<PAGE>
As filed with the Securities and Exchange Commission on March 1, 1999
Registration No. 333-50817
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 1
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 28
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT C (e-Annuity)
-------------------------------------------
(Exact Name of Registrant)
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)
Copies of all communications to Porter, Wright, Morris & Arthur
1667 K Street NW, Suite 1100
Washington, D.C. 20006
Attention: Patrice M. Pitts, Esq.
It is proposed that this filing will become effective on March 1, 1999
pursuant to paragraph (b) 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
(b) Not Applicable
(c) Not Applicable
(d) For Your Information
4.(a) Condensed Financial Information
(b) Condensed Financial Information
(c) Financial Statements
5.(a) Cover Page; 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
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
<PAGE>
CROSS REFERENCE SHEET TO ITEMS REQUIRED BY FORM N-4
N-4 ITEM CAPTION IN PROSPECTUS (PART A)
- -------- ------------------------------
1. Cover Page
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.
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 Lincoln National Life
Insurance Co. (Lincoln Life)
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
22. Annuity Payouts
23.(a) Financial Statements -- Lincoln
National Variable Annuity
Account C
(b) Consolidated Financial Statements --
Lincoln National Life
Insurance Co. (Lincoln Life)
<PAGE>
EANNUITY
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT C
INDIVIDUAL VARIABLE ANNUITY CONTRACTS
Issued by:
Lincoln National Life Insurance Co.
1300 South Clinton Street
Fort Wayne, Indiana 46802
Servicing Address:
Lincoln Financial Direct
P.O. Box 691
Leesburg, VA 20178
This prospectus describes an individual flexible premium deferred variable
annuity contract (Contract) issued by The Lincoln National Life Insurance
Company (Lincoln Life). Most transactions involving this Contract may be
performed through Lincoln Life's Internet Service Center.
The Contract described in this prospectus is offered for both traditional and
Roth individual retirement annuities (IRAs) and as a nonqualified Contract. A
nonqualified Contract can be owned jointly only by spouses and is purchased with
after-tax money.
The Contract offers you the accumulation of Contract Value and payment of
periodic annuity benefits. These benefits are paid on a variable basis. Annuity
benefits start at the Annuity Commencement Date which you select. If the
Contractowner dies before the Annuity Commencement Date, the Contract Value will
be paid to the Beneficiary. (See DEATH BENEFIT BEFORE ANNUITY COMMENCEMENT
DATE.)
The minimum initial Purchase Payment for the Contract is $1,000. The minimum
payment to the Contract, after the initial Purchase Payment, is $100 per
payment. Lincoln Life reserves the right to limit the sum of Purchase Payments
made under this Contract to $5,000,000.
All Purchase Payments will be placed in Lincoln National Variable Annuity
Account C (Variable Annuity Account [VAA]). The VAA is a segregated investment
account of Lincoln Life, which is the depositor. Based upon your instructions,
the VAA invests Purchase Payments (at net asset value) in specified mutual funds
(the Funds, Series and Portfolios). 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), Series or Portfolio(s) selected.
Investments in these funds are neither insured nor guaranteed by the U.S.
Government or by any other person or entity.
This prospectus details the information regarding the VAA that you should
know before investing. You should read it carefully and it will remain
available through Lincoln Life's Internet Service Center. We have also
attached current prospectuses for each of the 21 funds available through the
Contract as follows:
The eleven Lincoln National Funds prospectuses:
Page 1
<PAGE>
1. Lincoln National Aggressive Growth Fund, Inc.
2. Lincoln National Bond Fund, Inc.
3. Lincoln National Capital Appreciation Fund, Inc.
4. Lincoln National Equity-Income Fund, Inc.
5. Lincoln National Global Asset Allocation Fund, Inc.
6. Lincoln National Growth and Income Fund, Inc.
7. Lincoln National International Fund, Inc.
8. Lincoln National Managed Fund, Inc.
9. Lincoln National Money Market Fund, Inc.
10. Lincoln National Social Awareness Fund, Inc.
11. Lincoln National Special Opportunities Fund, Inc.
The prospectus for Delaware Group Premium Fund, Inc., which contains information
regarding:
12. Decatur Total Return Series
13. Global Bond Series
14. Trend Series
The BT Insurance Funds Trust prospectus for:
15. Equity 500 Index Fund
16. Small Cap Index Fund
The American Century Variable Portfolios, Inc. prospectus for:
17. VP International
The Baron Capital Funds Trust prospectus for:
18. Baron Capital Asset Fund
The Neuberger Berman Advisers Management Trust Portfolios prospectus for:
19. AMT Partners Portfolio
20. AMT MidCap Growth Portfolio
The Janus Aspen Series prospectus for:
21. Worldwide Growth Portfolio
You should read each of these prospectuses carefully before purchasing a
Contract and save them for future reference.
A Statement of Additional Information (SAI), dated March 1, 1999, concerning
the VAA has been filed with the SEC and is incorporated by reference into
this prospectus. A table of contents for the SAI appears on the last page of
this prospectus. A free copy of the SAI is available upon e-mail request
through our Internet Service Center (http://www.AnnuityNet.com). The SAI is
also available through the SEC website (http://www.sec.gov). In addition, the
material incorporated by reference and other information regarding
registrants who file electronically with the SEC is available through the SEC
website.
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.
The date of this prospectus is March 1, 1999.
Page 2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SPECIAL TERMS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
EXPENSE TABLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
CONTRACTOWNER TRANSACTION EXPENSES . . . . . . . . . . . . . . . . . . . . . . . .7
VAA ANNUAL EXPENSES FOR EANNUITY SUBACCOUNTS . . . . . . . . . . . . . . . . . . .7
ANNUAL EXPENSES OF THE FUNDS, SERIES AND PORTFOLIOS FOR THE YEAR ENDED 1997. . . .7
EXAMPLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
SYNOPSIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
CONDENSED FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . 11
INVESTMENT RESULTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
LINCOLN NATIONAL LIFE INSURANCE CO.. . . . . . . . . . . . . . . . . . . . . . . . 12
VARIABLE ANNUITY ACCOUNT (VAA) . . . . . . . . . . . . . . . . . . . . . . . . . . 12
INVESTMENTS OF THE VARIABLE ANNUITY ACCOUNT. . . . . . . . . . . . . . . . . . . . 12
INVESTMENT ADVISOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
FUNDS/SERIES/PORTFOLIOS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
LINCOLN NATIONAL FUNDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SERIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
PORTFOLIOS AND OTHER FUNDS . . . . . . . . . . . . . . . . . . . . . . . . . . 16
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS . . . . . . . . . . . . . . . . 17
REINVESTMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS. . . . . . . . . . . . . . . . 17
CHARGES AND OTHER DEDUCTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
DEDUCTIONS FROM THE VAA FOR EANNUITY . . . . . . . . . . . . . . . . . . . . . . 18
SURRENDER CHARGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
DEDUCTIONS FOR PREMIUM TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . 19
OTHER CHARGES AND DEDUCTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 19
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
THE CONTRACT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
PURCHASE OF CONTRACT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
WHO CAN INVEST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
PURCHASE PAYMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
VALUATION DATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
ALLOCATION OF PURCHASE PAYMENTS. . . . . . . . . . . . . . . . . . . . . . . . . 20
VALUATION OF ACCUMULATION UNITS. . . . . . . . . . . . . . . . . . . . . . . . . 21
TRANSFERS BETWEEN SUBACCOUNTS ON OR BEFORE THE ANNUITY COMMENCEMENT DATE . . . . 21
TRANSFERS AFTER THE ANNUITY COMMENCEMENT DATE. . . . . . . . . . . . . . . . . . 22
DEATH BENEFIT BEFORE THE ANNUITY COMMENCEMENT DATE . . . . . . . . . . . . . . . 22
JOINT OWNERSHIP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
DEATH OF ANNUITANT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SURRENDERS AND WITHDRAWALS . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
AMENDMENT OF CONTRACT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
OWNERSHIP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
</TABLE>
Page 3
<PAGE>
<TABLE>
<S> <C>
CONTRACTOWNER QUESTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
ANNUITY PAYOUTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
ANNUITY OPTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
GENERAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
VARIABLE ANNUITY PAYOUTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
FEDERAL TAX STATUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
TAXATION OF NONQUALIFIED ANNUITIES . . . . . . . . . . . . . . . . . . . . . . . 26
TAX DEFERRAL ON EARNINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
TAX TREATMENT OF PAYMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . 28
TAXATION OF WITHDRAWALS AND SURRENDERS . . . . . . . . . . . . . . . . . . . . 28
TAXATION OF ANNUITY PAYOUTS. . . . . . . . . . . . . . . . . . . . . . . . . . 28
TAXATION OF DEATH BENEFITS . . . . . . . . . . . . . . . . . . . . . . . . . . 29
PENALTY TAXES PAYABLE ON WITHDRAWALS, SURRENDERS, OR ANNUITY PAYOUTS . . . . . 29
SPECIAL RULES IF YOU OWN MORE THAN ONE ANNUITY CONTRACT. . . . . . . . . . . . 29
GIFTING A CONTRACT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
LOSS OF INTEREST DEDUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . 30
QUALIFIED RETIREMENT PLANS . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
TYPES OF QUALIFIED CONTRACTS AND TERMS OF CONTRACTS. . . . . . . . . . . . . . 30
TAX TREATMENT OF QUALIFIED CONTRACTS . . . . . . . . . . . . . . . . . . . . . 31
TAX TREATMENT OF PAYMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . 31
FEDERAL PENALTY TAXES PAYABLE ON DISTRIBUTIONS . . . . . . . . . . . . . . . . 31
TRANSFERS AND DIRECT ROLLOVERS . . . . . . . . . . . . . . . . . . . . . . . . 32
FEDERAL INCOME TAX WITHHOLDING . . . . . . . . . . . . . . . . . . . . . . . . . 32
TAX STATUS OF LINCOLN LIFE . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
CHANGES IN THE LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
VOTING RIGHTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
DISTRIBUTION OF THE CONTRACTS. . . . . . . . . . . . . . . . . . . . . . . . . . . 33
RETURN PRIVILEGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
STATE REGULATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
RECORDS AND REPORTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
ADVERTISEMENTS/SALES LITERATURE. . . . . . . . . . . . . . . . . . . . . . . . . . 35
PREPARING FOR THE YEAR 2000. . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
</TABLE>
Page 4
<PAGE>
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
Contract offered in this prospectus.
Accumulation Unit -- A measure used to calculate Contract Value before the
Annuity Commencement Date. See THE CONTRACTS.
Advisor or Investment Advisor -- The entity, which provides investment
management services to each of the Funds, Series and Portfolios. See INVESTMENT
ADVISOR.
Annuitant -- The person upon whose life the annuity benefit payments made after
the Annuity Commencement Date will be based.
Annuity Commencement Date -- The Valuation Date when the funds are withdrawn or
converted into Annuity Units for payment of annuity benefits under the Annuity
Payout Option selected. For purposes of determining whether an event occurs
before or after the Annuity Commencement Date, the Annuity Commencement Date is
deemed to begin at close of business on the Valuation Date.
Annuity Payout Option -- An optional form of payout of the annuity available
under the Contract. See ANNUITY PAYOUTS.
Annuity Payout -- An amount paid at regular intervals after the Annuity
Commencement Date under one of several options available to the Annuitant and/or
any other payee. The amount paid may vary.
Annuity Unit -- A measure used to calculate the amount of Annuity Payouts after
the Annuity Commencement Date. See ANNUITY PAYOUTS.
Beneficiary -- The person whom you designate to receive the Death Benefit, if
any, in case of the Contractowner's death.
Cash Surrender Value -- Upon Surrender, the Contract value less any applicable
Surrender Charges.
Code -- The Internal Revenue Code of 1986, as amended.
Contract (variable annuity contract) -- The agreement between you and us
providing a variable annuity.
Contractowner (you, your, owner) -- The person who has the ability to exercise
the rights under the Contract (decides on investment allocations, transfers,
payout option, 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.
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 the Owner's designated Beneficiary if
the Owner dies before the Annuity Commencement Date. See THE CONTRACTS.
Page 5
<PAGE>
Fund -- Any of the underlying investment options in which your Purchase Payments
are invested, except for the Series and the Portfolios.
Internet Service Center -- The Internet site that Lincoln Life maintains to
provide variable annuity contract documents and information to current and
prospective annuity Contractowners and through which various transactions may be
performed. Certain of these transactions may require faxed or mailed
signatures.
Lincoln Life (we, us, our) -- Lincoln National Life Insurance Co.
Portfolio -- Any of the underlying investment options offered by the Neuberger
Berman Advisers Management Trust Portfolios, by American Century Variable
Portfolios, Inc. and by Janus Aspen Series, in which your Purchase Payments are
invested.
Purchase Payments -- Amounts paid into the Contract.
Series -- Any of the underlying investment options offered by the Delaware Group
Premium Fund, Inc., in which your Purchase Payments are invested.
Servicing Office -- A unit of Lincoln National Life Insurance Company that
supports and services the eAnnuity Contract. This office is Lincoln Financial
Direct, P.O. Box 691, Leesburg, VA 20178
Statement of Additional Information (SAI) -- A document required by the SEC to
be provided upon request to a prospective purchaser of a Contract, you. This
free document gives more information about Lincoln Life, the VAA and the
Contract.
Subaccount -- That portion of the VAA that reflects investments in Accumulation
and Annuity Units of a class of a particular Fund, Series or Portfolio. A
Subaccount corresponds to each Fund, Series or Portfolio.
Surrender -- A Contract right that allows you to terminate your Contract and
receive your Cash Surrender Value. See THE CONTRACTS.
Surrender Charge -- Also known as a contingent deferred sales charge, this
charge may be assessed upon premature Withdrawals or Surrender of the Contract.
See CHARGES AND OTHER DEDUCTIONS.
Valuation Date -- Each day the New York Stock Exchange (NYSE) is open for
trading.
Valuation Period -- The period commencing at the close of trading (currently
4:00 p.m. EST) on each day that the NYSE is open for trading (i.e., the
Valuation Date) and ending at the close of such trading on the next succeeding
Valuation Date.
Withdrawal -- A Contract right that allows you to obtain a portion of your Cash
Surrender Value.
Page 6
<PAGE>
EXPENSE TABLES
CONTRACTOWNER TRANSACTION EXPENSES:
The Surrender Charge percentage is reduced to zero after three years according
to the following schedule:
<TABLE>
<S> <C> <C> <C> <C>
Contract Year 1 2 3 4 or more
Surrender Charge as % of 3% 2% 1% 0%
Contract Value Withdrawn
</TABLE>
(Note: This charge may be waived in certain cases. See CHARGES AND OTHER
DEDUCTIONS.)
VAA ANNUAL EXPENSES FOR EANNUITY SUBACCOUNTS:
(as a percentage of average account value for each Subaccount):
Annuity Asset Charge: 0.55%
ANNUAL EXPENSES OF THE FUNDS, SERIES AND PORTFOLIOS FOR THE YEAR ENDED 1997
(as a percentage of each funds' average net assets):
<TABLE>
- --------------------------------------------------------------------------------
MANAGEMENT OTHER TOTAL
FEES + EXPENSES = EXPENSES
<S> <C> <C> <C> <C>
1. Aggressive Growth (AG) 0.73% 0.08% 0.81%
- --------------------------------------------------------------------------------
2. Bond (B) 0.46 0.07 0.53
- --------------------------------------------------------------------------------
3. Capital Appreciation (CA) 0.75 0.09 0.84
- --------------------------------------------------------------------------------
4. Equity-Income (EI) 0.75 0.07 0.82
- --------------------------------------------------------------------------------
5. Global Asset Allocation (GAA) 0.72 0.17 0.89
- --------------------------------------------------------------------------------
6. Growth and Income (GI) 0.32 0.03 0.35
- --------------------------------------------------------------------------------
7. International (I) 0.79 0.14 0.93
- --------------------------------------------------------------------------------
8. Managed (M) 0.37 0.05 0.42
- --------------------------------------------------------------------------------
9. Money Market (MM) 0.48 0.11 0.59
- --------------------------------------------------------------------------------
10 Social Awareness (SA) 0.36 0.05 0.41
- --------------------------------------------------------------------------------
11. Special Opportunities (SO) 0.37 0.05 0.42
- --------------------------------------------------------------------------------
12. Trend Series (TS)* 0.67 0.13 0.80
- --------------------------------------------------------------------------------
13. Decatur Total Return 0.60 0.11 0.71
Series(TRS)*
- --------------------------------------------------------------------------------
14. Global Bond Series (GBS)* 0.47 0.33 0.80
- --------------------------------------------------------------------------------
15. Equity 500 Index (E500)** 0.20 0.10 0.30
- --------------------------------------------------------------------------------
16. Small Cap Index (SC)** 0.35 0.10 0.45
- --------------------------------------------------------------------------------
17. VP International (VPI) 1.50 N/A 1.50
- --------------------------------------------------------------------------------
18. Baron Capital Asset (BCA)*** 1.00 0.50 1.50
- --------------------------------------------------------------------------------
19. AMT Partners (P)**** 0.86 N/A 0.86
- --------------------------------------------------------------------------------
20. AMT MidCap Growth (MG)**** 1.00 N/A 1.00
- --------------------------------------------------------------------------------
21. Worldwide Growth (WG)***** 0.66 0.08 0.74
- --------------------------------------------------------------------------------
</TABLE>
* The Investment Advisors for these Series currently voluntarily waive
management fees to the extent necessary to maintain the Series total expense
Page 7
<PAGE>
ratio at a maximum of .80%. The management fees and total expenses, absent the
waiver, would have been .75% and .88% for TS and .75% and 1.08% for GBS. Should
they cease to waive those amounts in the future, these management fee
percentages and total expenses may be higher in future years.
** The Advisor has voluntarily undertaken to waive its fees and to reimburse the
funds for certain expenses so that the E500 and SC total expenses will not
exceed .30% and .45%, respectively. The total expenses, absent the waiver, would
have been 2.78% for E500 and 3.27% for SC. Should they cease to waive those
amounts in the future, these management fee percentages and total expenses may
be higher in future years.
*** The Investment Advisor reduces its fee to the extent required to meet the
contractual fee limits for the fund's total operating expenses of 1.50% for the
first $250 million of assets in the fund, 1.35% for the fund assets over $250
million and up to $500 million, and 1.25% for fund assets over $500 million.
Without the expense limitations, the actual expenses are estimated to be 1.6%.
**** The management of these funds has voluntarily undertaken to limit the
funds' expenses by reimbursing the fund for total expenses--after excluding
certain other expenses--that exceed, in the aggregate, 1.00% per annum of the
funds' average daily net asset value. The management fees and total expenses,
absent the waiver, would have been 1.05% for MG. Should they cease to waive
those amounts in the future, these management fee percentages and total expenses
may be higher in future years.
***** Management fees for WG reflect a reduced fee schedule effective July 1,
1997. The management fee for this Portfolio reflects the new rate applied to net
assets as of December 31, 1997. The information for WG is net of fee reductions
from Janus Capital. Fee reductions for the Portfolio reduce the management fee
to the level of the corresponding Janus retail fund. Without such reductions,
the Management Fee, Other Expenses and Total Expenses for the shares would have
been 0.72%, 0.09% and 0.81%, respectively. Janus Capital may modify or terminate
the fee reductions at any time upon at least 90 days' notice to the Trustees.
EXAMPLES
(reflecting expenses of the VAA, the Funds, Series and Portfolios)
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
<S> <C> <C> <C>
1. AG 45 54
-------------------------------------------
2. B 42 46
-------------------------------------------
3. CA 45 55
-------------------------------------------
4. EI 45 54
-------------------------------------------
5. GAA 46 57
-------------------------------------------
6. GI 40 40
-------------------------------------------
7. I 46 58
-------------------------------------------
8. M 41 42
-------------------------------------------
9. MM 43 47
-------------------------------------------
10. SA 41 42
-------------------------------------------
11. SO 41 42
-------------------------------------------
12. TS 45 54
-------------------------------------------
13. DTRS 44 51
-------------------------------------------
14. GBS 45 54
-------------------------------------------
15. E500 40 38
-------------------------------------------
16. SC 41 43
-------------------------------------------
17. VPI 52 75
-------------------------------------------
18. BCA 52 75
-------------------------------------------
19. P 45 56
-------------------------------------------
20. MG 47 60
-------------------------------------------
21. WG 44 52
-------------------------------------------
</TABLE>
Page 8
<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
<S> <C> <C> <C>
1. AG 14 43
-------------------------------------------
2. B 11 34
-------------------------------------------
3. CA 14 44
-------------------------------------------
4. EI 14 43
-------------------------------------------
5. GAA 15 46
-------------------------------------------
6. GI 9 29
-------------------------------------------
7. I 15 47
-------------------------------------------
8. M 10 31
-------------------------------------------
9. MM 12 36
-------------------------------------------
10. SA 10 31
-------------------------------------------
11. SO 10 31
-------------------------------------------
12. TS 14 43
-------------------------------------------
13. DTRS 13 40
-------------------------------------------
14. GBS 14 43
-------------------------------------------
15. E500 9 27
-------------------------------------------
16. SC 10 32
-------------------------------------------
17. VPI 21 64
-------------------------------------------
18. BCA 21 64
-------------------------------------------
19. P 14 45
-------------------------------------------
20. MG 16 49
-------------------------------------------
21. WG 13 41
-------------------------------------------
</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
of the VAA, the Funds, Series and Portfolios for the year ended December 31,
1997, although the expenses have been restated to reflect the current fees for
Capital Appreciation and Equity-Income. 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 and the prospectus for Delaware Group Premium Fund, Inc. In
addition, premium taxes may be applicable, although they do not appear in the
table. Also, we reserve the right to impose a charge on transfers between
Subaccounts, although we do not currently do so. 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.
SYNOPSIS
Page 9
<PAGE>
WHAT TYPE OF CONTRACT AM I BUYING? It is an individual variable annuity contract
issued by Lincoln Life. See THE CONTRACT.
WHAT IS THE VARIABLE ANNUITY ACCOUNT (VAA)? It is a segregated asset account
established under Indiana insurance law, and registered with the SEC as a unit
investment trust. The assets of the VAA are allocated to one or more
Subaccounts, according to your investment choice. Those assets are not
chargeable with liabilities arising out of any other business which Lincoln Life
may conduct. See VARIABLE ANNUITY ACCOUNT.
WHAT ARE MY INVESTMENT CHOICES? Through its various Subaccounts, the VAA uses
your Purchase Payments to purchase shares, at your direction, in one or more of
the 21 funds. In turn, each fund holds a portfolio of securities consistent with
its own particular investment policy. See INVESTMENTS OF THE VARIABLE ANNUITY
ACCOUNT.
HOW DOES THE CONTRACT WORK? During the accumulation period, while you are paying
in, your Purchase Payments will buy Accumulation Units under the Contract.
Should you decide to annuitize (that is, change your Contract to a payout mode
rather than an accumulation mode), your Accumulation Units will be converted to
Annuity Units. Your periodic Annuity Payout will be based upon the number of
Annuity Units to which you became entitled at the time you decided to annuitize
and the value of each unit on the Valuation Date. See THE CONTRACTS.
WHAT CAN I DO THROUGH THE INTERNET SERVICE CENTER? Almost every transaction can
be accomplished through the Internet Service Center. Only in very rare cases
will transactions bypass the Internet Service Center. Documents can be received,
accounts can be monitored, funds moved from one Subaccount to another, addresses
changed, Beneficiaries changed, funds withdrawn from the Contract, etc. As
technology matures the ease with which transactions can be performed through the
Internet Service Center will improve. For security reasons you may be issued a
PIN or password. Also, for legal reasons, certain transactions, such as change
of Beneficiary or Withdrawal of funds from the Contract, will require the
Contractowner to print or write a document, sign it, and mail or fax it to us.
WHAT CHARGES ARE ASSOCIATED WITH THIS CONTRACT? Should you decide to withdraw
Contract Value before your initial Purchase Payment has been in your Contract
for a period of three years, you will incur a Surrender Charge of anywhere from
1% to 3% of Contract Value. (Note: This charge is not assessed upon either, (1)
a Surrender of this Contract as a result of the death of the Contractowner, or
in the case of joint Contractowners, the death of one of the Contractowners, or
(2) election of an Annuity Payout Option available within this Contract.)
If your state assesses a premium tax with respect to your Contract, then at the
time the tax is incurred (or at such other time as we may choose), we will
deduct those amounts from Purchase Payments or Contract Value, as applicable.
We assess annual charges in the aggregate amount of .55% against the daily net
asset value of the VAA, including that portion of the Account attributable to
your Purchase Payments. This charge is the annuity asset charge. For a complete
discussion of the charges associated with the Contract, see CHARGES AND OTHER
DEDUCTIONS.
The VAA pays a fee to its Investment Advisor, based upon the average daily net
asset value of each Fund, Series or Portfolio. In addition, there are other
expenses associated with the daily operation of the Funds, Series and
Page 10
<PAGE>
Portfolios. See the EXPENSE TABLES. These fees and expenses are more fully
described in the prospectuses for the Funds, Series and Portfolios.
HOW MUCH MUST I PAY, AND HOW OFTEN? Subject to the minimum payments and maximum
total stated on the first page of the prospectus, the amount and frequency of
your payments are completely flexible. See THE CONTRACT-PURCHASE PAYMENTS.
HOW WILL MY ANNUITY PAYOUTS BE CALCULATED? If you decide to annuitize, you elect
an Annuity Payout Option. Once you have done so, your periodic payout will be
based upon a number of factors. The changing values of the funds in which you
have invested will be one factor. See ANNUITY PAYOUTS. REMEMBER THAT
PARTICIPANTS IN THE VAA BENEFIT FROM ANY GAIN, AND TAKE A RISK OF ANY DROP, IN
THE VALUE OF THE SECURITIES IN THE FUNDS, SERIES OR PORTFOLIOS.
WHAT HAPPENS IF I DIE BEFORE I ANNUITIZE? The Beneficiary whom you designate
will receive the then current value of the Contract. Your Beneficiary will have
certain options for how the money is to be paid out. See DEATH BENEFIT BEFORE
THE ANNUITY COMMENCEMENT DATE.
MAY I TRANSFER CONTRACT VALUE BETWEEN FUNDS, SERIES AND PORTFOLIOS? Yes.
Transfers are allowed before the Annuity Commencement Date. Transfers are
limited to three times annually after the Annuity Commencement Date. See THE
CONTRACTS-TRANSFERS BETWEEN SUBACCOUNTS ON OR BEFORE THE ANNUITY COMMENCEMENT
DATE and TRANSFERS AFTER THE ANNUITY COMMENCEMENT DATE.
MAY I SURRENDER THE CONTRACT OR MAKE A WITHDRAWAL? Yes, subject to Contract
requirements. See SURRENDERS AND WITHDRAWALS.
If you Surrender the Contract or make a Withdrawal, certain charges may be
assessed, as discussed above and under CHARGES AND OTHER DEDUCTIONS. In
addition, the Internal Revenue Service (IRS) may assess a 10% premature
Withdrawal penalty tax. A Surrender or a Withdrawal may be subject to 10%
withholding. See FEDERAL TAX STATUS-FEDERAL INCOME TAX WITHHOLDING.
DO I GET A FREE LOOK AT THIS CONTRACT? Yes. If within ten days (or a longer
period if required by law) of the date you receive the signed Contract through
the Internet Service Center, you cancel the Contract through the Internet
Service Center or return it, postage prepaid to the Servicing Office of Lincoln
Life, it will be canceled. During this period, your Purchase Payments will be
invested in the Money Market Fund. See RETURN PRIVILEGE.
CONDENSED FINANCIAL INFORMATION
Because the Subaccounts which are available under the Contract did not begin
operation before August 1998, financial information for the Subaccounts is
not included in this prospectus or in the SAI.
INVESTMENT RESULTS
At times, the VAA may compare its investment results to various unmanaged
indices or other variable annuities in reports to shareholders, sales literature
and advertisements. The results will be calculated on a total return basis for
Page 11
<PAGE>
various periods, with or without Surrender Charges. Results calculated without
Surrender Charges will be higher. Total returns include the reinvestment of all
distributions, which are reflected in changes in Accumulation Unit value. See
the SAI for further information.
FINANCIAL STATEMENTS
The financial statements of the VAA and the statutory-basis financial statements
and schedules of Lincoln Life are located in the SAI. If you would like a free
copy of the SAI, you may make an e-mail request to our Internet Service Center
or a written request to our Servicing Office.
LINCOLN NATIONAL LIFE INSURANCE CO.
Lincoln Life was founded in 1905 and is organized under Indiana law. We are one
of the largest stock life insurance companies in the United States. We are owned
by Lincoln National Corp. (LNC) which is also organized under Indiana law. LNC's
primary businesses are insurance and financial services. Lincoln Life is the
issuer of the variable annuity contracts. The obligations set forth in the
Contracts, other than those of the Contractowner, are our obligations. We also
serve as principal underwriter for the Contracts.
VARIABLE ANNUITY ACCOUNT (VAA)
On June 3, 1981, the VAA was established as an insurance company separate
account under Indiana law. The VAA is registered with the SEC as a unit
investment trust under the provisions of the Investment Company Act of 1940
(1940 Act), but 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 is used to support
annuity contracts other than the Contract described in this prospectus. 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, Series and
Portfolios. You assume the full investment risk for all amounts placed in the
VAA.
INVESTMENTS OF THE VARIABLE ANNUITY ACCOUNT
Page 12
<PAGE>
The VAA consists of several Subaccounts. A separate Subaccount corresponds to
each Fund, Series and Portfolio. You decide the Subaccount(s) to which you
allocate Purchase Payments. You may change your allocations without penalty or
charges. Shares of the Funds, Series and Portfolios will be sold to the VAA at
net asset value next determined after receipt of your Purchase Payment to fund
the Contract (See the Appendix to the Lincoln National Funds' prospectuses for
an explanation of net asset value). The Funds, Series and Portfolios are
required to redeem their shares at net asset value next determined after receipt
of our request. We reserve the right to add, delete or substitute Funds, Series
and Portfolios, subject to regulatory approval. All funds may not be available
in all states.
INVESTMENT ADVISOR
Lincoln Investment Management, Inc., (Lincoln Investment) is the Advisor for
each of the Lincoln National Funds and is primarily responsible for the
investment decisions affecting these Funds. Lincoln Investment is owned by LNC.
The services it provides are explained in the prospectuses of the Funds. Under
an advisory agreement with each Fund, Lincoln Investment provides portfolio
management and investment advice to that Fund, subject to the supervision of the
Fund's Board of Directors.
Additionally, Lincoln Investment currently has six sub-advisory agreements in
which the sub-advisor may perform some or substantially all 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.
Following is a chart that shows the Lincoln National Fund names and the six
sub-advisors under Lincoln Investment (the Advisor):
- --------------------------------------------------------------------------------
SUB-ADVISOR FUND
Delaware International Advisers, Ltd. International
- --------------------------------------------------------------------------------
Fidelity Management Trust Co. Equity-Income
- --------------------------------------------------------------------------------
Janus Capital Corp. Capital Appreciation
- --------------------------------------------------------------------------------
Lynch & Mayer, Inc. Aggressive Growth
- --------------------------------------------------------------------------------
Putnam Investment Management, Inc. Global Asset Allocation
- --------------------------------------------------------------------------------
Vantage Investment Advisors Growth and Income; Managed (for stock
portfolio); Social Awareness; and
Special Opportunities
- --------------------------------------------------------------------------------
The Bond and Money Market Funds do not have sub-advisors.
Delaware Management Company, Inc., (Delaware Management), an indirect subsidiary
of LNC, is the Advisor for the Trend Series and the Decatur Total Return Series
and is primarily responsible for the investment decisions affecting the Series.
Delaware International Advisers Ltd. (Delaware International), an affiliate of
Delaware Management, furnishes investment management services to the Global Bond
Series.
Additional information about Delaware Management and Delaware International may
be found in the Delaware Group Premium Fund, Inc. prospectuses under MANAGEMENT
OF THE FUND.
Page 13
<PAGE>
Bankers Trust Company is the Advisor for the Equity 500 Index Fund and the Small
Cap Index Fund, and is primarily responsible for the investment decisions
affecting these funds.
American Century Variable Portfolios, Inc. is a part of American Century
Investments, a family of 70 no-load mutual funds, and is the Advisor for the VP
International fund and is primarily responsible for investment decisions
affecting this fund.
The Baron Capital Asset Fund invests in the Baron Capital Funds Trust and BAMCO,
Inc. is the Investment Advisor.
NB Management is the Advisor and Neuberger Bergman, LLC, is the sub-advisor for
the AMT Partners Portfolio and the AMT MidCap Growth Portfolio, and are
primarily responsible for the investment decisions affecting these funds.
Janus Capital Corporation is the Advisor for the Janus Aspen Series Worldwide
Growth Portfolio. Janus Capital Corporation is primarily responsible for the
investment decisions affecting this fund.
FUNDS/SERIES/PORTFOLIOS
Following are brief summaries of the investment objectives and policies of the
Funds, Series and Portfolios. The year in which each Fund, Series or Portfolio
started trading is in parentheses. There is more detailed information in the
current prospectuses for the Funds, Series and Portfolios.
All of the funds with the exception of the Lincoln National Special
Opportunities Fund are diversified, open-end management investment companies.
Diversified funds do not own too large 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, Series or Portfolio when you make a
Withdrawal, Surrender the Contract or transfer from one Fund, Series or
Portfolio to another. 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
Investment Company Act of 1940. PLEASE BE ADVISED THAT THERE IS NO ASSURANCE
THAT ANY OF THE FUNDS, SERIES OR PORTFOLIOS WILL ACHIEVE ITS STATED OBJECTIVES.
LINCOLN NATIONAL FUNDS
1. AGGRESSIVE GROWTH FUND (1994) - The investment objective is to increase the
value of your shares (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. he Fund invests primarily in
medium-and long-term corporate and government bonds.
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 stock in companies of all sizes that are competing well
and with products or services are in high demand. It may also buy some
money market securities and bonds, including high risk (junk) bonds.
Page 14
<PAGE>
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 (1987) - The investment objective is long-term
return consistent with preservation of capital. The Fund invests in equity
and fixed-income securities, both of U.S. and foreign issuers.
6. GROWTH AND INCOME 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 responsibility 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.
SERIES
Following are brief summaries of the investment objectives and policies of the
Series being offered by Delaware Group Premium Fund, Inc. More detailed
information may be obtained from the current prospectuses for those Series.
PLEASE BE ADVISED THAT THERE IS NO ASSURANCE THAT ANY OF THE SERIES WILL ACHIEVE
ITS STATED OBJECTIVES.
12. DECATUR TOTAL RETURN SERIES (1996) - seeks the highest possible total rate
of return by selecting issues that exhibit the potential for capital
appreciation while providing higher than average dividend income. Decatur
Total Return Series invests generally, but not exclusively, in common
stocks and income-producing securities convertible into common stocks,
consistent with the Series' objective.
13. TREND SERIES (1996) - seeks long-term capital appreciation by investing
primarily in small-cap common stocks and convertible securities of emerging
and other growth-oriented companies. These securities will have been judged
to be responsive to changes in the market place and to have fundamental
characteristics to support growth. Income is not an objective.
14. GLOBAL BOND SERIES (1996) - seeks current income consistent with
preservation of principal by investing primarily in fixed income securities
that may also provide the potential for capital appreciation. This Series
is a global fund. As such, at least 65% of the Series' assets will be
invested in fixed income securities of issuers organized or having a
majority of their assets in or deriving a majority of their operating
income in at least three different countries, one of which may be the
United States.
Page 15
<PAGE>
PORTFOLIOS AND OTHER FUNDS
Following are brief summaries of the investment objectives and policies of the
Portfolios and other Funds. More detailed information about for those funds may
be obtained from the current prospectuses. PLEASE BE ADVISED THAT THERE IS NO
ASSURANCE THAT ANY OF THE FUNDS WILL ACHIEVE ITS STATED OBJECTIVES.
15. EQUITY 500 INDEX FUND (1997) - seeks to match the performance of the stock
market, as represented by the S&P 500-Registered Trademark- Index, before
expenses. The Fund will include the common stock of those companies
included in the S&P 500, other than Bankers Trust New York Corporation,
selected on the basis of computer-generated statistical data, that are
deemed representative of the industry diversification of the entire S&P
500.
16. SMALL CAP INDEX FUND (1997) - seeks to replicate as closely as possible the
total return of the Russell 2000 Small Stock Index ("the Russell 2000"), an
index consisting of 2,000 small-capitalization common stocks. The Fund will
include the common stock of those companies included in the Russell 2000,
on the basis of computer-generated statistical data, that are deemed
representative of the industry diversification of the entire Russell 2000.
17. VP INTERNATIONAL (1994) - seeks capital growth, by investing primarily in
an internationally diversified portfolio of common stocks that are
considered by management to have prospects for appreciation. The Fund will
invest primarily in securities of issuers located in developed markets.
18. BARON CAPITAL ASSET FUND (1998) - The Fund invests in a diversified
portfolio of primarily common stocks of small and medium-sized companies
with undervalued assets or favorable growth prospects. The Advisor seeks to
purchase stocks, judged by the Advisor, to have the potential of increasing
their value at least 50% over two subsequent years, although that goal may
not be achieved.
19. AMT PARTNERS PORTFOLIO (1994) - seeks capital growth through an investment
approach that is designed to increase capital with reasonable risk. It
invests primarily in common stocks of medium to large capitalization
companies, using the value-oriented investment approach.
20. AMT MIDCAP GROWTH PORTFOLIO (1997) - seeks capital appreciation by
investing primarily in common stocks of medium-capitalization companies,
using a growth-oriented investment approach.
21. WORLDWIDE GROWTH PORTFOLIO (1993) - seeks long-term growth of capital by
investing primarily in common stocks of foreign and domestic issuers, in a
manner consistent with the preservation of capital.
Shares of the Lincoln National Funds (1-11) and the Series (12-14) are sold
to Lincoln Life for investment of the assets of the VAA, Lincoln Life
Variable Annuity Account Q, Lincoln Life Flexible Premium Variable Life
Account K and for other variable life insurance contracts. Shares of some,
but not all, of the Lincoln National Funds are also sold to Lincoln Life for
investment of the assets of Lincoln Life Flexible Premium Variable Life
Accounts D and G, also to fund variable life insurance contracts. In
addition, shares of the non-Lincoln National Funds, Portfolios and the Series
are sold to separate accounts of life insurance companies other than Lincoln
Life. See OTHER INFORMATION. Shares of the Funds, Series and Portfolios are
not sold directly to the general public.
The investments for the Neuberger Berman Advisers Management Trust Portfolios
are managed by the same portfolio managers who manage one or more other mutual
funds with similar names, investment objectives and/or investment styles as each
Portfolio. You should be aware that each Portfolio is likely to differ from the
Page 16
<PAGE>
other mutual funds in size, cash flow pattern and tax matters. Accordingly, the
holdings and performance of each Portfolio can be expected to vary from those of
the other mutual funds.
We will purchase shares of the Funds, Series and Portfolios at net asset value
and direct them to the appropriate Subaccounts of the VAA. We will redeem
sufficient shares of the appropriate Funds, Series and Portfolios 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 Subaccount to another, we may redeem shares held in that Subaccount and
purchase shares for the other Subaccount. The shares are retired, but they may
be reissued later.
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
All of the investment objectives of the Funds, Series and Portfolios 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,
Series or Portfolio. The extent to which the particular investment policies,
practices or restrictions for each Fund, Series or Portfolio are fundamental or
non-fundamental depends on the particular Fund, Series or Portfolio. If they are
non-fundamental, they may be changed by the Board of Directors of the Funds,
Series or Portfolio without shareholder approval.
You are urged to consult the prospectus and SAI for each individual Fund, Series
or Portfolio for additional information regarding the fundamental and
non-fundamental policies, practices and restrictions of each of the Funds,
Series and Portfolios.
REINVESTMENT
All dividend and capital gain distributions of the Funds, Series and Portfolios
are automatically reinvested in shares of the distributing Funds, Series and
Portfolios at their net asset value on the date of distribution. Dividends are
not paid out to Contractowners as additional Accumulation Units or Annuity
Units, but are reflected in changes in unit values.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
We reserve the right, within the law, to make additions, deletions and
substitutions for the Funds, Series and Portfolios held by the VAA. (We may
substitute shares of another Series or of other Funds or of other Portfolios for
shares already purchased, or to be purchased in the future, under the Contract.
This substitution might occur if shares of a Fund, Series or Portfolio should no
longer be available, or if investment in any Fund's, Series' or Portfolio's
shares should no longer be available, or if investment in any Fund's, Series' or
Portfolio's share should become inappropriate, in the judgement of our
management, for the purposes for the Contract.) Lincoln Life shall give the
owner notice of the elimination and substitution of any Fund, Series or
Portfolio within fifteen days after such substitution occurs. Such notice will
be placed in your personal folder at the Internet Service Center and sent to
your last known e-mail address. Any such elimination, substitution or addition
will be subject to compliance with any applicable regulatory requirements.
Page 17
<PAGE>
CHARGES AND OTHER DEDUCTIONS
We will deduct the charges described below to cover our costs and expenses for
services provided and risks assumed under the Contracts. We incur certain costs
and expenses for the distribution and administration of the Contracts and for
providing the benefits payable thereunder. In the future we may pay commissions
to broker-dealers as a percentage of Purchase Payments. Our administrative
services include: processing applications for and issuing the Contracts;
processing purchases and redemptions of Fund, Series and Portfolio shares as
required (including dollar cost averaging, cross-reinvestment, and automatic
Withdrawal services); maintaining records; administering Annuity Payouts;
furnishing accounting and valuation services (including the calculation and
monitoring of daily Subaccount values); reconciling and depositing cash
receipts; providing contract confirmations; and furnishing an Internet Service
Center. The risks we assume include: the risk that the actual life-span of
persons receiving Annuity Payouts under the Contract guarantees will exceed the
assumptions reflected in our guaranteed rates (these rates are incorporated in
the Contract and cannot be changed); the risk that more owners than expected
will qualify for waivers of the Surrender Charge; and the risk that our costs in
providing the services will exceed our revenues from contract charges (which
cannot be changed by us). The amount of a charge may not necessarily correspond
to the costs associated with providing the services or benefits indicated by the
designation of the charge. For example, the Surrender Charge collected may not
fully cover all of the sales and distribution expenses actually incurred by us.
DEDUCTIONS FROM THE VAA FOR eANNUITY
We deduct from the VAA an amount, computed daily, which is equal to an annual
rate of 0.55% of the daily net asset value. This is our annuity asset charge.
SURRENDER CHARGE
The Surrender Charge percentage applies (except as described below) to
Surrenders or Withdrawals according to the following schedule:
<TABLE>
<S> <C> <C> <C> <C>
Contract Year 1 2 3 4 or more
Surrender Charge as % of 3% 2% 1% 0%
Contract Value Withdrawn
</TABLE>
In the case of a Withdrawal, the Surrender Charge will be deducted from the
remaining Contract Value and will itself be subject to a Surrender Charge.
A Surrender Charge does not apply to:
1. A Surrender or Withdrawal after the initial payment has been invested at
least three full years.
2. Annuitization of the Contract by electing an Annuity Payout Option
available within the Contract.
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<PAGE>
3. A Surrender of the Contract as a result of the death of the Contractowner;
or in the case of joint Contractowners, the death of one of the
Contractowners. The Surrender Charges are not waived as a result of the
death of an Annuitant who is not the Contractowner.
If a non-natural person (e.g., a corporation) is the Contractowner, the
Annuitant will be considered the Contractowner for purposes of (3) above.
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
vary, depending upon the law of your state of residence. In those states which
tax these premiums, the tax generally ranges from 0.5% to 4.0%.
OTHER CHARGES AND DEDUCTIONS
There are deductions from and expenses paid out of the assets of the underlying
Series that are more fully described in the prospectus for the Series.
ADDITIONAL INFORMATION
The Surrender Charges described previously may be reduced or eliminated for any
particular Contract. However, these charges will be reduced only to the extent
that we anticipate lower distribution and/or administrative expenses, or that we
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
Internet Service Center; (2) the use of mass enrollment procedures; (3) the
performance of administrative or sales functions by the employer; (4) the use by
an employer of automated techniques in submitting deposits or information
related to deposits on behalf of its employees; or (5) any other circumstances
which reduce distribution or administrative expenses. The exact amount of
Surrender Charges applicable to a particular Contract will be stated in that
Contract.
THE CONTRACT
PURCHASE OF CONTRACT
If you wish to purchase the Contract, you must apply for it through the Internet
Service Center. When we receive the completed application, we decide whether to
accept or reject it. If the application is accepted, the Contract is prepared
and executed by our legally authorized officers. The Contract is then sent to
you through the Internet Service Center. See DISTRIBUTION OF THE CONTRACTS.
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Once a completed application and all other information necessary for processing
a purchase order are received, the initial Purchase Payment will be invested in
the VAA 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 an incomplete application cannot
be completed within those five days, you will be informed of the reasons, and
the Purchase Payment will be returned immediately (unless you specifically
authorize us to keep it until the application is complete). Once the application
is complete, the initial Purchase Payment must be invested in the VAA within two
business days.
Purchase Payments can be mailed to: Lincoln National Life Insurance Company,
P.O. Box 62120, Baltimore, MD 21264-2120
WHO CAN INVEST
To apply for the Contract, you must be of legal age--but no older than age
85--in a state where the Contracts may be lawfully sold and also be eligible to
participate in any of the qualified or nonqualified plans for which the
Contracts are designed.
PURCHASE PAYMENTS
The minimum initial Purchase Payment is $1,000. Subsequent Purchase payments to
the Contract must be at least $100. Lincoln Life reserves the right to limit the
sum of Purchase Payments made under this Contract to $5,000,000. Payments may be
made or, if stopped, resumed at any time until the Annuity Commencement Date,
the Surrender of the Contract, the maturity date or the death of the
Contractowner (or joint Contractowner, if applicable), whichever comes first.
VALUATION DATE
Accumulation Units and Annuity Units will be valued once daily at the close of
trading (currently 4:00 p.m., EST) on each day the New York Stock Exchange is
open (Valuation Date). On any date other than a Valuation Date, the Accumulation
Unit value and the Annuity Unit value will not change.
ALLOCATION OF PURCHASE PAYMENTS
Purchase Payments are placed into the VAA's Subaccounts. Following your
allocation instructions, each VAA Subaccount invests in shares of the
corresponding funds.
Upon allocation to the appropriate Subaccount, Purchase Payments are converted
into Accumulation Units. The number of Accumulation Units credited is determined
by dividing the amount allocated to each Subaccount by the value of an
Accumulation Unit for that Subaccount on the Valuation Date on which the
Purchase Payment is received at our Servicing Office if received before 4:00
p.m., EST. If the Purchase Payment is received at or after 4:00 p.m., EST, we
will use the Accumulation Unit value computed on the next Valuation Date. The
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number of Accumulation Units determined in this way is not changed by any
subsequent change in the value of an Accumulation Unit. However, the dollar
value of an Accumulation Unit will vary depending not only upon how well the
underlying fund's investments perform, but also upon the expenses of the VAA and
the underlying funds.
VALUATION OF ACCUMULATION UNITS
The Contract Value at any time prior to the Annuity Commencement Date equals the
sum of the values of the Accumulation Units credited in the Subaccounts under
the Contract.
The value of a Subaccount on any Valuation Date is the number of Accumulation
Units in the Subaccount multiplied by the value of an Accumulation Unit in the
Subaccount at the end of the Valuation Period.
Accumulation Units for each Subaccount are valued separately. Initially, the
value of an Accumulation Unit was arbitrarily established at the inception of
the Subaccount. It may increase or decrease from Valuation Period to Valuation
Period. The Accumulation Unit value for a Subaccount for any later Valuation
Period is determined as follows:
(1) THE TOTAL VALUE OF FUND, SERIES OR PORTFOLIO SHARES HELD IN THE SUBACCOUNT
is calculated by multiplying the number of Fund, Series or Portfolio shares
owned by the Subaccount at the beginning of the Valuation Period by the net
asset value per share of the Fund, Series or Portfolio at the end of the
Valuation Period, and adding any dividend or other distribution of the
Fund, Series or Portfolio if an ex-dividend date occurs during the
Valuation Period; MINUS
(2) THE LIABILITIES OF THE SUBACCOUNT AT THE END OF THE VALUATION PERIOD (such
liabilities include daily charges imposed on the Subaccount, and may
include a charge or credit with respect to any taxes paid or reserved for
by Lincoln Life that Lincoln Life determines are as a result of the
operations from the Variable Account); the result DIVIDED BY
(3) THE OUTSTANDING NUMBER OF ACCUMULATION UNITS IN THE SUBACCOUNT AT THE
BEGINNING OF THE VALUATION PERIOD.
The daily charges imposed on a Subaccount for any Valuation Period represent the
annuity asset charge adjusted for the number of calendar days in the Valuation
Period. On an annual basis the annuity asset charge will not exceed 0.55%. The
Accumulation Unit value and Annuity Unit value may increase or decrease the
dollar value of benefits under the Contract. The dollar value of benefits will
not be adversely affected by expenses incurred by Lincoln Life.
TRANSFERS BETWEEN SUBACCOUNTS ON OR BEFORE THE ANNUITY COMMENCEMENT DATE
You may transfer all or a portion of your investment from one Subaccount to
another. A transfer involves the Surrender of Accumulation Units in one
Subaccount and the purchase of Accumulation Units in the other Subaccount. A
transfer will be done using the respective Accumulation Unit values determined
at the end of the Valuation Date on which the transfer request is received.
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Currently, there is no charge for a transfer. However, we reserve the right to
impose a charge in the future for transfers.
A transfer may be made through our Internet Service Center or by writing to our
Servicing Office. In order to prevent unauthorized or fraudulent Internet
transfers, we may require Contractowners to provide certain identifying
information before we will act upon their instructions. We may also assign the
Contractowner a password to serve as identification. We will not be liable for
following instructions we reasonably believe are genuine. Confirmation of all
transfer requests will be mailed electronically to the Contractowner on the next
Valuation Date. Internet transfers will be processed on the Valuation Date that
they are received when they are received at our Internet Service Center before 4
p.m. EST.
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.
TRANSFERS AFTER THE ANNUITY COMMENCEMENT DATE
You may transfer all or a portion of your investment in one Subaccount to
another Subaccount. Those transfers will be limited to three times per Contract
Year. Currently, there is no charge for these transfers. However, we reserve the
right to impose a charge in the future for transfers.
DEATH BENEFIT BEFORE THE ANNUITY COMMENCEMENT DATE
You may designate a Beneficiary during your lifetime and, unless prohibited by a
previous designation, change the Beneficiary by filing a written request with
our Servicing Office, or through our Internet Service Center. Each change of
Beneficiary revokes any previous designation.
If there is a single Contractowner and the Contractowner dies before the Annuity
Commencement Date the Death Benefit paid to the designated Beneficiary will be
the Contract Value as of the day on which Lincoln Life approves the payment of
the claim.
The value of the Death Benefit will be determined as of the date on which the
death claim is approved for payment. This approval will be granted upon receipt
of: (1) proof, satisfactory to us, of the death of the owner; (2) written
authorization for payment; and (3) our receipt of all required claim forms,
fully completed.
If a lump sum settlement is requested, the proceeds will be paid within seven
days of receipt of satisfactory claim documentation as discussed previously.
This payment may be postponed as permitted by the 1940 Act.
Payment will be made in accordance with applicable laws and regulations
governing payment of Death Benefits. No payment will be allowed that does not
satisfy the requirements of Code section 72(s) or 401(a)(9) as applicable, as
amended from time to time.
Unless otherwise provided in the Beneficiary designation, one of the following
procedures will take place on the death of a Beneficiary:
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1. If any Beneficiary dies before the Contractowner, that Beneficiary's
interest will go to any other Beneficiaries named, according to their
respective interests; and/or
2. If no Beneficiary survives the Contractowner, the proceeds will be paid to
the Contractowner's estate.
The Death Benefit payable to the Beneficiary must be distributed within five
years of the Contractowner's date of death unless the Beneficiary begins
receiving within one year of the Contractowner's death substantially equal
installments over a period not extending beyond the Beneficiary's life
expectancy.
If the Beneficiary is the spouse of the Contractowner, then the spouse may elect
to continue the Contract as Contractowner. If the Contractowner is a corporation
or other non-individual (non-natural person), the death of the Annuitant will be
treated as death of the Contractowner and the above distribution rules apply.
If there are joint Contractowners, upon the death of the first joint
Contractowner, the surviving joint Contractowner will receive the Death Benefit.
The surviving joint Contractowner will be treated as the primary, designated
Beneficiary. Any other Beneficiary designation on record at the time of death
will be treated as a contingent Beneficiary.
If the surviving joint Contractowner, as spouse of the deceased joint
Contractowner, continues the Contract as the sole owner in lieu of receiving the
Death Benefit, then the designated Beneficiary(s) will receive the Death Benefit
upon the death of the surviving spouse.
JOINT OWNERSHIP
If a joint Contractowner is named in the application, the joint Contractowners
shall be treated as having equal undivided interests in the Contract. Either
Contractowner, independently of the other, may exercise any ownership rights in
this Contract. Only spouses may be joint Contractowners.
DEATH OF ANNUITANT
If the Annuitant is also the Contractowner or a joint Contractowner, then the
Death Benefit will be subject to the provisions of this Contract regarding death
of the Contractowner. If the surviving spouse assumes the Contract, the
contingent Annuitant becomes the Annuitant. If no contingent Annuitant is named,
the surviving spouse becomes the Annuitant.
If an Annuitant who is not the Contractowner or joint Contractowner dies, then
the contingent Annuitant, if any, becomes the Annuitant. If no contingent
Annuitant is named, the Contractowner (or joint owner if younger) becomes the
Annuitant.
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SURRENDERS AND WITHDRAWALS
Before the Annuity Commencement Date, we will allow the Surrender of the
Contract or a Withdrawal of the Contract Value upon your written request or
through our Internet Service Center, subject to the rules discussed below. None
of the current annuitization options allow Surrender or Withdrawal rights after
the Annuity Commencement Date.
The Contract Value available upon Surrender/Withdrawal is the Cash Surrender
Value at the end of the Valuation Period during which the request for
Surrender/Withdrawal is received at the Servicing Office or Internet Service
Center. Unless a request for Withdrawal specifies otherwise, Withdrawals will be
made from all Subaccounts 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 $300, and the remaining Contract Value must be at least $1000.
Unless prohibited, Surrender/Withdrawal payments will be mailed or
electronically transferred within seven days after we receive a valid request at
the Servicing Office or through the Internet Service Center. The payment may be
postponed as permitted by the Investment Company Act of 1940.
There may be charges associated with Surrender of the Contract or Withdrawal of
Contract Value. These charges are deducted from the amount you request to be
withdrawn. See CHARGES AND OTHER DEDUCTIONS.
The tax consequences of a Surrender or Withdrawal are discussed in the section
FEDERAL TAX STATUS of this prospectus.
We reserve the right to terminate the Contract, if your Contract fails to meet
minimum Contract Value or payment frequencies as set forth in your state's
nonforfeiture law for individual deferred annuities.
AMENDMENT OF CONTRACT
We reserve the right to amend the Contract to meet the requirements of the 1940
Act or other applicable federal or state laws or regulations. You will be
notified of any changes, modifications or waivers.
OWNERSHIP
As Contractowner, you have all rights under the Contract. According to Indiana
law, the assets of the VAA are held for the exclusive benefit of all
Contractowners and their designated Beneficiaries. The assets of the VAA are not
chargeable with liabilities arising from any other business that we may conduct.
IRAs may not be assigned or transferred except as permitted by a domestic
relations order and upon written notification to us. We assume no responsibility
for the validity or effect of any assignment. Consult your tax adviser about the
tax consequences of an assignment.
CONTRACTOWNER QUESTIONS
The obligations to purchasers under the Contracts are those of Lincoln Life.
Questions about your Contract should be directed to us by e-mail to our Internet
Service Center or in writing to our Servicing Office.
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ANNUITY PAYOUTS
You may select any Annuity Commencement Date permitted by law provided that the
Annuity Commencement Date occurs before the Annuitant's (or the elder of the
joint Annuitants') 85th birthday. The Contract provides optional forms of
payouts of annuities, each of which is payable on a variable basis. Annuity
payments to you under any of the Annuity Payout Options are made on a monthly
basis. Following are explanations of the Annuity Payout Options available.
ANNUITY OPTIONS
LIFE ANNUITY. This option offers a periodic payout during the lifetime of the
Annuitant and ends with the last payout before the death of the Annuitant. This
option offers the highest periodic payout since there is no guarantee of a
minimum number of payouts or provision for a Death Benefit for Beneficiaries.
HOWEVER, THERE IS THE RISK UNDER THIS OPTION THAT THE RECIPIENT WOULD RECEIVE NO
PAYOUTS IF THE ANNUITANT DIES BEFORE THE DATE SET FOR THE FIRST PAYOUT; ONLY ONE
PAYOUT IF DEATH OCCURS BEFORE THE SECOND SCHEDULED PAYOUT, AND SO ON.
LIFE INCOME WITH PAYOUTS GUARANTEED FOR DESIGNATED PERIOD. This option
guarantees periodic payouts during a designated period, usually 10 or 20 years,
and then continues throughout the lifetime of the Annuitant. The designated
period is selected by the Contractowner.
JOINT LIFE ANNUITY. This option offers a periodic payout during the joint
lifetime of the Annuitant and a designated joint Annuitant. The payouts continue
during the lifetime of the survivor.
JOINT LIFE ANNUITY WITH GUARANTEED PERIOD. This option guarantees periodic
payouts during a designated period, usually 10 or 20 years, and continues during
the joint lifetime of the Annuitant and a designated joint Annuitant. The
payouts continue during the lifetime of the survivor. The designated period is
selected by the Contractowner.
GENERAL INFORMATION
None of the options listed above currently provide Withdrawal features
permitting the Contractowner to withdraw commuted values as a lump sum payment.
We may make available other options, with or without Withdrawal features.
Options are only available to the extent they are consistent with the
requirements of the Contract as well as Sections 72(s) and 401(a)(9) of the
Code, if applicable. The annuity asset charge will be assessed on all variable
Annuity Payouts, including options that may be offered that do not have a life
contingency and therefore no mortality risk.
The Annuity Commencement Date is usually on or before the Annuitant's 85th
birthday. You may change the Annuity Commencement Date or change the Annuity
Payout Option up to the scheduled Annuity Commencement Date, through our
Internet Service Center or by written notice to the Servicing Office. You must
give us at least 14 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.
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Unless you select another option, the Contract automatically provides for a life
annuity with Annuity Payouts guaranteed for 10 years (on a variable basis, in
proportion to the Subaccount allocations at the time of annuitization) except
when a joint life payout is required by law. Under any option providing for
payouts for a guaranteed period, the number of payouts which remain unpaid at
the date of the Annuitant's death (or surviving Annuitant's death in case of
joint life annuity) will be paid to the Contractowner if living, otherwise to
your Beneficiary as payouts become due.
VARIABLE ANNUITY PAYOUTS
Variable Annuity Payouts will be determined using:
1. The Contract Value on the Annuity Commencement Date;
2. The annuity tables contained in the Contract;
3. The Annuity Payout Option selected; and
4. The investment performance of the Funds, Series and Portfolios selected.
We determine the amount of Annuity Payouts by:
1. Determining the dollar amount of the first periodic payout; then
2. Crediting the Contract with a fixed number of Annuity Units equal to the
first periodic payout divided by the Annuity Unit value; and
3. Calculating the value of the Annuity Units each period 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 Funds, Series and Portfolios perform, relative to the 5%
assumed rate. The SAI contains a more complete explanation of this calculation.
FEDERAL TAX STATUS
INTRODUCTION
The Federal income tax treatment of the Contract is complex and sometimes
uncertain. The Federal income tax rules may vary with your particular
circumstances. This discussion DOES NOT include all the Federal income tax rules
that may affect you and the Contract. This discussion also DOES NOT address
other Federal tax consequences, or state or local tax consequences, associated
with the Contract. As a result, you should always consult a tax adviser about
the application of tax rules to their individual situation.
TAXATION OF NONQUALIFIED ANNUITIES
This part of the discussion describes some of the Federal income tax rules
applicable to nonqualified annuities. A nonqualified annuity is a Contract not
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issued in connection with a qualified retirement plan receiving special tax
treatment under the Code, such as an IRA or a section 403(b) plan.
TAX DEFERRAL ON EARNINGS
The Federal income tax law generally does not tax any increase in the Contract
Value until you receive a Contract distribution. However, for this general rule
to apply, certain requirements must be satisfied:
- - An individual must own the Contract or the tax law must treat the contact
as owned by an individual.
- - The investments of the VAA must be "adequately diversified" in accordance
with IRS regulations.
- - The right to choose particular investments for the Contract must be
limited.
- - The Annuity Commencement Date must not occur near the end of the
Annuitant's life expectancy.
CONTRACTS NOT OWNED BY AN INDIVIDUAL
If the Contract is owned by an entity (rather than an individual) the Code
generally does not treat it as an annuity contract for Federal income tax
purposes. This means that the entity owning the Contract pays tax currently on
the excess of the Contract Value over the Purchase Payments for the Contract.
Examples of contracts where the owner pays current tax on the
Contract's earnings are contracts issued to a corporation or a trust.
Exceptions to this rule exist. For example, the Code treats a contract as owned
by an individual if the named owner is a trust or other entity that holds the
contract as an agent for an individual. However, this exception does not apply
in the case of any employer that owns a contract to provide deferred
compensation for its employees.
INVESTMENTS IN THE VAA MUST BE DIVERSIFIED
For the Contract to be treated as an annuity for Federal income tax purposes,
the investments of the VAA must be "adequately diversified." IRS regulations
define standards for determining whether the investments of the VAA are
adequately diversified. If the VAA fails to comply with these diversification
standards, you could be required to pay tax currently on the excess of the
Contract Value over the total amount paid into the Contract. Although we do not
control the investments of the underlying investment options, we expect that the
underlying investment options will comply with the IRS regulations so that the
VAA will be considered "adequately diversified."
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RESTRICTIONS
Federal income tax law limits your rights to choose particular investments for
the Contract. Because the I.R.S. has not issued guidance specifying those
limits, the limits are uncertain and your right to allocate contract values
among the Subaccounts may exceed those limits. If so, the Contractowner would be
treated as the owner of the assets of the VAA and thus subject to current
taxation on the income and gains from those assets. We do not know what limits
may be set by the I.R.S. in any guidance that it may issue and whether any such
limits will apply to existing contracts. We reserve the right to modify the
Contract without Contractowner's consent to try to prevent the tax law from
considering them as the owner of the assets of the VAA.
AGE AT WHICH ANNUITY PAYOUTS BEGIN
Federal income tax rules do not expressly identify a particular age by which
Annuity Payouts must begin. However, those rules do require that an annuity
contract provide for amortization, through Annuity Payouts, of the Contract's
Purchase Payments and earnings. If Annuity Payouts under the Contract begin or
are scheduled to begin on a date past the Annuitant's 85th birthday, it is
possible that the tax law will not treat the Contract as an annuity for Federal
income tax purposes. In that event, Contractowner would be currently taxable on
the excess of the Contract Value over the amounts paid into the Contract.
TAX TREATMENT OF PAYMENTS
We make no guarantees regarding the tax treatment of any contract or of any
transaction involving a contract. However, the rest of this discussion assumes
that the Contract will be treated as an annuity for Federal income tax purposes
and that the tax law will not tax any increase in the Contract Value until there
is a distribution from the Contract.
TAXATION OF WITHDRAWALS AND SURRENDERS
The Contractowner will pay tax on Withdrawals to the extent their Contract Value
exceeds Purchase Payments in the Contract. This income (and all other income
from the Contract) is considered ordinary income. A higher rate of tax is paid
on ordinary income than on capital gains. Contractowner will pay tax on a
Surrender to the extent the amount received exceeds Purchase Payments. In
certain circumstances Purchase Payments are reduced by amounts received from the
Contract that were not included in income.
TAXATION OF ANNUITY PAYOUTS
The Code imposes tax on a portion of each Annuity Payout (at ordinary income tax
rates) and treats a portion as a nontaxable return of Purchase Payments in the
Contract. We will notify you annually of the taxable amount of your Annuity
Payout. Once you have recovered the total amount of the Purchase Payment in the
Contract, you will pay tax on the full amount of your Annuity Payouts. If
Annuity Payouts end because of the Annuitant's death and before the total amount
of the Purchase Payments in the Contract has been received, the amount not
received generally will be deductible.
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TAXATION OF DEATH BENEFITS
We may distribute amounts from the Contract because of the death of a
Contractowner. The tax treatment of these amounts depends on whether the
Contractowner or the Annuitant dies before or after the Annuity Commencement
Date.
- - Death prior to the Annuity Commencement Date --
- - If the Beneficiary receives Death Benefits under an Annuity Payout Option,
they are taxed in the same manner as Annuity Payouts.
- - If the Beneficiary does not receive Death Benefits under an Annuity Payout
Option, they are taxed in the same manner as a Withdrawal.
- - Death after the Annuity Commencement Date --
- - If Death Benefits are received in accordance with the existing Annuity
Payout Option, they are excludible from income if they do not exceed the
Purchase Payments not yet distributed from the Contract. All Annuity
Payouts in excess of the Purchase Payments not previously received are
includible in income.
- - If Death Benefits are received in a lump sum, the tax law imposes tax on
the amount of Death Benefits which exceeds the amount of Purchase Payments
not previously received.
PENALTY TAXES PAYABLE ON WITHDRAWALS, SURRENDERS, OR ANNUITY PAYOUTS
The Code may impose a 10% penalty tax on any distribution from the Contract
which Contractowner must include in gross income. The 10% penalty tax does not
apply if one of several exceptions exists. These exceptions include Withdrawals,
Surrenders, or Annuity Payouts that:
- - you receive on or after you reach age 59 1/2,
- - you receive because you became disabled (as defined in the tax law),
- - a Beneficiary receives on or after your death, or
- - you receive as a series of substantially equal periodic payments for your
life (or life expectancy).
SPECIAL RULES IF YOU OWN MORE THAN ONE ANNUITY CONTRACT
In certain circumstances, we must combine some or all of the nonqualified
annuity contracts you own in order to determine the amount of an Annuity Payout,
a Surrender, or a Withdrawal that you must include in income. For example, if
you purchase two or more deferred annuity contracts from the same life insurance
company (or its affiliates) during any calendar year, the Code treats all such
contracts as one Contract. Treating two or more contracts as one Contract could
affect the amount of a Surrender, a Withdrawal or an Annuity Payout that you
must include in income and the amount that might be subject to the penalty tax
described above.
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GIFTING A CONTRACT
If you transfers ownership of the Contract to a person other than the your
spouse, and receive a payment less than the Contract's value, you will pay tax
on the Contract Value to the extent it exceeds your Purchase Payments not
previously received. The new owner's Purchase Payments in the Contract would
then be increased to reflect the amount included in your income.
LOSS OF INTEREST DEDUCTION
After June 8, 1997 if the Contract is issued to a taxpayer that is not an
individual, or if the Contract is held for the benefit of an entity, the
entity will lose a portion of its deduction for otherwise deductible interest
expenses. This disallowance does not apply if you pay tax on the annual
increase in the Contract Value. Entities that are considering purchasing the
Contract, or entities that will benefit from someone else's ownership of the
Contract, should consult a tax adviser.
QUALIFIED RETIREMENT PLANS
We also designed the Contracts for use in connection with certain types of
retirement plans that receive favorable treatment under the Code. Contracts
issued to or in connection with a qualified retirement plan are called
"qualified contracts." We issue contracts for use with different types of
qualified plans. The Federal income tax rules applicable to those plans are
complex and varied. As a result, this Prospectus does not attempt to provide
more than general information about use of the Contract with the various
types of qualified plans. Persons planning to use the Contract in connection
with a qualified plan should obtain advice from a competent tax adviser.
TYPES OF QUALIFIED CONTRACTS AND TERMS OF CONTRACTS
Currently, we issue contracts in connection with the following types of
qualified plans:
- - Individual Retirement Accounts and Annuities ("Traditional IRAs")
- - Roth IRAs
We may issue the Contract for use with other types of qualified plans in the
future.
We will amend contracts to be used with a qualified plan as generally necessary
to conform to tax law requirements for the type of plan. However, the rights of
a person to any qualified plan benefits may be subject to the plan's terms and
conditions, regardless of the Contract's terms and conditions. In addition, we
are not bound by the terms and conditions of qualified plans to the extent such
terms and conditions contradict the Contract, unless we consent.
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TAX TREATMENT OF QUALIFIED CONTRACTS
The Federal income tax rules applicable to qualified plans and qualified
contracts vary with the type of plan and contract. For example,
- - Federal tax rules limit the amount of Purchase Payments that can be made,
and the tax deduction or exclusion that may be allowed for the Purchase
Payments. These limits vary depending on the type of qualified plan and
the Contractowner's specific circumstances, e.g., your compensation.
- - Under most qualified plans, e.g., 403(b) plans and Traditional IRAs, the
Contractowner must begin receiving payments from the Contract in certain
minimum amounts by a certain age, typically age 70 1/2. However, these
"minimum distribution rules" do not apply to a Roth IRA.
- - Loans are allowed under certain types of qualified plans, but Federal
income tax rules prohibit loans under other types of qualified plans. For
example, Federal income tax rules permit loans under some section 403(b)
plans, but prohibit loans under Traditional and Roth IRAs. If allowed,
loans are subject to a variety of limitations, including restrictions as to
the loan amount, the loan's duration, and the manner of repayment. Your
contract or plan may not permit loans.
TAX TREATMENT OF PAYMENTS
Federal income tax rules generally include distributions from a qualified
contract in your income as ordinary income. These taxable distributions will
include Purchase Payments that were deductible or excludible from income. Thus,
under many qualified contracts the total amount received is included in income
since a deduction or exclusion from income was taken for Purchase Payments.
There are exceptions. For example, you do not include amounts received from a
Roth IRA in income if certain conditions are satisfied.
Failure to comply with the minimum distribution rules applicable to certain
qualified plans, such as Traditional IRAs, will result in the imposition of an
excise tax. This excise tax generally equals 50% of the amount by which a
minimum required distribution exceeds the actual distribution from the qualified
plan.
FEDERAL PENALTY TAXES PAYABLE ON DISTRIBUTIONS
The Code may impose a 10% penalty tax on the amount received from the qualified
contract that must be included in income. The Code does not impose the penalty
tax if one of several exceptions applies. The exceptions vary depending on the
type of qualified contract purchased. For example, in the case of an IRA,
exceptions provide that the penalty tax does not apply to a Withdrawal,
Surrender, or Annuity Payout:
- - received on or after you reach age 59 1/2,
- - received on or after your death or because of your disability (as defined
in the tax law),
- - received as a series of substantially equal periodic payments for the your
life (or life expectancy), or
- - received as reimbursement for certain amounts paid for medical care.
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These exceptions, as well as certain others not described here, generally apply
to taxable distributions from other qualified plans. However, the specific
requirements of the exception may vary.
TRANSFERS AND DIRECT ROLLOVERS
In many circumstances, money may be moved between qualified contracts and
qualified plans by means of a rollover or a transfer. Special rules apply to
such rollovers and transfers. If the applicable rules are not followed, you may
suffer adverse Federal income tax consequences, including paying taxes which
might not otherwise have had to be pay. A qualified adviser should always be
consulted before you move or attempt to move funds between any qualified plan or
contract and another qualified plan or contract.
The direct rollover rules apply to certain payments (called "eligible rollover
distributions") from section 401(a) plans, section 403(a) or (b) plans, HR 10
plans, and contracts used in connection with these types of plans. (The direct
rollover rules do not apply to distributions from IRAs or section 457 plans).
The direct rollover rules require that we withhold Federal income tax equal to
20% of the eligible rollover distribution from the distribution amount, unless
you elect to have the amount directly transferred to certain qualified plans or
contracts. Before we send a rollover distribution, we will provide you with a
notice explaining these requirements and how the 20% withholding can be avoided
by electing a direct rollover.
FEDERAL INCOME TAX WITHHOLDING
We will withhold and remit to the IRS a part of the taxable portion of each
distribution made under the Contract unless the Contractowner notifies us at or
before the time of the distribution that tax is not to be withheld. In certain
circumstances, Federal income tax rules may require us to withhold tax. At the
time a Withdrawal, Surrender, or Annuity Payout is requested, we will give you
an explanation of the withholding requirements.
TAX STATUS OF LINCOLN LIFE
Under existing Federal income tax laws, Lincoln Life does not pay tax on
investment income and realized capital gains of the VAA. Lincoln Life does not
expect that it will incur any Federal income tax liability on the income and
gains earned by the VAA. We, therefore, do not impose a charge for Federal
income taxes. If Federal income tax law changes and we must pay tax on some or
all of the income and gains earned by the VAA, we may impose a charge against
the VAA to pay the taxes.
CHANGES IN THE LAW
The above discussion is based on the Code, IRS regulations, and interpretations
existing on the date of this Prospectus. However, Congress, the IRS, and the
courts may modify these authorities, sometimes retroactively.
Page 32
<PAGE>
VOTING RIGHTS
As required by law, we will vote the Funds, Series and Portfolios shares held in
the VAA at meetings of the shareholders of the various Funds, Series and
Portfolios. The voting will be done according to the instructions of
Contractowners who have interests in any Subaccounts which invest in the Funds,
Series and Portfolios. If the Investment Company Act of 1940 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, Series and
Portfolio 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 Subaccount to the total number of votes
attributable to the Subaccount. In determining the number of votes, fractional
shares will be recognized. After the Annuity Commencement Date, the votes
attributable to a Contract will decrease.
With regard to the Lincoln National Funds, Equity 500 Index Fund, Small Cap
Index Fund, VP International, Baron Capital Asset Fund, AMT Partners Portfolio
and AMT MidCap Growth Portfolio: Those shares held in a Subaccount for which no
timely instructions are received will be voted by us in proportion to the voting
instructions which are received for all Contracts participating in that
Subaccount. Voting instructions to abstain on any item to be voted on will be
applied on a pro-rata basis to reduce the number of votes eligible to be cast.
Since all the funds except the Lincoln National Funds engage in shared funding,
other persons or entities besides Lincoln Life may vote Series shares.
Whenever a shareholders meeting is called, each person having a voting interest
in a Subaccount will be sent proxy voting material, reports and other materials
relating to the Delaware Series. Since the Series engages in shared funding,
other persons or entities besides Lincoln Life may vote Series shares.
DISTRIBUTION OF THE CONTRACTS
We are the distributors of the Contracts. They will be sold through the Internet
Service Center we maintain for this purpose. 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 Securities Dealers (NASD).
RETURN PRIVILEGE
Within the free-look period after you receive the Contract, you may cancel it
for any reason through our Internet Service Center or by delivering or mailing
it postage prepaid, to Lincoln Financial Direct at P.O. Box 691, Leesburg, VA
20178. A Contract canceled under this provision will be void and your Contract
Value will be returned. No Surrender Charge will be assessed.
The Purchase Payments will be invested in the Lincoln National Money Market Fund
during the free-look period.
Page 33
<PAGE>
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. That Department conducts a full examination
of our operations at least every five years.
RECORDS AND REPORTS
As presently required by the 1940 Act and applicable regulations, we are
responsible for maintaining all records and accounts relating to the VAA. We
have entered into an agreement with the Delaware Service Company, 2005 Market
Street, Philadelphia, PA 19203, to provide accounting services to the VAA. We
will electronically mail to you, at your last known e-mail address, at least
semiannually after the first Contract Year, reports containing information
required by the 1940 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 is
only a part of that registration statement and, therefore, does not contain all
the information in the registration statement, its amendments and exhibits.
Please refer to the complete 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. 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, K and Q (all
registered as investment companies under the 1940 Act) are authorized to invest
assets in the following Lincoln National Funds and Delaware Series: Bond, Growth
and Income, Managed, Money Market and Special Opportunities (for Account D);
Growth and Income and Special Opportunities (for Account G); and all Funds,
Series and Portfolios for Accounts K and Q. Through the VAA and the Variable
Life Accounts, we are the sole shareholder in the Lincoln National Funds.
However, we are not the sole shareholder of Series shares in the Delaware Group
Premium Fund, Inc. or in the non-Lincoln National Funds and Portfolios.
Collectively, the VAA and the Variable Life Accounts may be referred to in the
prospectus and in the SAI as the variable accounts. Due to differences in
redemption rates, tax treatment or other considerations, the interests of
Contractowners under the Variable Life Accounts could conflict with those of
Contractowners under the VAA. In those cases where assets from variable life and
variable annuity separate accounts are invested in the same Fund, Series or
Portfolio (i.e., where mixed funding occurs), the Boards of Directors of the
Funds, Series or Portfolio involved will monitor for any material conflicts and
determine what action, if any, should be taken. If it becomes necessary for any
separate account to replace shares of any Fund, Series or Portfolio with another
Page 34
<PAGE>
investment, that Fund, Series or Portfolio may have to liquidate securities on a
disadvantageous basis. Refer to the prospectus for each Fund, Series and
Portfolio for more information about mixed funding. In the future, we may
purchase shares in the Funds, Series and Portfolios for one or more unregistered
segregated investment accounts.
On January 2, 1998, The Lincoln National Life Insurance Company entered into an
indemnity reinsurance transaction whereby 100% of a block of individual life and
annuity business of CIGNA Corporation was reinsured. On May 21, 1998, The
Lincoln National Life Insurance Company announced its intentions to acquire
certain domestic individual life insurance business from Aetna, Inc. via a 100%
indemnity reinsurance transaction. The transaction closed in the fall of 1998.
ADVERTISEMENTS/SALES LITERATURE
In marketing the variable annuity Contracts, we may refer to certain ratings
assigned to us under the Rating System of the A.M. Best Co., Oldwick, New
Jersey. The objective of Best's Rating System is to evaluate the various factors
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, Series and Portfolios, 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 claims
paying ability, the features of particular Contracts, and the comparative
investment performance of the Funds, Series and Portfolios with other portfolios
having similar objectives. A few such services are: Duff & Phelps, the Lipper
Group, Moody's, Morningstar, Standard and Poor's and VARDS. 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, Series and
Portfolios and their investment management.
PREPARING FOR THE YEAR 2000
Lincoln Life, as part of its year 2000 updating process, is responsible for the
updating of the VAA related computer systems. Many existing computer programs
use only two digits to identify a year in the date field. These programs were
designed and developed without considering the impact of the upcoming change in
the century. If not corrected many computer applications could fail or create
erroneous results by or at the Year 2000. The Year 2000 issue affects virtually
all companies and organizations. An affiliate of Lincoln Life, Delaware Services
Company (Delaware), provides substantially all of the necessary accounting and
valuation services for the VAA. Delaware, for its part, is responsible for
updating all of its computer systems, including those which service VAA, to
accommodate the year 2000. Lincoln Life and Delaware have begun formal
discussions with each other to asses the requirements for their respective
systems to interface properly in order to facilitate the accurate and orderly
operation of the VAA beginning in the year 2000.
Page 35
<PAGE>
The year 2000 issue is pervasive and complex and affects virtually every aspect
of the businesses of both Lincoln Life and Delaware (the Companies). The
computer systems of the companies and their interfaces with the computer systems
of vendors, suppliers, customers and other business partners are particularly
vulnerable. The inability to properly recognize date-sensitive electronic
information and to transfer data between systems could cause errors or even
complete failure of systems, which would result in a temporary inability to
process transactions correctly and engage in normal business activities for the
VAA. The Companies respectively are redirecting significant portions of their
internal information technology efforts and are contracting, as needed, with
outside consultants to help update their systems to accommodate the year 2000.
Also, in addition to the discussions with each other noted above, the Companies
have respectively initiated formal discussions with other critical parties that
interface with their systems to gain an understanding of the progress by those
parties in addressing year 2000 issues. While the Companies are making
substantial efforts to address their own systems and the systems with which they
interface, it is not possible to provide assurance that operational problems
will not occur. The Companies presently believe that, with the modification of
existing computer systems, updates by vendors and conversion to new software and
hardware, the year 2000 issue will not pose significant operations problems for
their respective computer systems. In addition, the Companies are incorporating
potential issues surrounding year 2000 into their contingency planning process,
in the event that, despite these substantial efforts, there are unresolved year
2000 problems. If the remediation efforts noted above are not completed timely
or properly, the year 2000 issue could have a material adverse impact on the
operation of the businesses of Lincoln Life or Delaware, or both.
The cost of addressing year 2000 issues and the timeliness of completion will be
closely monitored by management of the respective Companies and, for each
company, will be based on its management's best estimates which are derived
utilizing numerous assumptions of future events, including the continued
availability of certain resources, third-party modification plans and other
factors. Nevertheless, there can be no guarantee either by Lincoln Life or by
Delaware the estimated costs will be achieved, and actual results could differ
significantly from those anticipated. Specific factors that might cause such
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer problems, and other uncertainties.
LEGAL PROCEEDINGS
Lincoln Life is involved in various pending or threatened legal proceedings
arising from the conduct of its business. Most of these proceedings are routine
and in the ordinary course of business. In some instances these proceedings
include claims for unspecified or substantial punitive damages and similar types
of relief in addition to amounts for alleged contractual liability or requests
for equitable relief. After consultation with legal counsel and a review of
available facts, it is management's opinion that the ultimate liability, if any,
under these suits will not have a material adverse effect on the financial
position of Lincoln Life.
During the 1990's class action lawsuits alleging sales practices fraud have been
filed against many life insurance companies, and Lincoln Life has not been
Page 36
<PAGE>
immune. Several suits involved alleged fraud in the sale of interest-sensitive
universal and whole life insurance policies. These have been suits filed against
Lincoln Life, although as of the date of this Prospectus the court had not
certified a class in any of them. Plaintiffs seek unspecified damages and
penalties for themselves and on behalf of the putative class. Although the
relief sought in these cases is substantial, the cases are in the early stages
of litigation, and it is premature to make assessments about potential loss, if
any. Management denies the allegations and intends to defend these suits
vigorously. The amount of the liability, if any, which may arise as a result of
these suits (exclusive of any indemnification from professional liability
insurers) cannot be reasonably estimated at this time.
[Table of contents for SAI]
Page 37
<PAGE>
E-ANNUITY-TM-
LINCOLN NATIONAL
VARIABLE ANNUITY ACCOUNT C (VAA) (REGISTRANT)
LINCOLN NATIONAL
LIFE INSURANCE COMPANY (DEPOSITOR)
STATEMENT OF ADDITIONAL INFORMATION (SAI)
This SAI should be read in conjunction with the eAnnuity prospectus of the VAA
dated March 1, 1999.
You may request a free copy of the eAnnuity VAA Prospectus from
http://www.lfd.com or you may write Lincoln Financial Direct, P.O. Box 691,
Leesburg, VA 20178.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
- -------------------------------------------------------
GENERAL INFORMATION AND HISTORY
OF LINCOLN LIFE B-2
- -------------------------------------------------------
SPECIAL TERMS B-2
- -------------------------------------------------------
SERVICES B-2
- -------------------------------------------------------
PURCHASE OF SECURITIES BEING OFFERED B-2
- -------------------------------------------------------
CALCULATION OF PERFORMANCE DATA B-2
- -------------------------------------------------------
ANNUITY PAYOUTS B-6
- -------------------------------------------------------
<CAPTION>
Page
- -------------------------------------------------------
<S> <C>
FEDERAL TAX STATUS B-7
- -------------------------------------------------------
DETERMINATION OF ACCUMULATION AND
ANNUITY UNIT VALUE B-8
- -------------------------------------------------------
ADVERTISING AND SALES
LITERATURE/GRAPHICS B-8
- -------------------------------------------------------
FINANCIAL STATEMENTS B-9
- -------------------------------------------------------
</TABLE>
THIS SAI IS NOT A PROSPECTUS.
The date of this SAI is .
B-1
<PAGE>
GENERAL INFORMATION
AND HISTORY OF
LINCOLN NATIONAL LIFE
INSURANCE CO. (LINCOLN LIFE)
The prior depositor of the account, Lincoln National Pension Insurance Co., was
merged into Lincoln Life, effective January 1, 1989. Lincoln Life, organized in
1905, is an Indiana stock insurance corporation, engaged primarily in insurance
and financial services. Lincoln Life is owned by Lincoln National Corp., 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. They
are capitalized to make this document more understandable.
SERVICES
INDEPENDENT AUDITORS
The financial statements of the VAA and the statutory-basis financial statements
and schedules of Lincoln Life appearing in this SAI and registration statement
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their reports which also appear elsewhere in this document and in the
registration statement. The financial statements and schedules audited by Ernst
& Young LLP have been included in this document in reliance on their report
given on their authority as experts in accounting and auditing.
KEEPER OF RECORDS
All accounts, books, records and other documents which are required to be
maintained for the VAA are maintained by Lincoln Life. No separate charge
against the assets of the VAA is made by Lincoln Life for this service. We have
entered into an agreement with Delaware Service Co., 2005 Market Street,
Philadelphia, PA 19203, to provide accounting services to the VAA.
UNDERWRITER
Lincoln Life is the principal underwriter for the variable annuity contract. We
may not offer a Contract continuously or in every state. Lincoln Life retains no
underwriting commission from the sale of the Variable Annuity Contracts.
PURCHASE OF SECURITIES BEING OFFERED
The variable annuity contract is offered to the public through Lincoln Life's
Internet Service Center. There are no special purchase plans for any class of
prospective buyers. However, under certain limited circumstances described in
the prospectus, the Surrender Charges may be waived.
There are exchange privileges between Subaccounts. (See The Contract in the
Prospectus.) No exchanges are permitted between the VAA and other separate
accounts.
CALCULATION OF PERFORMANCE DATA
A. MONEY MARKET FUNDED SUBACCOUNTS:
Standardized performance data is not included because, as of the date hereof,
the Contract has not yet been sold. Nonstandardized performance data will be
accompanied by standard performance data once available.
1. Seven-day yield: 4.37%
Length of base period used in computing the yield: 7 days
Last Day in the base period: December 31, 1997
2. The yield will be determined by calculating the change in unit value for
the base period (the 7-day period ended December 31, 1997); then
dividing this figure by the account value at the beginning of the
period; then annualizing this result by the factor of 365/7. This yield
includes all deductions charged to the Contractowner's account, and
excludes any realized gains and losses from the sale of securities.
B-2
<PAGE>
B. OTHER SUBACCOUNTS:
The VAA advertises the performance of its various Subaccounts by observing how
they perform over various time periods -- monthly, year-to-date, yearly (fiscal
year), and over periods of three or more years.
TOTAL RETURN -- the tables below show, for the various Subaccounts of
the VAA, 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.
HISTORICAL FUND/SERIES PERFORMANCE ADJUSTED FOR CONTRACT AND VAA FEES AND
CHARGES. Returns are provided for years before the Fund and Series were
available investment options under the Contract. Returns for those periods
reflect an adjusted return as if those Funds and Series were available under the
Contract, and reflect the deduction of the annuity asset charge, and the VAA
investment advisory fee.
Tables 1A, 1B, 2A and 2B below assume a hypothetical investment of $1,000 at the
beginning of the period via the Subaccount investing in the applicable Fund or
Series and Withdrawal of the investment on 12/31/97. Table 1A contains
standardized performance which is computed according to a formula prescribed by
the SEC. Tables 1B, 2A and 2B contain non-standardized performance and are
calculated according to formulas which vary slightly from the SEC prescribed
formula. For Tables 1A and 1B, the returns shown reflect the annuity asset
charges, the VAA investment advisory fee, and the Surrender Charge. For Tables
2A and 2B, the returns shown reflect the annuity asset charge and the VAA
investment advisory fee, but not the Surrender Charge. THIS INFORMATION DOES NOT
INDICATE OR REPRESENT FUTURE PERFORMANCE.
TABLE 1A
SUBACCOUNT AVERAGE ANNUAL
TOTAL RETURNS (STANDARDIZED)
<TABLE>
<CAPTION>
10-years
1-year ending 5-years ending ending
Subaccounts 12/31/97 12/31/97 12/31/97
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------
Bond
Commenced Activity on December 21, 1981 6.32% 6.73% 8.26%
- -----------------------------------------------------------------------------------------
Growth and Income
Commenced Activity on December 21, 1981 27.28% 19.14% 15.12%
- -----------------------------------------------------------------------------------------
International
Commenced Activity on May 1, 1991 3.16% 11.97% 7.25%
- -----------------------------------------------------------------------------------------
Managed
Commenced Activity on April 29, 1983 18.42% 13.36% 11.70%
- -----------------------------------------------------------------------------------------
Global Asset Allocation
Commenced Activity on August 3, 1987 16.16% 13.72% 11.87%
- -----------------------------------------------------------------------------------------
Social Awareness
Commenced Activity on May 2, 1988 33.76% 22.87% 18.36%*
- -----------------------------------------------------------------------------------------
Special Opportunities
Commenced Activity on December 21, 1981 24.66% 17.51% 15.60%
- -----------------------------------------------------------------------------------------
Aggressive Growth
Commenced Activity on January 3, 1994 21.89% * 17.57%*
- -----------------------------------------------------------------------------------------
Capital Appreciation
Commenced Activity on January 3, 1994 27.10% * 21.51%*
- -----------------------------------------------------------------------------------------
Equity-Income
Commenced Activity on January 3, 1994 19.79% * 14.36%*
- -----------------------------------------------------------------------------------------
Trend-Series
Commenced Activity on May 1, 1996 18.13% * 10.74%*
- -----------------------------------------------------------------------------------------
Decatur Total Return Series
Commenced Activity on May 1, 1996 27.52% * 25.15%*
- -----------------------------------------------------------------------------------------
Global Bond Series
Commenced Activity on May 1, 1996 -1.82% * 6.10%*
- -----------------------------------------------------------------------------------------
</TABLE>
* The lifetime of this Subaccount is less than the complete period indicated.
The performance shown is for the period from commencement of activity.
B-3
<PAGE>
The length of the periods and the last day of each period used in the table
above are set out in the table headings. 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
Contractowner accounts; 2) all applicable nonrecurring 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.
B-4
<PAGE>
TABLE 1B
SUBACCOUNT CUMULATIVE TOTAL RETURNS (NON-STANDARDIZED)
<TABLE>
<CAPTION>
10-years
1-year ending 5-years ending ending
Subaccounts 12/31/97 12/31/97 12/31/97
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------
Bond
Commenced Activity on December 21, 1981 6.32% 38.47% 121.05%
- -----------------------------------------------------------------------------------------
Growth and Income
Commenced Activity on December 21, 1981 27.28% 140.05% 308.77%
- -----------------------------------------------------------------------------------------
International
Commenced Activity on May 1, 1991 3.16% 76.03% 59.49%
- -----------------------------------------------------------------------------------------
Managed
Commenced Activity on April 29, 1983 18.42% 87.19% 202.38%
- -----------------------------------------------------------------------------------------
Global Asset Allocation
Commenced Activity on August 3, 1987 16.16% 90.16% 206.81%
- -----------------------------------------------------------------------------------------
Social Awareness
Commenced Activity on May 2, 1988 33.76% 180.00% 410.18%*
- -----------------------------------------------------------------------------------------
Special Opportunities
Commenced Activity on December 21, 1981 24.66% 124.02% 326.25%
- -----------------------------------------------------------------------------------------
Aggressive Growth
Commenced Activity on January 3, 1994 21.89% * 90.80%*
- -----------------------------------------------------------------------------------------
Capital Appreciation
Commenced Activity on January 3, 1994 27.10% * 117.67%*
- -----------------------------------------------------------------------------------------
Equity-Income
Commenced Activity on January 3, 1994 19.79% * 70.83%*
- -----------------------------------------------------------------------------------------
Trend-Series
Commenced Activity on May 1, 1996 18.13% * 18.54%*
- -----------------------------------------------------------------------------------------
Decatur Total Return Series
Commenced Activity on May 1, 1996 27.52% (9) 45.40%*
- -----------------------------------------------------------------------------------------
Global Bond Series
Commenced Activity on May 1, 1996 -1.82% * 10.38%*
- -----------------------------------------------------------------------------------------
</TABLE>
* The lifetime of this Subaccount is less than the complete period indicated.
The performance shown is for the period from commencement of activity.
The length of the periods and the last day of each period used in the table
above are set out in the table headings. The cumulative total return for Table
2B for each period was determined by the following formula --
P (1 + C) = ERV
Where: P = a hypothetical Purchase Payment of $1,000
C = cumulative total return for the period
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 period in
question
The formula assumes that: 1) all recurring fees have been charged to
Contractowner accounts; 2) all applicable nonrecurring 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 above relate to the
contract form containing the highest level of charges.
B-5
<PAGE>
TABLE 1C
SUBACCOUNT CUMULATIVE TOTAL RETURNS--NEW FUNDS (NON-STANDARDIZED)
<TABLE>
<CAPTION>
1-year 5-years 10-years
ending ending ending
Subaccounts 12/31/98 12/31/98 12/31/98
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Partners 1.57% * *
Commenced Activity on March 22, 1994
- ------------------------------------------------------------------------------------------
MidCap 35.77% * *
Commenced Activity on November 3, 1997
- ------------------------------------------------------------------------------------------
Equity 500 Index 25.45% * *
Commenced Activity on October 1, 1997
- ------------------------------------------------------------------------------------------
Small Cap Index -4.67% * *
Commenced Activity on August 25, 1997
- ------------------------------------------------------------------------------------------
Capital Asset 29.67%* * *
Commenced Activity on October 1, 1998
- ------------------------------------------------------------------------------------------
VP International 15.75% * *
Commenced Activity on May 1, 1994
- ------------------------------------------------------------------------------------------
Worldwide Growth 25.66% 99.86% *
Commenced Activity on September 13,1993
- ------------------------------------------------------------------------------------------
</TABLE>
* The lifetime of this Subaccount is less than the complete period indicated.
The performance shown is for the period from commencement of activity.
The length of the periods and the last day of each period used in the table
above are set out in the table headings. The cumulative total return for Table
2B for each period was determined by the following formula
P (1 + C) = ERV
Where: P = a hypothetical Purchase Payment of $1,000
C = cumulative total return for the period
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 period
in question
The formula assumes that: 1) all recurring fees have been charged to
Contractowner accounts; 2) all applicable nonrecurring 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 above relate to the
contract form containing the highest level of charges.
B-6
<PAGE>
TABLE 2A
SUBACCOUNT AVERAGE ANNUAL TOTAL RETURNS (NON-STANDARDIZED)
<TABLE>
<CAPTION>
10-years
1-year ending 5-years ending ending
Subaccounts 12/31/97 12/31/97 12/31/97
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------
Bond
Commenced Activity on December 21, 1981 8.49% 6.73% 8.26%
- -----------------------------------------------------------------------------------------
Growth and Income
Commenced Activity on December 21, 1981 29.88% 19.14% 15.12%
- -----------------------------------------------------------------------------------------
International
Commenced Activity on May 1, 1981 5.27% 11.97% 7.25%
- -----------------------------------------------------------------------------------------
Managed
Commenced Activity on April 29, 1983 20.84% 13.36% 11.70%
- -----------------------------------------------------------------------------------------
Global Asset Allocation
Commenced Activity on August 3, 1987 18.53% 13.72% 11.87%
- -----------------------------------------------------------------------------------------
Social Awareness
Commenced Activity on May 2, 1988 36.49% 22.87% 18.36%*
- -----------------------------------------------------------------------------------------
Special Opportunities
Commenced Activity on December 21, 1981 27.21% 17.51% 15.60%
- -----------------------------------------------------------------------------------------
Aggressive Growth
Commenced Activity on January 3, 1994 24.38% * 17.57%*
- -----------------------------------------------------------------------------------------
Capital Appreciation
Commenced Activity on January 3, 1994 29.69% * 21.51%*
- -----------------------------------------------------------------------------------------
Equity-Income
Commenced Activity on January 3, 1994 22.24% * 14.36%*
- -----------------------------------------------------------------------------------------
Trend-Series
Commenced Activity on May 1, 1996 20.54% * 10.74%*
- -----------------------------------------------------------------------------------------
Decatur Total Return Series
Commenced Activity on May 1, 1996 30.13% * 25.15%*
- -----------------------------------------------------------------------------------------
Global Bond Series
Commenced Activity on May 1, 1996 0.19% * 6.10%*
- -----------------------------------------------------------------------------------------
</TABLE>
* The lifetime of this Subaccount is less than the complete period indicated.
The performance shown is for the period from commencement of activity.
The length of the periods and the last day of each period used in the table
above are set out in the table headings. 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) = CV Where: P = a hypothetical initial Purchase Payment of $1,000
T = average annual total return for the period in question
n = number of years
CV =Contract 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
Contractowner accounts; and 2) all applicable nonrecurring charges are deducted
at the end of the period in question. Surrender Charges are not deducted. The
performance figures shown in the table above relate to the Contract form
containing the highest level of charges.
B-7
<PAGE>
TABLE 2B
SUBACCOUNT CUMULATIVE TOTAL RETURNS (NON-STANDARDIZED)
<TABLE>
<CAPTION>
10-years
1-year ending 5-years ending ending
Subaccounts 12/31/97 12/31/97 12/31/97
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------
Bond
Commenced Activity on December 21, 1981 8.49% 38.47% 121.05%
- -----------------------------------------------------------------------------------------
Growth and Income
Commenced Activity on December 21, 1981 29.88% 140.05% 308.77%
- -----------------------------------------------------------------------------------------
International
Commenced Activity on May 1, 1991 5.27% 76.03% 59.49%
- -----------------------------------------------------------------------------------------
Managed
Commenced Activity on April 29, 1983 20.84% 87.19% 202.38%
- -----------------------------------------------------------------------------------------
Global Asset Allocation
Commenced Activity on August 3, 1987 18.53% 90.16% 206.81%
- -----------------------------------------------------------------------------------------
Social Awareness
Commenced Activity on May 2, 1988 36.49% 180.00% 410.18%*
- -----------------------------------------------------------------------------------------
Special Opportunities
Commenced Activity on December 21, 1981 27.21% 124.02% 326.25%
- -----------------------------------------------------------------------------------------
Aggressive Growth
Commenced Activity on January 3, 1994 24.38% * 90.80%*
- -----------------------------------------------------------------------------------------
Capital Appreciation
Commenced Activity on January 3, 1994 29.69% * 117.67%*
- -----------------------------------------------------------------------------------------
Equity-Income
Commenced Activity on January 3, 1994 22.24% * 70.83%*
- -----------------------------------------------------------------------------------------
Trend-Series
Commenced Activity on May 1, 1996 20.54% * 18.54%*
- -----------------------------------------------------------------------------------------
Decatur Total Return Series
Commenced Activity on May 1, 1996 30.13% * 45.40%*
- -----------------------------------------------------------------------------------------
Global Bond Series
Commenced Activity on May 1, 1996 0.19% * 10.38%*
- -----------------------------------------------------------------------------------------
</TABLE>
* The lifetime of this Subaccount is less than the complete period indicated.
The performance shown is for the period from commencement of activity.
The length of the periods and the last day of each period used in the table
above are set out in the table headings. The cumulative total return for Table
2B for each period was determined by the following formula --
P (1 + C) = CV
Where: P = a hypothetical Purchase Payment of $1,000
C = cumulative total return for the period
CV =contract value (as of the end of the period in question) of a hypothetical
$1,000 Purchase Payment made at the beginning of the period in question
The formula assumes that: 1) all recurring fees have been charged to
Contractowner accounts; 2) all applicable nonrecurring charges are deducted at
the end of the period in question. Surrender Charges are not deducted. The
performance figures above relate to the Contract form containing the highest
level of charges.
B-8
<PAGE>
TABLE 2C
SUBACCOUNT AVERAGE ANNUAL TOTAL RETURNS--NEW FUNDS (NON-STANDARDIZED)
<TABLE>
<CAPTION>
1-year 5-years 10-years
ending ending ending
Subaccounts 12/31/98 12/31/98 12/31/98
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Partners 3.64% 19.06%* *
Commenced Activity on March 22, 1994
- ------------------------------------------------------------------------------------------
MidCap 38.54% 51.82%* *
Commenced Activity on November 3, 1997
- ------------------------------------------------------------------------------------------
Equity 500 Index 28.01% 23.55%* *
Commenced Activity on October 1, 1997
- ------------------------------------------------------------------------------------------
Small Cap Index -2.72% 1.28%* *
Commenced Activity on August 25, 1997
- ------------------------------------------------------------------------------------------
Capital Asset 32.32%* * *
Commenced Activity on October 1, 1998
- ------------------------------------------------------------------------------------------
VP International 18.11% 11.68%* *
Commenced Activity on May 1, 1994
- ------------------------------------------------------------------------------------------
Worldwide Growth 28.22% 25.96%* *
Commenced Activity on September 13,1993
- ------------------------------------------------------------------------------------------
</TABLE>
* The lifetime of this Subaccount is less than the complete period indicated.
The performance shown is for the period from commencement of activity.
The length of the periods and the last day of each period used in the table
above are set out in the table headings. The cumulative total return for Table
2B for each period was determined by the following formula:
P (1 + C) = CV
Where: P = a hypothetical Purchase Payment of $1,000
C = cumulative total return for the period
CV = contract value (as of the end of the period in question) of a hypothetical
$1,000 Purchase Payment made at the beginning of the period in question
The formula assumes that: 1) all recurring fees have been charged to
Contractowner accounts; 2) all applicable nonrecurring charges are deducted at
the end of the period in question. Surrender Charges are not deducted. The
performance figures above relate to the Contract form containing the highest
level of charges.
B-9
<PAGE>
TABLE 2D
SUBACCOUNT CUMULATIVE TOTAL RETURNS--NEW FUNDS (NON-STANDARDIZED)
<TABLE>
<CAPTION>
1-year 5-years 10-years
ending ending ending
Subaccounts 12/31/98 12/31/98 12/31/98
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Partners 3.64% * *
Commenced Activity on March 22, 1994
- ------------------------------------------------------------------------------------------
MidCap 38.54% * *
Commenced Activity on November 3, 1997
- ------------------------------------------------------------------------------------------
Equity 500 Index 28.01% * *
Commenced Activity on October 1, 1997
- ------------------------------------------------------------------------------------------
Small Cap Index -2.72% * *
Commenced Activity on August 25, 1997
- ------------------------------------------------------------------------------------------
Capital Asset 32.32%* * *
Commenced Activity on October 1, 1998
- ------------------------------------------------------------------------------------------
VP International 18.11% * *
Commenced Activity on May 1, 1994
- ------------------------------------------------------------------------------------------
Worldwide Growth 28.22% 99.86%* *
Commenced Activity on September 13,1993
- ------------------------------------------------------------------------------------------
</TABLE>
* The lifetime of this Subaccount is less than the complete period indicated.
The performance shown is for the period from commencement of activity.
The length of the periods and the last day of each period used in the table
above are set out in the table headings. The cumulative total return for Table
2B for each period was determined by the following formula:
P (1 + C) = CV
Where: P = a hypothetical Purchase Payment of $1,000
C = cumulative total return for the period
CV = contract value (as of the end of the period in question) of a hypothetical
$1,000 Purchase Payment made at the beginning of the period in question
The formula assumes that: 1) all recurring fees have been charged to
Contractowner accounts; 2) all applicable nonrecurring charges are deducted at
the end of the period in question. Surrender Charges are not deducted. The
performance figures above relate to the Contract form containing the highest
level of charges.
B-10
<PAGE>
ANNUITY PAYOUTS
VARIABLE ANNUITY PAYOUTS
Variable Annuity Payouts will be determined on the basis of: (1) the value of
the Contract on 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 Payouts, Lincoln Life makes the following calculation:
first, it determines the dollar amount of the first payout; second, it credits
the Annuitant with a fixed number of Annuity Units based on the amount of the
first payout; and third, it calculates the value of the Annuity Units each
period thereafter. These steps are explained below.
The dollar amount of the first variable Annuity Payout is determined by applying
the total value of the Accumulation Units credited under the Contract valued as
of the Annuity Commencement Date (less any premium taxes) to the annuity tables
contained in the Contract. The first variable Annuity Payout will be paid within
14 days after the Annuity Commencement Date. The monthly anniversary of the
Annuity Commencement Date will become the date on which all future Annuity
Payouts will be calculated. Amounts shown in the tables are based on the 1983(a)
Individual Mortality Table modified, with an assumed investment return at the
rate of 5% per annum. The first Annuity Payout is determined by multiplying the
benefit per $1,000 of value shown in the Contract tables by the number of
thousands of dollars of Contract Value under the Contract. These annuity tables
vary according to the form of annuity selected and the age of the Annuitant at
the Annuity Commencement Date. The 5% interest rate stated above is the
measuring point for subsequent Annuity Payouts. 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
Payouts will decrease. If the assumed rate of interest were to be increased,
Annuity Payouts would start at a higher level but would decrease more rapidly or
increase more slowly.
Lincoln Life may use sex distinct annuity tables in Contracts where not
prohibited by law.
At an Annuity Commencement Date, the Annuitant is credited with Annuity Units
for each Subaccount on which variable Annuity Payouts are based. The number of
Annuity Units to be credited is determined by dividing the amount of the first
payout by the value of an Annuity Unit in each Subaccount selected. Although the
number of Annuity Units is fixed by this process, the value of such units will
vary with the value of the underlying eligible Funds. The amount of the second
and subsequent annuity payouts is determined by multiplying the Contractowner's
fixed number of Annuity Units in each Subaccount by the appropriate Annuity Unit
value for the Valuation Date ending on the monthly anniversary of the annuity
commencement date.
The value of each Subaccount Annuity Unit was arbitrarily established. The
Annuity Unit value for each Subaccount at the end of any Valuation Date is
determined as follows:
1. The total value of Fund or Series shares held in the Subaccount is
calculated by multiplying the number of shares by the net asset value at end
of Valuation Period plus any dividend or other distribution.
2. The liabilities of the Subaccount, including daily charges and taxes, are
subtracted
3. The result is divided by the number of Annuity Units in the Subaccount at
the beginning of Valuation Period, and adjusted by a factor to neutralize
the assumed investment return in the annuity table.
The value of the Annuity Units is determined as of the monthly anniversary of
the Annuity Commencement Date to permit calculation of amounts of Annuity
Payouts and mailing of checks in advance of their due dates. Such checks will
normally be issued and mailed at least three days before the due date.
PROOF OF AGE, SEX AND SURVIVAL
Lincoln Life may require proof of age, sex or survival of any payee upon whose
age, sex or survival payouts depend.
FEDERAL TAX STATUS
GENERAL
The operations of the VAA form a part of, and are taxed with, the operations of
Lincoln Life under the Internal Revenue Code of 1986, as amended (the code).
Investment income and realized net capital gains on the assets of the VAA 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, Lincoln Life believes that VAA 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, Lincoln Life
does not anticipate that it will incur any federal income tax liability
attributable to the VAA, 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 Lincoln Life's being taxed on income or gains attributable to
the VAA, then Lincoln Life may impose a charge against the VAA in order to make
provision for payment of such taxes.
TAX STATUS OF NONQUALIFIED CONTRACTS
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 Contractowner dies on or after the annuity
starting date, but before 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
Contractowner's death; and (B) if any Contractowner dies before the annuity
starting date, the entire interest must be distributed within five years after
the death of the Contractowner. These requirements are considered satisfied to
the extent that any portion of the Contractowner's interest that is payable to
or for the benefit of a designated Beneficiary is
B-11
<PAGE>
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 Contractowner'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. Lincoln Life 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.
INDIVIDUAL RETIREMENT ANNUITIES (IRA)
Under Section 408 of the Code, individuals may participate in a retirement
program known as an IRA. An individual may make an annual IRA contribution of up
to the lesser of $2,000 (or $4,000 if IRAs are maintained for both the
individual and the nonworking spouse and they file a joint tax return) or 100%
of compensation. However, IRA contributions may be nondeductible in whole or in
part if (1) the individual or the spouse is an active participant in certain
other retirement programs and (2) the income of the individual (or of the
individual and the 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.
ROTH IRAS
Beginning in 1998, individuals may purchase a new type of non-deductible IRA,
known as a Roth IRA. Purchase payments for a Roth IRA are limited to $2,000 per
year. This limitation is phased out for adjusted gross income between $95,000
and $110,000 in the case of single taxpayers, between $150,000 and $160,000 in
the case of married taxpayers filing joint returns, and between $0 and $15,000
in the case of married taxpayers filing separately. An overall $2,000 annual
limitation continues to apply to all of a taxpayer's IRA contributions,
including Roth IRAs and non-Roth IRAs.
Qualified distributions from Roth IRAs are entirely tax free. A qualified
distribution requires that the individual has held the Roth IRA for at least
five years and, in addition, that the distribution is made either after the
individual reaches age 59 1/2, on the individual's death or disability, or as a
qualified first-time home purchase, subject to a $10,000 lifetime maximum, for
the individual, a spouse, child, grandchild, or ancestor.
An individual may make a rollover contribution from a non-Roth IRA to a Roth
IRA, unless the individual has adjusted gross income over $100,000 or the
individual is a married taxpayer filing a separate return. The individual must
pay tax on any portion of the non-Roth IRA being rolled over that represents
income or a previously deductible IRA contribution. For rollovers in 1998, the
individual may pay that tax ratably in 1998 and over the succeeding three years.
There are no similar limitations on rollovers from a Roth IRA to another Roth
IRA.
TAX ON DISTRIBUTIONS FROM TRADITIONAL IRAS
IRS 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 will be subject to a 10% penalty tax if made before age 59 1/2
unless certain other exceptions apply. Failure to meet certain minimum
distribution requirements will result in a 50% excise tax.
Upon an employee's death, the taxation of benefits payable to the Beneficiary
generally follows these same principles, subject to a variety of special rules.
All participants in a Traditional IRA and a Roth IRA receive an IRA Disclosure.
This document explains the tax rules that apply to IRAs in greater detail.
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 annuity contracts and retirement plans, which are not
fully discussed above. Before an investment is made in any of the Contracts, a
competent tax advisor should be consulted.
DETERMINATION OF
ACCUMULATION AND
ANNUITY UNIT VALUE
A description of the days on which Accumulation and Annuity Units will be valued
is given in the prospectus. The New York Stock Exchange's (NYSE) most recent
announcement (which is subject to change) states that in 1998 it will be closed
on New Year's Day, Martin Luther King Day, Presidents Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. It may
also be closed on other days.
Since the portfolios of some of the Funds and Series 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 Series and of the variable account could therefore be significantly
affected) on days when the investor has no access to those Funds and Series.
ADVERTISING AND SALES LITERATURE
As set forth in the prospectus, Lincoln Life 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
B-12
<PAGE>
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 20 different countries.
LIPPER VARIABLE INSURANCE PRODUCTS PERFORMANCE ANALYSIS SERVICE is a publisher
of statistical data covering the investment company industry in the United
States and overseas. Lipper is recognized as the leading source of data on
open-end and closed-end funds. Lipper currently tracks the performance of over
5,000 investment companies and publishes numerous specialized reports, 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 annuity contracts.
STANDARD & POOR's CORP. 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.
STANDARD & POOR'S 500 INDEX (S&P 500) -- broad-based measurement of changes in
stock-market conditions based on the average performance of 500 widely held
common stocks; commonly known as the 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 Corp., a
financial advisory, securities rating and publishing firm.
NASDAQ-OTC Price Index -- this index is based on the National Association of
Securities Dealers Automated Quotations (NASDAQ) and represents all domestic
over-the-counter stocks except those traded on exchanges and those having only
one market maker, a total of some 3,500 stocks. It is market value-weighted and
was introduced with a base of 100.00 on February 5, 1971.
DOW JONES INDUSTRIAL AVERAGE (DJIA) -- price-weighted average of 30 actively
traded blue chip stocks, primarily industrials but including American Express
Co. and American Telephone and Telegraph Co. Prepared and published by Dow Jones
& Co., it is the oldest and most widely quoted of all the market indicators. The
average is quoted in points, not dollars.
In its advertisements and other sales literature for the VAA and the eligible
Funds, Lincoln Life intends to illustrate the advantages of the Contracts in a
number of ways:
DOLLAR-COST AVERAGING ILLUSTRATIONS. These illustrations will generally discuss
the price-leveling effect of making regular purchases in the same subaccounts
over a period of time, to take advantage of the trends in market prices of the
portfolio securities purchased for those Subaccounts.
AUTOMATIC WITHDRAWAL SERVICE. A service provided by Lincoln Life, through which
a Contractowner may take any distribution allowed by Code Section 401(a)(9) in
the case of qualified contracts, or permitted under Code Section 72 in the case
of nonqualified contracts, by way of an automatically generated payment.
LINCOLN LIFE'S CUSTOMERS. Sales literature for the VAA, the Funds and Series may
refer to the number of employers and the number of individual annuity clients
which Lincoln Life serves. As of March 17, 1998, Lincoln Life was serving over
13,000 organizations and had more than 1 million annuity clients.
LINCOLN LIFE'S ASSETS, SIZE. Lincoln Life may discuss its general financial
condition (see, for example, the reference to A.M. Best Co., 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 subclassification of those companies,
based upon recognized evaluation criteria. For example, at year-end 1997,
Lincoln Life was the 6th largest U.S. stock life insurance company based upon
overall assets.
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.
FINANCIAL STATEMENTS
Financial statements for Lincoln Life appear on the following pages.
B-13
<PAGE>
THIS PAGE WAS INTENTIONALLY LEFT BLANK.
B-14
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT C
STATEMENT OF ASSETS AND LIABILITY
DECEMBER 31, 1997
<TABLE>
<CAPTION>
DELAWARE DELAWARE DELAWARE
PERCENT AGGRESSIVE CAPITAL EMERGING EQUITY/ GLOBAL
OF NET GROWTH APPRECIATION GROWTH INCOME BOND
ASSETS COMBINED ACCOUNT BOND ACCOUNT ACCOUNT SERIES SERIES SERIES
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS
Investments at net asset
value:
- Lincoln National
Aggressive Growth
Fund,
Inc. - 20,538,876.338
shares at $16.39 per
share
(cost - $240,321,099) 3.6% $ 336,538,224 $336,538,224
- -------------------------
- Lincoln National Bond
Fund, Inc. -
21,673,088.212 shares
at $12.86 per share
(cost - $256,731,556) 3.0 278,728,827 $278,728,827
- -------------------------
- Lincoln National
Capital Appreciation
Fund,
Inc. - 25,239,693.100
shares at $17.53 per
share
(cost - $332,345,658) 4.7 442,461,845 $442,461,845
- -------------------------
- Delaware Emerging
Growth Series
3,188,970.924
shares at $17.39 per
share
(cost - $49,181,353) 0.6 55,456,204 $55,456,204
- -------------------------
- Delaware Equity/Income
Series 5,012,656.118
shares at $18.80 per
share
(cost - $85,288,396) 1.0 94,237,935 $94,237,935
- -------------------------
- Delaware Global Bond
Series 1,181,485.729
shares at $10.50 per
share
(cost - $12,389,777) 0.1 12,405,600 $12,405,600
- -------------------------
- Lincoln National
Equity-Income Fund,
Inc. -
39,782,391.791 shares
at $20.12 per share
(cost - $555,166,058) 8.5 800,339,302
- -------------------------
- Lincoln National
Global Asset
Allocation
Fund, Inc. -
27,866,136.046 shares
at $15.63 per
share (cost -
$336,837,273) 4.6 435,502,051
- -------------------------
- Lincoln National
Growth and Income
Fund,
Inc. - 83,235,581.825
shares at $41.95 per
share
(cost -
$2,099,399,866) 37.0 3,491,608,711
- -------------------------
- Lincoln National
International Fund,
Inc. -
31,426,189.646 shares
at $14.67 per share
(cost - $394,676,976) 4.9 461,109,004
- -------------------------
- Lincoln National
Managed Fund, Inc. -
43,887,686.344 shares
at $19.30 per share
(cost - $597,984,621) 9.0 847,217,671
- -------------------------
- Lincoln National Money
Market Fund, Inc. -
8,746,828.400 shares
at $10.00 per share
(cost - $87,468,284) 0.9 87,468,284
- -------------------------
- Lincoln National
Social Awareness Fund,
Inc. - 34,938,768.165
shares at $35.66 per
share
(cost - $826,939,759) 13.2 1,245,806,391
- -------------------------
- Lincoln National
Special Opportunities
Fund,
Inc. - 23,910,129.802
shares at $35.06 per
share
(cost - $602,317,122) 8.9 838,185,104
- ----------------------------------------------------------------------------------------------------------------------------
- -------------------------
TOTAL INVESTMENTS & TOTAL
ASSETS (Cost -
$6,477,047,798) 100.0 9,427,065,153 336,538,224 278,728,827 442,461,845 55,456,204 94,237,935 12,405,600
- -------------------------
LIABILITY -
Payable to The Lincoln
National Life
Insurance Company 0.0 258,012 9,083 7,626 12,070 1,491 2,567 342
- ----------------------------------------------------------------------------------------------------------------------------
- -------------------------
NET ASSETS 100.0% $9,426,807,141 $336,529,141 $278,721,201 $442,449,775 $55,454,713 $94,235,368 $12,405,258
- ----------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
- -------------------------
NET ASSETS ARE
REPRESENTED BY:
MULTIFUND WITHOUT
GUARANTEED MINIMUM
DEATH BENEFIT
Units in accumulation
period $198,261,432 $ 59,831,710 $232,364,459 $45,956,994 $62,514,884 $10,909,411
- -------------------------
Annuity reserves units 254,392 94,218 489,213 0 450,356 8,169
- -------------------------
Unit value $1.687 $4.632 $1.884 $1.191 $1.461 $1.109
- -------------------------
Value in accumulation
period 334,483,346 277,147,745 437,833,856 54,740,484 91,334,715 12,099,923
- -------------------------
Annuity reserves 429,181 436,433 921,803 -- 657,974 9,060
- -------------------------
---------------------------------------------------------------------------------
334,912,527 277,584,178 438,755,659 54,740,484 91,992,689 12,108,983
---------------------------------------------------------------------------------
MULTIFUND WITH GUARANTEED
MINIMUM DEATH BENEFIT
Units in accumulation
period 959,741 245,847 1,963,593 600,523 1,537,440 267,546
- -------------------------
Unit value $1.684 $4.625 $1.881 $1.189 $1.459 $1.107
- -------------------------
Value in accumulation
period 1,616,614 1,137,023 3,694,116 714,229 2,242,679 296,275
- -------------------------
---------------------------------------------------------------------------------
TOTAL NET ASSETS $336,529,141 $278,721,201 $442,449,775 $55,454,713 $94,235,368 $12,405,258
- -------------------------
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
B-15
<PAGE>
<TABLE>
<CAPTION>
EQUITY- GLOBAL ASSET GROWTH AND MONEY SOCIAL SPECIAL
INCOME ALLOCATION INCOME INTERNATIONAL MANAGED MARKET AWARENESS OPPORTUNITIES
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Investments at net asset
value:
- - Lincoln National
Aggressive Growth
Fund,
Inc. - 20,538,876.338
shares at $16.39 per
share
(cost - $240,321,099)
- -------------------------
- - Lincoln National Bond
Fund, Inc. -
21,673,088.212 shares
at $12.86 per share
(cost - $256,731,556)
- -------------------------
- - Lincoln National
Capital Appreciation
Fund,
Inc. - 25,239,693.100
shares at $17.53 per
share
(cost - $332,345,658)
- -------------------------
- - Delaware Emerging
Growth Series
3,188,970.924
shares at $17.39 per
share
(cost - $49,181,353)
- -------------------------
- - Delaware Equity/Income
Series 5,012,656.118
shares at $18.80 per
share
(cost - $85,288,396)
- -------------------------
- - Delaware Global Bond
Series 1,181,485.729
shares at $10.50 per
share
(cost - $12,389,777)
- -------------------------
- - Lincoln National
Equity-Income Fund,
Inc. -
39,782,391.791 shares
at $20.12 per share
(cost - $555,166,058) $800,339,302
- -------------------------
- - Lincoln National
Global Asset
Allocation
Fund, Inc. -
27,866,136.046 shares
at $15.63 per
share (cost -
$336,837,273) $435,502,051
- -------------------------
- - Lincoln National
Growth and Income
Fund,
Inc. - 83,235,581.825
shares at $41.95 per
share
(cost -
$2,099,399,866) $3,491,608,711
- -------------------------
- - Lincoln National
International Fund,
Inc. -
31,426,189.646 shares
at $14.67 per share
(cost - $394,676,976) $461,109,004
- -------------------------
- - Lincoln National
Managed Fund, Inc. -
43,887,686.344 shares
at $19.30 per share
(cost - $597,984,621) $847,217,671
- -------------------------
- - Lincoln National Money
Market Fund, Inc. -
8,746,828.400 shares
at $10.00 per share
(cost - $87,468,284) $87,468,284
- -------------------------
- - Lincoln National
Social Awareness Fund,
Inc. - 34,938,768.165
shares at $35.66 per
share
(cost - $826,939,759) $1,245,806,391
- -------------------------
- - Lincoln National
Special Opportunities
Fund,
Inc. - 23,910,129.802
shares at $35.06 per
share
(cost - $602,317,122) $838,185,104
- ------------------------------------------------------------------------------------------------------------------------------------
- -------------------------
TOTAL INVESTMENTS & TOTAL
ASSETS (Cost -
$6,477,047,798) 800,339,302 435,502,051 3,491,608,711 461,109,004 847,217,671 87,468,284 1,245,806,391 838,185,104
- -------------------------
LIABILITY -
Payable to The Lincoln
National Life
Insurance Company 21,918 11,944 95,677 12,728 23,189 2,400 34,120 22,857
- ------------------------------------------------------------------------------------------------------------------------------------
- -------------------------
NET ASSETS $800,317,384 $435,490,107 $3,491,513,034 $461,096,276 $847,194,482 $87,465,884 $1,245,772,271 $838,162,247
- ------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
- -------------------------
NET ASSETS ARE
REPRESENTED BY:
MULTIFUND WITHOUT
GUARANTEED MINIMUM
DEATH BENEFIT
Units in accumulation
period $367,650,521 $158,528,476 $356,437,044 $293,362,761 $178,408,049 $35,963,168 $ 249,012,275 $101,002,630
- -------------------------
Annuity reserves units 1,261,113 521,791 3,955,002 502,083 511,247 56,935 524,138 137,167
- -------------------------
Unit value $2.150 $2.720 $9.650 $1.562 $4.714 $2.419 $4.950 $8.249
- -------------------------
Value in accumulation
period 790,308,116 431,188,333 3,439,732,725 458,218,383 841,011,899 86,979,858 1,232,525,060 833,140,183
- -------------------------
Annuity reserves 2,710,910 1,419,239 38,167,051 784,229 2,410,011 137,700 2,594,303 1,131,452
- -------------------------
-----------------------------------------------------------------------------------------------------------
793,019,026 432,607,572 3,477,899,776 459,002,612 843,421,910 87,117,558 1,235,119,363 834,271,635
-----------------------------------------------------------------------------------------------------------
MULTIFUND WITH GUARANTEED
MINIMUM DEATH BENEFIT
Units in accumulation
period 3,400,524 1,061,444 1,412,921 1,342,514 801,564 144,247 2,155,674 472,405
- -------------------------
Unit value $2.146 $2.716 $9.635 $1.560 $4.707 $2.415 $4.942 $8.236
- -------------------------
Value in accumulation
period 7,298,358 2,882,535 13,613,258 2,093,664 3,772,572 348,326 10,652,908 3,890,612
- -------------------------
-----------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS $800,317,384 $435,490,107 $3,491,513,034 $461,096,276 $847,194,482 $87,465,884 $1,245,772,271 $838,162,247
- -------------------------
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
</TABLE>
B-16
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT C
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
DELAWARE DELAWARE DELAWARE
AGGRESSIVE CAPITAL EMERGING EQUITY/ GLOBAL
GROWTH BOND APPRECIATION GROWTH INCOME BOND
COMBINED ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
<S> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Net Investment Income
(Loss):
- Dividends from investment income $ 6,121,206 -- -- -- $ 83,162 $ 927,675 $494,003
- ---------------------------------------
- Dividends from
net realized gains
on investments 267,954,608 11,726,195 -- 10,124,652 299,383 1,352,669 74,664
- ---------------------------------------
- Mortality and expense
guarantees
Multifund without guaranteed minimum
death benefit (80,275,735) (2,825,672) (2,659,895) (3,610,961) (366,412) (458,296) (116,911)
- ---------------------------------------
Multifund with guaranteed minimum death
benefit (173,716) (5,312) (3,518) (10,978) (2,351) (5,913) (1,183)
- --------------------------------------- -------------- ----------- ----------- ----------- ---------- ---------- --------
- ---------------------------------------
NET INVESTMENT
INCOME (LOSS) 193,626,363 8,895,211 (2,663,413) 6,502,713 13,782 1,816,135 450,573
- ---------------------------------------
Net realized and unrealized
gain (loss) on investments:
- Net realized gain on investments 31,377,925 1,833,384 472,812 519,282 347,282 110,909 78,937
- ---------------------------------------
- Net change in unrealized
appreciation or depreciation on
investments 1,537,087,130 45,524,778 23,051,142 65,783,116 6,225,004 8,012,160 (414,693)
- --------------------------------------- -------------- ----------- ----------- ----------- ---------- ---------- --------
- ---------------------------------------
NET GAIN (LOSS) ON INVESTMENTS 1,568,465,055 47,358,162 23,523,954 66,302,398 6,572,286 8,123,069 (335,756)
- --------------------------------------- -------------- ----------- ----------- ----------- ---------- ---------- --------
- ---------------------------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $1,762,091,418 $56,253,373 $20,860,541 $72,805,111 $6,586,068 $9,939,204 $114,817
- --------------------------------------- -------------- ----------- ----------- ----------- ---------- ---------- --------
-------------- ----------- ----------- ----------- ---------- ---------- --------
- ---------------------------------------
</TABLE>
See accompanying notes.
B-17
<PAGE>
<TABLE>
<CAPTION>
GLOBAL
EQUITY ASSET GROWTH MONEY
INCOME ALLOCATION AND INCOME INTERNATIONAL MANAGED MARKET
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
Net Investment Income
(Loss):
- Dividends from investment income -- -- $ 614 -- -- $4,614,946
- ---------------------------------------
- Dividends from
net realized gains
on investments 11,974,504 26,564,476 84,750,368 21,503,545 17,963,870 --
- ---------------------------------------
- Mortality and expense
guarantees
Multifund without guaranteed minimum
death benefit (6,295,520) (3,863,550) (30,199,424) (4,696,227) (7,718,728) (926,159)
- ---------------------------------------
Multifund with guaranteed minimum death
benefit (24,515) (9,509) (42,543) (8,173) (12,486) (2,842)
- --------------------------------------- ------------ ----------- ------------ ----------- ------------ ----------
- ---------------------------------------
NET INVESTMENT
INCOME (LOSS) 5,654,469 22,691,417 54,509,015 16,799,145 10,232,656 3,685,945
- ---------------------------------------
Net realized and unrealized
gain (loss) on investments:
- Net realized gain on investments 258,445 508,189 6,554,616 6,993,977 5,361,324 --
- ---------------------------------------
- Net change in unrealized
appreciation or depreciation on
investments 150,387,800 38,745,607 697,915,930 (1,827,392) 127,206,619 --
- --------------------------------------- ------------ ----------- ------------ ----------- ------------ ----------
- ---------------------------------------
NET GAIN (LOSS) ON INVESTMENTS 150,646,245 39,253,796 704,470,546 5,166,585 132,567,943 --
- --------------------------------------- ------------ ----------- ------------ ----------- ------------ ----------
- ---------------------------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $156,300,714 $61,945,213 $758,979,561 $21,965,730 $142,800,599 $3,685,945
- --------------------------------------- ------------ ----------- ------------ ----------- ------------ ----------
------------ ----------- ------------ ----------- ------------ ----------
- ---------------------------------------
<CAPTION>
SOCIAL SPECIAL
AWARENESS OPPORTUNITIES
ACCOUNT ACCOUNT
<S> <C> <C>
- --------------------------------------------------------------------
Net Investment Income
(Loss):
- Dividends from investment income $ 1,569 ($ 763)
- ---------------------------------------
- Dividends from
net realized gains
on investments 36,165,750 45,454,532
- ---------------------------------------
- Mortality and expense
guarantees
Multifund without guaranteed minimum
death benefit (9,262,463) (7,275,517)
- ---------------------------------------
Multifund with guaranteed minimum death
benefit (32,096) (12,297)
- --------------------------------------- ------------ ------------
- ---------------------------------------
NET INVESTMENT
INCOME (LOSS) 26,872,760 38,165,955
- ---------------------------------------
Net realized and unrealized
gain (loss) on investments:
- Net realized gain on investments 762,828 7,575,940
- ---------------------------------------
- Net change in unrealized
appreciation or depreciation on
investments 252,909,838 123,567,221
- --------------------------------------- ------------ ------------
- ---------------------------------------
NET GAIN (LOSS) ON INVESTMENTS 253,672,666 131,143,161
- --------------------------------------- ------------ ------------
- ---------------------------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $280,545,426 $169,309,116
- --------------------------------------- ------------ ------------
------------ ------------
- ---------------------------------------
</TABLE>
B-18
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT C
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
DELAWARE DELAWARE
AGGRESSIVE CAPITAL EMERGING EQUITY/
GROWTH APPRECIATION GROWTH INCOME
COMBINED ACCOUNT BOND ACCOUNT ACCOUNT ACCOUNT ACCOUNT
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSETS AT JANUARY 1, 1996 $4,727,923,295 $137,078,088 $265,308,954 $127,109,396 $ -- $ --
- ---------------------------------------
Changes from operations:
- Net investment income (loss) 310,746,941 924,278 14,088,247 6,445,235 (81,542) 45,153
- ---------------------------------------
- Net realized gain (loss) on
investments 19,985,015 738,003 (371,046) 164,449 (14,135) 11,020
- ---------------------------------------
- Net change in unrealized
appreciation or depreciation on
investments 505,243,452 24,903,548 (10,488,612) 22,742,026 49,846 937,378
- --------------------------------------- -------------- ------------ ------------ ------------ ----------- -----------
- ---------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 835,975,408 26,565,829 3,228,589 29,351,710 (45,831) 993,551
- ---------------------------------------
Net increase from unit transactions 1,021,967,132 75,358,876 44,758 108,077,232 23,349,339 12,769,503
- --------------------------------------- -------------- ------------ ------------ ------------ ----------- -----------
- ---------------------------------------
TOTAL INCREASE IN NET ASSETS 1,857,942,540 101,924,705 3,273,347 137,428,942 23,303,508 13,763,054
- --------------------------------------- -------------- ------------ ------------ ------------ ----------- -----------
- ---------------------------------------
NET ASSETS AT DECEMBER 31, 1996 6,585,865,835 239,002,793 268,582,301 264,538,338 23,303,508 13,763,054
- ---------------------------------------
Changes from operations:
- Net investment income (loss) 193,626,363 8,895,211 (2,663,413) 6,502,713 13,782 1,816,135
- ---------------------------------------
- Net realized gain on investments 31,377,925 1,833,384 472,812 519,282 347,282 110,909
- ---------------------------------------
- Net change in unrealized
appreciation or depreciation on
investments 1,537,087,130 45,524,778 23,051,142 65,783,116 6,225,004 8,012,160
- --------------------------------------- -------------- ------------ ------------ ------------ ----------- -----------
- ---------------------------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 1,762,091,418 56,253,373 20,860,541 72,805,111 6,586,068 9,939,204
- ---------------------------------------
Net increase (decrease) from unit
transactions 1,078,849,888 41,272,975 (10,721,641) 105,106,326 25,565,137 70,533,110
- --------------------------------------- -------------- ------------ ------------ ------------ ----------- -----------
- ---------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 2,840,941,306 97,526,348 10,138,900 177,911,437 32,151,205 80,472,314
- --------------------------------------- -------------- ------------ ------------ ------------ ----------- -----------
- ---------------------------------------
NET ASSETS AT DECEMBER 31, 1997 $9,426,807,141 $336,529,141 $278,721,201 $442,449,775 $55,454,713 $94,235,368
- --------------------------------------- -------------- ------------ ------------ ------------ ----------- -----------
-------------- ------------ ------------ ------------ ----------- -----------
- ---------------------------------------
<CAPTION>
DELAWARE
GLOBAL
BOND
ACCOUNT
<S> <C>
- ----------------------------------------------------
NET ASSETS AT JANUARY 1, 1996 $ --
- ---------------------------------------
Changes from operations:
- Net investment income (loss) 77,642
- ---------------------------------------
- Net realized gain (loss) on
investments 7,815
- ---------------------------------------
- Net change in unrealized
appreciation or depreciation on
investments 430,516
- --------------------------------------- -----------
- ---------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 515,973
- ---------------------------------------
Net increase from unit transactions 7,939,048
- --------------------------------------- -----------
- ---------------------------------------
TOTAL INCREASE IN NET ASSETS 8,455,021
- --------------------------------------- -----------
- ---------------------------------------
NET ASSETS AT DECEMBER 31, 1996 8,455,021
- ---------------------------------------
Changes from operations:
- Net investment income (loss) 450,573
- ---------------------------------------
- Net realized gain on investments 78,937
- ---------------------------------------
- Net change in unrealized
appreciation or depreciation on
investments (414,693)
- --------------------------------------- -----------
- ---------------------------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 114,817
- ---------------------------------------
Net increase (decrease) from unit
transactions 3,835,420
- --------------------------------------- -----------
- ---------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 3,950,237
- --------------------------------------- -----------
- ---------------------------------------
NET ASSETS AT DECEMBER 31, 1997 $12,405,258
- --------------------------------------- -----------
-----------
- ---------------------------------------
</TABLE>
See accompanying notes.
B-19
<PAGE>
<TABLE>
<CAPTION>
EQUITY- GLOBAL ASSET GROWTH AND MONEY
INCOME ALLOCATION INCOME INTERNATIONAL MANAGED MARKET
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSETS AT JANUARY 1, 1996 $239,790,191 $255,711,056 $1,854,088,512 $358,203,920 $609,161,457 $78,753,630
- ---------------------------------------
Changes from operations:
- Net investment income (loss) 7,611,827 19,874,693 137,125,012 492,324 57,121,081 3,428,270
- ---------------------------------------
- Net realized gain (loss) on
investments 532,812 954,000 7,374,542 2,393,084 3,421,787 --
- ---------------------------------------
- Net change in unrealized
appreciation or depreciation on
investments 55,461,900 18,296,226 225,053,722 31,230,726 10,510,800 --
- --------------------------------------- ------------ ------------ -------------- ------------ ------------ -----------
- ---------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 63,606,539 39,124,919 369,553,276 34,116,134 71,053,668 3,428,270
- ---------------------------------------
Net increase from unit transactions 154,889,435 27,985,344 257,472,199 46,129,254 18,294,765 10,920,163
- --------------------------------------- ------------ ------------ -------------- ------------ ------------ -----------
- ---------------------------------------
TOTAL INCREASE IN NET ASSETS 218,495,974 67,110,263 627,025,475 80,245,388 89,348,433 14,348,433
- --------------------------------------- ------------ ------------ -------------- ------------ ------------ -----------
- ---------------------------------------
NET ASSETS AT DECEMBER 31, 1996 458,286,165 322,821,319 2,481,113,987 438,449,308 698,509,890 93,102,063
- ---------------------------------------
Changes from operations:
- Net investment income (loss) 5,654,469 22,691,417 54,509,015 16,799,145 10,232,656 3,685,945
- ---------------------------------------
- Net realized gain on investments 258,445 508,189 6,554,616 6,993,977 5,361,324 --
- ---------------------------------------
- Net change in unrealized
appreciation or depreciation on
investments 150,387,800 38,745,607 697,915,930 (1,827,392) 127,206,619 --
- --------------------------------------- ------------ ------------ -------------- ------------ ------------ -----------
- ---------------------------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 156,300,714 61,945,213 758,979,561 21,965,730 142,800,599 3,685,945
- ---------------------------------------
Net increase (decrease) from unit
transactions 185,730,505 50,723,575 251,419,486 681,238 5,883,993 (9,322,124)
- --------------------------------------- ------------ ------------ -------------- ------------ ------------ -----------
- ---------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 342,031,219 112,668,788 1,010,399,047 22,646,968 148,684,592 (5,636,179)
- --------------------------------------- ------------ ------------ -------------- ------------ ------------ -----------
- ---------------------------------------
NET ASSETS AT DECEMBER 31, 1997 $800,317,384 $435,490,107 $3,491,513,034 $461,096,276 $847,194,482 $87,465,884
- --------------------------------------- ------------ ------------ -------------- ------------ ------------ -----------
------------ ------------ -------------- ------------ ------------ -----------
- ---------------------------------------
<CAPTION>
SOCIAL SPECIAL
AWARENESS OPPORTUNITIES
ACCOUNT ACCOUNT
<S> <C> <C>
- ----------------------------------------------------------------------
NET ASSETS AT JANUARY 1, 1996 $ 302,255,392 $500,462,699
- ---------------------------------------
Changes from operations:
- Net investment income (loss) 21,087,918 42,506,803
- ---------------------------------------
- Net realized gain (loss) on
investments 428,694 4,343,990
- ---------------------------------------
- Net change in unrealized
appreciation or depreciation on
investments 90,089,795 36,025,581
- --------------------------------------- -------------- ------------
- ---------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 111,606,407 82,876,374
- ---------------------------------------
Net increase from unit transactions 226,269,776 52,467,440
- --------------------------------------- -------------- ------------
- ---------------------------------------
TOTAL INCREASE IN NET ASSETS 337,876,183 135,343,814
- --------------------------------------- -------------- ------------
- ---------------------------------------
NET ASSETS AT DECEMBER 31, 1996 640,131,575 635,806,513
- ---------------------------------------
Changes from operations:
- Net investment income (loss) 26,872,760 38,165,955
- ---------------------------------------
- Net realized gain on investments 762,828 7,575,940
- ---------------------------------------
- Net change in unrealized
appreciation or depreciation on
investments 252,909,838 123,567,221
- --------------------------------------- -------------- ------------
- ---------------------------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 280,545,426 169,309,116
- ---------------------------------------
Net increase (decrease) from unit
transactions 325,095,270 33,046,618
- --------------------------------------- -------------- ------------
- ---------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 605,640,696 202,355,734
- --------------------------------------- -------------- ------------
- ---------------------------------------
NET ASSETS AT DECEMBER 31, 1997 $1,245,772,271 $838,162,247
- --------------------------------------- -------------- ------------
-------------- ------------
- ---------------------------------------
</TABLE>
B-20
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT C
NOTES TO FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
THE ACCOUNT: The Lincoln National Variable Annuity Account C (the Variable
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. The Variable
Account consists of one product offering a guaranteed minimum death benefit
(GMDB) rider option.
INVESTMENTS: The Variable Account invests in the 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., Lincoln National Growth and
Income Fund, Inc., Lincoln National International Fund, Inc., Lincoln
National Managed Fund, Inc., Lincoln National Money Market Fund, Inc.,
Lincoln National Social Awareness Fund, Inc., Lincoln National Special
Opportunities Fund, Inc., Delaware Emerging Growth Series, Delaware
Equity/Income Series and the Delaware Global Bond Series (the Funds).
Investments in the Funds are stated at the closing net values per share on
December 31, 1997. The Funds are registered as open ended investment
management 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 are automatically reinvested in shares of the Funds on
the payable date.
FEDERAL INCOME TAXES: Operations of the Variable Account form a part of and
are taxed with operations of the Company, which is taxed as a "life insurance
company" under the Internal Revenue Code. Using current law, no federal
income taxes are payable with respect to the Variable Account's net
investment income and the net realized gain on investments.
ANNUITY RESERVES: Reserves on contracts not involving life contingencies are
calculated using an assumed investment rate of 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 a
percentage of the current value of the Variable Account each day. The rates
are as follows:
- Multifund at a daily rate of .00274525% (1.002% on an annual basis).
- Multifund with GMDB at a daily rate of .00356712328% (1.302% on an
annual basis).
In addition, amounts retained by the Company from the proceeds of the sales
of annuity contracts for contract charges and surrender charges were as
follows during 1997:
<TABLE>
<S> <C>
Lincoln National Aggressive Growth
Account $ 97,296
- ---------------------------------------
Lincoln National Bond Account 715,809
- ---------------------------------------
Lincoln National Capital Appreciation
Account 114,914
- ---------------------------------------
Delaware Emerging Growth Account 11,915
- ---------------------------------------
Delaware Equity Income Account 10,069
- ---------------------------------------
Delaware Global Bond Account 1,315
- ---------------------------------------
Lincoln National Equity-Income Account 203,095
- ---------------------------------------
Lincoln National Global Asset
Allocation Account 449,871
- ---------------------------------------
Lincoln National Growth and Income
Account 3,920,982
- ---------------------------------------
Lincoln National International Account 631,218
- ---------------------------------------
Lincoln National Managed Account 927,374
- ---------------------------------------
Lincoln National Money Market Account 813,396
- ---------------------------------------
Lincoln National Social Awareness
Account 1,123,658
- ---------------------------------------
Lincoln National Special Opportunities
Account 906,949
- --------------------------------------- ----------
- ---------------------------------------
$9,927,861
- --------------------------------------- ----------
----------
</TABLE>
Accordingly, the Company is responsible for all sales, general, and
administrative expenses applicable to the Variable Account.
B-21
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT C
NOTES TO FINANCIAL STATEMENTS CONTINUED
3. NET ASSETS
Net Assets at December 31, 1997 consisted of the following:
<TABLE>
<CAPTION>
DELAWARE DELAWARE
AGGRESSIVE CAPITAL EMERGING EQUITY/
GROWTH BOND APPRECIATION GROWTH INCOME
COMBINED ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Unit Transactions:
Accumulation units $5,043,582,942 $227,902,481 $138,519,777 $317,396,112 $48,914,475 $82,726,689
- ---------------------------------------
Annuity reserves 24,597,907 288,056 304,719 650,131 -- 575,923
- --------------------------------------- -------------- ------------ ------------ ------------ ----------- -----------
- ---------------------------------------
5,068,180,849 228,190,537 138,824,496 318,046,243 48,914,475 83,302,612
Accumulated net investment income
(loss) 1,306,316,744 8,667,056 118,141,970 13,022,186 (67,760) 1,861,288
- ---------------------------------------
Accumulated net realized gain (loss) on
investments 102,292,193 3,454,423 (242,536) 1,265,159 333,147 121,929
- ---------------------------------------
Net unrealized appreciation on
investments 2,950,017,355 96,217,125 21,997,271 110,116,187 6,274,851 8,949,539
- --------------------------------------- -------------- ------------ ------------ ------------ ----------- -----------
- ---------------------------------------
$9,426,807,141 $336,529,141 $278,721,201 $442,449,775 $55,454,713 $94,235,368
- --------------------------------------- -------------- ------------ ------------ ------------ ----------- -----------
-------------- ------------ ------------ ------------ ----------- -----------
<CAPTION>
DELAWARE
GLOBAL
BOND
ACCOUNT
<S> <C>
- ----------------------------------------------------
Unit Transactions:
Accumulation units $11,765,918
- ---------------------------------------
Annuity reserves 8,550
- --------------------------------------- -----------
- ---------------------------------------
11,774,468
Accumulated net investment income
(loss) 528,215
- ---------------------------------------
Accumulated net realized gain (loss) on
investments 86,752
- ---------------------------------------
Net unrealized appreciation on
investments 15,823
- --------------------------------------- -----------
- ---------------------------------------
$12,405,258
- --------------------------------------- -----------
-----------
</TABLE>
B-22
<PAGE>
<TABLE>
<CAPTION>
EQUITY- GLOBAL ASSET GROWTH AND MONEY
INCOME ALLOCATION INCOME INTERNATIONAL MANAGED MARKET
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
Unit Transactions:
Accumulation units $535,946,820 $251,871,731 $1,552,007,990 $354,234,434 $358,852,074 $32,036,377
- ---------------------------------------
Annuity reserves 1,666,670 839,047 15,948,964 591,808 1,268,810 102,206
- --------------------------------------- ------------ ------------ -------------- ------------ ------------ -----------
- ---------------------------------------
537,613,490 252,710,778 1,567,956,954 354,826,242 360,120,884 32,138,583
Accumulated net investment income
(loss) 16,292,020 81,067,677 504,470,847 27,627,063 226,415,207 55,327,301
- ---------------------------------------
Accumulated net realized gain (loss) on
investments 1,238,630 3,046,874 26,876,388 12,210,943 11,425,341 --
- ---------------------------------------
Net unrealized appreciation on
investments 245,173,244 98,664,778 1,392,208,845 66,432,028 249,233,050 --
- --------------------------------------- ------------ ------------ -------------- ------------ ------------ -----------
- ---------------------------------------
$800,317,384 $435,490,107 $3,491,513,034 $461,096,276 $847,194,482 $87,465,884
- --------------------------------------- ------------ ------------ -------------- ------------ ------------ -----------
------------ ------------ -------------- ------------ ------------ -----------
<CAPTION>
AWARENESS OPPORTUNITIES
ACCOUNT ACCOUNT
<S> <C> <C>
- ---------------------------------------
Unit Transactions:
Accumulation units $ 748,397,217 $383,010,847
- ---------------------------------------
Annuity reserves 1,743,548 609,475
- --------------------------------------- -------------- ------------
- ---------------------------------------
750,140,765 383,620,322
Accumulated net investment income
(loss) 72,287,389 180,676,285
- ---------------------------------------
Accumulated net realized gain (loss) on
investments 4,477,485 37,997,658
- ---------------------------------------
Net unrealized appreciation on
investments 418,866,632 235,867,982
- --------------------------------------- -------------- ------------
- ---------------------------------------
$1,245,772,271 $838,162,247
- --------------------------------------- -------------- ------------
-------------- ------------
</TABLE>
B-23
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT C
NOTES TO FINANCIAL STATEMENTS CONTINUED
4. SUMMARY OF CHANGES FROM UNIT TRANSACTIONS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
----------------------------------------------------------
DECEMBER 31, 1997 DECEMBER 31, 1996
UNITS AMOUNT UNITS AMOUNT
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
AGGRESSIVE GROWTH ACCOUNT
Accumulation Units:
Contract purchases 78,002,840 $ 121,767,920 98,305,494 $ 128,159,029
- ---------------------------------------
Terminated contracts and transfers to
annuity reserves (51,130,371) (80,454,253) (40,474,949) (53,011,052)
- --------------------------------------- ------------ -------------- ------------ --------------
- ---------------------------------------
26,872,469 41,313,667 57,830,545 75,147,977
Annuity Reserves:
Transfers from accumulation units and
between accounts 6,975 11,855 187,292 246,263
Annuity payments (34,725) (52,883) (26,469) (35,009)
Receipt (reimbursement) of mortality
guarantee
adjustment 208 336 (260) (355)
- --------------------------------------- ------------ -------------- ------------ --------------
(27,542) (40,692) 160,563 210,899
BOND ACCOUNT
Accumulation Units:
Contract purchases 16,929,287 75,416,109 19,495,617 81,335,083
- ---------------------------------------
Terminated contracts and transfers to
annuity reserves (19,453,329) (86,077,372) (19,537,780) (81,314,773)
- --------------------------------------- ------------ -------------- ------------ --------------
- ---------------------------------------
(2,524,042) (10,661,263) (42,163) 20,310
Annuity Reserves:
Transfers from accumulation units and
between accounts (3,807) (16,201) 20,646 72,918
Annuity payments (10,322) (45,383) (14,803) (48,134)
Receipt (reimbursement) of mortality
guarantee
adjustment 260 1,206 (78) (336)
- --------------------------------------- ------------ -------------- ------------ --------------
(13,869) (60,378) 5,765 24,448
CAPITAL APPRECIATION ACCOUNT
Accumulation Units:
Contract purchases 94,806,791 169,229,394 98,616,139 141,597,465
- ---------------------------------------
Terminated contracts and transfers to
annuity reserves (34,148,668) (64,259,997) (23,013,157) (33,832,749)
- --------------------------------------- ------------ -------------- ------------ --------------
- ---------------------------------------
60,658,123 104,969,397 75,602,982 107,764,716
Annuity Reserves:
Transfers from accumulation units and
between accounts 138,925 229,233 252,282 358,307
Annuity payments (53,115) (92,786) (33,426) (45,539)
Receipt of mortality guarantee
adjustment 266 482 (169) (252)
- --------------------------------------- ------------ -------------- ------------ --------------
86,076 136,929 218,687 312,516
DELAWARE EMERGING GROWTH SERIES
Accumulation Units:
Contract purchases 44,648,765 49,459,951 30,391,549 30,078,694
- ---------------------------------------
Terminated contracts and transfers to
annuity reserves (21,599,335) (23,894,814) (6,883,462) (6,729,355)
- --------------------------------------- ------------ -------------- ------------ --------------
- ---------------------------------------
23,049,430 25,565,137 23,508,087 23,349,339
Annuity Reserves:
Transfers from accumulation units and
between accounts -- -- -- --
Annuity payments -- -- -- --
Receipt of mortality guarantee
adjustment -- -- -- --
- --------------------------------------- ------------ -------------- ------------ --------------
-- -- -- --
</TABLE>
B-24
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT C
NOTES TO FINANCIAL STATEMENTS CONTINUED
4. SUMMARY OF CHANGES FROM UNIT TRANSACTIONS CONTINUED
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
- ---------------------------------------------------------------------------------------------------
DECEMBER 31, 1997 DECEMBER 31, 1996
UNITS AMOUNT UNITS AMOUNT
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
DELAWARE EQUITY/INCOME SERIES
Accumulation Units:
Contract purchases 63,329,518 86,279,609 13,194,259 13,803,232
- ---------------------------------------
Terminated contracts and transfers to
annuity reserves (11,448,700) (16,269,211) (1,022,753) (1,086,940)
- --------------------------------------- ------------ -------------- ------------ --------------
- ---------------------------------------
51,880,818 70,010,398 12,171,506 12,716,292
Annuity Reserves:
Transfers from accumulation units and
between accounts 419,174 561,795 49,346 54,319
Annuity payments (17,670) (39,841) (1,027) (1,108)
Receipt of mortality guarantee
adjustment 533 758 0 0
- --------------------------------------- ------------ -------------- ------------ --------------
402,037 522,712 48,319 53,211
DELAWARE GLOBAL BOND SERIES
Accumulation Units:
Contract purchases 11,055,192 11,820,716 8,540,427 8,841,232
- ---------------------------------------
Terminated contracts and transfers to
annuity reserves (7,482,823) (7,984,605) (935,839) (911,425)
- --------------------------------------- ------------ -------------- ------------ --------------
- ---------------------------------------
3,572,369 3,836,111 7,604,588 7,929,807
Annuity Reserves:
Transfers from accumulation units and
between accounts 0 9,011 9,537
Annuity payments (687) (755) (177) (257)
Receipt (reimbursement) of mortality
guarantee
adjustment 58 64 (36) (39)
- --------------------------------------- ------------ -------------- ------------ --------------
(629) (691) 8,798 9,241
EQUITY-INCOME ACCOUNT
Accumulation Units:
Contract purchases 148,013,646 291,732,249 140,613,459 214,658,603
- ---------------------------------------
Terminated contracts and transfers to
annuity reserves (51,494,858) (106,299,468) (37,898,146) (60,482,903)
- --------------------------------------- ------------ -------------- ------------ --------------
- ---------------------------------------
96,518,788 185,432,781 102,715,313 154,175,700
Annuity Reserves:
Transfers from accumulation units and
between accounts 347,399 651,161 636,113 968,086
Annuity payments (186,468) (354,641) (168,185) (254,362)
Receipt of mortality guarantee
adjustment 574 1,204 7 11
- --------------------------------------- ------------ -------------- ------------ --------------
161,505 297,724 467,935 713,735
GLOBAL ASSET ALLOCATION ACCOUNT
Accumulation Units:
Contract purchases 43,648,559 113,967,396 36,839,595 78,403,293
- ---------------------------------------
Terminated contracts and transfers to
annuity reserves (23,852,183) (63,439,313) (23,604,273) (50,316,084)
- --------------------------------------- ------------ -------------- ------------ --------------
- ---------------------------------------
19,796,376 50,528,083 13,235,322 28,087,209
Annuity Reserves:
Transfers from accumulation units and
between accounts 116,384 304,669 (5,442) (10,658)
Annuity payments (43,608) (111,483) (42,349) (90,846)
Receipt (reimbursement) of mortality
guarantee adjustment 865 2,306 (160) (361)
- --------------------------------------- ------------ -------------- ------------ --------------
73,641 195,492 (47,951) (101,865)
</TABLE>
B-25
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT C
NOTES TO FINANCIAL STATEMENTS CONTINUED
4. SUMMARY OF CHANGES FROM UNIT TRANSACTIONS CONTINUED
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
- ---------------------------------------------------------------------------------------------------
DECEMBER 31, 1997 DECEMBER 31, 1996
UNITS AMOUNT UNITS AMOUNT
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
GROWTH AND INCOME ACCOUNT
Accumulation Units:
Contract purchases 83,798,971 747,652,912 94,595,773 650,786,764
- ---------------------------------------
Terminated contracts and transfers to
annuity reserves (55,049,623) (497,930,628) (56,557,630) (394,499,393)
- --------------------------------------- ------------ -------------- ------------ --------------
- ---------------------------------------
28,749,348 249,722,284 38,038,143 256,287,371
Annuity Reserves:
Transfers from accumulation units and
between accounts 478,419 4,399,621 510,180 3,004,447
Annuity payments (323,198) (2,844,717) (339,756) (1,883,645)
Receipt of mortality guarantee
adjustment 15,141 142,298 8,746 64,026
- --------------------------------------- ------------ -------------- ------------ --------------
170,362 1,697,202 179,170 1,184,828
INTERNATIONAL ACCOUNT
Accumulation Units:
Contract purchases 97,406,729 158,472,222 112,601,196 163,360,279
- ---------------------------------------
Terminated contracts and transfers to
annuity reserves (96,731,431) (157,730,517) (80,079,799) (117,493,077)
- --------------------------------------- ------------ -------------- ------------ --------------
- ---------------------------------------
675,298 741,705 32,521,397 45,867,202
Annuity Reserves:
Transfers from accumulation units and
between accounts 40,514 62,938 282,552 399,875
Annuity payments (79,562) (125,126) (95,015) (137,742)
Receipt (reimbursement) of mortality
guarantee
adjustment 1,121 1,721 (56) (81)
- --------------------------------------- ------------ -------------- ------------ --------------
(37,927) (60,467) 187,481 262,052
MANAGED ACCOUNT
Accumulation Units:
Contract purchases 29,884,020 131,576,753 35,504,608 129,898,876
- ---------------------------------------
Terminated contracts and transfers to
annuity reserves (28,660,099) (125,696,264) (30,307,976) (111,630,287)
- --------------------------------------- ------------ -------------- ------------ --------------
- ---------------------------------------
1,223,921 5,880,489 5,196,632 18,268,589
Annuity Reserves:
Transfers from accumulation units and
between accounts 78,381 364,128 96,225 352,325
Annuity payments (76,380) (356,231) (81,051) (297,057)
Receipt of mortality guarantee
adjustment (948) (4,393) (7,523) (29,092)
- --------------------------------------- ------------ -------------- ------------ --------------
1,053 3,504 7,651 26,176
MONEY MARKET ACCOUNT
Accumulation Units:
Contract purchases 66,162,439 160,091,004 63,610,822 143,349,355
- ---------------------------------------
Terminated contracts and transfers to
annuity reserves (70,044,121) (169,385,979) (58,757,847) (132,358,398)
- --------------------------------------- ------------ -------------- ------------ --------------
- ---------------------------------------
(3,881,682) (9,294,975) 4,852,975 10,990,957
Annuity Reserves:
Transfers from accumulation units and
between accounts 7,761 18,708 60,600 8,458
Annuity payments (19,581) (46,466) (90,926) (80,073)
Reimbursement of mortality guarantee
adjustment 252 609 354 821
- --------------------------------------- ------------ -------------- ------------ --------------
(11,568) (27,149) (29,972) (70,794)
</TABLE>
B-26
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT C
NOTES TO FINANCIAL STATEMENTS CONTINUED
4. SUMMARY OF CHANGES FROM UNIT TRANSACTIONS CONTINUED
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
- ---------------------------------------------------------------------------------------------------
DECEMBER 31, 1997 DECEMBER 31, 1996
UNITS AMOUNT UNITS AMOUNT
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
SOCIAL AWARENESS ACCOUNT
Accumulation Units:
Contract purchases 116,822,936 515,505,656 94,393,886 308,894,873
- ---------------------------------------
Terminated contracts and transfers to
annuity reserves (41,297,975) (191,229,425) (24,955,052) (83,338,067)
- --------------------------------------- ------------ -------------- ------------ --------------
- ---------------------------------------
75,524,961 324,276,231 69,438,834 225,556,806
Annuity Reserves:
Transfers from accumulation units and
between accounts 245,103 1,042,822 243,625 805,720
Annuity payments (47,144) (221,176) (29,485) (93,573)
Receipt of mortality guarantee
adjustment (541) (2,607) 232 823
- --------------------------------------- ------------ -------------- ------------ --------------
197,418 819,039 214,372 712,970
SPECIAL OPPORTUNITIES ACCOUNT
Accumulation Units:
Contract purchases 27,528,360 207,693,807 33,491,123 193,907,939
- ---------------------------------------
Terminated contracts and transfers to
annuity reserves (23,658,971) (174,636,099) (24,879,192) (141,723,304)
- --------------------------------------- ------------ -------------- ------------ --------------
- ---------------------------------------
3,869,389 33,057,708 8,611,931 52,184,635
Annuity Reserves:
Transfers from accumulation units and
between accounts 16,851 122,454 64,182 383,208
Annuity payments (17,468) (130,953) (15,361) (91,944)
Receipt (reimbursement) of mortality
guarantee
adjustment (325) (2,591) (1,335) (8,459)
- --------------------------------------- ------------ -------------- ------------ --------------
(942) (11,090) 47,486 282,805
Net increase from unit transactions $1,078,849,888 $1,021,967,132
-------------- --------------
-------------- --------------
</TABLE>
5. PURCHASES AND SALES OF SECURITIES
The aggregate cost of investments purchased and the aggregate proceeds from
investments sold were as follows for 1996.
<TABLE>
<CAPTION>
AGGREGATE AGGREGATE
COST OF PROCEEDS
PURCHASES FROM SALES
<S> <C> <C>
- ---------------------------------------------------------------------
Aggressive Growth Account $ 58,843,415 $ 8,810,278
Bond Account 29,568,626 26,421,791
Capital Appreciation Account 115,710,320 2,416,893
Delaware Emerging Growth Account 31,578,512 6,016,238
Delaware Equity/Income Account 74,096,287 1,755,451
Delaware Global Bond Account 9,050,116 4,747,538
Equity-Income Account 199,002,879 1,116,564
Global Asset Allocation Account 84,015,034 2,593,701
Growth and Income Account 371,927,469 20,288,417
International Account 62,203,083 43,024,731
Managed Account 65,238,488 23,868,218
Money Market Account 74,513,188 75,918,140
Social Awareness Account 361,412,606 2,906,076
Special Opportunities Account 129,418,873 47,647,789
- --------------------------------------- -------------- ------------
$1,666,578,896 $267,531,825
- --------------------------------------- -------------- ------------
-------------- ------------
</TABLE>
B-27
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT C
NOTES TO FINANCIAL STATEMENTS CONTINUED
6. DAILY VALUATION CALCULATIONS
Effective October 1996, the daily unit value calculation process was transferred
from the Company to the Delaware Group, an affiliate of the Company. Costs
associated with the calculation of the unit value are paid by the Company.
7. CHANGE IN MANAGEMENT
Effective August 29, 1996, Clay Finlay Inc., Subadvisor of the Lincoln National
International Fund Inc., accepted an offer to sell their ownership interest in
the firm to United Asset Management, a New York Stock Exchange ("NYSE") listed
company. In October 1996, variable contractholders, via proxy solicitation,
instructed the Company to vote to retain Clay Finlay as the Subadvisor of the
Lincoln National International Fund.
The shares were voted as follows:
- 91.56% for retaining Clay Finlay,
- 3.26% against retaining Clay Finlay,
- 5.18% abstained
8. ADDITIONAL INVESTMENT OPTIONS
Effective May 1996, three investment options were added to the Variable Account.
The options include the Delaware Group Premium Funds, Inc. which consist of the
Equity/Income Series, Emerging Growth Series and the Global Bond Series.
B-28
<PAGE>
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 (Variable Account) as of
December 31, 1997, and the related statement of operations for the
year then ended, and the statement of changes in net assets for each
of the two years in the period then ended. These financial statements
are the responsibility of the Variable 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, 1997, 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, 1997, 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.
[SIG]
Fort Wayne, Indiana
April 6, 1998
B-29
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
BALANCE SHEETS -- STATUTORY BASIS
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------- ---------
(IN MILLIONS)
--------------------
<S> <C> <C>
ADMITTED ASSETS
CASH AND INVESTMENTS:
Bonds $18,560.7 $19,389.6
- ------------------------------------------------------------------------------------
Preferred stocks 257.3 239.7
- ------------------------------------------------------------------------------------
Unaffiliated common stocks 436.0 358.3
- ------------------------------------------------------------------------------------
Affiliated common stocks 412.1 241.5
- ------------------------------------------------------------------------------------
Mortgage loans on real estate 3,012.7 2,976.7
- ------------------------------------------------------------------------------------
Real estate 584.4 621.3
- ------------------------------------------------------------------------------------
Policy loans 660.5 626.5
- ------------------------------------------------------------------------------------
Other investments 335.5 282.7
- ------------------------------------------------------------------------------------
Cash and short-term investments 2,133.0 759.2
- ------------------------------------------------------------------------------------ --------- ---------
Total cash and investments 26,392.2 25,495.5
- ------------------------------------------------------------------------------------
Premiums and fees in course of collection 42.4 60.9
- ------------------------------------------------------------------------------------
Accrued investment income 343.5 343.6
- ------------------------------------------------------------------------------------
Funds withheld by ceding companies 44.1 25.8
- ------------------------------------------------------------------------------------
Other admitted assets 216.0 355.7
- ------------------------------------------------------------------------------------
Separate account assets 31,330.9 23,735.1
- ------------------------------------------------------------------------------------ --------- ---------
Total admitted assets $58,369.1 $50,016.6
- ------------------------------------------------------------------------------------ --------- ---------
--------- ---------
LIABILITIES AND CAPITAL AND SURPLUS
LIABILITIES:
Future policy benefits and claims $ 5,872.9 $ 5,954.0
- ------------------------------------------------------------------------------------
Other policyholder funds 16,360.1 17,262.4
- ------------------------------------------------------------------------------------
Amounts withheld or retained by Company as agent or trustee 878.2 250.2
- ------------------------------------------------------------------------------------
Funds held under reinsurance treaties 720.4 564.6
- ------------------------------------------------------------------------------------
Asset valuation reserve 450.0 375.5
- ------------------------------------------------------------------------------------
Interest maintenance reserve 135.4 76.7
- ------------------------------------------------------------------------------------
Other liabilities 413.9 490.9
- ------------------------------------------------------------------------------------
Federal income taxes 0.8 4.3
- ------------------------------------------------------------------------------------
Net transfers due from separate accounts (761.9) (659.7)
- ------------------------------------------------------------------------------------
Separate account liabilities 31,330.9 23,735.1
- ------------------------------------------------------------------------------------ --------- ---------
Total liabilities 55,400.7 48,054.0
- ------------------------------------------------------------------------------------
CAPITAL AND SURPLUS:
Common stock, $2.50 par value:
Authorized, issued and outstanding shares -- 10 million (owned by Lincoln National
Corporation) 25.0 25.0
- ------------------------------------------------------------------------------------
Paid-in surplus 1,821.8 883.4
- ------------------------------------------------------------------------------------
Unassigned surplus 1,121.6 1,054.2
- ------------------------------------------------------------------------------------ --------- ---------
Total capital and surplus 2,968.4 1,962.6
- ------------------------------------------------------------------------------------ --------- ---------
Total liabilities and capital and surplus $58,369.1 $50,016.6
- ------------------------------------------------------------------------------------ --------- ---------
--------- ---------
</TABLE>
See accompanying notes. S-1
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF INCOME -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
--------- --------- ---------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
PREMIUMS AND OTHER REVENUES:
Premiums and deposits $ 5,589.0 $ 7,268.5 $ 4,899.1
- -----------------------------------------------------------------------------
Net investment income 1,847.1 1,756.3 1,772.2
- -----------------------------------------------------------------------------
Amortization of interest maintenance reserve 41.5 27.2 34.0
- -----------------------------------------------------------------------------
Commissions and expense allowances on reinsurance ceded 99.7 90.9 98.3
- -----------------------------------------------------------------------------
Expense charges on deposit funds 119.3 100.7 83.2
- -----------------------------------------------------------------------------
Other income 21.3 16.8 14.5
- ----------------------------------------------------------------------------- --------- --------- ---------
Total revenues 7,717.9 9,260.4 6,901.3
- -----------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Benefits and settlement expenses 4,522.1 5,989.9 4,184.0
- -----------------------------------------------------------------------------
Underwriting, acquisition, insurance and other expenses 2,728.4 2,878.5 2,345.7
- ----------------------------------------------------------------------------- --------- --------- ---------
Total benefits and expenses 7,250.5 8,868.4 6,529.7
- ----------------------------------------------------------------------------- --------- --------- ---------
Gain from operations before dividends to policyholders, income taxes and net
realized gain on investments 467.4 392.0 371.6
- -----------------------------------------------------------------------------
Dividends to policyholders 27.5 27.3 27.3
- ----------------------------------------------------------------------------- --------- --------- ---------
Gain from operations before federal income taxes and net realized gain on
investments 439.9 364.7 344.3
- -----------------------------------------------------------------------------
Federal income taxes 78.3 83.6 103.7
- ----------------------------------------------------------------------------- --------- --------- ---------
Gain from operations before net realized gain on investments 361.6 281.1 240.6
- -----------------------------------------------------------------------------
Net realized gain on investments, net of income tax expense and excluding net
transfers to the interest maintenance reserve 31.3 53.3 43.9
- ----------------------------------------------------------------------------- --------- --------- ---------
Net income $ 392.9 $ 334.4 $ 284.5
- ----------------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
S-2
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
--------- --------- ---------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Capital and surplus at beginning of year $ 1,962.6 $ 1,732.9 $ 1,679.6
- -----------------------------------------------------------------------------
Correction of prior years' asset valuation reserve (Note 15) (37.6) -- --
- -----------------------------------------------------------------------------
Correction of prior year's admitted assets (Note 15) (57.0) -- --
- ----------------------------------------------------------------------------- --------- --------- ---------
1,868.0 1,732.9 1,679.6
CAPITAL AND SURPLUS INCREASE (DECREASE):
Net income 392.9 334.4 284.5
- -----------------------------------------------------------------------------
Difference in cost and admitted investment amounts (36.2) 38.6 143.2
- -----------------------------------------------------------------------------
Nonadmitted assets (0.4) (3.0) 2.9
- -----------------------------------------------------------------------------
Regulatory liability for reinsurance (3.9) 0.6 (2.0)
- -----------------------------------------------------------------------------
Life policy reserve valuation basis (0.9) (0.4) 2.9
- -----------------------------------------------------------------------------
Asset valuation reserve (36.9) (105.5) (112.5)
- -----------------------------------------------------------------------------
Mortgage loan, real estate and other investment reserves -- -- 2.2
- -----------------------------------------------------------------------------
Paid-in surplus, including contribution of common stock of affiliated
company in 1997 938.4 100.0 15.1
- -----------------------------------------------------------------------------
Separate account receivable due to change in valuation (2.6) -- 27.0
- -----------------------------------------------------------------------------
Dividends to shareholder (150.0) (135.0) (310.0)
- ----------------------------------------------------------------------------- --------- --------- ---------
Capital and surplus at end of year $ 2,968.4 $ 1,962.6 $ 1,732.9
- ----------------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes. S-3
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
---------- ---------- ----------
(IN MILLIONS)
----------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums, policy proceeds and other considerations received $ 6,364.3 $ 8,059.4 $ 5,430.9
- -----------------------------------------------------------------------
Allowances and reserve adjustments paid on reinsurance ceded (649.2) (767.5) (383.6)
- -----------------------------------------------------------------------
Investment income received 1,798.8 1,700.6 1,713.2
- -----------------------------------------------------------------------
Benefits paid (5,345.2) (4,050.4) (3,239.6)
- -----------------------------------------------------------------------
Insurance expenses paid (2,867.5) (2,972.2) (2,513.5)
- -----------------------------------------------------------------------
Federal income taxes recovered (paid) (87.0) (72.3) 38.4
- -----------------------------------------------------------------------
Dividends to policyholders (28.4) (27.7) (16.5)
- -----------------------------------------------------------------------
Other income received and expenses paid, net (42.7) 6.3 14.4
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net cash provided by (used in) operating activities (856.9) 1,876.2 1,043.7
- -----------------------------------------------------------------------
INVESTING ACTIVITIES
Sale, maturity or repayment of investments 12,142.6 12,542.0 13,183.9
- -----------------------------------------------------------------------
Purchase of investments (10,345.0) (14,175.4) (14,049.6)
- -----------------------------------------------------------------------
Other sources (uses) 563.1 (266.5) (64.0)
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net cash provided by (used in) investing activities 2,360.7 (1,899.9) (929.7)
- -----------------------------------------------------------------------
FINANCING ACTIVITIES
Surplus paid-in -- 100.0 15.1
- -----------------------------------------------------------------------
Proceeds from borrowings from shareholder 120.0 100.0 63.0
- -----------------------------------------------------------------------
Repayment of borrowings from shareholder (100.0) (63.0) (63.0)
- -----------------------------------------------------------------------
Dividends paid to shareholder (150.0) (135.0) (310.0)
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net cash provided by (used in) financing activities (130.0) 2.0 (294.9)
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net increase (decrease) in cash and short-term investments 1,373.8 (21.7) (180.9)
- -----------------------------------------------------------------------
Cash and short-term investments at beginning of year 759.2 780.9 961.8
- ----------------------------------------------------------------------- ---------- ---------- ----------
Cash and short-term investments at end of year $ 2,133.0 $ 759.2 $ 780.9
- ----------------------------------------------------------------------- ---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes.
S-4
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
ORGANIZATION AND OPERATIONS
The Lincoln National Life Insurance Company ("Company") is a wholly owned
subsidiary of Lincoln National Corporation ("LNC") and is domiciled in
Indiana. As of December 31, 1997, the Company owns 100% of the outstanding
common stock of four insurance company subsidiaries: First Penn-Pacific Life
Insurance Company ("First Penn"), Lincoln National Health & Casualty
Insurance Company ("LNH&C"), Lincoln National Reassurance Company ("LNRAC")
and Lincoln Life & Annuity Company of New York ("LLANY").
The Company's principal businesses consist of underwriting annuities,
deposit-type contracts and life and health insurance through multiple
distribution channels and the reinsurance of individual and group life and
health business. The Company is licensed and sells its products in 49
states, Canada and several U.S. territories.
USE OF ESTIMATES
The nature of the insurance and investment management businesses requires
management to make estimates and assumptions that affect the amounts
reported in the statutory-basis financial statements and accompanying notes.
Actual results could differ from those estimates.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity with
accounting practices prescribed or permitted by the Indiana Department of
Insurance ("Department"), which practices differ from generally accepted
accounting principles ("GAAP"). The more significant variances from GAAP are
as follows:
INVESTMENTS
Bonds are reported at cost or amortized cost or fair value based on their
National Association of Insurance Commissioners ("NAIC") rating. For GAAP,
the Company's bonds are classified as available-for-sale and, accordingly,
are reported at fair value with changes in the fair values reported directly
in shareholder's equity after adjustments for related amortization of
deferred acquisition costs, additional policyholder commitments and deferred
income taxes.
Investments in real estate are reported net of related obligations rather
than on a gross basis.
Changes between cost and admitted asset investment amounts are credited or
charged directly to unassigned surplus rather than to a separate surplus
account.
Under a formula prescribed by the NAIC, the Company defers the portion of
realized capital gains and losses on sales of fixed income investments,
principally bonds and mortgage loans, attributable to changes in the general
level of interest rates and amortizes those deferrals over the remaining
period to maturity of the individual security sold. The net deferral is
reported as the Interest Maintenance Reserve ("IMR") in the accompanying
balance sheets. Realized capital gains and losses are reported in income net
of federal income tax and transfers to the IMR. The asset valuation reserve
("AVR") is determined by an NAIC prescribed formula and is reported as a
liability rather than unassigned surplus. Under GAAP, realized capital gains
and losses are reported in the income statement on a pre-tax basis in the
period that the asset giving rise to the gain or loss is sold and valuation
allowances are provided when there has been a decline in value deemed other
than temporary, in which case, the provision for such declines are charged
to income.
SUBSIDIARIES
The accounts and operations of the Company's subsidiaries are not
consolidated with the accounts and operations of the Company as would be
required by GAAP. Under statutory accounting principles, the Company's
subsidiaries are carried at their statutory basis net equity and presented
in the balance sheet as affiliated common stocks.
POLICY ACQUISITION COSTS
The costs of acquiring and renewing business are expensed when incurred.
Under GAAP, acquisition costs related to traditional life insurance, to the
extent recoverable from future policy revenues, are deferred and amortized
over the premium-paying period of the related policies using assumptions
consistent with those used in computing policy benefit reserves. For
universal life insurance, annuity and other investment-type products,
deferred
S-5
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
policy acquisition costs, to the extent recoverable from future gross
profits, are amortized generally in proportion to the present value of
expected gross profits from surrender charges and investment, mortality and
expense margins.
NONADMITTED ASSETS
Certain assets designated as "nonadmitted," principally furniture and
equipment and certain receivables, are excluded from the accompanying
balance sheets and are charged directly to unassigned surplus.
PREMIUMS
Premiums and deposits with respect to universal life policies and annuity
and other investment-type contracts are reported as premium revenues;
whereas, under GAAP, such premiums and deposits are treated as liabilities
and policy charges represent revenues.
BENEFIT RESERVES
Certain policy reserves are calculated based on statutorily required
interest and mortality assumptions rather than on estimated expected
experience or actual account balances as would be required under GAAP.
Death benefits paid, policy and contract withdrawals, and the change in
policy reserves on universal life policies, annuity and other
investment-type contracts are reported as benefits and settlement expenses
in the accompanying statements of income; whereas, under GAAP, withdrawals
are treated as a reduction of the policy or contract liabilities and
benefits would represent the excess of benefits paid over the policy account
value and interest credited to the account values.
REINSURANCE
Premiums, claims and policy benefits and contract liabilities are reported
in the accompanying financial statements net of reinsurance amounts. For
GAAP, all assets and liabilities related to reinsurance ceded contracts are
reported on a gross basis.
A liability for reinsurance balances has been provided for unsecured policy
and contract liabilities and unearned premiums ceded to reinsurers not
authorized by the Department to assume such business. Changes to those
amounts are credited or charged directly to unassigned surplus. Under GAAP,
an allowance for amounts deemed uncollectible is established through a
charge to income.
Commissions on business ceded are reported as income when received rather
than deferred and amortized with deferred policy acquisition costs.
Certain reinsurance contracts meeting risk transfer requirements under
statutory-basis accounting practices have been accounted for using
traditional reinsurance accounting whereas such contracts would be accounted
for using deposit accounting under GAAP.
INCOME TAXES
Deferred income taxes are not provided for differences between financial
statement amounts and tax bases of assets and liabilities.
POLICYHOLDER DIVIDENDS
Policyholder dividends are recognized when declared rather than over the
term of the related policies.
STATEMENTS OF CASH FLOWS
Cash and short-term investments in the statements of cash flows represent
cash balances and investments with initial maturities of one year or less.
Under GAAP, the corresponding captions of cash and cash equivalents include
cash balances and investments with initial maturities of three months or
less.
S-6
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
A reconciliation of the Company's net income and capital and surplus
determined on a statutory accounting basis with amounts determined in
accordance with GAAP is as follows:
<TABLE>
<CAPTION>
CAPITAL AND SURPLUS NET INCOME
-----------------------------------------------------
DECEMBER 31 YEAR ENDED DECEMBER 31
1997 1996 1997 1996 1995
-----------------------------------------------------
(IN MILLIONS)
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amounts reported on a statutory basis $ 2,968.4 $ 1,962.6 $ 392.9 $ 334.4 $ 284.5
- ---------------------------------------------
GAAP adjustments:
Deferred policy acquisition costs and
present value of future profits 958.3 1,119.1 (98.9) 66.7 (63.0)
------------------------------------------
Policy and contract reserves (1,672.9) (1,405.3) (48.6) (57.1) (55.3)
------------------------------------------
Interest maintenance reserve 135.4 76.7 58.7 (39.7) 60.9
------------------------------------------
Deferred income taxes (13.0) (27.4) 70.3 1.8 38.3
------------------------------------------
Policyholders' share of earnings and
surplus on participating business (79.8) (81.9) 5.3 (.3) .2
------------------------------------------
Asset valuation reserve 450.0 375.5 -- -- --
------------------------------------------
Net realized gain (loss) on investments (91.5) (72.0) (20.4) 78.7 30.0
------------------------------------------
Unrealized gain on investments 1,245.5 825.2 -- -- --
------------------------------------------
Nonadmitted assets, including nonadmitted
investments 61.0 (7.1) -- -- --
------------------------------------------
Investments in subsidiary companies 188.8 156.6 (80.5) 29.9 34.3
------------------------------------------
Other, net (162.5) (99.0) (35.0) (82.6) (7.3)
------------------------------------------ --------- --------- --------- --------- ---------
Net increase (decrease) 1,019.3 860.4 (149.1) (2.6) 38.1
- --------------------------------------------- --------- --------- --------- --------- ---------
Amounts on a GAAP basis $ 3,987.7 $ 2,823.0 $ 243.8 $ 331.8 $ 322.6
- --------------------------------------------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
S-7
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Other significant accounting practices are as follows:
INVESTMENTS
The discount or premium on bonds is amortized using the interest method. For
mortgage-backed bonds, the Company recognizes income using a constant
effective yield based on anticipated prepayments and the estimated economic
life of the securities. When actual prepayments differ significantly from
anticipated prepayments, the effective yield is recalculated to reflect
actual payments to date and anticipated future payments. The net investment
in the securities is adjusted to the amount that would have existed had the
new effective yield been applied since the acquisition of the securities.
Short-term investments include investments with maturities of less than one
year at the date of acquisition. The carrying amounts for these investments
approximate their fair values.
Preferred stocks are reported at cost or amortized cost.
Unaffiliated common stocks are reported at fair value as determined by the
Securities Valuation Office of the NAIC and the related unrealized gains
(losses) are reported in unassigned surplus without adjustment for federal
income taxes.
Policy loans are reported at unpaid balances.
The Company uses various derivative instruments as part of its overall
liability-asset management program for certain investments and life
insurance and annuity products. The Company values all derivative
instruments on a basis consistent with that of the hedged item. Upon
termination, gains and losses on those instruments are included in the
carrying values of the underlying hedged items and are amortized over the
remaining lives of the hedged items as adjustments to investment income or
benefits from the hedged items through the IMR. Any unamortized gains or
losses are recognized when the underlying hedged items are sold. The
premiums paid for interest rate caps and swaptions are deferred and
amoritized to net investment income on a straight-line basis over the term
of the respective derivative.
Hedge accounting is applied as indicated above after the Company determines
that the items to be hedged expose the Company to interest rate
fluctuations, the widening of bond yield spreads over comparable maturity
U.S. Government obligations, increased liabilities associated with certain
reinsurance agreements and foreign exchange risk. Moreover, the derivatives
used are designated as a hedge and reduce the indicated risk by having a
high correlation between changes in the value of the derivatives and the
items being hedged at both the inception of the hedge and throughout the
hedge period. Should such criteria not be met or if the hedged items have
been sold, terminated or matured, the change in value of the derivatives is
included in net income.
Mortgage loans on real estate are reported at unpaid balances, less
allowances for impairments. Real estate is reported at depreciated cost.
Realized investment gains and losses on investments sold are determined
using the specific identification method. Changes in admitted asset carrying
amounts of bonds, mortgage loans and common and preferred stocks are
credited or charged directly in unassigned surplus.
LOANED SECURITIES
Securities loaned are treated as collateralized financing transactions and a
liability is recorded equal to the amount to be paid to reacquire the
security. It is the Company's policy to take possession of securities with a
market value at least equal to the value of the securities loaned.
Securities loaned are recorded at amortized cost as long as the value of the
related collateral is sufficient. The Company's agreements with third
parties generally contain contractual provisions to allow for additional
collateral to be obtained when necessary. The Company values collateral
daily and obtains additional collateral when deemed appropriate.
GOODWILL
Goodwill, which represents the excess of the ceding commission over
statutory-basis net assets of business purchased under an assumption
reinsurance agreement, is amortized on a straight-line basis over ten years.
S-8
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
PREMIUMS
Life insurance and annuity premiums are recognized as revenue when due.
Accident and health premiums are earned pro rata over the contract term of
the policies.
BENEFITS
Life, annuity and accident and health benefit reserves are developed by
actuarial methods and are determined based on published tables using
statutorily specified interest rates and valuation methods that will
provide, in the aggregate, reserves that are greater than or equal to the
minimum or guaranteed policy cash values or the amounts required by the
Department. The Company waives deduction of deferred fractional premiums on
the death of life and annuity policy insureds and returns any premium beyond
the date of death, except for policies issued prior to March 1977. Surrender
values on policies do not exceed the corresponding benefit reserves.
Additional reserves are established when the results of cash flow testing
under various interest rate scenerios indicate the need for such reserves.
If net premiums exceed the gross premiums on any insurance in-force,
additional reserves are established. Benefit reserves for policies
underwritten on a substandard basis are determined using the multiple table
reserve method.
The tabular interest, tabular less actual reserve released and the tabular
cost have been determined by formula or from the basic data for such items.
Tabular interest funds not involving life contingencies were determined
using the actual interest credited to the funds plus the change in accrued
interest.
Liabilities related to guaranteed investment contracts and policyholder
funds left on deposit with the Company generally are equal to fund balances
less applicable surrender charges.
CLAIMS AND CLAIM ADJUSTMENT EXPENSES
Unpaid claims and claim adjustment expenses on accident and health policies
represent the estimated ultimate net cost of all reported and unreported
claims incurred during the year. The Company does not discount claims and
claim adjustment expense reserves. The reserves for unpaid claims and claim
adjustment expenses are estimated using individual case-basis valuations and
statistical analyses. Those estimates are subject to the effects of trends
in claim severity and frequency. Although considerable variability is
inherent in such estimates, management believes that the reserves for claims
and claim adjustment expenses are adequate. The estimates are continually
reviewed and adjusted as necessary as experience develops or new information
becomes known; such adjustments are included in current operations.
REINSURANCE CEDED AND ASSUMED
Reinsurance premiums and claims and claim adjustment expenses are accounted
for on bases consistent with those used in accounting for the original
policies issued and the terms of the reinsurance contracts. Certain business
is transacted on a funds withheld basis and investment income on funds
withheld are reported in net investment income.
PENSION BENEFITS
Costs associated with the Company's defined benefit pension plans is
systematically accrued during the expected period of active service of the
covered employees.
INCOME TAXES
The Company and eligible subsidiaries have elected to file consolidated
federal and state income tax returns with LNC. Pursuant to an intercompany
tax sharing agreement with LNC, the Company provides for income taxes on a
separate return filing basis. The tax sharing agreement also provides that
the Company will receive benefit for net operating losses, capital losses
and tax credits which are not usable on a separate return basis to the
extent such items may be utilized in the consolidated income tax returns of
LNC.
STOCK OPTIONS
The Company recognizes compensation expense for its stock option incentive
plans using the intrinsic value method of accounting. Under the terms of the
intrinsic value method, compensation cost is the excess, if any, of the
quoted market price of LNC's common stock at the grant date, or other
S-9
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
measurement date, over the amount an employee must pay to acquire the stock.
ASSETS HELD IN SEPARATE ACCOUNTS AND LIABILITIES RELATED TO SEPARATE
ACCOUNTS
These assets and liabilities represent segregated funds administered and
invested by the Company for the exclusive benefit of pension and variable
life and annuity contractholders. The fees received by the Company for
administrative and contractholder maintenance services performed for these
separate accounts are included in the Company's statements of income.
2. PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company's statutory-basis financial statements are prepared in
accordance with accounting practices prescribed or permitted by the
Department. "Prescribed" statutory accounting practices include state laws,
regulations and general administrative rules, as well as a variety of
publications of the NAIC. "Permitted" statutory accounting practices
encompass all accounting practices that are not prescribed; such practices
may differ from state to state, may differ from company to company within a
state and may change in the future. The NAIC currently is in the process of
recodifying statutory accounting practices ("Codification"). Codification
will likely change, to some extent, prescribed statutory accounting
practices and may result in changes to the accounting practices that the
Company uses to prepare its statutory-basis financial statements.
Codification, which is expected to be approved by the NAIC in 1998, will
require adoption by the various states before it becomes the prescribed
statutory-basis of accounting for insurance companies domesticated within
those states. Accordingly, before Codification becomes effective for the
Company, the state of Indiana must adopt Codification as the prescribed
basis of accounting on which domestic insurers must report their
statutory-basis results to the Department. At this time, it is unclear
whether Indiana will adopt Codification. However, based on the current draft
guidance, management believes that the impact of Codification will not be
material to the Company's statutory-basis financial statements.
The Company has received written approval from the Department to record
surrender charges applicable to separate account liabilities for variable
life and annuity products as a liability in the separate account financial
statements payable to the Company's general account. In the accompanying
financial statements, a corresponding receivable is recorded with the
related income impact recorded in the accompanying statement of operations
as a change in reserves or change in premium and other deposit funds.
S-10
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS
The major categories of net investment income are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Income:
Bonds $ 1,524.4 $ 1,442.2 $ 1,457.4
----------------------------------------------------------------
Preferred stocks 23.5 9.6 6.4
----------------------------------------------------------------
Unaffiliated common stocks 8.3 6.5 5.2
----------------------------------------------------------------
Affiliated common stocks 15.0 9.5 12.6
----------------------------------------------------------------
Mortgage loans on real estate 257.2 269.3 252.0
----------------------------------------------------------------
Real estate 92.2 114.4 110.0
----------------------------------------------------------------
Policy loans 37.5 35.0 32.1
----------------------------------------------------------------
Other investments 28.2 22.4 62.6
----------------------------------------------------------------
Cash and short-term investments 70.3 48.9 53.2
---------------------------------------------------------------- --------- --------- ---------
Total investment income 2,056.6 1,957.8 1,991.5
- -------------------------------------------------------------------
Expenses:
Depreciation 21.0 25.0 25.9
----------------------------------------------------------------
Other 188.5 176.5 193.4
---------------------------------------------------------------- --------- --------- ---------
Total investment expenses 209.5 201.5 219.3
- ------------------------------------------------------------------- --------- --------- ---------
Net investment income $ 1,847.1 $ 1,756.3 $ 1,772.2
- ------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</TABLE>
Nonadmitted accrued investment income at December 31, 1997
and 1996 amounted to $2,600,000 and $2,500,000,
respectively, consisting principally of interest on bonds in
default and mortgage loans.
S-11
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
The cost or amortized cost, gross unrealized gains and
losses and the fair value of investments in bonds are
summarized as follows:
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------------------------------------------
(IN MILLIONS)
----------------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1997:
Corporate $13,003.8 $ 942.2 $ 60.1 $13,885.9
------------------------------------------------
U.S. government 436.3 67.9 -- 504.2
------------------------------------------------
Foreign government 1,202.1 104.9 5.4 1,301.6
------------------------------------------------
Mortgage-backed 3,874.3 215.2 27.1 4,062.4
------------------------------------------------
State and municipal 44.2 .3 -- 44.5
------------------------------------------------ --------- ----------- ----------- ---------
$18,560.7 $ 1,330.5 $ 92.6 $19,798.6
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
At December 31, 1996:
Corporate $12,548.1 $ 586.5 $ 66.6 $13,068.0
------------------------------------------------
U.S. government 1,088.7 43.2 18.0 1,113.9
------------------------------------------------
Foreign government 1,234.0 105.1 1.4 1,337.7
------------------------------------------------
Mortgage-backed 4,478.4 183.3 27.4 4,634.3
------------------------------------------------
State and municipal 40.4 .1 -- 40.5
------------------------------------------------ --------- ----------- ----------- ---------
$19,389.6 $ 918.2 $ 113.4 $20,194.4
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
</TABLE>
The carrying amount of bonds in the balance sheets at
December 31, 1997 and 1996 reflects NAIC adjustments of
$5,500,000 and $2,700,000, respectively, to decrease
amortized cost.
Fair values for bonds are based on quoted market prices,
where available. For bonds not actively traded, fair values
are estimated using values obtained from independent pricing
services or, in the case of private placements, are
estimated by discounting expected future cash flows using a
current market rate applicable to the coupon rate, credit
quality and maturity of the investments.
S-12
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
A summary of the cost or amortized cost and fair value of
investments in bonds at December 31, 1997, by contractual
maturity, is as follows:
<TABLE>
<CAPTION>
COST OR
AMORTIZED FAIR
COST VALUE
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Maturity:
In 1998 $ 490.1 $ 494.9
--------------------------------------------------------------------------
In 1999-2002 3,088.7 3,185.4
--------------------------------------------------------------------------
In 2003-2007 4,762.7 4,971.0
--------------------------------------------------------------------------
After 2007 6,344.9 7,084.9
--------------------------------------------------------------------------
Mortgage-backed securities 3,874.3 4,062.4
-------------------------------------------------------------------------- --------- ---------
Total $18,560.7 $19,798.6
- ----------------------------------------------------------------------------- --------- ---------
--------- ---------
</TABLE>
The expected maturities may differ from the contractual
maturities in the foregoing table because certain borrowers
may have the right to call or prepay obligations with or
without call or prepayment penalties.
At December 31, 1997, the Company did not have a material
concentration of financial instruments in a single investee,
industry or geographic location.
Proceeds from sales of investments in bonds during 1997,
1996 and 1995 were $9,715,000,000, $10,996,900,000 and
$12,234,100,000, respectively. Gross gains during 1997, 1996
and 1995 of $218,100,000, $169,700,000 and $225,600,000,
respectively, and gross losses of $78,000,000, $177,000,000
and $83,100,000, respectively, were realized on those sales.
At December 31, 1997 and 1996, investments in bonds, with an
admitted asset value of $76,200,000 and $70,700,000,
respectively, were on deposit with state insurance
departments to satisfy regulatory requirements.
The cost or amortized cost, gross unrealized gains and
losses and the fair value of investments in unaffiliated
common stocks and preferred stocks are as follows:
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------------------------
(IN MILLIONS)
--------------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1997:
Preferred stocks $257.3 $12.1 $ .7 $268.7
- ----------------------------------------
Unaffiliated common stocks 357.0 98.5 19.5 436.0
- ----------------------------------------
At December 31, 1996:
Preferred stocks $239.7 $10.5 $ 1.7 $248.5
- ----------------------------------------
Unaffiliated common stocks 289.9 84.6 16.2 358.3
- ----------------------------------------
</TABLE>
The carrying amount of preferred stocks in the balance
sheets at December 31, 1997 and 1996 reflects NAIC
adjustments of $4,000,000 and $700,000, respectively, to
decrease amortized cost.
S-13
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
During 1997, the minimum and maximum lending rates for
mortgage loans were 7.09% and 9.25%, respectively. At the
issuance of a loan, the percentage of loan to value on any
one loan does not exceed 75%. At December 31, 1997, the
Company did not hold any mortgages with interest overdue
beyond one year. All properties covered by mortgage loans
have fire insurance at least equal to the excess of the loan
over the maximum loan that would be allowed on the land
without the building.
Realized capital gains are reported net of federal income
taxes and amounts transferred to the IMR as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Realized capital gains $ 209.3 $ 69.3 $ 186.8
- ------------------------------------------------------------------------
Less amount transferred to IMR (net of related taxes (credit) of $54.0,
$(6.7) and $51.1 in 1997, 1996 and 1995, respectively) 100.2 (12.4) 94.8
- ------------------------------------------------------------------------ --------- --------- ---------
109.1 81.7 92.0
Less federal income taxes on realized gains 77.8 28.4 48.1
- ------------------------------------------------------------------------ --------- --------- ---------
Net realized capital gains $ 31.3 $ 53.3 $ 43.9
- ------------------------------------------------------------------------ --------- --------- ---------
--------- --------- ---------
</TABLE>
4. SUBSIDIARIES
Statutory-basis financial information related to the
Company's four wholly-owned subsidiaries is summarized as
follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
--------------------------------------------
<S> <C> <C> <C> <C>
Cash and invested assets $ 1,154.4 $ 284.8 $ 399.0 $ 796.3
- -----------------------------------------------------------
Other assets 36.9 77.3 481.6 130.8
- ----------------------------------------------------------- --------- ----------- --------- ---------
Total admitted assets $ 1,191.3 $ 362.1 $ 880.6 $ 972.1
- ----------------------------------------------------------- --------- ----------- --------- ---------
--------- ----------- --------- ---------
Insurance reserves $ 1,072.2 $ 266.7 $ 279.3 $ 588.7
- -----------------------------------------------------------
Other liabilities 48.4 21.7 546.4 5.8
- -----------------------------------------------------------
Liabilities related to separate accounts -- -- -- 164.7
- -----------------------------------------------------------
Capital and surplus 70.7 73.7 54.9 212.9
- ----------------------------------------------------------- --------- ----------- --------- ---------
Total liabilities and capital and surplus $ 1,191.3 $ 362.1 $ 880.6 $ 972.1
- ----------------------------------------------------------- --------- ----------- --------- ---------
--------- ----------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 267.6 $ 135.4 $ 125.3 $ 230.0
- ------------------------------------------------------------
Expenses 262.6 244.2 114.6 224.4
- ------------------------------------------------------------
Net realized gains (losses) .1 .6 (.1) (.1)
- ------------------------------------------------------------ --------- --------- --------- ---------
Net income $ 5.1 $ (108.2) $ 10.6 $ 5.5
- ------------------------------------------------------------ --------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
S-14
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
4. SUBSIDIARIES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
------------------------------------------------
<S> <C> <C> <C> <C>
Cash and invested assets $ 1,090.7 $ 146.4 $ 406.7 $ 664.3
- -----------------------------------------------------------
Other assets 31.8 17.7 503.1 9.1
- ----------------------------------------------------------- --------- ----------- ----------- -----------
Total admitted assets $ 1,122.5 $ 164.1 $ 909.8 $ 673.4
- ----------------------------------------------------------- --------- ----------- ----------- -----------
--------- ----------- ----------- -----------
Insurance reserves $ 1,013.5 $ 72.7 $ 261.8 $ 601.1
- -----------------------------------------------------------
Other liabilities 41.3 18.7 597.2 22.1
- -----------------------------------------------------------
Capital and surplus 67.7 72.7 50.8 50.2
- ----------------------------------------------------------- --------- ----------- ----------- -----------
Total liabilities and capital and surplus $ 1,122.5 $ 164.1 $ 909.8 $ 673.4
- ----------------------------------------------------------- --------- ----------- ----------- -----------
--------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 246.5 $ 104.9 $ 120.8 $ 642.7
- -------------------------------------------------------------
Expenses 247.1 97.1 114.1 661.3
- -------------------------------------------------------------
Net realized gains (losses) (.6) -- -- --
- ------------------------------------------------------------- --------- ----------- ----------- -----------
Net income (loss) $ (1.2) $ 7.8 $ 6.7 $ (18.6)
- ------------------------------------------------------------- --------- ----------- ----------- -----------
--------- ----------- ----------- -----------
</TABLE>
The carrying value of affiliated common stocks, representing
their statutory-basis net equity, was $412,100,000 and
$241,500,000 at December 31, 1997 and 1996, respectively.
The cost basis of investments in subsidiaries as of December
31, 1997 and 1996 was $466,200,000 and $194,000,000,
respectively.
During 1997 and 1996, the Company's insurance subsidiaries
paid dividends of $15,000,000 and $10,500,000, respectively.
5. FEDERAL INCOME TAXES
The effective federal income tax rate for financial
reporting purposes differs from the prevailing statutory tax
rate principally due to tax-exempt investment income,
dividends-received tax deductions, differences in policy
acquisition costs and policy and contract liabilities for
tax return and financial statement purposes.
Federal income taxes incurred of $78,300,000, $83,600,000
and $103,700,000 in 1997, 1996 and 1995, respectively, would
be subject to recovery in the event that the Company incurs
net operating losses within three years of the years for
which such taxes were paid.
Prior to 1984, a portion of the Company's current income was
not subject to current income tax, but was accumulated for
income tax purposes in a memorandum account designated as
"policyholders' surplus." The Company's balance in the
"policyholders' surplus" account at December 31, 1983 of
$187,000,000 was "frozen" by the Tax Reform Act of 1984 and,
accordingly, there have been no additions to the accounts
after that date. That portion of current income on which
income taxes have been paid will continue to be accumulated
in a memorandum account designated as "shareholder's
surplus," and is available for dividends to the shareholder
without additional payment of tax by the Company. The
December 31, 1997 memorandum account balance for
"shareholder's surplus"
S-15
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
5. FEDERAL INCOME TAXES (CONTINUED)
was $1,905,000,000. Should dividends to the shareholder
exceed its respective "shareholder's surplus," amounts would
need to be transferred from the "policyholders' surplus" and
would be subject to federal income tax at that time. Under
existing or foreseeable circumstances, the Company neither
expects nor intends that distributions will be made that
will result in any such tax.
6. SUPPLEMENTAL FINANCIAL DATA
The balance sheet caption, "Other Admitted Assets", includes
amounts recoverable from other insurers for claims paid by
the Company, and the balance sheet caption, "Future Policy
Benefits and Claims," has been reduced for insurance ceded
as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Insurance ceded $ 1,431.0 $ 1,154.5
- -------------------------------------------------------------------------------
Amounts recoverable from other insurers 35.9 16.0
- -------------------------------------------------------------------------------
</TABLE>
Reinsurance transactions included in the income statement
caption, "Premiums and Deposits," are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Insurance assumed $ 727.2 $ 241.3 $ 667.7
- ------------------------------------------------------------------------
Insurance ceded 302.9 193.3 453.1
- ------------------------------------------------------------------------ --------- --------- ---------
Net amount included in premiums $ 424.3 $ 48.0 $ 214.6
- ------------------------------------------------------------------------ --------- --------- ---------
--------- --------- ---------
</TABLE>
The income statement caption, "Benefits and Settlement
Expenses," is net of reinsurance recoveries of
$1,240,500,000, $787,900,000 and $1,407,000,000 for 1997,
1996 and 1995, respectively.
S-16
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
6. SUPPLEMENTAL FINANCIAL DATA (CONTINUED)
Deferred and uncollected life insurance premiums and annuity
considerations included in the balance sheet caption,
"Premiums and Fees in Course of Collection," are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------
NET OF
GROSS LOADING LOADING
-----------------------------------
(IN MILLIONS)
-----------------------------------
<S> <C> <C> <C>
Ordinary new business $ 3.2 $ 2.4 $ .8
- ------------------------------------------------------------------------
Ordinary renewal 17.8 3.2 14.6
- ------------------------------------------------------------------------
Group life 10.6 .2 10.4
- ------------------------------------------------------------------------ --------- --- -----
$ 31.6 $ 5.8 $ 25.8
--------- --- -----
--------- --- -----
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------
NET OF
GROSS LOADING LOADING
-----------------------------------
(IN MILLIONS)
-----------------------------------
<S> <C> <C> <C>
Ordinary new business $ 3.9 $ 1.9 $ 2.0
- ------------------------------------------------------------------------
Ordinary renewal 35.1 3.0 32.1
- ------------------------------------------------------------------------
Group life 9.4 (.1) 9.5
- ------------------------------------------------------------------------ --------- --- -----
$ 48.4 $ 4.8 $ 43.6
--------- --- -----
--------- --- -----
</TABLE>
The Company has entered into non-exclusive managing general
agent agreements with International Benefit Services Corp.,
HRM Claim Management, Inc. and Pediatrics Insurance
Consultants, Inc. to write group life and health business.
Direct premiums written related to the agreements amounted
to $2,000,000, $2,600,000 and $8,800,000 in 1997 and
$26,200,000, $3,800,000 and $8,600,000 in 1996,
respectively. During 1996, LNC Administrative Services
Corporation entered into a similar agreement with the
Company with direct premiums written amounting to $7,200,000
and 6,200,000 in 1997 and 1996, respectively. Authority
granted by the managing general agents agreements include
underwriting, claims adjustment and claims payment services.
7. ANNUITY RESERVES
At December 31, 1997, the Company's annuity reserves and
deposit fund liabilities, including separate accounts, that
are subject to discretionary withdrawal with adjustment,
S-17
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
7. ANNUITY RESERVES (CONTINUED)
subject to discretionary withdrawal without adjustment and
not subject to discretionary withdrawal provisions are
summarized as follows:
<TABLE>
<CAPTION>
AMOUNT PERCENT
----------------------
(IN MILLIONS)
----------------------
<S> <C> <C>
Subject to discretionary withdrawal with adjustment:
With market value adjustment $ 2,426.3 5%
-----------------------------------------------------------------------------
At book value, less surrender charge 4,225.8 8
-----------------------------------------------------------------------------
At market value 30,064.7 59
----------------------------------------------------------------------------- --------- ---
36,716.8 72
Subject to discretionary withdrawal without adjustment at book value with
minimal or no charge or adjustment 11,657.7 23
- --------------------------------------------------------------------------------
Not subject to discretionary withdrawal 2,531.1 5
- -------------------------------------------------------------------------------- --------- ---
Total annuity reserves and deposit fund liabilities -- before reinsurance 50,905.6 100%
- -------------------------------------------------------------------------------- ---
---
Less reinsurance 1,797.5
- -------------------------------------------------------------------------------- ---------
Net annuity reserves and deposit fund liabilities, including separate accounts $49,108.1
- -------------------------------------------------------------------------------- ---------
---------
</TABLE>
8. CAPITAL AND SURPLUS
Life insurance companies are subject to certain Risk-Based Capital ("RBC")
requirements as specified by the NAIC. Under those requirements, the amount
of capital and surplus maintained by a life insurance company is to be
determined based on the various risk factors related to it. At December 31,
1997, the Company exceeds the RBC requirements.
The payment of dividends by the Company is limited and cannot be made except
from earned profits. The maximum amount of dividends that may be paid by
life insurance companies without prior approval of the Indiana Insurance
Commissioner is subject to restrictions relating to statutory surplus and
net gain from operations. In 1998, the Company can pay dividends of
$361,600,000 without prior approval of the Indiana Insurance Commissioner.
9. EMPLOYEE BENEFIT PLANS
LNC maintains defined benefit pension plans for its employees (including
Company employees) and a defined contribution plan for the Company's agents.
LNC also maintains 401(k) plans, deferred compensation plans and
postretirement medical and life insurance plans for its employees and agents
(including the Company's employees and agents). The aggregate expenses and
accumulated obligations for the Company's portion of these plans are not
material to the Company's statutory-basis financial statements of income or
financial position for any of the periods shown.
LNC has various incentive plans for key employees, agents and directors of
LNC and its subsidiaries that provide for the issuance of stock options,
stock appreciation rights, restricted stock awards and stock incentive
awards. These plans are comprised primarily of stock option incentive plans.
Stock options granted under the stock option incentive plans are at the
market value at the date of grants and, subject to termination of
employment, expire ten years from the date of grant. Such options are
transferable only upon death and are exercisable one year from the date of
grant for options issued prior to 1992. Option issued subsequent to 1991 are
exercisable in 25% increments on the option issuance anniversary in the four
years following issuance.
As of December 31, 1997, 716,211 shares of LNC common stock were subject to
options granted to Company employees and agents under the stock option
incentive plans of which 370,239 were exercisable on that date. The exercise
prices of the outstanding options range from $23.50 to $75.66. During 1997,
1996 and 1995, 170,789, 72,405 and
S-18
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
117,806 options were exercised, respectively, and 1,846, 10,950 and 11,473
options were forfeited, respectively.
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES
DISABILITY INCOME CLAIMS
The liability for disability income claims net of the related asset for
amounts recoverable from reinsurers at December 31, 1997 and 1996 is a net
liability of $516,900,000 and $572,000,000, respectively. This liability is
based on the assumption that the recent experience will continue in the
future. If incidence levels or claim termination rates fluctuate
significantly from the assumptions underlying reserves, adjustments to
reserves may be required in the future. Accordingly, this liability may
prove to be deficient or excessive. However, it is management's opinion that
such future development will not materially affect the financial position of
the Company. The Company reviews reserve levels on an ongoing basis.
During 1995, the Company completed an in-depth review of the experience of
its disability income business. As a result of this study, and based on the
assumption that recent experience will continue in the future, net income
decreased by $15,200,000 as a result of strengthening the disability income
reserve.
Because of continuing adverse experience and worsening projections of future
experience, the Company conducted an additional in-depth review of loss
experience on its disability income business during 1997. As a result of
this study, the reserve level was deemed to be inadequate to meet future
obligations if current incident levels were to continue in the future. In
order to address this situation, the Company strengthened its disability
income reserve by $80,000,000 (pre-tax).
MARKETING AND COMPLIANCE ISSUES
Regulators continue to focus on market conduct and compliance issues. Under
certain circumstances companies operating in the insurance and financial
services markets have been held responsible for providing incomplete or
misleading sales materials and for replacing existing policies with policies
that were less advantageous to the policyholder. The Company's management
continues to monitor the Company's sales materials and compliance procedures
and is making an extensive effort to minimize any potential liability. Due
to the uncertainty surrounding such matters, it is not possible to provide a
meaningful estimate of the range of potential outcomes at this time;
however, it is management's opinion that such future development will not
materially affect the financial position of the Company.
GROUP PENSION ANNUITIES
The liabilities for guaranteed interest and group pension annuity contracts,
which are no longer being sold by the Company, are supported by a single
portfolio of assets that attempts to match the duration of these
liabilities. Due to the long-term nature of group pension annuities and the
resulting inability to exactly match cash flows, a risk exists that future
cash flows from investments will not be reinvested at rates as high as
currently earned by the portfolio.
Accordingly, these liabilities may prove to be deficient or excessive.
However, it is management's opinion that such future development will not
materially affect the financial position of the Company.
LEASES
The Company leases its servicing office properties through sale-leaseback
agreements. The agreements provide for a 25 year lease period with options
to renew for six additional terms of five years each. The agreements also
provide the Company with the right of first refusal to purchase the
properties during the term of the lease, including renewal periods, at a
price as defined in the agreements. The Company also has the option to
purchase the leased properties at fair market value as defined in the
agreements on the last day of the initial 25-year lease ending in 2009 or on
the last day of any of the renewal periods.
Total rental expense on operating leases in 1997, 1996 and 1995 was
$29,300,000, $26,400,000 and
S-19
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
$22,500,000, respectively. Future minimum rental commitments are as follows
(in millions):
<TABLE>
<S> <C>
1998 $ 18.5
- --------------------------------------
1999 18.9
- --------------------------------------
2000 20.1
- --------------------------------------
2001 20.4
- --------------------------------------
2002 20.7
- --------------------------------------
Thereafter 152.2
- -------------------------------------- ---------
$ 250.8
---------
---------
</TABLE>
The future commitments include amounts for space and equipment to be used by
the personnel that were added on January 2, 1998 as a result of the purchase
of a block of individual life and annuity business (see NOTE 12).
INFORMATION TECHNOLOGY COMMITMENT
In February 1998, the Company signed a seven-year contract with IBM Global
Services for providing information technology services for the Fort Wayne
operations. Annual costs are estimated to range from $33,600,000 to
$56,800,000.
INSURANCE CEDED AND ASSUMED
The Company cedes insurance to other companies, including certain
affiliates. The portion of risks exceeding the Company's retention limit is
reinsured with other insurers. Industry regulations prescribe the maximum
coverage that the Company can retain on an individual insured. Prior to
December 31, 1997, the Company limited its maximum coverage that it retained
on an individual to $3,000,000. Based on a review of the capital and
business in-force (including the addition of the block of business described
in NOTE 12), effective in January 1998, the Company changed the amount it
will retain on an individual to $10,000,000. Portions of the Company's
deferred annuity business have also been reinsured with other companies to
limit its exposure to interest rate risks. At December 31, 1997, the
reserves associated with these reinsurance arrangements totaled
$1,760,000,000. To cover products other than life insurance, the Company
acquires other insurance coverages with retentions and limits that
management believes are appropriate for the circumstances. The Company
remains liable if its reinsurers are unable to meet their contractual
obligations under the applicable reinsurance agreements.
The Company assumes insurance from other companies, including certain
affiliates. At December 31, 1997, the Company has provided $12,400,000 of
statutory surplus relief to other insurance companies under reinsurance
transactions. Generally, such amounts are offset by corresponding
receivables from the ceding company, which are secured by future profits on
the reinsured business. However, the Company is subject to the risk that the
ceding company may become insolvent and the right of offset would not be
permitted.
The regulatory required liability for unsecured reserves ceded to
unauthorized reinsurers was $8,200,000 and $4,300,000 at December 31, 1997
and 1996, respectively.
VULNERABILITY FROM CONCENTRATIONS
At December 31, 1997, the Company did not have a concentration of: 1)
business transactions with a particular customer, lender or distributor; 2)
revenues from a particular product or service; 3) sources of supply of labor
or services used in the business; or 4) a market or geographic area in which
business is conducted that makes it vulnerable to an event that is at least
reasonably possible to occur in the near term and which could cause a severe
impact to the Company's financial condition.
OTHER CONTINGENCY MATTERS
The Company is involved in various pending or threatened legal proceedings
arising from the conduct of business. Most of these proceedings are routine
in the ordinary course of business. The Company maintains professional
liability insurance coverage for claims in excess of $5,000,000. The degree
of applicability of this coverage depends on the specific facts of each
proceeding. In some instances, these proceedings include claims for
compensatory and punitive damages and similar types of relief in addition to
amounts for alleged contractual liability or requests for equitable relief.
After consultation with legal counsel and a review of available facts, it is
management's opinion that the ultimate liability, if any, under these suits
will
S-20
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
not have a material adverse affect on the financial position or results of
operations of the Company.
Two lawsuits involve alleged fraud in the sale of interest sensitive
universal life and whole life insurance policies. These two suits have been
filed as class actions against the Company, although the court has not
certified a class in either case. Plaintiffs seek unspecified damages and
penalties for themselves and on behalf of the putative class while the
relief sought in these cases in substantial, the cases are in the early
stages of litigation, and it is premature to make assessments about
potential loss, if any. Management intends to defend these suits vigorously.
The amount of liability, if any, which may arise as a result of these suits
cannot be reasonably estimated at this time.
The number of insurance companies that are under regulatory supervision has
resulted, and is expected to continue to result, in assessments by state
guaranty funds to cover losses to policyholders of insolvent or
rehabilitated companies. Mandatory assessments may be partially recovered
through a reduction in future premium taxes in some states. The Company has
accrued for expected assessments net of estimated future premium tax
deductions.
GUARANTEES
The Company has guarantees with off-balance-sheet risks whose contractual
amounts represent credit exposure. Outstanding guarantees with off-
balance-sheet risks, shown in notional or contract amounts, are as follows:
<TABLE>
<CAPTION>
NOTIONAL OR
CONTRACT AMOUNTS
--------------------
DECEMBER 31
--------------------
1997 1996
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Mortgage loan pass-through
certificates $ 41.6 $ 50.3
- ------------------------------
Real estate partnerships -- .5
- ------------------------------ --------- ---------
$ 41.6 $ 50.8
--------- ---------
--------- ---------
</TABLE>
The Company has invested in real estate partnerships that use conventional
mortgage loans to finance their projects. In some cases, the terms of these
arrangements involve guarantees by each of the partners to indemnify the
mortgagor in the event a partner is unable to pay its principal and interest
payments. In addition, the Company has sold commercial mortgage loans
through grantor trusts which issued pass-through certificates. The Company
has agreed to repurchase any mortgage loans which remain delinquent for 90
days at a repurchase price substantially equal to the outstanding principal
balance plus accrued interest thereon to the date of repurchase. It is
management's opinion that the value of the properties underlying these
commitments is sufficient that in the event of default the impact would not
be material to the Company. Accordingly, both the carrying value and fair
value of these guarantees is zero at December 31, 1997 and 1996.
DERIVATIVES
The Company has derivatives with off-balance-sheet risks whose notional or
contract amounts exceed the credit exposure. The Company has entered into
derivative transactions to reduce its exposure to fluctuations in interest
rates, the widening of bond yield spreads over comparable maturity U.S.
Government obligations, increased liabilities associated with reinsurance
agreements and foreign exchange risks. In addition, the Company is subject
to the risks associated with changes in the value of its derivatives;
however, such changes in value generally are offset by changes in the value
of the items being hedged by such contracts. Outstanding derivatives with
off-balance-sheet risks, shown in notional or contract amounts along with
their carrying value and estimated fair values, are as follows:
S-21
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
<TABLE>
<CAPTION>
NOTIONAL OR ASSETS (LIABILITIES)
CONTRACT AMOUNTS -----------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------------------------------------------------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1997 1996 1997 1997 1996 1996
-------------------------------------------------------
(IN MILLIONS)
-------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate derivatives:
Interest rate cap agreements $4,900.0 $5,500.0 $13.9 $ .9 $20.8 $ 8.2
---------------------------------
Swaptions 1,752.0 672.0 6.9 6.9 11.0 10.6
---------------------------------
Financial futures contracts -- 147.7 -- -- (2.4) (2.4)
---------------------------------
Interest rate swaps 10.0 -- -- (1.8) -- --
--------------------------------- -------- -------- -------- ----- -------- ------
6,662.0 6,319.7 20.8 6.0 29.4 16.4
Foreign currency derivatives:
Forward contracts 163.1 251.5 5.4 5.4 .2 (.2)
---------------------------------
Foreign currency options -- 43.9 -- -- .6 .4
---------------------------------
Foreign currency swaps 15.0 15.0 -- (2.1) -- (2.1)
--------------------------------- -------- -------- -------- ----- -------- ------
178.1 310.4 5.4 3.3 .8 (1.9)
-------- -------- -------- ----- -------- ------
$6,840.1 $6,630.1 $26.2 $ 9.3 $30.2 $ 14.5
-------- -------- -------- ----- -------- ------
-------- -------- -------- ----- -------- ------
</TABLE>
A reconciliation and discussion of the notional or contract amounts for the
significant programs using derivative agreements and contracts at December
31 is a follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------
INTEREST RATE CAPS SPREAD LOCKS SWAPTIONS
1997 1996 1997 1996 1997 1996
----------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $ 5,500.0 $ 5,110.0 $ -- $ 600.0 $ 672.0 $ --
- -----------------------------------
New contracts -- 390.0 50.0 15.0 1,080.0 672.0
- -----------------------------------
Terminations and maturities (600.0) -- (50.0) (615.0) -- --
- ----------------------------------- --------- --------- --------- --------- --------- ---------
Balance at end of year $ 4,900.0 $ 5,500.0 $ -- $ -- $ 1,752.0 $ 672.0
- ----------------------------------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL FUTURES INTEREST RATE SWAPS
CONTRACTS
------------------------------------------
1997 1996 1997 1996
------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $ 147.7 $ -- $ -- $ 5.0
- ------------------------------------------------------------
New contracts 88.3 7,918.8 10.0 --
- ------------------------------------------------------------
Terminations and maturities (236.0) (7,771.1) -- (5.0)
- ------------------------------------------------------------ --------- --------- --------- ---------
Balance at end of year $ -- $ 147.7 $ 10.0 $ --
- ------------------------------------------------------------ --------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
S-22
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
<TABLE>
<CAPTION>
FOREIGN CURRENCY DERIVATIVES
----------------------------------------------------------------
FOREIGN EXCHANGE FOREIGN CURRENCY FOREIGN CURRENCY
----------------------------------------------------------------
FORWARD CONTRACTS OPTIONS SWAPS
1997 1996 1997 1996 1997 1996
----------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $ 251.5 $ 15.7 $ 43.9 $ 99.2 $ 15.0 $ 15.0
- --------------------------------------
New contracts 833.1 406.9 -- 1,168.8 -- --
- --------------------------------------
Terminations and maturities (921.6) (171.1) (43.9) (1,224.1) -- --
- -------------------------------------- --------- --------- --------- --------- --------- ---------
Balance at end of year $ 163.1 $ 251.5 $ -- $ 43.9 $ 15.0 $ 15.0
- -------------------------------------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
INTEREST RATE CAPS
The interest rate cap agreements, which expire in 1998 through 2003, entitle
the Company to receive quarterly payments from the counterparties on
specified future reset dates, contingent on future interest rates. For each
cap, the amount of such payments, if any, is determined by the excess of a
market interest rate over a specified cap rate multiplied by the notional
amount divided by four. The purpose of the Company's interest rate cap
agreement program is to protect its annuity line of business from the effect
of rising interest rates. The premium paid for the interest rate caps is
included in other assets ($13,900,000 as of December 31, 1997) and is being
amortized over the terms of the agreements. This amortization is included in
net investment income.
SWAPTIONS
Swaptions, which expire in 2002 and 2003, entitle the Company to receive
settlement payments from the counterparties on specified expiration dates,
contingent on future interest rates. For each swaption, the amount of such
settlement payments, if any, is determined by the present value of the
difference between the fixed rate on a market rate swap and the strike rate
multiplied by the notional amount. The purpose of the Company's swaption
program is to protect its annuity line of business from the effect of
fluctuating interest rates. The premium paid for the swaptions is included
in other assets ($6,900,000 as of December 31, 1997) and is being amortized
over the terms of the agreements. This amortization is included in net
investment income.
SPREAD LOCKS
Spread-lock agreements provide for a lump sum payment to or by the Company,
depending on whether the spread between the swap rate and a specified
Government note is larger or smaller than a contractually specified spread.
Cash payments are based on the product of the notional amount, the spread
between the swap rate and the yield of an equivalent maturity Government
security and the price sensitivity of the swap at that time. The purpose of
the Company's spread-lock program is to protect a portion of its fixed
maturity securities against widening of spreads.
FINANCIAL FUTURES
The Company uses exchange-traded financial futures contracts to hedge
against interest rate risks and to manage duration of a portion of its fixed
maturity securities. Financial futures contracts obligate the Company to buy
or sell a financial instrument at a specified future date for a specified
price. They may be settled in cash or through delivery of the financial
instrument. Cash settlements on the change in market values of financial
futures contracts are made daily.
INTEREST RATE SWAPS
The Company uses interest rate swap agreements to hedge its exposure to
floating rate bond coupon payments, replicating a fixed rate bond. An
interest rate swap is a contractual agreement to exchange payments at one or
more times based on the actual or expected price, level, performance or
value of one or more underlying interest rates. The Company is required to
pay the counterparty to the agreements the stream of variable coupon
payments generated from the bonds, and in turn,
S-23
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
receives a fixed payment from the counterparty at a predetermined interest
rate. The net receipts/payments from interest rate swaps are recorded in net
investment income.
FOREIGN CURRENCY DERIVATIVES
The Company uses a combination of foreign exchange forward contracts,
foreign currency options and foreign currency swaps, all of which are traded
over-the-counter, to hedge some of the foreign exchange risk of investments
in fixed maturity securities denominated in foreign currencies. The foreign
currency forward contracts obligate the Company to deliver a specified
amount of currency at a future date at a specified exchange rate. Foreign
currency options give the Company the right, but not the obligation, to buy
or sell a foreign currency at a specific exchange rate during a specified
time period. A foreign currency swap is a contractual agreement to exchange
the currencies of two different countries pursuant to an agreement to
re-exchange the two currencies at the same rate of exchange at a specified
future date.
ADDITIONAL DERIVATIVE INFORMATION
Expenses for the agreements and contracts described above amounted to
$7,000,000, $6,900,000 and $5,600,000 in 1997, 1996 and 1995, respectively.
Deferred losses of $2,600,000 as of December 31, 1997, were the result of:
1) terminated and expired spread-lock agreements and; 2) financial futures
contracts. These losses are included with the related fixed maturity
securities to which the hedge applied and are being amortized over the life
of such securities.
The Company is exposed to credit loss in the event of nonperformance by
counterparties on interest rate cap agreements, swaptions, spread-lock
agreements, interest rate swaps, foreign exchange forward contracts, foreign
currency options and foreign currency swaps. However, the Company does not
anticipate nonperformance by any of the counterparties. The credit risk
associated with such agreements is minimized by purchasing such agreements
from financial institutions with long-standing, superior performance
records. The amount of such exposure is essentially the net replacement cost
or market value for such agreements with each counterparty if the net market
value is in the Company's favor. At December 31, 1997, the exposure was
$11,700,000.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following discussion outlines the methodologies and assumptions used to
determine the estimated fair values of the Company's financial instruments.
Considerable judgment is required to develop these fair values. Accordingly,
the estimates shown are not necessarily indicative of the amounts that would
be realized in a one-time, current market exchange of all of the Company's
financial instruments.
BONDS AND UNAFFILIATED COMMON STOCK
Fair values of bonds are based on quoted market prices, where available. For
bonds not actively traded, fair values are estimated using values obtained
from independent pricing services. In the case of private placements, fair
values are estimated by discounting expected future cash flows using a
current market rate applicable to the coupon rate, credit quality and
maturity of the investments. The fair values of unaffiliated common stocks
are based on quoted market prices.
MORTGAGE LOANS ON REAL ESTATE
The estimated fair values of mortgage loans on real estate are established
using a discounted cash flow method based on credit rating, maturity and
future income. The rating for mortgages in good standing are based on
property type, location, market conditions, occupancy, debt service
coverage, loan to value, caliber of tenancy, borrower and payment record.
Fair values for impaired mortgage loans are based on: 1) the present value
of expected future cash flows discounted at the loan's effective interest
rate; 2) the loan's market price; or 3) the fair value of the collateral if
the loan is collateral dependent.
POLICY LOANS
The estimated fair values of investments in policy loans are calculated on a
composite discounted cash flow basis using Treasury interest rates
consistent with the maturity durations assumed. These durations are based on
historical experience.
S-24
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
OTHER INVESTMENTS AND CASH AND SHORT-TERM INVESTMENTS
The carrying values for assets classified as other investments and cash and
short-term investments in the accompanying statutory-basis balance sheets
approximate their fair value.
INVESTMENT-TYPE INSURANCE CONTRACTS
The balance sheet captions, "Future Policy Benefits and Claims" and "Other
Policyholder Funds," include investment type insurance contracts (i.e.,
deposit contracts and guaranteed interest contracts). The fair values for
the deposit contracts and certain guaranteed interest contracts are based on
their approximate surrender values. The fair values for the remaining
guaranteed interest and similar contracts are estimated using discounted
cash flow calculations. These calculations are based on interest rates
currently offered on similar contracts with maturities that are consistent
with those remaining for the contracts being valued.
The remainder of the balance sheet captions "Future Policy Benefits and
Claims" and "Other Policyholder Funds," that do not fit the definition of
"investment-type insurance contracts" are considered insurance contracts.
Fair value disclosures are not required for these insurance contracts and
have not been determined by the Company. It is the Company's position that
the disclosure of the fair value of these insurance contracts is important
because readers of these financial statements could draw inappropriate
conclusions about the Company's capital and surplus determined on a fair
value basis. It could be misleading if only the fair value of assets and
liabilities defined as financial instruments are disclosed. The Company and
other companies in the insurance industry are monitoring the related actions
of the various rule-making bodies and attempting to determine an appropriate
methodology for estimating and disclosing the "fair value" of their
insurance contract liabilities.
SHORT-TERM DEBT
Fair values of short-term debt approximates carrying values.
GUARANTEES
The Company's guarantees include guarantees related to real estate
partnerships and mortgage loan pass-through certificates. Based on
historical performance where repurchases have been negligible and the
current status, which indicates none of the loans are delinquent, the fair
value liability for the guarantees related to the mortgage loan pass-through
certificates is insignificant.
DERIVATIVES
The Company's derivatives include interest rate cap agreements, swaptions,
spread-lock agreements, foreign currency exchange contracts, financial
futures contracts, interest rate swaps, foreign currency options and foreign
currency swaps. Fair values for these contracts are based on current
settlement values. These values are based on: 1) quoted market prices for
the foreign currency exchange contracts and financial future contracts and;
2) brokerage quotes that utilize pricing models or formulas using current
assumptions for all other swaps and agreements.
INVESTMENT COMMITMENTS
Fair values for commitments to make investment in fixed maturity securities
(primarily private placements), mortgage loans on real estate and real
estate are based on the difference between the value of the committed
investments as of the date of the accompanying balance sheets and the
commitment date. These estimates would take into account changes in interest
rates, the counterparties' credit standing and the remaining terms of the
commitments.
S-25
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying values and estimated fair values of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------
1997 1996
----------------------------------------------
CARRYING CARRYING
ASSETS (LIABILITIES) VALUE FAIR VALUE VALUE FAIR VALUE
- -----------------------------------------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------
<S> <C> <C> <C> <C>
Bonds $ 18,560.7 $ 19,798.6 $ 19,389.6 $ 20,194.4
- -----------------------------------------------
Preferred stock 257.3 268.7 239.7 248.5
- -----------------------------------------------
Unaffiliated common stock 436.0 436.0 358.3 358.3
- -----------------------------------------------
Mortgage loans on real estate 3,012.7 3,179.2 2,976.7 3,070.9
- -----------------------------------------------
Policy loans 660.5 648.3 626.5 612.7
- -----------------------------------------------
Other investments 335.5 335.5 282.7 282.7
- -----------------------------------------------
Cash and short-term investments 2,133.0 2,133.0 759.2 759.2
- -----------------------------------------------
Investment-type insurance contracts:
Deposit contracts and certain guaranteed
interest contracts (17,324.2) (16,887.6) (17,871.6) (17,333.0)
--------------------------------------------
Remaining guaranteed interest and similar
contracts (1,267.0) (1,294.6) (1,799.7) (1,835.4)
--------------------------------------------
Short-term debt (120.0) (120.0) (100.0) (100.0)
- -----------------------------------------------
Derivatives 26.2 9.3 26.5 13.8
- -----------------------------------------------
Investment commitments -- (.5) -- (.6)
- -----------------------------------------------
</TABLE>
12. ACQUISITIONS AND SALES OF SUBSIDIARIES
In October 1996, the Company and LLANY purchased a block of group
tax-qualified annuity business from UNUM Corporation's affiliate. The
transaction was completed in the form of a reinsurance transaction, which
resulted in a ceding commission of $71,800,000. The ceding commission has
been recorded as admissible goodwill of $62,300,000, which is to be
amortized on a straight-line basis over 10 years. LLANY was required by the
New York Department of Insurance to expense its portion of the ceding
commission in 1996. Policy liabilities and related accruals of the Company
and its wholly owned subsidiary increased by $3,200,000,000 as a result of
this transaction.
In 1997, LNC contributed 25,000,000 shares of common stock of American
States Financial Corporation ("American States") to the Company. American
States is a property casualty insurance holding company of which LNC owned
83.3%. The contributed common stock was accounted for as a capital
contribution equal to the fair value of the common stock received by the
Company. Subsequently, the American States common stock owned by the
Company, along with all other American States common stock owned by LNC and
its affiliates, was sold. The Company received proceeds from the sale in the
amount of $1,175,000,000. The Company recognized no gain or loss on the sale
of its portion of the common stock due to the receipt of such stock at fair
value.
On January 2, 1998, the Company issued a surplus note to LNC in return for
$500,000,000 in cash. The note calls for the Company to pay, on or before
March 31, 2028, the principal amount of the note and interest quarterly at a
6.56% annual rate. LNC also has a right to redeem the note for immediate
repayment in total or in part once per year on the
S-26
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
12. ACQUISITIONS AND SALES OF SUBSIDIARIES (CONTINUED)
anniversary date of the note, but not before January 2, 2003. Any payment of
interest or repayment of principal may be paid only out of excess surplus
(as defined in the note) and is subject to the approval of the Commissioner
of the Indiana Department of Insurance.
Proceeds from the sale of the Company's American States common stock, as
well as proceeds from the surplus note, were used to finance an indemnity
reinsurance transaction whereby the Company reinsured 100% of a block of
individual life insurance and annuity business from CIGNA Corporation. The
Company paid $1,264,400,000 to CIGNA on January 2, 1998 under the terms of
the reinsurance agreement, which will result in a decrease to surplus in
1998 of approximately $1,000,000,000. Operating results generated by this
block of business after the closing date will be included in the Company
financial statements from the closing date. At the time of closing, this
block of business had statutory liabilities of $4,658,200,000 that became
the Company's obligation. The company also received assets, measured on a
historical statutory basis, equal to the liabilities. During 1997, this
block produced premiums, fees and deposits of $1,051,000,000 and earnings of
$87,200,000 on a statutory basis. The Company also expects to pay
$30,000,000 to cover expenses associated with the reinsurance agreement and
to record a charge of approximately $12,000,000 during 1998 to cover certain
costs of integrating the existing operations with the new block of business.
13. TRANSACTIONS WITH AFFILIATES
A wholly owned subsidiary of LNC, Lincoln Financial Group, Inc. ("LFGI"),
has a nearly exclusive general agents contract with the Company under which
it sells the Company's products and provides the service that otherwise
would be provided by a servicing office marketing department and regional
offices. For providing these selling and marketing services, the Company
paid LFGI override commissions and operating expense allowances of
$61,600,000, $56,300,000 and $43,300,000 in 1997, 1996 and 1995,
respectively. LFGI incurred expenses of $5,500,000, $15,700,000 and
$10,400,000 in 1997, 1996 and 1995, respectively, in excess of the override
commissions and operating expense allowances received from the Company,
which the Company is not required to reimburse. Effective in January 1998,
the Company and LFGI agreed to increase the override commission expense and
eliminate the operating expense allowance.
Cash and short-term investments at December 31, 1997 and 1996 include the
Company's participation in a short-term investment pool with LNC of
$325,600,000 and $175,100,000, respectively. Related investment income
amounted to $15,500,000, $15,300,000 and $21,100,000 in 1997, 1996 and 1995,
respectively. Other liabilities at December 31, 1997 and 1996 include
$120,000,000 and $100,000,000, respectively, of notes payable to LNC.
The Company provides services to and receives services from affiliated
companies which resulted in a net payment of $48,500,000, $34,100,000 and
$24,900,000 in 1997, 1996 and 1995, respectively.
The Company cedes and accepts reinsurance from affiliated companies.
Premiums in the accompanying statements of income include premiums on
insurance business accepted under reinsurance contracts and exclude premiums
ceded to other affiliated companies, as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Insurance assumed $ 11.9 $ 17.9 $ 17.6
- ----------------------
Insurance ceded 100.3 302.8 214.4
- ----------------------
</TABLE>
S-27
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
13. TRANSACTIONS WITH AFFILIATES (CONTINUED)
The balance sheets include reinsurance balances with affiliated companies as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Future policy benefits
and claims assumed $ 245.5 $ 312.7
- ------------------------
Future policy benefits
and claims ceded 997.2 891.8
- ------------------------
Amounts recoverable on
paid and unpaid losses 30.4 31.2
- ------------------------
Reinsurance payable on
paid losses 5.3 2.7
- ------------------------
Funds held under
reinsurance treaties --
net liability 1,115.4 1,062.4
- ------------------------
</TABLE>
Substantially all reinsurance ceded to affiliated companies is with
unauthorized companies. To take a reserve credit for such reinsurance, the
Company holds assets from the reinsurer, including funds held under
reinsurance treaties, and is the beneficiary on letters of credit
aggregating $280,900,000 and $314,200,000 at December 31, 1997 and 1996,
respectively. The letters of credit are issued by banks and represent
guarantees of performance under the reinsurance agreement. At December 31,
1997 and 1996, LNC had guaranteed $229,100,000 and $239,200,000,
respectively, of these letters of credit. At December 31, 1997, the Company
has a receivable (included in the foregoing amounts) from affiliated
insurance companies in the amount of $130,700,000 for statutory surplus
relief received under financial reinsurance ceded agreements.
14. SEPARATE ACCOUNTS
Separate account assets and liabilities reported in the accompanying balance
sheets represent funds that are separately administered, principally for
annuity contracts, and for which the contractholder, rather than the
Company, bears the investment risk. Separate account contractholders have no
claim against the assets of the general account of the Company. Separate
account assets are reported at fair value and consist primarily of long-term
bonds, common stocks, short-term investments and mutual funds. The detailed
operations of the separate accounts are not included in the accompanying
financial statements. Fees charged on separate account policyholder deposits
are included in other income.
Separate account premiums, deposits and other considerations amounted to
$4,821,800,000, $4,148,700,000 and $3,068,200,000 in 1997, 1996 and 1995,
respectively. Reserves for separate accounts with assets at fair value were
$30,560,700,000 and $23,047,800,000 at December 31, 1997 and 1996,
respectively. All reserves are subject to discretionary withdrawal at market
value. Substantially all of the Company's separate accounts are
nonguaranteed.
S-28
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
14. SEPARATE ACCOUNTS (CONTINUED)
A reconciliation of transfers to (from) separate accounts are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996
------------------------
(IN MILLIONS)
------------------------
<S> <C> <C>
Transfers as reported in the Summary of Operations of
various Separate Accounts:
Transfers to separate accounts $ 4,824.0 $ 4,149.6
- ------------------------------------------------------------
Transfers from separate accounts (2,943.8) (2,058.5)
- ------------------------------------------------------------ --------- ---------
Net transfer to separate accounts as reported in the
Company's NAIC Annual Statement -- Summary of Operations $ 1,880.2 $ 2,091.1
- ------------------------------------------------------------ --------- ---------
--------- ---------
</TABLE>
15. RECONCILIATION OF ANNUAL STATEMENT TO AUDITED FINANCIAL STATEMENTS
In 1997, certain errors were identified by the Illinois
Insurance Department in the calculation of the AVR as of
December 31, 1996 and 1995. The effects of the AVR errors
also resulted in the need for revisions in the calculation
of certain investment limitation thresholds, the results of
which indicated that additional assets should have been
nonadmitted as of December 31, 1996. As discussed by the
Company with the Indiana and Illinois Insurance Departments,
corrections were made to affected pages of the Company's
NAIC Annual Statement which were refiled with various state
insurance departments. However, due to immateriality of the
corrections in relation to the financial statements taken as
a whole, the audited 1996 and 1995 statutory-basis financial
statements were not corrected and re-issued.
The Company's 1997 NAIC Annual Statement, as filed with
various state insurance departments, also includes the
corrected balances for 1996 and 1995. The following is a
reconciliation of total admitted assets, total liabilities
and capital and surplus as of December 31, 1996 as presented
in the 1997 NAIC Annual Statement (as corrected) to the
accompanying audited financial statements.
<TABLE>
<CAPTION>
TOTAL CAPITAL
ADMITTED TOTAL AND
ASSETS LIABILITIES SURPLUS
---------------------------------
<S> <C> <C> <C>
Balance as of December 31, 1996 as
reported in the accompanying audited
financial statements $50,016.6 $ 48,054.0 $ 1962.6
- ----------------------------------------
Effect of AVR errors -- 37.6 (37.6)
- ----------------------------------------
Effect of change in investment
limitations (57.0) -- (57.0)
- ---------------------------------------- --------- ----------- --------
Balance as of December 31, 1996 as
reported in the 1997 NAIC Annual
Statement $49,959.6 $ 48,091.6 $1,868.0
- ---------------------------------------- --------- ----------- --------
--------- ----------- --------
</TABLE>
16. IMPACT OF YEAR 2000 (UNAUDITED)
The Year 2000 Issue is pervasive and complex and affects virtually every
aspect of the Company's business. The Company's computer systems and
interfaces with the computer systems of vendors, suppliers, customers and
business partners are particularly vulnerable. The inability to properly
recognize date sensitive electronic information and transfer data between
systems could cause errors or even a complete systems failure which would
result in a temporary inability to process transactions correctly and engage
in normal business
S-29
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
16. IMPACT OF YEAR 2000 (UNAUDITED) (CONTINUED)
activities. The Company is redirecting a large portion of its internal
information technology efforts and contracting with outside consultants to
update its systems to accommodate the year 2000. Also, the Company has
initiated formal communications with critical parties that interface with
the Company's systems to gain an understanding of their progress in
addressing Year 2000 Issues. While the Company is making every effort to
address its own systems and the systems with which it interfaces, it is not
possible to provide assurance that operational problems will not occur. The
Company presently believes that with the modification of existing computer
systems, updates by vendors and conversion to new software and hardware, the
Year 2000 Issue will not pose significant operational problems for its
computer systems. In addition, the Company is developing contingency plans
in the event that, despite its best efforts, there are unresolved year 2000
problems. If the remediation efforts noted above are not completed timely or
properly, the Year 2000 Issue could have a material adverse impact on the
operation of the Company's business.
During 1997 and 1996, the Company incurred expenditures of approximately
$5,500,000 ($3,600,000 after-tax) to address this issue. The Company's
financial plans for 1998 through 2000 include expected expenditures of an
additional $20,000,000 ($13,000,000 after-tax) on this issue. The cost of
addressing Year 2000 Issues and the timeliness of completion will be closely
monitored by management and are based on managements's current best
estimates which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third
party modification plans and other factors. Nevertheless, there can be no
guarantee that these estimated costs will be achieved and actual results
could differ significantly from those anticipated. Specific factors that
might cause such differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer problems and other uncertainties.
S-30
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The Lincoln National Life Insurance Company
We have audited the accompanying statutory-basis balance sheets
of The Lincoln National Life Insurance Company (a wholly owned
subsidiary of Lincoln National Corporation) as of December 31,
1997 and 1996, and the related statutory-basis statements of
income, changes in capital and surplus and cash flows for each
of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
As described in Note 1 to the financial statements, the Company
presents its financial statements in conformity with accounting
practices prescribed or permitted by the Indiana Department of
Insurance, which practices differ from generally accepted
accounting principles. The variances between such practices and
generally accepted accounting principles and the effects on the
accompanying financial statements are also described in Note 1.
In our opinion, because of the effects of the matter described
in the preceding paragraph, the financial statements referred to
above do not present fairly, in conformity with generally
accepted accounting principles, the financial position of The
Lincoln National Life Insurance Company at December 31, 1997 and
1996, or the results of its operations or its cash flows for
each of the three years in the period ended December 31, 1997.
However, in our opinion, the financial statements referred to
above present fairly, in all material respects, the financial
position of The Lincoln National Life Insurance Company at
December 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with accounting practices
prescribed or permitted by the Indiana Department of Insurance.
[LOGO]
February 5, 1998
S-31
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA
DECEMBER 31, 1997 (IN MILLIONS)
<TABLE>
<S> <C> <C>
Investment income earned:
Government bonds $ 52.8
------------------------------------------------------------
Other bonds (unaffiliated) 1,471.6
------------------------------------------------------------
Preferred stocks (unaffiliated) 23.5
------------------------------------------------------------
Common stocks (unaffiliated) 8.3
------------------------------------------------------------
Common stocks of affiliates 15.0
------------------------------------------------------------
Mortgage loans 257.2
------------------------------------------------------------
Real estate 92.2
------------------------------------------------------------
Premium notes, policy loans and liens 37.5
------------------------------------------------------------
Cash on hand and on deposit 1.0
------------------------------------------------------------
Short-term investments 69.3
------------------------------------------------------------
Other invested assets 21.9
------------------------------------------------------------
Derivative instruments (10.0)
------------------------------------------------------------
Aggregate write-ins for investment income 16.3
------------------------------------------------------------ --------
Gross investment income $2,056.6
- ----------------------------------------------------------------- --------
--------
Real estate owned (cost, less encumbrances) $ 585.2
- ----------------------------------------------------------------- --------
--------
Mortgage loans (unpaid balance):
Farm mortgages $ 0.1
------------------------------------------------------------
Residential mortgages 3.1
------------------------------------------------------------
Commercial mortgages 3,009.5
------------------------------------------------------------ --------
Total mortgage loans $3,012.7
- ----------------------------------------------------------------- --------
--------
Mortgage loans by standing (unpaid balance):
Good standing $2,974.1
------------------------------------------------------------ --------
--------
Good standing with restructured terms $ 38.5
------------------------------------------------------------ --------
--------
Interest overdue more than three months, not in foreclosure $ --
------------------------------------------------------------ --------
--------
Foreclosure in process $ 0.1
------------------------------------------------------------ --------
--------
Other long-term assets (statement value) $ 281.5
- ----------------------------------------------------------------- --------
--------
</TABLE>
S-32
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA (CONTINUED)
DECEMBER 31, 1997 (IN MILLIONS)
<TABLE>
<S> <C>
Bonds and stocks of parent, subsidiaries and affiliates (cost):
Common stocks of subsidiaries $ 466.2
- ---------------------------------------------------------------------------------
-----------
Bonds and short-term investments by class and maturity:
Bonds by maturity (statement value):
Due within one year or less $ 3,140.1
- ----------------------------------------------------------------------
Over 1 year through 5 years 5,182.8
- ----------------------------------------------------------------------
Over 5 years through 10 years 5,772.8
- ----------------------------------------------------------------------
Over 10 years through 20 years 3,275.3
- ----------------------------------------------------------------------
Over 20 years 3,270.6
- ----------------------------------------------------------------------
-----------
Total by maturity $20,641.6
- ----------------------------------------------------------------------
-----------
-----------
Bonds by class (statement value):
Class 1 $13,879.0
- ----------------------------------------------------------------------
Class 2 5,215.6
- ----------------------------------------------------------------------
Class 3 848.0
- ----------------------------------------------------------------------
Class 4 668.8
- ----------------------------------------------------------------------
Class 5 23.6
- ----------------------------------------------------------------------
Class 6 6.6
- ----------------------------------------------------------------------
-----------
Total by class $20,641.6
- ----------------------------------------------------------------------
-----------
-----------
Total bonds publicly traded $16,457.1
- ---------------------------------------------------------------------------------
-----------
Total bonds privately placed $ 4,184.5
- ---------------------------------------------------------------------------------
-----------
Preferred stocks (statement value) $ 257.3
- ---------------------------------------------------------------------------------
-----------
Unaffiliated common stocks (market value) $ 436.0
- ---------------------------------------------------------------------------------
-----------
Short-term investments (cost or amortized cost) $ 2,080.9
- ---------------------------------------------------------------------------------
-----------
Financial options and caps owned (statement value) $ 20.8
- ---------------------------------------------------------------------------------
-----------
Financial options and caps written (statement value) $ --
- ---------------------------------------------------------------------------------
-----------
Swap and forward agreements open (statement value) $ 5.4
- ---------------------------------------------------------------------------------
-----------
Futures contracts open (current value) $ --
- ---------------------------------------------------------------------------------
-----------
Cash on deposit $ 52.1
- ---------------------------------------------------------------------------------
-----------
Life insurance in-force:
Ordinary $ 108.6
- ----------------------------------------------------------------------
-----------
-----------
Group life $ 31.2
- ----------------------------------------------------------------------
-----------
-----------
</TABLE>
S-33
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA (CONTINUED)
DECEMBER 31, 1997 (IN MILLIONS)
<TABLE>
<S> <C>
Amount of accidental death insurance in-force under ordinary policies $ 5.3
- ---------------------------------------------------------------------- ---------
---------
Life insurance policies with disability provisions in-force:
Ordinary $ 5.5
- ---------------------------------------------------------------------- ---------
---------
Group life $ --
- ---------------------------------------------------------------------- ---------
---------
Supplementary contracts in-force:
Ordinary -- not involving life contingencies:
Amount on deposit $ --
- ---------------------------------------------------------------------- ---------
---------
Income payable $ 0.8
- ---------------------------------------------------------------------- ---------
---------
Ordinary -- involving life contingencies:
Income payable $ 3.0
- ---------------------------------------------------------------------- ---------
---------
Group -- not involving life contingencies:
Income payable $ 1.1
- ---------------------------------------------------------------------- ---------
---------
Group -- involving life contingencies:
Income payable $ --
- ---------------------------------------------------------------------- ---------
---------
Annuities:
Ordinary:
Immediate -- amount of income payable $ 71.8
- ---------------------------------------------------------------------- ---------
---------
Deferred -- fully paid account balance $ 0.7
- ---------------------------------------------------------------------- ---------
---------
Deferred -- not fully paid account balance $ 264.0
- ---------------------------------------------------------------------- ---------
---------
Group:
Amount of income payable $ 0.3
- ---------------------------------------------------------------------- ---------
---------
Fully paid account balance $ 0.1
- ---------------------------------------------------------------------- ---------
---------
Not fully paid account balance $ 72.3
- ---------------------------------------------------------------------- ---------
---------
Accident and health insurance -- premiums in-force:
Ordinary $ 166.0
- ---------------------------------------------------------------------- ---------
---------
Group $ 77.7
- ---------------------------------------------------------------------- ---------
---------
Deposit funds and dividend accumulations:
Deposit funds account balance $16,507.3
- ---------------------------------------------------------------------- ---------
---------
Dividend accumulations -- account balance $ 114.4
- ---------------------------------------------------------------------- ---------
---------
</TABLE>
S-34
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTE TO SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA
NOTE -- BASIS OF PRESENTATION
The accompanying schedule presents selected statutory-basis
financial data as of December 31, 1997 and for the year then
ended for purposes of complying with paragraph 9 of the Annual
Audited Financial Reports in the General Section of the National
Association of Insurance Commissioners' Annual Statement
Instructions and agrees to or is included in the amounts
reported in The Lincoln National Life Insurance Company's 1997
Statutory Annual Statement as filed with the Indiana Department
of Insurance.
S-35
<PAGE>
REPORT OF INDEPENDENT AUDITORS ON
OTHER FINANCIAL INFORMATION
Board of Directors
The Lincoln National Life Insurance Company
Our audits were conducted for the purpose of forming an opinion
on the statutory-basis financial statements taken as a whole.
The accompanying supplemental schedule of selected statutory
basis financial data is presented to comply with the National
Association of Insurance Commissioners' Annual Statement
Instructions and is not a required part of the statutory-basis
financial statements. Such information has been subjected to the
auditing procedures applied in our audit of the statutory-basis
financial statements and, in our opinion, is fairly stated in
all material respects in relation to the statutory-basis
financial statements taken as a whole.
[LOGO]
February 5, 1998
S-36
<PAGE>
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) Part B Not Applicable.
(3) Part B TO BE FILED BY AMENDMENT
24 (b) LIST OF EXHIBITS
(1) Resolution of the Board of Directors of the Lincoln National Life
Insurance Company establishing Separate Account C is
incorporated herein by reference to Registration Statement on
Form N-4 (File No. 33-25990) filed on April 22, 1998.
(2) None.
(3) Not Applicable.
(4) Variable annuity contract.
(5) Application.
(6) (a) Articles of Incorporation of Lincoln National Life Insurance
Company are hereby incorporated by reference to Registration
Statement on Form S-6 (333-40745) filed November 21, 1997.
(b) Bylaws of Lincoln National Life Insurance Company are hereby
incorporated by reference to Registration Statement on
Form S-6 (333-40745) filed on November 21, 1997.
(7) Not applicable.
(8) (a) Services Agreement between Delaware Management Holdings,
Inc., Delaware Service Company, Inc. and Lincoln National
Life Insurance Company is incorporated herein by reference
to the Registration Statement on Form S-6 (333-40745)
filed on November 21, 1997.
(b) Form of Services Agreement between Twentieth Century
Securities, Inc. and Lincoln National Life Insurance
Company.
(c) Services Agreement between BT Insurance Funds Trust,
Bankers Trust Company, and Lincoln National Life
Insurance Company.
(d) Services Agreement between Janus Aspen Series and Lincoln
National Life Insurance Company.
(e) Services Agreement between Neuberger&Berman Advisers
Management Trust, Advisers Managers Trust,
Neuberger&Berman Management Incorporation and Lincoln
National Life Insurance Company.
(f) Services Agreement between Baron Capital Funds Trust,
Baron Capital, Inc. and Lincoln National Life Insurance
Company.
(9) Opinion and Consent of Mary Jo Ardington, Counsel*
(10) Consent of Ernst & Young LLP, Independent Auditors*
(11) Not applicable.
(12) Not applicable.
(13) Schedule of Computation*
(14) Not applicable.
(15) (a) Organizational Chart of Lincoln National Life Insurance
Holding Company System
(b) Memorandum Concerning Books and Records*
<PAGE>
Item 25.
- --------
DIRECTORS AND OFFICERS OF THE DEPOSITOR
<TABLE>
<CAPTION>
Positions and Offices with Lincoln National
Name Life Insurance Company
- ---- ----------------------
<S> <C>
Ian M. Rolland** Director
Jon A. Boscia* and Director
Carolyn P. Brody* Vice President
Thomas L. Clagg* Vice President and Associate General Counsel
Kelly D. Clevenger* Vice President
Jeffrey K. Dellinger* Vice President
Jack D. Hunter** Executive Vice President and General Counsel
Donald E. Keller* Vice President
H. Thomas Mc Meekin** Director
Reed P. Miller* Vice President
Stephen H. Lewis* Senior Vice President
Lawrence T. Rowland*** Executive Vice President
Keith J. Ryan* Senior Vice President, Asst. Treasurer and Chief Financial Officer
Gabriel L. Shaheen* President, Chief Executive Officer and Director
Richard C. Vaughan** Director
Roy V. Washington* Vice President
Janet C. Whitney** Vice President and Treasurer
C. Suzanne Womack** Assistant Vice President and Secretary
</TABLE>
* Principal business address is 1300 South Clinton Street, Fort Wayne, Indiana
46802.
** Principal business address is 200 East Berry Street, Fort Wayne, Indiana
46802-2706.
*** Principal business address is 1700 Magnavox Way, One Reinsurance Place, Fort
Wayne, Indiana 46804.
Item 26.
- --------
PERSONS CONTROLLED BY OR UNDER COMMON
CONTROL WITH THE DEPOSITOR OR REGISTRANT
See Exhibit 15(a): The Organizational Chart of The Lincoln National
Insurance Holding Company System is hereby incorporated herein by this
reference.
Item 27.
- --------
NUMBER OF CONTRACT OWNERS
As of , 1998, there were Contract Owners under Account
C.
Item 28.
- - --------
INDEMNIFICATION--UNDERTAKING
(a) Brief description of indemnification provisions.
In general, Article VII of the By-Laws of The Lincoln National Life
Insurance Company (Lincoln Life) provides that Lincoln Life will
indemnify certain persons against expenses, judgments and certain other
specified costs incurred by any such person if he/she is made a party
or is threatened to be made a party to a suit or proceeding because
he/she was a director, officer, or employee of LNL, as long as he/she
acted in good faith and in a manner he/she reasonably believed to be in
the best
<PAGE>
interests of, or not opposed to the best interests of, Lincoln Life.
Certain additional conditions apply to indemnification in criminal
proceedings.
In particular, separate conditions govern indemnification of directors,
officers, and employees of Lincoln Life in connection with suits by,
or in the rights of, Lincoln Life.
Please refer to Article VII of the By-Laws of Lincoln Life (Exhibit No.
6(b) hereto) for the full text of the indemnification provisions.
Indemnification is permitted by, and is subject to the requirements of,
Indiana law.
(b) Undertaking pursuant to Rule 484 of Regulation C under the Securities
Act of 1933:
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions described in Item
28(a) above or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
<PAGE>
such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the
Registrant in the successful defense of any such action, suit or
proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Item 29.
- --------
PRINCIPAL UNDERWRITER
(a) Lincoln National Variable Annuity Fund A (Group); Lincoln National
Variable Annuity Fund A (Individual); Lincoln Life Flexible Premium
Variable Life Account D; Lincoln National Variable Annuity Account E;
Lincoln Life Flexible Premium Variable Life Account F; Lincoln
Life 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 Lincoln National Life
Insurance Company from Account C during the fiscal year which ended
December 31, 1997:
<PAGE>
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Net Underwriting
Name of Principal Discounts and Compensation Brokerage
Underwriter Commissions on Redemption Commissions Compensation
----------- ----------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
The Lincoln National
Life Insurance a b
Company None None None None
</TABLE>
Notes:
(a) These figures represent compensation received by Lincoln National Life
Insurance Company for surrender, withdrawal and contract charges. See Charges
and other deductions, in the Prospectus.
(b) These figures represent compensation received by Lincoln National Life
Insurance Company for mortality and expense guarantees. See Charges and other
deductions, in the Prospectus.
Item 30.
- --------
LOCATION OF ACCOUNTS AND RECORDS
Exhibit 15(b) is hereby expressly incorporated herein by this reference.
(TO BE FILED BY AMENDMENT.)
Item 31.
- --------
Item 32. Undertakings
- --------
(a) Registrant undertakes that it will file a post-effective amendment to this
registration statement as frequently as necessary to ensure that the
audited financial statements in the registration statement are never more
than 16 months old for so long as payments under the variable annuity
contracts may be accepted.
(b) Registrant undertakes that it will include either (1) as part of any
application to purchase a Certificate or an Individual Contract offered by
the Prospectus, a space that an applicant can check to request a Statement
of Additional Information, or (2) a post cared or similar written
communication affixed to or included in the Prospectus that the applicant
can remove to send for a Statement of Additional Information.
(c) Registrant undertakes to deliver any Statement of Additional Information
and any financial statement required to be made available under this Form
promptly upon written or oral request to Lincoln Life at the address or
phone number listed in the Prospectus.
(d) The Lincoln National Life Insurance company hereby represents that the fees
and charges deducted under the contract, in the aggregate, are reasonable
in relation to the services rendered, the expenses expected to be incurred,
and the risks assumed by The Lincoln National Life Insurance Company.
<PAGE>
SIGNATURES
(a) As required by the Securities Act of 1933 and the Investment Company
Act of 1940, the Registrant certifies that it meets the requirements of
Securities Act Rule 485(b) for effectiveness of this Amendment and has caused
this Amendment to the Registration Statement to be signed on its behalf, in the
City of Fort Wayne and the State of Indiana on this 1st day of March, 1999.
LINCOLN NATIONAL VARIABLE ANNUITY
Account C (Registrant) - (e-Annuity)
By:
-----------------------------
Stephen H. Lewis
Senior Vice President, LNL
By: THE LINCOLN NATIONAL LIFE
INSURANCE COMPANY
(Depositor)
By:
-----------------------------
Gabriel L. Shaheen
Chief Executive Officer and President
(b) As required by the Securities Act of 1933, this Amendment to the
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
- ------------------------- Chief Executive Officer, March ___ , 1999
Gabriel L. Shaheen President & Director
(Principal Executive Officer)
- ------------------------- Executive Vice President March ___, 1999
Lawrence T. Rowland and Director
- ------------------------- Senior Vice President, Chief March ___, 1999
Keith J. Ryan Financial Officer and Assistant
Treasurer (Principal Accounting
Officer and Principal Financial
Officer)
- ------------------------- Director March ___, 1999
Jon A. Boscia
- ------------------------- Director March ___, 1999
H. Thomas McMeekin
- ------------------------- Director March ___, 1999
Richard C. Vaughan
<PAGE>
EXHIBIT INDEX
(4) Variable Annuity Contract
(5) (a) Application
(15)
(a) Organizational Chart of The Lincoln National Life Insurance
Holding Company System
<PAGE>
FORM OF
FUND PARTICIPATION AGREEMENT
THIS FUND PARTICIPATION AGREEMENT is made and entered into as of
September , 1996 by and between LINCOLN NATIONAL LIFE INSURANCE COMPANY (the
"Company") and TWENTIETH CENTURY SECURITIES, INC. (the "Distributor").
WHEREAS, the Company offers to the public certain group variable annuity
contracts and group variable life insurance contracts (the "Contracts"); and
WHEREAS, the Company wishes to offer as investment options under the
Contracts, TCI Balanced and TCI Growth (the "Funds"), both of which are a series
of mutual fund shares registered under the Investment Company Act of 1940, as
amended, and issued by TCI Portfolios, Inc. (the "Issuer"); and
WHEREAS, on the terms and conditions hereinafter set forth, Distributor and
the Issuer desire to make shares of the Funds available as investment options
under the Contracts and to retain the Company to perform certain administrative
services on behalf of the Funds;
WHEREAS, the Funds are open-end management investment companies that were
established for the purpose of serving as the investment vehicles for separate
accounts established for variable life insurance policies and variable annuity
contracts (collectively referred to as "Variable Insurance Products", the owners
of such products being referred to as "Product Owners") to be offered by
insurance companies which have entered into participation agreements with the
Fund ("Participating Insurance Companies"); and
WHEREAS, the Issuer filed with the Securities and Exchange Commission (the
"SEC") and the SEC has declared effective a registration statement (referred to
herein as the "Fund Registration Statement" and the prospectus contained
therein, or filed pursuant to Rule 497 under the 1933 Act, referred to herein as
the "Fund Prospectus") on Form N-1A to register itself as an open-end management
investment company (File No. 40-811-5188) under the Investment Company Act of
1940, as amended (the "1940 Act"), and the Fund shares (File No. 33-14567) under
the Securities Act of 1933, as amended (the "1933 Act"); and
WHEREAS, the Company has filed a registration statement with the SEC to
register under the 1933 Act certain variable annuity contracts described in
Schedule A to this Agreement as in effect at the time this Agreement is executed
and such other variable annuity contracts and variable life insurance policies
which may be added to Schedule A from time to time (such policies and contracts
shall be referred to herein collectively as the "Contracts," each such
registration statement for a class or classes of contracts listed on Schedule A
being referred to as the "Contracts Registration Statement" and the prospectus
for each such class or classes being referred to herein as the "Contracts
Prospectus; and
1
<PAGE>
WHEREAS, each Account (defined in SECTION 7(a) below), a validly existing
separate account, duly authorized by resolution of the Board of Directors of the
Company, set forth on Schedule B sets aside and invests assets attributable to
the Contracts; and
WHEREAS, the Company has registered or will have registered each Account with
the SEC as a unit investment trust under the 1940 Act before any Contracts are
issued by that Account; and
WHEREAS, the Distributor is registered as a broker-dealer with the SEC under
the Securities Exchange Act of 1934, as amended (the "1934 Act"), and is a
member in good standing of the National Association of Securities Dealers, Inc.
(the "NASD"); and
WHEREAS, the Distributor and the Issuer have entered into an agreement (the
"Distribution Agreement") pursuant to which the Distributor will distribute Fund
shares; and
WHEREAS, Investors Research Corporation (the "Investment Advisor") is
registered as an investment adviser under the 1940 Act and any applicable state
securities laws and serves as an investment manager to the Issuer and the Funds
pursuant to an agreement; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase Fund shares on behalf of each
Account to fund its Contracts and the Distributor is authorized to sell such
Fund shares to purchasers such as the Accounts at net asset value;
NOW, THEREFORE, the Company and Distributor agree as follows:
1. TRANSACTIONS IN THE FUNDS. Subject to the terms and conditions of this
Agreement, the Distributor will cause the Issuer to make shares of the Funds
available to be purchased, exchanged, or redeemed, by the Company on behalf of
the Accounts through a single account per Fund at the net asset value applicable
to each order. The Funds' shares shall be purchased and redeemed on a net basis
in such quantity and at such time as determined by the Company to satisfy the
requirements of the Contracts for which the Funds serve as underlying investment
media. Dividends and capital gains distributions will be automatically
reinvested in full and fractional shares of the Funds.
2. ADMINISTRATIVE SERVICES. The Company shall be solely responsible for
providing all administrative services for the Contract owners. The Company
agrees that it will maintain and preserve all records as required by law to be
maintained and preserved, and will otherwise comply with all laws, rules and
regulations applicable to the marketing of the Contracts and the provision of
administrative services to the Contract owners.
2
<PAGE>
3. TIMING OF TRANSACTIONS.
Distributor hereby appoints the Company as its agent and/or agent for the
Funds for the limited purpose of accepting purchase and redemption orders for
Fund shares from the Accounts and/or Contract Owners, as applicable. On each day
the New York Stock Exchange (the "Exchange") is open for trading (each, a
"Business Day"), the Company may receive instructions from the Accounts and/or
Contract Owners for the purchase or redemption of shares of the Funds
("Orders"). Orders received and accepted by the Company prior to the close of
regular trading on the Exchange (the "Close of Trading") on any given Business
Day (currently, 4:00 p.m. Eastern time) and transmitted to the Issuers by 10:00
a.m. Eastern time on the next following Business Day will be executed at the net
asset value determined as of the Close of Trading on the previous Business Day.
Any Orders received by the Company after the Close of Trading, and all Orders
that are transmitted to the Issuers after 10:00 a.m. Eastern time on the next
following Business Day, will be executed by the Issuers at the net asset value
next determined following receipt of such Order. The day as of which an Order is
executed by the Issuers pursuant to the provisions set forth above is referred
to herein as the "Trade Date".
4. PROCESSING OF TRANSACTIONS.
(a) By 7:00 p.m. Eastern time on each Business Day, Distributor will provide
to the Company, via facsimile or other electronic transmission acceptable to the
Company, the Funds' net asset value, dividend and capital gain information and,
in the case of income funds, the daily accrual for interest rate factor (mil
rate), determined at the Close of Trading.
(b) By 10:00 a.m. Eastern time on each Business Day, the Company will provide
to Distributor via facsimile or other electronic transmission acceptable to
Distributor a report stating whether the Orders received by the Company from
Contract Owners by the Close of Trading on the preceding Business Day resulted
in the Accounts being a net purchaser or net seller of shares of the Funds. As
used in this Agreement, the phrase "other electronic transmission acceptable to
Distributor" includes the use of remote computer terminals located at the
premises of the Company, its agents or affiliates, which terminals may be linked
electronically to the computer system of Distributor, its agents or affiliates
(hereinafter, "Remote Computer Terminals").
(c) Upon the timely receipt from the Company of the report described in (b)
above, the Funds' transfer agent will execute the purchase or redemption
transactions (as the case may be) at the net asset value computed as of the
Close of Trading on the Trade Date. Payment for net purchase transactions shall
be made by wire transfer to the applicable Fund custodial account designated by
the Distributor on the Business Day next following the Trade Date. Such wire
transfers shall be initiated by the Company's bank prior to 4:00 p.m. Eastern
time and received by the Funds prior to 6:00 p.m. Eastern time on the Business
Day next following the Trade Date ("T + 1"). If payments for a purchase Order is
not timely received, such Order will be executed at the net asset value next
computed
3
<PAGE>
following receipt of payment. Payments for net redemption transactions shall be
made by wire transfer by the Issuers to the account designated by the Company on
T + 1;
PROVIDED, HOWEVER, the Issuer reserves the right to settle redemptions
transactions within the time period set forth in the applicable Fund's
then-current prospectus. On any Business Day when the Federal Reserve Wire
Transfer System is closed, all communication and processing rules will be
suspended for the settlement of Orders. Orders will be settled on the next
Business Day on which the Federal Reserve Wire Transfer System is open and the
original Trade Date will apply.
5. PROSPECTUS, PROXY MATERIALS AND OTHER INFORMATION
(a) Distributor shall provide the Company with copies of the Issuer's proxy
materials, periodic fund reports to shareholders and other materials that are
required by law to be sent to the Issuer's shareholders. In addition,
Distributor shall provide the Company with a sufficient quantity of prospectuses
and Statements of Additional Information of the Funds to be used in conjunction
with the transactions contemplated by this Agreement, together with such
additional copies of the Issuer's prospectuses and Statements of Additional
Information as may be reasonably requested by Company. If the Company provides
for pass-through voting by the Contract owners, Distributor will provide the
Company with a sufficient quantity of proxy materials for each Contract owner.
(b) The cost of preparing, printing and shipping of the prospectuses,
proxy materials, periodic fund reports and other materials of the Issuer to
the Company shall be paid by Distributor or its agents or affiliates;
PROVIDED, HOWEVER, that if at any time Distributor or its agent reasonably
deems the usage by the Company of such items to be excessive, it may, prior
to the delivery of any quantity of materials in excess of what is deemed
reasonable, request that the Company demonstrate the reasonableness of such
usage. If the Distributor believes the reasonableness of such usage has not
been adequately demonstrated, it may request that the Company pay the cost of
printing (including press time) and delivery of any excess copies of such
materials. Unless the Company agrees to make such payments, Distributor may
refuse to supply such additional materials and Distributor shall be deemed in
compliance with this SECTION 5 if it delivers to the Company at least the
number of prospectuses and other materials as may be required by the Issuers
under applicable law.
(c) The cost of distribution, if any, of any prospectuses, proxy materials,
periodic fund reports and other materials of the Issuer to the Contract owners
shall be paid by the Company and shall not be the responsibility of Distributor
or the Issuer.
(d) The Fund shall not give any information or make any representations on
behalf of the Company or concerning the Company, the Account or the Contracts
other than the information or representations contained in the Contracts
Registration Statement or Contracts Prospectus, as such Registration Statement
and Prospectus may be amended or
4
<PAGE>
supplemented from time to time, or in published reports of the Account which are
in the public domain or approved in writing by the Company for distribution to
Contract owners, or in sales literature or other promotional material, except
with the prior written permission of the Company. The Company agrees to respond
to any request for permission on a prompt and timely basis. If the Company fails
respond within 10 days of a request by the Fund or the Distributor, then the
Fund is relieved of the obligation to obtain the prior written permission of the
Company.
(e) For purposes of this SECTION 5, the phrase "sales literature or other
promotional material" includes, but is not limited to, advertisements (such
as material published, or designed for use, in a newspaper, magazine or other
periodical, radio, television, telephone or tape recording, videotape
display, computer net site, signs or billboards, motion pictures or other
public media), sales literature (I.E., any written communication distributed
or made generally available to customers or the public, in print or
electronically, including brochures, circular, research reports, market
letters, form letters, seminar texts, or reprints or excerpts of any other
advertisement, sales literature, or published article), educational or
training materials or other communications distributed or made generally
available to some or all agents or employees, registration statements,
prospectuses, Statements of Additional Information, shareholder reports and
proxy materials, and any other material constituting sales literature or
advertising under NASD rules, the 1940 Act or the 1933 Act.
6. COMPENSATION AND EXPENSES.
(a) The Accounts shall be the sole shareholder of Fund shares purchased for
the Contract owners pursuant to this Agreement (the "Record Owners"). The
Company and the Record Owners shall properly complete any applications or other
forms required by Distributor or the Issuer from time to time.
(b) Distributor acknowledges that it will derive a substantial savings in
administrative expenses, such as a reduction in expenses related to postage,
shareholder communications and recordkeeping, by virtue of having a single
shareholder account per Fund for the Accounts rather than having each Contract
owner as a shareholder. In consideration of the Administrative Services and
performance of all other obligations under this Agreement by the Company,
Distributor will pay the Company a fee (the "Administrative Services fee") equal
to 20 basis points (0.20%) per annum of the average aggregate amount invested by
the Company under this Agreement. Distributor's obligation shall be suspended
with respect to any month during which the Company's average aggregate
investment in the Funds drops below $10 million. Notwithstanding the above, if
the Company's average investment in a single Fund during a month exceeds $5
million, Distributor will pay the Company the Administrative Services Fee with
respect to all amounts invested in such Fund. If the Company's investment in
such Fund drops below $5 million, the Distributor's obligation to pay the
Administrative Services Fee shall be suspended until the Company's average
investment in the Fund exceeds $5 million or
5
<PAGE>
average aggregate investment in the Funds exceeds $10 million. For purposes of
Section 6(b), First UNUM/UNUM assets in the Fund will be included in determining
the threshold.
(c) The payments received by the Company under this Agreement are for
administrative and shareholder services only and do not constitute payment in
any manner for investment advisory services or for costs of distribution.
(d) For the purposes of computing the payment to the Company contemplated by
this SECTION 6, the average aggregate amount invested by the Accounts in the
Funds over a one month period shall be computed by totaling the Company's
aggregate investment (share net asset value multiplied by total number of shares
of the Funds held by the Company) on each Business Day during the month and
dividing by the total number of Business Days during such month.
(e) Distributor will calculate the amount of the payment to be made pursuant
to this SECTION 6 at the end of each calendar quarter and will make such payment
to the Company within 30 days thereafter. The check for such payment will be
accompanied by a statement showing the calculation of the amounts being paid by
Distributor for the relevant months and such other supporting data as may be
requested by the Company and shall be mailed to:
Lincoln National Life Insurance Company
1300 South Clinton Street
Ft. Wayne, Indiana 46802
Attention: Kelly D. Clevenger
(f) In the event Distributor reduces its management fee with respect to any
Fund after the date hereof, Distributor may amend the Administrative Services
fee payable with regard to such Fund by providing the Company 30 days' advance
written notice of any such adjustment. The revised Administrative Services fee
shall become effective as of the latter of 30 days from the date of delivery of
the notice or the date prescribed in the notice.
7. REPRESENTATIONS AND WARRANTIES.
(a) The Company represents and warrants that: (i) this Agreement has been
duly authorized by all necessary corporate action and, when executed and
delivered, shall constitute the legal, valid and binding obligation of the
Company, enforceable in accordance with its terms; (ii) it has established the
Separate Accounts listed on Schedule B (the "Accounts"), each of which is a
separate account under the Indiana Insurance law, and has registered each
Account as a unit investment trust under the Investment Company Act of 1940 (the
"1940 Act") to serve as an investment vehicle for the Contracts; (iii) each
Contract provides for the allocation of net amounts received by the
6
<PAGE>
Company to an Account for investment in the shares of one of more specified
investment companies selected among those companies available through the
Account to act as underlying investment media; (iv) selection of a particular
investment company is made by the Contract owner under a particular Contract,
who may change such selection from time to time in accordance with the terms
of the applicable Contract; and (v) the activities of the Company
contemplated by this Agreement comply with all provisions of federal and
state insurance, securities, and tax laws applicable to such activities.
(b) Distributor represents and warrants that: (i) this Agreement has been
duly authorized by all necessary corporate action and, when executed and
delivered, shall constitute the legal, valid and binding obligation of
Distributor, enforceable in accordance with its terms; and (ii) the investments
of the Funds will at all times be adequately diversified within the meaning of
Section 817(h) of the Internal Revenue Service Code of 1986, as amended (the
"Code"), and the regulations thereunder, and that at all times while this
Agreement is in effect, all beneficial interests in each of the Funds will be
owned by one or more insurance companies or by any other party permitted under
Section 1.817-5(f)(3) of the Regulations promulgated under the Code; and (iii)
each Fund currently qualifies as a Regulated Investment Company under Subchapter
M of the Internal Revenue Code of 1986, as amended (the "Code"). The Distributor
further represents and warrants that it will cause the Funds to continue to
qualify and to maintain such qualification (under Subchapter M or any successor
or similar provision), and that it will notify the Company immediately upon
having a reasonable basis for believing that it has ceased to so qualify or that
it might not so qualify in the future and (iv) that Distributor is registered as
a Broker/Dealer under the Securities and Exchange Act of 1934.
(c) The Fund represents and warrants that Fund shares sold pursuant to this
Agreement shall be registered under the 1933 Act and duly authorized for
issuance in accordance with applicable law and that the Fund is and shall remain
registered under the 1940 Act for so long as the Fund shares are sold. The Fund
further represents and warrants that it is a corporation duly organized and in
good standing under the laws of Maryland.
(d) The Fund represents and warrants that the Fund's investment policies,
fees and expenses, and operations are and shall at all times remain in material
compliance with the laws of the state of Maryland, to the extent required to
perform this Agreement.
(e) The Fund represents and warrants that it has and maintains a fidelity
bond in accordance with Rule 17g-1 under the 1940 Act. The Fund will immediately
notify the Company in the event the fidelity bond coverage should lapse at any
time.
8. ADDITIONAL COVENANTS AND AGREEMENTS
(a) Each party shall comply with all provisions of federal and state laws
applicable to its respective activities under this Agreement. All obligations of
each party under this Agreement are subject to compliance with applicable
federal and state laws.
7
<PAGE>
(b) Each party shall promptly notify the other parties in the event that it
is, for any reason, unable to perform any of its obligations under this
Agreement.
(c) The Company covenants and agrees that all Orders accepted and transmitted
by it hereunder with respect to each Account on any Business Day will be based
upon instructions that it received from the Contract owners in proper form prior
to the Close of Trading of the Exchange on that Business Day. The Company shall
time stamp all Orders or otherwise maintain records that will enable the Company
to demonstrate compliance with SECTION 8(c) hereof.
(d) The Company covenants and agrees that all Orders transmitted to the
Issuers, whether by telephone, telecopy, or other electronic transmission
acceptable to Distributor, shall be sent by or under the authority and
direction of a person designated by the Company as being duly authorized to
act on behalf of the owner of the Accounts. Absent actual knowledge to the
contrary, Distributor shall be entitled to rely on the existence of such
authority and to assume that any person transmitting Orders for the purchase,
redemption or transfer of Fund shares on behalf of the Company is "an
appropriate person" as used in Sections 8-308 and 8-404 of the Uniform
Commercial Code with respect to the transmission of instructions regarding
Fund shares on behalf of the owner of such Fund shares. The Company shall
maintain the confidentiality of all passwords and security procedures issued,
installed or otherwise put in place with respect to the use of Remote
Computer Terminals and assumes full responsibility for the security therefor.
The Company further agrees to be responsible for the accuracy, propriety and
consequences of all data transmitted to Distributor by the Company by
telephone, telecopy or other electronic transmission acceptable to
Distributor.
(e) The Company agrees to make every reasonable effort to market its
Contracts. It will use its best efforts to give equal emphasis and promotion to
shares of the Funds as is given to other underlying investments of the Accounts.
(f) The Company shall not, without the written consent of Distributor, make
representations concerning the Issuer or the shares of the Funds except those
contained in the then-current prospectus and in current printed sales literature
approved by Distributor or the Issuer.
(g) Advertising and sales literature with respect to the Issuer or the Funds
prepared by the Company or its agents, if any, for use in marketing shares of
the Funds as underlying investment media to Contract owners shall be submitted
to Distributor for review and approval before such material is used. Failure by
Distributor to respond within 10 Business Days of the request by the Company
shall relieve the Company of the obligation to obtain prior approval of
Distributor.
(h) The Company will provide to Distributor at least one complete copy of all
registration statements, prospectuses, statements of additional information,
annual and
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<PAGE>
semi-annual reports, proxy statements, and all amendments or supplements to any
of the above that include a description of or information regarding the Funds
promptly after the filing of such document with the SEC or other regulatory
authority.
(i) Each party will comply with reasonable requests for information and
documents regarding the Funds or the other party's compliance with its
obligations under this Agreement made by the other party, by the Fund's Board of
Directors or by any appropriate governmental entity or self regulatory
organization.
9. USE OF NAMES. Except as otherwise expressly provided for in this
Agreement, neither Distributor nor the Funds shall use any trademark, trade
name, service mark or logo of the Company, or any variation of any such
trademark, trade name, service mark or logo, without the Company's prior
written consent, the granting of which shall be at the Company's sole option.
Except as otherwise expressly provided for in this Agreement, the Company
shall not use any trademark, trade name, service mark or logo of the Issuer
or Distributor, or any variation of any such trademarks, trade names, service
marks, or logos, without the prior written consent of either the Issuer or
Distributor, as appropriate, the granting of which shall be at the sole
option of Distributor and/or the Issuer.
10. PROXY VOTING.
(a) The Company shall provide pass-through voting privileges to all Contract
owners so long as the SEC continues to interpret the 1940 Act as requiring such
privileges. It shall be the responsibility of the Company to assure that it and
the separate accounts of the other Participating Companies (as defined in
SECTION 12(a) below) participating in any Fund calculate voting privileges in a
consistent manner.
(b) The Company will distribute to Contract owners all proxy material
furnished by Distributor and will vote shares in accordance with instructions
received from such Contract owners. The Company shall vote Fund shares for which
no instructions have been received in the same proportion as shares for which
such instructions have been received. The Company shall not oppose or interfere
with the solicitation of proxies for Fund shares held for such Contract owners.
11. INDEMNITY.
11.1. INDEMNIFICATION BY THE COMPANY. The Company agrees to indemnify and
hold harmless the Fund, the Distributor and each person who controls or
is associated with the Fund (other than another Participating Insurance Company)
or the Distributor within the meaning of such terms under the federal securities
laws and any officer, trustee, director, employee or agent of the foregoing,
against any and all losses, claims, expenses, damages or liabilities, joint or
several (including any investigative, legal and other expenses reasonably
incurred in connection with, and any amounts paid
9
<PAGE>
in settlement of, any action, suit or proceeding or any claim asserted), to
which they or any of them may become subject under any statute or regulation, at
common law or otherwise, insofar as such losses, claims, expenses, damages or
liabilities:
(a) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the Contracts Registration
Statement, Contracts Prospectus, sales literature or other promotional
material for the Contracts or the Contracts themselves (or any amendment or
supplement to any of the foregoing), or arise out of or are based upon the
omission or the alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading
in light of the circumstances in which they were made; provided that this
obligation to indemnify shall not apply if such statement or omission or such
alleged statement or alleged omission was made in reliance upon and in
conformity with information furnished in writing to the Company by the
Distributor (or a person authorized in writing to do so on behalf of the Fund
or the Distributor) for use in the Contracts Registration Statement,
Contracts Prospectus or in the Contracts or sales literature (or any
amendment or supplement) or otherwise for use in connection with the sale of
the Contracts or Fund shares; or
(b) arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact by or on behalf of the Company (other than
statements or representations contained in the Fund Registration Statement, Fund
Prospectus or sales literature or other promotional material of the Fund not
supplied by the Company or persons under its control) or wrongful conduct of the
Company or persons under its control with respect to the sale or distribution of
the Contracts or Fund shares; or
(c) arise out of any untrue statement or alleged untrue statement of a
material fact contained in the Fund Registration Statement, Fund Prospectus or
sales literature or other promotional material of the Fund or any amendment
thereof or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances in which they
were made, if such statement or omission was made in reliance upon and in
conformity with information furnished to the Fund by or on behalf of the
Company; or
(d) arise as a result of any failure by the Company to provide the services
and furnish the materials or to make any payments under the terms of this
Agreement; or
(e) arise out of any material breach by the Company of this Agreement,
including but not limited to any failure to transmit a request for redemption or
purchase of Fund shares on a timely basis in accordance with the procedures set
forth in SECTION 3; or
(f) arise as a result of the Company's providing the Fund with inaccurate
information, which causes the Fund to calculate its Net Asset Values
incorrectly.
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<PAGE>
This indemnification will be in addition to any liability which the Company
may otherwise have; provided, however, that no party shall be entitled to
indemnification if such loss, claim, damage or liability is due to the willful
misfeasance, bad faith, gross negligence or reckless disregard of duty by the
party seeking indemnification.
11.2. INDEMNIFICATION BY THE DISTRIBUTOR. The Distributor agrees to
indemnify and hold harmless the Company and each person who controls or is
associated with the Company within the meaning of such terms under the federal
securities laws and any officer, director, employee or agent of the foregoing,
against any and all losses, claims, expenses, damages or liabilities, joint or
several (including any investigative, legal and other expenses reasonably
incurred in connection with, and any amounts paid in settlement of, any action,
suit or proceeding or any claim asserted), to which they or any of them may
become subject under any statute or regulation, at common law or otherwise,
insofar as such losses, claims, expenses, damages or liabilities:
(a) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the Fund Registration Statement,
Fund Prospectus (or any amendment or supplement thereto) or sales literature or
other promotional material of the Fund, or arise out of or are based upon the
omission or the alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading in
light of the circumstances in which they were made; provided that this
obligation to indemnify shall not apply if such statement or omission or alleged
statement or alleged omission was made in reliance upon and in conformity with
information furnished in writing by the Company to the Distributor or its
affiliates for use in the Fund Registration Statement, Fund Prospectus (or any
amendment or supplement thereto) or sales literature for the Fund or otherwise
for use in connection with the sale of the Contracts or Fund shares; or
(b) arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact made by the Distributor (other than statements or
representations contained in the Fund Registration Statement, Fund Prospectus or
sales literature or other promotional material of the Fund not supplied by the
Fund or persons under their control) or gross negligence, willful misfeasance
or bad faith of the Distributor or persons under its control with respect to the
sale or distribution of the Contracts or Fund shares; or
(c) arise out of any untrue statement or alleged untrue statement of a
material fact contained in the Contract's Registration Statement, Contract's
Prospectus or sales literature or other promotional material for the Contracts
(or any amendment or supplement thereto), or the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading in light of the circumstances in which
they were made, if such statement or omission was made in reliance upon
information furnished in writing by the Distributor to the Company (or a person
authorized in writing to do so on behalf of the Fund or the Distributor); or
11
<PAGE>
(d) arise as a result of any failure by the Distributor to provide the
services and furnish the materials under the terms of this Agreement (including,
but not by way of limitation, a failure, whether unintentional or in good faith
or otherwise; (i) to comply with the diversification requirements specified in
SECTION 7(b) of this Agreement; and (ii) to provide the Company with accurate
information sufficient for it to calculate its accumulation and/or annuity unit
values in timely fashion as required by law and by the this Agreement); or
(e) arise out of any material breach by the Distributor of this Agreement.
This indemnification will be in addition to any liability which the Fund
may otherwise have; provided, however, that no party shall be entitled to
indemnification if such loss, claim, damage or liability is due to the wilful
misfeasance, bad faith, gross negligence or reckless disregard of duty by the
party seeking indemnification.
11.3. INDEMNIFICATION PROCEDURES. After receipt by a party entitled to
indemnification ("indemnified party") under this SECTION 11 of notice of the
commencement of any action, if a claim in respect thereof is to be made by the
indemnified party against any person obligated to provide indemnification under
this SECTION 11 ("indemnifying party"), such indemnified party will notify the
indemnifying party in writing of the commencement thereof as soon as practicable
thereafter, provided that the omission to so notify the indemnifying party will
not relieve it from any liability under this SECTION 11, except to the extent
that the omission results in a failure of actual notice to the indemnifying
party and such indemnifying party is damaged solely as a result of the failure
to give such notice. The indemnifying party, upon the request of the indemnified
party, shall retain counsel reasonably satisfactory to the indemnified party to
represent the indemnified party and any others the indemnifying party may
designate in such proceeding and shall pay the fees and disbursements of such
counsel related to such proceeding. In any such proceeding, any indemnified
party shall have the right to retain its own counsel, but the fees and expenses
of such counsel shall be at the expense of such indemnified party unless (i) the
indemnifying party and the indemnified party shall have mutually agreed to the
retention of such counsel or (ii) the named parties to any such proceeding
(including any impleaded parties) include both the indemnifying party and the
indemnified party and representation of both parties by the same counsel would
be inappropriate due to actual or potential differing interests between them.
The indemnifying party shall not be liable for any settlement of any proceeding
effected without its written consent but if settled with such consent or if
there be a final judgment for the plaintiff, the indemnifying party agrees to
indemnify the indemnified party from and against any loss or liability by reason
of such settlement or judgment.
A successor by law of the parties to this Agreement shall be entitled to the
benefits of the indemnification contained in this SECTION 11. The
indemnification provisions contained in this SECTION 11 shall survive any
termination of this Agreement.
12
<PAGE>
12. POTENTIAL CONFLICTS.
(a) The Company has received a copy of an application for exemptive relief,
as amended, filed by Investors Research on December 12, 1987, with the SEC and
the order issued by the SEC in response thereto (the "Shared Funding Exemptive
Order"). The Company has reviewed the conditions to the requested relief set
forth in such application for exemptive relief. As set forth in such
application, the Board of Directors of the Issuer (the "Board") will monitor the
Issuer for the existence of any material irreconcilable conflict between the
interests of the contract owners of all separate accounts ("Participating
Companies") investing in funds of the Issuer. An irreconcilable material
conflict may arise for a variety of reasons, including: (i) an action by any
state insurance regulatory authority; (ii) a change in applicable federal or
state insurance, tax, or securities laws or regulations, or a public ruling,
private letter ruling, no-action or interpretative letter, or any similar
actions by insurance, tax or securities regulatory authorities; (iii) an
administrative or judicial decision in any relevant proceeding; (iv) the manner
in which the investments of any portfolio are being managed; (v) a difference in
voting instructions given by variable annuity contract owners and variable life
insurance contract owners; or (vi) a decision by an insurer to disregard the
voting instructions of contract owners. The Board shall promptly inform the
Company if it determines that an irreconcilable material conflict exists and the
implications thereof.
(b) The Company will report any potential or existing conflicts of which it
is aware to the Board. The Company will assist the Board in carrying out its
responsibilities under the Shared Funding Exemptive Order by providing the Board
with all information reasonably necessary for the Board to consider any issues
raised. This includes, but is not limited to, an obligation by the Company to
inform the Board whenever contract owner voting instructions are disregarded.
(c) If a majority of the Board, or a majority of its disinterested Board
members, determines that a material irreconcilable conflict exists with regard
to contract owner investments in a Fund, the Board shall give prompt notice to
all Participating Companies. If the Board determines that the Company is
responsible for causing or creating said conflict, the Company shall at its sole
cost and expense, and to the extent reasonably practicable (as determined by a
majority of the disinterested Board members), take such action as is necessary
to remedy or eliminate the irreconcilable material conflict. Such necessary
action may include but shall not be limited to (i) withdrawing the assets
allocable to the Accounts from the fund and reinvesting such assets in a
different investment medium or submitting the question of whether such
segregation should be implemented to a vote of all affected contract owners and
as appropriate, segregating the assets of any appropriate group (i.e., annuity
contract owners, life insurance contract owners, or variable contract owners of
one or more Participating Companies) that votes in favor of such segregation, or
offering to the affected contract owners the option of making such a change [and
(ii) establishing a new registered management investment company or managed
separate account.]
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<PAGE>
Nothing in this paragraph (c) shall be construed to waive any cause of action
which may be available to Company against any other Participating Insurance
Company or Companies, or against any other person or entity, in the event
Company determines in good faith that it (Company) is not responsible (or is not
solely responsible) for the material irreconcilable conflict.
(d) If a material irreconcilable conflict arises as a result of a decision by
the Company to disregard its contract owner voting instructions and said
decision represents a minority position or would preclude a majority vote by all
of its contract owners having an interest in the Issuer, the Company at its sole
cost, may be required, at the Board's election, to withdraw an Account's
investment in the Issuer and terminate this Agreement; provided, however, that
such withdrawal and termination shall be limited to the extent required by the
foregoing material irreconcilable conflict as determined by a majority of the
disinterested members of the Board.
(e) For the purpose of this SECTION 12, a majority of the disinterested Board
members shall determine whether or not any proposed action adequately remedies
any irreconcilable material conflict, but in no event will the Issuer be
required to establish a new funding medium for any Contract. The Company shall
not be required by this SECTION 12 to establish a new funding medium for any
Contract if an offer to do so has been declined by vote of a majority of the
Contract owners materially adversely affected by the irreconcilable material
conflict.
13. APPLICABLE LAW. This Agreement shall be subject to the provisions of
all applicable securities law, and the rules and regulations and rulings
thereunder, including such exemptions from those statutes, rules and regulations
as the SEC may grant, and the terms hereof shall be limited, interpreted and
construed in accordance therewith.
14. TERMINATION. This agreement shall terminate as to the sale and issuance
of new Contracts:
(a) at the option of either the Company, Distributor or the Issuer upon six
months' advance written notice to the other;
(b) at the option of the Company if the Fund's shares are not available for
any reason to meet the requirement of Contracts as determined by the Company.
Reasonable advance notice of election to terminate shall be furnished by
Company;
(c) at the option of either party upon institution of formal proceedings
against the other party or the Investment Advisor or and Sub-Investment Advisor
by the National Association of Securities Dealers, Inc. (the "NASD"), the SEC or
any other regulatory body which the terminating party reasonably believes will
result in a material harm to the terminating party or the Funds, the Accounts or
the Contract owners;
14
<PAGE>
(d) upon termination of the Management Agreement between the Issuer and
Investment Advisor or the Distribution Agreement between the Issuer and the
Distributor. Notice of such termination shall be promptly furnished to the
Company. This subsection (e) shall not be deemed to apply if contemporaneously
with such termination a new contract of substantially similar terms is entered
into between the Issuer and the Investment Advisor or between the Issuer and
Distributor;
(e) upon the requisite vote of Contract owners having an interest in the
Issuer to substitute for the Issuer's shares the shares of another investment
company in accordance with the terms of Contracts for which the Issuer's shares
had been selected to serve as the underlying investment medium. The Company will
give 60 days' written notice to the Issuer and Distributor of any proposed vote
to replace the Funds' shares;
(f) upon assignment of this Agreement unless made with the written consent of
all other parties hereto;
(g) if the Issuer's shares are not registered, issued or sold in conformance
with Federal law or such law precludes the use of Fund shares as an underlying
investment medium of Contracts issued or to be issued by the Company. Prompt
notice shall be given by either party should such situation occur;
(h) at the option of the Issuer, if the Issuer reasonably determines in good
faith that the Company is not offering shares of the Fund in conformity with the
terms of this Agreement or applicable law;
(i) at the option of any party hereto upon a determination that continuing to
perform under this Agreement would, in the reasonable opinion of the terminating
party's counsel, violate any applicable federal or state law, rule, regulation
or judicial order;
(j) at the option of the Company or the Fund upon a determination by a
majority of the Fund Board, or a majority of disinterested Fund Board members,
that an irreconcilable material conflict exists among the interests of (i) any
Product owners or (ii) the interests of the Participating Insurance Companies
investing in the Fund;
(k) at the option of the Company if the Fund ceases to qualify as a Regulated
Investment Company under Subchapter M of the Code, or under any successor or
similar provision, or if the Company reasonably believes, based on an opinion of
its counsel, that the Fund may fail to so qualify;
(l) at the option of the Company if the Fund fails to meet the
diversification requirements specified in Section 817(h) of the Code and any
regulations thereunder;
(m) at the option of either the Fund or the Distributor if the Fund or the
Distributor, respectively, shall determine, in their sole judgment exercised in
good faith, that either
15
<PAGE>
(1) the Company shall have suffered a material adverse change in its business or
financial condition; or (2) the Company shall have been the subject of material
adverse publicity which is likely to have a material adverse impact upon the
business and operations of either the Fund or the Distributor; or
(n) at the option of the Company, if the Company shall determine, in its sole
judgment exercised in good faith, that either; (1) the Investment Advisor or
Distributor shall have suffered a material adverse change in their respective
businesses or financial condition; or (2) the Investment Advisor or Distributor
shall have been the subject of material adverse publicity which is likely to
have a material adverse impact upon the business and operations of the Company.
15. CONTINUATION OF AGREEMENT.
(a) Termination as the result of any cause listed in SECTION 14 shall not
affect the Issuer's obligation to furnish its shares to Contracts then in force
for which its shares serve or may serve as the underlying medium (unless such
further sale of Fund shares is proscribed by law or the SEC or other regulatory
body). Following termination, Distributor shall not have any Administrative
Services payment obligation to the Company (except for payment obligations
accrued but not yet paid as of the termination date).
(b) Notwithstanding any termination of this Agreement pursuant to SECTION 14
of this Agreement, the Fund will, at the option of the Company, continued to
make available additional Fund shares for so long after the termination of this
Agreement as the Company desires, pursuant to the terms and conditions of this
Agreement as provided in paragraph (b) below, for all Contracts in effect on the
effective date of termination of this Agreement (hereinafter referred to as
"Existing Contracts"). Specifically, without limitation, if the Company so
elects to make additional Fund shares available, the owners of the Existing
Contracts or the Company, whichever shall have legal authority to do so, shall
be permitted to redeem investments in the Fund and/or invest in the Fund.
(c) If Fund shares continue to be made available after such termination, the
provisions of this Agreement shall remain in effect except as set forth in
SECTION 14(a) and thereafter either the Fund or the Company may terminate the
Agreement, as so continued pursuant to this SECTION 15, upon prior written
notice to the other party, such notice to be for a period that is reasonable
under the circumstances but, if given by the Fund, need not be for more than six
months.
(d) The parties agree that this SECTION 15 shall not apply to any termination
made pursuant to SECTION 12 or any conditions or undertakings incorporated by
reference in SECTION 12, and the effect of such SECTION 12 termination shall be
governed by the provisions set forth or incorporated by reference therein.
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<PAGE>
16. NON-EXCLUSIVITY. Each of the parties acknowledges and agrees that this
Agreement and the arrangement described herein are intended to be non-exclusive
and that each of the parties is free to enter into similar agreements and
arrangements with other entities.
17. SURVIVAL. The provisions of SECTION 9 (use of names) and SECTION 11
(indemnity) of this Agreement shall survive termination of this Agreement.
18. AMENDMENT. Neither this Agreement, nor any provision hereof, may be
amended, waived, discharged or terminated orally, but only by an instrument in
writing signed by all of the parties hereto.
19. NOTICES. All notices and other communications hereunder shall be given
or made in writing, and shall be delivered personally, or sent by telex,
telecopier, express delivery or registered or certified mail, postage prepaid,
return receipt requested, to the party or parties to whom they are directed at
the following addresses, or at such other addresses as may be designated by
notice from such party to all other parties.
To the Company:
Lincoln National Life Insurance Company
1300 South Clinton Street
Ft. Wayne, Indiana 46802
Attention: Kelly D. Clevenger
(219) 455-5119 (office number)
(219) 455-1773 (telecopy number)
To the Issuer or Distributor:
Twentieth Century Mutual Funds
4500 Main Street
Kansas City, Missouri 64111
Attention: Charles A. Etherington, Esq.
(816) 340-4051 (office number)
(816) 340-4964 (telecopy number)
Any notice, demand or other communication given in a manner prescribed in
this SECTION 19 shall be deemed to have been delivered on receipt.
20. SUCCESSORS AND ASSIGNS. This Agreement may not be assigned without the
written consent of all parties to the Agreement at the time of such assignment.
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective permitted successors and assigns.
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<PAGE>
21. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one agreement, and
any party hereto may execute this Agreement by signing any such counterpart.
22. SEVERABILITY. In case any one or more of the provisions contained in
this Agreement should be invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein shall not in any way be affected or impaired thereby.
23. ENTIRE AGREEMENT. This Agreement, including the Attachments hereto,
constitutes the entire agreement between the parties with respect to the matters
dealt with herein, and supersedes all previous agreements, written or oral, with
respect to such matter.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date set forth above.
TWENTIETH CENTURY SECURITIES, INC. LINCOLN NATIONAL LIFE
INSURANCE COMPANY
By: By:
-------------------------------- -------------------------------
William M. Lyons Kelly D. Clevenger
Executive Vice President Vice President
<PAGE>
SCHEDULE A
SEPARATE ACCOUNTS OF LINCOLN NATIONAL LIFE INSURANCE COMPANY
INVESTING IN THE FUND
Lincoln National Variable Annuity Account L
<PAGE>
SCHEDULE B
VARIABLE ANNUITY CONTRACTS
AND VARIABLE LIFE INSURANCE POLICIES
SUPPORTED BY SEPARATE ACCOUNTS
LISTED ON SCHEDULE A
Group Variable Annuity I Contracts
Group Variable Annuity II Contracts
Group Variable Annuity III Contracts
<PAGE>
FUND PARTICIPATION AGREEMENT
THIS AGREEMENT made as of the 11th day of May, 1998, by and between BT
Insurance Funds Trust ("TRUST"), a Massachusetts business trust, Bankers Trust
Company ("ADVISER"), a New York banking corporation, and The Lincoln National
Life Insurance Company ("LIFE COMPANY"), a life insurance company organized
under the laws of the State of Indiana.
WHEREAS, TRUST is registered with the Securities and Exchange Commission
("SEC") under the Investment Company Act of 1940, as amended (the "'40 Act"), as
an open-end, diversified management investment company; and
WHEREAS, TRUST is comprised of several series funds (each a "Portfolio"),
with those Portfolios currently available being listed on Appendix A hereto; and
WHEREAS, TRUST was organized to act as the funding vehicle for certain
variable life insurance and/or variable annuity contracts ("Variable Contracts")
offered by life insurance companies through separate accounts ("Separate
Accounts") of such life insurance companies ("Participating Insurance
Companies"); and
WHEREAS, TRUST may also offer its shares to certain qualified pension and
retirement plans ("Qualified Plans"); and
WHEREAS, TRUST has received an order from the SEC, granting Participating
Insurance Companies and their separate accounts exemptions from the provisions
of Sections 9(a), 13(a), 15(a) and 15(b) of the '40 Act, and Rules 6e-2(b)(15)
and 6e-3(T)(b)(15) thereunder, to the extent necessary to permit shares of the
Portfolios of the TRUST to be sold to and held by Variable Contract Separate
Accounts of both affiliated and unaffiliated Participating Insurance Companies
and Qualified Plans ("Exemptive Order"); and
WHEREAS, LIFE COMPANY has established or will establish one or more
Separate Accounts to offer Variable Contracts and is desirous of having TRUST as
one of the underlying funding vehicles for such Variable Contracts; and
WHEREAS, ADVISER is a "bank" as defined in the Investment Advisers Act of
1940, as amended (the "Advisers Act") and as such is excluded from the
definition of "Investment Adviser" and is not required to register as an
investment adviser pursuant to the Advisers Act; and
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<PAGE>
WHEREAS, ADVISER serves as the TRUST's investment adviser; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, LIFE COMPANY intends to purchase shares of TRUST to fund the
aforementioned Variable Contracts and TRUST is authorized to sell such shares to
LIFE COMPANY at such shares' net asset value;
NOW, THEREFORE, in consideration of their mutual promises, LIFE COMPANY,
TRUST, and ADVISER agree as follows:
Article I. SALE OF TRUST SHARES
1.1 TRUST agrees to make available to the Separate Accounts of LIFE
COMPANY shares of the selected Portfolios as listed on Appendix B for investment
of purchase payments of Variable Contracts allocated to the designated Separate
Accounts as provided in TRUST's Registration Statement.
1.2 TRUST agrees to sell to LIFE COMPANY those shares of the selected
Portfolios of TRUST which LIFE COMPANY orders, executing such orders on a daily
basis at the net asset value next computed after receipt by TRUST or its
designee of the order for the shares of TRUST. For purposes of this Section 1.2,
LIFE COMPANY shall be the designee of TRUST for receipt of such orders from the
designated Separate Account and receipt by such designee shall constitute
receipt by TRUST; provided that LIFE COMPANY receives the order by 4:00 p.m. New
York time and TRUST receives notice from LIFE COMPANY by telephone or facsimile
(or by such other means as TRUST and LIFE COMPANY may agree in writing) of such
order by 9:00 a.m. New York time on the next Business Day. "Business Day" shall
mean any day on which the New York Stock Exchange is open for trading and on
which TRUST calculates its net asset value pursuant to the rules of the SEC.
1.3 TRUST agrees to redeem on LIFE COMPANY's request, any full or
fractional shares of TRUST held by LIFE COMPANY, executing such requests on a
daily basis at the net asset value next computed after receipt by TRUST or its
designee of the request for redemption, in accordance with the provisions of
this Agreement and TRUST's Registration Statement. (In the event of a conflict
between the provisions of this Agreement and the Trust's Registration Statement,
the provisions of the Registration Statement shall govern.) For purposes of this
Section 1.3, LIFE COMPANY shall be the designee of TRUST for receipt of requests
for redemption from the designated Separate Account and receipt by such designee
shall constitute receipt by TRUST; provided that LIFE COMPANY receives the
request for redemption by 4:00 p.m. New York time and TRUST receives notice from
LIFE COMPANY by telephone or facsimile (or by such other means as TRUST and LIFE
COMPANY may agree in
2
<PAGE>
writing) of such request for redemption by 9:00 a.m. New York time on the next
Business Day.
1.4 TRUST shall furnish, on or before each ex-dividend date, notice to
LIFE COMPANY of any income dividends or capital gain distributions payable on
the shares of any Portfolio of TRUST. LIFE COMPANY hereby elects to receive all
such income dividends and capital gain distributions as are payable on a
Portfolio's shares in additional shares of the Portfolio. LIFE COMPANY reserves
the right to change such election. TRUST shall notify LIFE COMPANY or its
designee of the number of shares so issued as payment of such dividends and
distributions.
1.5 TRUST shall make the net asset value per share for the selected
Portfolio(s) available to LIFE COMPANY on a daily basis as soon as reasonably
practicable after the net asset value per share is calculated but shall use its
best efforts to make such net asset value available by 6:30 p.m. New York time.
If TRUST provides LIFE COMPANY with materially incorrect share net asset value
information through no fault of LIFE COMPANY, LIFE COMPANY on behalf of the
Separate Accounts, shall be entitled to an adjustment to the number of shares
purchased or redeemed on each day for which such incorrect information was
provided to reflect the correct share net asset value. Any material error in the
calculation of net asset value per share, dividend or capital gain information
shall be reported promptly upon discovery to LIFE COMPANY.
1.6 At the end of each Business Day, LIFE COMPANY shall use the
information described in Section 1.5 to calculate Separate Account unit values
for the day. Using these unit values, LIFE COMPANY shall process each such
Business Day's Separate Account transactions based on requests and premiums
received by it by the close of trading on the floor of the New York Stock
Exchange (currently 4:00 p.m. New York time) to determine the net dollar amount
of TRUST shares which shall be purchased or redeemed at that day's closing net
asset value per share. The net purchase or redemption orders so determined
shall be transmitted to TRUST by LIFE COMPANY by 9:00 a.m. New York Time on the
Business Day next following LIFE COMPANY's receipt of such requests and premiums
in accordance with the terms of Sections 1.2 and 1.3 hereof.
1.7 If LIFE COMPANY's order requests the purchase of TRUST shares, LIFE
COMPANY shall pay for such purchase by wiring federal funds to TRUST or its
designated custodial account by 2:00 pm on the day the order is transmitted
by LIFE COMPANY. If LIFE COMPANY's order requests a net redemption resulting
in a payment of redemption proceeds to LIFE COMPANY, TRUST shall wire the
redemption proceeds to LIFE COMPANY by 2:00 pm that day, unless doing so
would require TRUST to dispose of Portfolio securities or otherwise incur
additional costs. In any event, proceeds shall be wired to LIFE COMPANY
within the time period permitted by the '40 Act or the rules, orders or
regulations thereunder, and TRUST shall notify the
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person designated in writing by LIFE COMPANY as the recipient for such notice of
such delay by 3:00 p.m. New York Time on the same Business Day that LIFE COMPANY
transmits the redemption order to TRUST. If LIFE COMPANY's order requests the
application of redemption proceeds from the redemption of shares to the purchase
of shares of another Fund advised by ADVISER, TRUST shall so apply such proceeds
on the same Business Day that LIFE COMPANY transmits such order to TRUST.
1.8 TRUST agrees that all shares of the Portfolios of TRUST will be sold
only to Participating Insurance Companies which have agreed to participate in
TRUST to fund their Separate Accounts and/or to Qualified Plans, all in
accordance with the requirements of Section 817(h)(4) of the Internal Revenue
Code of 1986, as amended ("Code") and Treasury Regulation 1.817-5. Shares of the
TRUST's Portfolios will not be sold directly to the general public.
1.9 TRUST may refuse to sell shares of any Portfolio to any person, or
suspend or terminate the offering of the shares of or liquidate any Portfolio of
TRUST if such action is required by law or by regulatory authorities having
jurisdiction or is, in the sole discretion of the Board of Trustees of the TRUST
(the "Board"), acting in good faith and in light of its duties under federal and
any applicable state laws, deemed necessary, desirable or appropriate and in the
best interests of the shareholders of such Portfolios.
1.10 Issuance and transfer of Portfolio shares will be by book entry only.
Stock certificates will not be issued to LIFE COMPANY or the Separate Accounts.
Shares ordered from Portfolio will be recorded in appropriate book entry titles
for the Separate Accounts.
Article II. REPRESENTATIONS AND WARRANTIES
2.1 LIFE COMPANY represents and warrants that it is an insurance company
duly organized and validly existing under the laws of Indiana and that it has
legally and validly established each Separate Account as a segregated asset
account under such laws, and that LIFE COMPANY, the principal underwriter for
the Variable Contracts, is registered as a broker-dealer under the Securities
Exchange Act of 1934 (the "'34 Act").
2.2 LIFE COMPANY represents and warrants that it has registered or, prior
to any issuance or sale of the Variable Contracts, will register each Separate
Account as a unit investment trust ("UIT") in accordance with the provisions of
the '40 Act and cause each Separate Account to remain so registered to serve as
a segregated asset account for the Variable Contracts, unless an exemption from
registration is available.
2.3 LIFE COMPANY represents and warrants that the Variable Contracts will
be registered under the Securities Act of 1933 (the "'33 Act") unless an
exemption from registration is available prior to any issuance or sale of the
Variable Contracts, and that
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the Variable Contracts will be issued and sold in compliance in all material
respects with all applicable federal and state laws (including all applicable
blue sky laws and further that the sale of the variable contracts shall comply
in all material respects with applicable state insurance law suitability
requirements).
2.4 LIFE COMPANY represents and warrants that the Variable Contracts are
currently and at the time of issuance will be treated as life insurance
policies, endowment or annuity contracts under applicable provisions of the
Code, that it will maintain such treatment and that it will notify TRUST
immediately upon having a reasonable basis for believing that the Variable
Contracts have ceased to be so treated or that they might not be so treated in
the future.
2.5 TRUST represents and warrants that the Fund shares offered and sold
pursuant to this Agreement will be registered under the '33 Act and sold in
accordance with all applicable federal laws, and TRUST shall be registered under
the '40 Act prior to and at the time of any issuance or sale of such shares.
TRUST, subject to Section 1.9 above, shall amend its registration statement
under the '33 Act and the '40 Act from time to time as required in order to
effect the continuous offering of its shares. TRUST shall register and qualify
its shares for sale in accordance with the laws of the various states only if
and to the extent deemed advisable by TRUST.
2.6 TRUST and ADVISER each represents and warrants that each Portfolio
will comply with the diversification requirements set forth in Section 817(h) of
the Code, and the rules and regulations thereunder, including without limitation
Treasury Regulation 1.817-5, and will notify LIFE COMPANY immediately upon
having a reasonable basis for believing any Portfolio has ceased to comply and
will immediately take all reasonable steps to adequately diversity the Portfolio
to achieve compliance.
2.7 TRUST represents and warrants that each Portfolio invested in by the
Separate Account will be treated as a "regulated investment company" under
Subchapter M of the Code, and will notify LIFE COMPANY immediately upon having a
reasonable basis for believing it has ceased to so qualify or might not so
qualify in the future.
2.8 ADVISER represents and warrants that it shall perform its obligations
hereunder in compliance in all material respects with all applicable state and
federal laws.
2.9 TRUST and ADVISER each represents and warrants that all officers,
employees and agents of the TRUST having access to securities or funds of any
Portfolio shall be covered by a blanket fidelity bond in such minimum amount as
the SEC may prescribe under Section 17(g) of the '40 act.
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Article III. PROSPECTUS AND PROXY STATEMENTS
3.1 TRUST shall prepare and be responsible for filing with the SEC and any
state regulators requiring such filing all shareholder reports, notices, proxy
materials (or similar materials such as voting instruction solicitation
materials), prospectuses and statements of additional information of TRUST.
TRUST shall bear the costs of registration and qualification of shares of the
Portfolios, preparation and filing of the documents listed in this Section 3.1
and all taxes and filing fees to which an issuer is subject on the issuance and
transfer of its shares.
3.2 TRUST or its designee shall provide LIFE COMPANY, free of charge, with
as many copies of the current prospectus (or prospectuses), statements of
additional information, annual and semi-annual reports and proxy statements for
the shares of the Portfolios as LIFE COMPANY may reasonably request for
distribution to existing Variable Contract owners whose Variable Contracts are
funded by such shares. TRUST or its designee shall provide LIFE COMPANY, at LIFE
COMPANY's expense, with as many copies of the current prospectus (or
prospectuses) for the shares as LIFE COMPANY may reasonably request for
distribution to prospective purchasers of Variable Contracts. If requested by
LIFE COMPANY, TRUST or its designee shall provide such documentation [including
a "camera ready" copy of the current prospectus (or prospectuses) for the
Portfolios used in THE LIFE COMPANY'S Variable Contracts as set in type or, at
the request of LIFE COMPANY, as a diskette in the form sent to the financial
printer] and other assistance as is reasonably necessary in order for the
parties hereto once a year [or more frequently if the prospectus (or
prospectuses), for such Portfolios for the shares is supplemented or amended] to
have the prospectus for the Variable Contracts and the prospectus (or
prospectuses) for the TRUST shares printed together in one document. The
expenses of such printing will be apportioned between LIFE COMPANY and TRUST in
proportion to the number of pages of the Variable Contract and TRUST prospectus,
taking account of other relevant factors affecting the expense of printing, such
as covers, columns, graphs and charts; TRUST shall bear the cost of printing the
TRUST prospectus portion of such document for distribution only to owners of
existing Variable Contracts funded by the TRUST shares and LIFE COMPANY shall
bear the expense of printing the portion of such documents relating to the
Separate Account; provided, however, LIFE COMPANY shall bear all printing
expenses of such combined documents where used for distribution to prospective
purchasers or to owners of existing Variable Contracts not funded by the shares.
In the event that LIFE COMPANY requests that TRUST or its designee provide
TRUST's prospectus in a "camera ready" or diskette format, TRUST shall be
responsible for providing the prospectus (or prospectuses) in the format in
which it is accustomed to formatting prospectuses and shall bear the expense of
providing the prospectus (or prospectuses) in such format (e.g. typesetting
expenses), and LIFE COMPANY shall bear the expense of adjusting or changing the
format to conform with any of its prospectuses.
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3.3 TRUST will provide LIFE COMPANY with at least one complete copy of
all prospectuses, statements of additional information, proxy statements,
exemptive applications and all amendments or supplements to any of the above
that relate to the Portfolios and any other material constituting sales
literature or advertising under NASD rules, the 40 Act or the 33 Act within
20 days of the date of such material and annual and semi-annual reports and
any amendments or supplements thereto within 80 days of the date of such
report or amendment or supplement thereto. LIFE COMPANY will provide TRUST
with at least one complete copy of all prospectuses, statements of additional
information, proxy statements, exemptive applications and all amendments or
supplements to any of the above that relate to a Separate Account and its
investment in Trust and any other material constituting sales literature or
advertising under NASD rules, the 40 Act or the 33 Act within 20 days of the
date of such material and annual and semi-annual reports and any amendments
within 80 days of the date of such report or amendment or supplement thereto.
Article IV. SALES MATERIALS
4.1 LIFE COMPANY will furnish, or will cause to be furnished, to TRUST and
ADVISER, each piece of sales literature or other promotional material in which
TRUST or ADVISER is named, at least ten (10) Business Days prior to its intended
use. No such material will be used if TRUST or ADVISER objects to its use in
writing within seven (7) Business Days after receipt of such material.
4.2 TRUST and ADVISER will furnish, or will cause to be furnished, to LIFE
COMPANY, each piece of sales literature or other promotional material in which
LIFE COMPANY or its Separate Accounts are named, at least ten (10) Business Days
prior to its intended use. No such material will be used if LIFE COMPANY objects
to its use in writing within seven (7) Business Days after receipt of such
material.
4.3 TRUST and its affiliates and agents shall not give any information
or make any representations on behalf of LIFE COMPANY or concerning LIFE
COMPANY, the Separate Accounts, or the Variable Contracts issued by LIFE
COMPANY, other than the information or representations contained in a
registration statement or prospectus for such Variable Contracts, as such
registration statement and prospectus may be amended or supplemented from
time to time, or in reports of the Separate Accounts or reports prepared for
distribution to owners of such Variable Contracts, or in sales literature or
other promotional material approved by LIFE COMPANY or its designee, except
with the written permission of LIFE COMPANY.
4.4 LIFE COMPANY and its affiliates and agents shall not give any
information or make any representations on behalf of TRUST or concerning TRUST
other than the information or representations contained in a registration
statement or prospectus for
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TRUST, as such registration statement and prospectus may be amended or
supplemented from time to time, or in sales literature or other promotional
material approved by TRUST or its designee, except with the written permission
of TRUST or ADVISER.
4.5 For purposes of this Agreement, the phrase "sales literature or other
promotional material" or words of similar import include, without limitation,
advertisements (such as material published, or designed for use, in a newspaper,
magazine or other periodical, radio, television, telephone or tape recording,
videotape display, signs or billboards, motion pictures or other public media),
sales literature (such as any written communication distributed or made
generally available to customers or the public, including brochures, circulars,
research reports, market letters, form letters, seminar texts, or reprints or
excerpts of any other advertisement, sales literature, or published article),
educational or training materials or other communications distributed or made
generally available to some or all agents or employees, registration statements,
prospectuses, statements of additional information, shareholder reports and
proxy materials, and any other material constituting sales literature or
advertising under National Association of Securities Dealers, Inc. ("NASD")
rules, the '40 Act, the '33 Act or rules thereunder.
Article V. POTENTIAL CONFLICTS
5.1 The parties acknowledge that TRUST has received an order from the
SEC granting relief from various provisions of the '40 Act and the rules
thereunder to the extent necessary to permit TRUST shares to be sold to and
held by Variable Contract separate accounts of both affiliated and
unaffiliated Participating Insurance Companies and Qualified Plans. The
Exemptive Order requires TRUST and each Participating Insurance Company to
comply with conditions and undertakings substantially as provided in this
Section 5. The TRUST will not enter into a participation agreement with any
other Participating Insurance Company unless it imposes the same conditions
and undertakings as are imposed on LIFE COMPANY hereby.
5.2 The Board will monitor TRUST for the existence of any material
irreconcilable conflict between the interests of Variable Contract owners of all
separate accounts and with participants of Qualified Plans investing in TRUST.
An irreconcilable material conflict may arise for a variety of reasons, which
may include: (a) an action by any state insurance regulatory authority; (b) a
change in applicable federal or state insurance, tax, or securities laws or
regulations, or a public ruling, private letter ruling or any similar action by
insurance, tax or securities regulatory authorities; (c) an administrative or
judicial decision in any relevant proceeding; (d) the manner in which the
investments of TRUST are being managed; (e) a difference in voting instructions
given by Variable Contract owners; (f) a decision by a Participating Insurance
Company
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to disregard the voting instructions of Variable Contract owners and (g) if
applicable, a decision by a Qualified Plan to disregard the voting instructions
of plan participants.
5.3 LIFE COMPANY will report any potential or existing conflicts of which
it becomes aware to the Board. LIFE COMPANY will be responsible for assisting
the Board in carrying out its duties in this regard by providing the Board with
all information reasonably necessary for the Board to consider any issues
raised. The responsibility includes, but is not limited to, an obligation by the
LIFE COMPANY to inform the Board whenever it has determined to disregard
Variable Contract owner voting instructions. These responsibilities of LIFE
COMPANY will be carried out with a view only to the interests of the Variable
Contract owners.
5.4 If a majority of the Board or majority of its disinterested
Trustees, determines that a material irreconcilable conflict exists affecting
LIFE COMPANY, LIFE COMPANY, at its expense and to the extent reasonably
practicable (as determined by a majority of the Board's disinterested
Trustees), will take any steps necessary to remedy or eliminate the
irreconcilable material conflict, up to and including; (a) withdrawing the
assets allocable to some or all of the Separate Accounts from TRUST or any
Portfolio thereof and reinvesting those assets in a different investment
medium, which may include another Portfolio of TRUST, or another investment
company; (b) submitting the question as to whether such segregation should be
implemented to a vote of all affected Variable Contract owners and as
appropriate, segregating the assets of any appropriate group (i.e. variable
annuity or variable life insurance Contract owners of one or more
Participating Insurance Companies) that votes in favor of such segregation,
or offering to the affected Variable Contract owners the option of making
such a change; and (c) establishing a new registered management investment
company (or series thereof) or managed separate account. If a material
irreconcilable conflict arises because of LIFE COMPANY's decision to
disregard Variable Contract owner voting instructions, and that decision
represents a minority position or would preclude a majority vote, LIFE
COMPANY may be required, at the election of TRUST, to withdraw the Separate
Account's investment in TRUST, and no charge or penalty will be imposed as a
result of such withdrawal. The responsibility to take such remedial action
shall be carried out with a view only to the interests of the Variable
Contract owners.
For the purposes of this Section 5.4, a majority of the disinterested
members of the Board shall determine whether or not any proposed action
adequately remedies any irreconcilable material conflict, but in no event will
TRUST or ADVISER (or any other investment adviser of TRUST) be required to
establish a new funding medium for any Variable Contract. Further, LIFE COMPANY
shall not be required by this Section 5.4 to establish a new funding medium for
any Variable Contracts [if any offer to do so has been declined by a vote of a
majority of Variable Contract owners materially and adversely affected by the
irreconcilable material conflict.]
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5.5 The Board's determination of the existence of an irreconcilable
material conflict and its implications shall be made known promptly and in
writing to LIFE COMPANY.
5.6 LIFE COMPANY shall from time to time submit to the Board such reports,
materials or data as the Board may reasonably request so that the Board may
fully carry out its obligations under this Article V.
Article VI. VOTING
6.1 LIFE COMPANY will provide pass-through voting privileges to all
Variable Contract owners so long as and to the extent the SEC continues to
interpret the '40 Act as requiring pass-through voting privileges for Variable
Contract owners. Accordingly, LIFE COMPANY, where applicable, will vote shares
of the Portfolio held in its 40 Act registered Separate Accounts in a manner
consistent with voting instructions timely received from its Variable Contract
owners. LIFE COMPANY will be responsible for assuring that each of its Separate
Accounts that participates in TRUST calculates voting privileges in a manner
consistent with other Participating Insurance Companies. LIFE COMPANY will vote
shares in a registered Separate Account for which it has not received timely
voting instructions in the same proportion as it votes those shares in that
Separate Account for which it has received voting instructions.
6.2 If and to the extent Rule 6e-2 and Rule 6e-3(T) are amended, or if
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the '40
Act or the rules thereunder with respect to mixed and shared funding on terms
and conditions materially different from any exemptions granted in the Exemptive
Order, then TRUST, and/or the Participating Insurance Companies, as appropriate,
shall take such steps as may be necessary to comply with Rule 6e-2 and Rule
6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such Rules are
applicable.
Article VII. INDEMNIFICATION
7.1 INDEMNIFICATION BY LIFE COMPANY. LIFE COMPANY agrees to indemnify and
hold harmless TRUST, ADVISER and each of their Trustees, directors, principals,
officers, employees and agents and each person, if any, who controls TRUST or
ADVISER within the meaning of Section 15 of the '33 Act (collectively, the
"Indemnified Parties") against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of LIFE COMPANY,
which consent shall not be unreasonably withheld) or litigation or threatened
litigation (including reasonable legal and other expenses), to which the
Indemnified Parties may become subject under any statute, regulation, at common
law or otherwise, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) or settlements are related to the sale
or acquisition of TRUST's shares or the Variable Contracts and:
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(a) arise out of or are based upon any untrue statements or alleged untrue
statements of any material fact contained in the Registration Statement or
prospectus or sales literature for the Variable Contracts or contained in
the Variable Contracts (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, provided that
this agreement to indemnify shall not apply as to any Indemnified Party if
such statement or omission or such alleged statement or omission was made
in reliance upon and in conformity with information furnished in writing to
LIFE COMPANY by or on behalf of TRUST for use in the registration statement
or prospectus for the Variable Contracts or in the Variable Contracts or
sales literature (or any amendment or supplement to any of the foregoing)
or otherwise for use in connection with the sale of the Variable Contracts
or TRUST shares; or
(b) arise out of or result from (i) untrue statements or representations (other
than statements or representations contained in the registration statement,
prospectus or sales literature of TRUST not supplied by LIFE COMPANY, or
persons under its control) or (ii) willful misfeasance, bad faith or gross
negligence of LIFE COMPANY or persons under its control, with respect to
the sale or distribution of the Variable Contracts or TRUST shares; or
(c) arise out of any untrue statement or alleged untrue statement of a material
fact contained in a registration statement, prospectus, or sales literature
of TRUST or any amendment thereof or supplement thereto or the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading if such
statement or omission or such alleged statement or omission was made in
reliance upon and in conformity with information furnished in writing to
TRUST by or on behalf of LIFE COMPANY; or
(d) arise as a result of any failure by LIFE COMPANY to provide substantially
the services and furnish the materials under the terms of this Agreement;
or
(e) arise out of or result from any material breach of any representation
and/or warranty made by LIFE COMPANY in this Agreement or arise out of or
result from any other material breach of this Agreement by LIFE COMPANY.
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7.2 LIFE COMPANY shall not be liable under this indemnification provision
with respect to any losses, claims, damages, liabilities or litigation incurred
or assessed against an Indemnified Party to the extent that such losses, claims,
damages, liabilities or litigation are attributable to such Indemnified Party's
willful misfeasance, bad faith, or gross negligence in the performance of such
Indemnified Party's duties or by reason of such Indemnified Party's reckless
disregard of obligations or duties under this Agreement.
7.3 LIFE COMPANY shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified LIFE COMPANY in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received
notice of such service on any designated agent), but failure to notify LIFE
COMPANY of any such claim shall not relieve LIFE COMPANY from any liability
which it may have to the Indemnified Party against whom such action is
brought otherwise than on account of this indemnification provision. In case
any such action is brought against an Indemnified Party, LIFE COMPANY shall
be entitled to participate at its own expense in the defense of such action.
LIFE COMPANY also shall be entitled to assume the defense thereof, with
counsel satisfactory to the party named in the action. After notice from LIFE
COMPANY to such party of LIFE COMPANY's election to assume the defense
thereof, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and LIFE COMPANY will not be liable to
such party under this Agreement for any legal or other expenses subsequently
incurred by such party independently in connection with the defense thereof
other than reasonable costs of investigation.
7.4 INDEMNIFICATION BY TRUST AND ADVISER. TRUST and ADVISER each agree to
indemnify and hold harmless LIFE COMPANY and each of its directors, officers,
employees, and agents and each person, if any, who controls LIFE COMPANY within
the meaning of Section 15 of the '33 Act (collectively, the "Indemnified
Parties") against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of TRUST or ADVISER (which
consent shall not be unreasonably withheld) or litigation or threatened
litigation (including reasonable legal and other expenses) to which the
Indemnified Parties may become subject under any statute, or regulation, at
common law or otherwise, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) or settlements are related to the sale
or acquisition of TRUST's shares for the Variable Contracts and:
(a) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the registration statement
or prospectus or sales literature of TRUST (or any amendment or
supplement to any of the foregoing), or arise out of
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or are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, provided that this
agreement to indemnify shall not apply as to any Indemnified Party if
such statement or omission or such alleged statement or omission was
made in reliance upon and in conformity with information furnished in
writing to ADVISER or TRUST by or on behalf of LIFE COMPANY for use
in the registration statement or prospectus for TRUST or in sales
literature (or any amendment or supplement to any of the foregoing) or
otherwise for use in connection with the sale of the Variable
Contracts or TRUST shares; or
(b) arise out of or result from (i) untrue statements or representations
(other than statements or representations contained in the
registration statement, prospectus or sales literature for the
Variable Contracts not supplied by ADVISER or TRUST or persons under
its control) or (ii) gross negligence, bad faith or willful
misfeasance of TRUST or ADVISER or persons under its control, with
respect to the sale or distribution of the Variable Contracts or TRUST
shares; or
(c) arise out of any untrue statement or alleged untrue statement of a
material fact contained in a registration statement, prospectus, or
sales literature covering the Variable Contracts, or any amendment
thereof or supplement thereto or the omission or alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, if such
statement or omission or such alleged statement or omission was made
in reliance upon and in conformity with information furnished in
writing to LIFE COMPANY for inclusion therein by or on behalf of
TRUST; or
(d) arise as a result of (i) a failure by TRUST or ADVISER to provide
substantially the services and furnish the materials under the terms
of this Agreement; or (ii) a failure by a Portfolio(s) invested in by
the Separate Account to comply with the diversification requirements
of Section 817(h) of the Code; or (iii) a failure by a Portfolio(s)
invested in by the Separate Account to qualify as a "regulated
investment company" under Subchapter M of the Code; or
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(e) arise out of or result from any material breach of any representation
and/or warranty made by TRUST or ADVISER in this Agreement or arise
out of or result from any other material breach of this Agreement by
TRUST or ADVISER.
7.5 TRUST and ADVISER shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party to the extent that such
losses, claims, damages, liabilities or litigation are attributable to such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement.
7.6 TRUST and ADVISER shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified TRUST and ADVISER in writing within
a reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify TRUST and ADVISER
of any such claim shall not relieve TRUST and ADVISER from any liability which
it may have to the Indemnified Party against whom such action is brought
otherwise than on account of this indemnification provision. In case any such
action is brought against the Indemnified Parties, TRUST and ADVISER shall be
entitled to participate at their own expense in the defense thereof. TRUST and
ADVISER also shall be entitled to assume the defense thereof, with counsel
satisfactory to the party named in the action. After notice from TRUST or
ADVISER to such party of TRUST's or ADVISER's election to assume the defense
thereof, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and TRUST and/or ADVISER as the case may be
will not be liable to such party under this Agreement for any legal or other
expenses subsequently incurred by such party independently in connection with
the defense thereof other than reasonable costs of investigation.
Article VIII. TERM; TERMINATION
8.1 This Agreement shall be effective as of the date hereof and shall
continue in force until terminated in accordance with the provisions herein.
8.2 This Agreement shall terminate in accordance with the following
provisions:
(a) At the option of LIFE COMPANY or TRUST at any time from the date
hereof upon 180 days' written notice, unless a shorter time is
agreed to by the parties;
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(b) At the option of LIFE COMPANY, if TRUST shares are not reasonably
available to meet the requirements of the Variable Contracts as
determined by LIFE COMPANY. Prompt notice of election to
terminate shall be furnished by LIFE COMPANY, said termination to
be effective ten days after receipt of notice unless TRUST makes
available a sufficient number of shares to reasonably meet the
requirements of the Variable Contracts within said ten-day
period;
(c) At the option of LIFE COMPANY, upon the institution of formal
proceedings against TRUST or ADVISER or any sub-adviser by the
SEC, the NASD, or any other regulatory body, the expected or
anticipated ruling, judgment or outcome of which would, in LIFE
COMPANY's reasonable judgment, after affording TRUST and ADVISER
reasonable opportunity for consultation with LIFE COMPANY,
materially impair TRUST's ability to meet and perform TRUST's
obligations and duties hereunder, or result in material harm to
the Separate Accounts, LIFE COMPANY, or owners of Variable
Contracts. Prompt notice of election to terminate shall be
furnished by LIFE COMPANY with said termination to be effective
upon receipt of notice;
(d) At the option of TRUST or ADVISER, upon the institution of formal
proceedings against LIFE COMPANY by the SEC, the NASD, or any
other regulatory body, the expected or anticipated ruling,
judgment or outcome of which would, in TRUST's or ADVISER's
reasonable judgment, after affording LIFE COMPANY reasonable
opportunity for consultation with TRUST and ADVISER, materially
impair LIFE COMPANY's ability to meet and perform its obligations
and duties hereunder. Prompt notice of election to terminate
shall be furnished by TRUST with said termination to be effective
upon receipt of notice;
(e) In the event TRUST's shares are not registered, issued or sold in
accordance with applicable state or federal law, or such law
precludes the use of such shares as the underlying investment
medium of Variable Contracts issued or to be issued by LIFE
COMPANY. Termination shall be effective upon such occurrence
without notice;
(f) At the option of TRUST if the Variable Contracts cease to qualify
as annuity contracts or life insurance contracts, as applicable,
15
<PAGE>
under the Code, or if TRUST reasonably believes that the Variable
Contracts may fail to so qualify. Termination shall be effective
upon receipt of notice by LIFE COMPANY;
(g) At the option of LIFE COMPANY, upon TRUST's or ADVISER's breach
of any material provision of this Agreement, which breach has not
been cured to the reasonable satisfaction of LIFE COMPANY within
ten days after written notice of such breach is delivered to
TRUST;
(h) At the option of TRUST or ADVISER, upon LIFE COMPANY's breach of
any material provision of this Agreement, which breach has not
been cured to the satisfaction of TRUST within ten days after
written notice of such breach is delivered to LIFE COMPANY;
(i) At the option of TRUST or ADVISER, if the Variable Contracts are
not registered, issued or sold in accordance with applicable
federal and/or state law. Termination shall be effective
immediately upon such occurrence without notice;
(j) At the option of LIFE COMPANY, upon 75 days written notice of a
vote of Variable Contract owners having an interest in a
Portfolio and upon written approval of LIFE COMPANY, to
substitute the shares of another investment company for the
corresponding shares of a Portfolio in accordance with the terms
of the Variable Contracts;
(k) In the event this Agreement is assigned without the prior written
consent of LIFE COMPANY, TRUST, and ADVISER, termination shall be
effective immediately upon such occurrence without notice.
8.3 Notwithstanding any termination of this Agreement pursuant to Section
8.2 hereof, TRUST at LIFE COMPANY'S option shall continue to make available
additional TRUST shares, as provided below, for so long as TRUST desires
pursuant to the terms and conditions of this Agreement, for all Variable
Contracts in effect on the effective date of termination of this Agreement
(hereinafter referred to as "Existing Contracts"). Specifically, without
limitation, if TRUST makes additional TRUST shares available, the owners of the
Existing Contracts or LIFE COMPANY, whichever shall have legal authority to do
so, shall be permitted to reallocate investments in TRUST, redeem investments in
TRUST and/or invest in TRUST upon the payment of additional premiums under the
Existing Contracts. If TRUST shares continue to be made
16
<PAGE>
available after such termination, the provisions of this Agreement shall remain
in effect and thereafter either TRUST or LIFE COMPANY may terminate the
Agreement, as so continued pursuant to this Section 8.3, upon sixty (60) days
prior written notice to the other party.
8.4 Except as necessary to implement Variable Contract owner initiated
transactions, or as required by state insurance laws or regulations, LIFE
COMPANY shall not redeem the shares attributable to the Variable Contracts (as
opposed to the shares attributable to LIFE COMPANY's assets held in the Separate
Accounts), and LIFE COMPANY shall not prevent Variable Contract owners from
allocating payments to a Portfolio that was otherwise available under the
Variable Contracts until thirty (30) days after the LIFE COMPANY shall have
notified TRUST of its intention to do so.
Article IX. NOTICES
Any notice hereunder shall be given by registered or certified mail return
receipt requested to the other party at the address of such party set forth
below or at such other address as such party may from time to time specify in
writing to the other party.
If to TRUST:
BT Insurance Funds Trust
c/o First Data Investor Services Group, Inc.
One Exchange Place
53 State Street, Mail Stop BOS865
Boston, MA 02109
AND
c/o BT Alex Brown
One South Street, Mail Stop 1-18-6
Baltimore, MD 21202
Attn: Brian Wixted
If to ADVISER:
Bankers Trust Company
130 Liberty Street, Mail Stop 2355
New York, NY 10006
Attn.: Vinay Mendiratta
17
<PAGE>
If to LIFE COMPANY:
Lincoln National Life Insurance
Kelly D. Clevenger
1300 S. Clinton Street
Fort Wayne, IN 46802-3506
Notice shall be deemed given on the date of receipt by the addressee as
evidenced by the return receipt.
Article X. MISCELLANEOUS
10.1 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
10.2 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
10.3 If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
10.4 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of New York.
It shall also be subject to the provisions of the federal securities laws and
the rules and regulations thereunder and to any orders of the SEC granting
exemptive relief therefrom and the conditions of such orders.
10.5 It is understood and expressly stipulated that neither the
shareholders of shares of any Portfolio nor the Trustees or officers of TRUST or
any Portfolio shall be personally liable hereunder. No Portfolio shall be liable
for the liabilities of any other Portfolio. All persons dealing with TRUST or a
Portfolio must look solely to the property of TRUST or that Portfolio,
respectively, for enforcement of any claims against TRUST or that Portfolio. It
is also understood that each of the Portfolios shall be deemed to be entering
into a separate Agreement with LIFE COMPANY so that it is as if each of the
Portfolios had signed a separate Agreement with LIFE COMPANY and that a single
document is being signed simply to facilitate the execution and administration
of the Agreement.
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<PAGE>
10.6 Each party shall cooperate with each other party and all appropriate
governmental authorities (including without limitation the SEC, the NASD and
state insurance regulators) and shall permit such authorities reasonable access
to its books and records in connection with any investigation or inquiry
relating to this Agreement or the transactions contemplated hereby.
10.7 The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations,
at law or in equity, which the parties hereto are entitled to under state and
federal laws.
10.8 If the Agreement terminates, the parties agree that Article 7 and
Sections 10.5, 10.6 and 10.7 shall remain in effect after termination.
10.9 No provision of this Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed by TRUST,
ADVISER and the LIFE COMPANY.
10.10 No failure or delay by a party in exercising any right or remedy
under this Agreement will operate as a waiver thereof and no single or partial
exercise of rights shall preclude a further or subsequent exercise. The rights
and remedies provided in this Agreement are cumulative and not exclusive of any
rights or remedies provided by law.
IN WITNESS WHEREOF, the parties have caused their duly authorized officers
to execute this Fund Participation Agreement as of the date and year first above
written.
BT INSURANCE FUNDS TRUST
By: /s/ Elizabeth Russell
------------------------------
Name: Elizabeth Russell
Title: Secretary
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BANKERS TRUST COMPANY
By: /s/ Irene S. Greenberg
------------------------------
Name: Irene S. Greenberg
Title: Vice President
THE LINCOLN NATIONAL LIFE INSURANCE
COMPANY
By: /s/ Kelly D. Clevenger
------------------------------
Name: Kelly D. Clevenger
Title: Vice President
20
<PAGE>
APPENDIX A
BT Insurance Funds Trust Portfolios
Equity 500 Index Fund
Small Cap Index Fund
<PAGE>
APPENDIX B
SEPARATE ACCOUNTS
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE SEPARATE ACCOUNT M
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE SEPARATE ACCOUNT R
<PAGE>
AMENDMENT TO APPENDIX B
AS OF NOVEMBER 1, 1998
Lincoln National Variable Annuity Account C
Lincoln Life Flexible Premium Variable Life Account M
Lincoln Life Variable Annuity Account N
Lincoln National Variable Annuity Account Q
Lincoln Life Flexible Premium Variable Life Account R
Lincoln National Life Insurance Company Separate Account 27
Lincoln National Life Insurance Company Separate Account 53
IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment to
Schedule A to be executed in its name and behalf by its duly authorized officer
on the date specified below.
Date: 10/9/98 BT INSURANCE FUNDS TRUST
----------
By: /s/ Elizabeth Russell
---------------------------
Elizabeth Russell,
Secretary
Date: 10/8/98 BANKERS TRUST COMPANY
----------
By: /s/ Irene S. Greenberg
---------------------------
Irene S. Greenberg,
Vice President
Date: 10/7/98 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY,
----------- on behalf of itself and its separate accounts and
as principal underwriter for its separate accounts
By: /s/ Kelly D. Clevenger
---------------------------
Kelly D. Clevenger,
Vice President
<PAGE>
JANUS ASPEN SERIES
FUND PARTICIPATION AGREEMENT
THIS AGREEMENT is made this 15th day of September, 1998, between JANUS
ASPEN SERIES, an open-end management investment company organized as a Delaware
business trust (the "Trust"), and The Lincoln National Life Insurance Company, a
life insurance company organized under the laws of the State of Indiana (the
"Company"), on its own behalf and on behalf of each segregated asset account of
the Company set forth on Schedule A, as may be amended from time to time (the
"Accounts").
WITNESSETH:
WHEREAS, the Trust has registered with the Securities and Exchange
Commission as an open-end management investment company under the Investment
Company Act of 1940, as amended (the "1940 Act"), and has registered the offer
and sale of its shares under the Securities Act of 1933, as amended (the " 1933
Act"); and
WHEREAS, the Trust desires to act as an investment vehicle for separate
accounts established for variable life insurance policies and variable annuity
contracts to be offered by insurance companies that have entered into
participation agreements with the Trust (the "Participating Insurance
Companies"); and
WHEREAS, the beneficial interest in the Trust is divided into several
series of shares, each series representing an interest in a particular managed
portfolio of securities and other assets (the "Portfolios"); and
WHEREAS, the Trust has received an order from the Securities and
Exchange Commission granting Participating Insurance Companies and their
separate accounts exemptions from the provisions of Sections 9(a), 13(a), 15(a)
and 15(b) of the 1940 Act, and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder,
to the extent necessary to permit shares of the Trust to be sold to and held by
variable annuity and variable life insurance separate accounts of both
affiliated and unaffiliated life insurance companies and certain qualified
pension and retirement plans (the "Exemptive Order"); and
WHEREAS, the Company has registered or will register (unless
registration is not required under applicable law) certain variable life
insurance policies and/or variable annuity contracts under the 1933 Act (the
"Contracts"); and
WHEREAS, the Company has registered or will register (unless
registration is not required pursuant to Section 3(v)(ii) of the 1940 Act) each
Account as a unit investment trust under the 1940 Act; and
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<PAGE>
WHEREAS, the Company desires to utilize shares of one or more Portfolios as
an investment vehicle of the Accounts;
NOW, THEREFORE, in consideration of their mutual promises, the parties
agree as follows:
ARTICLE I
SALE OF TRUST SHARES
1.1 The Trust shall make shares of its Portfolios available to the Accounts
at the net asset value next computed after receipt of such purchase order by the
Trust (or its agent), as established in accordance with the provisions of the
then current prospectus of the Trust. Shares of a particular Portfolio of the
Trust shall be ordered in such quantities and at such times as determined by the
Company to be necessary to meet the requirements of the Contracts. The Trustees
of the Trust (the "Trustees") may refuse to sell shares of any Portfolio to any
person, or suspend or terminate the offering of shares of any Portfolio if such
action is required by law or by regulatory authorities having jurisdiction or
is, in the sole discretion of the Trustees acting in good faith and in light of
their fiduciary duties under federal and any applicable state laws, necessary in
the best interests of the shareholders of such Portfolio.
1.2 The Trust will redeem any full or fractional shares of any Portfolio
when requested by the Company on behalf of an Account at the net asset value
next computed after receipt by the Trust (or its agent) of the request for
redemption, as established in accordance with the provisions of the then current
prospectus of the Trust. The Trust shall make payment for such shares in the
manner established from time to time by the Trust, but in no event shall payment
be delayed for a greater period than is permitted by the 1940 Act.
1.3 For the purposes of Sections 1.1 and 1.2, the Trust hereby appoints
the Company as its agent for the limited purpose of receiving and accepting
purchase and redemption orders resulting from investment in and payments under
the Contracts. Receipt by the Company shall constitute receipt by the Trust
provided that i) such orders are received by the Company in good order prior
to the time the net asset value of each Portfolio is priced in accordance with
its prospectus and ii) the Trust receives notice of such orders by 10:00 a.m.
New York time on the next following Business Day. The Trust will confirm receipt
of each trade in a manner mutually agreeable to the Trust and the Company.
"Business Day" shall mean any day on which the New York Stock Exchange is open
for trading and on which the Trust calculates its net asset value pursuant to
the rules of the Securities and Exchange Commission.
1.4 Purchase orders that are transmitted to the Trust in accordance with
Section 1.3 shall be paid for no later than 2:00 p.m. New York time on the same
Business Day that the Trust receives notice of the order. The Trust shall use
its best efforts to pay for redemption orders that are transmitted to the
Company in accordance with Section 1.2 no later than 2:30 p.m. New York time on
the same Business Day that the Trust receives notice of the order. Payments
shall be made in federal funds transmitted by wire.
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<PAGE>
1.5 Issuance and transfer of the Trust's shares will be by book entry only.
Stock certificates will not be issued to the Company or the Account. Shares
ordered from the Trust will be recorded in the appropriate title for each
Account or the appropriate subaccount of each Account.
1.6 The Trust shall furnish prompt notice to the Company of any income
dividends or capital gain distributions payable on the Trust's shares. The
Company hereby elects to receive all such income dividends and capital gain
distributions as are payable on a Portfolio's shares in additional shares of
that Portfolio.. The Company reserves the right, on its behalf and on behalf of
the Account, to revoke this election and to receive all such dividends in cash.
The Trust shall notify the Company of the number of shares so issued as payment
of such dividends and distributions.
1.7 The Trust shall make the net asset value per share for each Portfolio
available to the Company on a daily basis as soon as reasonably practical after
the net asset value per share is calculated and shall use its best efforts to
make such net asset value per share available by 6 p.m. New York time.
1.8 The Trust agrees that its shares will be sold only to Participating
Insurance Companies and their separate accounts and to certain qualified pension
and retirement plans to the extent permitted by the Exemptive Order. No shares
of any Portfolio will be sold directly to the general public. The Company agrees
that Trust shares will be used only for the purposes of funding the Contracts
and Accounts listed in Schedule A, as amended from time to time.
1.9 The Trust agrees that all Participating Insurance Companies shall have
the obligations and responsibilities regarding pass-through voting (unless
exempt therefrom) and conflicts of interest corresponding to those contained in
Section 2.8 and Article IV of this Agreement.
ARTICLE II
OBLIGATIONS OF THE PARTIES
2.1 The Trust shall prepare and be responsible for filing with the
Securities and Exchange Commission and any state regulators requiring such
filing all shareholder reports, notices, proxy materials (or similar materials
such as voting instruction solicitation materials), prospectuses and statements
of additional information of the Trust. The Trust shall bear the costs of
registration and qualification of its shares, preparation and filing of the
documents listed in this Section 2.1 and all taxes to which an issuer is subject
on the issuance and transfer of its shares.
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<PAGE>
2.2 At the option of the Company, the Trust shall either (a) provide the
Company (at the Company's expense) with as many copies of the Trust's current
prospectus, annual report, semi-annual report and other shareholder
communications, including any amendments or supplements to any of the foregoing,
as the Company shall reasonably request; or (b) provide the Company with a
camera ready copy of such documents in a form suitable for printing. The Trust
shall be responsible for its pro-rated share of the printing costs. The Trust
shall provide the Company with a copy of its statement of additional information
in a form suitable for duplication by the Company. The Trust (at its expense)
shall provide the Company with copies of any Trust-sponsored proxy materials in
such quantity as the Company shall reasonably require for distribution to
Contract owners.
2.3 The Company shall bear the costs (unless Janus Capital Corporation or
the Trust, pursuant to the terms of the letter to Company dated September 15,
1998, is required to bear the costs) of printing and distributing the Trust's
prospectus, statement of additional information, shareholder reports and other
shareholder communications to owners of and applicants for policies for which
the Trust is serving or is to serve as an investment vehicle. The Company shall
bear the costs of distributing proxy materials (or similar materials such as
voting solicitation instructions) to Contract owners. The Company assumes sole
responsibility for ensuring that such materials are delivered to Contract owners
in accordance with applicable federal and state securities laws.
2.4 The Company agrees and acknowledges that the Trust's adviser, Janus
Capital Corporation ("Janus Capital"), is the sole owner of the name and mark
"Janus" and that all use of any designation comprised in whole or part of Janus
(a "Janus Mark") under this Agreement shall inure to the benefit of Janus
Capital. Except as provided in Section 2.5, the Company shall not use any Janus
Mark on its own behalf or on behalf of the Accounts or Contracts in any
registration statement, advertisement, sales literature or other materials
relating to the Accounts or Contracts without the prior written consent of Janus
Capital. Such consent will not be unreasonably withheld and if no written
objection is received within 10 business days of receipt, approval will be
deemed given. Upon termination of this Agreement for any reason, the Company
shall cease all use of any Janus Mark(s) as soon as reasonably practicable.
2.5 (a) The Company shall furnish, or cause to be furnished, to the Trust
or its designee, a copy of each Contract prospectus or statement of additional
information in which the Trust or its investment adviser is named within 20 days
of the filing of such document with the Securities and Exchange Commission. The
Company shall furnish, or shall cause to be furnished, to the Trust or its
designee, each piece of sales literature or other promotional material in which
the Trust or its investment adviser is named, at least ten Business Days prior
to its use. No such material shall be used if the Trust or its designee
reasonably objects to such use within fifteen Business Days after receipt of
such material.
(b) The Trust shall furnish, or cause to be furnished, to the Company
or its designee, a copy of each Trust prospectus or statement of additional
information in which the
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<PAGE>
Company is named within 20 days of the filing of such document with the
Securities and Exchange Commission. The Trust shall furnish, or shall cause to
be furnished, to the Company or its designee, each piece of sales literature or
other promotional material in which the Company is named, at least ten Business
Days prior to its use. No such material shall be used if the Company or its
designee reasonably objects to such use within fifteen Business Days after
receipt of such material.
2.6 The Company shall not give any information or make any representations
or statements on behalf of the Trust or concerning the Trust or its investment
adviser in connection with the sale of the Contracts other than information or
representations contained in and accurately derived from the registration
statement or prospectus for the Trust shares (as such registration statement and
prospectus may be amended or supplemented from time to time), reports of the
Trust, Trust-sponsored proxy statements, or in sales literature or other
promotional material approved by the Trust or its designee, except as required
by legal process or regulatory authorities or with the written permission of the
Trust or its designee. Such consent will not be unreasonably withheld and if no
written objection is received within 10 business days of receipt, approval will
be deemed given.
2.7 The Trust shall not give any information or make any representations or
statements on behalf of the Company or concerning the Company, the Accounts or
the Contracts other than information or representations contained in and
accurately derived from the registration statement or prospectus for the
Contracts (as such registration statement and prospectus may be amended or
supplemented from time to time), or in materials approved by the Company for
distribution including sales literature or other promotional materials, except
as required by legal process or regulatory authorities or with the written
permission of the Company.
2.8 So long as, and to the extent that the Securities and Exchange
Commission interprets the 1940 Act to require pass-through voting privileges for
variable policyowners, the Company will provide pass-through voting privileges
to owners of policies whose cash values are invested, through the Accounts, in
shares of the Trust. The Trust shall require all Participating Insurance
Companies to calculate voting privileges in the same manner and the Company
shall be responsible for assuring that the Accounts calculate voting privileges
in the manner established by the Trust. With respect to each Account, the
Company will vote shares of the Trust held by the Account and for which no
timely voting instructions from policyowners are received as well as shares it
owns that are held by that Account, in the same proportion as those shares for
which voting instructions are received. The Company and its agents will in no
way recommend or oppose or interfere with the solicitation of proxies for Trust
shares held by Contract owners without the prior written consent of the Trust,
which consent may be withheld in the Trust's sole discretion.
2.9 The Company shall notify the Trust of any applicable state insurance
laws that restrict the Portfolios' investments or otherwise affect the operation
of the Trust and shall notify the Trust of any changes in such laws.
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<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 The Company represents and warrants that it is an insurance company
duly organized and validly existing under the laws of the State of Indiana and
that it has legally and validly established each Account as a segregated asset
account under such law on the date set forth in Schedule A.
3.2 The Company represents and warrants that each Account (1) has been
registered or, prior to any issuance or sale of the Contracts, will be
registered as a unit investment trust in accordance with the provisions of the
1940 Act or, alternatively (2) has not been registered in proper reliance upon
the exclusion from registration under Section 3(c)(ii) of the 1940 Act.
3.3 The Company represents and warrants that the Contracts or interests in
the Accounts (1) are or, prior to issuance, will be registered as securities
under the 1933 Act or, alternatively (2) are not registered because they are
properly exempt from registration under the 1933 Act or will be offered
exclusively in transactions that are properly exempt from registration under the
1933 Act. The Company further represents and warrants that the Contracts will be
issued and sold in compliance in all material respects with all applicable
federal and state laws.
3.4 The Trust represents and warrants that it is duly organized and validly
existing under the laws of the State of Delaware.
3.5 The Trust represents and warrants that the Trust shares offered and
sold pursuant to this Agreement will be registered under the 1933 Act and the
Trust shall be registered under the 1940 Act prior to any issuance or sale of
such shares. The Trust shall amend its registration statement under the 1933 Act
and the 1940 Act from time to time as required in order to effect the continuous
offering of its shares. The Trust shall register and qualify its shares for sale
in accordance with the laws of the various states only if and to the extent
deemed advisable by the Trust.
3.6 The Trust represents and warrants that the investments of each
Portfolio will comply with Subchapter M and the diversification requirements set
forth in Section 817(h) of the Internal Revenue Code of 1986, as amended
("Code"), and the rules and regulations thereunder. In the event of a breach of
this Section 3.6 by the Trust, it will a) immediately notify the Company of the
breach and b) take the necessary steps to adequately diversify each Portfolio so
as to achieve compliance within the grace period offered by Regulation 1.817-5.
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<PAGE>
ARTICLE IV
POTENTIAL CONFLICTS
4.1 The parties acknowledge that the Trust's shares may be made available
for investment to other Participating Insurance Companies. In such event, the
Trustees will monitor the Trust for the existence of any material irreconcilable
conflict between the interests of the contract owners of all Participating
Insurance Companies. An irreconcilable material conflict may arise for a variety
of reasons, including: (a) an action by any state insurance regulatory
authority; (b) a change in applicable federal or state insurance, tax, or
securities laws or regulations, or a public ruling, private letter ruling,
no-action or interpretative letter, or any similar action by insurance, tax, or
securities regulatory authorities; (c) an administrative or judicial decision in
any relevant proceeding; (d) the manner in which the investments of any
Portfolio are being managed; (e) a difference in voting instructions given by
variable annuity contract and variable life insurance contract owners; or (f) a
decision by an insurer to disregard the voting instructions of contract owners.
The Trustees shall promptly inform the Company if they determine that an
irreconcilable material conflict exists and the implications thereof.
4.2 The Company agrees to promptly report any potential or existing
conflicts of which it is aware to the Trustees. The Company will assist the
Trustees in carrying out their responsibilities under the Exemptive Order by
providing the Trustees with all information reasonably necessary for the
Trustees to consider any issues raised including, but not limited to,
information as to a decision by the Company to disregard Contract owner voting
instructions.
4.3 If it is determined by a majority of the Trustees, or a majority of its
disinterested Trustees, that a material irreconcilable conflict exists that
affects the interests of Contract owners, the Company shall, in cooperation with
other Participating Insurance Companies whose contract owners are also affected,
at its expense and to the extent reasonably practicable (as determined by the
Trustees) take whatever steps are necessary to remedy or eliminate the
irreconcilable material conflict, which steps could include: (a) withdrawing the
assets allocable to some or all of the Accounts from the Trust or any Portfolio
and reinvesting such assets in a different investment medium, including (but
not limited to) another Portfolio of the Trust, or submitting the question of
whether or not such segregation should be implemented to a vote of all affected
Contract owners and, as appropriate, segregating the assets of any appropriate
group (I.E., annuity contract owners, life insurance contract owners, or
variable contract owners of one or more Participating Insurance Companies) that
votes in favor of such segregation, or offering to the affected Contract owners
the option of making such a change; and (b) establishing a new registered
management investment company or managed separate account.
4.4 If a material irreconcilable conflict arises because of a decision by
the Company to disregard Contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Trust's election, to
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<PAGE>
withdraw the affected Account's investment in the Trust and terminate this
Agreement with respect to such Account; provided, however that such withdrawal
and termination shall be limited to the extent required by the foregoing
material irreconcilable conflict as determined by a majority the disinterested
Trustees. Any such withdrawal and termination must take place within six (6)
months after the Trust gives written notice that this provision is being
implemented. Until the end of such six (6) month period, the Trust shall
continue to accept and implement orders by the Company for the purchase and
redemption of shares of the Trust.
4.5 If a material irreconcilable conflict arises because a particular state
insurance regulator's decision applicable to the Company conflicts with the
majority of other state regulators, then the Company will withdraw the affected
Account's investment in the Trust and terminate this Agreement with respect to
such Account within six (6) months after the Trustees inform the Company in
writing that it has determined that such decision has created an irreconcilable
material conflict; provided, however, that such withdrawal and termination shall
be limited to the extent required by the foregoing material irreconcilable
conflict as determined by a majority of the disinterested Trustees. Until the
end of such six (6) month period, the Trust shall continue to accept and
implement orders by the Company for the purchase and redemption of shares of the
Trust.
4.6 For purposes of Sections 4.3 through 4.6 of this Agreement, a majority
of the disinterested Trustees shall determine whether any proposed action
adequately remedies any irreconcilable material conflict, but in no event will
the Company be required to establish a new funding medium for the Contracts if
an offer to do so has been declined by vote of a majority of Contract owners
materially adversely affected by the irreconcilable material conflict. In the
event that the Trustees determine that any proposed action does not adequately
remedy any irreconcilable material conflict, then the Company will withdraw the
Account's investment in the Trust and terminate this Agreement within six (6)
months after the Trustees inform the Company in writing of the foregoing
determination; provided, however, that such withdrawal and termination shall be
limited to the extent required by any such material irreconcilable conflict as
determined by a majority of the disinterested Trustees.
4.7 The Company shall at least annually submit to the Trustees such
reports, materials or data as the Trustees may reasonably request so that the
Trustees may fully carry out the duties imposed upon them by the Exemptive
Order, and said reports, materials and data shall be submitted more frequently
if deemed appropriate by the Trustees.
4.8 If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the
1940 Act or the rules promulgated thereunder with respect to mixed or shared
funding (as defined in the Exemptive Order) on terms and conditions
materially different from those contained in the Exemptive Order, then the
Trust and/or the Participating Insurance Companies, as appropriate, shall
take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T), as
amended, and Rule 6e-3, as adopted, to the extent such rules are applicable.
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ARTICLE V
INDEMNIFICATION
5.1 INDEMNIFICATION BY THE COMPANY. The Company agrees to indemnify and
hold harmless the Trust and each of its Trustees, officers, employees and agents
and each person, if any, who controls the Trust within the meaning of Section 15
of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this
Article V) against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Company) or expenses
(including the reasonable costs of investigating or defending any alleged loss,
claim, damage, liability or expense and reasonable legal counsel fees incurred
in connection therewith) (collectively, "Losses"), to which the Indemnified
Parties may become subject under any statute or regulation, or at common law or
otherwise, insofar as such Losses:
(a) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in a registration
statement or prospectus for the Contracts or in the Contracts themselves or
in sales literature generated or approved by the Company on behalf of the
Contracts or Accounts (or any amendment or supplement to any of the
foregoing) (collectively, "Company Documents" for the purposes of this
Article V), or arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, provided that
this indemnity shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or omission was made in
reliance upon and was accurately derived from written information furnished
to the Company by or on behalf of the Trust for use in Company Documents
or otherwise for use in connection with the sale of the Contracts or Trust
shares; or
(b) arise out of or result from statements or representations (other
than statements or representations contained in and accurately derived from
Trust Documents as defined in Section 5.2(a)) or wrongful conduct of the
Company or persons under its control, with respect to the sale or
acquisition of the Contracts or Trust shares; or
(c) arise out of or result from any untrue statement or alleged untrue
statement of a material fact contained in Trust Documents as defined in
Section 5.2(a) or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading if such statement or omission was made in
reliance upon and accurately derived from written information furnished to
the Trust by or on behalf of the Company; or
(d) arise out of or result from any failure by the Company to provide
the services or furnish the materials required under the terms of this
Agreement; or
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<PAGE>
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this Agreement or
arise out of or result from any other material breach of this Agreement by
the Company.
(f) arise out of (i) a failure by TRUST to substantially provide the
services and furnish the materials under the terms of this Agreement; or
(ii) a failure by a Portfolio(s) invested in by the Separate Account to
comply with the diversification requirements of Section 817(h) of the Code;
or (iii) a failure by a Portfolio(s) invested in by the Separate Account to
qualify as a "regulated investment company" under Subchapter M of the code.
5.2 INDEMNIFICATION BY THE TRUST. The Trust agrees to indemnify and hold
harmless the Company and each of its directors, officers, employees and agents
and each person, if any, who controls the Company within the meaning of Section
15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this
Article V) against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Trust) or expenses
(including the reasonable costs of investigating or defending any alleged loss,
claim, damage, liability or expense and reasonable legal counsel fees incurred
in connection therewith) (collectively, "Losses"), to which the Indemnified
Parties may become subject under any statute or regulation, or at common law or
otherwise, insofar as such Losses:
(a) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in the registration
statement or prospectus for the Trust (or any amendment or supplement
thereto), (collectively, "Trust Documents" for the purposes of this Article
V), or arise out of or are based upon the omission or the alleged omission
to state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading, provided that this indemnity
shall not apply as to any Indemnified Party if such statement or omission
or such alleged statement or omission was made in reliance upon and was
accurately derived from written information furnished to the Trust by or on
behalf of the Company for use in Trust Documents or otherwise for use in
connection with the sale of the Contracts or Trust shares; or
(b) arise out of or result from statements or representations (other
than statements or representations contained in and accurately derived from
Company Documents) or wrongful conduct of the Trust or persons under its
control, with respect to the sale or acquisition of the Contracts or Trust
shares; or
(c) arise out of or result from any untrue statement or alleged untrue
statement of a material fact contained in Company Documents or the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading if such
statement or omission was made in reliance upon and accurately derived from
written information furnished to the Company by or on behalf of the Trust;
or
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<PAGE>
(d) arise out of or result from any failure by the Trust to provide
the services or furnish the materials required under the terms of this
Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Trust in this Agreement or arise
out of or result from any other material breach of this Agreement by the
Trust.
5.3 Neither the Company nor the Trust shall be liable under the
indemnification provisions of Sections 5.1 or 5.2, as applicable, with respect
to any Losses incurred or assessed against an Indemnified Party that arise from
such Indemnified Party's willful misfeasance, bad faith or negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations or duties under this Agreement.
5.4 Neither the Company nor the Trust shall be liable under the
indemnification provisions of Sections 5.1 or 5.2, as applicable, with respect
to any claim made against an Indemnified Party unless such Indemnified Party
shall have notified the other party in writing within a reasonable time after
the summons, or other first written notification, giving information of the
nature of the claim shall have been served upon or otherwise received by such
Indemnified Party (or after such Indemnified Party shall have received notice of
service upon or other notification to any designated agent), but failure to
notify the party against whom indemnification is sought of any such claim shall
not relieve that party from any liability which it may have to the Indemnified
Party in the absence of Sections 5.1 and 5.2.
5.5 in case any such action is brought against the Indemnified Parties, the
indemnifying party shall be entitled to participate, at its own expense, in the
defense of such action. The indemnifying party also shall be entitled to assume
the defense thereof, with counsel reasonably satisfactory to the party named in
the action. After notice from the indemnifying party to the Indemnified Party of
an election to assume such defense, the Indemnified Party shall bear the fees
and expenses of any additional counsel retained by it, and the indemnifying
party will not be liable to the Indemnified Party under this Agreement for any
legal or other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
ARTICLE VI
TERMINATION
6.1 This Agreement may be terminated:
(a) by either party for any reason by ninety (90) days advance written
notice delivered to the other party; or
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<PAGE>
(b) at the option of the Company if shares of the Fund are not
available to meet the requirements of the Contracts as determined by the
Company. Prompt notice of the election to terminate for such cause shall be
furnished by the Company. Termination shall be effective ten days after the
giving of notice by the Company; or
(c) at the option of the Fund upon institution of formal proceedings
against the Company by the NASD, the SEC, the insurance commission of any
state or any other regulatory body regarding the Company's duties under
this Agreement or related to the sale of the Contracts, the operation of
each Account, the administration of the Contracts or the purchase of Fund
shares, or an expected ruling, judgment or outcome which would, in the
Fund's reasonable judgment, materially impair the Company's ability to
perform the Company's obligations and duties hereunder; or
(d) at the option of the Company upon institution of formal
proceedings against the Fund, the Fund's distributor, the Fund's investment
manager or any subinvestment manager, by the NASD, the SEC, or any state
securities or insurance commission or any other regulatory body regarding
the duties of the Fund or its distributor under this Agreement, or an
expected or anticipated ruling, judgment or outcome which would, in the
Company's reasonable judgment, materially impair the Fund's or the
distributor's ability to perform Fund's or distributor's obligations and
duties hereunder; or
(e) at the option of the Company upon institution of formal
proceedings against the Fund's investment manager or sub-investment manager
by the NASD, the SEC, or any state securities or insurance commission or
any other regulatory body which would, in the good faith opinion of the
Company, result in material harm to the Accounts, the Company, or
Contractowners; or
(f) upon requisite vote of the Contract owners having an interest in
the affected Portfolios (unless otherwise required by applicable law) and
written approval of the Company, to substitute the shares of another
investment company for the corresponding shares of the Fund in accordance
with the terms of the Contracts; or
(g) at the option of the Fund in the event any of the Contracts are
not registered, issued or sold in accordance with applicable Federal and/or
state law; or
(h) at the option of the Company or the Fund upon a determination by a
majority of the Fund Board, or a majority of disinterested Fund Board
members, that an irreconcilable material conflict exists among the
interests of (i) any contract owners or (ii) the interests of the
Participating Insurance Companies investing in the Fund; or
(i) at the option of the Company if the Fund ceases to qualify as a
Regulated Investment Company under Subchapter M of the Code, or under any
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<PAGE>
successor or similar provision, or if the Company reasonably believes,
based on an opinion of its counsel, that the Fund may fail to so qualify;
or
(j) at the option of the Company if the Fund fails to meet the
diversification requirements specified in Section 817(h) of the Code and
any regulations thereunder; or
(k) at the option of the Fund if the Contracts cease to qualify as
annuity contracts or life insurance policies, as applicable, under the
Code, or if the Fund reasonably believes that the Contracts may fail to so
qualify; or
(l) at the option of either the Fund or the Distributor if the Fund or
the Distributor, respectively, shall determine, in their sole judgment
exercised in good faith, that either (1) the Company shall have suffered a
material adverse change in its business or financial condition; or (2) the
Company shall have been the subject of material adverse publicity which is
likely to have a material adverse impact upon the business and operations
of either the Fund or its distributor; or
(m) at the option of the Company, if the Company shall determine, in
its sole judgment exercised in good faith, that either: (1) the Fund and
its distributor, or either of them, shall have suffered a material adverse
change in their respective businesses or financial condition; or (2) the
Fund or its distributor, or both of them, shall have been the subject of
material adverse publicity which is likely to have a material adverse
impact upon the business and operations of the Company; or
(n) upon the assignment of this Agreement (including, without
limitation, any transfer of the Contracts or the Accounts to another
insurance company pursuant to an assumption reinsurance agreement) unless
the non-assigning party consents thereto or unless this Agreement is
assigned to an affiliate of the Fund's distributor.
6.2 Notwithstanding any termination of this Agreement, the Trust shall, at
the option of the Company, continue to make available additional shares of the
Trust (or any Portfolio) pursuant to the terms and conditions of this Agreement
for all Contracts in effect on the effective date of termination of this
Agreement, [provided that the Company continues to pay the costs set forth in
Section 2.3].
6.3 The provisions of Article V shall survive the termination of this
Agreement, and the provisions of Article IV and Section 2.8 shall survive the
termination of this Agreement as long as shares of the Trust are held on behalf
of Contract owners in accordance with Section 6.2.
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<PAGE>
ARTICLE VII
NOTICES
Any notice shall be sufficiently given when sent by registered or certified
mail to the other party at the address of such party set forth below or at such
other address as such party may from time to time specify in writing to the
other party.
If to the Trust:
Janus Aspen Series
100 Fillmore Street
Denver, Colorado 80206
Attention: General Counsel
If to the Company:
Lincoln National Life Insurance Co.
1300 S. Clinton Street
Fort Wayne, IN 46802
Attention: Kelly D. Clevenger
ARTICLE VIII
MISCELLANEOUS
8.1 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
8.2 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
8.3 If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Agreement shall
not be affected thereby.
8.4 This Agreement shall be construed and the provisions hereof interpreted
under and in accordance with the laws of State of Colorado.
8.5 The parties to this Agreement acknowledge and agree that all
liabilities of the Trust arising, directly or indirectly, under this Agreement,
of any and every nature whatsoever, shall be satisfied solely out of the assets
of the Trust and that no Trustee, officer, agent or holder of shares of
beneficial interest of the Trust shall be personally liable for any such
liabilities.
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<PAGE>
8.6 Each party shall cooperate with each other party and all appropriate
governmental authorities (including without limitation the Securities and
Exchange Commission, the National Association of Securities Dealers, Inc., and
state insurance regulators) and shall permit such authorities reasonable access
to its books and records in connection with any investigation or inquiry
relating to this Agreement or the transactions contemplated hereby.
8.7 The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations,
at law or in equity, which the parties hereto are entitled to under state and
federal laws.
8.8 The parties to this Agreement acknowledge and agree that this Agreement
shall not be exclusive in any respect.
8.9 Neither this Agreement nor any rights or obligations hereunder may be
assigned by either party without the prior written approval of the other party.
8.10 No provisions of this Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed by both
parties.
IN WITNESS WHEREOF, the parties have caused their duly authorized officers
to execute this Participation Agreement as of the date and year first above
written.
JANUS ASPEN SERIES
By: /s/ Bonnie Howe
--------------------------------
Name: Bonnie M. Howe
--------------------------------
Title: Assistant Vice President
--------------------------------
THE LINCOLN NATIONAL LIFE
INSURANCE COMPANY
By: /s/ Kelly D. Clevenger
--------------------------------
Name: Kelly D. Clevenger
--------------------------------
Title: Vice President
--------------------------------
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<PAGE>
SCHEDULE A
SEPARATE ACCOUNTS AND ASSOCIATED CONTRACTS
Name of Separate Account and Contracts Funded
Date Established by Board of Directors By Separate Account
- -------------------------------------- -------------------
Lincoln National Variable Multi Fund Individual
Annuity Account C Variable Annuity and e Annuity
(Established June 3, 1981)
Lincoln National Variable GVA I, II, III
Annuity Account L (non-New York)
Lincoln Life Variable Multi Fund Group
Annuity Account Q Variable Annuity
(non-New York)
Lincoln National Life Insurance Director Group
Company Separate Account 34 Variable Annuity
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<PAGE>
AMENDMENT DATED , 1998
TO THE FUND PARTICIPATION AGREEMENT
BACKGROUND
WHEREAS, JANUS ASPEN SERIES (the "Trust"), and LINCOLN NATIONAL LIFE
INSURANCE COMPANY (The "Company") entered into a Fund Participation Agreement
dated September 25, 1998.
WHEREAS, the parties now desire to modify the Agreement as follows:
AMENDMENT
For good and valuable consideration the receipt of which is acknowledged, the
parties agree that:
1. Section 2.3. OBLIGATIONS OF THE PARTIES be amended with the addition
of the following:
If the Company elects to include any materials provided by the Trust,
specifically prospectuses, SAIs, shareholder reports and proxy materials, on its
web site or any other computer or electronic format, the Company assumes sole
responsibility for maintaining such materials in the form provided by the Trust
and for promptly replacing such materials with all updates provided by the
Trust.
2. The Agreement, as modified by this Amendment, is ratified and
confirmed.
LINCOLN NATIONAL LIFE JANUS ASPEN SERIES
INSURANCE COMPANY
By: /s/ Kelly D. Clevenger By:
------------------------- ----------------------
Name: Kelly D. Clevenger Bonnie M. Howe
------------------------ Assistant Vice President
Title: Vice President
-----------------------
<PAGE>
FUND PARTICIPATION AGREEMENT
THIS AGREEMENT made as of the 18th day of September, 1998, by and between
NEUBERGER&BERMAN ADVISERS MANAGEMENT TRUST ("TRUST"), a Delaware business trust,
ADVISERS MANAGERS TRUST ("MANAGERS TRUST"), a New York common law trust,
NEUBERGER&BERMAN MANAGEMENT INCORPORATED ("N&B MANAGEMENT"), a New York
corporation, and THE LINCOLN NATIONAL LIFE INSURANCE COMPANY ("LIFE COMPANY"), a
life insurance company organized under the laws of the State of Indiana.
WHEREAS, TRUST and MANAGERS TRUST are registered with the Securities and
Exchange Commission ("SEC") under the Investment Company Act of 1940, as amended
("40 Act") as open-end, diversified management investment companies; and
WHEREAS, TRUST is organized as a series fund comprised of several
portfolios ("Portfolios"), the currently available of which are listed on
Appendix A hereto; and
WHEREAS, MANAGERS TRUST is organized as a series fund, comprised of
several portfolios ("Series"), the currently operational of which are listed on
Appendix A hereto; and
WHEREAS, each Portfolio of TRUST will invest all of its net investable
assets in a corresponding Series of MANAGERS TRUST; and
WHEREAS, TRUST was organized to act as the funding vehicle for certain
variable life insurance and/or variable annuity contracts ("Variable Contracts")
offered by life insurance companies through separate accounts of such life
insurance companies ("Participating Insurance Companies") and also offers its
shares to certain qualified pension and retirement plans; and
WHEREAS, TRUST has received an order from the SEC, dated May 5,1995 (File
No. 812-9164), granting Participating Insurance Companies and their separate
accounts exemptions from the provisions of Sections 9(a), 13(a), 15(a) and 15(b)
of the '40 Act, and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the
extent necessary to permit shares of the Portfolios of the TRUST to be sold to
and held by variable annuity and variable life insurance separate accounts of
both affiliated and unaffiliated life insurance companies and certain qualified
pension and retirement plans (the "Order"); and
WHEREAS, LIFE COMPANY has established or will establish one or more
separate accounts ("Separate Accounts") to offer Variable Contracts and is
desirous of having one or more Portfolios of the TRUST as one or more of the
underlying funding vehicles for such Variable Contracts; and
WHEREAS, N&B MANAGEMENT is registered with the SEC as an investment
adviser under the Investment Advisers Act of 1940, as amended, and as a
broker-dealer under the Securities Exchange Act of 1934, as amended; and
<PAGE>
WHEREAS, N&B MANAGEMENT is the administrator and distributor of the
shares of each Portfolio of TRUST and investment manager of the corresponding
Series of MANAGERS TRUST; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, LIFE COMPANY intends to purchase shares of TRUST to fund the
aforementioned Variable Contracts and TRUST is authorized to sell such shares to
LIFE COMPANY at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, LIFE COMPANY,
TRUST, MANAGERS TRUST and N&B MANAGEMENT agree as follows:
Article 1. SALE OF TRUST SHARES
1.1 TRUST agrees to make available to the Separate Accounts of LIFE
COMPANY shares of the selected Portfolios as listed in Appendix B for investment
of proceeds from Variable Contracts allocated to the designated Separate
Accounts, such shares to be offered as provided in TRUST's Prospectus.
1.2 TRUST agrees to sell to LIFE COMPANY those shares of the selected
Portfolios of TRUST which LIFE COMPANY orders, executing such orders on a daily
basis at the net asset value next computed after receipt by TRUST or its
designee of the order for the shares of TRUST. For purposes of this Section 1.2,
LIFE COMPANY shall be the designee of TRUST for receipt of such orders from LIFE
COMPANY and receipt by such designee shall constitute receipt by TRUST; provided
that TRUST receives notice of such order by 9:30 a.m. New York time on the next
following Business Day. "Business Day" shall mean any day on which the New York
Stock Exchange is open for trading and on which TRUST calculates its net asset
value pursuant to the rules of the SEC.
1.3 TRUST agrees to redeem for cash, on LIFE COMPANY's request, any
full or fractional shares of TRUST held by LIFE COMPANY, executing such requests
on a daily basis at the net asset value next computed after receipt by TRUST or
its designee of the request for redemption. For purposes of this Section 1.3,
LIFE COMPANY shall be the designee of TRUST for receipt of requests for
redemption from LIFE COMPANY and receipt by such designee shall constitute
receipt by TRUST; provided that TRUST receives notice of such request for
redemption by 9:30 a.m. New York time on the next following Business Day.
1.4 TRUST shall furnish, on or before the ex-dividend date, notice to
LIFE COMPANY of any income dividends or capital gain distributions payable on
the shares of any Portfolio of TRUST. LIFE COMPANY hereby elects to receive all
such income dividends and capital gain distributions as are payable on a
Portfolio's shares in additional shares of the Portfolio. TRUST shall notify
LIFE COMPANY of the number of shares so issued as payment of such dividends and
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<PAGE>
distributions. LIFE COMPANY reserves the right to elect to receive any such
income dividends or capital gain distributions in cash.
1.5 TRUST shall make the net asset value per share for the selected
Portfolio(s) available to LIFE COMPANY on a daily basis as soon as reasonably
practicable after the net asset value per share is calculated but shall use its
best efforts to make such net asset value available by 6:00 p.m. New York time.
If TRUST provides LIFE COMPANY with materially incorrect share net asset value
information through no fault of LIFE COMPANY, LIFE COMPANY on behalf of the
Separate Accounts, shall be entitled to an adjustment to the number of shares
purchased or redeemed to reflect the correct share net asset value. Any material
error in the calculation of net asset value per share, dividend or capital gain
information shall be reported promptly upon discovery by TRUST or N&B
MANAGEMENT to LIFE COMPANY.
1.6 At the end of each Business Day, LIFE COMPANY shall use the
information described in Section 1.5 to calculate Separate Account unit values
for the day. Using these unit values, LIFE COMPANY shall process each such
Business Day's Separate Account transactions based on requests and premiums
received by it by the close of trading on the floor of the New York Stock
Exchange (currently 4:00 p.m. New York time) to determine the net dollar amount
of TRUST shares which shall be purchased or redeemed at that day's closing net
asset value per share. The net purchase or redemption orders so determined shall
be transmitted to TRUST by LIFE COMPANY by 9:30 a.m. New York Time on the
Business Day next following LIFE COMPANY's receipt of such requests and premiums
in accordance with the terms of Sections 1.2 and 1.3 hereof. TRUST shall provide
written confirmations of all purchase or redemption orders of TRUST shares to
LIFE COMPANY by 2:00 p.m. New York time on the Business Day that such purchase
or redemption orders are received by the TRUST in accordance with the terms of
Sections 1.2 and 1.3 hereof.
1.7 If LIFE COMPANY's order requests the purchase of TRUST shares,
LIFE COMPANY shall pay for such purchase by wiring federal funds to TRUST or
its designated custodial account on the day the order is transmitted by LIFE
COMPANY. If LIFE COMPANY's order requests a net redemption resulting in a
payment of redemption proceeds to LIFE COMPANY, TRUST shall wire the redemption
proceeds to LIFE COMPANY on the day the order is transmitted by LIFE COMPANY,
unless doing so would require TRUST to dispose of portfolio securities or
otherwise incur additional costs, but in such event, proceeds shall be wired to
LIFE COMPANY within seven days and TRUST shall notify the person designated in
writing by LIFE COMPANY as the recipient for such notice of such delay by 3:00
p.m. New York Time the same Business Day that LIFE COMPANY transmits the
redemption order to TRUST. If LIFE COMPANY's order requests the application of
redemption proceeds from the redemption of shares to the purchase of shares of
another fund administered or distributed by N&B MANAGEMENT, TRUST shall so apply
such proceeds the same Business Day that LIFE COMPANY transmits such order to
TRUST.
3
<PAGE>
1.8 Notwithstanding Section 1.7, TRUST reserves the right to suspend
the right of redemption or postpone the date of payment or satisfaction upon
redemption consistent with Section 22(e) of the 40 Act and any rules thereunder.
1.9 TRUST agrees that all shares of the Portfolios of TRUST will be
sold only to Participating Insurance Companies which have agreed to participate
in TRUST to fund their Separate Accounts and/or to certain qualified pension and
other retirement plans, all in accordance with the requirements of Section
817(h) of the Internal Revenue Code of 1986, as amended ("Code") and Treasury
Regulation 1.817-5. Shares of the Portfolios of TRUST will not be sold directly
to the general public.
1.10 TRUST may refuse to sell shares of any Portfolio to any person, or
suspend or terminate the offering of the shares of any Portfolio if such action
is required by law or by regulatory authorities having jurisdiction or is, in
the sole discretion of the Board of Trustees of TRUST, acting in good faith and
in light of its fiduciary duties under federal and any applicable state laws,
deemed necessary and in the best interests of the shareholders of such
Portfolios.
Article II. REPRESENTATIONS AND WARRANTIES
2.1 LIFE COMPANY represents and warrants that it is an insurance
company duly organized and validly existing under the laws of Indiana and that
it has legally and validly established each Separate Account as a segregated
asset account under such laws, and that LIFE COMPANY, the principal underwriter
for the Variable Contracts, is registered as a broker-dealer under the
Securities Exchange Act of 1934.
2.2 LIFE COMPANY represents and warrants that it has registered or,
prior to any issuance or sale of the Variable Contracts, will register each
Separate Account as a unit investment trust ("UIT") in accordance with the
provisions of the '40 Act and cause each Separate Account to remain so
registered to serve as a segregated asset account for the Variable Contracts,
unless an exemption from registration is available.
2.3 LIFE COMPANY represents and warrants that the Variable Contracts
will be registered under the Securities Act of 1933 (the "'33 Act"), unless an
exemption from registration is available, prior to any issuance or sale of the
Variable Contracts and that the Variable Contracts will be issued and sold in
compliance in all material respects with all applicable federal and state laws,
including any applicable state insurance law suitability requirement.
2.4 LIFE COMPANY represents and warrants that the Variable Contracts
are currently and at the time of issuance will be treated as life insurance,
endowment or annuity contracts under applicable provisions of the Code, that it
will maintain such treatment and that it will notify TRUST immediately upon
having a reasonable basis for believing that the Variable Contracts have ceased
to be so treated or that they might not be so treated in the future.
4
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2.5 LIFE COMPANY represents and warrants that it shall deliver such
prospectuses, statements of additional information, proxy statements and
periodic reports of the Trust as may be required to be delivered under
applicable federal or state law and interpretations of federal and state
securities regulators thereunder in connection with the offer and sale of the
Variable Contracts.
2.6 TRUST represents and warrants that the Portfolio shares offered
and sold pursuant to this Agreement will be registered under the '33 Act and
sold in accordance with all applicable federal and state laws, and TRUST shall
be registered under the '40 Act prior to and at the time of any issuance or sale
of such shares. TRUST shall amend its registration statement under the '33 Act
and the '40 Act from time to time as required in order to effect the continuous
offering of its shares. TRUST shall register and qualify its shares for sale in
accordance with the laws of the various states only if and to the extent deemed
advisable by TRUST.
2.7 TRUST represents and warrants that each Portfolio will comply with
the diversification requirements set forth in Section 817(h) of the Code, and
the rules and regulations thereunder, including without limitation Treasury
Regulation 1.817-5, and will notify LIFE COMPANY immediately upon having a
reasonable basis for believing any Portfolio has ceased to comply or might not
so comply and will immediately take all reasonable steps to adequately diversify
the Portfolio to achieve compliance within the grace period afforded by
Regulation 1.817-5.
2.8 TRUST represents and warrants that each Portfolio invested in by
the Separate Account is currently qualified as a "regulated investment company"
under Subchapter M of the Code, that it will make every effort to maintain such
qualification and will notify LIFE COMPANY immediately upon having a reasonable
basis for believing it has ceased to so qualify or might not so qualify in the
future.
Article III. PROSPECTUS AND PROXY STATEMENTS
3.1 TRUST shall prepare and be responsible for filing with the SEC and
any state regulators requiring such filing all shareholder reports, notices,
proxy materials (or similar materials such as voting instruction solicitation
materials), prospectuses and statements of additional information of TRUST.
TRUST shall bear the costs of registration and qualification of shares of the
Portfolios, preparation and filing of the documents listed in this Section 3.1
and all taxes to which an issuer is subject on the issuance and transfer of its
shares.
3.2 TRUST will bear the printing costs (or duplicating costs with
respect to the statement of additional information) and mailing costs associated
with the delivery of the following TRUST (or individual Portfolio) documents,
and any supplements thereto, to existing Variable Contract owners of LIFE
COMPANY:
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(i) prospectuses and statements of additional information;
(ii) annual and semi-annual reports; and
(iii) proxy materials.
LIFE COMPANY will submit any bills for printing, duplicating
and/or mailing costs, relating to the TRUST (or individual Portfolio) documents
described above, to TRUST for reimbursement by TRUST. LIFE COMPANY shall monitor
such costs and shall use its best efforts to control these costs. LIFE COMPANY
will provide TRUST on a semi-annual basis, or more frequently as reasonably
requested by TRUST, with a current tabulation of the number of existing Variable
Contract owners of LIFE COMPANY whose Variable Contract values are invested in
TRUST. This tabulation will be sent to TRUST in the form of a letter signed by a
duly authorized officer of LIFE COMPANY attesting to the accuracy of the
information contained in the letter. If requested by LIFE COMPANY, the TRUST
shall provide such documentation (including a final copy of the TRUST's
prospectus as set in type or in camera-ready copy) and other assistance as is
reasonably necessary in order for LIFE COMPANY to print together in one document
the current prospectus for the Variable Contracts issued by LIFE COMPANY and the
current prospectus for the TRUST. For purposes of this Article III, if LIFE
COMPANY so requests, TRUST will provide a separate prospectus for each TRUST
Portfolio used in a particular Separate Account, provided such prospectus is
contained in the TRUST's currently effective registration statement. Should LIFE
COMPANY wish to print any of these documents in a format different from that
provided by TRUST, LIFE COMPANY shall provide Trust with sixty (60) days' prior
written notice and LIFE COMPANY shall bear the cost associated with any format
change.
3.3 TRUST will provide, at its expense, LIFE COMPANY with the
following TRUST (or individual Portfolio) documents, and any supplements
thereto, with respect to prospective Variable Contract owners of LIFE COMPANY:
(i) camera-ready copy of the current prospectus for printing by
the LIFE COMPANY;
(ii) camera-ready copies of the individual Portfolio
prospectuses filed as part of the TRUST's registration
statement;
(iii) a copy of the statement of additional information suitable
for duplication;
(iv) camera-ready copy of proxy material suitable for printing;
and
(v) camera-ready copy of the annual and semi-annual reports for
printing by the LIFE COMPANY.
6
<PAGE>
3.4 TRUST will provide LIFE COMPANY with at least one complete copy of
all prospectuses, statements of additional information, annual and semi-annual
reports, proxy statements, exemptive applications and all amendments or
supplements to any of the above that relate to the Portfolios within 20 days
after the filing of each such document with the SEC or other regulatory
authority. LIFE COMPANY will provide TRUST with at least one complete copy of
all prospectuses, statements of additional information, annual and semi-annual
reports, proxy statements, exemptive applications and all amendments or
supplements to any of the above that relate to a Separate Account and the TRUST
within 20 days after the filing of each such document with the SEC or other
regulatory authority.
Article IV. SALES MATERIALS
4.1 LIFE COMPANY will furnish, or will cause to be furnished, to TRUST
and N&B MANAGEMENT, each piece of sales literature or other promotional material
in which TRUST, MANAGERS TRUST or N&B MANAGEMENT is named, at least ten (10)
Business Days prior to its intended use. No such material will be used if TRUST,
MANAGERS TRUST or N&B MANAGEMENT objects to its use in writing within five (5)
Business Days after receipt of such material.
4.2 TRUST and N&B MANAGEMENT will furnish, or will cause to be
furnished, to LIFE COMPANY, each piece of sales literature or other promotional
material in which LIFE COMPANY or its Separate Accounts are named, at least ten
(10) Business Days prior to its intended use. No such material will be used if
LIFE COMPANY objects to its use in writing within five (5) Business Days after
receipt of such material.
4.3 TRUST and its affiliates and agents shall not give any information
or make any representations on behalf of LIFE COMPANY or concerning LIFE
COMPANY, the Separate Accounts, or the Variable Contracts issued by LIFE
COMPANY, other than the information or representations contained in a
registration statement, prospectus or offering statement for such Variable
Contracts, as such registration statement, prospectus or offering statement may
be amended or supplemented from time to time, or in reports of the Separate
Accounts or reports prepared for distribution to owners of such Variable
Contracts, or in sales literature or other promotional material approved by LIFE
COMPANY or its designee, except with the written permission of LIFE COMPANY.
4.4 LIFE COMPANY and its affiliates and agents shall not give any
information or make any representations on behalf of TRUST or concerning TRUST
other than the information or representations contained in a registration
statement or prospectus for TRUST, as such registration statement and prospectus
may be amended or supplemented from time to time, or in sales literature or
other promotional material approved by TRUST or its designee, except with the
written permission of TRUST.
7
<PAGE>
4.5 For purposes of this Agreement, the phrase "sales literature or
other promotional material" or words of similar import include, without
limitation, advertisements (such as material published, or designed for use, in
a newspaper, magazine or other periodical, radio, television, telephone or tape
recording, videotape display, signs or billboards, motion pictures or other
public media), sales literature (such as any written communication distributed
or made generally available to customers or the public, including brochures,
circulars, research reports, market letters, form letters, seminar texts, or
reprints or excerpts of any other advertisement, sales literature, or published
article), educational or training materials or other communications distributed
or made generally available to some or all agents or employees, registration
statements, prospectuses, statements of additional information, shareholder
reports and proxy materials, and any other material constituting sales
literature or advertising under National Association of Securities Dealers, Inc.
rules, the '40 Act or the '33 Act.
Article V. POTENTIAL CONFLICTS
5.1 The Board of Trustees of TRUST and MANAGERS TRUST (the "Boards")
will monitor TRUST and MANAGERS TRUST, respectively, (collectively the "Funds"),
for the existence of any material irreconcilable conflict between the interests
of the Variable Contract owners of Participating Insurance Company Separate
Accounts investing in the Funds. A material irreconcilable conflict may arise
for a variety of reasons, including: (a) state insurance regulatory authority
action; (b) a change in applicable federal or state insurance, tax, or
securities laws or regulations, or a public ruling, private letter ruling, or
any similar action by insurance, tax, or securities regulatory authorities; (c)
an administrative or judicial decision in any relevant proceeding; (d) the
manner in which the investments of the Funds are being managed; (e) a difference
in voting instructions given by variable annuity and variable life insurance
contract owners or by contract owners of different Participating Insurance
Companies; or (f) a decision by a Participating Insurance Company to disregard
voting instructions of Variable Contract owners.
5.2 LIFE COMPANY will report any potential or existing conflicts to
the Boards. LIFE COMPANY will provide each appropriate Board with all
information reasonably necessary for it to consider any issues raised in
carrying out its responsibilities under the Conditions set forth in the notice
issued by the SEC for the Funds on April 12, 1995 (the "Notice") (Investment
Company Act Release No. 21003), which LIFE COMPANY has reviewed. LIFE COMPANY
will inform each appropriate Board whenever Variable Contract owner voting
instructions are disregarded by LIFE COMPANY. These responsibilities will be
carried out with a view only to the interests of the Variable Contract owners.
5.3 If a majority of the Board of a Fund or a majority of its
disinterested trustees or directors, determines that a material irreconcilable
conflict exists, affecting the LIFE COMPANY, LIFE COMPANY, at its expense and
to the extent reasonably practicable (as determined by a
8
<PAGE>
majority of disinterested trustees or directors), will take any steps necessary
to remedy or eliminate the material irreconcilable conflict consistent with the
terms and conditions set forth in the Notice.
If a material irreconcilable conflict arises because of LIFE COMPANY's
decision to disregard Variable Contract owner voting instructions, and that
decision represents a minority position or would preclude a majority vote, LIFE
COMPANY may be required, at the election of the relevant Fund, to withdraw its
Separate Account's investment in such Fund, and no charge or penalty will be
imposed as a result of such withdrawal. The responsibility to take such remedial
action shall be carried out with a view only to the interests of the Variable
Contract owners.
For the purposes of this Section 5.3, a majority of the disinterested
members of the applicable Board shall determine whether or not any proposed
action adequately remedies any irreconcilable material conflict, but in no event
will the relevant Fund or N&B MANAGEMENT (or any other investment adviser of the
Funds) be required to establish a new funding medium for any Variable Contract.
5.4 Any Board's determination of the existence of an irreconcilable
material conflict and its implications shall be made known promptly and in
writing to LIFE COMPANY.
5.5 No less than annually, LIFE COMPANY shall submit to the Boards
such reports, materials or data as such Boards may reasonably request so that
the Boards may fully carry out the obligations imposed upon them by these
Conditions. Such reports, materials, and data shall be submitted more frequently
if deemed appropriate by the applicable Boards, provided that such request shall
not be unreasonable.
Article VI. VOTING
6.1 LIFE COMPANY will provide pass-through voting privileges to all
Variable Contract owners participating in registered Separate Accounts so long
as the SEC continues to interpret the '40 Act as requiring pass-through voting
privileges for such Variable Contract owners. This condition will apply to
UIT-Separate Accounts investing in TRUST and to managed separate accounts
investing in MANAGERS TRUST to the extent a vote is required with respect to
matters relating to MANAGERS TRUST. Accordingly, LIFE COMPANY, where applicable,
will vote shares of a Fund held in its registered Separate Accounts in a manner
consistent with voting instructions timely received from its Variable Contract
owners. LIFE COMPANY will be responsible for assuring that each of its
registered Separate Accounts that participates in any Fund calculates voting
privileges in a manner consistent with other participants as defined in the
Conditions set forth in the Notice ("Participants"). The obligation to calculate
voting privileges in a manner consistent with all other registered Separate
Accounts investing in a Fund will be a contractual obligation of all
Participants under the agreements governing participation in the Funds. Each
Participant will vote shares held in a given registered Separate Account for
which it has not
9
<PAGE>
received timely voting instructions, as well as shares it owns, in the same
proportion as its votes those shares in that Account for which it has received
voting instructions.
6.2 If and to the extent Rule 6e-2 and Rule 6e-3(T) are amended, or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the '40
Act or the rules thereunder with respect to mixed and shared funding on terms
and conditions materially different from any exemptions granted in the Order,
then TRUST, MANAGERS TRUST and/or the Participants, as appropriate, shall take
such steps as may be necessary to comply with Rule 6e-2 and Rule 6e-3(T), as
amended, and Rule 6e-3, as adopted, to the extent such Rules are applicable.
Article VII. INDEMNIFICATION
7.1 INDEMNIFICATION BY LIFE COMPANY. LIFE COMPANY agrees to indemnify
and hold harmless TRUST, MANAGERS TRUST, N&B MANAGEMENT and each of their
Trustees, directors, officers, employees and agents and each person, if any, who
controls TRUST or MANAGERS TRUST or N&B MANAGEMENT within the meaning of Section
15 of the '33 Act (collectively, the "Indemnified Parties" for purposes of this
Article VII) against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of LIFE COMPANY, which
consent shall not be unreasonably withheld) or litigation (including reasonable
legal and other expenses), to which the Indemnified Parties may become subject
under any statute, regulation, at common law or otherwise, insofar as such
losses, claims, damages, liabilities or expenses (or actions in respect thereof)
or settlements are related to the offer, sale or acquisition of TRUST's shares
or the Variable Contracts and:
(a) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained in
the Registration Statement or prospectus for the Variable
Contracts or contained in the Variable Contracts (or any
amendment or supplement to any of the foregoing), or arise
out of or are based upon the omission or the alleged
omission to state therein a material fact required to be
stated therein or necessary to make the statements therein
not misleading, provided that this agreement to indemnify
shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or omission
was made in reliance upon and in conformity with
information furnished to LIFE COMPANY by or on behalf of
TRUST for use in the registration statement or prospectus
for the Variable Contracts or in the Variable Contracts or
sales literature (or any amendment or supplement to any of
the foregoing) or otherwise for use in connection with the
sale of the Variable Contracts or TRUST shares; or
(b) arise out of or as a result of untrue statements or
representations (other than statements or representations
contained in the registration statement, prospectus or
sales literature of TRUST not supplied by LIFE COMPANY,
10
<PAGE>
or persons under its control) or wilful misfeasance, bad
faith or negligence of LIFE COMPANY or persons under its
control, with respect to the sale or distribution of the
Variable Contracts or TRUST shares; or
(c) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a registration
statement, prospectus, or sales literature of TRUST or any
amendment thereof or supplement thereto or the omission or
alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements
therein not misleading if such statement or omission or
such alleged statement or omission was made in reliance
upon and in conformity with information furnished to TRUST
for inclusion therein by or on behalf of LIFE COMPANY; or
(d) arise as a result of any failure by LIFE COMPANY to
substantially provide the services and furnish the
materials under the terms of this Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by LIFE COMPANY in this
Agreement or arise out of or result from any other material
breach of this Agreement by LIFE COMPANY.
7.2 LIFE COMPANY shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations or duties under this Agreement or to
TRUST, whichever is applicable.
7.3 LIFE COMPANY shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified LIFE COMPANY in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify LIFE COMPANY of any
such claim shall not relieve LIFE COMPANY from any liability which it may have
to the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against an Indemnified Party, LIFE COMPANY shall be entitled to participate at
its own expense in the defense of such action. LIFE COMPANY also shall be
entitled to assume the defense thereof, with counsel reasonably satisfactory to
the party named in the action. After notice from LIFE COMPANY to such party of
LIFE COMPANY's election to assume the defense thereof, the Indemnified Party
shall bear the fees and expenses of any additional counsel retained by it, and
LIFE COMPANY will not be liable to such party under this Agreement
11
<PAGE>
for any legal or other expenses subsequently incurred by such party
independently in connection with the defense thereof other than reasonable costs
of investigation.
7.4 INDEMNIFICATION BY N&B MANAGEMENT. N&B MANAGEMENT agrees to
indemnify and hold harmless LIFE COMPANY and each of its directors, officers,
employees, and agents and each person, if any, who controls LIFE COMPANY within
the meaning of Section 15 of the '33 Act (collectively, the "Indemnified
Parties" for the purposes of this Article VII) against any and all losses,
claims, damages, liabilities (including amounts paid in settlement with the
written consent of N&B MANAGEMENT which consent shall not be unreasonably
withheld) or litigation (including reasonable legal and other expenses) to which
the Indemnified Parties may become subject under any statute, or regulation, at
common law or otherwise, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) or settlements are related to the
offer, sale or acquisition of TRUST's shares or the Variable Contracts and:
(a) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in
the registration statement or prospectus or sales
literature of TRUST (or any amendment or supplement to any
of the foregoing), or arise out of or are based upon the
omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to
make the statements therein not misleading, provided that
this agreement to indemnify shall not apply as to any
Indemnified Party if such statement or omission or such
alleged statement or omission was made in reliance upon and
in conformity with information furnished to N&B MANAGEMENT
or TRUST by or on behalf of LIFE COMPANY for use in the
registration statement or prospectus for TRUST or in sales
literature (or any amendment or supplement to any of the
foregoing) or otherwise for use in connection with the sale
of the Variable Contracts or TRUST shares; or
(b) arise out of or as a result of untrue statements or
representations (other than statements or representations
contained in the registration statement, prospectus or
sales literature for the Variable Contracts not supplied by
N&B MANAGEMENT or persons under its control) or wilful
misfeasance, bad faith or negligence of TRUST or N&B
MANAGEMENT or persons under their control, with respect to
the sale or distribution of the Variable Contracts or TRUST
shares; or
(c) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a registration
statement, prospectus, or sales literature covering the
Variable Contracts, or any amendment thereof or supplement
thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or
necessary to make the statements therein not
12
<PAGE>
misleading, if such statement or omission or such alleged
statement or omission was made in reliance upon and in
conformity with information furnished to LIFE COMPANY for
inclusion therein by or on behalf of TRUST; or
(d) arise as a result of (i) a failure by TRUST to
substantially provide the services and furnish the
materials under the terms of this Agreement; or (ii) a
failure by a Portfolio(s) invested in by the Separate
Account to comply with the diversification requirements of
Section 817(h) of the Code and the regulations thereunder;
or (iii) a failure by a Portfolio(s) invested in by the
Separate Account to qualify as a "regulated investment
company" under Subchapter M of the Code; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by N&B MANAGEMENT in
this Agreement or arise out of or result from any other
material breach of this Agreement by N&B MANAGEMENT.
7.5 N&B MANAGEMENT shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
to which an Indemnified Party would otherwise be subject by reason of such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement or to
LIFE COMPANY.
7.6 N&B MANAGEMENT shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified N&B MANAGEMENT in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify N&B MANAGEMENT of
any such claim shall not relieve N&B MANAGEMENT from any liability which it may
have to the Indemnified Party against whom such action is brought otherwise than
on account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, N&B MANAGEMENT shall be entitled to participate
at its own expense in the defense thereof. N&B MANAGEMENT also shall be entitled
to assume the defense thereof, with counsel satisfactory to the party named in
the action. After notice from N&B MANAGEMENT to such party of N&B MANAGEMENT's
election to assume the defense thereof, the Indemnified Party shall bear the
fees and expenses of any additional counsel retained by it, and N&B MANAGEMENT
will not be liable to such party under this Agreement for any legal or other
expenses subsequently incurred by such party independently in connection with
the defense thereof other than reasonable costs of investigation.
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<PAGE>
Article VIII. TERM; TERMINATION
8.1 This Agreement shall be effective as of the date hereof and shall
continue in force until terminated in accordance with the provisions herein.
8.2 This Agreement shall terminate in accordance with the following
provisions:
(a) At the option of LIFE COMPANY or TRUST at any time from the
date hereof upon 90 days' notice, unless a shorter time is
agreed to by the parties;
(b) At the option of LIFE COMPANY, if TRUST shares are not
reasonably available to meet the requirements of the
Variable Contracts as determined by LIFE COMPANY. Prompt
notice of election to terminate pursuant to this Section
8.2(b) shall be furnished by LIFE COMPANY, said termination
to be effective ten days after receipt of notice unless
TRUST makes available a sufficient number of shares to
reasonably meet the requirements of the Variable Contracts
within said ten-day period;
(c) At the option of LIFE COMPANY, upon the institution of
formal proceedings against TRUST or N&B MANAGEMENT by the
SEC, or any other regulatory body, the expected or
anticipated ruling, judgment or outcome of which would, in
LIFE COMPANY's reasonable judgment, materially impair
TRUST's ability to meet and perform TRUST's obligations and
duties hereunder or N&B MANAGEMENT's ability to manage any
Portfolio. Prompt notice of such election to terminate
shall be furnished by LIFE COMPANY with said termination to
be effective upon receipt of notice;
(d) At the option of TRUST, upon the institution of formal
proceedings against LIFE COMPANY by the SEC, the National
Association of Securities Dealers, Inc., or any other
regulatory body, the expected or anticipated ruling,
judgment or outcome of which would, in TRUST's reasonable
judgment, materially impair LIFE COMPANY's ability to meet
and perform its obligations and duties hereunder. Prompt
notice of election to terminate shall be furnished by TRUST
with said termination to be effective upon receipt of
notice;
(e) In the event TRUST's shares are not registered, issued or
sold in accordance with applicable state or federal law, or
such law precludes the use of such shares as the underlying
investment medium of Variable Contracts issued or to be
issued by LIFE COMPANY. Termination shall be effective upon
such occurrence without notice;
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<PAGE>
(f) At the option of TRUST if the Variable Contracts cease to
qualify as annuity contracts or life insurance contracts,
as applicable, under the Code, or if TRUST reasonably
believes that the Variable Contracts may fail to so
qualify. Termination shall be effective upon receipt of
notice by LIFE COMPANY;
(g) At the option of LIFE COMPANY, upon TRUST's breach of any
material provision of this Agreement, which breach has not
been cured to the satisfaction of LIFE COMPANY within ten
days after written notice of such breach is delivered to
TRUST;
(h) At the option of TRUST, upon LIFE COMPANY's breach of any
material provision of this Agreement, which breach has not
been cured to the satisfaction of TRUST within ten days
after written notice of such breach is delivered to LIFE
COMPANY;
(i) At the option of TRUST, if the Variable Contracts are not
registered (unless an exemption from registration is
available), issued or sold in accordance with applicable
federal and/or state law. Termination shall be effective
immediately upon such occurrence without notice;
(j) At the option of LIFE COMPANY, with respect to a Portfolio,
upon the vote of Variable Contract Owners and written
approval of LIFE COMPANY to substitute shares of another
investment company for the shares of any Portfolio in
accordance with the terms of the Variable Contracts,
provided LIFE COMPANY has given TRUST forty-five (45) days'
notice of the date of such substitution;
(k) In the event this Agreement is assigned without the prior
written consent of LIFE COMPANY, TRUST, MANAGERS TRUST and
N&B MANAGEMENT, termination shall be effective immediately
upon such occurrence without notice;
(l) At the option of LIFE COMPANY if a Portfolio fails to
satisfy the diversification requirements set forth in
Section 2.7 hereof and does not cure such failure within
the grace period afforded by Regulation 1.817-5.
Termination shall be effective immediately upon notice.
8.3 Notwithstanding any termination of this Agreement pursuant to
Section 8.2 hereof, TRUST will continue to make available additional TRUST
shares (limited to shares of the Portfolios designated in Appendix B), as
provided below, at the option of LIFE COMPANY for so
15
<PAGE>
long as LIFE COMPANY desires pursuant to the terms and conditions of this
Agreement, for all Variable Contracts in effect on the effective date of
termination of this Agreement (hereinafter referred to as "Existing Contracts").
Specifically, without limitation, if LIFE COMPANY so elects for TRUST to make
additional TRUST shares available, the owners of the Existing Contracts or LIFE
COMPANY, whichever shall have legal authority to do so, shall be permitted to
reallocate investments in TRUST, redeem investments in TRUST and/or invest in
TRUST upon the payment of additional premiums under the Existing Contracts. In
the event of a termination of this Agreement pursuant to Section 8.2 hereof,
LIFE COMPANY, as promptly as is practicable under the circumstances, shall
notify TRUST and N&B MANAGEMENT whether LIFE COMPANY elects for TRUST to
continue to make TRUST shares available after such termination. If TRUST shares
continue to be made available after such termination, the provisions of this
Agreement shall remain in effect. The parties agree that this Section 8.3 shall
not apply to any terminations of this Agreement by the TRUST, MANAGERS TRUST or
N&B MANAGEMENT pursuant to Sections 8.2(f),(h),(i) or (k) hereof.
8.4 Except as necessary to implement Variable Contract owner initiated
transactions, or as required by state insurance laws or regulations, LIFE
COMPANY shall not redeem the shares attributable to the Variable Contracts (as
opposed to the shares attributable to LIFE COMPANY's assets held in the Separate
Accounts), and LIFE COMPANY shall not prevent Variable Contract owners from
allocating payments to a Portfolio that was otherwise available under the
Variable Contracts, until thirty (30) days after the LIFE COMPANY shall have
notified TRUST of its intention to do so.
Article IX. NOTICES
Any notice hereunder shall be given by registered or certified mail
return receipt requested to the other party at the address of such party set
forth below or at such other address as such party may from time to time specify
in writing to the other party.
If to TRUST, MANAGERS TRUST or N&B MANAGEMENT:
Neuberger&Berman Management Incorporated
605 Third Avenue
New York, NY 10158-0006
Attention: Ellen Metzger, General Counsel
If to LIFE COMPANY:
The Lincoln National Life Insurance Company
1300 S. Clinton Street
Fort Wayne, IN 46802
Attention: Kelly D. Clevenger
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<PAGE>
Notice shall be deemed given on the date of receipt by the addressee as
evidenced by the return receipt.
Article X. MISCELLANEOUS
10.1 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
10.2 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
10.3 If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
10.4 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of New York. It
shall also be subject to the provisions of the federal securities laws and the
rules and regulations thereunder and to any orders of the SEC granting exemptive
relief therefrom and the conditions of such orders. However, the laws of the
State of New York will not apply to the terms or conditions of any type of
insurance contracts described herein.
10.5 The parties agree that the assets and liabilities of each Series
are separate and distinct from the assets and liabilities of each other Series.
No Series shall be liable or shall be charged for any debt, obligation or
liability of any other Series. No Trustee, officer or agent shall be personally
liable for such debt, obligation or liability of any Series or Portfolio and no
Portfolio or other investor, other than the Portfolio or other investors
investing in the Series which incurs a debt, obligation or liability, shall be
liable therefor.
10.6 Each party shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC, the
National Association of Securities Dealers, Inc. and state insurance regulators)
and shall permit such authorities reasonable access to its books and records in
connection with any investigation or inquiry relating to this Agreement or the
transactions contemplated hereby.
10.7 The rights, remedies and obligations contained in this Agreement
are cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled to under
state and federal laws.
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10.8 No provision of this Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed by TRUST,
MANAGERS TRUST, N&B MANAGEMENT and the LIFE COMPANY.
IN WITNESS WHEREOF, the parties have caused their duly authorized
officers to execute this Fund Participation Agreement as of the date and year
first above written.
NEUBERGER&BERMAN
ADVISERS MANAGEMENT TRUST
By: /s/ Stanley Egener
-----------------------------------------
Name: Stanley Egener
Title: President
ADVISERS MANAGERS TRUST
By: /s/ Stanley Egener
-----------------------------------------
Name: Stanley Egener
Title: President
NEUBERGER&BERMAN
MANAGEMENT INCORPORATED
By: /s/ Daniel J. Sullivan
-----------------------------------------
Name: Daniel J. Sullivan
Title: Senior Vice President
THE LINCOLN NATIONAL LIFE INSURANCE
COMPANY
By: /s/ Kelly D. Clevenger
-----------------------------------------
Name: Kelly D. Clevenger
Title: Vice President
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APPENDIX A
Neuberger&Berman Advisers Corresponding Series of
Management Trust and its Series (Portfolios) Advisers Managers Trust (Series)
- -------------------------------------------- --------------------------------
Balanced Portfolio AMT Balanced Investments
Growth Portfolio AMT Growth Investments
Guardian Portfolio AMT Guardian Investments
International Portfolio AMT International Investments
Limited Maturity Bond Portfolio AMT Limited Maturity Bond
Investments
Liquid Asset Portfolio AMT Liquid Asset Investments
Mid-Cap Growth Portfolio AMT Mid-Cap Growth Investments
Partners Portfolio AMT Partners Investments
Socially Responsive Portfolio AMT Socially Responsive
Investments
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APPENDIX B
Separate Accounts Selected Portfolios
- ----------------- -------------------
Lincoln National Variable Annuity Partners
Account C Mid-Cap Growth
Lincoln National Variable Annuity Partners
Account L
Lincoln Life Variable Annuity Partners
Account Q Mid-Cap Growth
Lincoln National Variable Annuity Mid-Cap Growth
Account 37
Lincoln National Variable Annuity Partners
Account 38
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PARTICIPATION AGREEMENT
AMONG
THE LINCOLN NATIONAL LIFE INSURANCE CO.
AND
BARON CAPITAL FUNDS TRUST
AND
BARON CAPITAL, INC.
THIS AGREEMENT, made and entered into this 28th day of August, 1998 by and
among Baron Capital Funds Trust (and all series thereof) a business trust
organized under the laws of the State of Delaware (the "Fund"), and THE LINCOLN
NATIONAL LIFE INSURANCE CO., an Indiana insurance corporation (the "Company"),
on its own behalf and on behalf of each separate account of the Company named in
Schedule 1 to this Agreement as in effect at the time this Agreement is executed
and such other separate accounts that may be added to Schedule 1 from time to
time in accordance with the provisions of Article XI of this Agreement (each
such account referred to as the "Account"), and Baron Capital, Inc. (the
"Distributor").
WHEREAS, the Fund is engaged in business as an open-end management
investment company and has a class of stock (the "Fund Insurance Shares") that
has been established for the purpose of serving as the investment vehicle for
separate accounts established for variable life insurance policies and variable
annuity contracts (collectively referred to as "Variable Insurance Products,"
the owners of such products being referred to as "Product owners") to be offered
by insurance companies which have entered into participation agreements with the
Fund ("Participating Insurance Companies"); and
WHEREAS, the Fund filed with the Securities and Exchange Commission (the
"SEC") and the SEC has declared effective a registration statement (referred to
herein as the "Fund Registration Statement" and the prospectus contained
therein, or filed pursuant to Rule 497 under the 1933 Act, referred to herein as
the "Fund Prospectus") on Form N-1A to register itself as an open-end management
investment company (File No. 33-40839) under the Investment Company Act of 1940,
as amended (the "1940 Act"), and the Fund Insurance Shares (File No. 811-8505)
under the Securities Act of 1933, as amended (the "1933 Act"); and
WHEREAS, the Company has filed a registration statement with the SEC to
register under the 1933 Act (unless exempt therefrom) certain variable annuity
contracts described in Schedule 2 to this Agreement as in effect at the time
this Agreement is executed and such other variable annuity contracts and
variable life insurance policies which may be added to Schedule 2 from time to
time in accordance with Article XI of this Agreement (such policies and
contracts shall be referred to herein collectively as the "Contracts," each such
registration statement for a class or classes of contracts listed on Schedule 2
being referred to as the "Contracts Registration Statement" and the prospectus
for each such class or classes being referred to herein as the "Contracts
Prospectus," and the owners of the such contracts, as distinguished from all
Product Owners, being referred to as "Contract Owners"); and
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WHEREAS, each Account, a validly existing separate account, duly authorized
by resolution of the Board of Directors of the Company on the date set forth on
Schedule 1, sets aside and invests assets attributable to the Contracts; and
WHEREAS, the Company has registered or will have registered each Account
with the SEC as a unit investment trust under the 1940 Act before any Contracts
are issued by that Account; and
WHEREAS, the Distributor is registered as a broker-dealer with the SEC
under the Securities Exchange Act of 1934, as amended (the "1934 Act"), and is a
member in good standing of the National Association of Securities Dealers, Inc.
(the "NASD"); and
WHEREAS, the Distributor and the Fund have entered into an agreement (the
"Fund Distribution Agreement") pursuant to which the Distributor will distribute
the Fund Insurance Shares; and
WHEREAS, BAMCO, Inc. (the "Investment Manager") is registered as an
investment adviser under the 1940 Act and any applicable state securities laws
and serves as an investment manager to the Fund pursuant to an agreement; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase Fund Insurance Shares on behalf of
each Account to fund its Contracts and the Distributor is authorized to sell
such Fund Insurance Shares to unit investment trusts such as the Accounts at net
asset value;
NOW, THEREFORE, in consideration of their mutual promises, the Company, the
Fund and the Distributor agree as follows:
ARTICLE I. SALE OF FUND SHARES
1.1. The Distributor agrees to sell to the Company those Fund Insurance
Shares, which the Company orders on behalf of each Account, executing such
orders on a daily basis in accordance with Section 1.4 of this Agreement.
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1.2. The Fund agrees to make Fund Insurance Shares available for purchase
by the Company on behalf of each Account at the then applicable net asset value
per share on Business Days as defined in Section 1.4 of this Agreement, and the
Fund shall use its best efforts to calculate AND DELIVER such net asset value by
6:00 p.m., E.S.T., on each such Business Day. Notwithstanding any other
provision in this Agreement to the contrary, the Board of Directors of the Fund
(the "Fund Board") may suspend or terminate the offering of shares, if such
action is required by law or by regulatory authorities having jurisdiction or
if, in the sole discretion of the Fund Board acting in good faith and in light
of its fiduciary duties under Federal and any applicable state laws, suspension
or termination is necessary and in the best interests of the shareholders (it
being understood that "shareholders" for this purpose shall mean Product
owners).
1.3. The Fund agrees to redeem, at the Company's request, any full or
fractional Fund Insurance Shares held by each Account or the Company, executing
such requests at the net asset value on a daily basis (Company will expect same
day redemption wires unless unusual circumstances evolve which cause the Fund to
have to redeem securities) in accordance with Section 1.4 of this Agreement, the
applicable provisions of the 1940 Act and the then currently effective Fund
Prospectus. Notwithstanding the foregoing, the Fund may delay redemption of Fund
Insurance Shares of any series to the extent permitted by the 1940 Act, any
rules, regulations or orders thereunder, or the then currently effective Fund
Prospectus.
1.4. (a) For purposes of Sections 1.1, 1.2 and 1.3, the Company shall
be the agent of the Fund for the limited purpose of receiving
redemption and purchase requests from each Account (but not from the
general account of the Company), and receipt on any Business Day by
the Company as such limited agent of the Fund prior to the time
prescribed in the current Fund Prospectus (which as of the date of
execution of this Agreement is 4 p.m., E.S.T.) shall constitute
receipt by the Fund on that same Business Day, provided that the
Fund, or its designee, receives notice of such redemption or purchase
request by 11:00 a.m., E.S.T. on the next following Business Day. For
purposes of this Agreement, "Business Day" shall mean any day on
which the New York Stock exchange is open for trading.
(b) The Company shall pay for the shares on the same day that it
places an order with the Fund to purchase those Fund Insurance Shares
for an Account. Payment for Fund Insurance Shares will be made by each
Account or the Company in Federal Funds transmitted to the Fund by
wire to be received by 11:00 a.m., E.S.T. on the day the Fund is
properly notified of the purchase order for shares. The Fund will
confirm receipt of each trade and these confirmations will be received
by the Company via Fax or Email by 1:00 p.m. E.S.T. If Federal Funds
are not received on time, such funds will be invested, and shares
purchased thereby will be issued, as soon as practicable.
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(c) Payment for shares redeemed by each Account or the Company
will be made in Federal Funds transmitted to the Company by wire on
the same day the Fund is notified of the redemption order of shares,
except that the Fund reserves the right to delay payment of redemption
proceeds, but in no event may such payment be delayed longer than the
period permitted under Section 22(e) of the 1940 Act. Neither the Fund
nor the Distributor shall bear any responsibility whatsoever for the
proper disbursement or crediting of redemption proceeds if securities
must be redeemed; the Company alone shall be responsible for such
action.
1.5. Issuance and transfer of Fund Insurance Shares will be by book entry
only. Stock certificates will not be issued to the Company or the Account.
Purchase and redemption orders for Fund Insurance Shares will be recorded in an
appropriate ledger for each Account or the appropriate subaccount of each
Account.
1.6. The Fund shall furnish notice as soon as reasonably practicable to the
Company of any income dividends or capital gain distributions payable on any
shares. The Company, on its behalf and on behalf of each Account, hereby elects
to receive all such dividends and distributions as are payable on any Fund
Insurance Shares in the form of additional shares. The Company reserves the
right, on its behalf and on behalf of each Account, to revoke this election and
to receive all such dividends in cash. The Fund shall notify the Company of the
number of Fund Insurance Shares so issued as payment of such dividends and
distributions.
1.7. The Fund shall use its best efforts to make the net asset value per
share available to the Company by 6 p.m., E.S.T. each Business Day, and in any
event, as soon as reasonably practicable after the net asset value per share is
calculated, and shall calculate such net asset value in accordance with the then
currently effective Fund Prospectus. Neither the Fund, any Series, the
Distributor, nor the Investment Manager nor any of their affiliates shall be
liable for any information provided to the Company pursuant to this Agreement
which information is based on incorrect information supplied by the Company to
the Fund, the Distributor or the Investment Manager.
1.8. (a) The Company may withdraw each Account's investment in the
Fund only: (i) as necessary to facilitate Contract owner requests;
(ii) upon a determination by a majority of the Fund Board, or a
majority of disinterested Fund Board members, that an irreconcilable
material conflict exists among the interests of (x) any Product Owners
or (y) the interests of the Participating Insurance Companies
investing in the Fund; (iii) upon requisite vote of the Contractowners
having an interest in the affected Fund to substitute the shares of
another investment company for shares in accordance with the terms of
the Contracts; (iv) as required by state and/or federal laws or
regulations or judicial or other legal precedent of general
application; or (v) at the Company's sole discretion, pursuant to an
order of the SEC under Section 26(b) of the 1940 Act.
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(b) The parties hereto acknowledge that the arrangement
contemplated by this Agreement is not exclusive and that the Fund
Insurance Shares may be sold to other insurance companies (subject to
Section 1.9 hereof) and the cash value of the Contracts may be
invested in other investment companies.
(c) The Company shall not, without prior notice to the
Distributor (unless otherwise required by applicable law), take any
action to operate each Account as a management investment company
under the 1940 Act.
1.9. The Fund and the Distributor agree that Fund Insurance Shares will be
sold only to Participating Insurance Companies and their separate accounts. The
Fund and the Distributor will not sell Fund Insurance Shares to any insurance
company or separate account unless an agreement complying with Article VII of
this Agreement is in effect to govern such sales. No Fund Insurance Shares will
be sold to the general public.
ARTICLE II. REPRESENTATIONS AND WARRANTIES
2.1. The Company represents and warrants (a) that the Contracts are
registered under the 1933 Act or will be so registered before the issuance
thereof, (b) that the Contracts will be issued in compliance in all material
respects with all applicable Federal and state laws and (c) that the Company
will require of every person distributing the Contracts that the Contracts be
offered and sold in compliance in all material respects with all applicable
Federal and state laws. The Company further represents and warrants that it is
an insurance company duly organized and validly existing under applicable law
and that it has legally and validly authorized each Account as a separate
account under Section 27-1-5-1 of the Indiana Insurance Code, and has registered
or, prior to the issuance of any Contracts, will register each Account (unless
exempt therefrom) as a unit investment trust in accordance with the provisions
of the 1940 Act to serve as a separate account for its Contracts, and that it
will maintain such registrations for so long as any Contracts issued under them
are outstanding.
2.2. The Fund represents and warrants that Fund Insurance Shares sold
pursuant to this Agreement shall be registered under the 1933 Act and duly
authorized for issuance in accordance with applicable law and that the Fund is
and shall remain registered under the 1940 Act for so long as the Fund Insurance
Shares are sold. The Fund further represents and warrants that it is a business
trust duly organized and in good standing under the laws of the State of
Delaware.
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2.3. The Fund represents and warrants that it currently qualifies as a
Regulated Investment Company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"). The Fund further represents and warrants that it
will make every effort to continue to qualify and to maintain such qualification
(under Subchapter M or any successor or similar provision), and that it will
notify the Company immediately upon having a reasonable basis for believing that
it has ceased to so qualify or that it might not so qualify in the future.
2.4. The Fund represents and warrants that it will comply with Section
817(h) of the Code, and all regulations issued thereunder. In the event of a
breach of this Section 3.6 by the Fund, it will a) immediately notify the
Company of the breach and b) to adequately diversify each series so as to
achieve compliance with the grace period offered by Regulation 1.817-5.
2.5. The Company represents that the Contracts are currently and at the
time of issuance will be treated as annuity contracts or life insurance
policies, whichever is appropriate, under applicable provisions of the Code. The
Company shall make every effort to maintain such treatment and shall notify the
Fund and the Distributor immediately upon having a reasonable basis for
believing that the Contracts have ceased to be so treated or that they might not
be so treated in the future.
2.6. The Fund represents that the Fund's investment policies, fees and
expenses, and operations are and shall at all times remain in material
compliance with the laws of the state of California, to the extent required to
perform this Agreement; and with any state-mandated investment restrictions set
forth on Schedule 3, as amended from time to time by the Company in accordance
with Section 6.6. The Fund, however, makes no representation as to whether any
aspect of its operations (including, but not limited to, fees and expenses and
investment policies) otherwise complies with the insurance laws or regulations
of any state. The Company alone shall be responsible for informing the Fund of
any investment restrictions imposed by state insurance law and applicable to the
Fund.
2.7. The Distributor represents and warrants that it is duly registered as
a broker-dealer under the 1934 Act, a member in good standing of the NASD, and
duly registered as a broker-dealer under applicable state securities laws; its
operations are in compliance with applicable law, and it will distribute the
Fund Insurance Shares according to applicable law.
2.8. The Distributor, on behalf of the Investment Manager, represents and
warrants that the Investment Manager is registered as an investment adviser
under the Investment Advisers Act of 1940 and is in compliance with applicable
federal and state securities laws.
2.9. The Fund represents and warrants that it has and maintains a fidelity
bond in accordance with Rule 17g-1 under the 1940 Act. The Fund will immediately
notify the Company in the event the fidelity bond coverage should lapse at any
time.
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ARTICLE III. PROSPECTUSES AND PROXY STATEMENTS; SALES MATERIAL AND OTHER
INFORMATION
3.1. The Distributor shall provide the Company with as many copies of the
current Fund Prospectus as the Company may reasonably request. If requested by
the Company in lieu thereof, the Fund at its expense shall provide to the
Company a camera-ready copy, and electronic version, of the current Fund
Prospectus suitable for printing and other assistance as is reasonably necessary
in order for the Company to have a new Contracts Prospectus printed together
with the Fund Prospectus in one document. See Article V for a detailed
explanation of the responsibility for the cost of printing and distributing Fund
prospectuses.
3.2. The Fund Prospectus shall state that the Statement of Additional
Information for the Fund is available from the Distributor (or, in the Fund's
discretion, the Fund Prospectus shall state that such Statement is available
from the Fund), and the Distributor (or the Fund) shall provide such Statement
free of charge to the Company and to any outstanding or prospective Contract
owner who requests such Statement.
3.3. (a) The Fund at its expense shall provide to the Company a
camera-ready copy of the Fund's shareholder reports and other
communications to shareholders (except proxy material), in each case
in a form suitable for printing, as determined by the Company. The
Fund shall be responsible for the costs of printing and distributing
these materials to Contract owners.
(b) The Fund at its expense shall be responsible for preparing,
printing and distributing its proxy material. The Company will provide
the appropriate Contractowner names and addresses to the Fund for this
purpose.
3.4. The Company shall furnish each piece of sales literature or other
promotional material in which the Fund or the Investment Manager is named to the
Fund or the Distributor prior to its use. No such material shall be used, except
with the prior written permission of the Fund or the Distributor. The Fund and
the Distributor agree to respond to any request for approval on a prompt and
timely basis. Failure of the Fund to respond within 10 days of the request by
the Company shall relieve the Company of the obligation to obtain the prior
written permission of the Fund or the Distributor.
3.5. The Company shall not give any information or make any representations
or statements on behalf of the Fund or concerning the Fund other than the
information or representations contained in the Fund Registration Statement or
Fund Prospectus, as such Registration Statement and Prospectus may be amended or
supplemented from time to time, or in reports or proxy statements for the Fund,
or in sales literature or other promotional material approved by the Fund or by
the Distributor, except with the prior written permission of the Fund or the
Distributor. The Fund agrees to respond to any request for permission on a
prompt and timely basis. If neither the Fund nor the Distributor responds within
10 days of a request by the Company, then the Company shall be relieved of the
obligation to obtain the prior written permission of the Fund.
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3.6. The Fund and the Distributor shall not give any information or make
any representations on behalf of the Company or concerning the Company, each
Account or the Contracts other than the information or representations contained
in the Contracts Registration Statement or Contracts Prospectus, as such
Registration Statement and Prospectus may be amended or supplemented from time
to time, or in published reports of each Account which are in the public domain
or approved in writing by the Company for distribution to Contract owners, or in
sales literature or other promotional material approved in writing by the
Company, except with the prior written permission of the Company. The Company
agrees to respond to any request for permission on a prompt and timely basis. If
the Company fails to respond within 10 days of a request by the Fund or the
Distributor, then the Fund and the Distributor are relieved of the obligation to
obtain the prior written permission of the Company.
3.7. The Fund will provide to the Company at least one complete copy of all
Fund Registration Statements, Fund Prospectuses, Statements of Additional
Information, annual and semi-annual reports and other reports, proxy statements,
sales literature and other promotional materials, applications for exemptions,
requests for no-action letters, and all amendments or supplements to any of the
above, that relate to the Fund or Fund Insurance Shares, within 20 days after
the filing of such document with the SEC or other regulatory authorities.
3.8. The Company will provide to the Fund at least one complete copy of all
Contracts Registration Statements, Contracts Prospectuses, Statements of
Additional Information, Annual and Semi-annual Reports, sales literature and
other promotional materials, and all amendments or supplements to any of the
above, that relate to the Contracts, within 20 days after the filing of such
document with the SEC or other regulatory authorities.
3.9. Each party will provide to the other party copies of draft versions of
any registration statements, prospectuses, and statements of additional
information, reports, proxy statements, and solicitations for voting
instructions, sales literature and other promotional materials, applications for
exemptions, requests for no-action letters, and all amendments or supplements to
any of the above, to the extent that the other party reasonably needs such
information for purposes of preparing a report or other filing to be filed with
or submitted to a regulatory agency. If a party requests any such information
before it has been filed, the other party will provide the requested information
if then available and in the version then available at the time of such request.
3.10. For purposes of this Article III, the phrase "sales literature or
other promotional material" includes, but is not limited to, advertisements
(such as material published, or designed for use, in a newspaper, magazine or
other periodical, radio, television, telephone or tape recording, videotape
display, computer net site, signs or billboards, motion pictures or other public
media), sales literature (I.E., any written communication distributed or made
generally available to customers or the public, in print or electronically,
including brochures, circulars, research reports, market letters, form letters,
seminar texts, or reprints or excerpts of any other advertisement, sales
literature, or published article), educational or training materials or other
communications
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distributed or made generally available to some or all agents or employees,
registration statements, prospectuses, Statements of Additional Information,
shareholder reports and proxy materials, and any other material constituting
sales literature or advertising under NASD rules, the 1940 Act or the 1933 Act.
ARTICLE IV. Voting
4.1 Subject to applicable law and the order referred to in Article VII, the
Fund shall: solicit voting instructions from Contract owners;
4.2 Subject to applicable law and the order referred to in Article VII, the
Company shall:
(a) vote Fund Insurance Shares attributable to Contract owners in
accordance with instructions or proxies received in timely fashion
from such Contract owners;
(b) vote Fund Insurance Shares attributable to Contract owners
for which no instructions have been received in the same proportion as
Fund Insurance Shares of such series for which instructions have been
received in timely fashion; and
(c) vote Fund Insurance Shares held by the Company on its own
behalf or on behalf of each Account that are not attributable to
Contract owners in the same proportion as Fund Insurance Shares of
such series for which instructions have been received in timely
fashion.
The Company shall be responsible for assuring that voting privileges for the
Accounts are calculated in a manner consistent with the provisions set forth
above.
ARTICLE V. FEES AND EXPENSES
All expenses incident to performance by the Fund under this Agreement
(including expenses expressly assumed by the Fund pursuant to this Agreement)
shall be paid by the Fund to the extent permitted by law. Except as may
otherwise be provided in Section 1.4 and Article VII of this Agreement, the
Company shall not bear any of the expenses for the cost of registration and
qualification of the Fund Insurance Shares under Federal and any state
securities law, preparation and filing of the Fund Prospectus and Fund
Registration Statement, the preparation of all statements and notices required
by any Federal or state securities law, all taxes on the issuance or transfer of
Fund Insurance Shares, and any expenses permitted to be paid or assumed by the
Fund pursuant to a plan, if any, under Rule 12b-1 under the 1940 Act.
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The Fund is responsible for the cost of printing and distributing Fund
Prospectuses and SAIs to existing Contractowners. (If for this purpose the
Company may print the Fund Prospectuses and SAIs in a booklet or separate
booklets containing disclosure for the Contracts and for underlying funds other
than those of the Fund, then the Fund shall pay only its proportionate share of
the total cost to distribute the booklet to existing Contract owners.)
The Company is responsible for the cost of printing and distributing Fund
prospectuses and SAIs for new sales; and Account Prospectuses and SAIs for
existing Contractowners. The Company shall have the final decision on choice of
printer for all Prospectuses and SAIs.
ARTICLE VI. COMPLIANCE UNDERTAKINGS
6.1. The Fund undertakes to comply with Subchapter M and Section 817(h) of
the Code, and all regulations issued thereunder.
6.2. The Company shall amend the Contracts Registration Statements under
the 1933 Act and each Account's Registration Statement under the 1940 Act from
time to time as required in order to effect the continuous offering of the
Contracts or as may otherwise be required by applicable law. The Company shall
register and qualify the Contracts for sale to the extent required by applicable
securities laws of the various states.
6.3. The Fund shall amend the Fund Registration Statement under the 1933
Act and the 1940 Act from time to time as required in order to effect for so
long as Fund Insurance Shares are sold the continuous offering of Fund Insurance
Shares as described in the then currently effective Fund Prospectus. The Fund
shall register and qualify Fund Insurance Shares for sale to the extent required
by applicable securities laws of the various states.
6.4. The Company shall be responsible for assuring that any prospectus
offering a Contract that is a life insurance contract where it is reasonably
possible that such Contract would be deemed a "modified endowment contract," as
that term is defined in Section 7702A of the Code, will describe the
circumstances under which a Contract could be treated as a modified endowment
contract (or policy).
6.5. To the extent that it decides to finance distribution expenses
pursuant to Rule 12b-1, the Fund undertakes to have a Fund Board of Directors, a
majority of whom are not interested persons of the Fund, formulate and approve
any plan under Rule 12b-1 to finance distribution expenses.
6.6. (a) The Company shall amend Schedule 3 when appropriate in order
to inform the Fund of any applicable state-mandated investment
restrictions with which the Fund must comply.
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(b) Should the Fund or the Distributor become aware of any
restrictions which may be appropriate for inclusion in Schedule 3, the
Company shall be informed immediately of the substance of those
restrictions.
ARTICLE VlI. POTENTIAL CONFLICTS
7.1. The Company has reviewed a copy of the order (the "Mixed and Shared
Funding Order") dated June 16, 1998 of the Securities and Exchange Commission
under Section 6c of the Act and, in particular, has reviewed the conditions to
the relief set forth in the related Notice. As set forth therein, the Company
agrees to report to the Board of Directors of the Fund (the "Board") any
potential or existing conflicts between the interests of Product Owners of all
separate accounts investing in the Fund, and to assist the Board in carrying out
its responsibilities under the conditions of the Mixed and Shared Funding Order
by providing all information reasonably necessary for the Board to consider any
issues raised, including information as to a decision to disregard voting
instructions of variable contract owners.
7.2. If a majority of the Board, or a majority of disinterested Board
Members, determines that a material irreconcilable conflict exists, the Board
shall give prompt notice to all Participating Insurance Companies.
(a) If a majority of the whole Board, after notice to the Company
and a reasonable opportunity for the Company to appear before it and
present its case, determines that the Company is responsible for said
conflict, and if the Company agrees with that determination, the
Company shall, at its sole cost and expense, take whatever steps are
necessary to remedy the irreconcilable material conflict. These steps
could include: (a) withdrawing the assets allocable to some or all of
the affected Accounts from the Fund and reinvesting such assets in a
different investment vehicle, or submitting the question of whether
such segregation should be implemented to a vote of all affected
Contractowners and, as appropriate, segregating the assets of any
particular group (i.e., variable annuity Contractowners, variable life
insurance policyowners, or variable Contractowners of one or more
Participating Insurance Companies) that votes in favor of such
segregation, or offering to the affected Contractowners the option of
making such a change; and (b) establishing a new registered mutual
fund or management separate account, or taking such other action as is
necessary to remedy or eliminate the irreconcilable material conflict.
(b) If the Company disagrees with the Board's determination, the
Company shall file a written protest with the Board, reserving its
right to dispute the determination as between just the Company and the
Fund. After reserving that right the Company, although disagreeing
with the Board that it (the Company) was responsible for the conflict,
shall take the necessary steps, under protest, to remedy
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the conflict, substantially in accordance with paragraph (a) just
above, for the protection of Contractowners.
(c) As between the Company and the Fund, if within 45 days after
the Board's determination the Company elects to press the dispute, it
shall so notify the Board in writing. The parties shall then attempt
to resolve the matter amicably through negotiation by individuals from
each party who are authorized to settle the matter.
If the matter has not been amicably resolved within 60 days from the
date of the Company's notice of its intent to press the dispute, then
before either party shall undertake to litigate the dispute it shall
be submitted to non-binding arbitration conducted expeditiously in
accordance with the CPR Rules for Non-Administered Arbitration of
Business Disputes, by a sole arbitrator; PROVIDED, HOWEVER, that if
one party has requested the other party to seek an amicable resolution
and the other party has failed to participate, the requesting party
may initiate arbitration before expiration of the 60-day period set
out just above.
If within 45 days of the commencement of the process to select an
arbitrator the parties cannot agree upon the arbitrator, then he or
she will be selected from the CPR Panels of Neutrals. The arbitration
shall be governed by the United States Arbitration Act, 9 U.S.C. Sec.
1-16. The place of arbitration shall be Fort Wayne, Indiana. The
Arbitrator is not empowered to award damages in excess of compensatory
damages.
(d) If the Board shall determine that the Fund or another insurer
was responsible for the conflict, then the Board shall notify the
Company immediately of that determination. The Fund shall assure the
Company that it (the Fund) or that other insurer, as applicable,
shall, at its sole cost and expense, take whatever steps are necessary
to eliminate the conflict.
7.3. If a material irreconcilable conflict arises because of the Company's
decision to disregard Contractowner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
shall withdraw (without charge or penalty) each Account's investment in the
Fund, if the Fund so elects.
7.4. Subject to the terms of Section 7.2 above, the Company shall carry out
the responsibility to take remedial action in the event of a Board determination
of an irreconcilable material conflict with a view only to the interests of
Contractowners.
7.5. For purposes of this Article, a majority of the disinterested members
of the Board shall determine whether or not any proposed action adequately
remedies any irreconcilable conflict, but in no event will the Fund be required
to establish a new funding medium for any variable contract, nor will the
Company be required to establish a new funding medium for any
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Contract if in either case an offer to do so has been declined by a vote of a
majority of affected Contractowners.
ARTICLE VIII. INDEMNIFICATION
8.1. INDEMNIFICATION BY THE COMPANY. The Company agrees to indemnify and
hold harmless the Fund, the Distributor and each person who controls or is
associated with the Fund (other than another Participating Insurance Company) or
the Distributor within the meaning of such terms under the federal securities
laws and any officer, trustee, director, employee or agent of the foregoing,
against any and all losses, claims, damages or liabilities, joint or several
(including any investigative, legal and other expenses reasonably incurred in
connection with, and any amounts paid in settlement of, any action, suit or
proceeding or any claim asserted), to which they or any of them may become
subject under any statute or regulation, at common law or otherwise, insofar as
such losses, claims, damages or liabilities:
(a) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the
Contracts Registration Statement, Contracts Prospectus, sales
literature or other promotional material for the Contracts or the
Contracts themselves (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading in light of the circumstances in which they were made;
provided that this obligation to indemnify shall not apply if such
statement or omission or such alleged statement or alleged omission
was made in reliance upon and in conformity with information furnished
in writing to the Company by the Fund or the Distributor (or a person
authorized in writing to do so on behalf of the Fund or the
Distributor) for use in the Contracts Registration Statement,
Contracts Prospectus or in the Contracts or sales literature (or any
amendment or supplement) or otherwise for use in connection with the
sale of the Contracts or Fund Insurance Shares; or
(b) arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact by or on behalf of the
Company (other than statements or representations contained in the
Fund Registration Statement, Fund Prospectus or sales literature or
other promotional material of the Fund not supplied by the Company or
persons under its control) or wrongful conduct of the Company or
persons under its control with respect to the sale or distribution of
the Contracts or Fund Insurance Shares; or
(c) arise out of any untrue statement or alleged untrue statement
of a material fact contained in the Fund Registration Statement, Fund
Prospectus or sales literature or other promotional material of the
Fund or any amendment thereof or supplement thereto, or the omission
or alleged omission to state therein a
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<PAGE>
material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances in
which they were made, if such statement or omission was made in
reliance upon and in conformity with information furnished to the Fund
by or on behalf of the Company; or
(d) arise as a result of any failure by the Company to provide
the services and furnish the materials or to make any payments under
the terms of this Agreement; or
(e) arise out of any material breach by the Company of this
Agreement, including but not limited to any failure to transmit a
request for redemption or purchase of Fund Insurance Shares on a
timely basis in accordance with the procedures set forth in Article 1;
or
(f) arise as a result of the Company's providing the Fund with
inaccurate information, which causes the Fund to calculate its Net
Asset Values incorrectly.
This indemnification will be in addition to any liability which the Company may
otherwise have; provided, however, that no party shall be entitled to
indemnification if such loss, claim, damage or liability is due to the willful
misfeasance, bad faith, gross negligence or reckless disregard of duty by the
party seeking indemnification.
8.2. INDEMNIFICATION BY THE DISTRIBUTOR. The Distributor agrees to
indemnify and hold harmless the Company and each person who controls or is
associated with the Company within the meaning of such terms under the federal
securities laws and any officer, director, employee or agent of the foregoing,
against any and all losses, claims, damages or liabilities, joint or several
(including any investigative, legal and other expenses reasonably incurred in
connection with, and any amounts paid in settlement of, any action, suit or
proceeding or any claim asserted), to which they or any of them may become
subject under any statute or regulation, at common law or otherwise, insofar as
such losses, claims, damages or liabilities:
(a) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the Fund
Registration Statement, Fund Prospectus (or any amendment or
supplement thereto) or sales literature or other promotional material
of the Fund, or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading in light of the circumstances in which they were made;
provided that this obligation to indemnify shall not apply if such
statement or omission or alleged statement or alleged omission was
made in reliance upon and in conformity with information furnished in
writing by the Company to the Fund or the Distributor for use in the
Fund
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<PAGE>
Registration Statement, Fund Prospectus (or any amendment or
supplement thereto) or sales literature for the Fund or otherwise for
use in connection with the sale of the Contracts or Fund Insurance
Shares; or
(b) arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact made by the Distributor or
the Fund (other than statements or representations contained in the
Fund Registration Statement, Fund Prospectus or sales literature or
other promotional material of the Fund not supplied by the Distributor
or the Fund or persons under their control) or wrongful conduct of the
Distributor or persons under its control with respect to the sale or
distribution of the Contracts or Fund Insurance Shares; or
(c) arise out of any untrue statement or alleged untrue statement
of a material fact contained in the Contract's Registration Statement,
Contracts Prospectus or sales literature or other promotional material
for the Contracts (or any amendment or supplement thereto), or the
omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading in light of the circumstances in which they were made, if
such statement or omission was made in reliance upon information
furnished in writing by the Distributor or the Fund to the Company (or
a person authorized in writing to do so on behalf of the Fund or the
Distributor); or
(d) arise as a result of any failure by the Fund to provide the
services and furnish the materials under the terms of this Agreement
(including, but not by way of limitation, a failure, whether
unintentional or in good faith or otherwise: (i) to comply with the
diversification requirements specified in Article VI of this
Agreement; and (ii) to provide the Company with accurate information
sufficient for it to calculate its accumulation and/or annuity unit
values in timely fashion as required by law and by the Contracts
Prospectuses); or
(e) arise out of any material breach by the Distributor or the
Fund of this Agreement.
This indemnification will be in addition to any liability which the Distributor
may otherwise have; provided, however, that no party shall be entitled to
indemnification if such loss, claim, damage or liability is due to the willful
misfeasance, bad faith, gross negligence or reckless disregard of duty by the
party seeking indemnification.
8.3. INDEMNIFICATION PROCEDURES. After receipt by a party entitled to
indemnification ("indemnified party") under this Article VIII of notice of the
commencement of any action, if a claim in respect thereof is to be made by the
indemnified party against any person obligated to provide indemnification under
this Article VIII ("indemnifying party"), such indemnified party will notify the
indemnifying party in writing of the commencement thereof as soon as practicable
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<PAGE>
thereafter, provided that the omission to so notify the indemnifying party will
not relieve it from any liability under this Article VIII, except to the extent
that the omission results in a failure of actual notice to the indemnifying
party and such indemnifying party is damaged solely as a result of the failure
to give such notice. The indemnifying party, upon the request of the indemnified
party shall retain counsel reasonably satisfactory to the indemnified party to
represent the indemnified party and any others the indemnifying party may
designate in such proceeding and shall pay the fees and disbursements of such
counsel related to such proceeding. In any such proceeding, any indemnified
party shall have the right to retain its own counsel, but the fees and expenses
of such counsel shall be at the expense of such indemnified party unless (i) the
indemnifying party and the indemnified party shall have mutually agreed to the
retention of such counsel or (ii) the named parties to any such proceeding
(including any impleaded parties) include both the indemnifying party and the
indemnified party and representation of both parties by the same counsel would
be inappropriate due to actual or potential differing interests between them.
The indemnifying party shall not be liable for any settlement of any proceeding
effected without its written consent but if settled with such consent or if
there be a final judgment for the plaintiff, the indemnifying party agrees to
indemnify the indemnified party from and against any loss or liability by reason
of such settlement or judgment.
A successor by law of the parties to this Agreement shall be entitled to
the benefits of the indemnification contained in this Article VIII. The
indemnification provisions contained in this Article VIII shall survive any
termination of this Agreement.
ARTICLE IX. APPLICABLE LAW
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the state of Indiana,
without giving effect to the principles of conflicts of laws.
9.2. This Agreement shall be subject to the provisions of the 1933, 1934
and 1940 Acts, and the rules and regulations and rulings thereunder, including
such exemptions from those statutes, rules and regulations as the SEC may grant,
and the terms hereof shall be limited, interpreted and construed in accordance
therewith.
ARTICLE X. TERMINATION
10.1. This Agreement shall terminate:
(a) at the option of any party upon 120 days advance written
notice to the other parties; or
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<PAGE>
(b) at the option of the Company if shares of the Fund are not
available to meet the requirements of the Contracts as determined by
the Company. Prompt notice of the election to terminate for such cause
shall be furnished by the Company. Termination shall be effective ten
days after the giving of notice by the Company; or
(c) at the option of the Fund upon institution of formal
proceedings against the Company by the NASD, the SEC, the insurance
commission of any state or any other regulatory body regarding the
Company's duties under this Agreement or related to the sale of the
Contracts, the operation of each Account, the administration of the
Contracts or the purchase of Fund Insurance Shares, or an expected or
anticipated ruling, judgment or outcome which would, in the Fund's
reasonable judgment, materially impair the Company's ability to
perform the Company's obligations and duties hereunder; or
(d) at the option of the Company upon institution of formal
proceedings against the Fund, the Distributor, the Investment Manager
or any Sub-Investment Manager, by the NASD, the SEC, or any state
securities or insurance commission or any other regulatory body
regarding the duties of the Fund or the Distributor under this
Agreement, or an expected or anticipated ruling, judgment or outcome
which would, in the Company's reasonable judgment, materially impair
the Fund's or the Distributor's ability to perform Fund's or
Distributor's obligations and duties hereunder; or
(e) at the option of the Company upon institution of formal
proceedings against the Investment Manager or Sub-investment Manager
by the NASD, the SEC, or any state securities or insurance commission
or any other regulatory body which would, in the good faith opinion of
the Company, result in material harm to the Accounts, the Company, or
Contractowners.
(f) upon requisite vote of the Contract owners having an interest
in the affected Series (unless otherwise required by applicable law)
and written approval of the Company, to substitute the shares of
another investment company for the corresponding shares of the Fund in
accordance with the terms of the Contracts; or
(g) at the option of the Fund in the event any of the Contracts
are not registered, issued or sold in accordance with applicable
Federal and/or state law; or
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<PAGE>
(h) at the option of the Company or the Fund upon a determination
by a majority of the Fund Board, or a majority of disinterested Fund
Board members, that an irreconcilable material conflict exists among
the interests of (i) any Product owners or (ii) the interests of the
Participating Insurance Companies investing in the Fund; or
(i) at the option of the Company if the Fund ceases to qualify as
a Regulated Investment Company under Subchapter M of the Code, or
under any successor or similar provision, or if the Company reasonably
believes, based on an opinion of its counsel, that the Fund may fail
to so qualify; or
(j) at the option of the Company if the Fund fails to meet the
diversification requirements specified in Section 817(h) of the Code
and any regulations thereunder; or
(k) at the option of the Fund if the Contracts cease to qualify
as annuity contracts or life insurance policies, as applicable, under
the Code, or if the Fund reasonably believes that the Contracts may
fail to so qualify; or
(l) at the option of either the Fund or the Distributor if the
Fund or the Distributor, respectively, shall determine, in their sole
judgment exercised in good faith, that either (1) the Company shall
have suffered a material adverse change in its business or financial
condition; or (2) the Company shall have been the subject of material
adverse publicity which is likely to have a material adverse impact
upon the business and operations of either the Fund or the
Distributor; or
(m) at the option of the Company, if the Company shall determine,
in its sole judgment exercised in good faith, that either: (1) the
Fund and the Distributor, or either of them, shall have suffered a
material adverse change in their respective businesses or financial
condition; or (2) the Fund or the Distributor, or both of them, shall
have been the subject of material adverse publicity which is likely to
have a material adverse impact upon the business and operations of the
Company; or
(n) upon the assignment of this Agreement (including, without
limitation, any transfer of the Contracts or the Accounts to another
insurance company pursuant to an assumption reinsurance agreement)
unless the non-assigning party consents thereto or unless this
Agreement is assigned to an affiliate of the Distributor.
10.2. NOTICE REQUIREMENT. Except as otherwise provided in Section 10.1, no
termination of this Agreement shall be effective unless and until the party
terminating this Agreement gives prior written notice to all other parties to
this Agreement of its intent to terminate which notice shall set forth the basis
for such termination. Furthermore:
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<PAGE>
(a) In the event that any termination is based upon the
provisions of Article VII or the provisions of Section 10.1(a) of this
Agreement, such prior written notice shall be given in advance of the
effective date of termination as required by such provisions; and
(b) in the event that any termination is based upon the
provisions of Section 10.1(c) or 10.1(d) of this Agreement, such prior
written notice shall be given at least ninety (90) days before the
effective date of termination, or sooner if required by law or
regulation.
(c) in the event that any termination is based upon the
provisions of Section 10.1(e) of this Agreement, such prior written
notice shall be given at least sixty (60) days before the date of any
proposed vote to replace the Fund's shares
10.3. EFFECT OF TERMINATION
(a) Notwithstanding any termination of this Agreement pursuant to
Section 10.1 of this Agreement, the Fund and the Distributor will, at
the option of the Company, continue to make available additional Fund
Insurance Shares for so long after the termination of this Agreement
as the Company desires, pursuant to the terms and conditions of this
Agreement as provided in paragraph (b) below, for all Contracts in
effect on the effective date of termination of this Agreement
(hereinafter referred to as "Existing Contracts"). Specifically,
without limitation, if the Company so elects to make additional Fund
Insurance Shares available, the owners of the Existing Contracts or
the Company, whichever shall have legal authority to do so, shall be
permitted to reallocate investments in the Fund, redeem investments in
the Fund and/or invest in the Fund upon the making of additional
purchase payments under the Existing Contracts.
(b) In the event of a termination of this Agreement pursuant to
Section 10.1 of this Agreement, the Fund and the Distributor shall
promptly notify the Company whether the Distributor and the Fund will
continue to make Fund Insurance Shares available after such
termination. If Fund Insurance Shares continue to be made available
after such termination, the provisions of this Agreement shall remain
in effect except for Section 10.1(a) and thereafter either the Fund or
the Company may terminate the Agreement, as so continued pursuant to
this Section 10.3, upon prior written notice to the other party, such
notice to be for a period that is reasonable under the circumstances
but, if given by the Fund, need not be for more than six months.
(c) The parties agree that this Section 10.3 shall not apply to
any termination made pursuant to Article VII or any conditions or
undertakings incorporated by reference in Article VII, and the effect
of such Article VII termination shall be governed by the provisions
set forth or incorporated by reference therein.
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<PAGE>
ARTICLE XI. APPLICABILITY TO NEW ACCOUNTS AND NEW CONTRACTS
The parties to this Agreement may amend the schedules to this Agreement
from time to time to reflect changes in or relating to the Contracts and to add
new classes of variable annuity contracts and variable life insurance policies
to be issued by the Company through an Account investing in the Fund. The
provisions of this Agreement shall be equally applicable to each such class of
contracts or policies, unless the context otherwise requires.
ARTICLE XII. NOTICES
Any notice shall be sufficiently given when sent by registered or certified
mail to the other party(ies) at the address of such party(ies) set forth below
or at such other address as such party(ies) may from time to time specify in
writing to the other party.
If to the Fund:
Baron Capital Funds Trust
767 Fifth Avenue
New York, New York, 10153
Attn: David E. Kaplan
cc: Linda S. Martinson, Esq.
If to the Company:
The Lincoln National Life Insurance Co.
1300 South Clinton Street
Fort Wayne, Indiana 46802
Attn: Kelly D. Clevenger
If to the Distributor:
Baron Capital, Inc.
767 Fifth Avenue
New York, New York, 10153
Attn: David E. Kaplan
cc: Linda S. Martinson, Esq.
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<PAGE>
ARTICLE XIII. MISCELLANEOUS
13.1. The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
13.2. This Agreement may be executed simultaneously in two or more
counterparts, each of which together shall constitute one and the same
instrument.
13.3. If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Agreement shall
not be affected thereby.
13.4. Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC, the
NASD and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
13.5. Each party represents that the execution and delivery of this
Agreement and the consummation of the transactions contemplated herein have been
duly authorized by all necessary corporate or trust action, as applicable, by
such party, and when so executed and delivered this Agreement will be the valid
and binding obligation of such party enforceable in accordance with its terms.
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<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed in its name and behalf by its duly authorized officer on the date
specified below.
Baron Capital Funds Trust
Date: Signature: ______________________________________________
Name: ___________________________________________________
Title: __________________________________________________
THE LINCOLN NATIONAL LIFE INSURANCE CO.
Date: Signature: ______________________________________________
Name: Kelly D. Clevenger
Title: Vice President
Baron Capital, Inc.
Date: Signature: ______________________________________________
Name: ___________________________________________________
Title: __________________________________________________
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<PAGE>
SCHEDULE 1
Separate Accounts of The Lincoln National Life Insurance Co.
Investing in the Fund
As of August 28, 1998
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT C
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT L
LINCOLN LIFE VARIABLE ANNUITY ACCOUNT Q
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<PAGE>
SCHEDULE 2
Variable Annuity Contracts
and Variable Life Insurance Policies
Supported by Separate Accounts
Listed on Schedule 1
As of August 28, 1998
MULTI-FUND-Registered Trademark- VARIABLE ANNUITY (INDIVIDUAL AND GROUP
ANNUITIES)
eANNUITY (INDIVIDUAL ANNUITY)
LINCOLN LIFE GROUP VARIABLE ANNUITY - GVA (GROUP VARIABLE ANNUITY)
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<PAGE>
SCHEDULE 3
State-mandated Investment Restrictions
Applicable to the Fund
As of August 28, 1998
The California Department of Insurance has established the following Guidelines
for an underlying portfolio of a Separate Account:
BORROWING. Borrowing limits for any variable contract separate account portfolio
are (1) 10% of net asset value when borrowing for any general purpose; and (2)
25% of net asset value when borrowing as a temporary measure to facilitate
redemptions. Net asset value of a portfolio is the market value of all
investments or assets owned less outstanding liabilities of the portfolio at the
time that any new or additional borrowing is undertaken.
FOREIGN INVESTMENTS - DIVERSIFICATION.
1. A portfolio will be invested in a minimum of five different foreign countries
at all times. However, this minimum is reduced to four when foreign investments
comprise less than 80% of the portfolio's net asset value; to three when less
than 60% of that value; to two when less than 40%; and to one when less than
20%.
2. Except as set forth in items 3 and 4 below, a Portfolio will have no more
than 20% of its net asset value invested in securities of issuers located in any
one country.
3. A Portfolio may have an additional 15% of its net asset value invested in
securities of issuers located in any one of the following countries: Australia,
Canada, France, Japan, the United Kingdom or Germany.
4. A Portfolio's investments in United States issuers are not subject to the
foreign country diversification guidelines.
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