trust Company
100% - Delaware - Trust Services
Delaware Service Company, Inc.
100% - Delaware - Shareholder Services & Transfer Agent
The Insurers' Fund, Inc. #
100% - Maryland - Inactive
LNC Administrative Services Corporation
100% - Indiana - Third Party Administrator
The Richard Leahy Corporation
100% - Indiana - Insurance Agency
The Financial Alternative, Inc.
100% - Utah - Insurance Agency
Financial Alternative Resources, Inc.
100% - Kansas - Insurance Agency
Financial Choices, Inc.
100% - Pennsylvania - Insurance Agency
Financial Investment Services, Inc.
(formerly Financial Services Department, Inc.)
100% - Indiana - Insurance Agency
Financial Investment, Inc.
(formerly Insurance Alternatives, Inc.)
100% - Indiana - Insurance Agency
3
<PAGE>
Lincoln National Corporation
Indiana - Holding Company
The Richard Leahy Corporation
100% - Indiana - Insurance Agency
The Financial Resources Department, Inc.
100% - Michigan - Insurance Agency
Insurance Services, Inc.
100% - Nevada - Insurance Agency
Investment Alternatives, Inc.
100% - Pennsylvania - Insurance Agency
The Investment Center, Inc.
100% - Tennessee - Insurance Agency
The Investment Group, Inc.
100% - New Jersey - Insurance Agency
Personal Financial Resources, Inc.
100% - Arizona - Insurance Agency
Personal Investment Services, Inc.
100% - Pennsylvania - Insurance Agency
LincAm Properties, Inc.
50% - Delaware - Real Estate Investment
Lincoln European Reinsurance Company
100% - Belgium
Lincoln Financial Group, Inc.
(formerly Lincoln National Sales Corporation)
100% - Indiana - Insurance Agency
LNC Equity Sales Corporation
100% - Indiana - Broker-Dealer
Corporation agencies: Lincoln Financial Group, Inc. ("LFG")
has 32 subsidiaries of which LFG owns from 80%-100% of the
common stock (see Attachment #1). These subsidiaries serve
as the corporate agency offices for the marketing and
servicing of products of The Lincoln National Life Insurance
Company. Each subsidiary's assets are less than 1% of the
total assets of the ultimate controlling person.
Professional Financial Planning, Inc.
100% - Indiana - Financial Planning Services
4
<PAGE>
Lincoln National Corporation
Indiana - Holding Company
Lincoln Life Improved Housing, Inc.
100% - Indiana
Lincoln National (China) Inc.
100% - Indiana - China Representatives Office
Lincoln National Intermediaries, Inc.
100% - Indiana - Reinsurance Intermediary
Lincoln National Investment Management Company
100% - Illinois - Mutual Fund Manager and
Registered Investment Adviser
Lincoln National Mezzanine Corporation
100% - Indiana - General Partner for Mezzanine Financing
Limited Partnership
Lincoln National Mezzanine Fund, L.P.
50% - Delaware - Mezzanine Financing Limited Partnership
The Lincoln National Life Insurance Company
100% - Indiana
First Penn-Pacific Life Insurance Company
100% - Indiana
Lincoln National Aggressive Growth Fund, Inc.
100% - Maryland - Mutual Fund
Lincoln National Bond Fund, Inc.
100% - Maryland - Mutual Fund
Lincoln National Capital Appreciation Fund, Inc.
100% - Maryland - Mutual Fund
Lincoln National Equity-Income Fund, Inc.
100% - Maryland - Mutual Fund
Lincoln National Growth Fund, Inc.
100% - Maryland - Mutual Fund
Lincoln National Health & Casualty Insurance Company
100% - Indiana
Lincoln National International Fund, Inc.
100% - Maryland - Mutual Fund
5
<PAGE>
Lincoln National Corporation
Indiana - Holding Company
The Lincoln National Life Insurance Company
100% - Indiana
Lincoln National Life Insurance Company
100% - Indiana
Special Pooled Risk Administrators, Inc.
100% - New Jersey - Catastrophe Reinsurance
Pool Administrator
Lincoln National Managed Fund, Inc.
100% - Maryland - Mutual Fund
Lincoln National Money Market Fund, Inc.
100% - Maryland - Mutual Fund
Lincoln National Putnam Master Fund, Inc.
100% - Maryland - Mutual Fund
Lincoln National Social Awareness Fund, Inc.
100% - Maryland - Mutual Fund
Lincoln National Special Opportunities Fund, Inc.
100% - Maryland - Mutual Fund
Lincoln National Management Services, Inc.
100% - Indiana - Underwriting and Management Services
Lincoln National Realty Corporation
100% - Indiana - Real Estate
Lincoln National Reassurance Company
100% - Indiana - Life Insurance
Lincoln National Reinsurance Company (Barbados) Limited
100% - Barbados
Lincoln National Reinsurance Company Limited
(formerly Heritage Reinsurance, Ltd.)
100% ** - Bermuda
Lincoln National Risk Management, Inc.
100% - Indiana - Risk Management Services
6
<PAGE>
Lincoln National Corporation
Indiana - Holding Company
Lincoln National Specialty Insurance Company
(formerly Western Casualty and Surety Company)
100% ** - Kansas - Property/Casualty
Lincoln National Structured Settlement, Inc.
100% - New Jersey
Lincoln National (UK) PLC
(formerly Cannon Lincoln PLC)
100% - England/Wales - Holding Company
Allied Westminster & Company Limited
(formerly One Olympic Way Financial Services Limited)
100% - England/Wales - Sales Services
Cannon Fund Managers Limited
100% - England/Wales - Inactive
Culverin Property Services Limited
100% - England/Wales - Property Development Services
Hansard Unit Trust Managers Limited
100% - England/Wales - Unit Trust Management
ILI Supplies Limited
100% - England/Wales - Computer Leasing
Liberty Life Assurance Company Limited
100% - England/Wales - Life Assurance
Liberty Life Pension Trustee Company Limited
100% - England/Wales - Computer Pension Fund
Liberty Press Limited
100% - England/Wales - Printing Services
7
<PAGE>
Lincoln National Corporation
Indiana - Holding Company
Lincoln National (UK) PLC
(formerly Cannon Lincoln PLC)
100% - England/Wales - Holding Company
Lincoln Assurance Limited
(formerly Cannon Assurance Limited)
100% ** - England/Wales - Life Assurance
Lincoln Fund Managers Limited
(formerly Cannon Lincoln Fund Managers Limited)
100% - England/Wales - Unit Trust Management
Lincoln Insurance Services Ltd.
(formerly: Cannon Lincoln Insurance Services Ltd.)
100% - Holding Company
British National Life Sales Ltd.
100% - Inactive
BNL Trustees Limited
100% - England/Wales - Corporate Pension Fund
Chapel Ash Financial Services Ltd.
100% - Direct Insurance Sales
Lincoln General Insurance Co. Ltd.
(formerly: Cannon General Insurance Co. Ltd.)
100% - Accident & Health Insurance
P.N. Kemp-Gee & Co. Ltd.
100% - Inactive
Lincoln Investment Management Limited
(formerly Cannon Lincoln Investment Management Ltd.)
100% - England/Wales - Investment Management Services
CL CR Management Ltd.
50% - England/Wales - Administrative Services
Lincoln National Training Services Limited
(formerly Cannon Lincoln Training Services Ltd.)
100% - England/Wales - Training Company
Lincoln Pension Trustees Limited
(formerly Cannon Pension Trustees Limited)
100% - England/Wales - Corporate Pension Fund
8
<PAGE>
Lincoln National Corporation
Indiana -- Holding Company
Lincoln National (UK) PLC
(formerly Cannon Lincoln PLC)
100% -- England/Wales -- Holding Company
LN Management Limited
(formerly: Cannon Lincoln Management Limited)
100% -- England/Wales -- Administrative Services
UK Mortgage Securities Limited
100% -- England/Wales -- Inactive
LN Securities Limited
(formerly Cannon Securities Limited)
100% -- England/Wales -- Nominee Company
Niloda Limited
100% -- England/Wales -- Investment Company
Linsco Reinsurance Company
(formerly Lincoln National Reinsurance Company)
100% -- Indiana -- Property/Casualty
Lynch & Mayer, Inc.
100% -- Indiana -- Investment Adviser
Lynch & Mayer Asia, Inc.
100% -- Delaware -- Investment Management
Lynch & Mayer Securities Corp.
100% -- Delaware -- Securities Broker
Old Fort Insurance Company, Ltd.
100% ** -- Bermuda
Servicios de Evaluacion de Riesgos, S. de R.L. de C.V.
49% -- Mexico (a partnership)
Underwriters & Management Services, Inc.
100% -- Indiana -- Underwriting Services
Vantage Global Advisors, Inc.
(formerly Modern Portfolio Theory Associates, Inc.)
100% -- Delaware -- Investment Adviser
9
<PAGE>
Footnotes:
- ---------
* The funds contributed by the Underwriters were, and continue to be subject
to trust agreements between American States Insurance Company, the
grantor, and each Underwriter, as trustee.
** Except for director-qualifying shares
# Lincoln National Corporation has subscribed for and paid for 100 shares of
Common Stock (with a par value of $1.00 per share) at a price of $10 per
share, as part of the organizing of the fund. As such stock is further
sold, the ownership of voting securities by Lincoln National Corporation
will decline and fluctuate.
10
<PAGE>
ATTACHMENT #1
LINCOLN FINANCIAL GROUP, INC.
CORPORATE AGENCY SUBSIDIARIES
1) Lincoln Financial Group, Inc. (AL)
2) Lincoln Southwest Financial Group, Inc. (Phoenix, AZ)
3) Lincoln Financial and Insurance Services of Northern California, Inc.
(formerly: Lincoln Financial and Insurance Services Corporation)
(Walnut Creek, CA)
3a) California Fringe Benefit and Insurance Marketing Corporation
DBA/California Fringe Benefit Company (Walnut Creek, CA)
4) Lincoln West Financial and Insurance Services Corporation (Orange, CA)
5) Southwest Financial and Insurance Services Corporation (Los Ang., CA)
6) Colorado-Lincoln Financial Group, Inc. (Denver, CO)
7) Lincoln National Sales Corporation of Connecticut (formerly: The Lincoln
Financial Group, Inc.) (Norwalk, CT)
8) Lincoln National Financial Services, Inc. (Lake Worth, FL)
9) Lincoln Financial Services, Inc. (Jacksonville, FL)
10) Lincoln National Sales Corporation of Georgia (Atlanta, GA)
11) CMP Financial Services, Inc. (Chicago, IL)
12) Lincoln National Sales Corporation of Indiana, Inc. (Indianapolis, IN)
13) Lincoln Financial Group of Northern Indiana, Inc. (Fort Wayne, IN)
14) The Financial Group, Inc. (Mission, KS)
14a) Financial Planning Partners, Ltd. (Mission, KS)
15) Lincoln National Midsouth Corporation (Louisville, KY)
16) The Lincoln National Financial Group of Louisiana, Inc. (Shreveport, LA)
17) Benefits Marketing Group, Inc. (D.C. & Chevy Chase, MD)
18) Morgan Financial Group, Inc. (Baltimore, MD)
19) Lincoln National of New England Insurance Agency, Inc. (Worcester, MA)
20) Lincoln Financial Group of Michigan, Inc. (Troy, MI)
20a) Financial Consultants of Michigan, Inc. (Troy, MI)
21) Lincoln National Financial Group, Inc. (Minneapolis, MN)
22) Lincoln Financial Group of Missouri, Inc. (formerly: John J. Moore &
Associates, Inc.) (St. Louis, MO)
23) Financial Associates, Inc. (Omaha, NE)
24) Beardslee & Associates, Inc. (Clifton, NJ)
25) Resources/Financial, Inc. (Albuquerque, NM)
26) Lincoln Financial Group/Carolinas, Inc. (Charlotte, NC)
27) Lincoln Cascades, Inc. (Portland, OR)
28) Lincoln Financial Services, Inc. (Pittsburgh, PA)
29) Lincoln National Financial Group of Philadelphia, Inc.
(Philadelphia, PA)
29a) Cavalier Financial Planners, Inc. (Philadelphia, PA)
39) Lincoln Financial Group, Inc. (Salt Lake City, UT)
31) Lincoln Financial Services of Virginia, Inc. (Norfolk, VA)
(DBA/Group Concepts Unlimited)
11
<PAGE>
Exhibit 14(b)
BOOKS AND RECORDS
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT C
RULES UNDER SECTION 31 OF THE INVESTMENT COMPANY ACT OF 1940
Records to Be Maintained by Registered Investment Companies, Certain
Majority-Owned Subsidiaries Thereof, and Other Persons Having Transactions
with Registered Investment Companies.
Reg. 270.31a-1. (a) Every registered investment company, and every underwriter,
broker, dealer, or investment advisor which is a majority-owned subsidiary of
such a company, shall maintain and keep current the accounts, books, and other
documents relating to its business which constitute the record forming the basis
for financial statements required to be filed pursuant to Section 30 of the
Investment Company Act of 1940 and of the auditor's certificates relating
thereto.
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
Annual Reports Controllers Eric Jones Permanently, the first
To Shareholders two years in an easily
accessible place
Semi-Annual Controllers Eric Jones Permanently, the first
Reports two years in an easily
accessible place
Form N-SAR Controllers Eric Jones Permanently, the first
two years in an easily
accessible place
(b) Every registered investment company shall maintain and keep current the
following books, accounts, and other documents:
Type of Record
- --------------
(1) Journals (or other records of original entry) containing an itemized daily
record in detail of all purchases and sales of securities (including sales and
redemptions of its own securities), all receipts and deliveries of securities
(including certificate numbers if such detail is not recorded by custodian or
transfer agent), all receipts and disbursements of cash and all other debits and
credits. Such records shall show for each such transaction the name and quantity
of securities, the unit and aggregate purchase or sale price, commission paid,
the market on which effected, the trade date, the settlement date, and the name
of the person through or from whom purchased or received or to whom sold or
delivered.
Purchases and Sales Journals
- ----------------------------
Daily reports Product Judy Esterline Permanently, the first
of securities Admin. Jon Geist two years in an easily
transactions Product accessible place
Management
Portfolio Securities
- --------------------
Not Applicable.
<PAGE>
LN-Record Location Person to Contract Retention
- --------- -------- ------------------ ---------
Receipts and Deliveries of Securities (units)
- ---------------------------------------------
Not Applicable.
Portfolio Securities
- --------------------
Not Applicable.
Receipts and Disbursements of Cash and other Debits and Credits
- ---------------------------------------------------------------
Daily Journals Product Judy Esterline Permanently, the first two
Admin. Jon Geist years in an easily accessible
Product place
Management
(2) General and auxiliary ledgers (or other record) reflecting all asset,
liability, reserve, capital, income and expense accounts, including:
(i) Separate ledger accounts (or other records) reflecting the following:
(a) Securities in transfer;
(b) Securities in physical possession;
(c) Securities borrowed and securities loaned;
(d) Monies borrowed and monies loaned (together with a record of the
collateral therefore and substitutions in such collateral);
(e) Dividends and interest received;
(f) Dividends receivable and interest accrued.
Instructions. (a) and (b) shall be stated in terms of securities quantities
only; (c) and (d) shall be stated in dollar amounts and securities quantities as
appropriate; (e) and (f) shall be stated in dollar amounts only.
General Ledger
- --------------
LNL trial Controllers Eric Jones Permanently, the first two
balance (5000 years in an easily accessible
series) place
Securities in Transfer
- ----------------------
Not Applicable.
Securities in Physical Possession
- ---------------------------------
Not Applicable.
Securities Borrowed and Loaned
- ------------------------------
Not Applicable.
Monies Borrowed and Loaned
- --------------------------
Not Applicable.
<PAGE>
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
Dividends and Interest Received
- -------------------------------
LNL Trial Controllers Eric Jones Permanently, the first two
Balance (5000 years in an easily
series) accessible place
Dividends Receivable and Interest Accrued
- -----------------------------------------
LNL Trial Controllers Eric Jones Permanently, the first
Balance (5000 two years in an easily
series) accessible place
(ii) Separate ledger accounts (or other records) for each portfolio security,
showing (as of trade dates), (a) the quantity and unit and aggregate price for
each purchase, sale, receipt, and delivery of securities and commodities for
such accounts, and (b) all other debits and credits for such accounts.
Securities positions and money balances in such ledger accounts (or other
records) shall be brought forward periodically but not less frequently than at
the end of fiscal quarters. Any portfolio security, the salability of which is
conditioned, shall be so noted. A memorandum record shall be available setting
forth, with respect to each portfolio security accounts, the amount and
declaration, ex-dividend, and payment dates of each dividend declared thereon.
Ledger Account for each portfolio Security
- ------------------------------------------
Daily Report Not Permanently, the first two
of Securities Applicable years in an easily accessible
transactions place
(iii) Separate ledger accounts (or other records) for each broker-dealer, bank
or other person with or through which transactions in portfolio securities are
affected, showing each purchase or sale of securities with or through such
persons, including details as to the date of the purchase or sale, the quantity
and unit and aggregate prices of such securities, and the commissions or other
compensation paid to such persons. Purchases or sales effected during the same
day at the same price may be aggregated.
Not Applicable.
(iv) Separate ledger accounts (or other records), which may be maintained by a
transfer agent or registar, showing for each shareholder of record of the
investment company the number of shares of capital stock of the copmany held, in
respect of share accumulation accounts (arising from periodic investment plans,
dividend reinvestment plans, deposit of issued shares by the owner thereof,
etc.), details shall be available as to the dates and number of shares of each
accumulation, and except with respect to already issued shares deposited by the
owner thereof, prices of each such accumulation.
Shareholder Accounts
- --------------------
Master file Controllers Eric Jones Permanently, the first two
record years in an easily accessible
place
<PAGE>
(3) A securities record or ledger reflecting separately for each portfolio
security as of trade date all "long" and "short" positions carried by the
investment company for its own account and showing the location of all
securities long and the off-setting position to all securities short. The record
called for by this paragraph shall not be required in circumstances under which
all portfolio securities are maintained by a bank or banks or a member or
members of a national securities exchange as custodian under a custody agreement
or as agent for such custodian.
LN-Record Location Person to Contact Retention
- --------- -------- ------------------ ---------
Securities Position Record
- --------------------------
Maintained by Bankers William P. Kelly Permanently, the first two
Custodian of Trust years in an easily
Securities Company accessible place
(4) Corporate charters, certificates of incorporation or trust agreements, and
bylaws, and minute books of stockholders' and directors' or trustees' meetings;
and minute books of directors' or trustees' committee and advisory board or
advisory committee meetings.
Corporate Documents
- -------------------
Not Applicable.
(5) A record of each brokerage order given by or in behalf of the investment
company for, or in connection with, the purchase or sale of securities, whether
executed or unexecuted. Such record shall include the name of the broker, the
terms and conditions of the order and of any modification or cancellation
thereof, the time of entry or cancellation, the price at which executed, and the
time of receipt of report of execution. The record shall indicate the name of
the person who placed the order in behalf of the investment company.
Order Tickets
- -------------
UIT applica- Not Six years, the first two
tions and Applicable years in an easily
daily reports accessible place
of securities
transactions
(6) A record of all other portfolio purchase or sales showing details comparable
to those prescribed in paragraph 5 above.
Commercial Paper
- ----------------
Not Applicable.
(7) A record of all puts, calls, spreads, straddles, and other options in which
the investment company has any direct or indirect interest or which the
investment company has granted or guaranteed; and a record of any contractual
commitments to purchase, sell, receive or deliver securities or other property
(but not including open orders placed with broker-dealers for the purchase or
sale of securities, which may be cancelled by the company on notices without
penalty or cost of any kind); containing at least an identification of the
security, the number of units involved, the option price, the date of maturity,
the date of issuance, and the person to whom issued.
Record of Puts, Calls, Spreads, Etc.
- ------------------------------------
Not Applicable.
<PAGE>
(8) A record of the proof of money balances in all ledger accounts (except
shareholder accounts), in the form of trial balances. Such trial balances shall
be prepared currently at least once a month.
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
Trial Balance
- -------------
LNL Trial Controllers Scott Schilling Permanently, the first two
Balance (5000 years in an easily
series) accessible place
(9) A record for each fiscal quarter, which shall be completed within 10 days
after the end of such quarter, showing specifically the basis or bases upon
which the allocation of orders for the purchase and sale of portfolio securities
to named brokers or dealers and the division of brokerage commissions or other
compensation on such purchase and sale orders among named persons were made
during such quarter. The record shall indicate the consideration given to (a)
sales of shares of the investment company by brokers or dealers, (b) the
supplying of services or benefits by brokers or dealers to the investment
company, its investment advisor or principal underwriter or any persons
affiliated therewith,
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from Lincoln
National Variable Annuity Account C as of December 31, 1994 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 2,924,248,901
<INVESTMENTS-AT-VALUE> 3,041,312,272
<RECEIVABLES> 86,529,660
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3,127,841,932
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,611,537
<TOTAL-LIABILITIES> 2,611,537
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,340,704,849
<SHARES-COMMON-STOCK> 395,066,867
<SHARES-COMMON-PRIOR> 198,342,346
<ACCUMULATED-NII-CURRENT> 625,514,655
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 41,947,520
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 117,063,371
<NET-ASSETS> 3,125,230,395
<DIVIDEND-INCOME> 195,071,603
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 28,835,549
<NET-INVESTMENT-INCOME> 166,236,054
<REALIZED-GAINS-CURRENT> 1,969,702
<APPREC-INCREASE-CURRENT> (199,112,550)
<NET-CHANGE-FROM-OPS> (30,906,794)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 724,803,954
<NUMBER-OF-SHARES-REDEEMED> 329,737,087
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 562,726,635
<ACCUMULATED-NII-PRIOR> 459,278,601
<ACCUMULATED-GAINS-PRIOR> 39,977,818
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 28,835,549
<AVERAGE-NET-ASSETS> 2,843,867,078
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> .0
<PER-SHARE-DISTRIBUTIONS> .0
<RETURNS-OF-CAPITAL> .0
<PER-SHARE-NAV-END> .0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
LINCOLN NATIONAL LIFE INSURANCE COMPANY CONSOLIDATED FINANCIAL
STATEMENTS AS OF DECEMBER 31, 1994 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<DEBT-HELD-FOR-SALE> 17,692,214
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 456,333
<MORTGAGE> 2,795,914
<REAL-ESTATE> 679,512
<TOTAL-INVEST> 22,310,900
<CASH> 990,880
<RECOVER-REINSURE> 2,069,292
<DEFERRED-ACQUISITION> 1,736,526
<TOTAL-ASSETS> 41,025,547
<POLICY-LOSSES> 7,540,772
<UNEARNED-PREMIUMS> 61,472
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 17,028,628
<NOTES-PAYABLE> 68,989
<COMMON> 25,000
0
0
<OTHER-SE> 1,895,955
<TOTAL-LIABILITY-AND-EQUITY> 41,025,547
1,099,480
<INVESTMENT-INCOME> 1,673,981
<INVESTMENT-GAINS> (69,568)
<OTHER-INCOME> 411,330
<BENEFITS> 2,194,047
<UNDERWRITING-AMORTIZATION> 660,363
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 260,198
<INCOME-TAX> 40,400
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
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