<PAGE>
As filed with the Securities and Exchange Commission on March 2, 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. 2
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 29
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT C (EANNUITY)
-------------------------------------------
(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 May 1, 1999 pursuant
to paragraph (a)(1) 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 Office:
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 funds. 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) you
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:
1. Lincoln National Aggressive Growth Fund, Inc.
Page 1
<PAGE>
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 May 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 May 1, 1999.
Page 2
<PAGE>
Table of Contents
SPECIAL TERMS..................................................................5
EXPENSE TABLES.................................................................6
CONTRACTOWNER TRANSACTION EXPENSES:..........................................6
VAA ANNUAL EXPENSES FOR EANNUITY SUBACCOUNTS:................................6
ANNUAL EXPENSES OF THE FUNDS, SERIES AND PORTFOLIOS FOR THE
YEAR ENDED 1998...........................................................6
EXAMPLES.....................................................................7
SYNOPSIS.......................................................................9
CONDENSED FINANCIAL INFORMATION...............................................11
ACCUMULATION UNIT VALUES....................................................11
ADDITIONAL INFORMATION FOR THE MONEY MARKET SUBACCOUNT......................12
INVESTMENT RESULTS............................................................13
FINANCIAL STATEMENTS..........................................................13
LINCOLN NATIONAL LIFE INSURANCE CO............................................13
VARIABLE ANNUITY ACCOUNT (VAA)................................................13
INVESTMENTS OF THE VARIABLE ANNUITY ACCOUNT...................................14
INVESTMENT ADVISOR..........................................................14
FUNDS.......................................................................15
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS............................17
REINVESTMENT OF DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS....................18
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS...........................18
CHARGES AND OTHER DEDUCTIONS..................................................18
DEDUCTIONS FROM THE VAA FOR EANNUITY........................................18
SURRENDER CHARGE............................................................19
DEDUCTIONS FOR PREMIUM TAXES................................................19
OTHER CHARGES AND DEDUCTIONS................................................19
ADDITIONAL INFORMATION......................................................19
THE CONTRACT..................................................................20
PURCHASE OF CONTRACT........................................................20
WHO CAN INVEST..............................................................20
PURCHASE PAYMENTS...........................................................20
VALUATION DATE..............................................................20
ALLOCATION OF PURCHASE PAYMENTS.............................................21
VALUATION OF ACCUMULATION UNITS.............................................21
TRANSFERS BETWEEN SUBACCOUNTS ON OR BEFORE THE ANNUITY COMMENCEMENT DATE....22
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..................................................24
AMENDMENT OF CONTRACT.......................................................24
OWNERSHIP...................................................................24
CONTRACTOWNER QUESTIONS.....................................................25
Page 3
<PAGE>
ANNUITY PAYOUTS...............................................................25
ANNUITY OPTIONS.............................................................25
GENERAL INFORMATION.........................................................25
VARIABLE ANNUITY PAYOUTS....................................................26
FEDERAL TAX STATUS............................................................26
INTRODUCTION................................................................26
TAXATION OF NONQUALIFIED ANNUITIES..........................................27
Tax Deferral on Earnings..................................................27
Tax Treatment of Payments.................................................28
Taxation of Withdrawals and Surrenders....................................28
Taxation of Annuity Payouts...............................................29
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...................30
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..........................................................33
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
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.
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.
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.
Beneficiary -- The person whom you designate to receive the Death Benefit, if
any, in case of the Contractowner's death.
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 before the Annuity Commencement Date, 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.
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.
Purchase Payments -- Amounts paid into the Contract.
Page 5
<PAGE>
Subaccount -- That portion of the VAA that reflects investments in Accumulation
and Annuity Units of a class of a particular fund. A Subaccount corresponds to
each fund.
Surrender Charge -- Also known as a contingent deferred sales charge, this
charge may be assessed upon premature withdrawals or surrender of the Contract
and is calculated according to the provisions of the Contract.
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 (in other words,
the Valuation Date) and ending at the close of such trading on the next
succeeding Valuation Date.
EXPENSE TABLES
CONTRACTOWNER TRANSACTION EXPENSES:
Currently, there is no charge for transfers between funds. However, we reserve
the right to impose such charges in the future.
The Surrender Charge percentage is reduced to zero after three years according
to the following schedule:
<TABLE>
<CAPTION>
Contract Year 1 2 3 4 or more
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
Surrender Charge as % of 3% 2% 1% 0%
Contract Value Withdrawn
</TABLE>
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 1998
(as a percentage of each funds' average net assets):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
Page 6
<PAGE>
- --------------------------------------------------------------------------------
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 funds currently voluntarily waive management
fees to the extent necessary to maintain the each fund's total expense 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 each
fund's expenses by reimbursing each fund for total expenses--after excluding
certain expenses--that exceed, in the aggregate, 1.00% per annum of each fund's
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 fund 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 fund 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 and of the funds)
If you surrender your Contract at the end of the applicable time period, you
would pay the following expenses on a $1,000 investment, assuming a 5% annual
return:
Page 7
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------
1 Year 5 Year 10 Years
<S> <C> <C> <C> <C>
1. AG 45 74 163
-------------------------------------------------------------
2. B 42 59 131
-------------------------------------------------------------
3. CA 45 76 166
-------------------------------------------------------------
4. EI 45 75 164
-------------------------------------------------------------
5. GAA 46 79 172
-------------------------------------------------------------
6. GI 40 50 111
-------------------------------------------------------------
7. I 46 81 176
-------------------------------------------------------------
8. M 41 54 119
-------------------------------------------------------------
9. MM 43 63 138
-------------------------------------------------------------
10. SA 41 53 118
-------------------------------------------------------------
11. SO 41 54 119
-------------------------------------------------------------
12. TS 45 74 162
-------------------------------------------------------------
13. DTRS 44 69 152
-------------------------------------------------------------
14. GBS 45 74 162
-------------------------------------------------------------
15. E500 40 47 105
-------------------------------------------------------------
16. SC 41 55 122
-------------------------------------------------------------
17. VPI 52 110 237
-------------------------------------------------------------
18. BCA 52 110 237
-------------------------------------------------------------
19. P 45 77 169
-------------------------------------------------------------
20. MG 47 84 184
-------------------------------------------------------------
21. WG 44 71 155
-------------------------------------------------------------
</TABLE>
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 5 Year 10 Years
<S> <C> <C> <C> <C>
1. AG 14 74 163
-------------------------------------------------------------
2. B 11 59 131
-------------------------------------------------------------
3. CA 14 76 166
-------------------------------------------------------------
4. EI 14 75 164
-------------------------------------------------------------
5. GAA 15 79 172
-------------------------------------------------------------
6. GI 9 50 111
-------------------------------------------------------------
7. I 15 81 176
-------------------------------------------------------------
8. M 10 54 119
-------------------------------------------------------------
9. MM 12 63 138
-------------------------------------------------------------
10. SA 10 53 118
-------------------------------------------------------------
11. SO 10 54 119
-------------------------------------------------------------
12. TS 14 74 162
-------------------------------------------------------------
13. DTRS 13 69 152
-------------------------------------------------------------
14. GBS 14 74 162
-------------------------------------------------------------
15. E500 9 47 105
-------------------------------------------------------------
16. SC 10 55 122
-------------------------------------------------------------
17. VPI 21 110 237
-------------------------------------------------------------
18. BCA 21 110 237
-------------------------------------------------------------
19. P 14 77 169
-------------------------------------------------------------
20. MG 16 84 184
-------------------------------------------------------------
21. WG 13 71 155
-------------------------------------------------------------
</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
Page 8
<PAGE>
of the VAA, the funds for the year ended December 31, 1998, 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
WHAT TYPE OF CONTRACT AM I BUYING? It is an individual deferred variable annuity
contract issued by Lincoln Life. See THE CONTRACT.
WHAT IS THE VARIABLE ANNUITY ACCOUNT (VAA)? It is a separate 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? If you decide to withdraw
Contract Value before your initial Purchase Payment has been in your Contract
for a period of three years, you pay a surrender charge of anywhere from 1% to
3% of Contract Value, depending on how many Contract Years have elapsed. We
waive the surrender charge in certain situations. See SURRENDER CHARGES.
Page 9
<PAGE>
If your state assesses a premium tax with respect to your Contract, we will
deduct those amounts from Purchase Payments or Contract Value at the time the
tax is incurred (or at another time we choose).
Further, we apply an annual charge totaling .55% to the daily net asset value of
the VAA. See CHARGES AND OTHER DEDUCTIONS.
Finally, each fund pays a management fee to its investment advisors based upon
its average daily net asset value. Each fund also has additional operating
expenses associated with the daily operation of the funds. See the EXPENSE
TABLES. These fees and expenses are more fully described in the prospectuses for
the funds.
HOW MUCH MUST I PAY, AND HOW OFTEN? In general, Purchase Payments are flexible,
although some limitations on the amounts may apply. 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. One factor will be the changing values of the
funds in which you have invested. Another factor will be your age at the Annuity
Commencement Date. 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? We will pay the Contract Value to your
designated Beneficiary. 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.
Currently, an unlimited number of 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, if you take a distribution before age 59 1/2 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.
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<PAGE>
CONDENSED FINANCIAL INFORMATION
ACCUMULATION UNIT VALUES
The following information relating to Accumulation Unit values and number of
Accumulation Units for the period ended December 31, 1998 comes from the VAA's
financial statements. The Contract was first available for sail on August 20,
1998.
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
Aggressive Growth Subaccount
Accumulation Unit value
o August 20, 1998 1.5589
o December 31, 1998 1.5693
Number of Accumulation Units
o December 31, 1998 3,697
- --------------------------------------------------------------------------------
Bond Subaccount
Accumulation Unit value
o August 20, 1998 4.8450
o December 31, 1998 5.0336
Number of Accumulation Units
o December 31, 1998 425
- --------------------------------------------------------------------------------
Capital Appreciation Subaccount
Accumulation Unit value
o August 20, 1998 2.1712
o December 31, 1998 2.5777
Number of Accumulation Units
o December 31, 1998 4,421
- --------------------------------------------------------------------------------
Equity-Income Subaccount
Accumulation Unit value
o August 20, 1998 2.2239
o December 31, 1998 2.4028
Number of Accumulation Units
o December 31, 1998 1,054
- --------------------------------------------------------------------------------
Global Asset Allocation Subaccount
Accumulation Unit value
o August 20, 1998 2.8980
o December 31, 1998 3.0613
Number of Accumulation Units
o December 31, 1998 972
- --------------------------------------------------------------------------------
Growth and Income Subaccount
Accumulation Unit value
o August 20, 1998 10.3200
o December 31, 1998 11.5125
Number of Accumulation Units
o December 31, 1998 224
- --------------------------------------------------------------------------------
International Subaccount
Accumulation Unit value
o August 20, 1998 1.6985
o December 31, 1998 1.7760
Number of Accumulation Units
o December 31, 1998 2,055
- --------------------------------------------------------------------------------
Managed Subaccount
Accumulation Unit value
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<PAGE>
o August 20, 1998 4.9209
o December 31, 1998 5.2684
Number of Accumulation Units
o December 31, 1998 530
- --------------------------------------------------------------------------------
Money Market Subaccount
Accumulation Unit value
o August 20, 1998 2.4819
o December 31, 1998 2.5209
Number of Accumulation Units
o December 31, 1998 30,369
- --------------------------------------------------------------------------------
Social Awareness Subaccount
Accumulation Unit value
o August 20, 1998 5.4070
o December 31, 1998 5.8851
Number of Accumulation Units
o December 31, 1998 1,623
- --------------------------------------------------------------------------------
Special Opportunities Subaccount
Accumulation Unit value
o August 20, 1998 8.2241
o December 31, 1998 8.7363
Number of Accumulation Units
o December 31, 1998 436
- --------------------------------------------------------------------------------
Decatur Total Return Subaccount
Accumulation Unit value
o August 20, 1998 1.5008
o December 31, 1998 1.6130
Number of Accumulation Units
o December 31, 1998 4,472
- --------------------------------------------------------------------------------
Global Bond Subaccount
Accumulation Unit value
o August 20, 1998 1.0982
o December 31, 1998 1.1859
Number of Accumulation Units
o December 31, 1998 1,781
- --------------------------------------------------------------------------------
Trend Subaccount
Accumulation Unit value
o August 20, 1998 1.2510
o December 31, 1998 1.3706
Number of Accumulation Units
o December 31, 1998 3,182
- --------------------------------------------------------------------------------
</TABLE>
The Equity 500 Index Fund, Small Cap Index Fund, VP International, Baron Capital
Asset Fund, AMT Partners Portfolio, AMT MidCap Growth Portfolio, and the
Worldwide Growth Portfolio were added on March 1, 1999. Therefore, these funds
are not included in this condensed financial information statement.
ADDITIONAL INFORMATION FOR THE MONEY MARKET SUBACCOUNT
Seven day yield: 3.5%; Length of base period: 7 days; Date of last day of base
period: December 31, 1998.
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<PAGE>
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
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 for Lincoln Life are located in the SAI. You can
request a free copy of the SAI through our Internet Service Center or by 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. We also serve as principal underwriter
for the Contracts.
VARIABLE ANNUITY ACCOUNT (VAA)
On June 3, 1981, Lincoln Life established the VAA 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. This means that by law its assets
cannot be charged with liabilities resulting from any other business that we may
conduct. All income, gains and losses, realized or not, from assets allocated to
the VAA are credited to or charged against the VAA. They are credited or charged
without regard to any other income, gains or losses of Lincoln Life.
We do not guarantee the investment performance of the VAA. Any investment gain
or loss depends on the investment performance of the funds. You assume the full
investment risk for all amounts placed in the VAA.
The VAA is used to support other annuity contracts offered by Lincoln Life in
addition to the contract described in this prospectus.
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<PAGE>
INVESTMENTS OF THE VARIABLE ANNUITY ACCOUNT
The VAA consists of several Subaccounts. A separate Subaccount corresponds to
each fund. You decide the Subaccount(s) to which you allocate Purchase Payments.
Shares of the funds will be sold at net asset value to the VAA in order to fund
the Contract. Any transaction you make will take place at the next net asset
values determined after the receipt of your transaction request. The funds are
required to redeem their shares at net asset value upon our request.
A fund's prospectus explains how the net asset value for that fund is
calculated. You should read the funds' prospectuses carefully before you invest
in this Contract. We reserve the right to add, delete or substitute funds,
subject to regulatory approval. All funds may not be available in all states.
INVESTMENT ADVISOR
Lincoln Investment Management, Inc. (Lincoln Investment) is the investment
advisor for each of the Lincoln National funds and is primarily responsible for
the investment decisions affecting these funds. 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. Lincoln Investment is owned by LNC.
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:
- --------------------------------------------------------------------------
Sub-advisor Fund
Delaware International Advisers, International
Ltd.
- --------------------------------------------------------------------------
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) is the advisor for the
Trend Series and the Decatur Total Return Series and is primarily responsible
for the investment decisions affecting the funds. Delaware International
Advisers Ltd. (Delaware International), an affiliate of Delaware Management,
furnishes investment management services to the Global Bond Series. Delaware
Management is an indirect subsidiary of LNC.
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<PAGE>
Bankers Trust Company is the investment 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.
BAMCO, Inc. is the investment advisor for the Baron Capital Asset Fund. BAMCO,
Inc., is a wholly owned subsidiary of Baron Capital Group, Inc.
NB Management is the investment 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 investment advisor for the Janus Aspen Series:
Worldwide Growth Portfolio. Janus Capital Corporation is primarily responsible
for the investment decisions affecting this fund.
FUNDS
Following are brief summaries of the investment objectives and policies of the
funds. The year in which each fund started trading is in parentheses. There is
more detailed information in the current prospectuses for the funds.
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 when you make a withdrawal, surrender the
Contract or transfer from one fund 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 will achieve its stated
objectives.
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. The 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.
4. Equity-Income Fund (1994) -- The investment objective is to achieve
reasonable income by investing primarily in income-producing equity
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<PAGE>
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.
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 fund's 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 fund is a global fund. As such, at least 65% of the fund's 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.
15. Equity 500 Index Fund (1997) -- seeks to match the performance of the
stock market, as represented by the S&P 500 (R) 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.
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<PAGE>
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 investment
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 (funds 1. to 11.), the Delaware Management
funds (funds 12. to 14.) are sold to Lincoln Life for investment of the assets
of the VAA and of Lincoln Life Flexible Premium Variable Life Account K, 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 all funds except
the Lincoln National funds are sold to separate accounts of life insurance
companies other than Lincoln Life. See OTHER INFORMATION. Shares of the funds
are not sold directly to the general public.
The portfolio managers for the Neuberger Berman Advisers Management Trust
Portfolios also manage one or more other mutual funds with similar names,
investment objectives and/or investment styles as the Neuberger Berman Advisor
Management Trust funds. You should be aware that each fund is likely to differ
from the other mutual funds in size, cash flow pattern and tax matters.
Accordingly, the holdings and performance of each fund can be expected to vary
from those of the other mutual funds.
We will purchase shares of each of the funds at net asset value and direct them
to the appropriate Subaccounts of the VAA. We will redeem sufficient shares of
the appropriate funds to pay Annuity Payouts, Death Benefits,
surrender/withdrawal proceeds, or for 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 are fundamental, which means that
no changes may be made without the affirmative vote of a majority of the
outstanding voting securities of each respective fund. The extent to which the
particular investment policies, practices or restrictions for each fund are
fundamental or non-fundamental depends on the particular fund. If they are
non-
Page 17
<PAGE>
fundamental, they may be changed by the Board of Directors of the funds
without shareholder approval.
You are urged to consult the prospectus and SAI for each individual fund for
additional information regarding the fundamental and non-fundamental policies,
practices and restrictions of each of the funds.
REINVESTMENT OF DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS
All dividend and capital gain distributions of the funds are automatically
reinvested in shares of the distributing funds 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 held by the VAA. (We may substitute shares of other
funds for shares already purchased, or to be purchased in the future, under the
Contract. This substitution might occur if shares of a fund should no longer be
available, or if investment in any fund's shares should no longer be available,
or if investment in any fund's share should become inappropriate, in the
judgement of our management, for the purposes for the Contract.) We cannot
substitute shares of one fund for another without approval by the SEC.
In this event we will inform you by placing a notice in your personal folder at
the Internet Service Center. This notice will also be sent to your last known
e-mail address.
CHARGES AND OTHER DEDUCTIONS
We will deduct the charges described below to cover our costs and expenses of
providing administrative and distribution services and for assuming certain
risks under the Contracts. In the future we may pay commissions to
broker-dealers as a percentage of Purchase Payments. 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.
Page 18
<PAGE>
SURRENDER CHARGE
The Surrender Charge percentage applies (except as described below) to
surrenders or withdrawals according to the following schedule:
<TABLE>
<CAPTION>
Contract Year 1 2 3 4 or more
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
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.
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 (for example, 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
funds that are more fully described in the prospectuses for the funds.
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
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<PAGE>
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.
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
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<PAGE>
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 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 shares held in the Subaccount is calculated by
multiplying the number of fund shares owned by the Subaccount at the
beginning of the Valuation Period by the net asset value per share of the
fund at the end of the Valuation Period, and adding any dividend or other
distribution of the fund if an ex-dividend date occurs during the
Valuation Period; minus
(2) The liabilities of the 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.
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<PAGE>
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 another 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.
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
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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. All payments must satisfy the requirements
of Internal Revenue Code of 1986, as amended, (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:
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
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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.
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 (Contract Value less any applicable Surrender Charge) 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
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relations order and upon written notification to us. We assume no responsibility
for the validity or effect of any assignment. Consult your tax advisor about the
tax consequences of an assignment.
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.
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. You may select one of the forms of payout of
annuities available under the Contract (described below). Annuity payments to
you under any of the Annuity Payout Options are made on a monthly basis and may
vary in amount.
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
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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.
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 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 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
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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 advisor about
the application of tax rules to your individual situation.
TAXATION OF NONQUALIFIED ANNUITIES
This part of the discussion describes some of the Federal income tax rules
applicable to nonqualified annuities. A nonqualified annuity is a Contract not
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:
o An individual must own the Contract or the tax law must treat the contact
as owned by an individual.
o The investments of the VAA must be "adequately diversified" in accordance
with IRS regulations.
o The right to choose particular investments for the Contract must be
limited.
o 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
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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."
Restrictions
Federal income tax law limits your rights to choose particular investments for
the Contract. Because the Internal Revenue Service 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 Internal Revenue Service 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. A 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.
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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.
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.
o Death prior to the Annuity Commencement Date --
o If the Beneficiary receives Death Benefits under an Annuity Payout
Option, they are taxed in the same manner as Annuity Payouts.
o If the Beneficiary does not receive Death Benefits under an Annuity
Payout Option, they are taxed in the same manner as a withdrawal.
o Death after the Annuity Commencement Date --
o 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.
o 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:
o you receive on or after you reach age 59 1/2,
o you receive because you became disabled (as defined in the tax law),
o a Beneficiary receives on or after your death, or
o you receive as a series of substantially equal periodic payments for your
life (or life expectancy).
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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.
Gifting a Contract
If you transfer ownership of the Contract to a person other than the your
spouse, and receive a payment less than the Contract 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 advisor.
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 advisor.
Types of Qualified Contracts and Terms of Contracts
Currently, we issue contracts in connection with the following types of
qualified plans:
o Individual Retirement Accounts and Annuities ("Traditional IRAs")
o Roth IRAs
We may issue the Contract for use with other types of qualified plans in the
future.
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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.
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,
o 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, for example, your
compensation.
o Under most qualified plans, for example, 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.
o 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:
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o received on or after you reach age 59 1/2,
o received on or after your death or because of your disability (as defined
in the tax law),
o received as a series of substantially equal periodic payments for the your
life (or life expectancy), or
o received as reimbursement for certain amounts paid for medical care.
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 you might
not otherwise have had to be pay. A qualified advisor 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.
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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.
VOTING RIGHTS
As required by law, we will vote the funds shares held in the VAA at meetings of
the shareholders of the various funds. The voting will be done according to the
instructions of Contractowners who have interests in any Subaccounts which
invest in the funds. 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 funds 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,
AMT MidCap Growth Portfolio and Worldwide 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 these 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 Decatur Total Return Series, Global Bond Series and Trend Series
(Delaware funds). Since the Delaware funds engages in shared funding, other
persons or entities besides Lincoln Life may vote funds 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
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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.
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 and Delaware funds: Bond, Growth and
Income, Managed, Money Market and Special Opportunities (for Account D); Growth
and Income and Special Opportunities (for Account G); and all Lincoln National
and Delaware funds for Accounts K and Q.
Through the VAA and the Variable Life Accounts, Lincoln Life is the sole
shareholder in the Lincoln National funds. However, Lincoln Life is not the sole
shareholder of the other funds. Collectively, the VAA and the Variable Life
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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 (in other words, where mixed funding occurs), the Boards of Directors of
the funds 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 with another investment, that fund may
have to liquidate securities on a disadvantageous basis. Refer to the prospectus
for each fund for more information about mixed funding. In the future, we may
purchase shares in the funds for one or more unregistered segregated investment
accounts.
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, 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
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 and their investment management.
PREPARING FOR THE YEAR 2000
Many existing computer programs use only two digits to identify a year in the
date field. These programs were designed and developed without considering the
impact of the upcoming change in the century. If not corrected many computer
applications could fail or create erroneous results by or at the year 2000. The
year 2000 issue affects virtually all companies and organizations.
Page 35
<PAGE>
Lincoln Life, as part of its year 2000 updating process, is responsible for the
updating of the VAA related computer systems. An affiliate of Lincoln Life,
Delaware 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 assess 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.
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 that 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
Page 36
<PAGE>
include claims for unspecified or substantial punitive damages and similar types
of relief in addition to amounts for alleged contractual liability or requests
for equitable relief. After consultation with legal counsel and a review of
available facts, it is management's opinion that the ultimate liability, if any,
under these suits will not have a material adverse effect on the financial
position of Lincoln Life.
During the 1990's class action lawsuits alleging sales practices fraud have been
filed against many life insurance companies, and Lincoln Life has not been
immune. Several suits 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 is incorporated herein by reference to the
Registration Statement on form N-4 (333-50817) filed on
March 1, 1999.
(c) Services Agreement between BT Insurance Funds Trust,
Bankers Trust Company, and Lincoln National Life
Insurance Company is incorporated herein by reference to the
Registration Statement on form N-4 (333-50817) filed on
March 1, 1999.
(d) Services Agreement between Janus Aspen Series and Lincoln
National Life Insurance Company is incorporated herein by
reference to the Registration Statement on form N-4
(333-50817) filed on March 1, 1999.
(e) Services Agreement between Neuberger&Berman Advisers
Management Trust, Advisers Managers Trust,
Neuberger&Berman Management Incorporation and Lincoln
National Life Insurance Company is incorporated herein by
reference to the Registration Statement on form N-4
(333-50817) filed on March 1, 1999.
(f) Services Agreement between Baron Capital Funds Trust,
Baron Capital, Inc. and Lincoln National Life Insurance
Company is incorporated herein by reference to the
Registration Statement on form N-4 (333-50817) filed on
March 1, 1999.
(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(a) 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 1 day of March, 1999.
LINCOLN NATIONAL VARIABLE ANNUITY
Account C (Registrant) - (e-Annuity)
By: /s/ Stephen H. Lewis
-------------------------------------
Stephen H. Lewis
Senior Vice President, LNL
By: THE LINCOLN NATIONAL LIFE
INSURANCE COMPANY
(Depositor)
By: /s/ Gabriel L. Shaheen
-------------------------------------
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
- --------- ----- ----
/s/ Gabriel L. Shaheen
- ---------------------- Chief Executive Officer, March 1, 1999
Gabriel L. Shaheen President & Director
(Principal Executive Officer)
- ---------------------- Executive Vice President March , 1999
Lawrence T. Rowland and Director
/s/ Keith J. Ryan
- ---------------------- Senior Vice President, Chief March 1, 1999
Keith J. Ryan Financial Officer and Assistant
Treasurer (Principal Accounting
Officer and Principal Financial
Officer)
- ---------------------- Director March , 1999
Jon A. Boscia
/s/ H. Thomas McMeekin
- --------------------- Director March 1, 1999
H. Thomas McMeekin
/s/ Richard C. Vaughan
- --------------------- Director March 1, 1999
Richard C. Vaughan
