<PAGE>
As filed with the Securities and Exchange Commission on May 25, 1995
Registration Nos. 2-26342 and
2-25618
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. ___ [_]
Post-Effective Amendment No. ___ [_]
LINCOLN NATIONAL VARIABLE ANNUITY FUND A
(Exact Name of Registrant as Specified in Charter)
(219) 455-2000
(Area Code and Telephone Number)
The Lincoln National Life Insurance Company
(Name of Insurance Company)
1300 South Clinton Street
Fort Wayne, Indiana 46802
(Address of Principal Executive Offices: Number, Street,
State, Zip Code)
Name and Address of Agent for Service: Copy to:
Jack D. Hunter, Esq. Frederick R. Bellamy, Esq.
The Lincoln National Life Insurance Company Sutherland, Asbill & Brennan
1300 South Clinton Street 1275 Pennsylvania Avenue, N.W.
P.O. Box 1110 Washington, D.C. 20004-2404
Fort Wayne, Indiana 46801
Approximate Date of Proposed Public Offering: As soon as practicable
following the effective date of this Registration Statement.
It is proposed that this filing will become effective on June 22, 1995
pursuant to Rule 488 under the Securities Act of 1933.
The Registrant has filed a declaration registering an indefinite amount of
securities pursuant to Rule 24f-2 under the Investment Company Act of 1940, as
amended. Accordingly, no filing fee is required herewith. A Rule 24f-2 notice
for the fiscal year ended December 31, 1994 was filed on February 21, 1995.
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY FUND A
Registration Statement on Form N-14
CROSS REFERENCE SHEET
Pursuant to Rule 481(a)
Part A Caption in Prospectus/Proxy Statement
------ -------------------------------------
1. Beginning of Registration
Statement and Outside Front
Cover Page of Prospectus Facing Sheet; Cover Page; Cross-
Reference Sheet
2. Beginning and Outside Back
Cover Page of Prospectus Table of Contents
3. Fee Table, Synopsis Information,
and Risk Factors General Voting Information; Summary of the
Reorganization
4. Information About the
Transaction Summary of the Reorganization; Proposed
Plan of Reorganization; Existing
and Pro Forma Capitalization
Table; Federal Tax Status; Exhibit A
5. Information About the Registrant Summary of the Reorganization; Proposed
Plan of Reorganization; Description of
Lincoln Life, Fund A and Fund B;
Exhibit B
6. Information About the Company
Being Acquired Summary of the Reorganization; Proposed
Plan of Reorganization; Description of
Lincoln Life, Fund A and Fund B;
Exhibit C
7. Voting Information General Voting Information
8. Interest of Certain Persons
and Experts Boards of Managers and Officers of
Fund A and Fund B; Interests of Named
Experts and Counsel
<PAGE>
9. Additional Information Required
for Re-offering by Persons
Deemed to be Underwriters Not Applicable
Caption in Statement
Part B of Additional Information
------ -------------------------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. Additional Information About
the Registrant Exhibit B
13. Additional Information About
the Company Being Acquired Exhibit C
14. Financial Statements Exhibits B and C
Part C
------
Information required to be included in Part C is set forth under the
appropriate item, so numbered in Part C of this Registration Statement.
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY FUND A
LINCOLN NATIONAL VARIABLE ANNUITY FUND B
1300 South Clinton Street
Fort Wayne, Indiana 46802
NOTICE OF MEETING OF CONTRACT OWNERS
NOTICE IS HEREBY GIVEN that special meetings (the "Meetings") of owners of
variable annuity contracts issued by The Lincoln National Life Insurance Company
("Lincoln Life") entitled to give voting instructions in connection with,
respectively, Lincoln National Variable Annuity Fund A ("Fund A"), or Lincoln
National Variable Annuity Fund B ("Fund B") will be held at the offices of
Lincoln National Corporation at 200 E. Berry Street, Fort Wayne, Indiana 46801,
on August 1, 1995, at 11:30 a.m., Eastern Standard Time, for the purposes of
considering and acting on the following matters, as set forth in the
accompanying Prospectus/Proxy Statement:
1. To approve or to disapprove an Agreement and Plan of Reorganization to
merge Fund B into Fund A, whereby Fund B would transfer all of its
assets and liabilities to Fund A in exchange for accumulation units
and annuity units of Fund A as described in the accompanying
Prospectus/Proxy Statement;
2. To elect the members of the respective Boards of Managers of Fund A
and Fund B who shall serve until the next annual meeting of contract
owners or until their successors are duly elected and qualified;
3. To ratify or to reject the selection of Ernst & Young LLP as the
independent auditors of Fund A and of Fund B until the next annual
meeting of contract owners; and
4. To consider and transact such other business as may properly come
before the Meetings or any adjournments or postponements thereof.
Each of the Boards of Managers of Fund A and Fund B has fixed the close of
business on May 4, 1995 as the record date for determination of contract owners
entitled to notice of, and to vote at, the Meetings or any adjournments or
postponements thereof.
YOUR VOTE IS IMPORTANT. CONTRACT OWNERS WHO DO NOT EXPECT TO ATTEND THE MEETING
ARE REQUESTED TO COMPLETE, SIGN AND DATE THE ACCOMPANYING PROXY, AND TO RETURN
IT IMMEDIATELY IN THE ENCLOSED POSTAGE-PAID ENVELOPE SO THAT THEY MAY BE
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY FUND A
LINCOLN NATIONAL VARIABLE ANNUITY FUND B
1300 SOUTH CLINTON STREET
FORT WAYNE, INDIANA 46802
1-800-348-1212, Ext. 4912
-------------------------------------
PROSPECTUS/PROXY STATEMENT
-------------------------------------
This Prospectus/Proxy Statement dated June 22, 1995, is being furnished by
the respective Boards of Managers of Lincoln National Variable Annuity Fund A
("Fund A") and Lincoln National Variable Annuity Fund B ("Fund B") (together,
Fund A and Fund B are sometimes referred to as the "Funds") to owners of certain
variable annuity contracts issued by The Lincoln National Life Insurance Company
("Lincoln Life"), in connection with the solicitation of voting instructions
from such contract owners as to: a proposed reorganization whereby Fund B would
be merged into Fund A; the election of members of the respective Boards of
Managers of the Funds; the ratification or rejection of Ernst & Young LLP as the
independent auditors for the Funds; and any other matter that may properly come
before the meetings. The enclosed proxy will be voted pursuant to a contract
owner's direction at the meetings of contract owners of Fund A and Fund B (the
"Meetings") to be held at the offices of Lincoln National Corporation at 200 E.
Berry Street, Fort Wayne, Indiana 46801, on August 1, 1995, at 11:30 a.m.,
Eastern Standard Time, and any adjournments or postponements thereof.
The contract owner may revoke the proxy at any time before it is voted by
filing with the Secretary to the Board of Managers, prior to the Meetings,
either a duly executed instrument of revocation or a duly executed proxy bearing
a later date. In addition, the proxy may be revoked by a contract owner
personally attending the Meetings and casting votes in person.
The Funds have previously provided their contract owners and participants
with annual reports for the fiscal year ended December 31, 1994. The
approximate date for mailing of proxy materials to contract owners and
participants is June 22, 1995.
Lincoln Life bears the cost of this proxy solicitation, which is made by
mail and in some instances, also by telephone or other means by officers or
employees of Lincoln Life and/or its affiliates.
Fund A was established by the Board of Directors of Lincoln Life on
September 16, 1966, as a segregated investment account in accordance with
certain provisions of Indiana Insurance Law. Fund A is an open-end, diversified
management investment company registered with the Securities and Exchange
Commission (the "SEC") under the Investment Company Act of 1940, as amended (the
"1940 Act"). Fund B was established by the Board of Directors of Lincoln Life
on December 1, 1966, as a segregated investment account in accordance with
certain provisions of Indiana Insurance Law. Fund B also is an open-end,
<PAGE>
diversified management investment company registered with the SEC under the 1940
Act. The current prospectuses for Fund A respectively, and for Fund B are
incorporated herein by reference, and are attached as Exhibits B and C of this
Prospectus/Proxy Statement.
As part of the proposed reorganization of Fund B into Fund A (the
"Reorganization"), Fund B will transfer its assets to Fund A, and Fund A will
credit accumulation and annuity units to contract owners of Fund B. The
accumulation and annuity units credited by Fund A would correspond to the value
of the net assets transferred by Fund B to Fund A. The Reorganization is
described in this Prospectus/Proxy Statement, which has been filed with the SEC
as part of a registration statement on Form N-14.
This Prospectus/Proxy Statement, which should be retained for future
reference, sets forth concisely the information about the Reorganization, Fund A
and Fund B that a contract owner should know before approving or disapproving
the Reorganization. A Statement of Additional Information, dated June 22, 1995,
containing more detailed information has been filed with the SEC and is
incorporated herein by reference. Copies of the Statement of Additional
Information may be obtained without charge by writing to Lincoln Life at P.O.
Box 2340, Fort Wayne, Indiana 46801, or by calling Kimberly Oakman at 1-800-348-
1212, Extension 4912.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
-2-
<PAGE>
TABLE OF CONTENTS
Page
----
GENERAL VOTING INFORMATION................................................ 4
I. APPROVAL OR DISAPPROVAL OF THE REORGANIZATION....................... 5
Summary of the Reorganization....................................... 5
Proposed Plan of Reorganization..................................... 8
Existing and Pro Forma Capitalization............................... 9
Description of Lincoln Life, Fund A, and Fund B..................... 10
Investment Objectives and Policies of the Funds..................... 11
Federal Tax Status.................................................. 13
Mortality and Expense Assurances.................................... 16
Sales and Administrative Services................................... 17
Surrender for Redemption............................................ 18
Voting Rights....................................................... 18
II. ELECTION OF THE BOARDS OF MANAGERS.................................. 19
Boards of Managers and Officers of Fund A and Fund B................ 19
Allocation of Brokerage Fees and Portfolio Turnover................. 22
III. RATIFICATION OR REJECTION OF THE SELECTION OF INDEPENDENT AUDITORS.. 23
IV. ADDITIONAL INFORMATION.............................................. 24
Principal Holders of Accumulation and Annuity Units of Fund A....... 24
Principal Holders of Accumulation and Annuity Units of Fund B....... 24
Valuation of Assets................................................. 24
State Regulation of Lincoln Life.................................... 25
Custodian........................................................... 25
Legal Proceedings................................................... 25
Legal Opinions...................................................... 25
Experts............................................................. 25
Public Information.................................................. 25
Interests of Named Experts and Counsel.............................. 26
Contract Owner Proposals............................................ 26
Other Matters....................................................... 26
EXHIBIT A - Agreement and Plan of Reorganization.......................... A-1
EXHIBIT B - Fund A Prospectus............................................. B-1
EXHIBIT C - Fund B Prospectus............................................. C-1
-3-
<PAGE>
GENERAL VOTING INFORMATION
This Prospectus/Proxy Statement is being furnished on behalf of the
respective Boards of Managers of Fund A and Fund B to owners of certain variable
annuity contracts issued by Lincoln Life in connection with the solicitation of
voting instructions from such contract owners with regard to the Meeting of Fund
A contract owners and Fund B contract owners to be held on August 1, 1995. The
respective Boards of Managers have called the Meetings to consider and to
approve or disapprove a proposal of a reorganization of Fund B with and into
Fund A, to elect members of the respective Boards of Managers, and to ratify or
to reject the selection of independent auditors for each Fund.
Fund A was organized as a segregated investment account of Lincoln Life,
and is registered with the SEC as an open-end, diversified management investment
company. Fund B was established as a segregated investment account of Lincoln
Life, and also is registered with the SEC as an open-end, diversified management
investment company under the 1940 Act.
The Boards of Managers of Fund A and Fund B have fixed the close of
business on May 4, 1995 as the record date for the determination of contract
owners entitled to notice of and to vote at the Meeting. As of May 4, 1995
there were 10,220,782 votes entitled to be cast by Fund A contract owners, and
1,052,528 votes entitled to be cast by Fund B contract owners. Neither of the
Funds knows of any person owning beneficially more than 5 percent of its
outstanding units. As of May 4, 1995, John B. Borsch, Jr., Member of the Board
of Managers of each Fund, owned 1,662.347 units of Fund B.
Lincoln Life is a stock life insurance company organized in 1905 under the
laws of the State of Indiana. It is principally engaged in the sale of life
insurance, annuities, and reinsurance. Lincoln Life is a wholly-owned
subsidiary of Lincoln National Corporation, a publicly-held insurance holding
company. Lincoln Life's home office (principal business address) is located at
1300 South Clinton Street, Fort Wayne, Indiana 46802. Lincoln Life's home
office mailing address is P.O. Box 2340, Fort Wayne, Indiana 46801.
TO BE GIVEN EFFECT, LINCOLN LIFE MUST RECEIVE AN OWNER'S PROPERLY EXECUTED
VOTING INSTRUCTION FORM AT THE HOME OFFICE ADDRESS BY 5:00 P.M. EASTERN STANDARD
TIME, JULY 31, 1995. An owner may revoke his or her voting instructions at any
time prior to their execution by written notice to Lincoln Life or Fund A or
Fund B's Secretary, or by attending the Meeting. IF NO CHOICE IS SPECIFIED ON A
VOTING INSTRUCTION FORM AS TO THE REORGANIZATION PROPOSAL, THE ELECTION OF BOARD
MEMBERS, OR THE RATIFICATION OR REJECTION OF INDEPENDENT AUDITORS, LINCOLN LIFE
WILL CONSIDER ITS TIMELY RECEIPT OF THE VOTING INSTRUCTION FORM AS AN
INSTRUCTION TO VOTE IN FAVOR OF THE REORGANIZATION, IN FAVOR OF THE PERSONS
SEEKING ELECTION TO THE BOARDS AND IN FAVOR OF THE PROPOSED INDEPENDENT
AUDITORS.
A quorum is comprised of contract owners entitled to cast 25 percent of the
accumulation and annuity units that may be cast for each Fund at its Meeting.
When a
-4-
<PAGE>
quorum is present, the affirmative vote of a majority of the accumulation and
annuity units represented in person or by proxy shall be required to approve the
Reorganization. If a quorum is not present, contract owners entitled to cast a
majority of the accumulation and annuity units represented at the Meeting may
adjourn that Fund's Meeting.
The number of votes which a contract owner may cast for individual
participants in the accumulation period under a group contract is equal to the
number of accumulation units under the contract. For individual participants
receiving annuity payments, the contract owner of a group contract may cast the
number of votes equal to (1) the amount of the assets remaining in the Fund to
meet the annuity obligations related to such individual participants divided by
(2) the value of the accumulation unit. Each participant has the right to
instruct the contract owner with respect to the votes attributable to his or her
individual account.
The number of votes which a contract owner of an individual variable
annuity contract in the accumulation period may cast is equal to the number of
accumulation units under the contract, and the number of votes which a contract
owner of an individual contract in the annuity period may cast is equal to (1)
the amount of the assets remaining in the Fund to meet the annuity obligations
related to such contract divided by (2) the value of the accumulation unit.
Lincoln Life will bear all of the expenses of soliciting voting
instructions. The solicitation of instructions will be made primarily by mail
but may include (without cost to Fund A or Fund B), telephone, facsimile or
oral communications by employees of Lincoln Life or its affiliates. This
Prospectus/Proxy Statement was first mailed to contract owners on or about
June 22, 1995.
I. APPROVAL OR DISAPPROVAL OF THE REORGANIZATION
SUMMARY OF THE REORGANIZATION
On May 2, 1995, the respective Boards of Managers of Fund A and Fund B
approved an Agreement and Plan of Reorganization (the "Reorganization
Agreement") (attached hereto as Exhibit A). The Reorganization Agreement
provides for the transfer of assets of Fund B to Fund A and the assumption of
the liabilities and contractual obligations of Fund B by Fund A in return for
accumulation and annuity units of Fund A. Upon completion of the
Reorganization, the units of Fund A held by Fund B would be credited to the
contract owners of Fund B as described below. Once this process has been
completed, the units of Fund B would be cancelled and Fund B would be
deregistered under the 1940 Act and would cease to exist.
The accumulation unit value for Fund B as of May 4, 1995, was $6.940, while
the accumulation unit value for Fund A as of that date was $8.200. The annuity
reserve unit value for Fund B as of May 4, 1995, was $6.940, while the annuity
reserve unit values for
-5-
<PAGE>
Fund A as of that date were $8.200 and $10.208. Under the terms of the
Reorganization Agreement, each Fund B contract owner will be credited with the
number of Fund A accumulation or annuity units that equals the total
accumulation or annuity value under the contract owner's Fund B contract. For
example, if a particular Fund B contract had a total accumulation value of
$10,000 on the date of the Reorganization represented by 5,000 accumulation
units valued at $2.00 each and the accumulation unit value for Fund A on that
date was $2.50, the Fund B contract owner would be credited with 4,000
accumulation units of Fund A.
Fund A has filed a registration statement with the SEC registering an
indefinite number of securities and relating to the exchange of units to be made
in connection with the Reorganization. This Prospectus/Proxy Statement has been
filed as part of the registration statement. The Boards of Managers have fixed
the close of business on May 4, 1995 as the record date for the determination of
contract owners entitled to notice of, and to vote at, the Meetings or any
adjournments or postponements thereof. As of the record date, Fund B had
1,052,528 votes entitled to be cast, and Fund A had 10,220,782 votes entitled to
be cast.
Currently, Fund A and Fund B have identical Boards of Managers. The Boards
of Managers of the Funds as well as the Board of Directors of Lincoln Life have
approved the Reorganization and the Reorganization Agreement. Pursuant to the
rules and regulations for each of the Funds, the Reorganization must also be
approved by the holders of at least a majority of the accumulation and annuity
units represented in person or by proxy for each of the Funds. Accordingly,
contract owners of the Funds are being asked to approve the Reorganization, as
well as to transact whatever other business arises at the Meetings of contract
owners of the Funds to be held on August 1, 1995.
Comparison of Fund A and Fund B
-------------------------------
Lincoln Life, a stock life insurance company, serves as the investment
adviser to the Funds pursuant to separate investment management services
agreements containing substantially identical provisions. Lincoln Life makes
deductions from each of the Funds, payable monthly, equal to 1.32% of the
average net asset value of each Fund on an annual basis. Among these expenses,
.32% is received for investment advisory services, 0.9% for contingent mortality
assurances, and approximately .102% for expense assurances.
The principal investment objective of both Funds is identical: long-term
capital growth in relation to the changing value of the dollar. A secondary
investment objective of each Fund is the production of current income. The
Funds seek to accomplish these objectives by investing in equity investments,
principally common stocks.
Contracts issued by Fund A are either individual or group contracts and
were offered and sold only to: (a) annuity purchase plans adopted by public
school systems and Section 501(c)(3) organizations pursuant to Section 403(b) of
the Internal Revenue Code of 1986, as amended (the "Code"); (b) qualified
employee pension and profit sharing trusts and qualified
-6-
<PAGE>
annuity plans; (c) individual retirement annuities and accounts adopted by or on
behalf of individuals pursuant to Section 408 of the Code; and (d) simplified
pension plans pursuant to Section 408(k) of the Code. Contracts issued by Fund
B were individual and group contracts not issued as part of a tax-qualified
retirement plan. The annuity contracts in each Fund are no longer being sold.
Subject to any restrictions imposed by the Code on any tax-qualified plan,
at any time during the accumulation period and prior to the commencement of
annuity payments, the variable annuity contracts funded by Fund A may be
surrendered for redemption at the current net asset value. Fund B contracts
also may be surrendered at the current net asset value. Neither Fund imposes
any fees or charges for surrender or redemption. Purchase payments under the
Funds' contracts, after deductions for sales and administrative expenses,
minimum death benefit deduction (if elected), and any applicable premium taxes,
are added to Fund A or Fund B. The sales and administrative fee deduction for
each type of contract is described herein under Sales and Administrative
Services. This deduction will remain the same for the Fund B contracts after
the Reorganization.
The assets of the Funds are held for the exclusive benefit of the owners of
and persons entitled to payments under the contracts to which they relate.
Lincoln Life believes that the substitution of Fund A instead of Fund B as the
investment vehicle for the contracts will have no tax consequences for contract
owners.
The following table summarizes the charges and deductions currently
applicable to each Fund, and applicable to Fund A following the Reorganization.
CONTRACT OWNER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
SINGLE PERIODIC
PREMIUM PREMIUM
<S> <C> <C>
Sales Load Imposed on Purchases
(as a percentage of purchase payments) 2%+$50 4.25%
Administrative Expense $65.00 1.00%
Minimum Death Benefit (if elected) .75% .75%
ANNUAL EXPENSES (as a percentage of average net assets)
Management Fees .32%
Annuity Rate and Expense Risk Fees 1.00%
Total Annual Expense 1.32%
EXAMPLE*
1 YEAR 3 YEARS 5 YEARS 10 YEARS
S.P. P.P. S.P. P.P. S.P. P.P. S.P. P.P.
At the end of the
applicable time period,
you would pay the
following expenses on a
$1,000 investment,
assuming 5% annual
return on assets: $147 $66 $173 $95 $202 $126 $287 $218
</TABLE>
*The figures are the same, whether the contract owner holds the contract,
surrenders it, or annuitizes. The expenses shown do not include charges for the
minimum death benefit, since the purchase of that benefit is optional with the
client. [S.P.=Single Premium; P.P.=Periodic Payment]
This table is provided to assist the contract owner in understanding the various
costs and expenses that he or she will bear directly or indirectly. For each
Fund, the table reflects expenses of operating both the variable annuity
contract and the Fund. Premium taxes may also be applicable, although they do
not appear in the table. THE "Example" SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE
SHOWN. This table is unaudited.
Risk Factors
------------
The contracts issued by both Funds are variable annuity contracts and thus
share the same types of risk factors. A variable annuity provides that the
contributions (less certain deductions) made by or on behalf of an annuitant
prior to his annuity commencement date will be accumulated and that after the
annuity commencement date Lincoln Life will make monthly payments to the
annuitant for the remainder of his lifetime or for some other period. Also,
Lincoln Life receives certain fees for assuming the mortality and expense risks
under the contract.
Under a variable annuity, contributions (less deductions) are placed in a
separate account, and the contract owner or annuitant assumes the risks of
investment gain or loss in that the value of the contract or individual account
(before commencement of the annuity) and the monthly annuity payments (after
commencement of the annuity) vary with the investment income and gains or losses
on the assets of the separate account.
The contracts issued by Fund A and Fund B are also similar for purposes of
assessing risk because they share the same investment objective. The basic
objective of both contracts is to provide the annuitant with annuity payments
that will tend to reflect the changes in the cost of living both before and
after retirement. However, there has been no actual correlation between the
cost of living index and investment performance. In some periods, they have
moved in opposite directions (i.e., the prices of securities have declined while
the
-7-
<PAGE>
cost of living was rising). Therefore, there is no assurance that the
investment objectives can be obtained with respect to either Fund A or Fund B.
The value of the investments held in the Funds fluctuates daily and is subject
to all the risks of changing economic conditions. There is no assurance that the
value of an annuitant's account during the years prior to the annuity
commencement date or the aggregate amount of the variable annuity payments
received during the years following commencement of annuity payments will equal
or exceed the purchase payments made by or on behalf of the annuitant.
Recommendation of Boards of Managers
------------------------------------
The Boards of Managers of the respective Funds believe that the
Reorganization is in the best interests of both Funds' contract owners in that
Fund A, having substantially greater assets than Fund B, has greater flexibility
in making investments than does Fund B. The Boards also believe that the terms
of the Reorganization Agreement are reasonable and fair, do not involve
overreaching on the part of any person concerned, and will not dilute the
interests of either Funds' contract owners. The Boards further believe that the
Reorganization will result in economies of scale and administrative
efficiencies. Consequently, each of the Boards of Managers of Fund A and Fund B
affirmatively recommends that each Fund's respective contract owners vote to
approve and adopt the Reorganization Agreement.
THE BOARDS OF MANAGERS RECOMMEND APPROVAL
OF THE REORGANIZATION
PROPOSED PLAN OF REORGANIZATION
On May 2, 1995, the Boards of Managers of Fund A and Fund B adopted,
subject to the approval of the contract owners of the Funds, the Reorganization
Agreement pursuant to which Fund B will be merged into Fund A, a substantially
equivalent type of managed separate account. Under the terms of the
Reorganization Agreement all of Fund B's business, assets and liabilities will
be transferred to Fund A, and Fund A will acquire all such business and assets
and will assume all such liabilities in exchange for the crediting to owners of
Fund B full and fractional accumulation and annuity units of Fund A. The number
of units to be credited to each Fund B contract owner will be determined by
dividing each such contract owner's account value (the net asset value per unit
of Fund B multiplied by the number of units owned) on the date of the transfer
of assets to Fund A by the net asset value per unit of Fund A. Upon the
effective date of the Reorganization, Fund A will succeed to all of the business
and operations of Fund B including the obligations under the variable annuity
contracts funded by Fund B. Also on the effective date, Lincoln Life will issue
to each owner of contracts funded in Fund B, a contract rider indicating that
such contracts are thereafter to be funded in Fund A. Except for the change in
the Fund funding the contracts, all rights and benefits of Fund B contract
owners would remain unchanged after the Reorganization.
As soon as units of Fund A have been credited to Fund B contract owners and
contract riders have been issued to all such contract owners, Fund B will
liquidate and take
-8-
<PAGE>
appropriate action to deregister under the 1940 Act. Such action will be
accompanied by the establishment of an account on the records of Fund A in the
name of each contract owner of Fund B, representing the number of units of Fund
A owned by such contract owner.
Pursuant to the rules and regulations for each of the Funds, the
Reorganization must be approved by the holders of at least a majority of the
accumulation and annuity units represented in person or by proxy for each of the
Funds before the Reorganization can be consummated.
Reasons for Reorganization
--------------------------
The Board of Directors of Lincoln Life and the Boards of Managers of the
Funds recommend the Reorganization on the basis that the consolidation of the
Funds will lead to economies of scale and administrative efficiencies. The
boards further believe that the Reorganization is in the best interests of Fund
B contract owners in that Fund A, having substantially greater assets than Fund
B, has greater flexibility in making investments than does Fund B. In addition,
the passage of the Tax Reform Act of 1984 ("Reform Act") effectively eliminated
any justification for the maintenance of the two Funds. Originally, Fund A was
established as a tax-qualified account, while Fund B was established as a non-
tax-qualified account (before the changes caused by the Reform Act went into
effect, Fund B was subject to capital gains taxes on realized gains and a
reserve was required to be maintained to reflect capital gains rates applied to
unrealized gains and losses). The Reform Act eliminated the distinction in tax
treatment accorded the two Funds.
EXISTING AND PRO FORMA CAPITALIZATION
The following table sets forth the existing capitalization of Fund A and
Fund B as of December 31, 1994 and the pro forma capitalization of Fund A, as
adjusted to give effect to the Reorganization. Information relating to per unit
income and capital changes is included in the separate prospectuses which
constitute a part of this Prospectus/Proxy Statement and which are set forth
herein under Exhibit B and Exhibit C.
-9-
<PAGE>
<TABLE>
<CAPTION>
Fund A as
Adjusted to Give
Effect to the
Fund A Fund B Reorganization
----------- ---------- -----------------
<S> <C> <C> <C>
Variable annuity contract
owners' equity:
Annuity accumulation
contracts:
Owners' Equity $71,315,546 $5,815,311 $77,130,857
Units 9,907,664 950,570 10,715,596
Unit Value $ 7.198 $ 6.118 $ 7.198
Annuity reserves:
(1) Owners' Equity $ 2,033,708 $ 891,827 $ 2,925,535
Units 282,538 145,778 406,437
Unit Value $ 7.198 $ 6.118 $ 7.198
(2) Owners' Equity $ 5,185,014 $ 0 $ 5,185,014
Units 580,251 0 580,251
Unit Value $ 8.936 $ 0 $ 8.936
TOTAL CONTRACT $78,534,268 $6,707,138 $85,241,406
OWNERS' EQUITY =========== ========== ===========
</TABLE>
DESCRIPTION OF LINCOLN LIFE, FUND A, AND FUND B
Lincoln Life is a stock life insurance company organized in 1905 under the
laws of the State of Indiana. Lincoln Life is principally engaged in the sale
of life insurance, annuities, and reinsurance. Lincoln Life is a wholly-owned
subsidiary of Lincoln National Corporation, a publicly-held insurance holding
company. Lincoln Life's home office is located at 1300 South Clinton Street,
Fort Wayne, Indiana 46802.
In accordance with the provisions of Indiana Insurance Law, Fund A was
established by Lincoln Life as a segregated investment account on September 16,
1966. Fund B was established as a segregated investment account of Lincoln Life
on December 1, 1966. Under the provisions of Indiana law, the Funds are not
chargeable with liabilities arising out of any other business Lincoln Life may
conduct which has no specific relation to or dependence upon the Funds. The
Funds, though an integral part of Lincoln Life, are registered under the
1940 Act as open-end, diversified management investment companies. Each Fund is
a "separate account" as that term is defined under the federal securities laws.
Registration with the SEC does not involve supervision of management or
investment practices or policies
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of the Funds or Lincoln Life by the SEC. Under Indiana law, regulation of
Lincoln Life by the insurance commissioner of the State of Indiana includes
regulation of the Funds.
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS
The Funds have identical investment objectives and policies. All
investment objectives and policies shown below (except Restrictions 9 through
11) are fundamental and may not be changed without approval of contract owners
casting a majority of the votes entitled to be cast (see Voting Rights, below).
Objectives
----------
1. The principal investment objective is the selection of investments for
the long-term growth of capital in relation to the changing value of the dollar.
Investments will be made with the objective of providing annuity payments which
may tend to reflect changes in the value of the dollar. An additional but
secondary investment objective is the production of current income.
2. Income and realized capital gains will be reinvested.
3. Each Fund's assets will be kept fully invested except that (a)
sufficient cash will be kept on hand to meet variable annuity contract payments
and (b) reasonable amounts of cash or United States Government securities may be
held for limited periods pending investment in accordance with investment
policies.
4. Each Fund's assets will usually be invested in a portfolio of equity
securities, mainly common stocks, diversified over industries and companies.
Changes in such diversification may be made from time to time to take into
account changes in the outlook for particular industries or companies. The
investments of a Fund will not, however, be concentrated in any one industry,
and no more than 25% of a Fund's assets will be invested in any one industry.
Such diversification does not eliminate the risks inherent in the making of
equity investments. The purchasing of common stocks may occur in rising or
declining markets.
Further, when a Fund's Board of Managers determines that investments of
other types may be advantageous on the basis of combined considerations of risk,
income and appreciation, investments may be made in bonds, notes or other
evidences of indebtedness, issued publicly or placed privately, of a type
customarily purchased for investment by institutional investors including United
States Government securities. Such investments, if made, constitute a defensive
policy. Such investments may, or may not, be convertible into stock or be
accompanied by stock purchase options or warrants for the purchase of stock.
Warrants are purely speculative in that they have no voting rights, pay no
dividends and have no rights with respect to the assets of the corporation
issuing them. Briefly, a warrant is an
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option to purchase a given security within a specified period for a specified
price. The prices of warrants do not necessarily move parallel to the price of
the underlying securities.
Restrictions
------------
The investments of each Fund are subject to the provisions of the Indiana
Insurance Law concerning earnings records, preferred stock coverage, self-
dealing, real estate holdings and concentration.
Loans will not be made, but the purchase of a portion of an issue of bonds,
debentures or other securities publicly distributed or privately placed with
financial institutions shall not be considered the making of a loan.
Each Fund will not:
1. Invest more than 5% of the value of the Fund's assets in securities of
any one issuer, except obligations of the United States Government and
instrumentalities thereof.
2. Acquire more than 10% of the voting securities of any one issuer.
3. Borrow money except for temporary or emergency purposes in an amount
up to 5% of the value of assets.
4. Underwrite securities of other issuers.
5. Purchase or sell real estate as a principal activity. However, the
right is reserved to invest up to 10% of the value of the assets of
the Fund in real properties.
6. Purchase commodities or commodity contracts.
7. Make short sales of securities.
8. Make purchases on margin, except for such short-term credits as are
necessary for the clearance of transactions.
9. Invest in the securities of a company for the purpose of exercising
management or control.
10. Place emphasis upon obtaining short-term trading profits, but it may
engage in short-term transactions in the event that a change in
economic conditions or a rapid appreciation or depreciation of stock
prices occurs. The securities
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markets in general have experienced volatility due to rapidly shifting
economic trends. This volatility can affect turnover.
11. Plan to make investments in securities of other investment companies.
However, the right is reserved to make such investments up to a
maximum of 10% of the value of the assets of the Fund, provided that
not more than 3% of the total outstanding voting stock of any one
investment company may be held.
Special Risks
-------------
Investments, if made, in any securities of the type which are privately
placed with financial institutions and which cannot be sold to the public
without prior registration of such securities with the SEC, will be limited in
order that the total of such investments will not exceed 10% of the value of
each Fund's assets. Such securities are commonly referred to as "restricted
securities." Restricted securities may not be readily marketable and a Fund may
not be able to dispose of its holdings in these securities at reasonable price
levels if such securities are ever acquired. Furthermore, registration of
restricted securities under the Securities Act of 1933 may be necessary if a
Fund is to sell such securities publicly. Should a considerable period of time
elapse between the time that a decision is made to sell restricted securities
and the time when a Fund may be permitted to sell them publicly under an
effective registration statement, adverse market conditions could develop with
the result that a Fund might not be able to obtain as favorable a price as that
prevailing at the time the decision to sell was made. During 1994 no restricted
securities were held.
FEDERAL TAX STATUS
Lincoln Life believes that the Reorganization will not have adverse tax
consequences for contract owners or for Fund A or Fund B.
The following is a general discussion of the federal income tax rules
applicable with respect to the variable annuity contracts as of the date of this
Prospectus/Proxy Statement. Further information is provided in the Statement of
Additional Information ("SAI"). NEITHER THESE DISCUSSIONS NOR THOSE IN THE SAI
ARE INTENDED AS TAX ADVICE. This section does not discuss the federal tax
consequences resulting from every possible situation, nor does it discuss any
applicable state, local or foreign tax laws. A prospective purchaser should
consult a competent tax adviser to discuss any federal tax consequences
associated with situations not discussed in this Prospectus/Proxy Statement.
General
-------
The operations of each Fund form a part of, and are taxed with, the
operations of Lincoln Life under the Code. Under existing federal income tax
law, Lincoln Life does not anticipate that it will incur any federal income tax
liability attributable to a Fund, and therefore Lincoln Life does not intend to
make provision for any such taxes. However, if
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Lincoln Life determines that it may be taxed on income or gains attributable to
the Fund or certain types of contracts, then Lincoln Life may impose a charge
against that Fund (with respect to some or all contracts) in order to provide
for payment of such taxes.
Non-Qualified Contracts
-----------------------
With respect to the Fund B contract owners, an annuity contract owner
generally is not taxed on increases in the value of a contract until
distribution occurs, either in the form of a lump sum payment received by
withdrawing all or part of the cash value (i.e., "surrenders") or as annuity
payments under the annuity option elected. For this purpose, the assignment or
pledge of, or the agreement to assign or pledge, any portion of the value of a
contract will be treated as a distribution. A transfer of ownership of a
contract, or designation of an annuitant or other beneficiary who is not also
the contract owner, may also result in tax consequences. The taxable portion of
a distribution (in the form of a lump sum payment or an annuity) is taxed as
ordinary income. However, for purchase payments made after February 28, 1986, a
contract owner who is not a natural person (subject to limited exceptions) will
be taxed on any increase in the contract's cash value over the "investment in
the contract" during the taxable year, even if no distribution occurs. The
following discussion applies to contracts owned by natural persons.
In the case of a surrender under a contract, generally amounts received are
first treated as taxable income to the extent that the cash value of the
contract immediately before the surrender exceeds the "investment in the
contract" at that time. Any additional amount withdrawn is not taxable.
However, in the case of a surrender under a contract issued before August 14,
1982, and allocable to an "investment in the contract" made before that date,
amounts received are treated as taxable income only to the extent that they
exceed the "investment in the contract." The "investment in the contract"
generally equals the amount of any premium paid by or on behalf of an individual
under a contract.
The tax consequences of contract ownership after annuity payments commence
may vary depending on the form of annuity selected under a contract. However,
the recipient of an annuity payment under a contract generally is taxed on the
portion of such payment that exceeds the "investment in the contract." For
variable annuity payments, the taxable portion is determined by a formula that
establishes a specific dollar amount of each payment that is not taxed. The
dollar amount is determined by dividing the "investment in the contract" by the
total number of expected periodic payments. For fixed annuity payments, there
generally is no tax on the portion of each payment that represents the same
ratio that the "investment in the contract" bears to the total expected value of
payments for the term of the annuity; the remainder of each payment is taxable.
However, for individuals whose annuity starting date is after December 31, 1986,
the entire distribution (whether fixed or variable) will be fully taxable once
the recipient is deemed to have recovered the dollar amount of his "investment
in the contract."
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Multiple Contracts
------------------
All non-qualified contracts entered into after October 21, 1988, and issued
by the same insurance company (or its affiliates) to the same contract owner
during any calendar year will be treated as a single contract, for tax purposes.
Qualified Contracts
-------------------
Fund A contracts were sold in connection with the following types of tax-
qualified retirement plans: (1) annuity contracts purchased for employees by
public school systems and Section 501(c)(3) organizations, qualified under
Section 403(b) of the Code; (2) pension and profit-sharing plans of self-
employed individuals ("H.R. 10" or "Keogh" plans) or corporations, qualified
under Section 401(a) or 403(a) of the Code; (3) individual retirement annuities,
qualified under Section 408 of the Code; (4) deferred compensation plans of
state or local governments and tax exempt organizations, qualified under Section
457 of the Code; and (5) simplified employee pension plans, qualified under
Section 408(k) of the Code. Participants under such plans, as well as contract
owners, annuitants and beneficiaries, should be aware that the rights of any
person to any benefits under such plans may be subject to the terms, conditions
and limitations of the plans themselves, regardless of the terms and conditions
of the contracts. Purchasers of contracts for use with any qualified plan, as
well as plan participants and beneficiaries, should consult counsel and other
competent advisers as to the suitability of the contracts to their specific
needs, and as to applicable Code limitations and tax consequences.
The tax rules applicable to these plans, including restrictions on
contributions and benefits, taxation of distributions, and any tax penalties,
vary according to the type of the plan and its term and conditions. Generally,
in the case of a distribution under a contract purchased in connection with
these plans (other than plans qualified under section 457 of the Code), the
amount received is taxable only to the extent it exceeds the "investment in the
contract." The "investment in the contract" equals the portion of plan
contributions invested in the Contract that was not excluded from the
individual's gross income, and may be zero. Special favorable tax treatment may
be available for lump sum distributions, and partial or total distributions that
are "rolled over" to other retirement programs within 60 days of receipt.
Adverse tax consequences may result from excess contributions, distributions
prior to age 59 1/2 (subject to certain exceptions), distributions that commence
later than dates specified by the Code, distributions in excess of a specified
annual amount, and in certain other circumstances.
Withholding
-----------
Pension and annuity distributions generally are subject to withholding for
the recipient's federal income tax liability at rates that vary according to the
type of distribution and the recipient's tax status. Recipients, however, may be
provided the opportunity to elect not to have tax withheld from distributions.
Distributions from Section 457 plans are subject
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to the general wage withholding rules. Under the Unemployment Compensation
Amendments of 1992 ("UCA"), twenty percent (20%) income tax withholding may
apply to "eligible rollover distributions." All taxable distributions from
qualified plans and Section 403(b) annuities are "eligible rollover
distributions," except (1) annuities paid out over life or life expectancy, (2)
installments paid for a period spanning ten years or more, and (3) required
minimum distributions. The UCA imposes a mandatory twenty percent (20%) income
tax withholding on any eligible rollover distribution that the holder does not
elect to have paid in a direct rollover to another qualified plan, Section
403(b) annuity, or individual retirement account.
MORTALITY AND EXPENSE ASSURANCES
Although variable annuity payments made under the contracts will vary in
accordance with the investment performance of the Funds, the payments will not
be affected by (a) Lincoln Life's actual expenses, if greater or lesser than the
deductions provided for in the contract, or (b) Lincoln Life's actual mortality
experience among annuitants after retirement.
Lincoln Life assumes the risk that actual mortality of annuitants may be
less than was assumed in calculating the annuity rates. The mortality assurance
provided by Lincoln Life under the contracts is Lincoln Life's contractual
obligation to continue to make monthly annuity payments, determined in
accordance with the annuity tables and other provisions contained in the
contracts, to each annuitant regardless of how long he lives and regardless of
how long all annuitants as a group live. This obligation assures an annuitant
that neither his longevity nor an improvement in life expectancy generally will
have any adverse effect on the monthly annuity payments he will receive under
the contract and relieves the annuitant from the risk that he will outlive the
funds which he has accumulated for retirement. The assurance is based on
Lincoln Life's actuarial determination of expected mortality rates among
annuitants. If the future proves that Lincoln Life's actuarial determination of
expected mortality rates among annuitants was erroneous because, as a group,
their longevity is longer than anticipated, Lincoln Life must provide amounts
from its general funds to fulfill its contractual obligations. In that event,
Lincoln Life may incur a loss. Conversely, if longevity among annuitants is
lower than anticipated, a gain may result to Lincoln Life.
Lincoln Life provides an expense assurance by assuming the risk that the
administrative fee may be insufficient to cover the actual administrative costs.
For providing expense assurances and for the assumption of the mortality
risks, a charge of approximately 1.002% on an annual basis is deducted from the
current net asset value of the Funds each valuation day.
Lincoln Life also provides a minimum death benefit that may be selected by
a contract owner for an additional deduction of .75% of each purchase payment.
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SALES AND ADMINISTRATIVE SERVICES
Lincoln Life acts as principal underwriter and provides all sales and
administrative services in connection with the contracts and the Funds. Lincoln
Life deducts a sales and administrative expense fee to cover these services as
set forth below.
A deduction of 5.25% for sales and administrative expenses is made from
each contribution under a periodic payment group variable annuity contract, with
an additional deduction of 0.75% made from each contribution for the minimum
death benefit, if such coverage has been elected. For single payment group
variable annuity contracts written prior to April 30, 1980, the deduction from
the payment made for a participant was the lesser of (a) 2.5% plus $50 for sales
expenses and $65 for administrative expenses or (b) 2.8% for sales expenses and
0.7% for administrative expenses. For single payment group variable annuity
contracts written on and after April 30, 1980, the deduction from the payment
made for a participant is 2.5% plus $50 for sales expenses and $65 for
administrative expenses.
A deduction of 8.75% for sales and administrative expenses is made from
each contribution under a periodic payment individual variable annuity contract
purchased prior to April 29, 1977. A deduction of 5.25% is made from each
contribution under a periodic payment individual variable annuity contract
purchased on or after April 29, 1977.
In the case of a single payment individual variable annuity contract
written prior to April 30, 1980, a deduction of 3.5% plus $50 for sales expenses
and $65 for administrative expenses was made from the single payment. For
single payment contracts written on and after April 30, 1980, the deduction from
the payment is 2.5% plus $50 for sales expenses and $65 for administrative
expenses. In the event that an experience rating credit is granted in the form
of a reduction in the sales load applicable to subsequent payments made under a
contract, the effective sales charge deducted from the payment may be less than
that indicated above. In each case, applicable premium taxes are deducted from
contributions in accordance with local law.
Administrative expenses include such items as fees and expenses of the
Board of Managers, salaries, rent, postage, telephone, travel, legal, actuarial
and accounting fees, custodian fees, printing, office equipment, stationery and
plan administration costs. The charge for administrative expenses is designed
only to reimburse Lincoln Life for its actual administrative expenses, and
Lincoln Life does not expect to recover from the charge or any modification
thereof any amount above its accumulated expenses in administering the
contracts. For Fund A, the aggregate amount deducted for sales and
administrative expenses during 1994 was $14,573. For Fund B, the 1994 deduction
for sales and administrative expenses was $1,994.
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SURRENDER FOR REDEMPTION
With respect to Fund A contracts, at any time during the accumulation
period and prior to the commencement of annuity payments, an annuitant may
surrender the contract or certificate for redemption: (a) for contracts used in
IRA's, the annuitant may surrender the contract for redemption; (b) for
contracts under HR-10 plans, the annuitant may surrender the contract for
redemption to the extent permitted in the plan; and (c) for contracts used in
plans qualifying under Section 403(b) of the Code. However, with respect to
contributions under a 403(b) plan and made after December 31, 1988, redemptions
may only be made when the participant reaches age 59 1/2, separates from
service, dies or becomes disabled, or in the case of hardship (except for income
attributable to such contributions).
With respect to Fund B contracts, since they do not represent tax
advantaged plans, contract owners may at any time prior to the commencement of
annuity payments, surrender their contracts for redemption. Redemptions may be
effected by sending a written request for surrender to Lincoln Life accompanied
by the contract or certificate. There may, however be a tax penalty applied.
The contracts impose no charge or fee for surrender for redemption.
In addition, subject to possible plan and Code restrictions, a portion
of the termination value of the contract or participant's account may be
surrendered subject to the following limitations:
1. No more than one such partial surrender for redemption may be
allowed on behalf of any annuitant in any one contract year; and
2. No partial surrender for redemption will be permitted as a result
of which the current value of the accumulation units remaining in the contract
falls below $10.
For IRA contracts, if annuity payments have not commenced prior to the
close of the annuitant's tax year in which he attains age 70 1/2, then, not
later than the close of such tax year, Lincoln Life will distribute in one sum
to the annuitant the annuitant's entire interest in the contract.
VOTING RIGHTS
Current and new contract owners of Fund A will have the right to vote
at annual meetings of contract owners on the following matters:
1. Initial approval of and any amendment to an investment advisory
agreement;
2. Ratification of the selection of independent public accountants for
Fund A;
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3. Election of members to the Board of Managers of Fund A:
4. Any change in the fundamental investment policies of Fund A or
other policies requiring contract owners' approval; and
5. The transaction of such other business as may properly come before
the meeting.
Contract owners entitled to cast 25 percent of the accumulation and
annuity votes that may be cast shall constitute a quorum for the transaction of
business at any Fund A contract owners' meeting. When a quorum is present, the
vote of a majority of the accumulation and annuity units represented in person
or by proxy shall be required to determine any question at a contract owners'
meeting. If a quorum is not present, contract owners entitled to cast a
majority of the units represented may adjourn the meeting.
The determination of the number of votes to be cast will be made as of
a date (the record date) within 90 days prior to the Meeting of contract owners,
and the contract owner will receive at least 20 days' written notice of the
Meeting and of the number of votes to which he is entitled. The contract owner
will be entitled to vote only if he was the owner on the record date and on the
date of the written notice of the Meeting.
II. ELECTION OF THE BOARDS OF MANAGERS
BOARDS OF MANAGERS AND OFFICERS OF FUND A AND FUND B
Fund A and Fund B are each managed by a Board of Managers whose
members are elected by the contract owners in accordance with the rules and
regulations adopted by their respective Boards. Both Boards of Managers and the
Officers of the Funds currently share common membership. Each Fund's rules and
regulations state that the Board of Managers shall consist of not less than
three (3) nor more than seventeen (17) members. At the Meetings, it is intended
to fix the number of members of the Board of Managers at five (5) and to elect
five (5) managers. The proxy holder named in the enclosed proxy intends to vote
all proxies (except those in which authority to vote on Managers is withheld) in
favor of the nominees to the Board of Managers named in the succeeding table to
serve until the next annual meeting or until the election and qualification of
their successors. If any nominee is unable to serve as a Manager at the time of
the Meetings, or before any adjournment thereof, the proxy will be voted for the
election of a qualified substitute nominee or the size of the Board will be
reduced accordingly. The nominees have agreed to serve if elected.
During the last fiscal year, the Board of Managers held a total of
four (4) meetings. All of the Managers attended all of the meetings of the Board
of Managers which they were eligible to attend.
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On February 14, 1979, the Boards of Managers established audit
committees of the respective Boards. The functions of these committees are to
recommend to the Board of Managers the hiring of the Fund's independent auditor
and to review the independent auditor's report. The members of the audit
committee are: Messrs. Borsch and Nelson, and Ms. Frisby. During 1994 the
audit committee for each Fund met once. Neither Fund has any nominating or
compensation committees.
The members and nominees of the Boards of Managers of the Funds are as
follows:
<TABLE>
<CAPTION>
PRESENT POSITION AND
POSITION PRINCIPAL OCCUPATION
NAME AND ADDRESS AGE WITH THE FUND DURING LAST FIVE YEARS
---------------- --- ------------- ----------------------
<S> <C> <C>
Nancy L. Frisby, CPA 52 Chairperson and Vice President/Chief Financial
700 Broadway Member, since Officer (formerly Vice President -
Fort Wayne, IN 46802 1992, of the Finance; Regional Controller of
Board of Managers; Finance) St. Joseph Medical
Member, Audit Center
Committee of the
Board of Managers
John B. Borsch, Jr. 61 Member, since Retired; Associate Vice President-
1776 Sherwood Road 1978, of the Investments, Northwestern
Des Plaines, IL 60016 Board of Managers; University
Member, Audit
Committee of the
Board of Managers
Stanley R. Nelson 68 Member, since Executive in Residence,
University of 1977, of the Program in Health Services
Minnesota Board of Managers; Administrator, University of
(Mayo Box 97) Member, Audit Minnesota
420 Delaware Street, S.E. Committee of the Formerly, President, Henry Ford
Minneapolis, MN 55455 Board of Managers Health Care Corporation
*Kelly D. Clevenger 42 Nominee seeking Vice President, The Lincoln
5506 Hartford Drive initial election National Life Insurance Company
Fort Wayne, IN 46835 to the Board of
Managers
*Barbara S. Kowalczyk 43 Nominee seeking Senior Vice President, Lincoln
4745 Hartman Road initial election National Corporation
Fort Wayne, IN 46807 to the Board of
Managers
</TABLE>
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The executive officers of the Funds are as follows:
<TABLE>
<CAPTION>
POSITION PRESENT POSITION AND PRINCIPAL
NAME AND ADDRESS WITH THE FUND OCCUPATION DURING LAST FIVE YEARS
---------------- ------------- ---------------------------------
<S> <C> <C>
*Max A. Roesler Vice President, Vice President and Treasurer, Lincoln
1300 S. Clinton Street Treasurer, and National Corporation; Vice President
Fort Wayne, IN 46802 Principal Financial and Treasurer (formerly Assistant Vice
Officer President), The Lincoln National Life
Insurance Company
*Cynthia A. Rose Secretary to the Assistant Secretary, Lincoln National
1300 S. Clinton Street Board of Managers Corporation, Assistant Secretary, The
Fort Wayne, IN 46802 Lincoln National Life Insurance
Company
*Lantz M. Mintch Principal Accounting Second Vice President, The Lincoln
1300 S. Clinton Officer National Life Insurance Company
Fort Wayne, IN 46802
</TABLE>
* Indicates the person is an "interested person" of the Funds as that term
is defined in the 1940 Act. Interested persons who serve as members of the
Boards of Managers are salaried officers and employees of Lincoln Life or its
affiliates and receive no additional remuneration for their services rendered to
the Funds.
The following table shows the compensation paid to all managers of Fund A
during 1994:
<TABLE>
<CAPTION>
Total
Pension or Estimated Compensation
Retirement Annual From Fund and
Aggregate Benefits Benefits Fund Complex
Compensation Accrued As Upon Paid to
Name of Person, Position From Fund Part of Fund Retirement Managers
====================================================================================================================================
<S> <C> <C> <C> <C>
John B. Borsch, Jr. $1,000 $0 $0 $13,000
Manager
------------------------------------------------------------------------------------------------------------------------------------
Nancy L. Frisby $1,000 $0 $0 $13,000
Chairperson and Manager
------------------------------------------------------------------------------------------------------------------------------------
Stanley R. Nelson $1,000 $0 $0 $13,000
Manager
------------------------------------------------------------------------------------------------------------------------------------
Robert A. Nikels $0 $0 $0 $0
Former Chairman and Manager
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table shows the compensation paid to all managers of Fund B
during 1994:
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<TABLE>
<CAPTION>
Total
Pension or Estimated Compensation
Retirement Anmual From Fund and
Aggregate Benefits Benefits Fund Complex
Compensation Accrued As Upon Paid to
Name of Person, Position From Fund Part of Fund Retirement Managers
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John B. Borsch, Jr. $1,000 $0 $0 $13,000
Manager
------------------------------------------------------------------------------------------------------------------------------------
Nancy L. Frisby $1,000 $0 $0 $13,000
Chairperson and Manager
------------------------------------------------------------------------------------------------------------------------------------
Stanley R. Nelson $1,000 $0 $0 $13,000
Manager
------------------------------------------------------------------------------------------------------------------------------------
Robert A. Nikels $ 0 $0 $0 $ 0
Former Chairman and Manager
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Pursuant to arrangements with each Fund, Lincoln Life paid a fee of
$250 per meeting attended to each member of the Board of Managers who was not an
interested person of that Fund. Total remuneration paid to members of the
Boards of Managers for service to each Fund during 1994 was $3,000.00. The
executive officers of the Funds are officers of Lincoln Life and/or its
affiliates and receive no additional remuneration for their services rendered to
each Fund. The executive officers are elected annually by the Boards of
Managers to serve until the election and qualification of their successors.
No person is the record or beneficial owner of 5% or more of either of
the Funds. Members of the Boards of Managers and officers of the Funds as a
group own less than 1% of each Fund.
Each of the nominees is also a Director of 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., and Lincoln National Special Opportunities Fund, Inc., all
investment companies registered under the 1940 Act. "Total Compensation From
Fund and Fund Complex Paid to Managers" includes compensation paid by each of
these funds, as well as Fund A and Fund B.
THE BOARDS OF MANAGERS RECOMMEND A "VOTE FOR" EACH NOMINEE TO THE
BOARDS OF MANAGERS.
ALLOCATION OF BROKERAGE FEES AND
PORTFOLIO TURNOVER
In its capacity as investment adviser to the Funds, Lincoln Life
places orders for the purchase and sale of securities for the Funds' portfolios.
It is each Fund's policy to have orders placed with brokers or dealers who will
give the best execution of such orders at
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prices and under conditions most favorable to that Fund. Lincoln Life will
customarily deal with principal market makers in purchasing over-the-counter
securities.
Consistent with the policy of seeking best price and execution for
transaction size and risk involved in selecting brokers or dealers or
negotiating the commission rate to be paid, Lincoln Life considers: the firm's
financial responsibility and reputation; the range and quality of the services
made available to the Fund; and the broker's or dealer's professional services,
including execution, clearance procedures, wire service quotations, and ability
to provide performance, statistical, and other research information for
consideration, analysis, and evaluation by the staff of Lincoln Life in the
course of reaching investment decisions for the investment companies managed by
Lincoln Life. Although these various services are useful to the Funds, the
specific value of these services is not determinable. In accordance with this
policy, each Fund does not execute brokerage transactions solely on the basis of
the lowest negotiated commission rate available for a particular transaction.
The Funds have not made direct payments to brokers for research.
However, the Funds may at some future time determine to do so if it is deemed by
a Fund's Board of Managers to be advisable and in the best interest of a Fund.
It is Lincoln Life's policy not to place brokerage business on the
basis of the sale of the Funds' shares or with consideration to any business
relationships or services (other than those specified above) which exist between
broker-dealer and Lincoln Life, its parent (Lincoln National Corporation) or any
of its affiliates.
Occasionally, orders for the purchase or sale of securities of a Fund
are combined with similar orders of the general account of Lincoln Life and/or
other registered investment companies that are managed by Lincoln Life or an
affiliate. When such orders are combined, the transactions will be allocated as
to price and amount in a manner considered fair to each registered investment
company.
Fund A paid aggregate brokerage fees of $161,000 in 1994, and Fund B
paid aggregate brokerage fees of $15,000 in 1994.
During 1994 Fund A's portfolio turnover rate was 64.1%. For 1993 the
portfolio turnover rate was 49.9% and for 1992 the portfolio turnover rate was
71.0%. Fund B's portfolio turnover rate for these years was 65.6%, 64.7%, and
71.3%, respectively.
III. RATIFICATION OR REJECTION OF THE SELECTION OF
INDEPENDENT AUDITORS
On February 14, 1995, the Boards of Managers unanimously selected
Ernst & Young LLP as the independent auditors of the Funds. Contract owners are
asked to ratify this selection. Unless instructed in the proxy to the contrary,
the proxy holder named in the
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<PAGE>
accompanying proxy intends to vote in favor of the ratification of the selection
of Ernst & Young LLP.
The Funds previously selected Ernst & Young LLP as the independent
auditors of the Funds for 1994. The services performed by Ernst & Young LLP are
all considered to be audit services and include: examination of annual financial
statements; review and consultation connected with filings of annual reports to
shareholders and with the SEC; and consultation on financial accounting and
reporting matters. The selection of Ernst & Young LLP as the independent
auditors of the Funds constituted approval by the Boards of Managers of each of
the foregoing audit services, and the Boards of Managers believe that the
services have no effect on audit independence.
Ernst & Young LLP is also the independent auditor for Lincoln Life.
Ernst & Young LLP has no direct or indirect financial interests in either the
Funds or Lincoln Life, or any connection with the Funds or Lincoln Life in the
capacity of promoter, underwriter, voting trustee, director, officer, or
employee. A representative of Ernst & Young LLP will attend the annual meeting,
will be given an opportunity to make a statement if he or she desires to do so,
and will be available to answer appropriate questions.
THE RESPECTIVE BOARDS OF MANAGERS RECOMMEND A "VOTE FOR" RATIFICATION
OF THE SELECTION OF ERNST & YOUNG LLP AS INDEPENDENT AUDITORS FOR FUND A AND
FOR FUND B.
IV. ADDITIONAL INFORMATION
PRINCIPAL HOLDERS OF ACCUMULATION AND ANNUITY UNITS OF
FUND A
There are no contract owners holding five percent or more of the
outstanding units of Fund A. The Board of Managers of Fund A, including
nominees at the Meeting, owns as a group less than one percent of the
outstanding units of Fund A.
Upon consummation of the proposed reorganization, no contract owner
will own five percent or more of the outstanding units of Fund A.
PRINCIPAL HOLDERS OF ACCUMULATION AND ANNUITY UNITS OF
FUND B
There are no contract owners holding five percent or more of the
outstanding units of Fund B. The Board of Managers of Fund B, including
nominees at the Meeting, owns as a group less than one percent of the
outstanding units of Fund B.
VALUATION OF ASSETS
The value of assets held in the Funds is calculated each day the New
York Stock Exchange is open for trading.
-24-
<PAGE>
STATE REGULATION OF LINCOLN LIFE
As an insurance company organized under the provisions of the
insurance laws of the State of Indiana, Lincoln Life (including the Funds) is
subject to regulation by the Indiana Commissioner of Insurance. Periodically,
the Commissioner examines the liabilities and reserves of Lincoln Life and the
Funds and certifies to their correctness.
In addition, Lincoln Life is subject to the insurance laws and
regulations of the other jurisdictions in which it is or may become licensed to
operate. Generally, the insurance departments of such jurisdictions apply the
laws of the state of domicile in determining permissible investments.
CUSTODIAN
Bankers Trust Company, 14 Wall Street, 4th Floor, New York, New York
10005 acts as the custodian for each Funds' assets under agreements among the
custodian, each Fund and Lincoln Life.
LEGAL PROCEEDINGS
There are no material legal proceedings pending to which Lincoln Life
or the Funds are a party, or to which their property is subject, which depart
from the ordinary routine litigation incident to the kinds of business conducted
by them.
LEGAL OPINIONS
Legal matters relating to federal securities laws applicable to the
contracts have been passed upon by Jonathan J. Myers, Assistant General Counsel
to Lincoln Life. Legal matters relating to federal income tax laws applicable
to the contracts have been passed upon by Sandra G. Lamp, Senior Counsel to
Lincoln Life.
EXPERTS
The financial statements of the Funds included in this Prospectus/
Proxy Statement have been audited by Ernst & Young LLP, independent auditors,
for the periods indicated in their reports thereon which appear elsewhere
herein. The financial statements audited by Ernst & Young LLP have been included
in reliance on their reports given on their authority as experts in accounting
and auditing.
PUBLIC INFORMATION
Fund A and Fund B are subject to the informational requirements of the
Securities Exchange Act of 1934, and in accordance therewith file reports, proxy
material and other information with the SEC. Such reports, proxy material and
other information can be inspected and copied at the public reference facilities
maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the SEC's Regional Offices at 7 World Trade Center, Suite 1300, New York, New
York 10048; 1401 Brickell Avenue, Suite 200, Miami, Florida 33131; 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511; 1801 California
Street, Suite 4800, Denver, Colorado 80202-2648; and 5670 Wilshire Boulevard,
11th Floor, Los Angeles, California 90036-3648. Copies of such material can be
obtained at prescribed rates from the Public Reference Branch, Office of
Consumer Affairs and Information Services, Securities and Exchange Commission,
450 Fifth Street, N.W., Washington, D.C. 20549.
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<PAGE>
INTERESTS OF NAMED EXPERTS AND COUNSEL
No expert named herein or any counsel was employed on a contingent
basis, or did or will receive in connection herewith any substantial interest,
direct or indirect, in Fund A or Fund B.
CONTRACT OWNER PROPOSALS
Proposals of contract owners of the Funds to be considered for
presentation at the next annual meeting of contract owners must be received by
Lincoln Life at 1300 South Clinton Street, Fort Wayne, Indiana 46802, no later
than December 14, 1995 to be included in the proxy materials for that meeting.
OTHER MATTERS
The Boards of Managers of Fund A and Fund B do not know of any other
matter that may properly be brought, and which is likely to be brought, before
the Meeting. However, should other matters be properly brought before the
Meeting, the persons named on the enclosed proxy or their substitutes will vote
in accordance with their best judgment on such matters.
WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE MEETING, PLEASE SIGN
AND RETURN THE ENCLOSED PROXY PROMPTLY. YOUR VOTE IS IMPORTANT. IF YOU WISH TO
ATTEND THE MEETING AND VOTE IN PERSON, YOU MAY REVOKE YOUR PROXY.
By Order of the Board of Managers
/S/CYNTHIA A. ROSE
------------------
Cynthia A. Rose, Secretary
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<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
LINCOLN NATIONAL VARIABLE ANNUITY FUND A
AND
LINCOLN NATIONAL VARIABLE ANNUITY FUND B
RECITALS
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement"), dated as of
May 2, 1995, is made by and among Lincoln National Variable Annuity Fund A
("Fund A") and Lincoln National Variable Annuity Fund B ("Fund B"), each a
segregated investment account established by the Board of Directors of The
Lincoln National Life Insurance Company (the "Company") under the insurance laws
of the State of Indiana, and the Company.
WHEREAS, Fund A and Fund B are each an open-end, diversified man agement
investment company registered with the Securities and Exchange Commission (the
"SEC") under the Investment Company Act of 1940, as amended (the "1940 Act");
and
WHEREAS, the Company is the sponsor of Fund A and Fund B and of the
respective individual and group variable annuity contracts offered by Fund A and
Fund B (the "Contracts") which are registered with the SEC under the Securities
Act of 1933, as amended (the "1933 Act"); and
WHEREAS, the respective Boards of Managers for Fund A and Fund B believe
that it would be in the best interests of Fund A and Fund B for Fund A to
acquire all of the assets of Fund B and assume all of Fund B's liabilities, in
exchange for accumulation units of Fund A ("Units") (collectively, the
transactions may be referred to as the "Reorganization"); and
WHEREAS, the respective Boards of Managers for Fund A and Fund B, including
a majority of those managers who are not otherwise "interested persons" (as
defined in the 1940 Act) of either Fund A, Fund B or the Company, have
determined that the terms of this Agreement, including the consideration to be
paid and received, are reasonable and fair, do not involve overreaching on the
part of any person concerned, and will not dilute the interests of any variable
annuity contract owner in either Fund A or Fund B; and
WHEREAS, the respective Boards of Managers have determined that the
investment objectives of Fund A are substantially the same as the investment
objectives of Fund B so that the Reorganization is consistent with the
investment objectives and policies as recited in the registration statements and
reports relating to each of Fund A and Fund B; and
<PAGE>
WHEREAS, the respective Boards of Managers have determined that execution
of the Reorganization is in the best interests of the variable annuity contract
owners of each of Fund A and Fund B and is consistent with the general purposes
of the 1940 Act; and
WHEREAS, the respective Boards of Managers of each of Fund A and Fund B
have duly approved this Reorganization;
NOW, THEREFORE, in consideration of the mutual promises made herein, and
for the purpose of setting forth the terms and conditions of the Reorganization,
the method of carrying the same into effect, the manner and basis of exchanging
the assets and liabilities of Fund B for Units of Fund A, and such other details
and provisions as may appear necessary or desirable, the parties hereto have
agreed and do hereby agree, subject to the approval or adoption of this
Agreement by the requisite vote of the owners of variable annuity contracts of
each of Fund A and Fund B and subject to the conditions hereinafter set forth,
as follows:
ARTICLE I
Effective Time of Reorganization
The Effective Time of the Reorganization shall be at 5:00 p.m. on October
4, 1995, or such other time as shall be specified by Fund A and Fund B in
accordance with their powers to amend this Agreement.
ARTICLE II
Terms and Conditions of Reorganization
At the Effective Time of the Reorganization, Fund A shall, subject to the
terms and conditions herein, acquire all of the assets and assume all of the
liabilities of Fund B and Fund A shall continue its existence as a segregated
investment account of the Company and an open-end, diversified management
investment company registered with the SEC under the 1940 Act. The terms and
conditions of the Reorganization are (in addition to those set forth elsewhere
in this Agreement) that:
(a) Subject to the terms and conditions contained herein, Fund B shall
assign, transfer, and convey to Fund A all of its assets, including all
securities, cash and other investments, and all of its liabilities
(both absolute and contingent, known and unknown), including its
contractual obligations under the variable annuity contracts funded by
Fund B, and Fund A shall in exchange therefor acquire all such assets
and assume all such liabilities of Fund B, and credit to Fund B
variable
<PAGE>
annuity contract owners a number of Units of Fund A (both full and
fractional) determined immediately prior to the Effective Time of the
Reorganization by dividing the aggregate value of the net assets of
Fund B to be transferred by the net asset value per Unit of Fund A,
both determined in accordance with the SEC rules relating thereto. All
debts, liabilities, obligations, and duties of Fund B, to the extent
that they exist at or after the Effective Time of the Reorganization,
attach to Fund A and may be enforced against Fund A to the same extent
as if the same had been incurred by Fund A. However, Fund B will use
its best efforts to ascertain or provide for all known liabilities so
far as may be possible prior to the Effective Time of the
Reorganization.
(b) At the Effective Time of the Reorganization, the assets and liabilities
of Fund B received by Fund A as consideration for the issue of Units of
Fund A, as contemplated herein, together with all assets in which such
consideration is invested or reinvested, all income, earnings, profits,
and proceeds thereof, including any proceeds derived from the sale,
exchange, or liquidation of such assets, and any funds or payments
derived from any reinvestment of such proceeds, shall become assets of
Fund A.
(c) Any reporting responsibilities of Fund B are and shall remain the
responsibility of Fund B only up to the Effective Time of the Reorgan-
ization after which time they shall become the responsibilities of Fund
A. Notwithstanding the foregoing, Fund B shall, after the Effective
Time of the Reorganization, remain responsible for filings necessary
for it to deregister with the SEC as an investment company.
(d) As promptly as is practicable after the Effective Time of the
Reorganization, Fund B shall file an application with the SEC pursuant
to Section 8(f) of the 1940 Act seeking an order declaring that Fund B
has ceased to be an investment company, and shall file any appropriate
notice regarding its dissolution required under Indiana law.
ARTICLE III
Reorganization
The assets and liabilities of Fund B shall be exchanged for Units of Fund A
as follows:
(a) At the Effective Time of the Reorganization, Fund B's outstanding net
assets and liabilities shall be exchanged for an aggregate number of
Units (both full and fractional) of Fund A determined by dividing the
net assets of Fund B by the net asset value per Unit of Fund A.
<PAGE>
(b) Promptly after the Effective Time of the Reorganization, Fund A shall
cause to be registered on its books in the name of each owner of record
of variable annuity contracts of Fund B immediately prior to the
Effective Time of the Reorganization, without any action on the part of
such owner, the number of Units (and fractional interests in Units) of
Fund A for which the variable annuity contracts (and fractional
interests in variable annuity contracts) of Fund B registered in the
name of such owner have been exchanged pursuant to paragraph (a) of
this Article. Fund B shall deliver to Fund A at the Effective Time of
the Reorganization, a certificate of an authorized Fund B officer
stating that Fund B's records contain the names and addresses of all
Fund B contract owners and the value of outstanding variable annuity
contracts owned by each prior to the Effective Time of the
Reorganization.
(c) Delivery of the assets of Fund B to be transferred to Fund A shall be
made at the Effective Time of the Reorganization and shall be delivered
to Bankers Trust, in its capacity as Fund A's custodian, for Fund A's
account, together with proper instructions and all necessary documents
to transfer such assets to Fund A's account. In particular, portfolio
securities or other investments represented by a certificate or written
instrument shall be duly endorsed in proper form for transfer in such
condition as to constitute a good delivery thereof in accordance with
the custom of brokers and shall be accompanied by all necessary state
stock transfer stamps or a check for the appropriate purchase price
thereof. Portfolio securities and instruments deposited with a
securities depository, as defined in Rule 17f-4 under the 1940 Act,
shall be delivered prior to the Effective Time of the Reorganization by
book entry in accordance with the customary practices of such
depositories and Bankers Trust. Cash shall be delivered prior to the
Effective Time of the Reorganization by transfer on Bankers Trust's
books, shall be physically delivered in the form of currency, or shall
be transferred by wire of federal funds.
(d) Fund A Units issued hereunder shall be issued in open account form by
book entry without issue of certificates. At the Effective Time of the
Reorganization, the transfer books of Fund B shall close and no
transfer of assets of Fund B shall thereafter occur.
(e) The net value of each Fund A Unit shall be computed in the manner set
forth in the currently effective Form N-3 registration statement for
Fund A. The value of securities and other investments of Fund B shall
be computed in the manner set forth in the currently effective Form N-3
registration statement for Fund A, subject to any adjustments as agreed
to by Fund A and Fund B in consultations with the independent auditors
of Fund A and Fund B.
<PAGE>
(f) In the event that trading on the New York Stock Exchange or on another
exchange or market on which securities or other investments held by Fund B
are traded shall be disrupted on the date of the Effective Time of the
Reorganization so that, in the judgment of both Fund A and Fund B, accurate
appraisal of the net assets of Fund B is impracticable, the Effective Time
of the Reorganization shall be postponed until the first business day after
the day on which trading on such exchange or in such market shall have been
resumed without disruption.
(g) The Company agrees that at the Effective Time of the Reorganization it will
issue to each owner of variable annuity contracts funded by Fund B, a
contract rider indicating that the variable annuity contracts are
thereafter to be funded by Fund A. The Company further agrees that except
for the change in the separate account funding the variable annuity
contracts, all rights and benefits of Fund B variable annuity contract
owners will remain unchanged.
(h) At or after the Effective Time of the Reorganization, and upon evidence
being given by Fund A that Units of Fund A have been credited to owners of
Fund B variable annuity contracts and upon the issuance by the Company of a
rider to all Fund B variable annuity contracts indicating the change, Fund
B will liquidate and take appropriate action to deregister with the SEC
under the 1940 Act. Such action by Fund B will be accompanied by the
establishment of an account on the records of Fund A in the name of each
Fund B variable annuity contract owner and representing the respective pro
rata number of Units of Fund A due such contract owner. Variable annuity
contracts of Fund B issued prior to the Reorganization shall represent
outstanding contracts of Fund A after the Effective Time of the
Reorganization.
ARTICLE IV
Conditions Precedent
The obligations of Fund A and Fund B to effectuate the Reorganization
hereunder shall be subject to the satisfaction of each of the following
conditions, except for those conditions that either Fund A or Fund B may waive
in writing:
(a) Such authority, including "no-action" letters, and orders from the SEC
and state insurance or securities commissions as may be necessary to
permit the parties to carry out the transactions contemplated by this
Agreement shall have been received.
<PAGE>
(b) The filing and clearance of a post-effective amendment to the
registration statement of Fund A, or the filing and clearance of an
initial registration statement of Fund A on the appropriate form under
the 1933 Act and the 1940 Act containing such disclosure to such
registration statement as is deemed to be necessary and appropriate as
a result of the Reorganization.
(c) Confirmation shall have been provided that Fund A is duly registered as
a diversified open-end management investment company under the 1940 Act
and any securities that are deemed to be offered to contract owners
upon the exchange are duly registered under the 1933 Act.
(d) Fund B shall have received an opinion of counsel (who may be an
employee of the Company) that Fund A is duly formed and validly
existing under the laws of the State of Indiana and that the Units of
Fund A to be credited pursuant to the terms of this Agreement have been
duly authorized, and, when credited as provided in this Agree ment,
will have been validly issued and nonassessable.
(e) Each party shall have received an opinion of counsel (who may be an
employee of the Company) to the effect that the Reorganization
contemplated by this Agreement will not have adverse tax consequences
to owners of the variable annuity contracts.
(f) The variable annuity contracts of Fund A shall have been duly qualified
in all states and other jurisdictions where such qualifications are
required so as to permit the transfers of the Units of Fund A
contemplated by this Agreement to be consummated.
(g) A vote approving this Agreement and the Reorganization contemplated
hereby shall have been solicited from persons owning Fund A contracts
and from persons owning Fund B contracts who are entitled to vote at a
meeting to approve the Reorganization and at least a majority of each
of the respecitve Funds' outstanding units shall have voted
affirmatively at such meeting to approve the Reorganization.
(h) The Board of Managers of Fund A shall have taken the following actions
at a meeting duly called for such purposes: (i) authorization of the
issuance by Fund A of Units to contract owners of Fund B at the
Effective Time of the Reorganization in exchange for the assets of Fund
B pursuant to the terms and provisions of this Agreement; and (ii)
authorization of Fund A to assume the liabilities, including contrac-
tual obligations, of Fund B.
ARTICLE V
<PAGE>
Representations and Warranties
Each of Fund A and Fund B (except as otherwise set forth herein) hereby
represents and warrants to the other that:
(a) Such entity is a segregated investment account (also known as a
"separate account" as defined in Section 2(a)(37) of the 1940 Act) duly
organized, validly existing, and in good standing under the laws of the
State of Indiana.
(b) Such separate account is an investment company registered under the
1940 Act and at the Effective Time of the Reorganization will have made
all filings required to be made under the 1940 Act with the SEC. In
addition, such separate account will have, at the Effective Time of the
Reorganization, an effective registration statement under the 1933 Act
that will conform in all material respects to the requirements of the
1933 Act. The Form N-3 registration statement of such separate account
currently is in full force and effect and conforms in all material
respects to the requirements of the 1940 Act and the 1933 Act.
(c) Such separate account has complied, and at the Effective Time of the
Reorganization will have complied, in all material respects with the
applicable laws of the jurisdictions in which its contracts are being
sold with respect to qualification, filing of reports, and the sale of
its securities.
(d) No currently effective registration statement or prospectus or other
document used in connection with the offering of such separate
account's contracts contains an untrue statement of any material fact
or fails to state a material fact required to be stated therein or
necessary to make the statements therein not misleading.
(e) The financial statements certified by Ernst & Young appearing in the
current registration statement of such separate account, fairly present
the financial position of such separate account as of such dates and
the results of its operations and changes in its net assets for the
periods indicated, in conformity with generally accepted accounting
principles applied on a consistent basis.
(f) Such separate account will have, at the Effective Time of the
Reorganization, good and marketable title to all of the securities and
other assets shown on the statement of assets and liabilities of such
separate account, to be furnished as of the Effective Time of the
Reorganization, free and clear of all liens or encumbrances of any
nature whatsoever.
<PAGE>
(g) The statement of assets and liabilities of such separate account, to be
furnished by such separate account as of the Effective Time of the
Reorganization, will accurately reflect the net assets and outstanding
shares of such separate account as of such date in conformity with
generally accepted accounting principles applied on a consistent basis.
(h) The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereunder have been duly authorized by
the Board of Managers of such separate account (including a majority of
the managers who are not "interested persons" of such separate account
as that term is defined in Section 2(a)(19) of the 1940 Act). Such
separate account (subject to the approval of this Agreement by the
contract owners of Fund A and the contract owners of Fund B as
described herein), has all necessary power to execute, deliver, and
perform this Agreement, and this Agreement constitutes a valid and
binding obligation of such separate account enforceable in accordance
with its terms, subject to the effect of bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance, and other similar
laws relating to or affecting creditors' rights generally and court
decisions with respect thereto, and to general principles of equity and
the discretion of the court before which a proceeding is brought
(regardless of whether the enforceability is considered in a proceeding
in equity or at law). Such separate account is not in violation of, and
the execution, delivery and performance of this Agreement will not
result in the violation of, any provision of its Rules and Regulations
or of any agreement, indenture, instrument, contract, lease, or other
undertaking to which it is a party or by which it is bound.
(i) Except for its investment management services agreement and its custody
agreement, such separate account is not a party to or subject to any
material contract. No default exists and no event has occurred and is
continuing which, with lapse of time or actions by a third party, could
result in a default under any of such contracts.
(j) There are no legal, administrative, or other proceedings or
investigations pending or, to the knowledge of such separate account,
threatened against or affecting such separate account that can reason-
ably be expected to have a material adverse effect on the financial
condition, business, or properties of such separate account nor does
such separate account know of any facts which might form the basis for
the institution of such proceedings or investigations. Such separate
account is not in violation of any applicable law or regulation and is
not a party to or subject to the provisions of any order, decree, or
judgment of any court or government body.
<PAGE>
(k) Such separate account has not itself employed, and to its knowledge no
other person has employed, any broker or finder in connection with the
Reorganization or transactions contemplated hereby.
(l) The information provided and to be provided by such separate account
for use in the proxy statement to be used in connection with the
Reorganization, shall be true and correct in all material respects
without omission of any material fact which is required to make such
information not false or misleading.
(m) Such separate account has maintained all records required under Section
31 of the 1940 Act and rules thereunder for the periods required.
(n) Since December 31, 1994, and except as contemplated herein, there has
not been:
(i) any change in the business, results of operations, assets or
financial condition, or the manner of conducting the business of
such separate account (other than changes in the ordinary course of
business including fluctuations in the value of its portfolio
securities or sales or redemptions of its units or contracts) which
changes have had a material adverse effect on such business,
results of operations, assets or financial condition of such
separate account;
(ii) any amendment of the Rules and Regulations of such separate
account.
ARTICLE VI
Covenants of Fund A and Fund B
(a) Both Fund A and Fund B will seek contract owner approval of this
Agreement and the transactions contemplated herein. Each Fund agrees to
furnish the other with such data and information as shall be reasonably
requested for inclusion in the proxy statement to be furnished to the
Fund's contract owners in connection with such meeting of contract
owners.
(b) Each Fund will distribute to its contract owners of record entitled to
vote on this Reorganization, a proxy statement that complies in all
material respects with the applicable provisions of Section 14(a) of
the Securities Exchange Act of 1934 and Section 20(a) of the 1940 Act
and the rules and regulations promulgated thereunder.
<PAGE>
(c) Fund B agrees to take all necessary and appropriate steps to terminate,
as of the Effective Time of the Reorganization, its investment
management services agreement and its custody agreement.
(d) Subject to the provisions of this Agreement, Fund A and Fund B will
take, or cause to be taken, all action, and do or cause to be done, all
things necessary, proper, or advisable to consummate and make effective
the transactions contemplated by this Agreement.
ARTICLE VII
Expenses
The Company, investment adviser to Fund A and to Fund B, shall bear all
expenses of entering into and carrying out the provisions of this Agreement
except routine and ordinary expenses of Fund A and Fund B, which would other-
wise have been incurred by these separate accounts had the Agreement not been
effected.
ARTICLE VIII
Conditions Precedent to the Reorganization
(a) Conditions Precedent to Obligations of Fund B. The obligations of Fund
B hereunder are, except for those conditions that it may waive in
writing, subject to the conditions that:
The representations and warranties of Fund A contained in this
Agreement shall be true and correct in all material respects at and
as of the Effective Time of the Reorganization, except for the
representations and warranties specifically relating to a time or
times other than the Effective Time of the Reorganization (which
shall be true and correct in all material respects at such time or
times) and except for changes contemplated and permitted by this
Agreement, with the same force and effect as if made at and as of
the Effective Time of the Reorganization; Fund A shall have
performed or complied in all material respects with all agreements
and covenants required by this Agreement to be performed by it at
or prior to the Effective Time of the Reorganization.
<PAGE>
(b) Conditions Precedent to Obligations of Fund A. The obligations of Fund
A hereunder are, except for those conditions that it may waive in
writing, subject to the conditions that:
The representations and warranties of Fund B contained in this
Agreement shall be true and correct in all material respects at and
as of the Effective Time of the Reorganization, except for the
representations and warranties specifically relating to a time or
times other than the Effective Time of the Reorganization (which
shall be true and correct in all material respects at such time or
times) and except for changes contemplated and permitted by this
Agreement, with the same force and effect as if made at and as of
the Effective Time of the Reorganization; Fund B shall have
performed or complied in all material respects with all agreements
and covenants required by this Agreement to be performed by it at or
prior to the Effective Time of the Reorganization.
(c) Conditions Precedent to Obligations of both Fund A and Fund B. The
obligations of Fund A and Fund B hereunder are, except those conditions
that they may together waive in writing, subject to the conditions
that:
(1) The SEC shall not have issued an unfavorable report under Section
25(b) of the 1940 Act; nor instituted any proceedings seeking to
enjoin consummation of the Agreement under Section 25(c) of the
1940 Act.
(2) This Agreement shall have been approved by the Fund A contract
owners and by the Fund B contract owners to the extent required
by applicable law.
(3) An SEC order under Section 17(b) of the 1940 Act shall have been
received by Fund A and Fund B approving the terms of the Agreement.
(4) All other approvals or applications to public authorities, federal,
state, or local, and all approvals from any private persons, the
granting of which is necessary for the consummation of the
transactions contemplated hereby or for the preventing of any
termination of any material right, privilege, license, agreement
of, or preventing any material loss or disadvantage to either Fund
A or Fund B upon consummation of the transactions contemplated
hereby, shall have been obtained.
<PAGE>
(5) The N-14 registration statement for Fund A shall have become effective
under the 1933 Act; no stop orders suspending the effectiveness of the
registration statement shall have been issued; and, to the best
knowledge of the parties, no investigation or proceeding for that
purpose shall have been instituted or be pending, threatened or
contemplated under the 1933 Act.
(6) No other legal, administrative or other proceedings shall be instituted
or threatened between the date of this Agreement and the Effective Time
of the Reorganization seeking to restrain or otherwise prohibit the
reorganization.
ARTICLE IX
Termination; Waiver; Order
(a) This Agreement may be terminated and abandoned at any time (whether before
or after approval by the Fund A or Fund B contract owners) prior to the
Effective Time of the Reorganization: (1) by resolution of the Board of
Managers of either Fund A or Fund B; (2) by mutual consent of Fund A and
Fund B; (3) by either Fund A or Fund B if any condition to its obligations
set forth herein has not been fulfilled and has not been waived by it; or
(4) if circumstances should develop that, in the opinion of either Board,
make proceeding with the Agreement inadvisable.
(b) Any election by either Fund A or Fund B to terminate and abandon this
Agreement shall be exercised by its Board of Managers.
(c) In the event of termination of this Agreement pursuant to the provisions
hereof, the Agreement shall become void and have no effect, without any
liability on the part of either Fund A or Fund B to the other Fund A or Fund
B or to such other Fund A's or Fund B's contract owners or Board of
Managers.
(d) At any time prior to the Effective Time of the Reorganization, compliance
with any of the terms or conditions of this Agreement may be waived by Fund
A or Fund B entitled to the benefit thereof by action taken by its Board of
Managers, if, in the judgment of the Board of Managers taking such action,
such waiver will not have a material adverse effect on the benefits intended
under this Agreement to the contract owners of either Fund A or Fund B on
behalf of which such action is taken.
<PAGE>
(e) At any time prior to the Effective Time of the Reorganization, whether
before or after approval of this Agreement by the Fund A or Fund B
contract owners, Fund A and Fund B may, by action of their
Chairpersons, amend, modify, or supplement this Agreement, provided
that such amendment will not have a material adverse effect on the
benefits intended under this Agreement for the Funds' contract owners.
(f) If any SEC order or orders with respect to this Agreement shall impose
any terms or conditions that are acceptable (as determined by either
Fund A's or Fund B's Board of Managers), such terms and conditions
shall be binding as if a part of this Agreement without further vote of
approval of the Fund A or Fund B contract owners.
ARTICLE X
Miscellaneous
(a) This Agreement embodies the entire agreement between Fund A and Fund B
and there are no agreements, understandings, restrictions, or
warranties between Fund A and Fund B other than those set forth herein
or herein provided for.
(b) This Agreement may be executed in any number of counterparts each of
which shall be deemed to be an original but all such counterparts
together shall constitute but one instrument.
(c) This Agreement and all amendments hereto shall be governed by, and
construed in accordance with, the laws of the State of Indiana.
(d) The Company, Fund A, and Fund B shall take such further actions as may
be necessary or desirable and proper to consummate the transactions
contemplated hereby.
<PAGE>
IN WITNESS WHEREOF, each of Fund A, Fund B, and the Company has duly
authorized this Agreement and caused it to be signed on its behalf as of the
date first above written.
LINCOLN NATIONAL VARIABLE ANNUITY FUND A
By: /S/ NANCY L. FRISBY
-------------------
Nancy L. Frisby
Chairperson, Board of Managers
Attest:
/S/ STEVEN M. KLUEVER
---------------------
May 2, 1995
LINCOLN NATIONAL VARIABLE ANNUITY FUND B
By: /S/ NANCY L. FRISBY
-------------------
Nancy L. Frisby
Chairperson, Board of Managers
Attest:
/S/ STEVEN M. KLUEVER
---------------------
May 2, 1995
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
By: /S/ KELLY D. CLEVENGER
----------------------
Kelly D. Clevenger
Vice President
Attest:
/S/ STEVEN M. KLUEVER
---------------------
May 2, 1995
<PAGE>
EXHIBIT B
FUND A PROSPECTUSES
<PAGE>
LINCOLN NATIONAL
VARIABLE ANNUITY
FUND A (Individual)
1300 South Clinton Street, Fort Wayne, Indiana 46802
Telephone: 1-800-348-1212
INDIVIDUAL VARIABLE ANNUITY CONTRACTS
ISSUED BY:
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
The individual variable annuity contracts offered by this prospectus are
designed and offered: (a) for annuity purchase plans adopted by public school
systems and Section 501(c)(3) organizations pursuant to Section 403(b) of the
Internal Revenue Code of 1986, as amended (the "Code"), (b) for qualified
employee pension and profit-sharing trusts (described in Section 401 (a) and tax
exempt under Section 501(a) of the Code) and qualified annuity plans (described
in Section 403(a) of the Code), including H.R.-10 Plans, (c) for Individual
Retirement Annuities and Accounts adopted by or on behalf of individuals
pursuant to Section 408 of the Code and (d) for Simplified Pension Plans
pursuant to Section 408(k) of the Code. Such qualified plans provide special
tax treatment to participating employees and self-employed individuals and their
beneficiaries. Contracts offered by this prospectus are also designed for
governmental and charitable organizations deferred compensation plans meeting
the requirements of Section 457 of the Code.
The principal investment objective of Lincoln National Variable Annuity Fund A
(the Fund) is the long-term growth of capital in relation to the changing value
of the dollar. A secondary investment objective is the production of current
income. The Fund seeks to accomplish these objectives by investing in equity
securities, principally common stocks.
Depending on the provisions of the plan, the Participant or Contract Owner may
elect, if the plan so provides, that a portion (in multiples of 10%) of payments
be applied by the Company to purchase fixed-dollar accumulation units under he
variable annuity contract. However, unless reference is specifically made to
fixed-dollar elements, this prospectus relates to variable elements under the
Separate Account.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS SETS FORTH CONCISELY THE INFORMATION ABOUT THE FUND THAT A
PROSPECTIVE INVESTOR OUGHT TO KNOW BEFORE INVESTING. PLEASE READ IT CAREFULLY
AND RETAIN IT FOR FUTURE REFERENCE.
ADDITIONAL INFORMATION ABOUT THE FUND HAS BEEN FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION. THAT STATEMENT OF ADDITIONAL INFORMATION (SAI), DATED
APRIL 30, 1995, HAS BEEN INCORPORATED BY REFERENCE INTO THIS PROSPECTUS AND WILL
BE PROVIDED ON REQUEST AND WITHOUT CHARGE. WRITE KIM OAKMAN, THE LINCOLN
NATIONAL LIFE INSURANCE COMPANY, P.O. BOX 2340, FORT WAYNE, INDIANA 46801, OR
CALL 1-800-348-1212, extension 4912. A TABLE OF CONTENTS FOR THE SAI APPEARS ON
THE LAST PAGE OF THIS PROSPECTUS.
____________
THIS PROSPECTUS IS DATED APRIL 30, 1995
1
<PAGE>
TABLE OF CONTENTS
Page
Special Terms
Expense Table
Synopsis
Per-Accumulation-Unit Income and Capital Changes
Financial Statements
The Company
The Fund
Investment Objectives and Policies of the Fund
Charges and Deductions
Investment Management
The Variable Annuity Contracts
Accumulation Period
Annuity Period
Fund Valuation Procedure
Federal Tax Status
Voting Rights
Legal Proceedings
Other Annuity Contracts
Custodian
State Regulation
Table of Contents of the Statement of Additional Information
SPECIAL TERMS
As used in this prospectus the following terms have the indicated meanings.
ACCUMULATION UNIT: A statistical device used to determine the value of an
individual account prior to the commencement of annuity payments.
ANNUITANT: The person on whose life or life expectancy the payments are based.
ANNUITY: A series of payments for (a) life, (b) life with either a minimum
number of payments or an ascertainable sum guaranteed, or (c) the joint lifetime
of the Annuitant and another person and thereafter during the lifetime of their
survivor.
ANNUITY RATE PROMISE: The promise that the amount of annuity payments will not
be affected by the fact that Annuitants live longer than expected.
ANNUITY UNIT: A statistical device used to determine the amount of annuity
payments.
2
<PAGE>
CONTRACT OWNER: The annuitant, or other designated person, except in cases where
a Contract is issued to a trustee of a trust or a custodian of a qualified
pension or profit-sharing plan under Section 401(a) of the Code or of an
Individual Retirement Annuity under Section 408 of the Code, or where a Contract
is issued in connection with a deferred compensation plan pursuant to Section
457 of the Code. In cases where the Contract is issued to such a trustee or
custodian, as defined above, the Contract Owner is the trustee or custodian.
FIXED-DOLLAR ANNUITY: An annuity with payments which remain fixed throughout the
payment period and which do not reflect the investment experience of a separate
account.
PAYMENTS: Amounts paid to purchase an annuity by or on behalf of an Annuitant.
PARTICIPANT: The individual participating in a qualified pension or profit-
sharing plan pursuant to Section 401(a) of the Code, a deferred compensation
plan pursuant to Section 457 of the Code, a tax deferred annuity pursuant to
Section 403(a) of the Code, and a tax sheltered annuity pursuant to 403(b) of
the Code.
SEPARATE ACCOUNT: Assets set aside in a separate account by The Lincoln National
Life Insurance Company with respect to payments received under the variable
annuity contracts offered by this prospectus and certain other annuity contracts
and designated as Lincoln National Variable Annuity Fund A.
TERMINATION AND SURRENDER: Surrender means redemption; the term redemption may
be used interchangeably with surrender. The termination options permit
redemption as set forth in Accumulation Period, below.
VARIABLE ANNUITY: An annuity providing for payments varying in accordance with
the changing values of securities held in a separate account.
VARIABLE ANNUITY CONTRACT: An agreement between the Company and the Contract
Owner providing a variable annuity.
3
<PAGE>
EXPENSE TABLE
<TABLE>
<CAPTION>
CONTRACT OWNER TRANSACTION EXPENSES
SINGLE PERIODIC
PREMIUM PREMIUM
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales Load Imposed on Purchases (as a percentage of purchase payments) 2%+$50 4.25%
Administrative Expense $65.00 1.00%
Minimum Death Benefit (if elected) .75% .75%
ANNUAL EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees .32%
Annuity Rate and Expense Risk Fees 1.00%
Total Annual Expenses 1.32%
EXAMPLE*
1 YEAR 3 YEARS 5 YEARS 10 YEARS
S.P. P.P. S.P. P.P. S.P. P.P. S.P. P.P.
At the end of the applicable time period, you would
pay the following expenses on a $1,000 investment,
assuming 5% annual return on assets: $147 $66 $173 $95 $202 $126 $287 $218
</TABLE>
*The figures are the same, whether the Contract Owner holds the contract,
surrenders it, or annuitizes. The expenses shown do not include charges for
the minimum death benefit, since the purchase of that benefit is optional with
the client. [S.P.=Single Premium; P.P.=Periodic Payment]
4
<PAGE>
This table is provided to assist the Contract Owner in understanding the various
costs and expenses that he or she will bear directly or indirectly. The table
reflects expenses of operating both the Variable Annuity Contract and the Fund.
For a more complete description of the various costs and expenses involved, see
"Charges and Deductions" in this Prospectus. Premium taxes may also be
applicable, although they do not appear in the table. THE "EXAMPLE" SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY
BE GREATER OR LESSER THAN THOSE SHOWN. This table is unaudited.
SYNOPSIS
WHAT ARE THE VARIABLE ANNUITIES BEING OFFERED?
The variable annuity contracts offered by this prospectus are of 2 types:
immediate annuities and deferred annuities. Deferred annuities may be purchased
with a single payment or with periodic payments. Immediate annuities may only
be purchased with a single payment.
WHO IS THE PRINCIPAL UNDERWRITER?
The Lincoln National Life Insurance Company (the Company), a registered broker-
dealer, is the principal underwriter. It makes contracts available through its
registered representatives licensed to sell life insurance policies and annuity
contracts.
INVESTMENT ADVISER--NATURE OF BUSINESS
The Company, a stock life insurance company providing life insurance and
annuities, serves as investment adviser to the Fund.
WHAT FEES ARE CHARGED TO THE FUND?
For providing investment management services, the Company (the adviser) will
make daily deductions aggregating .323% annually of the average daily value of
the Fund. (See Investment Management, below.)
Daily deductions of 1.002% annually of the average daily value of the Fund are
also made for annuity rate and expense guarantees. (See Charges and Deductions,
below.)
In general, see Expense Table on page 3.
WHAT IS THE MAXIMUM SALES LOAD?
The maximum sales load under a periodic payment contract is 4.49% of the net
amount invested which is 4.25% of the offering price (gross payment received).
Under a single payment contract, the maximum sales load is 3.9% of the net
amount invested. The maximum sales load is 2% of the offering price (gross
payment received) plus $50.
5
<PAGE>
There are provisions for reduced sales charges. (See Charges and Deductions,
below.)
ADMINISTRATIVE EXPENSE CHARGES
In addition to the maximum sales load described above, a charge is also deducted
for administrative expenses. This charge is a maximum of 1% under periodic
payment contracts; under single payment contracts, the charge is $65.
ARE THERE ANY OTHER DEDUCTIONS, CHARGES OR PENALTIES?
If the minimum death benefit has been elected, an additional deduction of .75%
is made from each purchase payment. Deductions are also made for any applicable
premium taxes. If you withdraw contract value or surrender the contract before
the annuity period begins, you may be subject to a penalty tax under Section
72(q) of the Code.
IS THERE A SHORT-TERM CANCELLATION RIGHT?
Within 10 days after this contract is first received, it may be cancelled for
any reason by delivering or mailing it to the agent through whom it was
purchased or to the Home Office of the Company. Upon cancellation, this
contract shall be void from the beginning and the Company will return the value
of any payments made to the variable account (including the sales and
administrative charge).
IS A MINIMUM INVESTMENT REQUIRED?
Normally, under a periodic payment contract, the minimum amount of any scheduled
purchase payment is $25 and the scheduled purchase payments must total at least
$600 per year. Normally, under a single payment contract the minimum payment is
$5,000.
INVESTMENT OBJECTIVES
The principal investment objective of the Fund is the long-term growth of
capital in relation to the changing value of the dollar. A secondary investment
objective is the production of current income. (See Investment Objectives and
Policies of the Fund, below.)
TYPE OF FUND
The Fund is a segregated investment account of the Company, operated as an open-
end, diversified management investment company, which continuously offers its
variable annuity contracts for sale.
REDEMPTION OR REPURCHASE PRICE
Payments upon redemption will be made at the value of the account without any
charge. (See Accumulation Period, below.)
6
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY FUND A
PER-ACCUMULATION-UNIT INCOME AND CAPITAL CHANGES
(For an accumulation unit outstanding throughout the year)
The following per-unit income and capital changes table of the Fund has
been audited by Ernst & Young LLP, independent auditors. This table should be
read in conjunction with the Fund's financial statements, notes and report of
independent auditors included in the Statement of Additional Information. The
information is for years ended December 31.
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income $ .217 $ .204 $ .206 $ .181 $ .146 $ .183 $ .150 $ .130 $ .105 $ .094
Expenses .095 .090 .083 .076 .064 .062 .053 .055 .044 .034
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net investment income .122 .114 .123 .105 .082 .121 .097 .075 .061 .060
Net realized and unreal-
lized gain (loss) on
investments (.040) .522 (.099) 1.402 (.102) .786 .266 .166 .458 .657
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Increase (decrease) in
accumulation unit value .082 .636 .024 1.507 (.020) .907 .363 .241 .519 .717
Accumulation unit value
at beginning of year 7.116 6.480 6.456 4.949 4.969 4.062 3.699 3.458 2.939 2.222
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
ACCUMULATION UNIT
VALUE AT END OF YEAR $7.198 $7.116 $6.480 $6.456 $4.949 $4.969 $4.062 $3.699 $3.458 $2.939
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
RATIOS
Ratio of expenses to
average net assets 1.27% 1.27% 1.27% 1.27% 1.28% 1.28% 1.28% 1.30% 1.28% 1.29%
Ratio of net investment
income to average
net assets 1.75% 1.72% 2.01% 1.85% 1.72% 2.63% 2.49% 1.82% 1.86% 2.38%
Portfolio turnover rate 64.09% 49.90% 70.97% 36.99% 59.57% 201.20% 178.95% 146.44% 59.64% 28.66%
Number of accumulation
units outstanding at
end of year (expressed
in thousands) 9,908 11,538 12,742 14,185 16,554 19,522 22,564 26,247 30,133 34,563
</TABLE>
8
<PAGE>
FINANCIAL STATEMENTS
Financial statements for the Fund and for the Company are in the Statement of
Additional Information (SAI) for the Fund. To obtain a copy of the SAI, call or
write to the source listed on page 1 of this Prospectus.
THE COMPANY
The Lincoln National Life Insurance Company (the Company) is a stock life
insurance company organized in 1905 under the laws of the State of Indiana. It
is principally engaged in the sale of life insurance, annuities, and
reinsurance. The Company is a wholly-owned subsidiary of Lincoln National
Corporation, a publicly-held insurance holding company. The Home Office of the
Company (principal business address) is located at 1300 South Clinton Street,
Fort Wayne, Indiana. The Company's Home Office mailing address is P.O. Box
2340, Fort Wayne, IN 46801.
THE FUND
On September 16, 1966 the Board of Directors of the Company established a
segregated investment account designated Lincoln National Variable Annuity Fund
A (the Fund or Variable Contract) in accordance with certain provisions of
Indiana Insurance Law. The Fund is an open-end, diversified management
investment company registered with the Securities and Exchange Commission (SEC)
under the Investment Company Act of 1940, as amended (the 1940 Act).
The present Board of Managers for the Fund has been elected by the Contract
Owners (See Voting Rights, below.) A majority of these Members are persons who
are not otherwise interested persons of the Company as the term "interested
persons" is defined in the 1940 Act. Members of the Board of Managers are also
Members of the Board of Managers of Lincoln National Variable Annuity Fund B
(Fund B), and are Directors of the following: 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.; and Lincoln National Special Opportunities Fund, Inc. All
of the foregoing (including Fund B) are registered investment companies. The
Board is responsible, among other things, for authorizing investment programs
for the Fund, in accordance with the Fund's investment objectives and policies;
for recommending to Contract Owners any appropriate changes to those objectives
and policies; and for contracting for certain services necessary to the
operation of the Fund.
The Indiana law under which the Fund was established provides it shall not be
chargeable with liabilities arising out of any other business which the Company
may conduct and which has no specific relation to or dependence upon the Fund.
Accordingly, the assets of the Fund will be held exclusively for the benefit of
Participants in, and persons entitled to
9
<PAGE>
payment under, variable annuity contracts. Income, gains, and losses, whether or
not realized, from assets allocated to the Fund are, in accordance with the
applicable variable annuity contracts, credited to or charged against the Fund
without regard to other income, gains, or losses of the Company. The assets of
the Fund may not be charged with liabilities arising out of any other business
of the Company. The obligations arising under the variable annuity contracts are
obligations of the Company. The Fund is a "separate account" as that term is
defined under the federal securities laws.
The Company, in addition to serving as Investment Adviser for the Fund (See
Investment Management, below), provides overall management of the Fund's
business affairs, subject to the authority of the Board of Managers.
INVESTMENT OBJECTIVES AND POLICIES OF THE FUND
All investment objectives and policies shown below (except Restrictions 9
through 11) are fundamental and may not be changed without approval of Contract
Owners casting a majority of the votes entitled to be cast (see Voting Rights,
below).
OBJECTIVES
1. The principal investment objective is the selection of investments for the
long-term growth of capital in relation to the changing value of the dollar.
Investments will be made with the objective of providing annuity payments which
may tend to reflect changes in the value of the dollar. An additional but
secondary investment objective is the production of current income.
2. Income and realized capital gains will be reinvested.
3. The Fund's assets will be kept fully invested except that (a) sufficient
cash will be kept on hand to meet variable annuity contract payments and (b)
reasonable amounts of cash or United States Government securities may be held
for limited periods pending investment in accordance with investment policies.
4. The Fund's assets will usually be invested in a portfolio of equity
securities, mainly common stocks, diversified over industries and companies.
Changes in such diversification may be made from time to time to take into
account changes in the outlook for particular industries or companies. The
investments of the Fund will not, however, be concentrated in any one industry,
and no more than 25% of the Fund's assets will be invested in any one industry.
Such diversification does not eliminate the risks inherent in the making of
equity investments. The purchasing of common stocks may occur in rising or
declining markets.
Further, when the Board of Managers determines that investments of other types
may be advantageous on the basis of combined considerations of risk, income and
appreciation, investments may be made in bonds, notes or other evidences of
indebtedness, issued publicly or placed privately, of a type
10
<PAGE>
customarily purchased for investment by institutional investors including United
States Government securities. Such investments, if made, constitute a defensive
policy. Such investments may, or may not, be convertible into stock or be
accompanied by stock purchase options or warrants for the purchase of stock.
Warrants are purely speculative in that they have no voting rights, pay no
dividends and have no rights with respect to the assets of the corporation
issuing them. A warrant, basically, is an option to purchase a given security
within a specified period for a specified price. The prices of warrants do not
necessarily move parallel to the price of the underlying securities.
RESTRICTIONS
The investments of the Fund are subject to the provisions of the Indiana
Insurance Law concerning earnings records, preferred stock coverage, self-
dealing, real estate holdings and concentration.
Loans will not be made, but the purchase of a portion of an issue of bonds,
debentures or other securities publicly distributed or privately placed with
financial institutions shall not be considered the making of a loan.
The Fund will not:
1. Invest more than 5% of the value of the Fund's assets in securities of any
one issuer, except obligations of the United States Government and
instrumentalities thereof.
2. Acquire more than 10% of the voting securities of any one issuer.
3. Borrow money except for temporary or emergency purposes in an amount
up to 5% of the value of the assets.
4. Underwrite securities of other issuers.
5. Purchase or sell real estate as a principal activity. However, the right
is reserved to invest up to 10% of the value of the assets of the Fund in
real properties.
6. Purchase commodities or commodity contracts.
7. Make short sales of securities.
8. Make purchases on margin, except for such short-term credits as are
necessary for the clearance of transactions.
9. Invest in the securities of a company for the purpose of exercising
management or control.
10. Place emphasis upon obtaining short-term trading profits, but it may
engage in short-term transactions in the event that a change in economic
conditions or a rapid appreciation or depreciation of stock prices occurs.
The Fund's portfolio turnover rates were 64.09% for 1994, 49.9% for 1993,
and 70.97% for 1992. The securities markets in general have experienced
volatility due to rapidly shifting economic trends. This volatility can
affect turnover.
11. Plan to make investments in securities of other investment companies.
However, the right is reserved to make such investments up to a maximum of
10% of the value of the assets of the Fund, provided that not more than 3%
of the total outstanding voting stock of any one investment company may be
held.
11
<PAGE>
SPECIAL RISKS
Investments, if made, in any securities of the type which are privately placed
with financial institutions and which cannot be sold to the public without prior
registration of such securities with the SEC, will be limited in order that the
total of such investments will not exceed 10% of the value of the Fund's assets.
Such securities are commonly referred to as "restricted securities." Restricted
securities may not be readily marketable and the Fund may not be able to dispose
of its holdings in these securities at reasonable price levels if such
securities are ever acquired. Furthermore, registration of restricted securities
under the Securities Act of 1933 may be necessary if the Fund is to sell such
securities publicly. Should a considerable period of time elapse between the
time that a decision is made to sell restricted securities and the time when the
Fund may be permitted to sell them publicly under an effective registration
statement, adverse market conditions could develop with the result that the Fund
might not be able to obtain as favorable a price as that prevailing at the time
the decision to sell was made. During 1994 no restricted securities were held.
CHARGES AND DEDUCTIONS
DEDUCTION FROM PURCHASE PAYMENTS--SALES AND ADMINISTRATIVE EXPENSES
Under periodic payment contracts, a deduction of 4.25% for sales expenses and 1%
for administrative expenses is made from each purchase payment when received.
Under single payment contracts, which contemplate that lump sum amounts under
pension or retirement plans will be applied to the purchase of an annuity, the
deduction from each purchase payment made on behalf of a Participant for sales
and administrative expenses is 2% plus $50 for sales expenses and $65 for
administrative expenses. In addition to periodic payments, the Contract Owner
may make single payments on behalf of Participants. The deduction from such a
payment made for a Participant is 2%.
Administrative expenses include salaries, rent, postage, telephone, travel,
legal, actuarial and accounting fees, office equipment, and stationery. The
administrative charge is designed to cover the expense of administering these
contracts, and the Company does not expect to realize a profit by virtue of this
charge.
Should the Company increase the combined sales and administrative expense
charge, then, for existing holders of periodic payment contracts, the Company
promises not to deduct more than 5.25% from any year's payment, as long as that
payment is no more than twice the original year's payment. The excess will be
charged at the higher rate.
These services are provided under a Sales and Administrative Services Agreement
executed by the Company and the Fund. The Agreement continues in effect from
year to year if approved at least annually by a majority of the Board of
Managers who are not interested persons of the Company or the Fund, cast in
person at a meeting called for the purpose of voting on such
12
<PAGE>
approval.
Deductions for sales and administrative expenses made from purchase payments
applied to purchase fixed-dollar accumulation units are the same as those made
from payments applied to the Separate Account.
Over the actuarial life of the contracts issued by the Fund, the aggregate sales
load is expected to exceed the aggregate distribution expenses associated with
those contracts. To the extent that sales load does not exceed distribution
expenses during the first year of those contracts, the Company pays those
expenses out of its general assets. Aggregate sales load in years after the
first exceeds aggregate distribution expenses in those years.
For sales and administrative expenses, the Fund paid $14,573 in 1994, $18,663 in
1993, and $23,468 in 1992.
REDUCED CHARGES
No sales or administrative expense charge is deducted from:
1. Amounts transferred between the fixed and the separate account portions of
contracts offered by this prospectus, if such transfers are permitted by the
underwriting practices of the Company.
2. Purchase payments under contracts offered by this prospectus to (a)
Members of the Board of Managers and officers of the Fund, (b) directors,
officers and full-time employees of the Company, if they spend more than 50% of
their working time either (1) rendering investment advisory services to the Fund
or Fund B, or supervising persons who spend more than 50% of their working time
rendering such services, or acting in a position necessary for such persons to
render such services, or (2) selling or offering for sale contracts of the Fund
or of Fund B, or supervising persons who spend more than 50% of their working
time selling or offering such contracts for sale, or acting in a position
necessary for such persons to sell or offer such contracts for sale, and (c)
sales representatives of the Company, or to any trust, pension, profit-sharing,
or other benefit plan for such persons, provided that each of the foregoing
persons has acted as above described for not less than 90 days, and provided
further that such sales are made with the written assurances of the purchaser
that the purchase is made for investment purposes and that the contracts will
not be resold except through redemption; and/or
3. Payments under contracts offered by this prospectus to the owners of or
beneficiaries under life insurance, endowment, or annuity contracts issued by
the Company in cases where and to the extent that proceeds payable under such
policies are applied to the purchase of contracts offered by this prospectus.
Contract Owners of Fund B who meet the requirements of Sections 457 and 414(d)
of the Code may exchange their contracts for contracts of this Fund in an equal
dollar amount at the respective Accumulation Unit values at the time of the
exchange (i.e., without incurring any additional sales load or other charges).
Such an exchange constitutes an exchange of an annuity
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contract for an annuity contract of identical value at the time of the transfer
and as such is a non-taxable exchange for federal tax purposes.
EXPERIENCE RATING CREDIT
The variable annuity contracts are non-participating and do not share in the
surplus of the Company; however, each variable annuity contract provides for
experience rating. The experience credit will be determined annually on the
basis of allocated costs compared with the amounts deducted for sales and
administrative expenses. If such costs exceed the amount deducted, no
additional deduction will be made from the Participant's individual account.
If, however, the amount deducted for such expenses exceeds allocated costs, the
Company, in its discretion, may allocate all, a portion on none of such excess
as an experience rating credit.
Credits will be applied without deduction of any amounts for sales or
administrative expenses. Application of the credit will be made in 1 of 2 ways,
as considered appropriate by the Company: (a) by a reduction in the amount
deducted from subsequent purchase payments for sales and administrative
expenses, or (b) by the crediting of a number of additional accumulation units
or annuity units, as applicable, equal in value to the amount of the credit less
any applicable premium taxes.
During 1994, there were no experience rating credits paid. In years in which
experience rating credits are granted, the granting of those credits in no way
obligates the Company to grant such credits in ensuing years, as the Company
retains sole discretion with respect to payment of experience rating credits.
DEDUCTION FROM PURCHASE PAYMENTS--MINIMUM DEATH BENEFIT
An additional deduction of .75% is made from each purchase payment for the
minimum death benefit, if such coverage has been elected. The Company
anticipates that the sale of this death benefit will generate profits for it.
(See Accumulation Period, below.)
DEDUCTION FROM PURCHASE PAYMENTS--PREMIUM TAXES
Any applicable premium taxes are deducted from purchase payments in accordance
with local law. Premium tax deductions are held in the General Account of the
Company until paid to the appropriate state on a quarterly or annual basis. The
balance of the payment less all deductions is placed in the Fund and credited to
the Participant's individual account. The tax ranges from .5% (.005) to 5.0%
(.05) of purchase payments.
DEDUCTION FROM AVERAGE DAILY VALUE OF THE FUND--ANNUITY RATE AND EXPENSE
PROMISES
Although variable annuity payments will vary in accordance with the investment
performance of the Fund, they will not be affected by adverse mortality
experience or by an increase in the Company's expenses to an
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amount in excess of the expense deductions provided for in the variable annuity
contract. The Company assumes the risk that Annuitants as a class may live
longer than expected and that expenses may be higher than the deductions for
such expenses. In either case, the loss will fall on the Company. Conversely,
if such reserves and deductions prove more than sufficient, the excess will be a
profit to the Company.
In return for the assumption of these risks, deductions aggregating 1.002%
annually of the average daily value of the Fund are made consisting of .9% for
annuity rates and .102% for expenses.
DEDUCTION FROM AVERAGE DAILY VALUE OF THE FUND--INVESTMENT ADVISORY FEES
For providing investment advisory services to the Fund, the Company makes
deductions aggregating .323% annually of the average daily value of the Fund.
(See Investment Management, below.)
The Fund paid investment advisory fees of $272,740 in 1994, $290,422 for 1993,
and $295,121 for 1992.
INVESTMENT MANAGEMENT
The Company has been registered under the Investment Advisers Act of 1940 since
1967, and it serves as investment adviser of the Fund. (See The Company, above,
for a description of the Company; and Management, in the SAI, for affiliated
persons.) Investment management services are provided under an Investment
Management Services Agreement executed by the Company and the Board of Managers.
The Agreement continues in effect from year to year if approved at least
annually by a majority of the Board of Managers, who are not interested persons
of the Company or the Fund, cast in person at a meeting called for the purpose
of voting on such approval, and by either (a) the Board of Managers, or (b) a
majority vote of all Contract Owners.
The Agreement may be terminated at any time without penalty on 60 days' written
notice to the Company by the Board of Managers or by a majority vote of all
Contract Owners. The Company may not terminate the Agreement without the prior
approval of a new investment advisory agreement by a majority vote of all
Contract Owners. In the event of assignment, the Agreement will terminate.
In performing investment management services, the Company continuously provides
the Board of Managers with an investment program for its consideration. Upon
approval of such an investment program by the Board of Managers, the Company
executes the program by placing orders for the purchase or sale of the assets of
the Fund.
A "sub-advisory agreement" is in force between the Company and Vantage Global
Advisors, Inc. ("Vantage"), a Delaware corporation. Under it, Vantage may
perform some, or substantially all, of the investment advisory services required
by the Fund. However, the Company remains primarily responsible for investment
decisions affecting the Fund, and no additional
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compensation from the assets of the Fund is assessed as a result of that
agreement.
THE VARIABLE ANNUITY CONTRACTS
ANNUITY PROMISE
The variable annuity contract includes the Company's promise that variable
payments will be made for the lifetime of the Annuitant (commencing on the
selected annuity date) based upon mortality assumptions contained in the
contract and annuity option selected, regardless of the actual mortality
experience among the Annuitants. That is, while annuity payments are based on
life expectancies, Annuitants will nevertheless continue to receive annuity
payments if they live longer than expected. Annuity payments will not be
affected by an increase in the Company's expenses.
GENERAL COMMENTS
The periodic payment contract provides that the annuity rates and the deductions
for sales expenses, administrative expenses, and for annuity rate and expense
promises will apply to payments on an annualized basis not in excess of twice
the initial payment on an annualized basis. Payments in excess of this limit
may be made, however, with the consent of the Company. It is anticipated that
such consent will be granted at times when the individual variable annuity
contracts then being offered by the Company are substantially similar in
benefits and costs to those described herein.
Depending on the provisions of the plan, the Contract Owner may elect, if the
plan so provides, that a portion (in multiples of 10%) of payments be applied by
the Company to purchase fixed-dollar Accumulation Units (not described in this
prospectus) under the variable annuity contract. Either the fixed or variable
portion of a deferred annuity contract may be terminated by the Contract Owner
at any time prior to commencement of annuity payments provided the payment
allocated to the other portion satisfies the Company's usual underwriting
practices.
This prospectus describes only the elements of the contract pertaining to the
Separate Account except where reference to fixed-dollar elements is specifically
made.
PURCHASE OF CONTRACTS
Persons wishing to purchase contracts must complete application forms to be
forwarded to the Home Office of the Company for its acceptance. Upon
acceptance, contracts are prepared, executed by duly authorized officers of the
Company, and forwarded to the Contract Owner.
An initial purchase payment will be priced not later than two business days
after receipt of an order to purchase, if the application and all information
necessary for processing the purchase order are complete upon receipt. The
Company may retain the purchase payment for up to five business days while
attempting to complete an incomplete application. If
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the application cannot be made complete within five days, the applicant will be
informed of the reasons for the delay and the purchase payment will be returned
immediately unless the applicant specifically consents to the Company retaining
the purchase payment until the application is made complete. Thereafter, this
initial purchase payment must be priced within two business days.
Certain significant provisions of the contracts are discussed in the following
paragraphs.
INCREASE OR DECREASE IN AMOUNT OF PERIODIC PAYMENTS
Within the "purchase limits" stated below, the amount of a periodic payment on
an annualized basis may be increased up to twice the initial payment on an
annualized basis or decreased on any date a payment is due. Submission of a
payment different from the previous payment will constitute notice of such
change.
ASSIGNMENT
Unless contrary to applicable law, assignment of variable annuity contracts or
participants individual accounts thereunder is prohibited.
PURCHASE LIMITS
Normally, under a periodic payment contract, the minimum amount of any scheduled
purchase payment is $25 and the scheduled purchase payments must total at least
$600 per year. Normally, under a single payment contract the minimum payment is
$5,000.
REINVESTMENT PRIVILEGE
The Contract Owner or a Participant may elect to make a reinvestment purchase
with any part of the proceeds of a total or partial liquidation of the contract
without any deductions by the Company. Such election must be made within 30
days of the date of such liquidation and the purchase must be of a contract
covered by this prospectus. A representation must be made that the proceeds
being used to make the purchase have retained their tax favored status under an
arrangement for which the contracts offered by this prospectus are designed (see
Synopsis, above). The number of Accumulation Units which will be credited upon
reinvesting the funds will be based on the value of the Accumulation Unit(s) the
next time such value is computed following receipt of the proceeds and request
for reinvestment at the Company's Home office. This reinvestment privilege may
be utilized only once with respect to any Contract Owner or Participant. For
tax reporting purposes, a liquidation and subsequent reinvestment purchase will
be treated by the Company as separate transactions. Prior to a liquidation or
subsequent reinvestment purchase, a tax adviser should be consulted by the
Contract Owner or Participant.
GENERAL RISK FACTORS
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Variable annuities are designed to provide Participants with payments which will
tend to reflect changes in the cost of living. The Company seeks to accomplish
this objective by providing a medium for investment in equity securities
accompanied by annuity promises. There is no assurance that this objective will
be attained.
Historically, the value of a diversified portfolio of common stocks held for an
extended period of time has tended to rise during periods of inflation. There
has, however, been no exact correlation, and for some periods the prices of
securities have declined while the cost of living was rising.
The value of the investments held in the Fund fluctuates daily and is subject to
the risks of changing economic conditions as well as the risks inherent in the
ability of management to anticipate changes in such investments necessary to
meet changes in economic conditions.
There is no assurance that the value of a Participant's individual account
during the years prior to retirement or that the aggregate amount of the
variable annuity payments received during the years following the commencement
of annuity payments will equal or exceed the payments made on behalf of a
Participant. Neither is there assurance that the value of an unallocated fund's
contract will equal or exceed the payments made to this account. The policy of
investment in common stocks may be maintained in both rising and declining
markets.
CONTRACT OWNER INQUIRIES
The obligations to purchasers under the Variable Annuity Contracts are those of
the Company. Inquiries from Contract Owners should be directed to the Company
at 1-800-348-1212.
ACCUMULATION PERIOD
ACCUMULATION UNITS
The purchase payments, less deductions, are credited to the account of the
Contract Owner in the form of Accumulation Units. The number of Accumulation
Units credited for a Contract Owner is determined by dividing the net purchase
payment by the value of an Accumulation Unit when the net purchase payment is
received, if received prior to the close of trading on the New York Stock
Exchange and by the value computed on the next trading day, if received
thereafter. (See Fund Valuation Procedure, below.) Crediting of Accumulation
Units may be delayed on payments received which cannot be identified or
allocated to a specific Contract Owner's account.
The number of Accumulation Units so determined shall not be changed by any
subsequent change in the value of an Accumulation Unit, but the dollar value of
an Accumulation Unit will vary in amount depending upon the investment
experience of the Fund.
VALUE OF CONTRACT OWNER'S ACCOUNT
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The value of a Contract Owner's account at any time prior to the commencement of
annuity payments can be computed by multiplying the total number of Accumulation
Units by the current Accumulation Unit value. The Contract Owner bears the
investment risk, that is, the risk that market values may decline. There is no
assurance that the value of the Contract Owner's account will equal or exceed
the payments made by the Contract Owner. Each Contract Owner is advised
annually of the number of Accumulation Units credited to his or her account, the
current Accumulation Unit value, and the total value of his or her account.
BENEFICIARY
For those optional forms of payment which provide for death benefits either
before or after retirement, the Contract Owner may designate a beneficiary. The
Contract Owner may change any beneficiary during the life of the Annuitant
unless otherwise provided in the previous designation. Each change of
beneficiary revokes any previous designation. A change may be made by filing a
written request in a form that the Company will accept at its Home Office. The
Company reserves the right to require the contract for endorsement of a change
of beneficiary.
Unless otherwise provided in the beneficiary designation, one of the procedures
described below will take place on the death of a beneficiary.
1. If any beneficiary dies before the Annuitant, that beneficiary's interest
will pass to other beneficiaries according to their respective interests.
2. If no beneficiary survives the Annuitant, the proceeds will be paid in one
sum to the Contract Owner, if living; otherwise to the Contract Owner's estate.
DEATH OF CONTRACT OWNER
If the owner of a non-qualified contract dies before annuity payments have
begun, then in accordance with the provisions of Section 72(s) of the Code, the
Cash Surrender Value (proceeds) of the Contract will be paid as follows: (i)
Upon the death of a non-annuitant owner, the proceeds shall be paid to any
surviving joint or contingent owner(s); (ii) If no joint or contingent owner has
been named, then the proceeds shall be paid to the annuitant named in the
contract.
If the decedent owner or joint owner is also the annuitant, then the death will
be treated as death of the annuitant subject to the provisions of this Contract
regarding death of annuitant. If the recipient of the proceeds is the surviving
spouse of the Contract Owner, the Contract may be continued in the name of the
spouse as owner.
In accordance with Section 72(s), any distribution must be paid within 5 years
of the death of the owner unless the beneficiary begins receiving, within one
year of the Contract Owner's death, the distribution in the form of a life
annuity or an annuity for a period certain not exceeding the beneficiary's life
expectancy.
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JOINT/CONTINGENT OWNERSHIP
If a joint owner is named in the application, such joint owners shall be treated
as having equal undivided interests in the Contract. Either owner, independent
of the other, may exercise any ownership rights in this Contract. A contingent
owner cannot exercise any ownership rights in this Contract while the contract
owner is alive.
DEATH BENEFIT BEFORE RETIREMENT
If the Annuitant dies prior to the commencement of annuity payments, death
proceeds payable will normally be the value of the Contract Owner's account
determined as of the valuation date coincident with or next following the date
written notice of death is received by the Company. If the Contract Owner has a
minimum death benefit rider in force, the death proceeds will be the greater of
the total contributions applied (excluding rider premiums) or the value of the
account.
The proceeds due on death may be applied to provide variable payments, fixed-
dollar payments or a combination of both.
NON-FORFEITURE OPTIONS
SURRENDER OF CONTRACT
Upon default in payments and prior to the death of the Annuitant, the Contract
Owner may (a) exercise any of the Settlement Options described below or (b)
surrender the whole or a portion of his or her account by submission of a
written request for surrender and the contract to the Company's Home Office and
receive the cash value, subject to any limitations on early settlement contained
in an applicable qualified trust or plan. (See Federal Tax Status, below and in
the SAI.)
The payment of any value upon surrender will be made within 7 days after the
request for surrender is received by the Company at its Home Office. If the
payment of a surrender value results in reduction of the Company's state premium
tax liability, the amount payable will include the lesser of (a) the amount by
which the Company's premium tax liability is reduced or (b) the amount
previously deducted from purchase payments for premium taxes on the contract
being surrendered.
Payment may be postponed (a) for any period during which the New York Stock
Exchange is closed other than customary weekend and holiday closings or during
which trading on the New York Stock Exchange is restricted; (b) for any period
during which an emergency exists as a result of which (1) disposal of securities
in the Fund is not reasonably practicable or (2) it is not reasonably
practicable to determine the value of the Fund's net assets; or (c) for such
other periods as the SEC may by order permit for the protection of the Contract
Owners.
SUSPENSION OF PERIODIC PAYMENTS
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In addition, a periodic payments Contract Owner may have his or her account
continued from the date of default in payments as a paid-up annuity to commence
on the maturity date stated in the contract.
Periodic payments may be resumed at any time prior to maturity, surrender or
death of the Annuitant.
RESTRICTIONS UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM
Title 8, Section 830.105 of the Texas Government Code, consistent with prior
interpretations of the Attorney General of the State of Texas, permits
participants in the Texas Optional Retirement Program (ORP) to redeem their
interest in a variable annuity contract issued under the ORP only upon: (1)
termination of employment in all institutions as defined in Texas law, (2)
retirement, or (3) death. Accordingly, a participant in the ORP will be
required to obtain a certificate of termination from his/her employer before
he/she can redeem his/her account.
SETTLEMENT OPTIONS
Contracts issued in connection with qualified employee pension and profit-
sharing trusts and qualified annuity plans, including H.R.-10 trusts and plans
covering self-employed individuals and their employees and certain tax deferred
annuity plans will have settlement options as stated in the trust or plan. The
terms of the applicable trust or plan should be consulted for limitations on
early surrender or payment in settlement. In certain circumstances, settlement
options will be governed by applicable law rather than by the terms of the trust
or plan. With respect to contracts issued in connection with plans qualifying
under Section 403(b) of the Code, the First and Sixth Options are limited as
noted below and the Fourth and Fifth Options will not be available. (See
Federal Tax Status, below and in the SAI.)
Within the foregoing limitations, at any time prior to the commencement of the
annuity payments and during the lifetime of the Annuitant, the Contract Owner
may elect to have all or a portion of the amount due in settlement of the
contract on death of the Annuitant or upon surrender of the contract applied
under any of the 6 settlement options described below. Therefore, a Contract
Owner cannot make payments under a contract while receiving payments pursuant to
a Settlement Option under the contract.
During the lifetime of an Annuitant, the payee under a Settlement Option is the
Annuitant. After the death of the Annuitant, the payee under a Settlement
Option is the beneficiary during his or her lifetime.
There is no assurance that the value of a Contract Owner's individual account
during the years prior to retirement or that the aggregate amount of the
variable annuity payments received during the years following the commencement
of annuity payments will be equal or exceed the payments paid by a Contract
Owner.
All options may be selected on a fixed or variable basis or a combination
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thereof except the Fifth Option which is available on a fixed basis only.
Amounts applied to the purchase of a fixed-dollar annuity will not participate
in the investment experience of the Fund. The allocation between fixed and
variable may be changed at any time prior to 30 days before the date on which
payments are to commence.
After annuity payments have commenced, the Company will honor any request for a
surrender of the remaining value of a contract in any case in which annuity
payments are being made under a form of annuity not involving life
contingencies. This applies to the First and Fourth Options at all times. The
charge for mortality guarantees also continue to be deducted from accounts held
under the First and Fourth Options, although these options are not based on life
contingencies.
FIRST OPTION--PAYMENTS FOR DESIGNATED PERIOD
The proceeds may be paid in monthly payments over a period from 1 to 30 years.
However, under contracts issued in connection with Section 403(b) plans, this
option will not be available if the number of years in the period over which the
proceeds would otherwise be paid plus the attained age of the Annuitant at the
time the first payment is due would exceed 95.
SECOND OPTION--LIFE INCOME WITH PAYMENTS GUARANTEED FOR DESIGNATED PERIOD
The proceeds may be paid in monthly payments during a designated period elected
and thereafter throughout the lifetime of the payee. The designated period may
be 10, 15 or 20 years. The amount of each payment will depend on the payee's
sex and age.
THIRD OPTION--UNIT REFUND LIFE ANNUITY
The unit refund life annuity is an annuity payable monthly during the lifetime
of the Annuitant with the guarantee that upon death a payment will be made of
the value of the number of Annuity Units equal to the excess, if any, of (a) the
total amount applied under this option divided by the Annuity Unit value for the
date annuity payments commence over (b) the Annuity Units represented by each
payment to the Annuitant multiplied by the number of payments paid prior to
death. The value of the number of Annuity Units is computed on the date the
Home Office receives written notice of the Annuitant's death, provided that if
notice is not received prior to the close of trading at the New York Stock
Exchange on such date computation shall be made on the first trading date
thereafter.
For example, assume that $10,000 is applied under this option. Further assume
that the Annuity Unit value for the annuity commencement date is $2 and the
first monthly payment due the Annuitant is $61. This means that the Annuitant
has 5,000 Annuity Units credited to his or her account ($10,000 divided by $2
per unit) as of the annuity commencement date and that each monthly payment
received by the Annuitant will be equal to the monetary value, at the time paid,
of 30.5 units ($61 first monthly payment divided by $2 per unit). Assume the
Annuitant receives 10 monthly payments and then dies. Prior to death the
Annuitant was paid the value of 305
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units (30.5 per month x 10 months). The beneficiary is entitled to the value in
1 sum of 4,695 Annuity Units (5,000 units initially less 305 units already
valued and paid). If the value of an Annuity Unit is $2.05 on the relevant
valuation date, the cash payment to the beneficiary will be $9,624.75 (4,695
remaining units x unit value of $2.05).
FOURTH OPTION--PAYMENTS OF DESIGNATED AMOUNT
The proceeds may be paid in equal annual, semi-annual, quarterly or monthly
payments of a designated amount (not less than $50 per year per $1,000 of
original proceeds left with the Company) until the proceeds adjusted by
investment experience are exhausted. The minimum amount withdrawable under this
option is not necessarily the recommended amount. This option will not be
available under contracts issued in connection with Section 403(b) plans.
FIFTH OPTION--INTEREST INCOME
The proceeds may be left on deposit with the Company, subject to withdrawal upon
demand, and interest thereon will be paid annually, semi-annually, quarterly or
monthly as elected. The company guarantees an interest rate of 3% per year.
This option will not be available under contracts issued in connection with
Section 403(b) plans.
SIXTH OPTION--ANNUITY SETTLEMENT
The proceeds may be paid in payments in the form provided by any single payment
immediate annuity contract issued by the Company on the date on which the
proceeds become payable. However, the amount of the first payment shall be 103%
of the first payment which such proceeds would otherwise provide under such
annuity contract on the basis of the Company's rates in effect on such date.
For the purpose of calculating the first payment under the single payment
immediate annuity contract selected pursuant to this option, it is assumed that
a deduction for sales and administrative expenses (which currently amounts to 2%
plus $115 for single payment variable annuity contracts) has been made from the
amount applied under this option. Under contracts issued in connection with
Section 403(b) plans, no form of settlement option will be available under this
provision which is not available under the Second and Third Options or which is
not available under the First Option under contracts issued in connection with
Section 403(b) plans.
If at any time the interest payments or other payments to any payee under a
settlement option are or become less than $25 each, the Company shall have the
right to change the frequency of payment to such intervals as will result in
payments of at least $25.
At the death of any payee after a Settlement Option becomes operative, the then
present value of the current dollar amount of any unpaid payments certain under
the First or Second Option, or the amount payable at the death of the payee
under the Third Option or the proceeds remaining with the Company under the
Fourth or Fifth option shall be paid in 1 sum to the
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executors or administrators of the payee unless other provision shall have been
specified in the election and approved by the Company. If the Sixth Option has
been selected and becomes operative, then at the death of the last surviving
payee the amount payable thereunder shall be paid in a single sum to the
executors or administrators of such payee unless other provisions have been
specified in the election and approved by the Company. Present values will be
based on the Assumed Investment Rate (AIR) used in determining annuity payments.
The mortality and expense risk charge and the charge for administrative services
will be assessed on all annuity options, including those that do not have a life
contingency and thus no mortality risks.
ANNUITY PERIOD
ASSUMED INVESTMENT RATE (AIR)
The Company will permit the Contract Owner to elect an AIR of 3.5%, 4.5% or 5%
if state law or regulations permit. These AIRs are used merely to determine the
required level of employer contributions in connection with certain pension
plans. It should not be inferred that such rates will bear any relationship to
the actual net investment experience of the Fund.
The choice of the AIR affects the pattern of annuity payments. A higher AIR
will produce a higher initial payment but a more slowly rising series of
subsequent payments (or a more rapidly falling series of subsequent payments)
than a lower AIR.
The objective of a variable annuity contract is to provide level payments during
periods when the economy is relatively stable and to reflect as increased
payments only the excess investment results flowing from inflation or an
increase in productivity. The achievement of this objective will depend in part
upon the validity of the assumption that the net investment rate of the Fund
equals the AIR during periods of stable prices. Subsequent payments will be
smaller than, equal to or greater than the first payment depending upon whether
the actual net investment rate is smaller than, equal to or greater than the
AIR.
The following table shows the Annuity Unit values at each year end for the
different AIRs:
Annuity Unit Values Annuity Unit Values
Assumed Investment Rate Assumed Investment Rate
December 31 3.5% 4.5% 5% December 31 3.5% 4.5% 5%
1985 1.565 1.312 1.202 1990 2.175 1.739 1.556
1986 1.775 1.473 1.343 1991 2.565 2.031 1.809
1987 1.834 1.508 1.368 1992 2.705 2.120 1.476
1988 1.946 1.584 1.431 1993 2.870 2.227 1.964
1989 2.300 1.855 1.667 1994 2.805 2.156 1.892
FORM OF ANNUITY
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DEFERRED ANNUITY CONTRACTS
A Contract Owner selects prior to issue of the deferred annuity contract a
maturity date not later than age 75, except that contracts issued in connection
with qualified employee pension and profit-sharing trusts (described in Section
401(a) and tax exempt under Section 501(a) of the Internal Revenue Code) and
qualified annuity plans (described in Section 403(a) of the Code), including
H.R.-10 trusts and plans covering self-employed individuals and their employees,
provide for annuity payments to commence at the date and under the option
specified in the plan.
If a Contract Owner does not elect otherwise, the contract automatically
provides for a life annuity with 120 monthly payments guaranteed, except in
those cases in which a joint and survivor annuity payout is required by law.
(Under any option providing for guaranteed payments, the number of such payments
which remain unpaid at the date of the Annuitant's death will be paid to the
Annuitant's beneficiaries as such payments become due. (See Accumulation
Period, above.)
In addition to the automatic provision and the non-forfeiture and Settlement
Options, the contract includes 3 optional annuities (described below) each of
which may be selected on either a fixed annuity or variable annuity basis, or a
combination thereof. In the absence of an election to the contrary, the amount
accumulated in the Fund will be applied to provide variable annuity payments and
the amount accumulated for a fixed annuity will be applied to provide fixed
annuity payments. Within the limitations of the plan, the Contract Owner may
only change the maturity date, annuity options or allocation between fixed and
variable up to 30 days prior to the date annuity payments would otherwise
commence. If proceeds become available to a beneficiary, the beneficiary may
choose or change any payment option if proceeds are available to the beneficiary
in one sum. A choice or change must be in writing in a form that the Company
will accept.
IMMEDIATE ANNUITY CONTRACT
The Company offers 5 forms of immediate variable annuity contracts. (See
Accumulation Period--Settlement Options--Second and Third Options, above, and
Optional Annuity Forms, below.)
OPTIONAL ANNUITY FORMS
LIFE ANNUITY
An annuity payable monthly during the lifetime of the Annuitant and terminating
with the last monthly payment preceding the death of the Annuitant. This option
offers the maximum level of monthly payments since there is no guarantee of a
minimum number of payments or provision for a death benefit for beneficiaries.
It would be possible under this option for the Annuitant to receive no annuity
payment if he or she died prior to the due date of the first annuity payment,
one annuity payment if the Annuitant died before the second annuity payment
date, etc.
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JOINT AND LAST SURVIVOR ANNUITY
An annuity payable monthly during the joint lifetime of the Annuitant and a
designated second person, and thereafter during the remaining lifetime of the
survivor.
JOINT AND TWO-THIRDS TO SURVIVOR ANNUITY
An annuity payable monthly during the joint lifetime of the Annuitant and a
designated second person with two-thirds of the number of Annuity Units in
effect during the joint lifetime continuing during the remaining lifetime of the
survivor.
MONTHLY ANNUITY PAYMENTS
DEFERRED ANNUITY CONTRACTS--FIRST MONTH
When annuity payments commence under a deferred annuity contract, the value of
the Contract Owner's account is determined as the product of the value of an
Accumulation Unit on the 14th day prior to the date the first annuity payment is
due and the number of Accumulation Units credited to the Contract Owner's
account as of the date annuity payments commence.
The contract contains tables indicating the dollar amount of the first monthly
payment under each form of annuity for each $1,000 of value of the Contract
Owner's account. The first monthly payment varies according to the form of
annuity selected (see the descriptions above) and the adjusted age of the
Annuitant.
The Company may use sex distinct tables in contracts that are not associated
with employer sponsored plans.
The contract contains a formula for determining the adjusted age, and tables are
determined from the Progressive Annuity Table assuming births in the year 1900
and an AIR of 3.5% per year. The total first monthly annuity payment is
determined by multiplying the number of thousands of dollars of value of the
Contract Owner's account (less applicable premium taxes not previously deducted)
by the amount of the first monthly payment per $1,000 of value from the table in
the contract.
Each contract contains a provision that the first monthly payment will not be
less than 103% of the first monthly payment available under a then currently
issued immediate annuity at the same AIR if a single purchase payment were made
equal to the value which is being applied under the contract to provide annuity
benefits.
For purposes of calculating the first payment under the single payment
immediate annuity contract selected pursuant to this provision, it is assumed
that a deduction for sales and administrative expenses (which currently amounts
to 2% plus $115 for single payment variable annuity contracts) has been made
from the amount applied under this provision.
26
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If the annuity specified in the plan can be obtained at a lower cost to the
Contract Owner by using the same mortality table as is used in determining
payments under group variable annuity contracts then being issued by the Company
for a similar class of Annuitants, it will be done.
DEFERRED ANNUITY CONTRACTS--SUBSEQUENT MONTHS
The amount of the first monthly annuity payment, is divided by the value of an
Annuity Unit for the valuation period in which the payment is due to determine
the number of Annuity Units represented by the first payment. This number of
Annuity Units remains fixed during the annuity period, and in each subsequent
month, the dollar amount of the annuity payment is determined by multiplying
this fixed number of Annuity Units by the then value of an Annuity Unit.
IMMEDIATE ANNUITY CONTRACTS
In the case of immediate annuities, the number of Annuity Units purchased is
specified in the contract. The number of such units is determined by (a)
multiplying the net single payment (after deductions) by the applicable annuity
factor from the annuity tables then used by the Company for immediate variable
annuity contracts, and (b) dividing such product by the value of the Annuity
Unit based on the net investment factor calculated on the Valuation Date
coincident with or next following the date of issue of the contract. This
number of Annuity units remains fixed during the annuity period, and the dollar
amount of the annuity payment is determined by multiplying this fixed number of
Annuity Units by the then value of an Annuity Unit.
FUND VALUATION PROCEDURE
VALUATION DATE
A valuation date is any date on which the New York Stock Exchange is open for
trading. On any date other than a valuation date, the Accumulation Unit value
or the Annuity Unit value will be the same as that on the next following
valuation date.
VALUATION PERIOD
A valuation period is that period of time from the beginning of the day
following a valuation date to the end of the next following valuation date.
ACCUMULATION UNIT VALUE
The value of an Accumulation Unit was set at $1 effective March 1, 1967. The
value of an Accumulation Unit on the last day of any subsequent valuation period
is determined by multiplying such value on the last day of the prior valuation
period by the net investment factor for the current valuation period.
Accumulation Units will be valued daily, as of the close of trading on the New
York Stock Exchange.
27
<PAGE>
ANNUITY UNIT VALUE
The value of an Annuity Unit for the valuation period ending March 1, 1967 was
established at $1. The value of the Annuity Unit for any subsequent valuation
period is determined by multiplying the value for the immediately preceding
valuation period by the product of (a) the net investment factor for the
valuation period containing the 14th day prior to the last day of the current
valuation period and (b) a factor to neutralize the AIR built into the annuity
tables contained in the contract which is not applicable as actual net
investment income is credited instead.
The value of an Annuity Unit on any date upon which the New York Stock Exchange
is closed is its value on the next succeeding valuation date. The net
investment factor for the 14th day prior to the current valuation date is used
in calculating the value of an Annuity Unit in order to permit calculation of
amounts of annuity payments and mailing of checks in advance of their due dates.
Such checks will normally be issued and mailed at least 3 days before the due
date.
NET INVESTMENT FACTOR
The net investment rate for any valuation period is equal to the gross
investment rate expressed in decimal form to 8 places less a deduction of the
product of .00363% (1.325% on an annual basis; deduction for providing
investment management, annuity rate promises and expense promises) and the
number of days in the valuation period.
The gross investment rate is the quotient of 2 factors, "a" and "b." "a" is
equal to investment income for the valuation period, plus capital gains, minus
capital losses and taxes (see Federal Tax Status, below and in the SAI.) "b" is
equal to the value of the Fund at the beginning of the valuation period. "a" is
divided by "b" to yield the gross investment rate. The gross investment rate
may be positive or negative.
The net investment factor for the Fund is 1.0 plus the net investment rate for
the period. (See Purchase and Pricing of Securities Being Offered, in the SAI,
for an illustration of the method of calculation of Accumulation Unit value and
Annuity Unit value.)
VALUING THE FUND'S ASSETS
In determining the value of the assets of the Fund, each security traded on a
national securities exchange is valued at the last reported sale price on the
valuation date. If there has been no sale on such day, then the value of such
security is taken to be the average of the reported bid and asked prices at the
time as of which the value is being ascertained.
Any security not traded on a securities exchange but traded in the over-the-
counter market is valued at the average of the quoted bid and asked prices on
the valuation date. Securities, including restricted securities, if any, or
other assets for which market quotations are not readily available are valued at
fair value as determined in good faith by the Board
28
<PAGE>
of Managers.
FEDERAL TAX STATUS
The following is a general discussion of the federal income tax rules applicable
with respect to the Contracts as of the date of the Prospectus. Further
information is provided in the Statement of Additional Information (SAI).
NEITHER THESE DISCUSSIONS NOR THOSE IN THE SAI ARE INTENDED AS TAX ADVICE. This
section does not discuss the federal tax consequences resulting from every
possible situation, nor does it discuss any applicable state, local or foreign
tax laws. Prior to the purchase of a Contract, a prospective purchaser should
consult a competent tax adviser.
GENERAL
The operations of the Fund form a part of, and are taxed with, the operations of
the Company under the Internal Revenue Code of 1986, as amended (the "Code").
Under existing federal income tax law, the Company does not anticipate that it
will incur any federal income tax liability attributable to the Fund, and
therefore the Company does not intend to make provision for any such taxes.
However, if the Company determines that it may be taxed on income or gains
attributable to the Fund or certain types of Contracts, then the Company may
impose a charge against the Fund (with respect to some or all Contracts) in
order to provide for payment of such taxes.
QUALIFIED CONTRACTS
The Contracts may be purchased in connection with the following types of tax-
favored retirement plans: (1) annuity contracts purchased for employees by
public school systems and Section 501(c)(3) organizations, qualified under
Section 403(b) of the Code; (2) pension and profit-sharing plans of self-
employed individuals ("H.R.10" or "Keogh" plans) or corporations, qualified
under Section 401(a) or 403(a) of the Code; (3) individual retirement annuities,
qualified under Section 408 of the Code; (4) deferred compensation plans of
state or local governments and tax exempt organizations, qualified under Section
457 of the Code; and (5) simplified employee pension plans, qualified under
Section 408(k) of the Code. Participants under such plans, as well as Contract
Owners, annuitants and beneficiaries, should be aware that the rights of any
person to any benefits under such plans may be subject to the terms, conditions
and limitations of the plans themselves, regardless of the terms and conditions
of the Contracts. Purchasers of Contracts for use with any qualified plan, as
well as plan participants and beneficiaries, should consult counsel and other
competent advisers as to the suitability of the Contracts to their specific
needs, and as to applicable Code limitations and tax consequences.
The tax rules applicable to these plans, including restrictions on contributions
and benefits, taxation of distributions, and any tax penalties, vary according
to the type of the plan and its terms and conditions. Generally, in the case of
a distribution under a Contract purchased in connection with these plans (other
than plans qualified under
29
<PAGE>
Section 457 of the Code), the amount received is taxable only to the extent it
exceeds the "investment in the contract." The "investment in the contract"
equals the portion of plan contributions invested in the Contract that was not
excluded from the individual's gross income, and may be zero. Special favorable
tax treatment may be available for lump sum distributions, and partial or total
distributions that are "rolled over" to other retirement programs within 60 days
of receipt. Adverse tax consequences may result from excess contributions,
distributions prior to age 59 1/2 (subject to certain exceptions), distributions
that commence later than dates specified by the Code, distributions in excess of
a specified annual amount, and in certain other circumstances.
MULTIPLE CONTRACTS
All non-qualified contracts entered into after October 21, 1988, and issued by
the same insurance company (or its affiliates) to the same contract owner during
any calendar year will be treated as a single contract, for tax purposes.
WITHHOLDING
Pension and annuity distributions generally are subject to withholding for the
recipient's federal income tax liability at rates that vary according to the
type of distribution and the recipient's tax status. Recipients, however, may
be provided the opportunity to elect not to have tax withheld from
distributions. Distributions from Section 457 plans are subject to the general
wage withholding rules. Under the Unemployment Compensation Amendments of 1992
("UCA"), twenty percent (20%) income tax withholding may apply to "eligible
rollover distributions." All taxable distributions from qualified plans and
Section 403(b) annuities are "eligible rollover distributions," except (1)
annuities paid out over life or life expectancy, (2) installments paid for a
period spanning ten years or more, and (3) required minimum distributions. The
UCA imposes a mandatory twenty percent (20%) income tax withholding on any
eligible rollover distribution that the holder does not elect to have paid in a
direct rollover to another qualified plan, Section 403(b) annuity, or individual
retirement account.
VOTING RIGHTS
When a meeting is to be held, the Rules and Regulations of the Fund specify a
quorum as 25% of the Contract Owners entitled to vote at an annual or special
meeting. Therefore, less than a majority of those entitled to vote could take
action which is not prohibited by law which could affect other Contract Owners'
rights.
The number of votes which a Contract Owner may cast for Participants in the
accumulation period is equal to the number of Accumulation Units under the
contract. For Annuitants receiving annuity payments, the Contract Owner may
cast the number of votes equal to (a) the amount of assets established in the
Fund to meet the annuity obligations related to such Annuitants divided by (b)
the value of an Accumulation Unit. The amount of the assets established in the
Fund for an Annuitant receiving annuity payments will
30
<PAGE>
decrease as annuity payments are made.
Since assets are maintained in the Fund with respect to other contracts than
those offered by this prospectus, Contract Owners under such other contracts are
also entitled to vote. The number of votes which they are entitled to cast is
computed in the same manner as for Contract Owners of the variable annuity
contracts offered by this prospectus.
The number of votes each Contract Owner may cast shall be determined as of a
date to be chosen by the Board of Managers within 90 days of the date of the
meeting, and at least 20 days' written notice of the meeting will be given. To
be entitled to vote, a Contract Owner must have been an owner on both the date
as of which the number of votes was determined and the date of the written
notice.
During the accumulation period, a Participant under a group contract with
respect to which assets are maintained in the Fund or an employee covered by an
individual contract issued in connection with an H.R.-10 plan or pursuant to
Section 403(b) of the Internal Revenue Code will have the right to instruct the
Contract Owner with respect to the votes attributable to his or her individual
account, and a Participant under a group contract or an employee covered by an
individual contract issued pursuant to a qualified employee pension or profit-
sharing trust or a qualified annuity plan (other than one involving an H.R.-10
plan or pursuant to Section 403(b) will have the right to instruct the Contract
Owner only with respect to votes attributable to payments made by him or her, if
any, and with respect to additional votes that are authorized by the terms of
the plan, if any. All other votes entitled to be cast during such period under
such a trust or plan may be cast by the Contract Owner in its sole discretion.
During the annuity period, every Participant and every employee will have the
right to instruct the Contract Owner with respect to all votes attributable to
the amount of assets established in the Fund to meet the annuity obligations
related to such Participant or employee. Each Contract Owner and each employee
and Participant having the right to instruct a Contract Owner with respect to
any votes will receive all proxy materials.
The Rules and Regulations of the Fund provide that each Contract Owner shall
cast the votes with respect to which instructions from an employee or a
Participant have been received in accordance with such instructions and all
votes with respect to which no instructions are received, other than those as to
which no employee or Participant is entitled to give instructions, shall be cast
in the same proportion as are votes with respect to which instructions are
received by such Contract Owners. If no one is entitled to instruct a Contract
Owner or if a Contract Owner receives no instructions, all votes to which such
Contract Owner is entitled may be cast in the Contract Owner's sole discretion.
The Company and the Fund have no duty to ascertain whether Contract Owners
actually cast votes under such contracts in accordance with the voting rights
provisions described in this section.
31
<PAGE>
The Rules and Regulations of the Fund permit the Board of Managers to dispense
with an annual meeting in any year in which the Investment Company Act of 1940
does not require a Contract Owner to vote on: 1) election of members of the
Board of Managers; 2) approval of an investment advisory agreement; 3)
ratification of the independent public accountant; or 4) approval of a
distribution agreement. Each year, prior to the date set by the Rules and
Regulations for the annual meeting, the Board of Managers will determine whether
such meeting need be held.
Special meetings may be called for any proper purpose when permitted by
applicable law. As a result of the option for the Board to dispense with annual
meetings of Contract Owners, special meetings must be called whenever there is a
change in the Fund's independent public accountant, and whenever fewer than 50%
of the existing Members of the Board of Managers has been elected by Contract
Owners. Also, since dispensing with annual meetings results in perpetuating
Members of the Board of Managers in office, the Fund is required to call a
special meeting when Contract Owners who meet the standards of Section 16(c) of
the Investment Company Act of 1940 apply to the Fund requesting that such a
meeting be called for the purpose of removing one or Members of the Board of
Managers. That section also requires that the Fund facilitate communication
between Contract Owners who wish to solicit the approval of other Contract
Owners for the calling of such a meeting. Additional information about this
procedure is available from Fund management.
LEGAL PROCEEDINGS
As of the date of this Prospectus, neither the Fund nor the Company was involved
in any material pending legal proceedings, other than ordinary routine
litigation incidental to the business.
OTHER ANNUITY CONTRACTS
Group variable annuity contracts are also sold by the Company. Assets with
respect to the group variable annuity contracts are also held in the Fund and
are affected by its investment experience. All such contracts initially meet
the requirements of Section 403(b) of the Internal Revenue Code, or are issued
with respect to (a) plans initially qualifying under Section 401(a) of the Code,
(b) annuity plans initially qualifying under Section 403(a) of the Code, (c)
retirement plans initially qualifying for special tax treatment under Section
408 of the Code, or (d) governmental deferred compensation plans as defined in
Section 414(d) or meeting the requirements of Section 457 of the Code.
CUSTODIAN
Bankers Trust Company, 14 Wall Street, 4th Floor, New York, New York 10005
("Bankers") is Custodian for the Fund pursuant to a Custodian Agreement
effective March 4, 1985. Under this Agreement, Bankers shall (1) receive and
disburse money; (2) receive and hold securities; (3) transfer, exchange, or
deliver securities; (4) present for payment coupons and other income items,
collect interest and cash dividends received, hold stock
32
<PAGE>
dividends, etc.; (5) cause escrow and deposit receipts to be executed; (6)
register securities; and (7) deliver to the Fund proxies, proxy statements, etc.
STATE REGULATION
As a life insurance company organized and operating under Indiana law, the
Company is subject to provisions governing such companies and to regulation by
the Indiana Commissioner of Insurance.
The Company's books and accounts are subject to review and examination by the
Indiana Insurance Department (Department) at all times and a full examination of
its operations normally is conducted by the Department at least once in every 5
years.
TABLE OF CONTENTS OF THE
STATEMENT OF ADDITIONAL INFORMATION (SAI)
ITEM Page
General Information and History....................................... B-2
Special Terms......................................................... B-2
Investment Objectives and Policies of the Fund........................ B-2
Management............................................................ B-2
Investment Advisory and Related Services.............................. B-3
Brokerage Allocation.................................................. B-3
Purchase and Pricing of Securities Being Offered...................... B-3
Distribution of Variable Annuity Contracts............................ B-4
Federal Tax Status.................................................... B-4
Other Services........................................................ B-6
Underwriters.......................................................... B-6
Determination of Net Asset Value...................................... B-6
Financial Statements.................................................. B-7
NOTE: SEE THE COVER PAGE OF THIS PROSPECTUS FOR DETAILS ABOUT HOW TO OBTAIN A
COPY OF THE SAI.
33
<PAGE>
LINCOLN NATIONAL
VARIABLE ANNUITY
FUND A (INDIVIDUAL)
PROSPECTUS
APRIL 30, 1995
INDIVIDUAL VARIABLE ANNUITY
CONTRACTS ISSUED BY
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
FORT WAYNE, INDIANA
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THE PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF, OR SOLICITATION OF
AN OFFER TO ACQUIRE, ANY INTEREST OR PARTICIPATION IN THE VARIABLE ANNUITY
CONTRACTS OFFERED BY THIS PROSPECTUS IN ANY JURISDICTION TO ANYONE TO WHOM IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION IN SUCH JURISDICTION.
To obtain a copy of the Statement of Additional Information, please complete and
mail the following form:
--------------------------------------------------------------------------------
Please send me a copy of the current Statement of Additional Information for
Lincoln National Variable Annuity Fund A (Individual):
(Please Print)
Name:__________________________________________________________________________
Address:_______________________________________________________________________
City____________________________ State_____________________ Zip________________
Mail to: Kim Oakman, The Lincoln National Life Insurance Company, P.O. Box 2340,
Fort Wayne, Indiana 46801
Form 10586 4/95
34
<PAGE>
LINCOLN NATIONAL
VARIABLE ANNUITY
FUND A (GROUP)
1300 South Clinton Street, Fort Wayne, Indiana 46802
Telephone: 1-800-348-1212
GROUP VARIABLE ANNUITY CONTRACTS
ISSUED BY:
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
The group variable annuity contracts offered by this prospectus are designed and
offered: (a) for annuity purchase plans adopted by public school systems and
Section 501(c)(3) organizations pursuant to Section 403(b) of the Internal
Revenue Code of 1986, as amended ("Code"), (b) for qualified employee pension
and profit-sharing trusts (described in Section 401(a) and tax exempt under
Section 501(a) of the Code) and qualified annuity plans (described in Section
403(a) of the Code), including H.R.-10 plans, (c) for Individual Retirement
Annuities and Accounts adopted by or on behalf of individuals pursuant to
Section 408 of the Code and (d) for Simplified Pension Plans pursuant to Section
408(k) of the Code. Such qualified plans provide special tax treatment to
participating employees and self-employed individuals and their beneficiaries.
Contracts offered by this prospectus are also designed for governmental and
charitable organizations deferred compensation plans meeting the requirements of
Section 457 of the Code.
The principal investment objective of Lincoln National Variable Annuity Fund A
(the Fund) is the long-term growth of capital in relation to the changing value
of the dollar. A secondary investment objective is the production of current
income. The Fund seeks to accomplish these objectives by investing in equity
securities, principally common stocks.
Depending on the provisions of the plan, the Participant or Contract Owner may
elect, if the plan so provides, that a portion (in multiples of 10%) of payments
be applied by the Company to purchase fixed-dollar accumulation units under the
variable annuity contract. However, unless reference is specifically made to
fixed-dollar elements, this prospectus relates to variable elements under the
Separate Account.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS SETS FORTH CONCISELY THE INFORMATION ABOUT THE FUND THAT A
PROSPECTIVE INVESTOR OUGHT TO KNOW BEFORE INVESTING. PLEASE READ IT CAREFULLY
AND RETAIN IT FOR FUTURE REFERENCE.
ADDITIONAL INFORMATION ABOUT THE FUND HAS BEEN FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION. THAT STATEMENT OF ADDITIONAL INFORMATION (SAI), DATED APRIL
30, 1995, HAS BEEN INCORPORATED BY REFERENCE INTO THIS
<PAGE>
PROSPECTUS AND WILL BE PROVIDED ON REQUEST AND WITHOUT CHARGE. WRITE KIMBERLY
OAKMAN, THE LINCOLN NATIONAL LIFE INSURANCE COMPANY, P.O. BOX 2340, FORT WAYNE,
INDIANA 46801, OR CALL 1-800-348-1212, extension 4912. A TABLE OF CONTENTS FOR
THE SAI APPEARS ON THE LAST PAGE OF THIS PROSPECTUS.
____________
THIS PROSPECTUS IS DATED APRIL 30, 1995
TABLE OF CONTENTS
ITEMS PAGE
Special Terms 2
Expense Table 3
Synopsis 4
Per-Accumulation-Unit Income and Capital Changes 5
Financial Statements 5
The Company 5
The Fund 6
Investment Objectives and Policies of the Fund 6
Charges and Deductions 7
Investment Management 9
The Variable Annuity Contracts 9
Accumulation Period 11
Annuity Period 13
Fund Valuation Procedure 15
Federal Tax Status 16
Voting Rights 16
Legal Proceedings 17
Other Annuity Contracts 17
Custodian 18
State Regulation 18
Table of Contents of the Statement of Additional Information 18
SPECIAL TERMS
As used in this prospectus the following terms have the indicated meanings.
ACCUMULATION UNIT: A statistical device used to determine the value of an
individual account prior to the commencement of annuity payments.
ANNUITANT: The person on whose life or life expectancy the payments are based.
ANNUITY: A series of payments for (a) life, (b) life with either a minimum
number of payments or an ascertainable sum guaranteed, or (c) the joint lifetime
of the Annuitant and another person and thereafter during the lifetime of their
survivor.
ANNUITY RATE PROMISE: The promise that the amount of annuity payments will not
be affected by the fact that Annuitants live longer than expected.
2
<PAGE>
ANNUITY UNIT: A statistical device used to determine the amount of annuity
payments.
CONTRACT OWNER: The annuitant, or other designated person, except in cases where
a Contract is issued to a trustee of a trust or a custodian of a qualified
pension or profit-sharing plan under Section 401(a) of the Code or of an
Individual Retirement Annuity under Section 408 of the Code, or where a Contract
is issued in connection with a deferred compensation plan pursuant to Section
457 of the Code. In cases where the Contract is issued to such a trustee or
custodian, as defined above, the Contract Owner is the trustee or custodian.
FIXED-DOLLAR ANNUITY: An annuity with payments which remain fixed throughout the
payment period and which do not reflect the investment experience of a separate
account.
PAYMENTS: Amounts paid to purchase an annuity by or on behalf of an Annuitant.
PARTICIPANT: The individual participating in a qualified pension or profit-
sharing plan pursuant to Section 401(a) of the Code, a deferred compensation
plan pursuant to Section 457 of the Code, a tax deferred annuity pursuant to
Section 403(a) of the Code, and a tax sheltered annuity pursuant to 403(b) of
the Code.
SEPARATE ACCOUNT: Assets set aside in a separate account by The Lincoln National
Life Insurance Company with respect to payments received under the variable
annuity contracts offered by this prospectus and certain other annuity contracts
and designated as Lincoln National Variable Annuity Fund A.
TERMINATION AND SURRENDER: Surrender means redemption; the term redemption may
be used interchangeably with surrender. The termination options permit
redemption as set forth in Accumulation Period, below.
VARIABLE ANNUITY: An annuity providing for payments varying in accordance with
the changing values of securities held in a separate account.
VARIABLE ANNUITY CONTRACT: An agreement between the Company and the Contract
Owner providing a variable annuity.
3
<PAGE>
<TABLE>
<CAPTION>
EXPENSE TABLE
<S> <C> <C>
CONTRACT OWNER TRANSACTION EXPENSES
SINGLE PERIODIC
PREMIUM PREMIUM
Sales Load Imposed on Purchases
(as a percentage of purchase payments) 2%+$50 4.25%
Administrative Expense $ 65.00 1.00%
Minimum Death Benefit (if elected) .75% .75%
ANNUAL EXPENSES (as a percentage of average net assets)
Management Fees .32%
Annuity Rate and Expense Risk Fees 1.00%
Total Annual Expenses 1.32%
EXAMPLE*
1 YEAR 3 YEARS 5 YEARS 10 YEARS
S.P. P.P. S.P. P.P. S.P. P.P. S.P. P.P.
At the end of the
applicable time period,
you would pay the
following expenses on a
$1,000 investment,
assuming 5% annual
return on assets: $147 $66 $173 $95 $202 $126 $287 $218
</TABLE>
*The figures are the same, whether the Contract Owner holds the contract,
surrenders it, or annuitizes. The expenses shown do not include charges for the
minimum death benefit, since the purchase of that benefit is optional with the
client. [S.P.=Single Premium; P.P.=Periodic Payment]
This table is provided to assist the Contract Owner in understanding the various
costs and expenses that he or she will bear directly or indirectly. The table
reflects expenses of operating both the Variable Annuity Contract and the Fund.
For a more complete description of the various costs and expenses involved, see
"Charges and Deductions" in this Prospectus. Premium taxes may also be
applicable, although they do not appear in the table. THE "Example" SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY
BE GREATER OR LESSER THAN THOSE SHOWN. This table is unaudited.
4
<PAGE>
SYNOPSIS
WHAT ARE THE VARIABLE ANNUITIES BEING OFFERED?
The variable annuity contracts offered by this prospectus are of 2 types:
immediate annuities and deferred annuities. Deferred annuities may be purchased
with a single payment or with periodic payments. Immediate annuities may only
be purchased with a single payment.
WHO IS THE PRINCIPAL UNDERWRITER?
The Lincoln National Life Insurance Company (the Company), a registered broker-
dealer, is the principal underwriter. It makes contracts available through its
registered representatives licensed to sell life insurance policies and annuity
contracts.
INVESTMENT ADVISER--NATURE OF BUSINESS
The Company, a stock life insurance company providing life insurance and
annuities, serves as investment adviser to the Fund.
WHAT FEES ARE CHARGED TO THE FUND?
For providing investment management services, the Company (the adviser) will
make daily deductions aggregating .323% annually of the average daily value of
the Fund. (See Investment Management, below.)
Daily deductions of 1.002% annually of the average daily value of the Fund are
also made for annuity rate and expense guarantees. (See Charges and Deductions,
below.)
In general, see Expense Table on page 3.
WHAT IS THE MAXIMUM SALES LOAD?
The maximum sales load under a periodic payment contract is 4.49% of the net
amount invested which is 4.25% of the offering price (gross payment received).
Under a single payment contract, the maximum sales load is 3.9% of the net
amount invested. The maximum sales load is 2% of the offering price (gross
payment received) plus $50.
There are provisions for reduced sales charges. (See Charges and Deductions,
below.)
ADMINISTRATIVE EXPENSE CHARGES
In addition to the maximum sales load described above, a charge is also deducted
for administrative expenses. This charge is a maximum of 1% under periodic
payment contracts; under single payment contracts, the charge is $65.
5
<PAGE>
ARE THERE ANY OTHER DEDUCTIONS, CHARGES OR PENALTIES?
If the minimum death benefit has been elected, an additional deduction of .75%
is made from each purchase payment. Deductions are also made for any applicable
premium taxes. If you withdraw contract value or surrender the contract before
the annuity period begins, you may be subject to a penalty tax under Section
72(q) of the Code.
IS THERE A SHORT-TERM CANCELLATION RIGHT?
Within 10 days after this contract is first received, it may be cancelled for
any reason by delivering or mailing it to the agent through whom it was
purchased or to the Home Office of the Company. Upon cancellation, this
contract shall be void from the beginning and the Company will return the value
of any payments made to the variable account (including the sales and
administrative charge).
IS A MINIMUM INVESTMENT REQUIRED?
Normally, under a periodic payment contract, the minimum amount of any scheduled
purchase payment is $25 and the scheduled purchase payments must total at least
$600 per year. Normally, under a single payment contract the minimum payment is
$5,000.
INVESTMENT OBJECTIVES
The principal investment objective of the Fund is the long-term growth of
capital in relation to the changing value of the dollar. A secondary investment
objective is the production of current income. (See Investment Objectives and
Policies of the Fund, below.)
TYPE OF FUND
The Fund is a segregated investment account of the Company, operated as an open-
end, diversified management investment company, which continuously offers its
variable annuity contracts for sale.
REDEMPTION OR REPURCHASE PRICE
Payments upon redemption will be made at the value of the account without any
charge. (See Accumulation Period, below.)
6
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY FUND A
PER-ACCUMULATION-UNIT INCOME AND CAPITAL CHANGES
(For an accumulation unit outstanding throughout the year)
The following per-unit income and capital changes table of the Fund has
been audited by Ernst & Young LLP, independent auditors. This table should be
read in conjunction with the Fund's financial statements, notes and report of
independent auditors included in the Statement of Additional Information. The
information is for years ended December 31.
PER-ACCUMULATION-UNIT INCOME AND CAPITAL CHANGES
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
----- ------ ------ ------ ------ ------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income $.217 $ .204 $ .206 $ .181 $ .146 $ .183 $ .150 $ .130 $ .105 $ .094
Expenses .095 .090 .083 .076 .064 .062 .053 .055 .044 .034
----- ------ ------ ------ ------ ------ ------ ------ ------- -------
Net investment income .122 .114 .123 .105 .082 .121 .097 .075 .061 .060
Net realized and unrealized
gain (loss) on investments (.040) .522 (.099) 1.402 (.102) .786 .266 .166 .458 .657
----- ------ ------ ------ ------ ------ ------ ------ ------- -------
Increase (decrease) in
accumulation unit value .082 .636 .024 1.507 (.020) .907 .363 .241 .519 .717
Accumulation unit value
at beginning of year 7.116 6.480 6.456 4.949 4.969 4.062 3.699 3.458 2.939 2.222
----- ------ ------ ------ ------ ------ ------ ------ ------- -------
ACCUMULATION UNIT
VALUE AT END OF YEAR $7.198 $7.116 $6.480 $6.456 $4.949 $4.969 $4.062 $3.699 $3.458 $2.939
====== ====== ====== ====== ====== ====== ====== ====== ======= =======
RATIOS
Ratio of expenses to
average net assets 1.27% 1.27% 1.27% 1.27% 1.28% 1.28% 1.28% 1.30% 1.28% 1.29%
Ratio of net investment
income to average
net assets 1.75% 1.72% 2.01% 1.85% 1.72% 2.63% 2.49% 1.82% 1.86% 2.38%
Portfolio turnover rate 64.09% 49.90% 70.97% 36.99% 59.57% 201.20% 178.95% 146.44% 59.64% 28.66%
Number of accumulation
units outstanding at
end of year (expressed
in thousands) 9,908 11,538 12,742 14,185 16,554 19,522 22,564 26,247 30,133 34,563
</TABLE>
7
<PAGE>
FINANCIAL STATEMENTS
Financial statements for the Fund and for the Company are in the Statement of
Additional Information (SAI) for the Fund. To obtain a copy of the SAI, call or
write to the source listed on page 1 of this Prospectus.
THE COMPANY
The Lincoln National Life Insurance Company (the Company) is a stock life
insurance company organized in 1905 under the laws of the State of Indiana. It
is principally engaged in the sale of life insurance, annuities, and
reinsurance. The Company is a wholly-owned subsidiary of Lincoln National
Corporation, a publicly-held insurance holding company. The Home Office of the
Company (principal business address) is located at 1300 South Clinton Street,
Fort Wayne, Indiana. The Company's Home Office mailing address is P.O. Box
2340, Fort Wayne, IN 46801.
THE FUND
On September 16, 1966 the Board of Directors of the Company established a
segregated investment account designated Lincoln National Variable Annuity Fund
A (the Fund or Variable Contract) in accordance with certain provisions of
Indiana Insurance Law. The Fund is an open-end, diversified management
investment company registered with the Securities and Exchange Commission (SEC)
under the Investment Company Act of 1940, as amended (the 1940 Act).
The present Board of Managers for the Fund has been elected by the Contract
Owners (See Voting Rights, below.) A majority of these Members are persons who
are not otherwise interested persons of the Company as the term "interested
persons" is defined in the 1940 Act. Members of the Board of Managers are also
Members of the Board of Managers of Lincoln National Variable Annuity Fund B
(Fund B), and are Directors of the following: 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 Putnam
Master Fund, Inc.; Lincoln National Social Awareness Fund, Inc.; and Lincoln
National Special Opportunities Fund, Inc. All of the foregoing (including Fund
B) are registered investment companies. The Board is responsible, among other
things, for authorizing investment programs for the Fund, in
8
<PAGE>
accordance with the Fund's investment objectives and policies; for recommending
to Contract Owners any appropriate changes to those objectives and policies; and
for contracting for certain services necessary to the operation of the Fund.
The Indiana law under which the Fund was established provides it shall not be
chargeable with liabilities arising out of any other business which the Company
may conduct and which has no specific relation to or dependence upon the Fund.
Accordingly, the assets of the Fund will be held exclusively for the benefit of
Participants in, and persons entitled to payment under, variable annuity
contracts. Income, gains, and losses, whether or not realized, from assets
allocated to the Fund are, in accordance with the applicable variable annuity
contracts, credited to or charged against the Fund without regard to other
income, gains, or losses of the Company. The assets of the Fund may not be
charged with liabilities arising out of any other business of the Company. The
obligations arising under the variable annuity contracts are obligations of the
Company. The Fund is a "separate account" as that term is defined under the
federal securities laws.
The Company, in addition to serving as Investment Adviser for the Fund (See
Investment Management, below), provides overall management of the Fund's
business affairs, subject to the authority of the Board of Managers.
INVESTMENT OBJECTIVES AND POLICIES OF THE FUND
All investment objectives and policies shown below (except Restrictions 9
through 11) are fundamental and may not be changed without approval of Contract
Owners casting a majority of the votes entitled to be cast (see Voting Rights,
below).
OBJECTIVES
1. The principal investment objective is the selection of investments for the
long-term growth of capital in relation to the changing value of the dollar.
Investments will be made with the objective of providing annuity payments which
may tend to reflect changes in the value of the dollar. An additional but
secondary investment objective is the production of current income.
2. Income and realized capital gains will be reinvested.
3. The Fund's assets will be kept fully invested except that (a) sufficient
cash will be kept on hand to meet variable annuity contract payments and (b)
reasonable amounts of cash or United States Government securities may be held
for limited periods pending investment in accordance with investment policies.
4. The Fund's assets will usually be invested in a portfolio of equity
securities, mainly common stocks, diversified over industries and companies.
Changes in such diversification may be made from time to time to take into
account changes in the outlook for particular industries or companies. The
investments of the Fund will not, however, be concentrated in any one industry,
and no more than 25% of the Fund's assets will be invested in any one industry.
Such diversification does not eliminate the risks inherent in the making of
equity investments. The purchasing of common stocks may occur in rising or
declining markets.
Further, when the Board of Managers determines that investments of other types
may be advantageous on the basis of combined considerations of risk, income and
appreciation, investments may be made in bonds, notes or other evidences of
indebtedness, issued publicly or placed privately, of a type customarily
purchased for investment by institutional investors including United States
Government securities. Such investments, if made, constitute
9
<PAGE>
a defensive policy. Such investments may, or may not, be convertible into stock
or be accompanied by stock purchase options or warrants for the purchase of
stock. Warrants are purely speculative in that they have no voting rights, pay
no dividends and have no rights with respect to the assets of the corporation
issuing them. A warrant, basically, is an option to purchase a given security
within a specified period for a specified price. The prices of warrants do not
necessarily move parallel to the price of the underlying securities.
RESTRICTIONS
The investments of the Fund are subject to the provisions of the Indiana
Insurance Law concerning earnings records, preferred stock coverage, self-
dealing, real estate holdings and concentration.
Loans will not be made, but the purchase of a portion of an issue of bonds,
debentures or other securities publicly distributed or privately placed with
financial institutions shall not be considered the making of a loan.
The Fund will not:
1. Invest more than 5% of the value of the Fund's assets in securities of
any one issuer, except obligations of the United States Government and
instrumentalities thereof.
2. Acquire more than 10% of the voting securities of any one issuer.
3. Borrow money except for temporary or emergency purposes in an amount up
to 5% of the value of the assets.
4. Underwrite securities of other issuers.
5. Purchase or sell real estate as a principal activity. However, the right
is reserved to invest up to 10% of the value of the assets of the Fund in
real properties.
6. Purchase commodities or commodity contracts.
7. Make short sales of securities.
8. Make purchases on margin, except for such short-term credits as are
necessary for the clearance of transactions.
9. Invest in the securities of a company for the purpose of exercising
management or control.
10. Place emphasis upon obtaining short-term trading profits, but it may
engage in short-term transactions in the event that a change in economic
conditions or a rapid appreciation or depreciation of stock prices occurs.
The Fund's portfolio turnover rates were 64.09% for 1994, 49.9% for 1993,
and 70.97% for 1992. The securities markets in general have experienced
volatility due to rapidly shifting economic trends. This volatility can
affect turnover.
11. Plan to make investments in securities of other investment companies.
However, the right is reserved to make such investments up to a maximum of
10% of the value of the assets of the Fund, provided that not more than 3%
of the total outstanding voting stock of any one investment company may be
held.
10
<PAGE>
SPECIAL RISKS
Investments, if made, in any securities of the type which are privately placed
with financial institutions and which cannot be sold to the public without prior
registration of such securities with the SEC, will be limited in order that the
total of such investments will not exceed 10% of the value of the Fund's assets.
Such securities are commonly referred to as "restricted securities." Restricted
securities may not be readily marketable and the Fund may not be able to dispose
of its holdings in these securities at reasonable price levels if such
securities are ever acquired. Furthermore, registration of restricted securities
under the Securities Act of 1933 may be necessary if the Fund is to sell such
securities publicly. Should a considerable period of time elapse between the
time that a decision is made to sell restricted securities and the time when the
Fund may be permitted to sell them publicly under an effective registration
statement, adverse market conditions could develop with the result that the Fund
might not be able to obtain as favorable a price as that prevailing at the time
the decision to sell was made. During 1994 no restricted securities were held.
CHARGES AND DEDUCTIONS
DEDUCTION FROM PURCHASE PAYMENTS--SALES AND ADMINISTRATIVE EXPENSES
Under periodic payment contracts, a deduction of 4.25% for sales expenses and 1%
for administrative expenses is made from each purchase payment when received.
Under single payment contracts, which contemplate that lump sum amounts under
pension or retirement plans will be applied to the purchase of an annuity, the
deduction from each purchase payment made on behalf of a Participant for sales
and administrative expenses is 2% plus $50 for sales expenses and $65 for
administrative expenses. In addition to periodic payments, the Contract Owner
may make single payments on behalf of Participants. The deduction from such a
payment made for a Participant is 2%.
Administrative expenses include salaries, rent, postage, telephone, travel,
legal, actuarial and accounting fees, office equipment, and stationery. The
administrative charge is designed to cover the expense of administering these
contracts, and the Company does not expect to realize a profit by virtue of this
charge.
These services are provided under a Sales and Administrative Services Agreement
executed by the Company and the Fund. The Agreement continues in effect from
year to year if approved at least annually by a majority of the Board of
Managers who are not interested persons of the Company or the Fund, cast in
person at a meeting called for the purpose of voting on such approval.
With respect to the regular Group Variable Annuity Contract, should the Company
increase the combined sales and administrative expense charge, then, for
existing holders of periodic payment contracts, the Company promises not to
deduct more than 5.25% from any year's payment, as long as
11
<PAGE>
that payment is no more than twice the original year's payment. The excess will
be charged at the higher rate. With respect to the Group Variable Annuity
Deposit Administration Contract, should the Company increase the combined sales
and administrative expense charge, then, for existing holders of periodic
payment contracts, the Company promises not to deduct more than 5.25% from any
of the payments made in the first 14 contract years immediately following the
first contract year, as long as the payment in any of those 14 years is no more
than twice the original payment. The excess will be charged at the higher rate.
For both types of contracts, the deduction for sales and administrative expenses
may be decreased by the application of experience rating credits.
Deductions for sales and administrative expenses made from purchase payments
applied to purchase fixed-dollar accumulation units are the same as those made
from payments applied to the Separate Account.
Over the actuarial life of the contracts issued by the Fund, the aggregate sales
load is expected to exceed the aggregate distribution expenses associated with
those contracts. To the extent that sales load does not exceed distribution
expenses during the first year of those contracts, the Company pays those
expenses out of its general assets. Aggregate sales load in years after the
first exceeds aggregate distribution expenses in those years.
For sales and administrative expenses, the Fund paid $14,573 in 1994, $18,663 in
1993, and $23,468 in 1992.
REDUCED CHARGES
No sales or administrative expense charge is deducted from:
1. Amounts transferred between the fixed and the separate account portions of
contracts offered by this prospectus, if such transfers are permitted by the
underwriting practices of the Company.
2. Purchase payments under contracts offered by this prospectus to (a)
Members of the Board of Managers and officers of the Fund, (b) directors,
officers and full-time employees of the Company, if they spend more than 50% of
their working time either (1) rendering investment advisory services to the Fund
or Fund B, or supervising persons who spend more than 50% of their working time
rendering such services, or acting in a position necessary for such persons to
render such services, or (2) selling or offering for sale contracts of the Fund
or of Fund B, or supervising persons who spend more than 50% of their working
time selling or offering such contracts for sale, or acting in a position
necessary for such persons to sell or offer such contracts for sale, and (c)
sales representatives of the Company, or to any trust, pension, profit-sharing,
or other benefit plan for such persons, provided that each of the foregoing
persons has acted as above described for not less than 90 days, and provided
further that such sales are made with the written assurances of the purchaser
that the purchase is made for investment purposes and that the contracts will
not be resold except through redemption; and/or
12
<PAGE>
3. Payments under contracts offered by this prospectus to the owners of or
beneficiaries under life insurance, endowment, or annuity contracts issued by
the Company in cases where and to the extent that proceeds payable under such
policies are applied to the purchase of contracts offered by this prospectus.
Contract Owners of Fund B who meet the requirements of Sections 457 and 414(d)
of the Code may exchange their contracts for contracts of this Fund in an equal
dollar amount at the respective Accumulation Unit values at the time of the
exchange (i.e., without incurring any additional sales load or other charges).
Such an exchange constitutes an exchange of an annuity contract for an annuity
contract of identical value at the time of the transfer and as such is a non-
taxable exchange for federal tax purposes.
EXPERIENCE RATING CREDIT
The variable annuity contracts are non-participating and do not share in the
surplus of the Company; however, each variable annuity contract provides for
experience rating. The experience credit will be determined annually on the
basis of allocated costs compared with the amounts deducted for sales and
administrative expenses. If such costs exceed the amount deducted, no
additional deduction will be made from the Participant's individual account.
If, however, the amount deducted for such expenses exceeds allocated costs, the
Company, in its discretion, may allocate all, a portion on none of such excess
as an experience rating credit.
Credits will be applied without deduction of any amounts for sales or
administrative expenses. Application of the credit will be made in 1 of 2 ways,
as considered appropriate by the Company: (a) by a reduction in the amount
deducted from subsequent purchase payments for sales and administrative
expenses, or (b) by the crediting of a number of additional accumulation units
or annuity units, as applicable, equal in value to the amount of the credit less
any applicable premium taxes.
During 1994, there were no experience rating credits paid. In years in which
experience rating credits are granted, the granting of those credits in no way
obligates the Company to grant such credits in ensuing years, as the Company
retains sole discretion with respect to payment of experience rating credits.
DEDUCTION FROM PURCHASE PAYMENTS--MINIMUM DEATH BENEFIT
An additional deduction of .75% is made from each purchase payment for the
minimum death benefit, if such coverage has been elected. The Company
anticipates that the sale of this death benefit will generate profits for it.
(See Accumulation Period, below.)
DEDUCTION FROM PURCHASE PAYMENTS--PREMIUM TAXES
Any applicable premium taxes are deducted from purchase payments in accordance
with local law. Premium tax deductions are held in the General
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<PAGE>
Account of the Company until paid to the appropriate state on a quarterly or
annual basis. The balance of the payment less all deductions is placed in the
Fund and credited to the Participant's individual account. The tax ranges from
.5% (.005) to 5.0% (.05) of purchase payments.
DEDUCTION FROM AVERAGE DAILY VALUE OF THE FUND--ANNUITY RATE AND EXPENSE
PROMISES
Although variable annuity payments will vary in accordance with the investment
performance of the Fund, they will not be affected by adverse mortality
experience or by an increase in the Company's expenses to an amount in excess of
the expense deductions provided for in the variable annuity contract. The
Company assumes the risk that Annuitants as a class may live longer than
expected and that expenses may be higher than the deductions for such expenses.
In either case, the loss will fall on the Company. Conversely, if such reserves
and deductions prove more than sufficient, the excess will be a profit to the
Company.
In return for the assumption of these risks, deductions aggregating 1.002%
annually of the average daily value of the Fund are made consisting of .9% for
annuity rates and .102% for expenses.
By the terms of the variable annuity contracts, all periodic deductions and
annuity rates are subject to certain modifications by the Company (See The
Variable Annuity Contracts, below.) However, in the case of deductions for
investment advisory services, such deductions may only be modified by a majority
vote of Contract Owners.
DEDUCTION FROM AVERAGE DAILY VALUE OF THE FUND--INVESTMENT ADVISORY FEES
For providing investment advisory services to the Fund, the Company makes
deductions aggregating .323% annually of the average daily value of the Fund.
(See Investment Management, below.)
The Fund paid investment advisory fees of $272,740 for 1994, $290,422 for 1993,
and $295,121 for 1992.
INVESTMENT MANAGEMENT
The Company has been registered under the Investment Advisers Act of 1940 since
1967, and it serves as investment adviser of the Fund. (See The Company, above,
for a description of the Company; and Management, in the SAI, for affiliated
persons.) Investment management services are provided under an Investment
Management Services Agreement executed by the Company and the Board of Managers.
The Agreement continues in effect from year to year if approved at least
annually by a majority of the Board of Managers, who are not interested persons
of the Company or the Fund, cast in person at a meeting called for the purpose
of voting on such approval, and by either (a) the Board of Managers, or (b) a
majority vote of all Contract Owners.
14
<PAGE>
The Agreement may be terminated at any time without penalty on 60 days' written
notice to the Company by the Board of Managers or by a majority vote of all
Contract Owners. The Company may not terminate the Agreement without the prior
approval of a new investment advisory agreement by a majority vote of all
Contract Owners. In the event of assignment, the Agreement will terminate.
In performing investment management services, the Company continuously provides
the Board of Managers with an investment program for its consideration. Upon
approval of such an investment program by the Board of Managers, the Company
executes the program by placing orders for the purchase or sale of the assets of
the Fund.
A "sub-advisory agreement" is in force between the Company and Vantage Global
Advisors, Inc. ("Vantage"), a Delaware corporation. Under it, Vantage may
perform some, or substantially all, of the investment advisory services required
by the Fund. However, the Company remains primarily responsible for investment
decisions affecting the Fund, and no additional compensation from the assets of
the Fund is assessed as a result of that agreement.
THE VARIABLE ANNUITY CONTRACTS
ANNUITY PROMISE
The variable annuity contract includes the Company's promise that variable
payments will be made for the lifetime of the Annuitant (commencing on the
selected annuity date) based upon mortality assumptions contained in the
contract and annuity option selected, regardless of the actual mortality
experience among the Annuitants. That is, while annuity payments are based on
life expectancies, Annuitants will nevertheless continue to receive annuity
payments if they live longer than expected. Annuity payments will not be
affected by an increase in the Company's expenses.
PURCHASE OF CONTRACTS
Two types of Group Variable Annuity Contracts are covered by this prospectus:
1. Under the regular Group Variable Annuity Contract, payments are allocated to
the accounts of individual Participants. Each Participant under the regular
Group Variable Annuity Contract receives a certificate which summarizes the
provisions of the group contract and evidences participation.
2. The Group Variable Annuity Deposit Administration Contract is designed for
use with defined benefit pension plans and defined benefit H.R.-10 plans.
15
<PAGE>
In each case, the group contract is issued to the Contract Owner. The payments
are added to a single account for the contract.
Persons wishing to become Participants under a group contract must complete
application forms to be forwarded to the Home Office of the Company for its
acceptance. Upon acceptance, certificates are prepared and forwarded to the
Participant.
An initial purchase payment will be priced not later than two business days
after receipt of an order to purchase, if the application and all information
necessary for processing the purchase order are complete upon receipt. The
Company may retain the purchase payment for up to five business days while
attempting to complete an incomplete application. If the application cannot be
made complete within five days, the applicant will be informed of the reasons
for the delay and the purchase payment will be returned immediately unless the
applicant specifically consents to the Company retaining the purchase payment
until the application is made complete. Thereafter, this initial purchase
payment must be priced within two business days.
Certain significant provisions of the contracts are discussed in the following
sections.
MODIFICATION OF CONTRACT
The variable annuity contract cannot be modified by the Company except with
approval of the Contract Owner (which is the employer or a trustee in the case
of group variable annuity contracts) until it has been in force for at least 3
years. Further, no modifications can affect retired Participants in any manner
without their written consent, unless such modification is deemed by the Company
to be necessary to give the Contract Owner or Participants the benefit of
federal or state statutes or Treasury Department rules or regulations.
Moreover, under the regular Group Variable Annuity Contract, the annuity rate
promise, expense promise, and the deductions applicable at the time of a
Participant's entry into the plan will continue to apply for all purchase
payments made on his or her behalf, up to a maximum payment in any year equal to
200% of the amount paid in the first year of participation. The portion of the
purchase payments in excess of such maximum will receive the benefit of the
promises applicable to new entrants into the plan in the year such excess is
first received by the Company, and these promises will continue to apply if the
increased payment is continuously made.
Under the Group Variable Annuity Deposit Administration Contract, the annuity
rate promise, expense promise and the deductions applicable at issue will
continue to apply for all payments made during the first 15 contract years up to
a maximum payment in any year equal to 200% of the amount paid in the first
contract year. The portion of the purchase payments in excess of such maximum
will receive the benefit of the promises applicable to new contracts in the year
such excess is first received by the Company and these promises will continue to
apply if the increased payment is continuously made during the first 15 contract
years. The
16
<PAGE>
Company has not found it necessary in the past to change the annuity rate
promise, expense promise, or the deductions applicable at the time of a
Participant's entry into the plan.
Notwithstanding the above, the Company reserves the right to unilaterally modify
this variable annuity contract to comply with federal and state laws.
ASSIGNMENT
Unless contrary to applicable law, assignment of variable annuity contracts or
participants individual accounts thereunder is prohibited.
PURCHASE LIMITS
Normally, under a periodic payment contract, the minimum amount of any scheduled
purchase payment is $25 and the scheduled purchase payments must total at least
$600 per year per Participant. Normally, under a single payment contract the
minimum payment is $5,000 for any one Participant.
REINVESTMENT PRIVILEGE
The Contract Owner or a Participant may elect to make a reinvestment purchase
with any part of the proceeds of a total or partial liquidation of the contract
without any deductions by the Company. Such election must be made within 30
days of the date of such liquidation and the purchase must be of a contract
covered by this prospectus. A representation must be made that the proceeds
being used to make the purchase have retained their tax favored status under an
arrangement for which the contracts offered by this prospectus are designed (see
Synopsis, above). The number of Accumulation Units which will be credited upon
reinvesting the funds will be based on the value of the Accumulation Unit(s) the
next time such value is computed following receipt of the proceeds and request
for reinvestment at the Company's Home office. This reinvestment privilege may
be utilized only once with respect to any Contract Owner or Participant. For
tax reporting purposes, a liquidation and subsequent reinvestment purchase will
be treated by the Company as separate transactions. Prior to a liquidation or
subsequent reinvestment purchase, a tax adviser should be consulted by the
Contract Owner or Participant.
GENERAL RISK FACTORS
Variable annuities are designed to provide Participants with payments which will
tend to reflect changes in the cost of living. The Company seeks to accomplish
this objective by providing a medium for investment in equity securities
accompanied by annuity promises. There is no assurance that this objective will
be attained.
Historically, the value of a diversified portfolio of common stocks held for an
extended period of time has tended to rise during periods of inflation. There
has, however, been no exact correlation, and for some periods the prices of
securities have declined while the cost of living was
17
<PAGE>
rising.
The value of the investments held in the Fund fluctuates daily and is subject to
the risks of changing economic conditions as well as the risks inherent in the
ability of management to anticipate changes in such investments necessary to
meet changes in economic conditions.
There is no assurance that the value of a Participant's individual account
during the years prior to retirement or that the aggregate amount of the
variable annuity payments received during the years following the commencement
of annuity payments will equal or exceed the payments made on behalf of a
Participant. Neither is there assurance that the value of an unallocated fund's
contract will equal or exceed the payments made to this account. The policy of
investment in common stocks may be maintained in both rising and declining
markets.
CONTRACT OWNER INQUIRIES
The obligations to purchasers under the Variable Annuity Contracts are those of
the Company. Inquiries from Contract Owners should be directed to the Company
at 1-800-348-1212.
ACCUMULATION PERIOD
ACCUMULATION UNITS
Under the regular Group Variable Annuity Contract, the purchase payments made
with respect to a Participant, less deductions, are credited to the account of
the Participant in the form of Accumulation Units. Under the Group Variable
Annuity Deposit Administration Contract, net payments are credited to the
account of the Contract Owner. The number of Accumulation Units credited for a
Contract Owner is determined by dividing the net purchase payment by the value
of an Accumulation Unit when the net purchase payment is received, if received
prior to the close of trading on the New York Stock Exchange and by the value
computed on the next trading day, if received thereafter. (See Fund Valuation
Procedure, below.) Crediting of Accumulation Units may be delayed on payments
received which cannot be identified or allocated to a specific Contract Owner's
account.
The number of Accumulation Units so determined shall not be changed by any
subsequent change in the value of an Accumulation Unit, but the dollar value of
an Accumulation Unit will vary in amount depending upon the investment
experience of the Fund.
VALUE OF PARTICIPANT'S ACCOUNT
The value of a Participant's individual account at any time prior to the
commencement of annuity payments or the value of a Contract Owner's account can
be computed by multiplying the total number of Accumulation Units by the current
Accumulation Unit value. The Participant bears the investment risk, that is,
the risk that market values may decline. There is no assurance that the value
of the Participant's individual account will equal
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<PAGE>
or exceed the payments made on his or her behalf. Each Participant is advised
annually of the number of Accumulation Units credited to his or her account, the
current Accumulation Unit value, and the total value of the account.
DEATH BENEFIT BEFORE RETIREMENT
If the Annuitant dies prior to the commencement of benefit payments, death
proceeds payable will be the value of the person's account determined as of the
valuation date coincident with or next following the date written notice of
death is received by the Company.
If minimum death benefit coverage has been elected, the variable annuity
contract will contain a promise that in the event of the death of the
Participant prior to the commencement of benefit payments, death proceeds
payable will be the greater of (a) the value of the Participant's account
determined as of the valuation next following receipt of written notice of death
by the Company or (b) in the event of such death prior to the Participant's 65th
birthday, 100% of the total purchase payments made on behalf of the Participant
minus a proportionate reduction for any partial withdrawals of the value of the
Participant's account. Payment of death proceeds will be made within 7 days of
receipt of such notice.
DEATH OF CONTRACT OWNER
If the owner of a non-qualified contract dies before annuity payments have
begun, then in accordance with the provisions of Section 72(s) of the Code, the
Cash Surrender Value (proceeds) of the Contract will be paid as follows: (i)
Upon the death of a non-annuitant owner, the proceeds shall be paid to any
surviving joint or contingent owner(s); (ii) If no joint or contingent owner has
been named, then the proceeds shall be paid to the annuitant named in the
contract.
If the decedent owner or joint owner is also the annuitant, then the death will
be treated as death of the annuitant subject to the provisions of this Contract
regarding death of annuitant. If the recipient of the proceeds is the surviving
spouse of the Contract Owner, the Contract may be continued in the name of the
spouse as owner.
In accordance with Section 72(s), any distribution must be paid within 5 years
of the death of the owner unless the beneficiary begins receiving, within one
year of the Contract Owner's death, the distribution in the form of a life
annuity or an annuity for a period certain not exceeding the beneficiary's life
expectancy.
JOINT/CONTINGENT OWNERSHIP
If a joint owner is named in the application, such joint owners shall be treated
as having equal undivided interests in the Contract. Either owner, independent
of the other, may exercise any ownership rights in this Contract. A contingent
owner cannot exercise any ownership rights in this Contract while the contract
owner is alive.
SURRENDER OF CONTRACT
The Contract Owner, if the plan so provides, has the right to surrender in whole
or in part at any time prior to the commencement of the annuity
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period. The Contract Owner must submit a written request for surrender to the
Company's Home Office. The Contract Owner will receive the value of that
portion of the account surrendered computed as of the valuation time coincident
with or next following the date of surrender, and payment will be made within 7
days after the date of surrender. (For federal income tax consequences of a
surrender for cash, see Federal Tax Status, below and in the SAI.) [Note:
however, special restrictions on surrenders and withdrawals now apply if your
Contract was purchased as part of a retirement plan of a public school system or
tax-exempt institution under Section 403(b) of the Code. Section 403(b)
prohibits the withdrawal of post-1988 contributions pursuant to a salary
reduction agreement (within the meaning of Section 402(g)(3)(C) of the Code),
and earnings thereon, from a 403(b) contract except in the event the
participant: 1) attains age 59 1/2; 2) separates from service; 3) dies; 4)
becomes totally and permanently disabled; or 5) experiences financial hardship
(in which event the income attributable to such contributions may not be
withdrawn). Pre-1989 contributions and earnings through December 31, 1988, are
not subject to the above restrictions.
Payment of any termination value may be postponed (a) when the New York Stock
Exchange is closed other than customary weekend and holiday closing or during
which trading on the New York Stock Exchange is restricted; (b) for any period
during which an emergency exists as a result of which (1) disposal of securities
in the Fund is not reasonably practicable or (2) it is not reasonably
practicable to determine the value of the Fund's net assets or (c) for such
other periods as the SEC may by order permit for the protection of the
Participants.
For contracts issued in connection with qualified employee pension and profit-
sharing trust and qualified annuity plans including H.R.-10 trusts of plans
covering self-employed individuals and their employees and certain tax deferred
annuity plans, termination options will be as stated in the trust or plan, and
the terms of the trust or plan applicable to the Participant should be consulted
for limitations on early surrender or payment. (See Federal Tax Status, below
and in the SAI.)
For all other contracts, upon termination of payments on the Participant's
behalf and prior to the commencement of annuity payments, a Participant will
have the following options:
1. A Participant may have his or her individual account applied to provide
fixed or variable annuity payments or a combination thereof commencing
immediately under the selected annuity option. (See Annuity Period, below.)
2. A Participant may surrender the whole or any portion of his or her
individual account by submission of a written request for surrender and the
certificate to the Company's Home Office, and receive the value of the account
computed as of the valuation time coincident with or next following the date of
surrender. Payment will be made within 7 days after the date of surrender. If
the payment of a surrender value results in reduction of the Company's state
premium tax liability, the amount payable will include
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the lesser of (a) the amount by which the Company's premium tax liability is
reduced or (b) the amount previously deducted from purchase payments for premium
taxes on the contract being surrendered.
3. The Participant may leave his or her individual account in force under the
group contract and the account will continue to participate in the investment
results of the Fund. When the originally selected retirement date arrives, the
Participant will begin to receive annuity payments under the selected option.
(See Annuity Period, below.) At any time in the interim, the Participant can
surrender his or her individual account in accordance with (2.) above.
If the Participant becomes an employee of another employer or a member of an
association which has a similar variable annuity contract in force with the
Company, the Participant may transfer his or her individual account to the other
contract.
A Participant may also purchase an individual variable annuity contract of the
type then being issued by the Company, if any, upon making such payments as may
then be required.
RESTRICTIONS UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM
Title 8, Section 830.105 of the Texas Government Code, consistent with prior
interpretations of the Attorney General of the State of Texas, permits
participants in the Texas Optional Retirement Program (ORP) to redeem their
interest in a variable annuity contract issued under the ORP only upon: (1)
termination of employment in all institutions as defined in Texas law, (2)
retirement, or (3) death. Accordingly, a participant in the ORP will be
required to obtain a certificate of termination from his/her employer before
he/she can redeem his/her account.
ANNUITY PERIOD
ASSUMED INVESTMENT RATE (AIR)
Variable annuity contracts providing for deferred annuities contain a table of
annuity rates based on an AIR of 3.5% per year. The Company will permit the
Contract Owner to select an AIR permitted by state law or regulations as
follows: 3.5%, 4.5%, 5% or 6%. These AIRs are used merely to determine the
first monthly payment for each $1,000 of value. It should not be inferred that
such rates will bear any relationship to the actual net investment experience of
the Fund.
The choice of the AIR affects the pattern of annuity payments. A higher AIR
will produce a higher initial payment but a more slowly rising series of
subsequent payments (or a more rapidly falling series of subsequent payments)
than a lower AIR.
The objective of a variable annuity contract is to provide level payments during
periods when the economy is relatively stable and to reflect as increased
payments only the excess investment results flowing from
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inflation or an increase in productivity. The achievement of this objective
will depend in part upon the validity of the assumption that the net investment
rate of the Fund equals the AIR during periods of stable prices. Subsequent
payments will be smaller than, equal to or greater than the first payment
depending upon whether the actual net investment rate is smaller than, equal to
or greater than the AIR.
The following table shows the Annuity Unit values at each year end for the
different AIRs:
<TABLE>
<CAPTION>
Annuity Unit Values
Assumed Investment Rate
<S> <C> <C> <C> <C>
December 31 3.5% 4.5% 5% 6%
1985 1.565 1.312 1.202 1.010
1986 1.775 1.473 1.343 1.117
1987 1.834 1.508 1.368 1.127
1988 1.946 1.584 1.431 1.168
1989 2.300 1.855 1.667 1.348
1990 2.175 1.739 1.556 1.247
1991 2.565 2.031 1.809 1.436
1992 2.705 2.120 1.878 1.476
1993 2.870 2.227 1.964 1.529
1994 2.805 2.156 1.892 1.459
</TABLE>
RETIREMENT DATE; FORM OF ANNUITY
A Participant or Contract Owner in accordance with the plan, selects a
retirement date not later than age 75 and an annuity option--either of which may
be changed at any time prior to 30 days before the date upon which annuity
payments are to commence--except that contracts issued under plans qualified
under Section 401(a) pursuant to qualified annuity plans under Section 403(a) of
the Code, including H.R.-10 plans, or plans pursuant to Section 408, provide for
annuity payments to commence at the date and under the option specified under
the plan. The contract provides 4 optional annuity forms described below, each
of which may be selected on either a fixed annuity or variable annuity basis, or
a combination thereof. The allocation between fixed and variable may be changed
at any time prior to 30 days before the date on which payments are to commence.
Amounts applied to the purchase of a fixed-dollar annuity will not participate
in the investment experience of the Fund. If an election has not been made
otherwise, the option with 120 monthly payments guaranteed will be effective,
except in those cases in which a joint and survivor annuity payout is required
by law.
In such instance, the accumulated amount in the Fund will be applied to provide
variable annuity payments under such option and any amount accumulated for a
fixed annuity will be applied to provide fixed annuity payments under such
option. In such cases, the minimum first monthly payment required on the new
basis is $25, or $25 on each basis if a combination of fixed and variable
payments is elected. If at any time the payments are or become less than $25,
the Company has the right to change
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the frequency of payment to intervals that will result in payments of at least
$25.
While the contracts contain no provision under which an Annuitant or a
beneficiary may surrender his or her contract (see Accumulation Period, above)
and receive a lump-sum settlement in lieu thereof once annuity payments have
commenced, the Company has undertaken to honor any request for a surrender of
the remaining value of a contract in any case in which annuity payments are
being made under a form of annuity not involving life contingencies. This
applies to Option 2 when annuity payments are being continued during the
remainder of the guaranteed period to the beneficiary designated by the
Participant.
OPTIONAL ANNUITY FORMS
OPTION 1--LIFE ANNUITY
An annuity payable monthly during the lifetime of the Annuitant and terminating
with the last monthly payment preceding the death of the Annuitant. This option
offers the maximum level of monthly payments since there is no guarantee of a
minimum number of payments or provision for a death benefit for beneficiaries.
It would be possible under this option for the Annuitant to receive no annuity
payment if he or she died prior to the due date of the first annuity payment,
one annuity payment if the Annuitant died before the second annuity payment
date, etc.
OPTION 2--LIFE ANNUITY WITH 120, 180, OR 240 MONTHLY PAYMENTS GUARANTEED
An annuity payable monthly during the lifetime of the Annuitant with the
guarantee that if, at the death of the Annuitant, payments have been made for
less than 120, 180 or 240 months as elected, annuity payments will be continued
during the remainder of such period to the beneficiary designated by the
Participant. If the beneficiary dies while receiving annuity payments, the
present value of the current dollar amount of the remaining guaranteed number of
annuity payments, computed on the basis of the AIR, shall be paid in one sum to
the estate of the beneficiary.
OPTION 3--UNIT REFUND LIFE ANNUITY
An annuity payable monthly during the lifetime of the Annuitant with the
guarantee that upon death a payment will be made of the value of the number of
Annuity Units equal to the excess, if any, of (a) the total amount applied under
this option divided by the Annuity Unit Value for the date annuity payments
commence over (b) the Annuity Units represented by each payment to the Annuitant
multiplied by the number of payments paid prior to death. The value of the
number of Annuity Units is computed on the date the Home Office receives written
notice of the annuitant's death, provided that if notice is not received prior
to the close of trading at the New York Stock Exchange on such date computation
shall be made on the first trading date thereafter.
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For example, assume that $10.000 is applied under this option. Further assume
that the Annuity Unit value for the annuity commencement date is $2 and the
first monthly payment due the Annuitant is $61. This means that the Annuitant
has 5,000 Annuity Units credited to his or her account ($10,000 divided by $2
per unit) as of the annuity commencement date and that each monthly payment
received by the Annuitant will be equal to the monetary value, at the time paid,
of 30.5 units ($61 first monthly payment divided by $2 per unit). Assume the
Annuitant receives 10 monthly payments and then dies. Prior to death, the
Annuitant was paid the value of 305 units (30.5 per month x 10 months). The
beneficiary is entitled to the value in one sum of 4,695 Annuity Units (5,000
units initially less 305 units already valued and paid). If the value of an
Annuity Unit is $2.05 on the relevant valuation date, the cash payment to the
beneficiary will be $9,624.75 (4,694 remaining units x unit value of $2.05).
OPTION 4--JOINT AND SURVIVOR ANNUITY
An annuity payable monthly during the joint lifetime of the Annuitant and a
designated second person, and thereafter during the remaining lifetime of the
survivor.
Other annuity options may be provided if agreed upon by the Company and the
Contract Owner. If any such option involves the deferral of annuity payments,
the Annuitant shall have the right to surrender his contract at any time during
the period of deferral. The mortality and expense risk charge and the charge
for administrative services will be assessed on all annuity options, including
those that do not have a life contingency and thus no mortality risk.
FIRST MONTHLY ANNUITY PAYMENT
Under the regular Group Variable Annuity Contract, when annuity payments are to
commence, the value of the Participant's individual account is determined as the
product of the value of an Accumulation Unit on the 14th day prior to the date
the first annuity payment is due and the number of Accumulation Units credited
to the Participant's account as of the date annuity payments commence.
The contract contains tables indicating the dollar amount of the first monthly
payment under each optional form of annuity for each $1,000 of value applied.
The first monthly payment varies according to the form of annuity selected (see
the descriptions above) and the adjusted age of the Annuitant.
The contract contains a formula for determining the adjusted age, and the tables
are determined from the Progressive Annuity Table assuming births in the yea
1900 and an AIR of 3.5% per year. The total first monthly annuity payment is
determined by multiplying the value of the Participant's individual account
(less any applicable premium taxes not previously deducted) by the amount of the
first monthly payment per $1,000 of value from the tables in the contract.
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If a greater first monthly payment would result, the Company will compute the
first monthly payment using an annuity rate based on the same mortality table as
is used in determining such payments under group variable annuity contracts then
being issued for a similar class of Annuitant.
Under the Group Variable Annuity Deposit Administration Contract, upon written
notice by the Contract Owner that annuity payments are to commence, the Company
shall determine as of the 14th day prior to the date the first annuity payment
is due, the amount necessary to provide the annuity specified in the Plan. This
amount is determined by dividing the annuity specified in the Plan by the amount
of the first monthly payment per $1,000 of value from the tables in the contract
and adding any applicable premium taxes not previously deducted. The number of
Accumulation Units to be removed from the Contract Owner's unallocated account
and used to purchase an annuity and pay any applicable premium tax is determined
by dividing the amount determined as described in the preceding sentence by the
Accumulation Unit value for the 14th day prior to the date the first annuity
payment is due. If the annuity specified in the plan can be obtained at a lower
cost to the Contract Owner by using the same mortality table as is used in
determining payments under group variable annuity contracts then being issued by
the Company for a similar class of Annuitants, it will be done.
SUBSEQUENT MONTHLY ANNUITY PAYMENTS
The amount of the first monthly annuity payment is divided by the value of an
Annuity Unit for the valuation period in which the payment is due to determine
the number of Annuity Units represented by the first payment. This number of
Annuity Units remains fixed during the annuity period, and in each subsequent
month, the dollar amount of the annuity payment is determined by multiplying
this fixed number of Annuity Units by the then value of an Annuity Unit.
FUND VALUATION PROCEDURE
VALUATION DATE
A valuation date is any date on which the New York Stock Exchange is open for
trading. On any date other than a valuation date, the Accumulation Unit value
or the Annuity Unit value will be the same as that on the next following
valuation date.
VALUATION PERIOD
A valuation period is that period of time from the beginning of the day
following a valuation date to the end of the next following valuation date.
ACCUMULATION UNIT VALUE
The value of an Accumulation Unit was set at $1 effective March 1, 1967. The
value of an Accumulation Unit on the last day of any subsequent valuation period
is determined by multiplying such value on the last day of
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<PAGE>
the prior valuation period by the net investment factor for the current
valuation period. Accumulation Units will be valued daily, as of the close of
trading on the New York Stock Exchange.
ANNUITY UNIT VALUE
The value of an Annuity Unit for the valuation period ending March 1, 1967 was
established at $1. The value of the Annuity Unit for any subsequent valuation
period is determined by multiplying the value for the immediately preceding
valuation period by the product of (a) the net investment factor for the
valuation period containing the 14th day prior to the last day of the current
valuation period and (b) a factor to neutralize the AIR built into the annuity
tables contained in the contract which is not applicable as actual net
investment income is credited instead.
The value of an Annuity Unit on any date upon which the New York Stock Exchange
is closed is its value on the next succeeding valuation date. The net
investment factor for the 14th day prior to the current valuation date is used
in calculating the value of an Annuity Unit in order to permit calculation of
amounts of annuity payments and mailing of checks in advance of their due dates.
Such checks will normally be issued and mailed at least 3 days before the due
date.
NET INVESTMENT FACTOR
The net investment rate for any valuation period is equal to the gross
investment rate expressed in decimal form to 8 places less a deduction of the
product of .00363% (1.325% on an annual basis; deduction for providing
investment management, annuity rate promises and expense promises) and the
number of days in the valuation period.
The gross investment rate is the quotient of 2 factors, "a" and "b." "a" is
equal to investment income for the valuation period, plus capital gains, minus
capital losses and taxes (see Federal Tax Status, below and in the SAI.) "b" is
equal to the value of the Fund at the beginning of the valuation period. "a" is
divided by "b" to yield the gross investment rate. The gross investment rate
may be positive or negative.
The net investment factor for the Fund is 1.0 plus the net investment rate for
the period. (See Purchase and Pricing of Securities Being Offered, in the SAI,
for an illustration of the method of calculation of Accumulation Unit value and
Annuity Unit value.)
VALUING THE FUND'S ASSETS
In determining the value of the assets of the Fund, each security traded on a
national securities exchange is valued at the last reported sale price on the
valuation date. If there has been no sale on such day, then the value of such
security is taken to be the average of the reported bid and asked prices at the
time as of which the value is being ascertained.
Any security not traded on a securities exchange but traded in the over-
26
<PAGE>
the-counter market is valued at the average of the quoted bid and asked prices
on the valuation date. Securities, including restricted securities, if any, or
other assets for which market quotations are not readily available are valued at
fair value as determined in good faith by the Board of Managers.
FEDERAL TAX STATUS
The following is a general discussion of the federal income tax rules applicable
with respect to the Contracts as of the date of the Prospectus. Further
information is provided in the Statement of Additional Information (SAI).
NEITHER THESE DISCUSSIONS NOR THOSE IN THE SAI ARE INTENDED AS TAX ADVICE. This
section does not discuss the federal tax consequences resulting from every
possible situation, nor does it discuss any applicable state, local or foreign
tax laws. Prior to the purchase of a Contract, a prospective purchaser should
consult a competent tax adviser.
GENERAL
The operations of the Fund form a part of, and are taxed with, the operations of
the Company under the Internal Revenue Code of 1986, as amended (the "Code").
Under existing federal income tax law, the Company does not anticipate that it
will incur any federal income tax liability attributable to the Fund, and
therefore the Company does not intend to make provision for any such taxes.
However, if the Company determines that it may be taxed on income or gains
attributable to the Fund or certain types of Contracts, then the Company may
impose a charge against the Fund (with respect to some or all Contracts) in
order to provide for payment of such taxes.
QUALIFIED CONTRACTS
The Contracts may be purchased in connection with the following types of tax-
favored retirement plans: (1) annuity contracts purchased for employees by
public school systems and Section 501(c)(3) organizations, qualified under
Section 403(b) of the Code; (2) pension and profit-sharing plans of self-
employed individuals ("H.R.10" or "Keogh" plans) or corporations, qualified
under Section 401(a) or 403(a) of the Code; (3) individual retirement annuities,
qualified under Section 408 of the Code; (4) deferred compensation plans of
state or local governments and tax exempt organizations, qualified under Section
457 of the Code; and (5) simplified employee pension plans, qualified under
Section 408(k) of the Code. Participants under such plans, as well as Contract
Owners, annuitants and beneficiaries, should be aware that the rights of any
person to any benefits under such plans may be subject to the terms, conditions
and limitations of the plans themselves, regardless of its and conditions of the
Contracts. Purchasers of Contracts for use with any qualified plan, as well as
plan participants and beneficiaries, should consult counsel and other competent
advisers as to the suitability of the Contracts to their specific needs, and as
to applicable Code limitations and tax consequences.
The tax rules applicable to these plans, including restrictions on
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<PAGE>
contributions and benefits, taxation of distributions, and any tax penalties,
vary according to the type of the plan and its terms and conditions. Generally,
in the case of a distribution under a Contract purchased in connection with
these plans (other than plans qualified under Section 457 of the Code), the
amount received is taxable only to the extent it exceeds the "investment in the
contract." The "investment in the contract" equals the portion of plan
contributions invested in the Contract that was not excluded from the
individual's gross income, and may be zero. Special favorable tax treatment may
be available for lump sum distributions, and partial or total distributions that
are "rolled over" to other retirement programs within 60 days of receipt.
Adverse tax consequences may result from excess contributions, distributions
prior to age 59 1/2 (subject to certain exceptions), distributions that commence
later than dates specified by the Code, distributions in excess of a specified
annual amount, and in certain other circumstances.
MULTIPLE CONTRACTS
All non-qualified contracts entered into after October 21, 1988, and issued by
the same insurance company (or its affiliates) to the same contract owner during
any calendar year will be treated as a single contract, for tax purposes.
WITHHOLDING
Pension and annuity distributions generally are subject to withholding for the
recipient's federal income tax liability at rates that vary according to the
type of distribution and the recipient's tax status. Recipients, however, may
be provided the opportunity to elect not to have tax withheld from
distributions. Distributions from Section 457 plans are subject to the general
wage withholding rules. Under the Unemployment Compensation Amendments of 1992
("UCA"), twenty percent (20%) income tax withholding may apply to "eligible
rollover distributions." All taxable distributions from qualified plans and
Section 403(b) annuities are "eligible rollover distributions," except (1)
annuities paid out over life or life expectancy, (2) installments paid for a
period spanning ten years or more, and (3) required minimum distributions. The
UCA imposes a mandatory twenty percent (20%) income tax withholding on any
eligible rollover distribution that the holder does not elect to have paid in a
direct rollover to another qualified plan, Section 403(b) annuity, or individual
retirement account.
VOTING RIGHTS
When a meeting is to be held, the Rules and Regulations of the Fund specify a
quorum as 25% of the Contract Owners entitled to vote at an annual or special
meeting. Therefore, less than a majority of those entitled to vote could take
action which is not prohibited by law which could affect other Contract Owners'
rights.
The number of votes which a Contract Owner may cast for Participants in the
accumulation period is equal to the number of Accumulation Units under the
contract. For Annuitants receiving annuity payments, the Contract Owner
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<PAGE>
may cast the number of votes equal to (a) the amount of assets established in
the Fund to meet the annuity obligations related to such Annuitants divided by
(b) the value of an Accumulation Unit. The amount of the assets established in
the Fund for an Annuitant receiving annuity payments will decrease as annuity
payments are made.
Since assets are maintained in the Fund with respect to other contracts than
those offered by this prospectus, Contract Owners under such other contracts are
also entitled to vote. The number of votes which they are entitled to cast is
computed in the same manner as for Contract Owners of the variable annuity
contracts offered by this prospectus.
The number of votes each Contract Owner may cast shall be determined as of a
date to be chosen by the Board of Managers within 90 days of the date of the
meeting, and at least 20 days' written notice of the meeting will be given. To
be entitled to vote, a Contract Owner must have been an owner on both the date
as of which the number of votes was determined and the date of the written
notice.
During the accumulation period, a Participant under a group contract with
respect to which assets are maintained in the Fund or an employee covered by an
individual contract issued in connection with an H.R.-10 plan or pursuant to
Section 403(b) of the Internal Revenue Code will have the right to instruct the
Contract Owner with respect to the votes attributable to his or her individual
account, and a Participant under a group contract or an employee covered by an
individual contract issued pursuant to a qualified employee pension or profit-
sharing trust or a qualified annuity plan (other than one involving an H.R.-10
plan or pursuant to Section 403(b) will have the right to instruct the Contract
Owner only with respect to votes attributable to payments made by him or her, if
any, and with respect to additional votes that are authorized by the terms of
the plan, if any. All other votes entitled to be cast during such period under
such a trust or plan may be cast by the Contract Owner in its sole discretion.
During the annuity period, every Participant and every employee will have the
right to instruct the Contract Owner with respect to all votes attributable to
the amount of assets established in the Fund to meet the annuity obligations
related to such Participant or employee. Each Contract Owner and each employee
and Participant having the right to instruct a Contract Owner with respect to
any votes will receive all proxy materials.
The Rules and Regulations of the Fund provide that each Contract Owner shall
cast the votes with respect to which instructions from an employee or a
Participant have been received in accordance with such instructions and all
votes with respect to which no instructions are received, other than those as to
which no employee or Participant is entitled to give instructions, shall be cast
in the same proportion as are votes with respect to which instructions are
received by such Contract Owners. If no one is entitled to instruct a Contract
Owner or if a Contract Owner receives no instructions, all votes to which such
Contract Owner is entitled may be cast in the Contract Owner's sole discretion.
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<PAGE>
The Company and the Fund have no duty to ascertain whether Contract Owners
actually cast votes under such contracts in accordance with the voting rights
provisions described in this section.
The Rules and Regulations of the Fund permit the Board of Managers to dispense
with an annual meeting in any year in which the Investment Company Act of 1940
does not require a Contract Owner to vote on: 1) election of members of the
Board of Managers; 2) approval of an investment advisory agreement; 3)
ratification of the independent public accountant; or 4) approval of a
distribution agreement. Each year, prior to the date set by the Rules and
Regulations for the annual meeting, the Board of Managers will determine whether
such meeting need be held.
Special meetings may be called for any proper purpose when permitted by
applicable law. As a result of the option for the Board to dispense with annual
meetings of Contract Owners, special meetings must be called whenever there is a
change in the Fund's independent public accountant, and whenever fewer than 50%
of the existing Members of the Board of Managers has been elected by Contract
Owners. Also, since dispensing with annual meetings results in perpetuating
Members of the Board of Managers in office, the Fund is required to call a
special meeting when Contract Owners who meet the standards of Section 16(c) of
the Investment Company Act of 1940 apply to the Fund requesting that such a
meeting be called for the purpose of removing one or Members of the Board of
Managers. That section also requires that the Fund facilitate communication
between Contract Owners who wish to solicit the approval of other Contract
Owners for the calling of such a meeting. Additional information about this
procedure is available from Fund management.
LEGAL PROCEEDINGS
As of the date of this Prospectus, neither the Fund nor the Company was involved
in any material pending legal proceedings, other than ordinary routine
litigation incidental to the business.
OTHER ANNUITY CONTRACTS
Individual variable annuity contracts are also sold by the Company. Assets with
respect to the individual variable annuity contracts are also held in the Fund
and are affected by its investment experience. All such contracts initially
meet the requirements of Section 403(b) of the Internal Revenue Code, or are
issued with respect to (a) plans initially qualifying under Section 401(a) of
the Code, (b) annuity plans initially qualifying under Section 403(a) of the
Code, (c) retirement plans initially qualifying for special tax treatment under
Section 408 of the Code, or (d) governmental deferred compensation plans as
defined in Section 414(d) or meeting the requirements of Section 457 of the
Code.
CUSTODIAN
30
<PAGE>
Bankers Trust Company, 14 Wall Street, 4th Floor, New York, New York 10005
("Bankers") is Custodian for the Fund pursuant to a Custodian Agreement
effective March 4, 1985. Under this Agreement, Bankers shall (1) receive and
disburse money; (2) receive and hold securities; (3) transfer, exchange, or
deliver securities; (4) present for payment coupons and other income items,
collect interest and cash dividends received, hold stock dividends, etc.; (5)
cause escrow and deposit receipts to be executed; (6) register securities; and
(7) deliver to the Fund proxies, proxy statements, etc.
STATE REGULATION
As a life insurance company organized and operating under Indiana law, the
Company is subject to provisions governing such companies and to regulation by
the Indiana Commissioner of Insurance.
The Company's books and accounts are subject to review and examination by the
Indiana Insurance Department (Department) at all times and a full examination of
its operations normally is conducted by the Department at least once in every 5
years.
TABLE OF CONTENTS OF THE
STATEMENT OF ADDITIONAL INFORMATION (SAI)
ITEM Page
General Information and History B-2
Special Terms B-2
Investment Objectives and Policies of the Fund B-2
Management B-3
Investment Advisory and Related Services B-3
Brokerage Allocation B-3
Purchase and Pricing of Securities Being Offered B-3
Distribution of Variable Annuity Contracts B-4
Federal Tax Status B-4
Other Services B-7
Underwriters B-7
Determination of Net Asset Value B-7
Financial Statements B-8
NOTE: SEE THE COVER PAGE OF THIS PROSPECTUS FOR DETAILS ABOUT HOW TO OBTAIN A
COPY OF THE SAI.
31
<PAGE>
LINCOLN NATIONAL
VARIABLE ANNUITY
FUND A (GROUP)
PROSPECTUS
APRIL 30, 1995
GROUP VARIABLE ANNUITY
CONTRACTS ISSUED BY
The Lincoln National Life Insurance Company
Fort Wayne, Indiana
No person has been authorized to give any information or to make any
representations other than those contained in the prospectus and, if given or
made, such information or representations must not be relied upon as having been
authorized. This prospectus does not constitute an offer of, or solicitation of
an offer to acquire, any interest or participation in the variable annuity
contracts offered by this prospectus in any jurisdiction to anyone to whom it is
unlawful to make such an offer or solicitation in such jurisdiction.
To obtain a copy of the Statement of Additional Information, please complete and
mail the following form:
___________________________________________________________________________
Please send me a copy of the current Statement of Additional Information for
Lincoln National Variable Annuity Fund A (Group):
(Please Print)
Name:______________________________________________________________________
Address:___________________________________________________________________
City______________________ State_______________________Zip_________________
Mail to: Kimberly Oakman, The Lincoln National Life Insurance Company,
P.O. Box 2340, Fort Wayne, Indiana 46801
32
<PAGE>
EXHIBIT C
FUND B PROSPECTUS
<PAGE>
LINCOLN NATIONAL
VARIABLE ANNUITY
FUND B (Individual)
1300 South Clinton Street, Fort Wayne, Indiana 46802
Telephone: 1-800-348-1212
INDIVIDUAL VARIABLE ANNUITY CONTRACTS
ISSUED BY:
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
The individual variable annuity contracts offered by this prospectus are
designed for retirement planning for individuals.
The principal investment objective of Lincoln National Variable Annuity Fund B
(the Fund) is the long-term growth of capital in relation to the changing value
of the dollar. A secondary investment objective is the production of current
income. The Fund seeks to accomplish these objectives by investing in equity
securities, principally common stocks.
The Contract Owner may elect that a portion (in multiples of 10%) of payments be
applied by the Company to purchase fixed-dollar accumulation units under the
variable annuity contract. However, unless reference is specifically made to
fixed-dollar elements, this prospectus relates to variable elements under the
Separate Account.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS SETS FORTH CONCISELY THE INFORMATION ABOUT THE FUND THAT A
PROSPECTIVE INVESTOR OUGHT TO KNOW BEFORE INVESTING. PLEASE READ IT CAREFULLY
AND RETAIN IT FOR FUTURE REFERENCE.
ADDITIONAL INFORMATION ABOUT THE FUND HAS BEEN FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION. THAT STATEMENT OF ADDITIONAL INFORMATION (SAI), DATED
APRIL 30, 1995, HAS BEEN INCORPORATED BY REFERENCE INTO THIS PROSPECTUS AND WILL
BE PROVIDED ON REQUEST AND WITHOUT CHARGE. WRITE KIM OAKMAN, THE LINCOLN
NATIONAL LIFE INSURANCE COMPANY, P.O. BOX 2340, FORT WAYNE, INDIANA 46801, OR
CALL 1-800-348-1212, extension 4912. A TABLE OF CONTENTS FOR THE SAI APPEARS ON
THE LAST PAGE OF THIS PROSPECTUS.
____________
THIS PROSPECTUS IS DATED APRIL 30, 1995
1
<PAGE>
TABLE OF CONTENTS
Page
Special Terms 2
Expense Table 3
Synopsis 4
Per-Accumulation-Unit Income and Capital Changes 5
Financial Statements 5
The Company 5
The Fund 5
Investment Objectives and Policies of the Fund 6
Charges and Deductions 7
Investment Management 9
The Variable Annuity Contracts 9
Accumulation Period 10
Annuity Period 13
Fund Valuation Procedure 15
Federal Tax Status 15
Voting Rights 16
Legal Proceedings 17
Other Annuity Contracts 17
Custodian 18
State Regulation 18
Table of Contents of the Statement of Additional Information 18
SPECIAL TERMS
As used in this prospectus the following terms have the indicated meanings.
ACCUMULATION UNIT: A statistical device used to determine the value of an
individual account prior to the commencement of annuity payments.
ANNUITANT: The person on whose life or life expectancy the payments are based.
ANNUITY: A series of payments for (a) life, (b) life with either a minimum
number of payments or an ascertainable sum guaranteed, or (c) the joint lifetime
of the Annuitant and another person and thereafter during the lifetime of their
survivor.
ANNUITY RATE PROMISE: The promise that the amount of annuity payments will not
be affected by the fact that Annuitants live longer than expected.
ANNUITY UNIT: A statistical device used to determine the amount of annuity
payments.
2
<PAGE>
CONTRACT OWNER: The annuitant, or other designated person, except in cases where
a Contract is issued to a trustee of a trust or a custodian of a qualified
pension or profit-sharing plan under Section 401(a) of the Code or of an
Individual Retirement Annuity under Section 408 of the Code, or where a Contract
is issued in connection with a deferred compensation plan pursuant to Section
457 of the Code. In cases where the Contract is issued to such a trustee or
custodian, as defined above, the Contract Owner is the trustee or custodian.
FIXED-DOLLAR ANNUITY: An annuity with payments which remain fixed throughout the
payment period and which do not reflect the investment experience of a separate
account.
PAYMENTS: Amounts paid to purchase an annuity by or on behalf of an Annuitant.
PARTICIPANT: The individual participating in a qualified pension or profit-
sharing plan pursuant to Section 401(a) of the Code, a deferred compensation
plan pursuant to Section 457 of the Code, a tax deferred annuity pursuant to
Section 403(a) of the Code, and a tax sheltered annuity pursuant to 403(b) of
the Code.
SEPARATE ACCOUNT: Assets set aside in a separate account by The Lincoln National
Life Insurance Company with respect to payments received under the variable
annuity contracts offered by this prospectus and certain other annuity contracts
and designated as Lincoln National Variable Annuity Fund B.
TERMINATION AND SURRENDER: Surrender means redemption; the term redemption may
be used interchangeably with surrender. The termination options permit
redemption as set forth in Accumulation Period, below.
VARIABLE ANNUITY: An annuity providing for payments varying in accordance with
the changing values of securities held in a separate account.
VARIABLE ANNUITY CONTRACT: An agreement between the Company and the Contract
Owner providing a variable annuity.
3
<PAGE>
<TABLE>
<CAPTION>
EXPENSE TABLE
<S> <C> <C>
CONTRACT OWNER TRANSACTION EXPENSES
SINGLE PERIODIC
PREMIUM PREMIUM
Sales Load Imposed on Purchases (as a percentage of purchase payments) 2%+$50 4.25%
Administrative Expense $ 65.00 1.00%
Minimum Death Benefit (if elected) .75% .75%
ANNUAL EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees .32%
Annuity Rate and Expense Risk Fees 1.00%
Total Annual Expenses 1.32%
EXAMPLE*
1 YEAR 3 YEARS 5 YEARS 10 YEARS
S.P. P.P. S.P. P.P. S.P. P.P. S.P. P.P.
At the end of the applicable time period, you would
pay the following expenses on a $1,000 investment,
assuming 5% annual return on assets: $147 $66 $173 $95 $202 $126 $287 $218
</TABLE>
*The figures are the same, whether the Contract Owner holds the contract,
surrenders it, or annuitizes. The expenses shown do not include charges for
the minimum death benefit, since the purchase of that benefit is optional with
the client. [S.P.=Single Premium; P.P.=Periodic Payment]
This table is provided to assist the Contract Owner in understanding the various
costs and expenses that he or she will bear directly or indirectly. The table
reflects expenses of operating both the Variable Annuity Contract and the Fund.
For a more complete description of the various costs and expenses involved, see
"Charges and Deductions" in this Prospectus. Premium taxes may also be
applicable, although they do not appear in the table. THE "EXAMPLE" SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY
BE GREATER OR LESSER THAN THOSE SHOWN. This table is unaudited.
4
<PAGE>
SYNOPSIS
WHAT ARE THE VARIABLE ANNUITIES BEING OFFERED?
The variable annuity contracts offered by this prospectus are of 2 types:
immediate annuities and deferred annuities. Deferred annuities may be purchased
with a single payment or with periodic payments. Immediate annuities may only
be purchased with a single payment.
WHO IS THE PRINCIPAL UNDERWRITER?
The Lincoln National Life Insurance Company (the Company), a registered broker-
dealer, is the principal underwriter. It makes contracts available through its
registered representatives licensed to sell life insurance policies and annuity
contracts.
INVESTMENT ADVISER--NATURE OF BUSINESS
The Company, a stock life insurance company providing life insurance and
annuities, serves as investment adviser to the Fund.
WHAT FEES ARE CHARGED TO THE FUND?
For providing investment management services, the Company (the adviser) will
make daily deductions aggregating .323% annually of the average daily value of
the Fund. (See Investment Management, below.)
Daily deductions of 1.002% annually of the average daily value of the Fund are
also made for annuity rate and expense guarantees. (See Charges and Deductions,
below.)
In general, see Expense Table on page 3.
WHAT IS THE MAXIMUM SALES LOAD?
The maximum sales load under a periodic payment contract is 4.49% of the net
amount invested which is 4.25% of the offering price (gross payment received).
Under a single payment contract, the maximum sales load is 3.9% of the net
amount invested. The maximum sales load is 2% of the offering price (gross
payment received) plus $50.
There are provisions for reduced sales charges. (See Charges and Deductions,
below.)
ADMINISTRATIVE EXPENSE CHARGES
In addition to the maximum sales load described above, a charge is also deducted
for administrative expenses. This charge is a maximum of 1% under periodic
payment contracts; under single payment contracts, the charge is $65.
5
<PAGE>
ARE THERE ANY OTHER DEDUCTIONS, CHARGES OR PENALTIES?
If the minimum death benefit has been elected, an additional deduction of .75%
is made from each purchase payment. Deductions are also made for any applicable
premium taxes. If you withdraw contract value or surrender the contract before
the annuity period begins, you may be subject to a penalty tax under Section
72(q) of the Code.
IS THERE A SHORT-TERM CANCELLATION RIGHT?
Within 10 days after this contract is first received, it may be cancelled for
any reason by delivering or mailing it to the agent through whom it was
purchased or to the Home Office of the Company. Upon cancellation, this
contract shall be void from the beginning and the Company will return the value
of any payments made to the variable account (including the sales and
administrative charge).
IS A MINIMUM INVESTMENT REQUIRED?
Normally, under a periodic payment contract, the minimum amount of any scheduled
purchase payment is $25 and the scheduled purchase payments must total at least
$600 per year. Normally, under a single payment contract the minimum payment is
$5,000.
INVESTMENT OBJECTIVES
The principal investment objective of the Fund is the long-term growth of
capital in relation to the changing value of the dollar. A secondary investment
objective is the production of current income. (See Investment Objectives and
Policies of the Fund, below.)
TYPE OF FUND
The Fund is a segregated investment account of the Company, operated as an open-
end, diversified management investment company, which continuously offers its
variable annuity contracts for sale.
REDEMPTION OR REPURCHASE PRICE
Payments upon redemption will be made at the value of the account without any
charge. (See Accumulation Period, below.)
6
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY FUND B
PER-ACCUMULATION-UNIT INCOME AND CAPITAL CHANGES
(For an accumulation unit outstanding throughout the year)
The following per-unit income and capital changes table of the Fund has
been audited by Ernst & Young LLP, independent auditors. This table should be
read in conjunction with the Fund's financial statements, notes and report of
independent auditors included in the Statement of Additional Information. The
information is for years ended December 31.
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income $ .181 $ .176 $ .179 $ .159 $ .128 $.159 $ .131 $ .111 $ .088 $ .079
Expenses .082 .079 .072 .067 .056 .054 .045 .048 .038 .030
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net investment income .099 .097 .107 .092 .072 .105 .086 .063 .050 .049
Net realized and unreal-
ized gain (loss) on
investments (.175) .454 (.101) 1.224 (.090) .719 .228 .166 .357 .591
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Increase (decrease) in
accumulation unit value (.076) .551 .006 1.316 (.018) .824 .314 .229 .407 .640
Accumulation unit value
at beginning of year 6.194 5.643 5.637 4.321 4.339 3.515 3.201 2.972 2.565 1.925
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
ACCUMULATION UNIT
VALUE AT END OF YEAR $6.118 $6.194 $5.643 $5.637 $4.321 $4.339 $3.515 $3.201 $2.972 $2.565
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
RATIOS
Ratio of expenses to
average net assets 1.31% 1.32% 1.32% 1.32% 1.33% 1.33% 1.32% 1.33% 1.32% 1.32%
Ratio of net investment
income to average
net assets 1.59% 1.64% 1.96% 1.82% 1.69% 2.58% 2.48% 1.76% 1.70% 2.19%
Portfolio turnover rate 65.59% 64.70% 71.26% 38.71% 60.48% 216.47% 201.27% 164.92% 65.03% 27.88%
Number of accumulation
units outstanding at
end of year (expressed
in thousands) 951 1,151 1,333 1,428 1,623 1,835 2,107 2,265 2,511 2,911
</TABLE>
7
<PAGE>
FINANCIAL STATEMENTS
Financial statements for the Fund and for the Company are in the Statement of
Additional Information (SAI) for the Fund. To obtain a copy of the SAI, call or
write to the source listed on page 1 of this Prospectus.
THE COMPANY
The Lincoln National Life Insurance Company (the Company) is a stock life
insurance company organized in 1905 under the laws of the State of Indiana. It
is principally engaged in the sale of life insurance, annuities, and
reinsurance. The Company is a wholly-owned subsidiary of Lincoln National
Corporation, a publicly-held insurance holding company. The Home Office of the
Company (principal business address) is located at 1300 South Clinton Street,
Fort Wayne, Indiana. The Company's Home Office mailing address is P.O. Box
2340, Fort Wayne, IN 46801.
THE FUND
On December 1, 1966 the Board of Directors of the Company established a
segregated investment account designated Lincoln National Variable Annuity Fund
B (the Fund or Variable Contract) in accordance with certain provisions of
Indiana Insurance Law. The Fund is an open-end, diversified management
investment company registered with the Securities and Exchange Commission (SEC)
under the Investment Company Act of 1940, as amended (the 1940 Act).
The present Board of Managers for the Fund has been elected by the Contract
Owners (See Voting Rights, below.) A majority of these Members are persons who
are not otherwise interested persons of the Company as the term "interested
persons" is defined in the 1940 Act. Members of the Board of Managers are also
Members of the Board of Managers of Lincoln National Variable Annuity Fund A
(Fund A), and are Directors of the following: 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.; and Lincoln National Special Opportunities Fund, Inc. All
of the foregoing (including Fund B) are registered investment companies. The
Board is responsible, among other things, for authorizing investment programs
for the Fund, in accordance with the Fund's investment objectives and policies;
for recommending to Contract Owners any appropriate changes to those objectives
and policies; and for contracting for certain services necessary to the
operation of the Fund.
The Indiana law under which the Fund was established provides it shall not be
chargeable with liabilities arising out of any other business which the Company
may conduct and which has no specific relation to or dependence upon the Fund.
Accordingly, the assets of the Fund will be held exclusively for the benefit of
Participants in, and persons entitled to
8
<PAGE>
payment under, variable annuity contracts. Income, gains, and losses, whether or
not realized, from assets allocated to the Fund are, in accordance with the
applicable variable annuity contracts, credited to or charged against the Fund
without regard to other income, gains, or losses of the Company. The assets of
the Fund may not be charged with liabilities arising out of any other business
of the Company. The obligations arising under the variable annuity contracts are
obligations of the Company. The Fund is a "separate account" as that term is
defined under the federal securities laws.
The Company, in addition to serving as Investment Adviser for the Fund (See
Investment Management, below), provides overall management of the Fund's
business affairs, subject to the authority of the Board of Managers.
INVESTMENT OBJECTIVES AND POLICIES OF THE FUND
All investment objectives and policies shown below (except Restrictions 9
through 11) are fundamental and may not be changed without approval of Contract
Owners casting a majority of the votes entitled to be cast (see Voting Rights,
below).
OBJECTIVES
1. The principal investment objective is the selection of investments for the
long-term growth of capital in relation to the changing value of the dollar.
Investments will be made with the objective of providing annuity payments which
may tend to reflect changes in the value of the dollar. An additional but
secondary investment objective is the production of current income.
2. Income and realized capital gains will be reinvested.
3. The Fund's assets will be kept fully invested except that (a) sufficient
cash will be kept on hand to meet variable annuity contract payments and (b)
reasonable amounts of cash or United States Government securities may be held
for limited periods pending investment in accordance with investment policies.
4. The Fund's assets will usually be invested in a portfolio of equity
securities, mainly common stocks, diversified over industries and companies.
Changes in such diversification may be made from time to time to take into
account changes in the outlook for particular industries or companies. The
investments of the Fund will not, however, be concentrated in any one industry,
and no more than 25% of the Fund's assets will be invested in any one industry.
Such diversification does not eliminate the risks inherent in the making of
equity investments. The purchasing of common stocks may occur in rising or
declining markets.
Further, when the Board of Managers determines that investments of other types
may be advantageous on the basis of combined considerations of risk, income and
appreciation, investments may be made in bonds, notes or other evidences of
indebtedness, issued publicly or placed privately, of a type
9
<PAGE>
customarily purchased for investment by institutional investors including United
States Government securities. Such investments, if made, constitute a defensive
policy. Such investments may, or may not, be convertible into stock or be
accompanied by stock purchase options or warrants for the purchase of stock.
Warrants are purely speculative in that they have no voting rights, pay no
dividends and have no rights with respect to the assets of the corporation
issuing them. A warrant, basically, is an option to purchase a given security
within a specified period for a specified price. The prices of warrants do not
necessarily move parallel to the price of the underlying securities.
RESTRICTIONS
The investments of the Fund are subject to the provisions of the Indiana
Insurance Law of 1935 concerning earnings records, preferred stock coverage,
self-dealing, real estate holdings and concentration.
Loans will not be made, but the purchase of a portion of an issue of bonds,
debentures or other securities publicly distributed or privately placed with
financial institutions shall not be considered the making of a loan.
The Fund will not:
1. Invest more than 5% of the value of the Fund's assets in securities of any
one issuer, except obligations of the United States Government and
instrumentalities thereof.
2. Acquire more than 10% of the voting securities of any one issuer.
3. Borrow money except for temporary or emergency purposes in an amount
up to 5% of the value of the assets.
4. Underwrite securities of other issuers.
5. Purchase or sell real estate as a principal activity. However, the right
is reserved to invest up to 10% of the value of the assets of the Fund in
real properties.
6. Purchase commodities or commodity contracts.
7. Make short sales of securities.
8. Make purchases on margin, except for such short-term credits as are
necessary for the clearance of transactions.
9. Invest in the securities of a company for the purpose of exercising
management or control.
10. Place emphasis upon obtaining short-term trading profits, but it may
engage in short-term transactions in the event that a change in economic
conditions or a rapid appreciation or depreciation of stock prices occurs.
The Fund's portfolio turnover rates were 65.59% for 1994, 64.7% for 1993,
and 71.3% for 1992. The securities markets in general have experienced
volatility due to rapidly shifting economic trends. This volatility can
affect turnover.
11. Plan to make investments in securities of other investment companies.
However, the right is reserved to make such investments up to a maximum of
10% of the value of the assets of the Fund, provided that not more than 3%
of the total outstanding voting stock of any one investment company may be
held.
10
<PAGE>
SPECIAL RISKS
Investments, if made, in any securities of the type which are privately placed
with financial institutions and which cannot be sold to the public without prior
registration of such securities with the SEC, will be limited in order that the
total of such investments will not exceed 10% of the value of the Fund's assets.
Such securities are commonly referred to as "restricted securities." Restricted
securities may not be readily marketable and the Fund may not be able to dispose
of its holdings in these securities at reasonable price levels if such
securities are ever acquired. Furthermore, registration of restricted securities
under the Securities Act of 1933 may be necessary if the Fund is to sell such
securities publicly. Should a considerable period of time elapse between the
time that a decision is made to sell restricted securities and the time when the
Fund may be permitted to sell them publicly under an effective registration
statement, adverse market conditions could develop with the result that the Fund
might not be able to obtain as favorable a price as that prevailing at the time
the decision to sell was made. During 1994 no restricted securities were held.
CHARGES AND DEDUCTIONS
DEDUCTION FROM PURCHASE PAYMENTS--SALES AND ADMINISTRATIVE EXPENSES
Under periodic payment contracts, a deduction of 4.25% for sales expenses and 1%
for administrative expenses is made from each purchase payment when received.
Under single payment contracts, which contemplate that lump sum amounts under
pension or retirement plans will be applied to the purchase of an annuity, the
deduction from each purchase payment made on behalf of a Participant for sales
and administrative expenses is 2% plus $50 for sales expenses and $65 for
administrative expenses. In addition to periodic payments, the Contract Owner
may make single payments on behalf of Participants. The deduction from such a
payment made for a Participant is 2%.
Administrative expenses include salaries, rent, postage, telephone, travel,
legal, actuarial and accounting fees, office equipment, and stationery. The
administrative charge is designed to cover the expense of administering these
contracts, and the Company does not expect to realize a profit by virtue of this
charge.
Should the Company increase the combined sales and administrative expense
charge, then, for existing holders of periodic payment contracts, the Company
promises not to deduct more than 5.25% from any year's payment, as long as that
payment is no more than twice the original year's payment. The excess will be
charged at the higher rate.
These services are provided under a Sales and Administrative Services Agreement
executed by the Company and the Fund. The Agreement continues in effect from
year to year if approved at least annually by a majority of the Board of
Managers who are not interested persons of the Company or the Fund, cast in
person at a meeting called for the purpose of voting on such
11
<PAGE>
approval.
Deductions for sales and administrative expenses made from purchase payments
applied to purchase fixed-dollar accumulation units are the same as those made
from payments applied to the Separate Account.
Over the actuarial life of the contracts issued by the Fund, the aggregate sales
load is expected to exceed the aggregate distribution expenses associated with
those contracts. To the extent that sales load does not exceed distribution
expenses during the first year of those contracts, the Company pays those
expenses out of its general assets. Aggregate sales load in years after the
first exceeds aggregate distribution expenses in those years.
For sales and administrative expenses, the Fund paid $1,994 in 1994, $2,838 in
1993, and $3,321 in 1992.
REDUCED CHARGES
No sales or administrative expense charge is deducted from:
1. Amounts transferred between the fixed and the separate account portions of
contracts offered by this prospectus, if such transfers are permitted by the
underwriting practices of the Company.
2. Purchase payments under contracts offered by this prospectus to (a)
Members of the Board of Managers and officers of the Fund, (b) directors,
officers and full-time employees of the Company, if they spend more than 50% of
their working time either (1) rendering investment advisory services to the Fund
or Fund A, or supervising persons who spend more than 50% of their working time
rendering such services, or acting in a position necessary for such persons to
render such services, or (2) selling or offering for sale contracts of the Fund
or of Fund A, or supervising persons who spend more than 50% of their working
time selling or offering such contracts for sale, or acting in a position
necessary for such persons to sell or offer such contracts for sale, and (c)
sales representatives of the Company, or to any trust, pension, profit-sharing,
or other benefit plan for such persons, provided that each of the foregoing
persons has acted as above described for not less than 90 days, and provided
further that such sales are made with the written assurances of the purchaser
that the purchase is made for investment purposes and that the contracts will
not be resold except through redemption; and/or
3. Payments under contracts offered by this prospectus to the owners of or
beneficiaries under life insurance, endowment, or annuity contracts issued by
the Company in cases where and to the extent that proceeds payable under such
policies are applied to the purchase of contracts offered by this prospectus.
Contract Owners of Fund A who meet the requirements of Sections 457 and 414(d)
of the Code may exchange their contracts for contracts of this Fund in an equal
dollar amount at the respective Accumulation Unit values at the time of the
exchange (i.e., without incurring any additional sales load or other charges).
Such an exchange constitutes an exchange of an annuity
12
<PAGE>
contract for an annuity contract of identical value at the time of the transfer
and as such is a non-taxable exchange for federal tax purposes.
EXPERIENCE RATING CREDIT
The variable annuity contracts are non-participating and do not share in the
surplus of the Company; however, each variable annuity contract provides for
experience rating. The experience credit will be determined annually on the
basis of allocated costs compared with the amounts deducted for sales and
administrative expenses. If such costs exceed the amount deducted, no
additional deduction will be made from the Participant's individual account.
If, however, the amount deducted for such expenses exceeds allocated costs, the
Company, in its discretion, may allocate all, a portion on none of such excess
as an experience rating credit.
Credits will be applied without deduction of any amounts for sales or
administrative expenses. Application of the credit will be made in 1 of 2 ways,
as considered appropriate by the Company: (a) by a reduction in the amount
deducted from subsequent purchase payments for sales and administrative
expenses, or (b) by the crediting of a number of additional accumulation units
or annuity units, as applicable, equal in value to the amount of the credit less
any applicable premium taxes.
During 1994, there were no experience rating credits paid. In years in which
experience rating credits are granted, the granting of those credits in no way
obligates the Company to grant such credits in ensuing years, as the Company
retains sole discretion with respect to payment of experience rating credits.
DEDUCTION FROM PURCHASE PAYMENTS--MINIMUM DEATH BENEFIT
An additional deduction of .75% is made from each purchase payment for the
minimum death benefit, if such coverage has been elected. The Company
anticipates that the sale of this death benefit will generate profits for it.
(See Accumulation Period, below.)
DEDUCTION FROM PURCHASE PAYMENTS--PREMIUM TAXES
Any applicable premium taxes are deducted from purchase payments in accordance
with local law. Premium tax deductions are held in the General Account of the
Company until paid to the appropriate state on a quarterly or annual basis. The
balance of the payment less all deductions is placed in the Fund and credited to
the Participant's individual account. The tax ranges from .5% (.005) to 5%
(.05) of purchase payments.
DEDUCTION FROM AVERAGE DAILY VALUE OF THE FUND--ANNUITY RATE AND EXPENSE
PROMISES
Although variable annuity payments will vary in accordance with the investment
performance of the Fund, they will not be affected by adverse mortality
experience or by an increase in the Company's expenses to an
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amount in excess of the expense deductions provided for in the variable annuity
contract. The Company assumes the risk that Annuitants as a class may live
longer than expected and that expenses may be higher than the deductions for
such expenses. In either case, the loss will fall on the Company. Conversely, if
such reserves and deductions prove more than sufficient, the excess will be a
profit to the Company.
In return for the assumption of these risks, deductions aggregating 1.002%
annually of the average daily value of the Fund are made consisting of .9% for
annuity rates and .102% for expenses.
DEDUCTION FROM AVERAGE DAILY VALUE OF THE FUND--INVESTMENT ADVISORY FEES
For providing investment advisory services to the Fund, the Company makes
deductions aggregating .323% annually of the average daily value of the Fund.
(See Investment Management, below.)
The Fund paid investment advisory fees of $24,105 for 1994, $27,026 for 1993,
and $28,241 for 1992.
INVESTMENT MANAGEMENT
The Company has been registered under the Investment Advisers Act of 1940 since
1967, and it serves as investment adviser of the Fund. (See The Company, above,
for a description of the Company; and Management, in the SAI, for affiliated
persons.) Investment management services are provided under an Investment
Management Services Agreement executed by the Company and the Board of Managers.
The Agreement continues in effect from year to year if approved at least
annually by a majority of the Board of Managers, who are not interested persons
of the Company or the Fund, cast in person at a meeting called for the purpose
of voting on such approval, and by either (a) the Board of Managers, or (b) a
majority vote of all Contract Owners.
The Agreement may be terminated at any time without penalty on 60 days' written
notice to the Company by the Board of Managers or by a majority vote of all
Contract Owners. The Company may not terminate the Agreement without the prior
approval of a new investment advisory agreement by a majority vote of all
Contract Owners. In the event of assignment, the Agreement will terminate.
In performing investment management services, the Company continuously provides
the Board of Managers with an investment program for its consideration. Upon
approval of such an investment program by the Board of Managers, the Company
executes the program by placing orders for the purchase or sale of the assets of
the Fund.
A "sub-advisory agreement" is in force between the Company and Vantage Global
Advisors, Inc. ("Vantage"), a Delaware corporation. Under it, Vantage may
perform some, or substantially all, of the investment advisory services required
by the Fund. However, the Company remains primarily responsible for investment
decisions affecting the Fund, and no additional
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compensation from the assets of the Fund is assessed as a result of that
agreement.
THE VARIABLE ANNUITY CONTRACTS
ANNUITY PROMISE
The variable annuity contract includes the Company's promise that variable
payments will be made for the lifetime of the Annuitant (commencing on the
selected annuity date) based upon mortality assumptions contained in the
contract and annuity option selected, regardless of the actual mortality
experience among the Annuitants. That is, while annuity payments are based on
life expectancies, Annuitants will nevertheless continue to receive annuity
payments if they live longer than expected. Annuity payments will not be
affected by an increase in the Company's expenses.
GENERAL COMMENTS
The periodic payment contract provides that the annuity rates and the deductions
for sales expenses, administrative expenses, and for annuity rate and expense
promises will apply to payments on an annualized basis not in excess of twice
the initial payment on an annualized basis. Payments in excess of this limit
may be made, however, with the consent of the Company. It is anticipated that
such consent will be granted at times when the individual variable annuity
contracts then being offered by the Company are substantially similar in
benefits and costs to those described herein.
The Contract Owner may elect that a portion (in multiples of 10%) of payments be
applied by the Company to purchase fixed-dollar Accumulation Units (not
described in the prospectus) under the variable annuity contract. Either the
fixed or variable portion of a deferred annuity contract may be terminated by
the Contract Owner at any time prior to commencement of annuity payments
provided the payment allocated to the other portion satisfies the Company's
usual underwriting practices.
This prospectus describes only the elements of the contract pertaining to the
Separate Account except where reference to fixed-dollar elements is specifically
made.
PURCHASE OF CONTRACTS
Persons wishing to purchase contracts must complete application forms to be
forwarded to the Home Office of the Company for its acceptance. Upon
acceptance, contracts are prepared, executed by duly authorized officers of the
Company, and forwarded to the Contract Owner.
An initial purchase payment will be priced not later than two business days
after receipt of an order to purchase, if the application and all information
necessary for processing the purchase order are complete upon receipt. The
Company may retain the purchase payment for up to five business days while
attempting to complete an incomplete application. If the application cannot be
made complete within five days, the applicant will be informed of the reasons
for the delay and the purchase payment will be returned immediately unless the
applicant specifically consents to the
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Company retaining the purchase payment until the application is made complete.
Thereafter, this initial purchase payment must be priced within two business
days.
Certain significant provisions of the contracts are discussed in the following
paragraphs.
INCREASE OR DECREASE IN AMOUNT OF PERIODIC PAYMENTS
Within the "purchase limits" stated below, the amount of a periodic payment on
an annualized basis may be increased up to twice the initial payment on an
annualized basis or decreased on any date a payment is due. Submission of a
payment different from the previous payment will constitute notice of such
change.
ASSIGNMENT
Unless contrary to applicable law, assignment of variable annuity contracts or
participants individual accounts thereunder is prohibited.
PURCHASE LIMITS
Normally, under a periodic payment contract, the minimum amount of any scheduled
purchase payment is $25 and the scheduled purchase payments must total at least
$600 per year. Normally, under a single payment contract the minimum payment is
$5,000.
GENERAL RISK FACTORS
Variable annuities are designed to provide Participants with payments which will
tend to reflect changes in the cost of living. The Company seeks to accomplish
this objective by providing a medium for investment in equity securities
accompanied by annuity promises. There is no assurance that this objective will
be attained.
Historically, the value of a diversified portfolio of common stocks held for an
extended period of time has tended to rise during periods of inflation. There
has, however, been no exact correlation, and for some periods the prices of
securities have declined while the cost of living was rising.
The value of the investments held in the Fund fluctuates daily and is subject to
the risks of changing economic conditions as well as the risks inherent in the
ability of management to anticipate changes in such investments necessary to
meet changes in economic conditions.
There is no assurance that the value of a Participant's individual account
during the years prior to retirement or that the aggregate amount of the
variable annuity payments received during the years following the commencement
of annuity payments will equal or exceed the payments made on behalf of a
Participant. Neither is there assurance that the value of an unallocated fund's
contract will equal or exceed the payments made to this
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<PAGE>
account. The policy of investment in common stocks may be maintained in both
rising and declining markets.
CONTRACT OWNER INQUIRIES
The obligations to purchasers under the Variable Annuity Contracts are those of
the Company. Inquiries from Contract Owners should be directed to the Company
at 1-800-348-1212.
ACCUMULATION PERIOD
ACCUMULATION UNITS
The purchase payments, less deductions, are credited to the account of the
Contract Owner in the form of Accumulation Units. The number of Accumulation
Units credited for a Contract Owner is determined by dividing the net purchase
payment by the value of an Accumulation Unit when the net purchase payment is
received, if received prior to the close of trading on the New York Stock
Exchange and by the value computed on the next trading day, if received
thereafter. (See Fund Valuation Procedure, below.) Crediting of Accumulation
Units may be delayed on payments received which cannot be identified or
allocated to a specific Contract Owner's account.
The number of Accumulation Units so determined shall not be changed by any
subsequent change in the value of an Accumulation Unit, but the dollar value of
an Accumulation Unit will vary in amount depending upon the investment
experience of the Fund.
VALUE OF CONTRACT OWNER'S ACCOUNT
The value of a Contract Owner's account at any time prior to the commencement of
annuity payments can be computed by multiplying the total number of Accumulation
Units by the current Accumulation Unit value. The Contract Owner bears the
investment risk, that is, the risk that market values may decline. There is no
assurance that the value of the Contract Owner's account will equal or exceed
the payments made by the Contract Owner. Each Contract Owner is advised
annually of the number of Accumulation Units credited to his or her account, the
current Accumulation Unit value, and the total value of his or her account.
BENEFICIARY
For those optional forms of payment which provide for death benefits either
before or after retirement, the Contract Owner may designate a beneficiary. The
Contract Owner may change any beneficiary during the life of the Annuitant
unless otherwise provided in the previous designation. Each change of
beneficiary revokes any previous designation. A change may be made by filing a
written request in a form that the Company will accept at its Home Office. The
Company reserves the right to require the contract for endorsement of a change
of beneficiary.
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Unless otherwise provided in the beneficiary designation, one of the procedures
described below will take place on the death of a beneficiary:
1. If any beneficiary dies before the Annuitant, that beneficiary's interest
will pass to other beneficiaries according to their respective interests.
2. If no beneficiary survives the Annuitant, the proceeds will be paid in one
sum to the Contract Owner, if living; otherwise to the Contract Owner's estate.
DEATH BENEFIT BEFORE RETIREMENT
If the Annuitant dies prior to the commencement of annuity payments, death
proceeds payable will normally be the value of the Contract Owner's account
determined as of the valuation date coincident with or next following the date
written notice of death is received by the Company. If the Contract Owner has a
minimum death benefit rider in force, the death proceeds will be the greater of
the total contributions applied (excluding rider premiums) or the value of the
account.
The proceeds due on death may be applied to provide variable payments, fixed-
dollar payments or a combination of both.
DEATH OF CONTRACT OWNER
If the owner of a non-qualified contract dies before annuity payments have
begun, then in accordance with the provisions of Section 72(s) of the Code, the
Cash Surrender Value (proceeds) of the Contract will be paid as follows: (i)
Upon the death of a non-annuitant owner, the proceeds shall be paid to any
surviving joint or contingent owner(s); (ii) If no joint or contingent owner has
been named, then the proceeds shall be paid to the annuitant named in the
contract.
If the decedent owner or joint owner is also the annuitant, then the death will
be treated as death of the annuitant subject to the provisions of this Contract
regarding death of annuitant. If the recipient of the proceeds is the surviving
spouse of the owner, the Contract may be continued in the name of the spouse as
owner.
In accordance with Section 72(s), any distribution must be paid within 5 years
of the death of the owner unless the beneficiary begins receiving, within one
year of the Contract Owner's death, the distribution in the form of a life
annuity or an annuity for a period certain not exceeding the beneficiary's life
expectancy.
JOINT/CONTINGENT OWNERSHIP
If a joint owner is named in the application, such joint owners shall be treated
as having equal undivided interests in the Contract. Either owner, independent
of the other, may exercise any ownership rights in this Contract. A contingent
owner cannot exercise any ownership rights in this
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<PAGE>
Contract while the contract owner is alive.
NON-FORFEITURE OPTIONS
SURRENDER OF CONTRACT
Upon default in payments and prior to the death of the Annuitant, the Contract
Owner may (a) exercise any of the Settlement Options described below or (b)
surrender the whole or a portion of his or her account by submission of a
written request for surrender and the contract to the Company's Home Office and
receive the cash value of his or her account. (See Federal Tax Status, below and
in the SAI.)
The payment of any value upon surrender will be made within 7 days after the
request for surrender is received by the Company at its Home Office. If the
payment of a surrender value results in reduction of the Company's state premium
tax liability, the amount payable will include the lesser of (a) the amount by
which the Company's premium tax liability is reduced or (b) the amount
previously deducted from purchase payments for premium taxes on the contract
being surrendered.
Payment may be postponed (a) for any period during which the New York Stock
Exchange is closed other than customary weekend and holiday closings or during
which trading on the New York Stock Exchange is restricted; (b) for any period
during which an emergency exists as a result of which (1) disposal of securities
in the Fund is not reasonably practicable or (2) it is not reasonably
practicable to determine the value of the Fund's net assets; or (c) for such
other periods as the SEC may by order permit for the protection of the Contract
Owners.
SUSPENSION OF PERIODIC PAYMENTS
In addition, a periodic payments Contract Owner may have his or her account
continued from the date of default in payments as a paid-up annuity to commence
on the maturity date stated in the contract.
If no non-forfeiture option is elected by the Contract Owner within 31 days of
default in payments, the contract will automatically be continued under the
paid-up annuity option.
Periodic payments may be resumed at any time prior to maturity, surrender or
death of the Annuitant.
SETTLEMENT OPTIONS
At any time prior to the commencement of the annuity payments and during the
lifetime of the Annuitant, the Contract Owner may elect to have all or a portion
of the amount due in settlement of the contract on death of the Annuitant or
upon surrender of the contract applied under any of the 6 settlement options
described below. Therefore, a Contract Owner cannot
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<PAGE>
make payments under a contract while receiving payments pursuant to a Settlement
Option under the contract.
It would generally be disadvantageous for an investor to purchase another
variable annuity contract while receiving payments under a Settlement Option.
During the lifetime of an Annuitant, the payee under a Settlement Option is the
Annuitant. After the death of the Annuitant, the payee under a Settlement
Option is the beneficiary during his or her lifetime.
There is no assurance that the value of a Contract Owner's individual account
during the years prior to retirement or that the aggregate amount of the
variable annuity payments received during the years following the commencement
of annuity payments will be equal or exceed the payments paid by a Contract
Owner.
All options may be selected on a fixed or variable basis or a combination
thereof except the Fifth Option which is available on a fixed basis only.
Amounts applied to the purchase of a fixed-dollar annuity will not participate
in the investment experience of the Fund. The allocation between fixed and
variable may be changed at any time prior to 30 days before the date on which
payments are to commence.
After annuity payments have commenced, the Company will honor any request for a
surrender of the remaining value of a contract in any case in which annuity
payments are being made under a form of annuity not involving life
contingencies. This applies to the First and Fourth Options at all times. The
charge for mortality guarantees also continue to be deducted from accounts held
under the First and Fourth Options, although these options are not based on life
contingencies.
FIRST OPTION--PAYMENTS FOR DESIGNATED PERIOD
The proceeds may be paid in monthly payments over a period from 1 to 30 years.
SECOND OPTION--LIFE INCOME WITH PAYMENTS GUARANTEED FOR DESIGNATED PERIOD
The proceeds may be paid in monthly payments during a designated period elected
and thereafter throughout the lifetime of the payee. The designated period may
be 10, 15 or 20 years. The amount of each payment will depend on the payee's sex
and age.
THIRD OPTION--UNIT REFUND LIFE ANNUITY
The unit refund life annuity is an annuity payable monthly during the lifetime
of the Annuitant with the guarantee that upon death a payment will be made of
the value of the number of Annuity Units equal to the excess, if any, of (a) the
total amount applied under this option divided by the Annuity Unit value for the
date annuity payments commence over (b) the Annuity Units represented by each
payment to the Annuitant multiplied by the number of payments paid prior to
death. The value of the number of
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Annuity Units is computed on the date the Home Office receives written notice of
the Annuitant's death, provided that if notice is not received prior to the
close of trading at the New York Stock Exchange on such date computation shall
be made on the first trading date thereafter.
For example, assume that $10,000 is applied under this option. Further assume
that the Annuity Unit value for the annuity commencement date is $2 and the
first monthly payment due the Annuitant is $61. This means that the Annuitant
has 5,000 Annuity Units credited to his or her account ($10,000 divided by $2
per unit) as of the annuity commencement date and that each monthly payment
received by the Annuitant will be equal to the monetary value, at the time paid,
of 30.5 units ($61 first monthly payment divided by $2 per unit). Assume the
Annuitant receives 10 monthly payments and then dies. Prior to death the
Annuitant was paid the value of 305 units (30.5 per month x 10 months). The
beneficiary is entitled to the value in 1 sum of 4,695 Annuity Units (5,000
units initially less 305 units already valued and paid). If the value of an
Annuity Unit is $2.05 on the relevant valuation date, the cash payment to the
beneficiary will be $9,624.75 (4,695 remaining units x unit value of $2.05).
FOURTH OPTION--PAYMENTS OF DESIGNATED AMOUNT
The proceeds may be paid in equal annual, semi-annual, quarterly or monthly
payments of a designated amount (not less than $50 per year per $1,000 of
original proceeds left with the Company) until the proceeds adjusted by
investment experience are exhausted. The minimum amount withdrawable under this
option is not necessarily the recommended amount.
FIFTH OPTION--INTEREST INCOME
The proceeds may be left on deposit with the Company, subject to withdrawal upon
demand, and interest thereon will be paid annually, semi-annually, quarterly or
monthly as elected. The company guarantees an interest rate of 3% per year.
SIXTH OPTION--ANNUITY SETTLEMENT
The proceeds may be paid in payments in the form provided by any single payment
immediate annuity contract issued by the Company on the date on which the
proceeds become payable. However, the amount of the first payment shall be 103%
of the first payment which such proceeds would otherwise provide under such
annuity contract on the basis of the Company's rates in effect on such date. For
the purpose of calculating the first payment under the single payment immediate
annuity contract selected pursuant to this option, it is assumed that a
deduction for sales and administrative expenses (which currently amounts to 2%
plus $115 for single payment variable annuity contracts) has been made from the
amount applied under this option.
The minimum amount of proceeds which may be applied under any settlement option
for any payee shall be $5,000; proceeds of a smaller amount due any payee will
be paid in one sum. If at any time the interest payments or
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other payments to any payee under a settlement option are or become less than
$25 each, the Company shall have the right to change the frequency of payment to
such intervals as will result in payments of at least $25.
At the death of any payee after a Settlement Option becomes operative, the ten
present value of the current dollar amount of any unpaid payments certain under
the First or Second Option, or the amount payable at the death of the payee
under the Third Option or the proceeds remaining with the Company under the
Fourth or Fifth option shall be paid in 1 sum to the executors or administrators
of the payee unless other provision shall have been specified in the election
and approved by the Company. If the Sixth Option has been selected and becomes
operative, then at the death of the last surviving payee the amount payable
thereunder shall be paid in a single sum to the executors or administrators of
such payee unless other provisions have been specified in the election and
approved by the Company. Present values will be based on the Assumed Investment
Rate (AIR) used in determining annuity payments. The mortality and expense risk
charge and the charge for administrative services will be assessed on all
annuity options, including those that do not have a life contingency and thus no
mortality risk.
ANNUITY PERIOD
ASSUMED INVESTMENT RATE (AIR)
The Company will permit the Contract Owner to elect an AIR of 3.5%, 4.5% or 5%
if state law or regulations permit. These AIRs are used merely to determine the
required level of employer contributions in connection with certain pension
plans. It should not be inferred that such rates will bear any relationship to
the actual net investment experience of the Fund.
The choice of the AIR affects the pattern of annuity payments. A higher AIR
will produce a higher initial payment but a more slowly rising series of
subsequent payments (or a more rapidly falling series of subsequent payments)
than a lower AIR.
The objective of a variable annuity contract is to provide level payments during
periods when the economy is relatively stable and to reflect as increased
payments only the excess investment results flowing from inflation or an
increase in productivity. The achievement of this objective will depend in part
upon the validity of the assumption that the net investment rate of the Fund
equals the AIR during periods of stable prices. Subsequent payments will be
smaller than, equal to or greater than the first payment depending upon whether
the actual net investment rate is smaller than, equal to or greater than the
AIR.
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The following table shows the Annuity Unit values at each year end for the
different AIRs:
<TABLE>
<CAPTION>
Annuity Unit Values Annuity Unit Values
Assumed Investment Rate Assumed Investment Rate
December 31 3.5% 4.5% 5% December 31 .5% 4.5% 5%
<S> <C> <C> <C> <C> <C> <C> <C>
1985 1.565 1.312 1.202 1990 1.920 1.539 1.379
1986 1.541 1.282 1.171 1991 2.266 1.799 1.604
1987 1.604 1.322 1.202 1992 2.381 1.870 1.659
1988 1.702 1.389 1.256 1993 2.525 1.965 1.735
1989 2.030 1.641 1.477 1994 2.409 1.857 1.632
</TABLE>
FORM OF ANNUITY
DEFERRED ANNUITY CONTRACTS
A Contract Owner selects prior to issue of the deferred annuity contract a
maturity date not later than age 75, except that contracts issued in connection
with qualified employee pension and profit-sharing trusts (described in Section
401(a) and tax exempt under Section 501(a) of the Internal Revenue Code) and
qualified annuity plans (described in Section 403(a) of the Code), including
H.R.-10 trusts and plans covering self-employed individuals and their employees,
provide for annuity payments to commence at the date and under the option
specified in the plan.
If a Contract Owner does not elect otherwise, the contract automatically
provides for a life annuity with 120 monthly payments guaranteed, except in
those cases in which a joint and survivor annuity payout is required by law.
(Under any option providing for guaranteed payments, the number of such payments
which remain unpaid at the date of the Annuitant's death will be paid to the
Annuitant's beneficiaries as such payments become due. See Accumulation
Period, above.)
In addition to the automatic provision and the non-forfeiture and Settlement
Options, the contract includes 3 optional annuities (described below) each of
which may be selected on either a fixed annuity or variable annuity basis, or a
combination thereof. In the absence of an election to the contrary, the amount
accumulated in the Fund will be applied to provide variable annuity payments and
the amount accumulated for a fixed annuity will be applied to provide fixed
annuity payments. Within the limitations of the plan, the Contract Owner may
only change the maturity date, annuity options or allocation between fixed and
variable up to 30 days prior to the date annuity payments would otherwise
commence. If proceeds become available to a beneficiary, the beneficiary may
choose or change any payment option if proceeds are available to the beneficiary
in one sum. A choice or change must be in writing in a form that the Company
will accept.
IMMEDIATE ANNUITY CONTRACT
The Company offers 5 forms of immediate variable annuity contracts. (See
Accumulation Period--Settlement Options--Second and Third Options, above, and
Optional Annuity Forms, below.)
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OPTIONAL ANNUITY FORMS
LIFE ANNUITY
An annuity payable monthly during the lifetime of the Annuitant and terminating
with the last monthly payment preceding the death of the Annuitant. This option
offers the maximum level of monthly payments since there is no guarantee of a
minimum number of payments or provision for a death benefit for beneficiaries.
It would be possible under this option for the Annuitant to receive no annuity
payment if he or she died prior to the due date of the first annuity payment,
one annuity payment if the Annuitant died before the second annuity payment
date, etc.
JOINT AND LAST SURVIVOR ANNUITY
An annuity payable monthly during the joint lifetime of the Annuitant and a
designated second person, and thereafter during the remaining lifetime of the
survivor.
JOINT AND TWO-THIRDS TO SURVIVOR ANNUITY
An annuity payable monthly during the joint lifetime of the Annuitant and a
designated second person with two-thirds of the number of Annuity Units in
effect during the joint lifetime continuing during the remaining lifetime of the
survivor.
MONTHLY ANNUITY PAYMENTS
DEFERRED ANNUITY CONTRACTS--FIRST MONTH
When annuity payments commence under a deferred annuity contract, the value of
the Contract Owner's account is determined as the product of he value of an
Accumulation Unit on the 14th day prior to the date the first annuity payment is
due and the number of Accumulation Units credited to the Contract Owner's
account as of the date annuity payments commence.
The contract contains tables indicating the dollar amount of the first monthly
payment under each form of annuity for each $1,000 of value of the Contract
Owner's account. The first monthly payment varies according to the form of
annuity selected (see the descriptions above) and the adjusted age of the
Annuitant.
The Company may use sex distinct tables in contracts that are not associated
with employer sponsored plans.
The contract contains a formula for determining the adjusted age, and tables are
determined from the Progressive Annuity Table assuming births in the year 1900
and an AIR of 3.5% per year. The total first monthly annuity payment is
determined by multiplying the number of thousands of dollars of value of the
Contract Owner's account (less applicable premium taxes not previously deducted)
by the amount of the first monthly payment per $1,000 of value from the table in
the contract.
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Each contract contains a provision that the first monthly payment will not be
less than 103% of the first monthly payment available under a then currently
issued immediate annuity at the same AIR if a single purchase payment were made
equal to the value which is being applied under the contract to provide annuity
benefits.
For the purposes of calculating the first payment under the single payment
immediate annuity contract selected pursuant to this provision, it is assumed
that a deduction for sales and administrative expenses (which currently amounts
to 2% plus $115 for single payment variable annuity contracts) has been made
from the amount applied under this provision.
If the annuity specified in the plan can be obtained at a lower cost to the
Contract Owner by using the same mortality table as is used in determining
payments under group variable annuity contracts then being issued by the Company
for a similar class of Annuitants, it will be done.
DEFERRED ANNUITY CONTRACTS--SUBSEQUENT MONTHS
The amount of the first monthly annuity payment, is divided by the value of an
Annuity Unit for the valuation period in which the payment is due to determine
the number of Annuity Units represented by the first payment. This number of
Annuity Units remains fixed during the annuity period, and in each subsequent
month, the dollar amount of the annuity payment is determined by multiplying
this fixed number of Annuity Units by the then value of an Annuity Unit.
IMMEDIATE ANNUITY CONTRACTS
In the case of immediate annuities, the number of Annuity Units purchased is
specified in the contract. The number of such units is determined by (a)
multiplying the net single payment (after deductions) by the applicable annuity
factor from the annuity tables then used by the Company for immediate variable
annuity contracts, and (b) dividing such product by the value of the Annuity
Unit based on the net investment factor calculated on the Valuation Date
coincident with or next following the date of issue of the contract. This
number of Annuity units remains fixed during the annuity period, and the dollar
amount of the annuity payment is determined by multiplying this fixed number of
Annuity Units by the then value of an Annuity Unit.
FUND VALUATION PROCEDURE
VALUATION DATE
A valuation date is any date on which the New York Stock Exchange is open for
trading. On any date other than a valuation date, the Accumulation Unit value
or the Annuity Unit value will be the same as that on the next following
valuation date.
VALUATION PERIOD
A valuation period is that period of time from the beginning of the day
following a valuation date to the end of the next following valuation date.
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ACCUMULATION UNIT VALUE
The value of an Accumulation Unit was set at $1 effective November 22, 1967.
The value of an Accumulation Unit on the last day of any subsequent valuation
period is determined by multiplying such value on the last day of the prior
valuation period by the net investment factor for the current valuation period.
Accumulation Units will be valued daily, as of the close of trading on the New
York Stock Exchange.
ANNUITY UNIT VALUE
The value of an Annuity Unit for the valuation period ending November 22, 1967
was established at $1. The value of the Annuity Unit for any subsequent
valuation period is determined by multiplying the value for the immediately
preceding valuation period by the product of (a) the net investment factor for
the valuation period containing the 14th day prior to the last day of the
current valuation period and (b) a factor to neutralize the AIR built into the
annuity tables contained in the contract which is not applicable as actual net
investment income is credited instead.
The value of an Annuity Unit on any date upon which the New York Stock Exchange
is closed is its value on the next succeeding valuation date. The net
investment factor for the 14th day prior to the current valuation date is used
in calculating the value of an Annuity Unit in order to permit calculation of
amounts of annuity payments and mailing of checks in advance of their due dates.
Such checks will normally be issued and mailed at least 3 days before the due
date.
NET INVESTMENT FACTOR
The net investment rate for any valuation period is equal to the gross
investment rate expressed in decimal form to 8 places less a deduction of the
product of .00363% (1.325% on an annual basis; deduction for providing
investment management, annuity rate promises and expense promises) and the
number of days in the valuation period.
The gross investment rate is the quotient of 2 factors, "a" and "b." "a" is
equal to investment income for the valuation period, plus capital gains, minus
capital losses and taxes (see Federal Tax Status, below and in the SAI.) "b" is
equal to the value of the Fund at the beginning of the valuation period. "a" is
divided by "b" to yield the gross investment rate. The gross investment rate
may be positive or negative.
The net investment factor for the Fund is 1.0 plus the net investment rate for
the period. (See Purchase and Pricing of Securities Being Offered, in the SAI,
for an illustration of the method of calculation of Accumulation Unit value and
Annuity Unit value.)
VALUING THE FUND'S ASSETS
In determining the value of the assets of the Fund, each security traded on
26
<PAGE>
a national securities exchange is valued at the last reported sale price on the
valuation date. If there has been no sale on such day, then the value of such
security is taken to be the average of the reported bid and asked prices at the
time as of which the value is being ascertained.
Any security not traded on a securities exchange but traded in the over-the-
counter market is valued at the average of the quoted bid and asked prices on
the valuation date. Securities, including restricted securities, if any, or
other assets for which market quotations are not readily available are valued at
fair value as determined in good faith by the Board of Managers.
FEDERAL TAX STATUS
The following is a general discussion of the federal income tax rules applicable
to the Contracts as of the date of this Prospectus. Further information is
provided in the Statement of Additional Information (SAI). NEITHER THESE
DISCUSSIONS NOR THOSE IN THE SAI ARE INTENDED AS TAX ADVICE. This section does
not discuss the federal tax consequences resulting from every possible
situation. Moreover, no attempt has been made to consider any applicable state,
local or foreign tax law, other than the imposition of any state premium taxes
(see Charges and Deductions, above). Any person concerned about the tax
implications with respect to the Contracts should consult a competent tax
adviser. The following discussion is based upon the Company's understanding of
the present federal income tax laws as they are currently interpreted by the
Internal Revenue Service. No representation is made as to the likelihood of
continuation of the present federal income tax laws or of the current
interpretations by the Internal Revenue Service.
TAX STATUS OF THE CONTRACTS
The following discussion assumes that the Contracts will qualify as annuity
contracts for federal income tax purposes. The SAI describes such
qualifications.
TAXATION OF THE CONTRACTS
An annuity Contract Owner generally is not taxed on increases in the value of a
Contract until distribution occurs, either in the form of a lump sum payment
received by withdrawing all or part of the cash value (i.e., "surrenders") or as
annuity payments under the annuity option elected. For this purpose, the
assignment or pledge of, or the agreement to assign or pledge, any portion of
the value of a Contract will be treated as a distribution. A transfer of
ownership of a contract, or designation of an annuitant or other beneficiary who
is not also the contract owner, may also result in tax consequences. The taxed
portion of a distribution (in the form of a lump sum payment or an annuity) is
taxed as ordinary income. However, for purchase payments made after February 28,
1986, an owner of a Contract who is not a natural person (subject to limited
exceptions) will be taxed on any increase in the Contract's cash value over the
"investment in the contract" during the taxable year, even if no distribution
occurs.
27
<PAGE>
The following discussion applies to Contracts owned by natural persons.
In the case of a surrender under a Contract, generally amounts received are
first treated as taxable income to the extent that the cash value of the
contract immediately before the surrender exceeds the "investment in the
contract" at that time. Any additional amount withdrawn is not taxable.
However, in the case of a surrender under a Contract issued before August 14,
1982, and allocable to an "investment in the contract." The "investment in the
contract" generally equals the portion, if any, of any premium paid by or on
behalf of an individual under a Contract which is not excluded from the
individual's gross income.
Although the tax consequences may vary depending on the form of annuity selected
under the Contract, the recipient of an annuity payment under a Contract
generally is taxed on the portion of such payment that exceeds the "investment
in the contract." For variable annuity payments, the taxable portion is
determined by a formula that establishes a specific dollar amount of each
payment that is not taxed. The dollar amount is determined by dividing the
"investment in the contract" by the total number of expected periodic payments.
For fixed annuity payments, there generally is no tax on the portion of each
payment that represents the same ratio that the "investment in the contract"
bears to the total expected value of payments for the term of the annuity; the
remainder of each payment is taxable. However, for individuals whose annuity
starting date is after December 31, 1986, the entire distribution (whether fixed
or variable) will be fully taxable once the recipient is deemed to have
recovered the dollar amount of his "investment in the contract."
There may be imposed a penalty tax on distributions equal to ten percent of the
amount treated as taxable income. The penalty tax is not imposed in certain
circumstances: (1) distributions received on or after age 59 1/2 or due to
disability; (2) distributions made on or after the holder's death; (3)
distributions received in substantially equal installments as a life annuity
(subject to special "recapture" rules if the series of payments is subsequently
modified), and (4) distributions allocable to the "investment in the contract"
before August 14, 1982.
MULTIPLE CONTRACTS
All non-qualified contracts entered into after October 21, 1988 and issued by
the same insurance company (or its affiliates) to the same contract owner during
any calendar year will be treated as a single contract, for tax purposes.
WITHHOLDING
Pension and annuity distributions generally are subject to withholding for the
recipient's federal income tax liability at rates that vary according to the
type of distribution and the recipient's tax status. Recipients, however, may
be provided the opportunity to elect not to have tax withheld from
distributions. Under the Unemployment Compensation Amendments of 1992 ("UCA"),
twenty percent (20%) income tax withholding may apply to "eligible
28
<PAGE>
rollover distributions." All taxable distributions from qualified plans and
Section 403(b) annuities are "eligible rollover distributions," except (1)
annuities paid out over life or life expectancy, (2) installments paid for a
period spanning ten years or more, and (3) required minimum distributions. The
UCA imposes a mandatory twenty percent (20%) income tax withholding on any
eligible rollover distribution that the holder does not elect to have paid in a
direct rollover to another qualified plan, Section 403(b) annuity, or individual
retirement account.
VOTING RIGHTS
When a meeting is to be held, the Rules and Regulations of the Fund specify a
quorum as 25% of the Contract Owners entitled to vote at an annual or special
meeting. Therefore, less than a majority of those entitled to vote could take
action which is not prohibited by law which could affect other Contract Owners'
rights.
The number of votes which a Contract Owner may cast for Participants in the
accumulation period is equal to the number of Accumulation Units under the
contract. For Annuitants receiving annuity payments, the Contract Owner may
cast the number of votes equal to (a) the amount of assets established in the
Fund to meet the annuity obligations related to such Annuitants divided by (b)
the value of an Accumulation Unit. The amount of the assets established in the
Fund for an Annuitant receiving annuity payments will decrease as annuity
payments are made.
Since assets are maintained in the Fund with respect to other contracts than
those offered by this prospectus, Contract Owners under such other contracts are
also entitled to vote. The number of votes which they are entitled to cast is
computed in the same manner as for Contract Owners of the variable annuity
contracts offered by this prospectus.
The number of votes each Contract Owner may cast shall be determined as of a
date to be chosen by the Board of Managers within 90 days of the date of the
meeting, and at least 20 days' written notice of the meeting will be given. To
be entitled to vote, a Contract Owner must have been an owner on both the date
as of which the number of votes was determined and the date of the written
notice.
During the accumulation period, a Participant under a group contract with
respect to which assets are maintained in the Fund or an employee covered by an
individual contract issued in connection with an H.R.-10 plan or pursuant to
Section 403(b) of the Internal Revenue Code will have the right to instruct the
Contract Owner with respect to the votes attributable to his or her individual
account, and a Participant under a group contract or an employee covered by an
individual contract issued pursuant to a qualified employee pension or profit-
sharing trust or a qualified annuity plan (other than one involving an H.R.-10
plan or pursuant to Section 403(b) will have the right to instruct the Contract
Owner only with respect
29
<PAGE>
to votes attributable to payments made by him or her, if any, and with respect
to additional votes that are authorized by the terms of the plan, if any. All
other votes entitled to be cast during such period under such a trust or plan
may be cast by the Contract Owner in its sole discretion.
During the annuity period, every Participant and every employee will have the
right to instruct the Contract Owner with respect to all votes attributable to
the amount of assets established in the Fund to meet the annuity obligations
related to such Participant or employee. Each Contract Owner and each employee
and Participant having the right to instruct a Contract Owner with respect to
any votes will receive all proxy materials.
The Rules and Regulations of the Fund provide that each Contract Owner shall
cast the votes with respect to which instructions from an employee or a
Participant have been received in accordance with such instructions and all
votes with respect to which no instructions are received, other than those as to
which no employee or Participant is entitled to give instructions, shall be cast
in the same proportion as are votes with respect to which instructions are
received by such Contract Owners. If no one is entitled to instruct a Contract
Owner or if a Contract Owner receives no instructions, all votes to which such
Contract Owner is entitled may be cast in the Contract Owner's sole discretion.
The Company and the Fund have no duty to ascertain whether Contract Owners
actually cast votes under such contracts in accordance with the voting rights
provisions described in this section.
The Rules and Regulations of the Fund permit the Board of Managers to dispense
with an annual meeting in any year in which the Investment Company Act of 1940
does not require a Contract Owner to vote on: 1) election of members of the
Board of Managers; 2) approval of an investment advisory agreement; 3)
ratification of the independent public accountant; or 4) approval of a
distribution agreement. Each year, prior to the date set by the Rules and
Regulations for the annual meeting, the Board of Managers will determine whether
such meeting need be held.
Special meetings may be called for any proper purpose when permitted by
applicable law. As a result of the option for the Board to dispense with annual
meetings of Contract Owners, special meetings must be called whenever there is a
change in the Fund's independent public accountant, and whenever fewer than 50%
of the existing Members of the Board of Managers has been elected by Contract
Owners. Also, since dispensing with annual meetings results in perpetuating
Members of the Board of Managers in office, the Fund is required to call a
special meeting when Contract Owners who meet the standards of Section 16(c) of
the Investment Company Act of 1940 apply to the Fund requesting that such a
meeting be called for the purpose of removing one or Members of the Board of
Managers. That section also requires that the Fund facilitate communication
between Contract Owners who wish to solicit the approval of other Contract
Owners for the calling of such a meeting. Additional information about this
procedure is available from Fund management.
30
<PAGE>
LEGAL PROCEEDINGS
As of the date of this Prospectus, neither the Fund nor the Company is involved
in any material pending legal proceedings, other than ordinary routine
litigation incidental to the business.
OTHER ANNUITY CONTRACTS
Group variable annuity contracts are also sold by the Company. Assets with
respect to the group variable annuity contracts are also held in the Fund and
are affected by its investment experience. All such contracts initially meet
the requirements of Section 403(b) of the Internal Revenue Code, or are issued
with respect to (a) plans initially qualifying under Section 401(a) of the Code,
(b) annuity plans initially qualifying under Section 403(a) of the Code, (c)
retirement plans initially qualifying for special tax treatment under Section
408 of the Code, or (d) governmental or tax-exempt organization deferred
compensation plans meeting the requirements of Code Section 457.
CUSTODIAN
Bankers Trust Company, 14 Wall Street, 4th Floor, New York, New York 10005
("Bankers") is Custodian for the Fund pursuant to a Custodian Agreement
effective March 4, 1985. Under this Agreement, Bankers shall (1) receive and
disburse money; (2) receive and hold securities; (3) transfer, exchange, or
deliver securities; (4) present for payment coupons and other income items,
collect interest and cash dividends received, hold stock dividends, etc.; (5)
cause escrow and deposit receipts to be executed; (6) register securities; and
(7) deliver to the Fund proxies, proxy statements, etc.
STATE REGULATION
As a life insurance company organized and operating under Indiana law, the
Company is subject to provisions governing such companies and to regulation by
the Indiana Commissioner of Insurance.
The Company's books and accounts are subject to review and examination by the
Indiana Insurance Department (Department) at all times and a full examination of
its operations normally is conducted by the Department at least once in every 5
years.
TABLE OF CONTENTS OF THE
STATEMENT OF ADDITIONAL INFORMATION (SAI)
<TABLE>
<CAPTION>
ITEM Page
<S> <C>
General Information and History B-2
Special Terms B-2
Investment Objectives and Policies of the Fund B-2
Management B-2
Investment Advisory and Related Services B-3
Brokerage Allocation B-3
Purchase and Pricing of Securities Being Offered B-3
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Distribution of Variable Annuity Contracts B-4
Federal Tax Status B-4
Other Services B-5
Underwriters B-5
Determination of Net Asset Value B-5
Financial Statements B-6
</TABLE>
NOTE: SEE THE COVER PAGE OF THIS PROSPECTUS FOR DETAILS ABOUT HOW TO OBTAIN A
COPY OF THE SAI.
32
<PAGE>
LINCOLN NATIONAL
VARIABLE ANNUITY
FUND B (INDIVIDUAL)
PROSPECTUS
APRIL 30, 1995
INDIVIDUAL VARIABLE ANNUITY
CONTRACTS ISSUED BY
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
FORT WAYNE, INDIANA
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THE PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF, OR SOLICITATION OF
AN OFFER TO ACQUIRE, ANY INTEREST OR PARTICIPATION IN THE VARIABLE ANNUITY
CONTRACTS OFFERED BY THIS PROSPECTUS IN ANY JURISDICTION TO ANYONE TO WHOM IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION IN SUCH JURISDICTION.
To obtain a copy of the Statement of Additional Information, please complete and
mail the following form:
-------------------------------------------------------------------------------
Please send me a copy of the current Statement of Additional Information for
Lincoln National Variable Annuity Fund B (Individual):
(Please Print)
Name:__________________________________________________________________________
Address:_______________________________________________________________________
City____________________________ State_____________________ Zip________________
Mail to: Kim Oakman, The Lincoln National Life Insurance Company, P.O. Box 2340,
Fort Wayne, Indiana 46801
Form 10734 4/95
33
<PAGE>
LINCOLN NATIONAL
VARIABLE ANNUITY
FUND B (GROUP)
1300 South Clinton Street, Fort Wayne, Indiana 46802
Telephone: 1-800-348-1212
GROUP VARIABLE ANNUITY CONTRACTS
ISSUED BY:
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
The group variable annuity contracts offered by this prospectus are designed for
retirement planning. The variable annuity contracts provide annuity payments
commencing on a selected future annuity date.
The principal investment objective of Lincoln National Variable Annuity Fund B
(the Fund) is the long-term growth of capital in relation to the changing value
of the dollar. A secondary investment objective is the production of current
income. The Fund seeks to accomplish these objectives by investing in equity
securities, principally common stocks.
Depending on the provisions of the Plan, the Participant or Contract Owner may
elect, if the Plan so provides, that a portion (in multiples of 10%) of payments
be applied by the Company to purchase fixed-dollar accumulation units under the
variable annuity contract. However, unless reference is specifically made to
fixed-dollar elements, this prospectus relates to variable elements under the
Separate Account.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS SETS FORTH CONCISELY THE INFORMATION ABOUT THE FUND THAT A
PROSPECTIVE INVESTOR OUGHT TO KNOW BEFORE INVESTING. PLEASE READ IT CAREFULLY
AND RETAIN IT FOR FUTURE REFERENCE.
ADDITIONAL INFORMATION ABOUT THE FUND HAS BEEN FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION. THAT STATEMENT OF ADDITIONAL INFORMATION (SAI), DATED
APRIL 30, 1995, HAS BEEN INCORPORATED BY REFERENCE INTO THIS PROSPECTUS AND WILL
BE PROVIDED ON REQUEST AND WITHOUT CHARGE. WRITE KIM OAKMAN, THE LINCOLN
NATIONAL LIFE INSURANCE COMPANY, P.O. BOX 2340, FORT WAYNE, INDIANA 46801, OR
CALL 1-800-348-1212, extension 4912. A TABLE OF CONTENTS FOR THE SAI APPEARS ON
THE LAST PAGE OF THIS PROSPECTUS.
____________
THIS PROSPECTUS IS DATED APRIL 30, 1995.
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Special Terms 2
Expense Table 3
Synopsis 4
Per-Accumulation-Unit Income and Capital Changes 5
Financial Statements 5
The Company 5
The Fund 5
Investment Objectives and Policies of the Fund 6
Charges and Deductions 7
Investment Management 8
The Variable Annuity Contracts 9
Accumulation Period 10
Annuity Period 11
Fund Valuation Procedure 13
Federal Tax Status 14
Voting Rights 15
Legal Proceedings 16
Other Annuity Contracts 16
Custodian 16
State Regulation 16
Table of Contents of the Statement of Additional Information 16
</TABLE>
SPECIAL TERMS
As used in this prospectus the following terms have the indicated meanings.
ACCUMULATION UNIT: A statistical device used to determine the value of an
individual account prior to the commencement of annuity payments.
ANNUITANT: The person on whose life or life expectancy the payments are based.
ANNUITY: A series of payments for (a) life, (b) life with either a minimum
number of payments or an ascertainable sum guaranteed, or (c) the joint lifetime
of the Annuitant and another person and thereafter during the lifetime of their
survivor.
ANNUITY RATE PROMISE: The promise that the amount of annuity payments will not
be affected by the fact that Annuitants live longer than expected.
ANNUITY UNIT: A statistical device used to determine the amount of annuity
payments.
CONTRACT OWNER: The annuitant, or other designated person, except in cases where
a Contract is issued to a trustee of a trust or a custodian of a qualified
pension or profit-sharing plan under Section 401(a) of the Code or of an
Individual Retirement Annuity under Section 408 of the Code, or where a Contract
is issued in connection with a deferred compensation plan pursuant to Section
457 of the Code. In cases where the Contract is issued to such a trustee or
custodian, as defined above, the Contract Owner is the trustee or custodian.
2
<PAGE>
FIXED-DOLLAR ANNUITY: An annuity with payments which remain fixed throughout the
payment period and which do not reflect the investment experience of a separate
account.
PAYMENTS: Amounts paid to purchase an annuity by or on behalf of an Annuitant.
PARTICIPANT: The individual participating in a qualified pension or profit-
sharing plan pursuant to Section 401(a) of the Code, a deferred compensation
plan pursuant to Section 457 of the Code, a tax deferred annuity, pursuant to
Section 403(a) of the Code, and a tax sheltered annuity pursuant to 403(b) of
the Code.
SEPARATE ACCOUNT: Assets set aside in a separate account by The Lincoln National
Life Insurance Company with respect to payments received under the variable
annuity contracts offered by this prospectus and certain other annuity contracts
and designated as Lincoln National Variable Annuity Fund B.
TERMINATION AND SURRENDER: Surrender means redemption; the term redemption may
be used interchangeably with surrender. The termination options permit
redemption as set forth in Accumulation Period, below.
VARIABLE ANNUITY: An annuity providing for payments varying in accordance with
the changing values of securities held in a separate account.
VARIABLE ANNUITY CONTRACT: An agreement between the Company and the Contract
Owner providing a variable annuity.
3
<PAGE>
EXPENSE TABLE
<TABLE>
<CAPTION>
CONTRACT OWNER TRANSACTION EXPENSES
SINGLE PERIODIC
PREMIUM PREMIUM
<S> <C> <C>
Sales Load Imposed on Purchases
(as a percentage of purchase payments) 2%+$50 4.25%
Administrative Expense $65.00 1.00%
Minimum Death Benefit (if elected) .75% .75%
ANNUAL EXPENSES (as a percentage of average net assets)
Management Fees .32%
Annuity Rate and Expense Risk Fees 1.00%
Total Annual Expenses 1.32%
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE*
1 YEAR 3 YEARS 5 YEARS 10 YEARS
S.P. P.P. S.P. P.P. S.P. P.P. S.P. P.P.
<S> <C> <C> <C> <C> <C> <C> <C> <C>
At the end of the
applicable time period,
you would pay the
following expenses on a
$1,000 investment,
assuming 5% annual
return on assets: $147 $66 $173 $95 $202 $126 $287 $218
</TABLE>
*The figures are the same, whether the Contract Owner holds the contract,
surrenders it, or annuitizes. The expenses shown do not include charges for the
minimum death benefit, since the purchase of that benefit is optional with the
client. [S.P.=Single Premium; P.P.=Periodic Payment]
This table is provided to assist the Contract Owner in understanding the various
costs and expenses that he or she will bear directly or indirectly. The table
reflects expenses of operating both the Variable Annuity Contract and the Fund.
For a more complete description of the various costs and expenses involved, see
"Charges and Deductions" in this Prospectus. Premium taxes may also be
applicable, although they do not appear in the table. THE "Example" SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY
BE GREATER OR LESSER THAN THOSE SHOWN. This table is unaudited.
4
<PAGE>
SYNOPSIS
WHAT ARE THE VARIABLE ANNUITIES BEING OFFERED?
The variable annuity contracts offered by this prospectus are of 2 types:
immediate annuities and deferred annuities. Deferred annuities may be purchased
with a single payment or with periodic payments. Immediate annuities may only
be purchased with a single payment.
WHO IS THE PRINCIPAL UNDERWRITER?
The Lincoln National Life Insurance Company (the Company), a registered broker-
dealer, is the principal underwriter. It makes contracts available through its
registered representatives licensed to sell life insurance policies and annuity
contracts.
INVESTMENT ADVISER--NATURE OF BUSINESS
The Company, a stock life insurance company providing life insurance and
annuities, serves as investment adviser to the Fund.
WHAT FEES ARE CHARGED TO THE FUND?
For providing investment management services, the Company (the adviser) will
make daily deductions aggregating .323% annually of the average daily value of
the Fund. (See Investment Management, below.)
Daily deductions of 1.002% annually of the average daily value of the Fund are
also made for annuity rate and expense guarantees. (See Charges and Deductions,
below.)
In general, see Expense Table on page 3.
WHAT IS THE MAXIMUM SALES LOAD?
The maximum sales load under a periodic payment contract is 4.49% of the net
amount invested which is 4.25% of the offering price (gross payment received).
Under a single payment contract, the maximum sales load is 3.9% of the net
amount invested. The maximum sales load is 2% of the offering price (gross
payment received) plus $50.
There are provisions for reduced sales charges. (See Charges and Deductions,
below.)
ADMINISTRATIVE EXPENSE CHARGES
In addition to the maximum sales load described above, a charge is also deducted
for administrative expenses. This charge is a maximum of 1% under periodic
payment contracts; under single payment contracts, the charge is $65.
5
<PAGE>
ARE THERE ANY OTHER DEDUCTIONS, CHARGES OR PENALTIES?
If the minimum death benefit has been elected, an additional deduction of .75%
is made from each purchase payment. Deductions are also made for any applicable
premium taxes. If you withdraw contract value or surrender the contract before
the annuity period begins, you may be subject to a penalty tax under Section
72(q) of the Code.
IS THERE A SHORT-TERM CANCELLATION RIGHT?
Within 10 days after this contract is first received, it may be cancelled for
any reason by delivering or mailing it to the agent through whom it was
purchased or to the Home Office of the Company. Upon cancellation, this
contract shall be void from the beginning and the Company will return the value
of any payments made to the variable account (including the sales and
administrative charge).
IS A MINIMUM INVESTMENT REQUIRED?
Normally, under a periodic payment contract, the minimum amount of any scheduled
purchase payment is $25 and the scheduled purchase payments must total at least
$600 per year. Normally, under a single payment contract the minimum payment is
$5,000.
INVESTMENT OBJECTIVES
The principal investment objective of the Fund is the long-term growth of
capital in relation to the changing value of the dollar. A secondary investment
objective is the production of current income. (See Investment Objectives and
Policies of the Fund, below.)
TYPE OF FUND
The Fund is a segregated investment account of the Company, operated as an open-
end, diversified management investment company, which continuously offers its
variable annuity contracts for sale.
REDEMPTION OR REPURCHASE PRICE
Payments upon redemption will be made at the value of the account without any
charge. (See Accumulation Period, below.)
6
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY FUND B
PER-ACCUMULATION-UNIT INCOME AND CAPITAL CHANGES
(For an accumulation unit outstanding throughout the year)
The following per-unit income and capital changes table of the Fund has
been audited by Ernst & Young LLP, independent auditors. This table should be
read in conjunction with the Fund's financial statements, notes and report of
independent auditors included in the Statement of Additional Information. The
information is for years ended December 31.
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income $ .181 $ .176 $ .179 $.159 $ .128 $ .159 $ .131 $ .111 $ .088 $ .079
Expenses .082 .079 .072 .067 .056 .054 .045 .048 .038 .030
Net investment income .099 .097 .107 .092 .072 .105 .086 .063 .050 .049
Net realized and unreal-
ized gain (loss) on
investments (.175) .454 (.101) 1.224 (.090) .719 .228 .166 .357 .591
Increase (decrease) in
accumulation unit value (.076) .551 .006 1.316 (.018) .824 .314 .229 .407 .640
Accumulation unit value
at beginning of year 6.194 5.643 5.637 4.321 4.339 3.515 3.201 2.972 2.565 1.925
ACCUMULATION UNIT
VALUE AT END OF YEAR $6.118 $6.194 $5.643 $5.637 $4.321 $4.339 $3.515 $3.201 $2.972 $2.565
RATIOS
Ratio of expenses to
average net assets 1.31% 1.32% 1.32% 1.32% 1.33% 1.33% 1.32% 1.33% 1.32% 1.32%
Ratio of net investment
income to average
net assets 1.59% 1.64% 1.96% 1.82% 1.69% 2.58% 2.48% 1.76% 1.70% 2.19%
Portfolio turnover rate 65.59% 64.70% 71.26% 38.71% 60.48% 216.47% 201.27% 164.92% 65.03% 27.88%
Number of accumulation
units outstanding at
end of year (expressed
in thousands) 951 1,151 1,333 1,428 1,623 1,835 2,107 2,265 2,511 2,911
</TABLE>
7
<PAGE>
FINANCIAL STATEMENTS
Financial statements for the Fund and for the Company are in the Statement of
Additional Information (SAI) for the Fund. To obtain a copy of the SAI, call or
write to the source listed on page 1 of this Prospectus.
THE COMPANY
The Lincoln National Life Insurance Company (the Company) is a stock life
insurance company organized in 1905 under the laws of the State of Indiana. It
is principally engaged in the sale of life insurance, annuities, and
reinsurance. The Company is a wholly-owned subsidiary of Lincoln National
Corporation, a publicly-held insurance holding company. The Home Office of the
Company (principal business address) is located at 1300 South Clinton Street,
Fort Wayne, Indiana. The Company's Home Office mailing address is P.O. Box
2340, Fort Wayne, IN 46801.
THE FUND
On December 1, 1966 the Board of Directors of the Company established a
segregated investment account designated Lincoln National Variable Annuity Fund
B (the Fund or Variable Contract) in accordance with certain provisions of
Indiana Insurance Law. The Fund is an open-end, diversified management
investment company registered with the Securities and Exchange Commission (SEC)
under the Investment Company Act of 1940, as amended (the 1940 Act).
The present Board of Managers for the Fund has been elected by the Contract
Owners (See Voting Rights, below.) A majority of these Members are persons who
are not otherwise interested persons of the Company as the term "interested
persons" is defined in the 1940 Act. Members of the Board of Managers are also
Members of the Board of Managers of Lincoln National Variable Annuity Fund A
(Fund A), and are Directors of the following: 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.; and Lincoln National Special Opportunities Fund, Inc. All
of the foregoing (including Fund B) are registered investment companies. The
Board is responsible, among other things, for authorizing investment programs
for the Fund, in accordance with the Fund's investment objectives and policies;
for recommending to Contract Owners any appropriate changes to those objectives
and policies; and for contracting for certain services necessary to the
operation of the Fund.
The Indiana law under which the Fund was established provides it shall not be
chargeable with liabilities arising out of any other business which the Company
may conduct and which has no specific relation to or dependence upon the Fund.
Accordingly, the assets of the Fund will be held exclusively for the benefit of
Participants in, and persons entitled to payment under, variable annuity
contracts. Income, gains, and losses, whether or not realized, from assets
allocated to the Fund are, in
8
<PAGE>
accordance with the applicable variable annuity contracts, credited to or
charged against the Fund without regard to other income, gains, or losses of the
Company. The assets of the Fund may not be charged with liabilities arising out
of any other business of the Company. The obligations arising under the variable
annuity contracts are obligations of the Company. The Fund is a "separate
account" as that term is defined under the federal securities laws.
The Company, in addition to serving as Investment Adviser for the Fund (See
Investment Management, below), provides overall management of the Fund's
business affairs, subject to the authority of the Board of Managers.
INVESTMENT OBJECTIVES AND POLICIES OF THE FUND
All investment objectives and policies shown below (except Restrictions 9
through 11) are fundamental and may not be changed without approval of Contract
Owners casting a majority of the votes entitled to be cast (see Voting Rights,
below).
OBJECTIVES
1. The principal investment objective is the selection of investments for the
long-term growth of capital in relation to the changing value of the dollar.
Investments will be made with the objective of providing annuity payments which
may tend to reflect changes in the value of the dollar. An additional but
secondary investment objective is the production of current income.
2. Income and realized capital gains will be reinvested.
3. The Fund's assets will be kept fully invested except that (a) sufficient
cash will be kept on hand to meet variable annuity contract payments and (b)
reasonable amounts of cash or United States Government securities may be held
for limited periods pending investment in accordance with investment policies.
4. The Fund's assets will usually be invested in a portfolio of equity
securities, mainly common stocks, diversified over industries and companies.
Changes in such diversification may be made from time to time to take into
account changes in the outlook for particular industries or companies. The
investments of the Fund will not, however, be concentrated in any one industry,
and no more than 25% of the Fund's assets will be invested in any one industry.
Such diversification does not eliminate the risks inherent in the making of
equity investments. The purchasing of common stocks may occur in rising or
declining markets.
Further, when the Board of Managers determines that investments of other types
may be advantageous on the basis of combined considerations of risk, income and
appreciation, investments may be made in bonds, notes or other evidences of
indebtedness, issued publicly or placed privately, of a type customarily
purchased for investment by institutional investors including United States
Government securities. Such investments, if made, constitute
9
<PAGE>
a defensive policy. Such investments may, or may not, be convertible into stock
or be accompanied by stock purchase options or warrants for the purchase of
stock. Warrants are purely speculative in that they have no voting rights, pay
no dividends and have no rights with respect to the assets of the corporation
issuing them. A warrant, basically, is an option to purchase a given security
within a specified period for a specified price. The prices of warrants do not
necessarily move parallel to the price of the underlying securities.
RESTRICTIONS
The investments of the Fund are subject to the provisions of the Indiana
Insurance Law concerning earnings records, preferred stock coverage, self-
dealing, real estate holdings and concentration.
Loans will not be made, but the purchase of a portion of an issue of bonds,
debentures or other securities publicly distributed or privately placed with
financial institutions shall not be considered the making of a loan.
The Fund will not:
1. Invest more than 5% of the value of the Fund's assets in securities of any
one issuer, except obligations of the United States Government and
instrumentalities thereof.
2. Acquire more than 10% of the voting securities of any one issuer.
3. Borrow money except for temporary or emergency purposes in an amount up to
5% of the value of the assets.
4. Underwrite securities of other issuers.
5. Purchase or sell real estate as a principal activity. However, the right
is reserved to invest up to 10% of the value of the assets of the Fund in
real properties.
6. Purchase commodities or commodity contracts.
7. Make short sales of securities.
8. Make purchases on margin, except for such short-term credits as are
necessary for the clearance of transactions.
9. Invest in the securities of a company for the purpose of exercising
management or control.
10. Place emphasis upon obtaining short-term trading profits, but it may
engage in short-term transactions in the event that a change in economic
conditions or a rapid appreciation or depreciation of stock prices occurs.
The Fund's portfolio turnover rates were 65.59% for 1994, 64.7% for 1993,
and 71.26% for 1992. The securities markets in general have experienced
volatility due to rapidly shifting economic trends. This volatility can
affect turnover.
11. Plan to make investments in securities of other investment companies.
However, the right is reserved to make such investments up to a maximum of
10% of the value of the assets of the Fund, provided that not more than 3%
of the total outstanding voting stock of any one investment company may be
held.
10
<PAGE>
SPECIAL RISKS
Investments, if made, in any securities of the type which are privately placed
with financial institutions and which cannot be sold to the public without prior
registration of such securities with the SEC, will be limited in order that the
total of such investments will not exceed 10% of the value of the Fund's assets.
Such securities are commonly referred to as "restricted securities." Restricted
securities may not be readily marketable and the Fund may not be able to dispose
of its holdings in these securities at reasonable price levels if such
securities are ever acquired. Furthermore, registration of restricted securities
under the Securities Act of 1933 may be necessary if the Fund is to sell such
securities publicly. Should a considerable period of time elapse between the
time that a decision is made to sell restricted securities and the time when the
Fund may be permitted to sell them publicly under an effective registration
statement, adverse market conditions could develop with the result that the Fund
might not be able to obtain as favorable a price as that prevailing at the time
the decision to sell was made. During 1994 no restricted securities were held.
CHARGES AND DEDUCTIONS
DEDUCTION FROM PURCHASE PAYMENTS--SALES AND ADMINISTRATIVE EXPENSES
Under periodic payment contracts, a deduction of 4.25% for sales expenses and 1%
for administrative expenses is made from each purchase payment when received.
Under single payment contracts, which contemplate that lump sum amounts under
pension or retirement plans will be applied to the purchase of an annuity, the
deduction from each purchase payment made on behalf of a Participant for sales
and administrative expenses is 2% plus $50 for sales expenses and $65 for
administrative expenses. In addition to periodic payments, the Contract Owner
may make single payments on behalf of Participants. The deduction from such a
payment made for a Participant is 2%.
Administrative expenses include salaries, rent, postage, telephone, travel,
legal, actuarial and accounting fees, office equipment, and stationery. The
administrative charge is designed to cover the expense of administering these
contracts, and the Company does not expect to realize a profit by virtue of this
charge.
These services are provided under a Sales and Administrative Services Agreement
executed by the Company and the Fund. The Agreement continues in effect from
year to year if approved at least annually by a majority of the Board of
Managers who are not interested persons of the Company or the Fund, cast in
person at a meeting called for the purpose of voting on such approval.
Deductions for sales and administrative expenses made from purchase payments
applied to purchase fixed-dollar accumulation units are the same as those made
from payments applied to the Separate Account.
11
<PAGE>
Over the actuarial life of the contracts issued by the Fund, the aggregate sales
load is expected to exceed the aggregate distribution expenses associated with
those contracts. To the extent that sales load does not exceed distribution
expenses during the first year of those contracts, the Company pays those
expenses out of its general assets. Aggregate sales load in years after the
first exceeds aggregate distribution expenses in those years.
For administrative and sales expenses, the Fund paid $1,994 in 1994, $2,838 in
1993, and $3,321 in 1992.
REDUCED CHARGES
No sales or administrative expense charge is deducted from:
1. Amounts transferred between the fixed and the separate account portions of
contracts offered by this prospectus, if such transfers are permitted by the
underwriting practices of the Company;
2. Purchase payments under contracts offered by this prospectus to (a)
Members of the Board of Managers and officers of the Fund, (b) directors,
officers and full-time employees of the Company, if they spend more than 50% of
their working time either (1) rendering investment advisory services to the Fund
or Fund A, or supervising persons who spend more than 50% of their working time
rendering such services, or acting in a position necessary for such persons to
render such services, or (2) selling or offering for sale contracts of the Fund
or of Fund A, or supervising persons who spend more than 50% of their working
time selling or offering such contracts for sale, or acting in a position
necessary for such persons to sell or offer such contracts for sale, and (c)
sales representatives of the Company, or to any trust, pension, profit-sharing,
or other benefit plan for such persons, provided that each of the foregoing
persons has acted as above described for not less than 90 days, and provided
further that such sales are made with the written assurances of the purchaser
that the purchase is made for investment purposes and that the contracts will
not be resold except through redemption.
EXPERIENCE RATING CREDIT
The variable annuity contracts are non-participating and do not share in the
surplus of the Company; however, each variable annuity contract provides for
experience rating. The experience credit will be determined annually on the
basis of allocated costs compared with the amounts deducted for sales and
administrative expenses. If such costs exceed the amount deducted, no
additional deduction will be made from the Participant's individual account.
If, however, the amount deducted for such expenses exceeds allocated costs, the
Company, in its discretion, may allocate all, a portion on none of such excess
as an experience rating credit.
Credits will be applied without deduction of any amounts for sales or
administrative expenses. Application of the credit will be made in 1 of 2 ways,
as considered appropriate by the Company: (a) by a reduction in the
12
<PAGE>
amount deducted from subsequent purchase payments for sales and administrative
expenses, or (b) by the crediting of a number of additional accumulation units
or annuity units, as applicable, equal in value to the amount of the credit less
any applicable premium taxes.
During 1994, there were no experience rating credits paid. In years in which
experience rating credits are granted, the granting of those credits in no way
obligates the Company to grant such credits in ensuing years, as the Company
retains sole discretion with respect to the payment of experience rating
credits.
DEDUCTION FROM PURCHASE PAYMENTS--MINIMUM DEATH BENEFIT
An additional deduction of .75% is made from each purchase payment for the
minimum death benefit, if such coverage has been elected. The Company
anticipates that the sale of this death benefit will generate profits for it.
(See Accumulation Period, below.)
DEDUCTION FROM PURCHASE PAYMENTS--PREMIUM TAXES
Any applicable premium taxes are deducted from purchase payments in accordance
with local law. Premium tax deductions are held in the General Account of the
Company until paid to the appropriate state on a quarterly or annual basis. The
balance of the payment less all deductions is placed in the Fund and credited to
the Participant's individual account. The tax ranges from .5% (.005) to 5%
(.05) of purchase payments.
DEDUCTION FROM AVERAGE DAILY VALUE OF THE FUND--ANNUITY RATE AND EXPENSE
PROMISES
Although variable annuity payments will vary in accordance with the investment
performance of the Fund, they will not be affected by adverse mortality
experience or by an increase in the Company's expenses to an amount in excess of
the expense deductions provided for in the variable annuity contract. The
Company assumes the risk that Annuitants as a class may live longer than
expected and that expenses may be higher than the deductions for such expenses.
In either case, the loss will fall on the Company. Conversely, if such reserves
and deductions prove more than sufficient, the excess will be a profit to the
Company.
In return for the assumption of these risks, deductions aggregating 1.002%
annually of the average daily value of the Fund are made consisting of .9% for
annuity rates and .102% for expenses. All periodic deductions and annuity rates
are subject to modification (see The Variable Annuity Contracts, below.)
However, in the case of deductions for investment advisory services, such
deductions may only be modified by a majority vote of Contract Owners.
13
<PAGE>
DEDUCTION FROM AVERAGE DAILY VALUE OF THE FUND--INVESTMENT ADVISORY FEES
For providing investment advisory services to the Fund, the Company makes
deductions aggregating .323% annually of the average daily value of the Fund.
(See Investment Management, below.)
The Fund paid investment advisory fees of $24,105 for 1994, $27,026 for 1993,
and $28,241 for 1992.
INVESTMENT MANAGEMENT
The Company has been registered under the Investment Advisers Act of 1940 since
1967, and it serves as investment adviser of the Fund. (See The Company, above,
for a description of the Company; and Management, in the SAI, for affiliated
persons.) Investment management services are provided under an Investment
Management Services Agreement executed by the Company and the Board of Managers.
The Agreement continues in effect from year to year if approved at least
annually by a majority of the Board of Managers, who are not interested persons
of the Company or the Fund, cast in person at a meeting called for the purpose
of voting on such approval, and by either (a) the Board of Managers, or (b) a
majority vote of all Contract Owners.
The Agreement may be terminated at any time without penalty on 60 days' written
notice to the Company by the Board of Managers or by a majority vote of all
Contract Owners. The Company may not terminate the Agreement without the prior
approval of a new investment advisory agreement by a majority vote of all
Contract Owners. In the event of assignment, the Agreement will terminate.
In performing investment management services, the Company continuously provides
the Board of Managers with an investment program for its consideration. Upon
approval of such an investment program by the Board of Managers, the Company
executes the program by placing orders for the purchase or sale of the assets of
the Fund.
A "sub-advisory agreement" is in force between the Company and Vantage Global
Advisors, Inc. ("Vantage"), a Delaware corporation. Under it, Vantage may
perform some, or substantially all, of the investment advisory services required
by the Fund. However, the Company remains primarily responsible for investment
decisions affecting the Fund, and no additional compensation from the assets of
the Fund is assessed as a result of that agreement.
THE VARIABLE ANNUITY CONTRACTS
ANNUITY PROMISE
The variable annuity contract includes the Company's promise that variable
payments will be made for the lifetime of the Annuitant (commencing on the
selected annuity date) based upon mortality assumptions contained in the
contract regardless of the actual mortality experience among the
14
<PAGE>
Annuitants. That is, while annuity payments are based on life expectancies,
Annuitants will nevertheless continue to receive annuity payments if they live
longer than expected. Annuity payments will not be affected by an increase in
the Company's expenses.
PURCHASE OF CONTRACTS
The group contract is issued to the Contract Owner and covers all Participants,
each of whom receives a certificate which summarizes the provisions of the group
contract and evidences participations.
Persons wishing to become Participants under a group contract must complete
application forms to be forwarded to the Home Office of the Company for its
acceptance. Upon acceptance, certificates are prepared and forwarded to the
Participant.
An initial purchase payment will be priced not later than two business days
after receipt of an order to purchase, if the application and all information
necessary for processing the purchase order are complete upon receipt. The
Company may retain the purchase payment for up to five business days while
attempting to complete an incomplete application. If the application cannot be
made complete within five days, the applicant will be informed of the reasons
for the delay and the purchase payment will be returned immediately unless the
applicant specifically consents to the Company retaining the purchase payment
until the application is made complete. Thereafter, this initial purchase
payment must be priced within two business days.
Certain significant provisions of the contracts are discussed in the following
sections.
MODIFICATION OF CONTRACT
The variable annuity contract provides that during the first 3 years it is in
force it cannot be modified by the Company, except with approval of the Contract
Owner (which is the employer or a trustee in the case of group variable annuity
contracts). After the variable annuity contract has been in force for at least
3 years, it can be modified by the Company except that (a) no modification can
affect retired Participants in any manner without their written consent, unless
deemed by the Company to be necessary to achieve the benefits of federal or
state statutes or Treasury Department rules or regulations and (b) the annuity
rate promise, expense promise, and the deductions applicable at the time of a
Participant's entry into the plan will continue to be applicable for all
payments made on his or her behalf in any year up to double the amount paid in
the first year of participation. Payments in any year above that amount will
receive the benefit of the promises applicable to new entrants into the plan in
the year such payments are first received by the Company and these promises will
apply as long as the additional payments are continuously maintained. The
Company has not found it necessary in the past to change the annuity rate
promise, expense promise, or the deductions applicable at the time of a
Participant's entry into the plan.
15
<PAGE>
Notwithstanding the above, the company reserves the right to unilaterally alter
the terms of the variable annuity contract to comply with the terms of federal
and state law.
ASSIGNMENT
Unless contrary to applicable law, assignment of variable annuity contracts or
participants individual accounts thereunder is prohibited.
PURCHASE LIMITS
Normally, under a periodic payment contract, the minimum amount of any scheduled
purchase payment must total at least $600 per year per Participant. Normally,
under a single payment contract the minimum payment is $5,000 for any 1
Participant.
GENERAL RISK FACTORS
Variable annuities are designed to provide Participants with payments which will
tend to reflect changes in the cost of living. The Company seeks to accomplish
this objective by providing a medium for investment in equity securities
accompanied by annuity promises. There is no assurance that this objective will
be attained.
Historically, the value of a diversified portfolio of common stocks held for an
extended period of time has tended to rise during periods of inflation. There
has, however, been no exact correlation, and for some periods the prices of
securities have declined while the cost of living was rising.
The value of the investments held in the Fund fluctuates daily and is subject to
the risks of changing economic conditions as well as the risks inherent in the
ability of management to anticipate changes in such investments necessary to
meet changes in economic conditions.
There is no assurance that the value of a Participant's individual account
during the years prior to retirement or that the aggregate amount of the
variable annuity payments received during the years following the commencement
of annuity payments will equal or exceed the payments made on behalf of a
Participant. Neither is there assurance that the value of an unallocated fund's
contract will equal or exceed the payments made to this account. The policy of
investment in common stocks may be maintained in both rising and declining
markets.
CONTRACT OWNER INQUIRIES
The obligations to purchasers under the Variable Annuity Contracts are those of
the Company. Inquiries from Contract Owners should be directed to the Company
at 1-800-348-1212.
ACCUMULATION PERIOD
16
<PAGE>
ACCUMULATION UNITS
Under the regular Group Variable Annuity Contract, the purchase payments made
with respect to a Participant, less deductions, are credited to the account of
the Participant in the form of Accumulation Units. Under the Group Variable
Annuity Deposit Administration Contract, net payments are credited to the
account of the Contract Owner. The number of Accumulation Units credited to an
account is determined by dividing the net purchase payment by the value of an
Accumulation Unit when the net purchase payment is received, if received prior
to the close of trading on the New York Stock Exchange and by the value computed
on the next trading day, if received thereafter. (See Fund Valuation Procedure,
below.) Crediting of Accumulation Units may be delayed on payments received
which cannot be identified or allocated to a specific Participant's individual
account.
The number of Accumulation Units so determined shall not be changed by any
subsequent change in the value of an Accumulation Unit, but the dollar value of
an Accumulation Unit will vary in amount depending upon the investment
experience of the Fund.
VALUE OF PARTICIPANT'S ACCOUNT
The value of a Participant's individual account at any time prior to the
commencement of annuity payments can be computed by multiplying the total number
of Accumulation Units by the current Accumulation Unit value. The Participant
bears the investment risk, that is, the risk that market values may decline.
There is no assurance that the value of the Participant's individual account
will equal or exceed the payments made on his or her behalf. Each Participant
is advised annually of the number of Accumulation Units credited to his or her
account, the current Accumulation Unit value, and the total value of the
account.
DEATH BENEFIT BEFORE RETIREMENT
If the Annuitant dies prior to the commencement of benefit payments, death
proceeds payable will be the value of the person's account determined as of the
valuation date coincident with or next following the date written notice of
death is received by the Company.
If minimum death benefit coverage has been elected, the variable annuity
contract will contain a promise that in the event of the death of the
Participant prior to the commencement of benefit payments, death proceeds
payable will be the greater of (a) the value of the Participant's account
determined as of the valuation next following receipt of written notice of death
by the Company or (b) in the event of such death prior to the Participant's 65th
birthday, 100% of the total purchase payments made on behalf of the Participant
minus a proportionate reduction for any partial withdrawals of the value of the
Participant's account. Payment of death proceeds will be made within 7 days of
receipt of such notice.
17
<PAGE>
DEATH OF CONTRACT OWNER
If the owner of a non-qualified contract dies before annuity payments have
begun, then in accordance with the provisions of Section 72(s) of the Code, the
Cash Surrender Value (proceeds) of the Contract will be paid as follows: (i)
Upon the death of a non-annuitant owner, the proceeds shall be paid to any
surviving joint or contingent owner(s); (ii) If no joint or contingent owner has
been named, then the proceeds shall be paid to the annuitant named in the
contract.
If the decedent owner or joint owner is also the annuitant, then the death will
be treated as death of the annuitant subject to the provisions of this Contract
regarding death of annuitant. If the recipient of the proceeds is the surviving
spouse of the Contract Owner, the Contract may be continued in the name of the
spouse as owner.
In accordance with Section 72(s), any distribution must be paid within 5 years
of the death of the owner unless the beneficiary begins receiving, within one
year of the Contract owner's death, the distribution in the form of a life
annuity or an annuity for a period certain not exceeding the beneficiary's life
expectancy.
JOINT/CONTINGENT OWNERSHIP
If a joint owner is named in the application, such joint owners shall be treated
as having equal undivided interests in the Contract. Either owner, independent
of the other, may exercise any ownership rights in this Contract. A contingent
owner cannot exercise any ownership rights in this Contract while the contract
owner is alive.
SURRENDER OF CONTRACT
The Contract Owner, if the plan so provides, has the right to surrender in whole
or in part at any time prior to the commencement of the annuity period. The
Contract Owner must submit a written request for surrender to the Company's Home
Office. The Contract Owner will receive the value of that portion of the
account surrendered computed as of the valuation time coincident with or next
following the date of surrender, and payment will be made within 7 days after
the date of surrender. (For federal income tax consequences of a surrender for
cash, see Federal Tax Status, below and in the SAI.)
Payment of any termination value may be postponed (a) when the New York Stock
Exchange is closed other than customary weekend and holiday closing or during
which trading on the New York Stock Exchange is restricted; (b) for any period
during which an emergency exists as a result of which (1) disposal of securities
in the Fund is not reasonably practicable or (2) it is not reasonably
practicable to determine the value of the Fund's net assets or (c) for such
other periods as the SEC may by order permit for the protection of the
Participants.
18
<PAGE>
For contracts issued in connection with a non-qualified employee pension plan,
termination options will be as stated in the plan, and the terms of the plan
applicable to the Participant should be consulted for limitations on early
surrender or payment. A Participant's interest in a contract may not be
surrendered once annuity payments have commenced. The amount receivable upon
surrender as a cash settlement or as an annuity payment may be more or less than
the amount paid on behalf of a Participant. (See Federal Tax Status, below and
in the SAI.)
For all other contracts, upon termination of payments on the Participant's
behalf and prior to the commencement of annuity payments, a Participant will
have the following options:
1. A Participant may have his or her individual account applied to provide
fixed or variable annuity payments or a combination thereof commencing
immediately under the selected annuity option. (See Annuity Period, below.)
2. A Participant may surrender the whole or any portion of his or her
individual account by submission of a written request for surrender and the
certificate to the Company's Home Office, and receive the value of the account
computed as of the valuation time coincident with or next following the date of
surrender. Payment will be made within 7 days after the date of surrender. If
the payment of a surrender value results in reduction of the Company's state
premium tax liability, the amount payable will include the lesser of (a) the
amount by which the Company's premium tax liability is reduced or (b) the amount
previously deducted from purchase payments for premium taxes on the contract
being surrendered.
3. The Participant may leave his or her individual account in force under the
group contract and the account will continue to participate in the investment
results of the Fund. When the originally selected retirement date arrives, the
Participant will begin to receive annuity payments under the selected option.
(See Annuity Period, below.) At any time in the interim, the Participant can
surrender his or her individual account in accordance with (2.) above.
If the Participant becomes an employee of another employer or a member of an
association which has a similar variable annuity contract in force with the
Company, the Participant may transfer his or her individual account to the other
contract.
A Participant may also purchase an individual variable annuity contract of the
type then being issued by the Company, if any, upon making such payments as may
then be required.
ANNUITY PERIOD
ASSUMED INVESTMENT RATE (AIR)
Variable annuity contracts providing for deferred annuities contain a table of
annuity rates based on an AIR of 3.5% per year. The Company will permit
19
<PAGE>
the Contract Owner to select an AIR permitted by state law or regulations as
follows: 3.5%, 4.5%, 5% or 6%. These AIRs are used merely to determine the first
monthly payment for each $1,000 of value. It should not be inferred that such
rates will bear any relationship to the actual net investment experience of the
Fund.
The choice of the AIR affects the pattern of annuity payments. A higher AIR
will produce a higher initial payment but a more slowly rising series of
subsequent payments (or a more rapidly falling series of subsequent payments)
than a lower AIR.
The objective of a variable annuity contract is to provide level payments during
periods when the economy is relatively stable and to reflect as increased
payments only the excess investment results flowing from inflation or an
increase in productivity. The achievement of this objective will depend in part
upon the validity of the assumption that the net investment rate of the Fund
equals the AIR during periods of stable prices. Subsequent payments will be
smaller than, equal to or greater than the first payment depending upon whether
the actual net investment rate is smaller than, equal to or greater than the
AIR.
The following table shows the Annuity Unit values at each year end for the
different AIRs:
<TABLE>
<CAPTION>
Annuity Unit Values
Assumed Investment Rate
December 31 3.5% 4.5% 5% 6%
<S> <C> <C> <C> <C>
1985 1.565 1.312 1.202 1.010
1986 1.541 1.282 1.171 .977
1987 1.604 1.322 1.202 .993
1988 1.702 1.389 1.256 1.029
1989 2.030 1.641 1.477 1.198
1990 1.920 1.539 1.379 1.109
1991 2.266 1.799 1.604 1.278
1992 2.381 1.870 1.659 1.308
1993 2.525 1.965 1.735 1.355
1994 2.409 1.857 1.632 1.262
</TABLE>
RETIREMENT DATE; FORM OF ANNUITY
A Participant selects in accordance with the annuity purchase plan, a retirement
date not later than age 75 and an annuity option--either of which may be changed
at any time prior to 30 days before the date upon which annuity payments are to
commence--except contracts issued under non-qualified plans. The contract
provides 4 optional annuity forms described below, each of which may be selected
on either a fixed annuity or variable annuity basis, or a combination thereof.
The allocation between fixed and variable may be changed at any time prior to 30
days before the date on which payments are to commence. Amounts applied to the
purchase of a fixed-dollar annuity will not participate in the investment
experience of the Fund. If an election has not been made otherwise, the option
with 120
20
<PAGE>
monthly payments guaranteed will be effective. In such instances, the
accumulated amount in the Fund will be applied to provide variable annuity
payments under such option and any amount accumulated for a fixed annuity will
be applied to provide fixed annuity payments under such option. In such cases,
the minimum first monthly payment required on the new basis is $25, or $25 on
each basis if a combination of fixed and variable payments is elected. If at any
time the payments are or become less than $25, the Company has the right to
change the frequency of payment to intervals that will result in payments of at
least $25.
While the contracts contain no provision under which an Annuitant or a
beneficiary may surrender his or her contract (see Accumulation Period, above)
and receive a lump-sum settlement in lieu thereof once annuity payments have
commenced, the Company has undertaken to honor any request for a surrender of
the remaining value of a contract in any case in which annuity payments are
being made under a form of annuity not involving life contingencies. This
applies to Option 2 when annuity payments are being continued during the
remainder of the guaranteed period to the beneficiary designated by the
Participant.
OPTIONAL ANNUITY FORMS
OPTION 1--LIFE ANNUITY
An annuity payable monthly during the lifetime of the Annuitant and terminating
with the last monthly payment preceding the death of the Annuitant. This option
offers the maximum level of monthly payments since there is no guarantee of a
minimum number of payments or provision for a death benefit for beneficiaries.
It would be possible under this option for the Annuitant to receive no annuity
payment if he or she died prior to the due date of the first annuity payment,
one annuity payment if the Annuitant died before the second annuity payment
date, etc.
OPTION 2--LIFE ANNUITY WITH 120, 180, OR 240 MONTHLY PAYMENTS GUARANTEED
An annuity payable monthly during the lifetime of the Annuitant with the
guarantee that if, at the death of the Annuitant, payments have been made for
less than 120, 180 or 240 months as elected, annuity payments will be continued
during the remainder of such period to the beneficiary designated by the
Participant. If the beneficiary dies while receiving annuity payments, the
present value of the current dollar amount of the remaining guaranteed number of
annuity payments, computed on the basis of the AIR, shall be paid in one sum to
the estate of the beneficiary.
OPTION 3--UNIT REFUND LIFE ANNUITY
An annuity payable monthly during the lifetime of the Annuitant with the
guarantee that upon death a payment will be made of the value of the number of
Annuity Units equal to the excess, if any, of (a) the total amount applied under
this option divided by the Annuity Unit Value for the date annuity payments
commence over (b) the Annuity Units represented by each payment to the Annuitant
multiplied by the number of payments paid prior to
21
<PAGE>
death. The value of the number of Annuity Units is computed on the date the Home
Office receives written notice of the annuitant's death, provided that if notice
is not received prior to the close of trading at the New York Stock Exchange on
such date computation shall be made on the first trading date thereafter.
For example, assume that $10,000 is applied under this option. Further assume
that the Annuity Unit value for the annuity commencement date is $2 and the
first monthly payment due the Annuitant is $61. This means that the Annuitant
has 5,000 Annuity Units credited to his or her account ($10,000 divided by $2
per unit) as of the annuity commencement date and that each monthly payment
received by the Annuitant will be equal to the monetary value, at the time paid,
of 30.5 units ($61 first monthly payment divided by $2 per unit). Assume the
Annuitant receives 10 monthly payments and then dies. Prior to death, the
Annuitant was paid the value of 305 units (30.5 per month x 10 months). The
beneficiary is entitled to the value in one sum of 4,695 Annuity Units (5,000
units initially less 305 units already valued and paid). If the value of an
Annuity Unit is $2.05 on the relevant valuation date, the cash payment to the
beneficiary will be $9,624.75 (4,694 remaining units x unit value of $2.05).
OPTION 4--JOINT AND SURVIVOR ANNUITY
An annuity payable monthly during the joint lifetime of the Annuitant and a
designated second person, and thereafter during the remaining lifetime of the
survivor.
Other annuity options may be provided if agreed upon by the Company and the
Contract Owner. If any such option involves the deferral of annuity payments,
the Annuitant shall have the right to surrender his contract at any time during
the period of deferral. The mortality and expense risk charge and the charge
for administrative services will be assessed on all annuity options, including
those that do not have a life contingency and thus no mortality risk.
FIRST MONTHLY ANNUITY PAYMENT
Under the regular Group Variable Annuity Contract, when annuity payments are to
commence, the value of the Participant's individual account is determined as the
product of the value of an Accumulation Unit on the 14th day prior to the date
the first annuity payment is due and the number of Accumulation Units credited
to the Participant's account as of the date annuity payments commence.
The contract contains tables indicating the dollar amount of the first monthly
payment under each optional form of annuity for each $1,000 of value applied.
The first monthly payment varies according to the form of annuity selected (see
the descriptions above) and the adjusted age of the Annuitant.
The contract contains a formula for determining the adjusted age, and the tables
are determined from the Progressive Annuity Table assuming births in
22
<PAGE>
the year 1900 and an AIR of 3.5% per year. The total first monthly annuity
payment is determined by multiplying the value of the Participant's individual
account (less any applicable premium taxes not previously deducted) by the
amount of the first monthly payment per $1,000 of value from the tables in the
contract.
If the annuity specified in the plan can be obtained at a lower cost to the
Contract Owner by using the same mortality table as is used in determining
payments under group variable annuity contracts then being issued by the Company
for a similar class of Annuitants, it will be done.
SUBSEQUENT MONTHLY ANNUITY PAYMENTS
The amount of the first monthly annuity payment is divided by the value of an
Annuity Unit for the valuation period in which the payment is due to determine
the number of Annuity Units represented by the first payment. This number of
Annuity Units remains fixed during the annuity period, and in each subsequent
month, the dollar amount of the annuity payment is determined by multiplying
this fixed number of Annuity Units by the then value of an Annuity Unit.
FUND VALUATION PROCEDURE
VALUATION DATE
A valuation date is any date on which the New York Stock Exchange is open for
trading. On any date other than a valuation date, the Accumulation Unit value
or the Annuity Unit value will be the same as that on the next following
valuation date.
VALUATION PERIOD
A valuation period is that period of time from the beginning of the day
following a valuation date to the end of the next following valuation date.
ACCUMULATION UNIT VALUE
The value of an Accumulation Unit was set at $1 effective November 22, 1967.
The value of an Accumulation Unit on the last day of any subsequent valuation
period is determined by multiplying such value on the last day of the prior
valuation period by the net investment factor for the current valuation period.
Accumulation Units will be valued daily, as of the close of trading on the New
York Stock Exchange.
ANNUITY UNIT VALUE
The value of an Annuity Unit for the valuation period ending November 22, 1967
was established at $1. The value of the Annuity Unit for any subsequent
valuation period is determined by multiplying the value for the immediately
preceding valuation period by the product of (a) the net investment factor for
the valuation period containing the 14th day prior to
23
<PAGE>
the last day of the current valuation period and (b) a factor to neutralize the
AIR built into the annuity tables contained in the contract which is not
applicable as actual net investment income is credited instead.
The value of an Annuity Unit on any date upon which the New York Stock Exchange
is closed is its value on the next succeeding valuation date. The net
investment factor for the 14th day prior to the current valuation date is used
in calculating the value of an Annuity Unit in order to permit calculation of
amounts of annuity payments and mailing of checks in advance of their due dates.
Such checks will normally be issued and mailed at least 3 days before the due
date.
NET INVESTMENT FACTOR
The net investment rate for any valuation period is equal to the gross
investment rate expressed in decimal form to 8 places less a deduction of the
product of .00363% (1.325% on an annual basis; deduction for providing
investment management, annuity rate promises and expense promises) and the
number of days in the valuation period.
The gross investment rate is the quotient of 2 factors, "a" and "b." "a" is
equal to investment income for the valuation period, plus capital gains, minus
capital losses and taxes (see Federal Tax Status, below and in the SAI.) "b" is
equal to the value of the Fund at the beginning of the valuation period. "a" is
divided by "b" to yield the gross investment rate. The gross investment rate
may be positive or negative.
The net investment factor for the Fund is 1.0 plus the net investment rate for
the period. (See Purchase and Pricing of Securities Being Offered, in the SAI,
for an illustration of the method of calculation of Accumulation Unit value and
Annuity Unit value.)
VALUING THE FUND'S ASSETS
In determining the value of the assets of the Fund, each security traded on a
national securities exchange is valued at the last reported sale price on the
valuation date. If there has been no sale on such day, then the value of such
security is taken to be the average of the reported bid and asked prices at the
time as of which the value is being ascertained.
Any security not traded on a securities exchange but traded in the over-the-
counter market is valued at the average of the quoted bid and asked prices on
the valuation date. Securities, including restricted securities, if any, or
other assets for which market quotations are not readily available are valued at
fair value as determined in good faith by the Board of Managers.
FEDERAL TAX STATUS
The following is a general discussion of the federal income tax rules applicable
to the Contracts as of the date of this Prospectus. Further information is
provided in the Statement of Additional Information (SAI).
24
<PAGE>
NEITHER THESE DISCUSSIONS NOR THOSE IN THE SAI ARE INTENDED AS TAX ADVICE. This
section does not discuss the federal tax consequences resulting from every
possible situation. Moreover, no attempt has been made to consider any
applicable state, local or foreign tax law, other than the imposition of any
state premium taxes (see Charges and Deductions, above). Any person concerned
about the tax implications with respect to the Contracts should consult a
competent tax adviser. The following discussion is based upon the Company's
understanding of the present federal income tax laws as they are currently
interpreted by the Internal Revenue Service. No representation is made as to the
likelihood of continuation of the present federal income tax laws or of the
current interpretations by the Internal Revenue Service.
TAX STATUS OF THE CONTRACTS
The following discussion assumes that the Contracts will qualify as annuity
contracts for federal income tax purposes. The SAI describes such
qualifications.
TAXATION OF THE CONTRACTS
An annuity Contract Owner generally is not taxed on increases in the value of a
Contract until distribution occurs, either in the form of a lump sum payment
received by withdrawing all or part of the cash value (i.e., "surrenders") or as
annuity payments under the annuity option elected. For this purpose, the
assignment or pledge of, or the agreement to assign or pledge, any portion of
the value of a Contract will be treated as a distribution. A transfer of
ownership of a contract, or designation of an annuitant or other beneficiary who
is not also the contract owner, may also result in tax consequences. The taxed
portion of a distribution (in the form of a lump sum payment or an annuity) is
taxed as ordinary income. However, for purchase payments made after February 28,
1986, an owner of a Contract who is not a natural person (subject to limited
exceptions) will be taxed on any increase in the Contract's cash value over the
"investment in the contract" during the taxable year, even if no distribution
occurs. The following discussion applies to Contracts owned by natural persons.
In the case of a surrender under a Contract, generally amounts received are
first treated as taxable income to the extent that the cash value of the
contract immediately before the surrender exceeds the "investment in the
contract" at that time. Any additional amount withdrawn is not taxable.
However, in the case of a surrender under a Contract issued before August 14,
1982, and allocable to an "investment in the contract" made before that date,
amounts received are treated as taxable income only to the extent that they
exceed the "investment in the contract." The "investment in the contract"
generally equals the portion, if any, of any premium paid by or on behalf of an
individual under a Contract which is not excluded from the individual's gross
income.
Although the tax consequences may vary depending on the form of annuity selected
under the Contract, the recipient of an annuity payment under a Contract
generally is taxed on the portion of such payment that exceeds the
25
<PAGE>
"investment in the contract." For variable annuity payments, the taxable portion
is determined by a formula that establishes a specific dollar amount of each
payment that is not taxed. The dollar amount is determined by dividing the
"investment in the contract" by the total number of expected periodic payments.
For fixed annuity payments, there generally is no tax on the portion of each
payment that represents the same ratio that the "investment in the contract"
bears to the total expected value of payments for the term of the annuity; the
remainder of each payment is taxable. However, for individuals whose annuity
starting date is after December 31, 1986, the entire distribution (whether fixed
or variable) will be fully taxable once the recipient is deemed to have
recovered the dollar amount of his "investment in the contract."
There may be imposed a penalty tax on distributions equal to ten percent of the
amount treated as taxable income. The penalty tax is not imposed in certain
circumstances: (1) distributions received on or after age 59 1/2 or disability;
(2) distributions made on or after the holder's death; (3) distributions
received in substantially equal installments as a life annuity (subject to
special "recapture" rules if the series of payments is subsequently modified),
and (4) distributions allocable to the "investment in the contract" before
August 14, 1982.
MULTIPLE CONTRACTS
All non-qualified contracts entered into after October 21, 1988, and issued by
the same insurance company (or its affiliates) to the same contract owner during
any calendar year will be treated as a single contract, for tax purposes.
WITHHOLDING
Pension and annuity distributions generally are subject to withholding for the
recipient's federal income tax liability at rates that vary according to the
type of distribution and the recipient's tax status. Recipients, however, may be
provided the opportunity to elect not to have tax withheld from distributions.
Under the Unemployment Compensation Amendments of 1992 ("UCA"), twenty percent
(20%) income tax withholding may apply to "eligible rollover distributions." All
taxable distributions from qualified plans and Section 403(b) annuities are
"eligible rollover distributions," except (1) annuities paid out over life or
life expectancy, (2) installments paid for a period spanning ten years or more,
and (3) required minimum distributions. The UCA imposes a mandatory twenty
percent (20%) income tax withholding on any eligible rollover distribution that
the holder does not elect to have paid in a direct rollover to another qualified
plan, Section 403(b) annuity, or individual retirement account.
VOTING RIGHTS
When a meeting is to be held, the Rules and Regulations of the Fund specify a
quorum as 25% of the Contract Owners entitled to vote at an annual or special
meeting. Therefore, less than a majority of those entitled to vote could take
action which is not prohibited by law which could affect other Contract Owners'
rights.
26
<PAGE>
The number of votes which a Contract Owner may cast for Participants in the
accumulation period is equal to the number of Accumulation Units under the
contract. For Annuitants receiving annuity payments, the Contract Owner may
cast the number of votes equal to (a) the amount of assets established in the
Fund to meet the annuity obligations related to such Annuitants divided by (b)
the value of an Accumulation Unit. The amount of the assets established in the
Fund for an Annuitant receiving annuity payments will decrease as annuity
payments are made.
Since assets are maintained in the Fund with respect to other contracts than
those offered by this prospectus, Contract Owners under such other contracts are
also entitled to vote. The number of votes which they are entitled to cast is
computed in the same manner as for Contract Owners of the variable annuity
contracts offered by this prospectus.
The number of votes each Contract Owner may cast shall be determined as of a
date to be chosen by the Board of Managers within 90 days of the date of the
meeting, and at least 20 days' written notice of the meeting will be given. To
be entitled to vote, a Contract Owner must have been an owner on both the date
as of which the number of votes was determined and the date of the written
notice.
During the accumulation period, a Participant will have the right to instruct
the Contract Owner only with respect to votes attributable to payments made by
the Participant, if any. All other votes entitled to be cast during such period
under such plan may be cast by the Contract Owner in its sole discretion.
During the annuity period, every Participant under the variable annuity
contracts offered by this prospectus will have the right to instruct the
Contract Owner with respect to all votes attributable to the amount of assets
established in the Fund to meet the annuity obligations related to such
Participant. Each Contract Owner and each employee and Participant having the
right to instruct a Contract Owner with respect to any votes will receive all
proxy materials. The Company will mail all proxy solicitation materials directly
to Participants and Annuitants unless a Contract Owner wishes to distribute such
materials.
The Rules and Regulations of the Fund provide that each Contract Owner shall
cast the votes with respect to which instructions from an employee or a
Participant have been received in accordance with such instructions and all
votes with respect to which no instructions are received, other than those as to
which no employee or Participant is entitled to give instructions, in the same
proportion as are votes with respect to which instructions are received by such
Contract Owners. If no Participant is entitled to give instructions or if a
Contract Owner receives no instructions, all votes to which such Contract Owner
is entitled may be cast in the Contract Owner's sole discretion.
The Company and the Fund have no duty to ascertain whether Contract Owners
actually cast votes under such contracts in accordance with the voting rights
provisions described in this section.
27
<PAGE>
The Rules and Regulations of the Fund permit the Board of Managers to dispense
with an annual meeting in any year in which the Investment Company Act of 1940
does not require a Contract Owner to vote on: 1) election of members of the
Board of Managers; 2) approval of an investment advisory agreement; 3)
ratification of the independent public accountant; or 4) approval of a
distribution agreement. Each year, prior to the date set by the Rules and
Regulations for the annual meeting, the Board of Managers will determine whether
such meeting need be held.
Special meetings may be called for any proper purpose when permitted by
applicable law. As a result of the option for the Board to dispense with annual
meetings of Contract Owners, special meetings must be called whenever there is a
change in the Fund's independent public accountant, and whenever fewer than 50%
of the existing Members of the Board of Managers has been elected by Contract
Owners. Also, since dispensing with annual meetings results in perpetuating
Members of the Board of Managers in office, the Fund is required to call a
special meeting when Contract Owners who meet the standards of Section 16(c) of
the Investment Company Act of 1940 apply to the Fund requesting that such a
meeting be called for the purpose of removing one or Members of the Board of
Managers. That section also requires that the Fund facilitate communication
between Contract Owners who wish to solicit the approval of other Contract
Owners for the calling of such a meeting. Additional information about this
procedure is available from Fund management.
LEGAL PROCEEDINGS
As of the date of this Prospectus, neither the Fund nor the Company is involved
in any material pending legal proceedings, other than ordinary routine
litigation incidental to the business.
OTHER ANNUITY CONTRACTS
Individual variable annuity contracts are also sold by the Company, the assets
of which are also held in the Fund and are affected by its investment
experience.
CUSTODIAN
Bankers Trust Company, 14 Wall Street, 4th Floor, New York, New York 10005
("Bankers") is Custodian for the Fund pursuant to a Custodian Agreement
effective March 4, 1985. Under this Agreement, Bankers shall (1) receive and
disburse money; (2) receive and hold securities; (3) transfer, exchange, or
deliver securities; (4) present for payment coupons and other income items,
collect interest and cash dividends received, hold stock dividends, etc.; (5)
cause escrow and deposit receipts to be executed; (6) register securities; and
(7) deliver to the Fund proxies, proxy statements, etc.
28
<PAGE>
STATE REGULATION
As a life insurance company organized and operating under Indiana law, the
Company is subject to provisions governing such companies and to regulation by
the Indiana Commissioner of Insurance.
The Company's books and accounts are subject to review and examination by the
Indiana Insurance Department (Department) at all times and a full examination of
its operations normally is conducted by the Department at least once in every 5
years.
<TABLE>
<CAPTION>
TABLE OF CONTENTS OF THE
STATEMENT OF ADDITIONAL INFORMATION (SAI)
ITEM Page
<S> <C>
General Information and History B-2
Special Terms B-2
Investment Objectives and Policies of the Fund B-2
Management B-2
Investment Advisory and Related Services B-3
Brokerage Allocation B-3
Purchase and Pricing of Securities Being Offered B-3
Distribution of Variable Annuity Contracts B-4
Federal Tax Status B-4
Other Services B-5
Underwriters B-5
Determination of Net Asset Value B-5
Financial Statements B-6
</TABLE>
NOTE: SEE THE COVER PAGE OF THIS PROSPECTUS FOR DETAILS ABOUT HOW TO OBTAIN A
COPY OF THE SAI.
29
<PAGE>
LINCOLN NATIONAL
VARIABLE ANNUITY
FUND B (GROUP)
PROSPECTUS
APRIL 30, 1995
GROUP VARIABLE ANNUITY
CONTRACTS ISSUED BY
The Lincoln National Life Insurance Company
Fort Wayne, Indiana
No person has been authorized to give any information or to make any
representations other than those contained in the prospectus and, if given or
made, such information or representations must not be relied upon as having been
authorized. This prospectus does not constitute an offer of, or solicitation of
an offer to acquire, any interest or participation in the variable annuity
contracts offered by this prospectus in any jurisdiction to anyone to whom it is
unlawful to make such an offer or solicitation in such jurisdiction.
To obtain a copy of the Statement of Additional Information, please complete and
mail the following form:
-------------------------------------------------------------------------------
Please send me a copy of the current Statement of Additional Information for
Lincoln National Variable Annuity Fund B (Group):
(Please Print)
Name:
--------------------------------------------------------------------------
Address:
-----------------------------------------------------------------------
City State Zip
-------------------- -------------------- --------------------
Mail to: Kim Oakman, The Lincoln National Life Insurance Company, P.O. Box
2340, Fort Wayne, Indiana 46801
-------------------------------------------------------------------------------
Form 10737 4/95
30
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
June 22, 1995
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
June 22, 1995
Lincoln National Variable Annuity Fund A
This Statement of Additional Information is not a prospectus. The
Statement of Additional Information should be read in conjunction with the
Prospectus/Proxy Statement of Lincoln National Variable Annuity Fund A dated
June 22, 1995. That document may be obtained by writing The Lincoln National
Life Insurance Company, P.O. Box 2340, Fort Wayne, Indiana 46801, or by calling
1-800-348-1212, Extension 4912.
TABLE OF CONTENTS
Exhibit A - Fund A Statement of Additional Information (4/30/95)
Exhibit B - Fund B Statement of Additional Information (4/30/95)
<PAGE>
Item 12. Additional Information About the Registrant
-------------------------------------------
Additional information regarding Lincoln National Variable Annuity
Fund A is found in the Statements of Additional Information to Fund
A's Registration Statements on Form N-3 filed with the Securities and
Exchange Commission on April 11, 1995 (File Nos. 2-25618; 2-26342).
These Statements of Additional Information are attached hereto as
Exhibit A.
Item 13. Additional Information About the Company Being Acquired
-------------------------------------------------------
Additional information regarding Lincoln National Variable Annuity
Fund B is found in the Statement of Additional Information to Fund B's
Registration Statement on Form N-3 filed with the Securities and
Exchange Commission on April 11, 1995 (File No. 2-27460). That
Statement of Additional Information is attached hereto as Exhibit B.
Item 14. Financial Statements
--------------------
Financial statements regarding Fund A dated December 31, 1994 are
included in the Statements of Additional Information provided in
Exhibit A. Financial statements regarding Fund B dated December 31,
1994 are included in the Statement of Additional Information provided
in Exhibit B.
<PAGE>
EXHIBIT A
FUND A STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION (SAI)
LINCOLN NATIONAL VARIABLE ANNUITY FUND A (INDIVIDUAL)
(REGISTRANT)
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
(DEPOSITOR)
THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE
PROSPECTUS OF LINCOLN NATIONAL VARIABLE ANNUITY FUND A (INDIVIDUAL) DATED
APRIL 30, 1995. YOU MAY OBTAIN A COPY OF THE FUND A (INDIVIDUAL) PROSPECTUS ON
REQUEST AND WITHOUT CHARGE. PLEASE WRITE KIM OAKMAN, THE LINCOLN NATIONAL LIFE
INSURANCE COMPANY, P.O. BOX 2340, FORT WAYNE, INDIANA 46801 OR CALL 1-800-348-
1212, EXTENSION 4912.
____________
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS.
TABLE OF CONTENTS
ITEM PAGE
General Information and History B-2
Special Terms B-2
Investment Objectives and Policies of the Fund B-2
Management B-2
Investment Advisory and Related Services B-3
Brokerage Allocation B-3
Purchase and Pricing of Securities Being Offered B-3
Distribution of Variable Annuity Contracts B-4
Federal Tax Status B-4
Other Services B-6
Underwriters B-6
Determination of Net Asset Value B-6
Financial Statements B-7
____________
THE DATE OF THIS STATEMENT OF ADDITIONAL INFORMATION IS APRIL 30, 1995
FORM 10586 (SAI) 4/95
B-1
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION (SAI)
LINCOLN NATIONAL VARIABLE ANNUITY FUND A (INDIVIDUAL)
GENERAL INFORMATION AND HISTORY OF
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
The Lincoln National Life Insurance Company (the Company) is an Indiana
insurance corporation, engaged primarily in the direct issuance of life
insurance contracts and annuities, and is also a professional reinsurer. The
Company is wholly owned by Lincoln National Corporation, a publicly-held
insurance holding company domiciled in Indiana.
SPECIAL TERMS
The Special terms used in this SAI are the ones defined in the Prospectus.
INVESTMENT OBJECTIVES AND POLICIES OF THE FUND
See that heading in the Prospectus.
MANAGEMENT
MANAGERS AND OFFICERS OF THE FUND
The Fund is managed by a Board of Managers, whose Members are elected annually
by the Contract Owners. The affairs of the Fund are conducted in accordance
with Rules and Regulations adopted by the Board of Managers.
<PAGE>
<TABLE>
<CAPTION>
POSITION PRESENT POSITION AND PRINCIPAL
NAME AND ADDRESS WITH THE FUND OCCUPATION DURING LAST FIVE YEARS
<S> <C> <C>
John B. Borsch, Jr. Member Retired (formerly Associate Vice President--Investments,
1776 Sherwood Road Northwestern University, Evanston, Illinois)
Des Plaines, IL 60016
Nancy L. Frisby, CPA Chairman and Regional Vice President/Chief Financial Officer (formerly
700 Broadway Member Vice President--Finance; Regional Controller of Finance),
Fort Wayne, IN 46802 St. Joseph Medical Center, Fort Wayne, Indiana
Stanley R. Nelson Member Executive in Residence, Program in Health Services Adminis-
University of Minnesota tration, University of Minnesota, Minneapolis, Minnesota,
(Mayo Box 97) (formerly President, Henry Ford Health Care Corporation,
420 Delaware Street, S.E. Detroit, Michigan)
Minneapolis, MN 55455
*Max A. Roesler Vice President and Vice President and Treasurer, Lincoln National Corporation;
1300 S. Clinton Street Treasurer Vice President and Treasurer (formerly Assistant Vice
Fort Wayne, IN 46802 President), The Lincoln National Life Insurance Company
*C. Suzanne Womack Secretary to the Board Secretary, Lincoln National Corporation; Secretary, The
200 East Berry Street of Managers Lincoln National Life Insurance Company
Fort Wayne, IN 46802
</TABLE>
*An "interested person" of the Fund as that term is defined in the Investment
Company Act of 1940.
**Merged into the Company in 1989.
REMUNERATION OF CERTAIN AFFILIATED PERSONS
No person receives any remuneration from the Fund. The Company pays all
expenses relative to the operation of the Fund, for which it deducts certain
amounts (see the Prospectus).
CONTROL OF THE FUND
No person is the record or beneficial owner of 5% or more of the Fund. In
addition, Members of the Board of Managers and officers of the Fund as a group
own less than 1% of the Registrant.
B-2
<PAGE>
INVESTMENT ADVISORY AND RELATED SERVICES
This information is disclosed in the Prospectus.
BROKERAGE ALLOCATION
The Company places orders for the purchase and sale of securities for the Fund's
portfolio. It is the Fund's policy to have orders placed with brokers or
dealers who will give the best execution of such orders at prices and under
conditions most favorable to the Fund. The Company will customarily deal with
principal market makers in purchasing over-the-counter securities. In the
allocation of brokerage business, preference may be given to those brokers and
dealers who provide statistical, research, or other services--so long as there
is no sacrifice in getting the best price and execution.
Consistent with the policy of seeking best price and execution for the
transaction size and the risk involved, in selecting brokers or dealers or
negotiating the commissions to be paid, the Company considers each firm's
financial responsibility and reputation, range and quality of the service made
available to the Fund and the broker's or dealer's professional services,
including execution, clearance procedures, wire service quotations and ability
to provide performance, statistical and other research information for
consideration, analysis and evaluation by the Company. In accordance with this
policy, the Company does not execute brokerage transactions solely on the basis
of the lowest commission rates available for a particular transaction.
The Fund paid brokerage fees of $161,000 in 1994, $108,356 in 1993, and $160,683
in 1992.
PURCHASE AND PRICING OF SECURITIES BEING OFFERED
OFFERING TO PUBLIC; SALES LOAD
This information is disclosed in the Prospectus.
GENERAL FORMULAS FOR DETERMINING VALUE OF THE ACCUMULATION UNIT
The following formulas set out in general terms the computation of the
Accumulation Unit value at the close of trading on any day upon which the New
York Stock Exchange is open.
<PAGE>
Gross Investment Rate = Investment Income+Capital Gains-Capital Losses-Taxes
------------------------------------------------------
Value of Fund at Beginning of Valuation Period
Net Investment Rate = Gross Investment Rate-.0000363 (for a 1 day Valuation
Period)
Net Investment Factor = Net Investment Rate+1.00000000
Accumulation Unit Value = Accumulation Unit Value x Net Investment Factor
on Preceding Valuation Date
<PAGE>
CALCULATION OF ACCUMULATION UNIT VALUE USING HYPOTHETICAL EXAMPLE
The above computations may be illustrated by the following hypothetical example.
Assume that the value of the assets of the Fund at the beginning of a 1 day
valuation period was $5,000,000; that the value of an Accumulation Unit on that
date was $1.135; and that during the valuation period the investment income was
$4,000, the net unrealized capital gains were $6,000 and the net realized
capital losses were $3,000. Assuming these figures are net after provision for
applicable taxes, the value of the assets of the Fund at the end of the
valuation period, before adding payments received during the period, would thus
be $5,007,000 ($5,000,000 plus $4,000 plus $6,000 minus $3,000).
The gross investment rate for the valuation period would be equal to (a) $7,000
($4,000 plus $6,000 less $3,000) divided by (b) $5,000,000 which produces .14%
(.0014). The net investment rate for the valuation period is determined by
deducting .00363% (.0000363) from the gross investment rate, which results in a
net investment rate of .13637% (.0013637). The net investment factor for the
valuation period would be determined as the net investment rate plus 1.0, or
1.0013637.
The value of the Accumulation Unit at the end of the valuation period would be
equal to the value at the beginning of the period ($1.135) multiplied by the net
investment factor for the period (1.0013637), which produces $1.1365478.
<PAGE>
GENERAL FORMULAS FOR DETERMINING DOLLAR AMOUNT OF ANNUITY PAYMENTS
Number of Annuity Units = Dollar Amount of First Monthly Payment
----------------------------------------
Annuity Unit Value on Date of First Payment
<TABLE>
<CAPTION>
<C> <C> <C> <C>
Value of Annuity Unit Factor to Net Investment Factor for
Annuity Unit Value = on Preceding Valuation Date x Neutralize x 14th Day Preceding Current
AIR Valuation Date
Dollar Amount of Second Annuity Unit Value for Period
and Subsequent Annuity Payment = Number of Annuity Units x in Which Payment is Due
</TABLE>
B-3
CALCULATION OF ANNUITY PAYMENTS USING HYPOTHETICAL EXAMPLE
The determination of the Annuity Unit value and the annuity payment may be
illustrated by the following hypothetical example. Assume a Participant at the
date of retirement has credited to his individual account 30,000 Accumulation
Units, and that the value of an Accumulation Unit on the 14th day preceding the
last day of the valuation period in which annuity payments commence was $1.15
producing a total value of his individual account of $34,500. Assume also that
the Participant elects an option for which the table in the variable annuity
contract indicates the first monthly payment is $6.57 per $1,000 of value
applied; the Participant's first monthly payment would thus be 34.5 multiplied
by $6.57 or $226.67.
Assume that the Annuity Unit value for the valuation period in which the first
payment was due was $1.10. When this is divided into the first monthly payment
the number of Annuity Units represented by that payment is determined to be
206.064. The value of this same number of Annuity Units will be paid in each
subsequent month.
Assume further that the net investment factor for the Fund for the 14th day
preceding the last day of the valuation period in which the next annuity payment
is due is 1.0019. Multiplying this factor by .99990575 (for a 1 day valuation
period) to neutralize the AIR of 3.5% per year built into the number of Annuity
Units determined as per above, produces a result of 1.00180557. This is then
multiplied by the Annuity Unit value for the valuation period preceding the
period in which the next annuity payment is due (assume $1.105) to produce an
Annuity Unit value for the current valuation period of $1.10699515.
The current monthly payment is then determined by multiplying the fixed number
of Annuity Units by the current Annuity Unit value or 206.064 times $1.10699515,
which produces a current monthly payment of $228.11.
DISTRIBUTION OF VARIABLE ANNUITY CONTRACTS
Variable annuity contracts will be sold by registered representatives of the
Company who have been licensed by the state insurance departments, by certain
employees of the Company and through selected dealers who are members of the
National Association of Securities Dealers, Inc. (NASD).
<PAGE>
The Company is registered with the SEC under the Securities Exchange Act of 1934
as a broker-dealer and is a member of the NASD. For contracts of the Fund sold
through other broker-dealers, the Company will pay the broker-dealer an amount
equivalent to the amount deducted for sales expenses. The amount paid to the
broker-dealer may be greater during the first year of a variable annuity
contract than the amount deducted for sales expenses. The Company pays any
excess over the amount deducted for sales expenses.
FEDERAL TAX STATUS
GENERAL
The operations of the Fund form a part of, and are taxed with, the operations of
the Company under the Internal Revenue Code of 1986, as amended (the "Code").
Investment income and realized capital gains on the assets of the Fund are
reinvested and taken into account in determining the accumulation and annuity
unit values. As a result, such investment income and realized capital gains are
automatically applied to increase reserves under the Contract. Under existing
federal income tax law, separate account investment income and capital gains are
not taxed to the extent they are applied to increase reserves under a contract
issued in connection with the Fund. Accordingly, the Company does not
anticipate that it will incur any federal income tax liability attributable to
the Fund, and therefore the Company does not intend to make provisions for any
such taxes. However, if changes in the federal tax laws or interpretations
thereof result in the Company being taxed on income or gains attributable to the
Fund or certain types of Contracts, then the Company may impose a charge against
the Fund (with respect to some or all Contracts) in order to make provision for
payment of such taxes. The terms of the plan may limit the rights otherwise
available under the Contracts.
QUALIFIED CONTRACTS
The rules governing the tax treatment of contributions and distributions under
such plans, as set forth in the Code and applicable rulings and regulations, are
complex and subject to change. These rules also vary according to the type of
plan and the terms and conditions of the plan itself. Therefore, no attempt is
made herein to provide more than general information about the use of Contracts
with the various types of plans, based on the Company's understanding of the
current Federal tax laws as interpreted by the Internal Revenue Service.
Purchasers of Contracts for use with such a plan and plan participants and
beneficiaries should consult counsel and other competent advisers as to the
suitability of the plan and the Contract to their specific needs, and as to
applicable Code limitations and tax consequences. Participants under such
plans, as well as Contract Owners, annuitants, and beneficiaries, should also be
aware that the rights of any person to any benefits under such plans may be
subject to the terms and conditions of the plans themselves regardless of the
terms and conditions of the Contract.
Following are brief descriptions of the various types of plans and of the use of
Contracts in connection therewith.
PUBLIC SCHOOL SYSTEMS AND SECTION 501(C)(3) ORGANIZATIONS
<PAGE>
Payments made to purchase annuity contracts by public school systems or Section
501(c)(3) organizations for their employees are excludable from the gross income
of the employee to the extent that aggregate payments for the employee do not
exceed the "exclusion allowance" provided by Section 403(b) of the Code, the
overall limits for excludable contributions of Section 415 of the Code or the
limit on elective contributions. Furthermore, the investment results of the
Fund credited to the account are not taxable until benefits are received either
in the form of annuity payments or in a single sum.
If an employee's individual account is surrendered, usually the full amount
received would be includable in income for that year at ordinary rates.
Distributions are subject to certain restrictions.
B-4
QUALIFIED CORPORATE EMPLOYEE'S PENSION AND PROFIT-SHARING TRUSTS AND QUALIFIED
ANNUITY PLANS
Payments made by a corporate employer and the increments on all payments for
qualified corporate plans are not taxable as income to the employee until
distributed. However, the employee may be required to include these amounts in
gross income prior to distribution if the qualified plan or trust loses its
qualification. Corporate plans qualified under Sections 401(a) or 403(a) of the
Code are subject to extensive rules, including limitations on maximum
contributions or benefits.
Distributions of amounts in excess of nondeductible employee contributions are
generally taxable as ordinary income. If an employee or beneficiary receives a
"lump-sum distribution," that is, if the employee or beneficiary receives in a
single tax year the total amounts payable with respect to that employee and the
benefits are paid as a result of the employee's death or separation from service
or after the employee attains age 59 1/2, taxable gain may be either eligible
for special "lump sum averaging" treatment or, if the recipient was age 50
before January 1, 1986, eligible for taxation at a 20% rate to the extent the
distribution reflects payments made prior to January 1, 1974. These special tax
rules are not available in all cases.
SELF-EMPLOYED INDIVIDUALS (H.R.-10 OR KEOGH)
Under Code provisions, self-employed individuals may establish plans commonly
known as "H.R.-10" or "Keogh plans" for themselves and their employees. The tax
consequences to participants under such plans depend upon the plan itself. Such
plans are subject to special rules in addition to those applicable to qualified
corporate plans. Purchasers of the Contracts for use with H.R.-10 plans should
seek competent advice as to suitability of plan documents and the funding
contracts.
INDIVIDUAL RETIREMENT ANNUITIES (IRA)
Under Section 408 of the Code, individuals may participate in a retirement
program known as Individual Retirement Annuity (IRA). An individual may make an
annual IRA contribution of up to the lesser of $2,000 ($2,250 if IRAs are
maintained for both the individual and his nonworking spouse) or 100% of
compensation. However, IRA contributions may be nondeductible in
<PAGE>
whole or in part if (1) the individual or his spouse is an active participant in
certain other retirement programs and (2) the income of the individual (or of
the individual and his spouse) exceeds a specified amount. Distributions from
certain other IRA plans or qualified plans may be "rolled over" to an IRA on a
tax deferred basis without regard to the limit on contributions, provided
certain requirements are met. Distributions from IRAs are subject to certain
restrictions. Deductible IRA contributions and all IRA earnings will be taxed
as ordinary income when distributed. The failure to satisfy certain Code
requirements with respect to an IRA may result in adverse tax consequences.
DEFERRED COMPENSATION PLANS (457 PLANS)
Under the Code provisions, employees and independent contractors performing
services for state and local governments or tax-exempt organizations may
establish deferred compensation plans with a governmental employer or tax-exempt
organization. While participants in such plans may be permitted to specify the
form of investment in which their plan accounts will participate, all such
investments are owned by the sponsoring employer and are subject to the claims
of such employer's creditors. The amounts deferred under a plan which meet the
requirements of Section 457 of the Code are not taxable as income to the
participant until paid or otherwise made available to the participant or
beneficiary. Deferrals are taxed as compensation from the employer when they
are actually or constructively received by the employee. As a general rule, the
maximum amount which can be deferred in any one year is the lesser of $7,500 or
33 1/3% of the participant's includable compensation. However, in limited
circumstances, up to $15,000 may be deferred in each of the last three years
before retirement. Deferred compensation plans of tax-exempt employers must
also comply with the requirements of Section 457.
SIMPLIFIED EMPLOYEE PENSION PLANS
An employer may make contributions on behalf of employees to a simplified
pension plan as provided by Section 408(k) of the Code. The contributions and
distribution dates are limited by the Code provisions. All distributions from
the plan will be taxed as ordinary income. Any distribution before the employee
attains age 59 1/2 (except in the event of death or disability) or the failure
to satisfy certain othe Code requirements may result in adverse tax
consequences.
TAXATION OF DISTRIBUTIONS FROM QUALIFIED CONTRACTS
The following rules generally apply to distributions from contracts purchased in
connection with the plans discussed above, other than governmental deferred
compensation plans.
The portion, if any, of any contribution under a contract made by or on behalf
of an individual which is not excluded from the employee's gross income
(generally, the employee's own non-deductible contributions) constitutes his
"investment in the contract." If a distribution is made in the form of annuity
payments, the employee's "investment in the contract" (adjusted for certain
refund provisions) divided by his life expectancy (or other period for which
annuity payments are expected to be made)
<PAGE>
constitutes a tax-free return of capital each year. The dollar amount of
annuity payments received in any year in excess of such return is taxable as
ordinary income. However, for employees whose annuity starting date is after
December 31, 1986, all distributions will be fully taxable once the employee is
deemed to have recovered the dollar amount of his investment in the contract.
For amounts distributed after 1986, rules generally provide that all
distributions 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.)
B-5
If a surrender of or withdrawal from the contract is effected and a distribution
is made in a single payment, the proceeds may qualify for special "lump-sum
distribution" treatment under certain qualified plans, as discussed above.
Otherwise, the amount by which the payment exceeds the "investment in the
contract" (adjusted for any prior withdrawal) will be taxed as ordinary income
in the year of receipt.
Distributions from qualified plans, 403(b) plans and IRAs will be subject to (1)
a 10% penalty tax if made before age 59 1/2 unless certain other exceptions
apply, and (2) a 15% penalty tax on combined annual distributions in excess of
$150,000 subject to various special rules. Failure to meet certain minimum
distribution requirements for the above plans, as well as for Section 457 plans,
will result in a 50% excise tax. Various other adverse tax consequences may also
be potentially applicable in certain circumstances to these types of plans.
Upon an employee's death, the taxation of benefits payable to his beneficiary
generally follow these same principles, subject to a variety of special rules.
In particular, tax on death benefits paid as a lump-sum may be deferred if,
within 60 days after the lump-sum becomes payable, the beneficiary instead
elects to receive annuity payments. The estate tax exclusion previously
afforded benefits from certain plans was generally repealed with respect to
persons dying after 1984.
Section 72(s) provides that Contracts issued after January 18, 1985, will not be
treated as annuity contracts for purposes of Section 72 unless the Contract
provides that (A) if any Contract Owner dies on or after the annuity starting
date but prior to the time the entire interest in the Contract has been
distributed, the remaining portion of such interest must be distributed, at
least as rapidly as under the method of distribution in effect at the time of
the Contract Owner's death; and (B) if any Contract Owner dies prior to the
annuity starting date, the entire interest must be distributed within five years
after the death of the Contract Owner. These requirements are considered
satisfied if any portion of the Contract Owner's interest that is payable to or
for the benefit of a "designated beneficiary" is distributed over that
designated beneficiary's life, or a period not extending beyhond the designated
beneficiary's life expectancy, and if that disytribution begins within one year
of the Contract Owner's death. The "designated beneficiary" is the person
designated by the Contract Owner as a beneficiary and to whom Contract ownership
passes by reason of death, and must be a natural person. However, if the
recipient of the proceeds is the surviving spouse of the Contract Owner, the
Contract may be continued in the name of such surviving spouse as the Contract
Owner. Contracts issued after January 18, 1985 contain provisions intended
<PAGE>
to comply with these Code requirements, although regulations interpreting these
requirements have not yet been issued. The Company 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 reghulation or otherwise.
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. Before an investment is made in any of the above plans, a tax
adviser should be consulted.
OTHER SERVICES
CUSTODIAN
The Custodian for the securities purchased by the Eligible Funds is Bankers
Trust Company, 14 Wall Street, 4th Floor, New York, New York 10005. Custodian
will perform those functions outlined in the Prospectus.
INDEPENDENT AUDITORS
The financial statements of the Fund and the consolidated financial statements
and schedules of the Company, which have been included in this Statement of
Additional Information, and the Per-Accumulation-Unit Income and Capital Changes
Table appearing in the Prospectus, have been audited by Ernst & Young LLP, 2300
Fort Wayne National Bank Building, Fort Wayne, Indiana 46802, independent
auditors, as set forth in their reports thereon appearing elsewhere herein and
in the Registration Statement, and are included in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.
KEEPER OF RECORDS
All accounts, books, records and other documents which are required to be
maintained for the Fund are maintained by the Company. No separate charge
against the assets of the Fund is made by the Company for this service.
UNDERWRITERS
The Company is the principal underwriter for the variable annuity contracts.
The offering of the Contracts is continuous. The Company retains no
underwriting commissions from the sale of the variable annuity contracts.
DETERMINATION OF NET ASSET VALUE
A description of the days on which the Fund's net asset value per share will be
determined is given in the Prospectus. The New York Stock Exchange's most
recent announcement (which is subject to change) states that it will be closed
on New Years Day, January 1; President's Day,
<PAGE>
February 20; Good Friday, April 14; Memorial Day, May 29; Independence Day,
July 4; Labor Day, September 4; Thanksgiving Day, November 23; and Christmas
Day, December 25. It may also be closed on other days.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION (SAI)
LINCOLN NATIONAL VARIABLE ANNUITY FUND A (GROUP)
(REGISTRANT)
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
(DEPOSITOR)
This Statement of Additional Information should be read in conjunction with the
Prospectus of Lincoln National Variable Annuity Fund A (Group) dated April 30,
1995. You may obtain a copy of the Fund A (Group) Prospectus on request and
without charge. Please write Kimberly Oakman, The Lincoln National Life
Insurance Company, P.O. Box 2340, Fort Wayne, Indiana 46801 or call 1-800-348-
1212, Extension 4912.
____________
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS.
TABLE OF CONTENTS
ITEM PAGE
General Information and History B-2
Special Terms B-2
Investment Objectives and Policies of the Fund B-2
Management B-2
Investment Advisory and Related Services B-3
Brokerage Allocation B-3
Purchase and Pricing of Securities Being Offered B-3
Distribution of Variable Annuity Contracts B-4
Federal Tax Status B-4
Other Services B-7
Underwriters B-7
Determination of Net Asset Value B-7
Financial Statements B-8
____________
THE DATE OF THIS STATEMENT OF ADDITIONAL INFORMATION IS APRIL 30, 1995.
1
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION (SAI)
LINCOLN NATIONAL VARIABLE ANNUITY FUND A (GROUP)
GENERAL INFORMATION AND HISTORY OF
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
The Lincoln National Life Insurance Company (the Company) is an Indiana
insurance corporation, engaged primarily in the direct issuance of life
insurance contracts and annuities, and is also a professional reinsurer. The
Company is wholly owned by Lincoln National Corporation, a publicly-held
insurance holding company domiciled in Indiana.
SPECIAL TERMS
The Special terms used in this SAI are the ones defined in the Prospectus.
INVESTMENT OBJECTIVES AND POLICIES OF THE FUND
See that heading in the Prospectus.
MANAGEMENT
MANAGERS AND OFFICERS OF THE FUND
The Fund is managed by a Board of Managers, whose Members are elected annually
by the Contract Owners. The affairs of the Fund are conducted in accordance
with Rules and Regulations adopted by the Board of Managers.
POSITION PRESENT POSITION AND PRINCIPAL
NAME AND ADDRESS WITH THE FUND OCCUPATION DURING LAST FIVE YEARS
John B. Borsch, Jr. Member Retired (formerly Associate Vice
1776 Sherwood Road President--Investments, Northwestern
Des Plaines, IL 60016 University, Evanston, Illinois
Nancy L. Frisby, CPA Chairperson Regional Vice President/Chief
700 Broadway and Member Financial Officer (formerly Vice
Fort Wayne, IN 46802 President--Finance; Regional
Controller of Finance), St. Joseph
Medical Center, Fort Wayne, Indiana
Stanley R. Nelson Member Executive in Residence, Program in
University of Minnesota Health Services Administration,
(Mayo Box 97) University of Minnesota,
420 Delaware St., S.E. Minneapolis, Minnesota, (formerly
Minneapolis, MN 55455 President, Henry Ford Health Care
Corporation, Detroit, Michigan)
2
<PAGE>
*Max A. Roesler Vice Presi- Vice President and Treasurer,
1300 S. Clinton dent and Lincoln National Corporation; Vice
Fort Wayne, IN 46802 Treasurer President and Treasurer (formerly
Assistant Vice President), The
Lincoln National Life Insurance
Company
*C. Suzanne Womack Secretary to Secretary, Lincoln National
200 East Berry the Board of Corporation; Secretary, The Lincoln
Fort Wayne, IN 46802 Managers National Life Insurance Company
*An "interested person" of the Fund as that term is defined in the
Investment Company Act of 1940.
+Merged into the Company in 1989.
REMUNERATION OF CERTAIN AFFILIATED PERSONS
No person receives any remuneration from the Fund. The Company pays all
expenses relative to the operation of the Fund, for which it deducts certain
amounts (see the Prospectus).
CONTROL OF THE FUND
No person is the record or beneficial owner of 5% or more of the Fund. In
addition, Members of the Board of Managers and officers of the Fund as a group
own less than 1% of the Registrant.
INVESTMENT ADVISORY AND RELATED SERVICES
This information is disclosed in the Prospectus.
BROKERAGE ALLOCATION
The Company places orders for the purchase and sale of securities for the Fund's
portfolio. It is the Fund's policy to have orders placed with brokers or
dealers who will give the best execution of such orders at prices and under
conditions most favorable to the Fund. The Company will customarily deal with
principal market makers in purchasing over-the-counter securities. In the
allocation of brokerage business, preference may be given to those brokers and
dealers who provide statistical, research, or other services--so long as there
is no sacrifice in getting the best price and execution.
Consistent with the policy of seeking best price and execution for the
transaction size and the risk involved, in selecting brokers or dealers or
negotiating the commissions to be paid, the Company considers each firm's
financial responsibility and reputation, range and quality of the service made
available to the Fund and the broker's or dealer's professional services,
including execution, clearance procedures, wire service quotations and ability
to provide performance, statistical and other
3
<PAGE>
research information for consideration, analysis and evaluation by the Company.
In accordance with this policy, the Company does not execute brokerage
transactions solely on the basis of the lowest commission rates available for a
particular transaction.
The Fund paid brokerage fees of $161,000 for 1994, $108,356 for 1993, and
$160,683 for 1992.
PURCHASE AND PRICING OF SECURITIES BEING OFFERED
OFFERING TO PUBLIC; SALES LOAD
This information is disclosed in the Prospectus.
GENERAL FORMULAS FOR DETERMINING VALUE OF THE ACCUMULATION UNIT
The following formulas set out in general terms the computation of the
Accumulation Unit value at the close of trading on any day upon which the New
York Stock Exchange is open.
Investment Income+Capital Gains-Capital Losses-Taxes
----------------------------------------------------
Gross Investment Rate= Value of Fund at Beginning of Valuation Period
Net Investment Rate=Gross Investment Rate-.0000363 (for a 1 day Valuation
Period)
Net Investment Factor=Net Investment Rate+1.00000000
Accumulation Unit Value x Net Investment Factor
Accumulation Unit Value=on Preceding Valuation Date
CALCULATION OF ACCUMULATION UNIT VALUE USING HYPOTHETICAL EXAMPLE
The above computations may be illustrated by the following hypothetical example.
Assume that the value of the assets of the Fund at the beginning of a 1 day
valuation period was $5,000,000; that the value of an Accumulation Unit on that
date was $1.135; and that during the valuation period the investment income was
$4,000, the net unrealized capital gains were $6,000 and the net realized
capital losses were $3,000. Assuming these figures are net after provision for
applicable taxes, the value of the assets of the Fund at the end of the
valuation period, before adding payments received during the period, would thus
be $5,007,000 ($5,000,000 plus $4,000 plus $6,000 minus $3,000).
The gross investment rate for the valuation period would be equal to (a) $7,000
($4,000 plus $6,000 less $3,000) divided by (b) $5,000,000 which produces .14%
(.0014). The net investment rate for the valuation period is determined by
deducting .00363% (.0000363) from the gross investment rate, which results in a
net investment rate of .13637% (.0013637). The net investment factor for the
valuation period would be determined as the net investment rate plus 1.0, or
1.0013637.
4
<PAGE>
The value of the Accumulation Unit at the end of the valuation period would be
equal to the value at the beginning of the period ($1.135) multiplied by the net
investment factor for the period (1.0013637), which produces $1.1365478.
GENERAL FORMULAS FOR DETERMINING DOLLAR AMOUNT OF ANNUITY PAYMENTS
Dollar Amount of First Monthly Payment
--------------------------------------
Number of Annuity Units=Annuity Unit Value on Date of First Payment
Net Investment
Value of Annuity Unit Factor to Factor for 14th
Annuity Unit Value=on Preceding Valuation x Neutralize x Day Preceding
Date AIR Current Valuation
Date
Dollar Amount of Annuity Unit Value
Second and Subsequent=Number of Annuity Units x for Period in Which
Annuity Payment Payment is Due
CALCULATION OF ANNUITY PAYMENTS USING HYPOTHETICAL EXAMPLE
The determination of the Annuity Unit value and the annuity payment may be
illustrated by the following hypothetical example. Assume a Participant at the
date of retirement has credited to his individual account 30,000 Accumulation
Units, and that the value of an Accumulation Unit on the 14th day preceding the
last day of the valuation period in which annuity payments commence was $1.15
producing a total value of his individual account of $34,500. Assume also that
the Participant elects an option for which the table in the variable annuity
contract indicates the first monthly payment is $6.57 per $1,000 of value
applied; the Participant's first monthly payment would thus be 34.5 multiplied
by $6.57 or $226.67.
Assume that the Annuity Unit value for the valuation period in which the first
payment was due was $1.10. When this is divided into the first monthly payment
the number of Annuity Units represented by that payment is determined to be
206.064. The value of this same number of Annuity Units will be paid in each
subsequent month.
Assume further that the net investment factor for the Fund for the 14th day
preceding the last day of the valuation period in which the next annuity payment
is due is 1.0019. Multiplying this factor by .99990575 (for a 1 day valuation
period) to neutralize the AIR of 3.5% per year built into the number of Annuity
Units determined as per above, produces a result of 1.00180557. This is then
multiplied by the Annuity Unit value for the valuation period preceding the
period in which the next annuity payment is due (assume $1.105) to produce an
Annuity Unit value for the current valuation period of $1.10699515.
The current monthly payment is then determined by multiplying the fixed number
of Annuity Units by the current Annuity Unit value or 206.064 times
5
<PAGE>
$1.10699515, which produces a current monthly payment of $228.11.
DISTRIBUTION OF VARIABLE ANNUITY CONTRACTS
Variable annuity contracts will be sold by registered representatives of the
Company who have been licensed by the state insurance departments, by certain
employees of the Company and through selected dealers who are members of the
National Association of Securities Dealers, Inc. (NASD). The Company is
registered with the SEC under the Securities Exchange Act of 1934 as a broker-
dealer and is a member of the NASD. For contracts of the Fund sold through
other broker-dealers, the Company will pay the broker-dealer an amount
equivalent to the amount deducted for sales expenses. The amount paid to the
broker-dealer may be greater during the first year of a variable annuity
contract than the amount deducted for sales expenses. The Company pays any
excess over the amount deducted for sales expenses.
FEDERAL TAX STATUS
GENERAL
The operations of the Fund form a part of, and are taxed with, the operations of
the Company under the Internal Revenue Code of 1986, as amended (the Code).
Investment income and realized net capital gains on the assets of the Fund are
reinvested and taken into account in determining the accumulation and annuity
unit values. As a result, such investment income and realized capital gains are
automatically applied to increase reserves under the Contract. Under existing
federal income tax law, separate account investment income and capital gains are
not taxed to the extent they are applied to increase reserves under a contract
issued in connection with the Fund. Accordingly, the Company does not
anticipate that it will incur any federal income tax liability attributable to
the Fund, and therefore the Company does not intend to make provisions for any
such taxes. However, if changes in the federal tax laws or interpretations
thereof result in the Company being taxed on income or gains attributable to the
Fund or certain types of Contracts, then the Company may impose a charge against
the Fund (with respect to some or all Contracts) in order to make provision for
payment of such taxes. The terms of the plan may limit the rights otherwise
available under the Contracts.
QUALIFIED CONTRACTS
The rules governing the tax treatment of contributions and distributions under
such plans, as set forth in the Code and applicable rulings and regulations, are
complex and subject to change. These rules also vary according to the type of
plan and the terms and conditions of the plan itself. Therefore, no attempt is
made herein to provide more than general information about the use of Contracts
with the various types of plans, based on the Company's understanding of the
current Federal tax laws as interpreted by the Internal Revenue Service.
Purchasers of Contracts for use with such a plan and plan participants and
beneficiaries should consult counsel and other competent advisers as to the
suitability of the plan and
6
<PAGE>
the Contract to their specific needs, and as to applicable Code limitations and
tax consequences. Participants under such plans, as well as Contract Owners,
annuitants, and beneficiaries, should also be aware that the rights of any
person to any benefits under such plans may be subject to the terms and
conditions of the plans themselves regardless of the terms and conditions of the
Contract.
Following are brief descriptions of the various types of plans and of the use of
Contracts in connection therewith.
PUBLIC SCHOOL SYSTEMS AND SECTION 501(C)(3) ORGANIZATIONS
Payments made to purchase annuity contracts by public school systems or Section
501(c)(3) organizations for their employees are excludable from the gross income
of the employee to the extent that aggregate payments for the employee do not
exceed the "exclusion allowance" provided by Section 403(b) of the Code, the
overall limits for excludable contributions of Section 415 of the Code or the
limit on elective contributions. Furthermore, the investment results of the
Fund credited to the account are not taxable until benefits are received either
in the form of annuity payments or in a single sum.
If an employee's individual account is surrendered, usually the full amount
received would be includable in income for that year at ordinary rates.
Distributions are subject to certain restrictions.
QUALIFIED CORPORATE EMPLOYEE'S PENSION AND PROFIT-SHARING TRUSTS AND QUALIFIED
ANNUITY PLANS
Payments made by a corporate employer and the increments on all payments for
qualified corporate plans are not taxable as income to the employee until
distributed. However, the employee may be required to include these amounts in
gross income prior to distribution if the qualified plan or trust loses its
qualification. Corporate plans qualified under Sections 401(a) or 403(a) of the
Code are subject to extensive rules, including limitations on maximum
contributions or benefits.
Distributions of amounts in excess of nondeductible employee contributions are
generally taxable as ordinary income. If an employee or beneficiary receives a
"lump-sum distribution," that is, if the employee or beneficiary receives in a
single tax year the total amounts payable with respect to that employee and the
benefits are paid as a result of the employee's death or separation from service
or after the employee attains age 59 1/2, taxable gain may be either eligible
for special "lump sum averaging" treatment or, if the recipient was age 50
before January 1, 1986, eligible for taxation at a 20% rate to the extent the
distribution reflects payments made prior to January 1, 1974. These special tax
rules are not available in all cases.
SELF-EMPLOYED INDIVIDUALS (H.R.-10 OR KEOGH)
7
<PAGE>
Under Code provisions, self-employed individuals may establish plans commonly
known as "H.R.-10" or "Keogh plans" for themselves and their employees. The tax
consequences to participants under such plans depend upon the plan itself. Such
plans are subject to special rules in addition to those applicable to qualified
corporate plans. Purchasers of the Contracts for use with H.R.-10 plans should
seek competent advice as to suitability of plan documents and the funding
contracts.
INDIVIDUAL RETIREMENT ANNUITIES (IRA)
Under Section 408 of the Code, individuals may participate in a retirement
program known as Individual Retirement Annuity (IRA). An individual may make an
annual IRA contribution of up to the lesser of $2,000 ($2,250 if IRAs are
maintained for both the individual and his nonworking spouse) or 100% of
compensation. However, IRA contributions may be nondeductible in whole or in
part if (1) the individual or his spouse is an active participant in certain
other retirement programs and (2) the income of the individual (or of the
individual and his spouse) exceeds a specified amount. Distributions from
certain other IRA plans or qualified plans may be "rolled over" to an IRA on a
tax deferred basis without regard to the limit on contributions, provided
certain requirements are met. Distributions from IRAs are subject to certain
restrictions. Deductible IRA contributions and all IRA earnings will be taxed
as ordinary income when distributed. The failure to satisfy certain Code
requirements with respect to an IRA may result in adverse tax consequences.
DEFERRED COMPENSATION PLANS (457 PLANS)
Under the Code provisions, employees and independent contractors performing
services for state and local governments or tax-exempt organization may
establish deferred compensation plans with a governmental employer or a tax-
exempt organization. While participants in such plans may be permitted to
specify the form of investment in which their plan accounts will participate,
all such investments are owned by the sponsoring employer and are subject to the
claims of its creditors. The amounts deferred under a plan which meet the
requirements of Section 457 of the Code are not taxable as income to the
participant until paid or otherwise made available to the participant or
beneficiary. Deferrals are taxed as compensation from the employer when they
are actually or constructively received by the employee. As a general rule, the
maximum amount which can be deferred in any one year is the lesser of $7,500 or
33 1/3% of the participant's includable compensation. However, in limited
circumstances, up to $15,000 may be deferred in each of the last three years
before retirement. Deferred compensation plans of tax-exempt employers must
also comply with the requirements of Section 457.
SIMPLIFIED EMPLOYEE PENSION PLANS
An employer may make contributions on behalf of employees to a simplified
pension plan as provided by Section 408(k) of the Code. The contributions and
distribution dates are limited by the Code provisions. All
8
<PAGE>
distributions from the plan will be taxed as ordinary income. Any distribution
before the employee attains age 59 1/2 (except in the event of death or
disability) or the failure to satisfy certain other Code requirements may result
in adverse tax consequences.
TAXATION OF DISTRIBUTIONS FROM QUALIFIED CONTRACTS
The following rules generally apply to distributions from contracts purchased in
connection with the plans discussed above, other than governmental deferred
compensation plans.
The portion, if any, of any contribution under a contract made by or on behalf
of an individual which is not excluded from the employee's gross income
(generally, the employee's own non-deductible contributions) constitutes his
"investment in the contract." If a distribution is made in the form of annuity
payments, the employee's "investment in the contract" (adjusted for certain
refund provisions) divided by his life expectancy (or other period for which
annuity payments are expected to be made) constitutes a tax-free return of
capital each year. The dollar amount of annuity payments received in any year
in excess of such return is taxable as ordinary income. However, for employees
whose annuity starting date is after December 31, 1986, all distributions will
be fully taxable once the employee is deemed to have recovered the dollar amount
of his investment in the contract. For amounts distributed after 1986, rules
generally provide that all distributions 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).
If a surrender of or withdrawal from the contract is effected and a distribution
is made in a single payment, the proceeds may qualify for special "lump-sum
distribution" treatment under certain qualified plans, as discussed above.
Otherwise, the amount by which the payment exceeds the "investment in the
contract" (adjusted for any prior withdrawal) will be taxed as ordinary income
in the year of receipt. Because typically an annuitant's income decreases and
his tax deductions increase after retirement, he generally will be in a lower
tax bracket when he is taxed on annuity payments.
Distributions from qualified plans, 403(b) plans and IRAs will be subject to (1)
a 10% penalty tax if made before age 59 1/2 unless certain other exceptions
apply, and (2) a 15% penalty tax on combined annual distributions in excess of
$150,000, subject to various special rules. Failure to meet certain minimum
distribution requirements for the above plans, as well as for Section 457 plans,
will result in a 50% excise tax. Various other adverse tax consequences may also
be potentially applicable in certain circumstances to these types of plans.
Upon an employee's death, the taxation of benefits payable to his beneficiary
generally follow these same principles, subject to a variety of special rules.
In particular, tax on death benefits paid as a lump-sum may be deferred if,
within 60 days after the lump-sum becomes payable, the
9
<PAGE>
beneficiary instead elects to receive annuity payments.
Section 72(s) provides that Contracts issued after January 18, 1985, will not be
treated as annuity contracts for purposes of Section 72 unless the Contract
provides that (A) if any Contract Owner dies on or after the annuity starting
date but prior to the time the entire interest in the Contract has been
distributed, the remaining portion of such interest must be distributed at least
as rapidly as under the method of distribution in effect at the time of the
Contract Owner's death; and (B) if any Contract Owner dies prior to the annuity
starting date, the entire interest must be distributed within five years after
the death of the Contract Owner. These requirements are considered satisfied if
any portion of the Contract Owner's interest that is payable to or for the
benefit of a "designated beneficiary" is distributed over that designated
beneficiary's life, or a period not extending beyond the designated
beneficiary's life expectancy, and if that distribution begins within one year
of the Contract Owner's death. The 'designated beneficiary" is the person
designated by the Contract Owner as a beneficiary and to whom Contract ownership
passes by reason of death, and must be a natural person. However, if the
recipient of the proceeds is the surviving spouse of the Contract Owner, the
contract may be continued in the name of such surviving spouse as the Contract
Owner. Contracts issued after January 18, 1985 contain provisions intended to
comply with these Code requirements, although regulations interpreting these
requirements have not yet been issued. The Company 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.
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. Before an investment is made in any of the above plans, a tax
adviser should be consulted.
OTHER SERVICES
CUSTODIAN
The Custodian for the securities purchased by the Eligible Funds is Bankers
Trust Company, 14 Wall Street, 4th Floor, New York, New York 10005. Custodian
will perform those functions outlined in the Prospectus.
INDEPENDENT AUDITORS
The financial statements of the Fund and the consolidated financial statements
and schedules of the Company, which have been included in this
10
<PAGE>
Statement of Additional Information, and the Per-Accumulation-Unit Income and
Capital Changes Table appearing in the Prospectus, have been audited by Ernst &
Young LLP, 2300 Fort Wayne National Bank Building, Fort Wayne, Indiana 46802,
independent auditors, as set forth in their reports thereon appearing elsewhere
herein and in the Registration Statement, and are included in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing.
KEEPER OF RECORDS
All accounts, books, records and other documents which are required to be
maintained for the Fund are maintained by the Company. No separate charge
against the assets of the Fund is made by the Company for this service.
UNDERWRITERS
The Company is the principal underwriter for the variable annuity contracts.
The offering of the contracts is continuous. The Company retains no
underwriting commissions from the sale of the variable annuity contracts.
DETERMINATION OF NET ASSET VALUE
A description of the days on which the Fund's net asset value per share will be
determined is given in the Prospectus. The New York Stock Exchange's most
recent announcement (which is subject to change) states that it will be closed
on President's Day, February 20; Good Friday, April 14; Memorial Day, May 29;
Independence Day, July 4; Labor Day, September 4; Thanksgiving Day, November 23;
and Christmas Day, December 25.
11
<PAGE>
FINANCIAL STATEMENTS
LINCOLN NATIONAL VARIABLE ANNUITY FUND A
Statement of Operations
Year Ended December 31, 1994
<TABLE>
<CAPTION>
INVESTMENT INCOME
<S> <C> <C>
Income:
Dividends.............................. $2,531,456
Interest............................... 23,845
----------
2,555,301
Expenses:
Investment management services........ $ 272,740
Mortality and expense guarantees...... 802,080 1,074,820
----------- ----------
NET INVESTMENT INCOME 1,480,481
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain on investments....... 7,201,941
Decrease in net unrealized
appreciation of investments........... (7,661,756)
-----------
NET REALIZED AND UNREALIZED
LOSS ON INVESTMENTS (459,815)
----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $1,020,666
==========
Statements of Changes in Net Assets
Year Ended December 31
1994 1993
------------- ------------
Changes from operations:
Net investment income................... $ 1,480,481 $ 1,551,124
Net realized gain on investments........ 7,201,941 5,200,053
Increase (decrease) in net
unrealized appreciation of investments.. (7,661,756) 1,715,365
------------ -----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 1,020,666 8,466,542
Net decrease from equity transactions..... (12,355,642) (8,870,946)
------------ -----------
TOTAL DECREASE IN NET ASSETS (11,334,976) (404,404)
Net assets at beginning of year........... 89,869,244 90,273,648
------------ -----------
NET ASSETS AT END OF YEAR $ 78,534,268 $89,869,244
============ ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY FUND A
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
<TABLE>
<CAPTION>
PERCENT NUMBER
OF OF MARKET
NET ASSETS SHARES VALUE
---------- ------ ------
<S> <C> <C> <C>
INVESTMENTS
COMMON STOCKS:
AEROSPACE: .......................................... 0.6%
McDonnell Douglas Corporation .................... 3,600 $ 511,200
AIR TRANSPORTATION: ................................. 1.7
Airborne Freight Corp. ........................... 6,000 123,000
Federal Express Corporation* ..................... 11,000 662,750
Lockheed Corp. ................................... 7,400 537,425
----------
1,323,175
BANKING AND INSURANCE: .............................. 10.3
Ahmanson HF & Co. ................................ 16,100 259,613
American General Corporation ..................... 41,400 1,169,550
Chase Manhattan Corporation ...................... 34,100 1,172,187
Cigna Corporation ................................ 7,300 464,462
Conseco Inc. ..................................... 5,500 237,187
First Chicago Corporation ........................ 17,000 811,750
First Interstate Bank ............................ 13,500 912,937
MBNA Corp. ....................................... 43,000 1,005,125
Nationsbank Corporation .......................... 26,500 1,195,812
SunAmerica Inc. .................................. 15,300 554,625
Transamerica Corp. ............................... 5,500 273,625
----------
8,056,873
BROADCASTING: ....................................... 1.4
Belo (A.H.) Corporation .......................... 3,500 197,750
Capital Cities ABC Inc. .......................... 10,500 895,125
----------
1,092,875
BUILDING MATERIALS: ................................. 1.1
Armstrong World Inc. ............................. 22,700 873,950
CHEMICALS: .......................................... 4.9
Dow Chemical Co. ................................. 8,600 578,350
Du Pont E I De Nemours & Co. ..................... 20,900 1,175,625
Georgia Gulf Corp.* .............................. 8,800 342,100
Lyondell Petrochemical ........................... 43,300 1,120,388
Olin Corp. ....................................... 11,900 612,850
----------
3,829,313
CONSUMER PRODUCTS AND SERVICES: ..................... 5.5
American Brands, Inc. ............................ 34,800 1,305,000
Philip Morris Companies Inc. ..................... 37,700 2,167,750
Premark International, Inc. ...................... 18,800 841,300
----------
4,314,050
DRUG AND HOSPITAL SUPPLIES: ......................... 7.6
Baxter International Inc. ........................ 39,800 1,124,350
Bristol-Myers Squibb Company ..................... 19,300 1,116,987
Lilly (Eli) & Company ............................ 21,000 1,378,125
Schering-Plough Corporation ...................... 17,500 1,295,000
Upjohn Co. ....................................... 33,800 1,039,350
----------
5,953,812
ELECTRICAL AND ELECTRONICS: ......................... 6.2
Advanced Micro Devices, Inc.* .................... 26,600 661,675
Cypress Semiconductor Corporation* ............... 6,400 148,000
General Electric Company ......................... 43,700 2,228,700
General Instrument Corp.* ........................ 6,500 195,000
Quantum Corp.* ................................... 48,200 725,988
Texas Instruments Inc. ........................... 11,800 883,525
----------
4,842,888
ENTERTAINMENT: ...................................... 1.2
Mattel, Inc. ..................................... 27,350 687,169
Mirage Resorts Inc.* ............................. 13,300 272,650
----------
959,819
FINANCE: ............................................ 0.5
Clayton Homes Inc. ............................... 26,562 418,351
FINANCIAL SERVICES: ................................. 0.9
Dean Witter Discover & Co. ....................... 20,500 694,437
</TABLE>
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY FUND A
STATEMENT OF NET ASSETS-CONTINUED
<TABLE>
<CAPTION>
PERCENT NUMBER
OF OF MARKET
NET ASSETS SHARES VALUE
---------- ---------- ----------
<S> <C> <C> <C>
FOOD AND BEVERAGE: ....................... 6.8%
Campbell Soup Company .................. 26,800 $1,182,550
Coca Cola Company ...................... 22,800 1,174,200
ConAgra, Inc. .......................... 14,000 437,500
Coors (Adolph) C.B. .................... 8,000 135,000
Fleming Companies, Inc. ................ 28,700 667,275
IBP, Inc. .............................. 30,800 931,700
Ralston-Continental Baking Group* ...... 420 1,575
Safeway Inc.* .......................... 25,100 800,063
----------
5,329,863
HOUSEHOLD APPLIANCES: .................... 0.8
Maytag Corporation ..................... 40,600 609,000
MACHINERY & ENGINEERING: ................. 1.4
Briggs & Stratton Corporation .......... 4,000 131,000
Clark Equipment Company* ............... 3,200 173,600
Novellus Systems Inc.* ................. 16,600 827,925
----------
1,132,525
METALS AND MINING: ....................... 1.8
Phelps Dodge Corporation ............... 20,100 1,243,688
Precision Castparts Corporation ........ 10,500 212,625
----------
1,456,313
MISCELLANEOUS: ........................... 2.6
Jostens Inc. ........................... 37,700 702,163
Omnicom Group, Inc. .................... 19,700 1,019,475
Outboard Marine Corporation ............ 17,300 339,513
----------
2,061,151
MOTOR VEHICLES AND EQUIPMENT: ............ 4.0
Chrysler Corporation ................... 23,100 1,131,900
Ford Motor Company ..................... 51,000 1,428,000
TRW Inc. ............................... 8,700 574,200
----------
3,134,100
OFFICE AND BUSINESS EQUIPMENT: ........... 5.4
Avery Dennison Corp. ................... 10,300 365,650
Compaq Computer Corporation* ........... 31,600 1,248,200
Computer Associates International Inc. . 18,600 902,100
Micron Technology Inc. ................. 21,300 939,863
Reynolds & Reynolds Co. ................ 9,400 235,000
Stratus Computer Inc.* ................. 6,600 250,800
Tandem Computers Inc.* ................. 15,600 267,150
----------
4,208,763
PETROLEUM AND PETROLEUM RELATED: ......... 9.9
Amoco Corp. ............................ 13,400 792,275
Ashland Oil, Inc. ...................... 22,100 762,450
Exxon Corporation ...................... 25,100 1,524,825
Halliburton Co. ........................ 19,400 642,625
Mobil Corp. ............................ 6,300 530,775
Royal Dutch Petroleum Company .......... 14,100 1,515,750
Tenneco, Inc. .......................... 26,000 1,105,000
Ultramar Corporation ................... 31,800 810,900
Williams Companies, Inc. ............... 3,500 87,937
----------
7,772,537
PUBLIC UTILITIES: ........................ 4.8
Baltimore Gas & Electric Company ....... 9,200 203,550
Consolidated Edison Company ............ 40,100 1,032,575
General Public Utilities Corp. ......... 28,700 753,375
Northeast Utilities .................... 47,400 1,025,025
Ohio Edison Company .................... 29,500 545,750
Portland General ....................... 11,500 221,375
----------
3,781,650
REAL ESTATE: ............................. 0.3
Lennar Corporation ..................... 13,200 204,600
RETAIL: .................................. 4.6
Kroger Co.* ............................ 43,900 1,059,088
Penney (J.C.) Company, Inc. ............ 25,100 1,120,088
Sears, Roebuck and Co. ................. 11,800 542,800
Wal-Mart Stores ........................ 40,900 869,125
----------
3,591,101
</TABLE>
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY FUND A
STATEMENT OF NET ASSETS-CONTINUED
<TABLE>
<CAPTION>
PERCENT NUMBER
OF OF MARKET
NET ASSETS SHARES VALUE
---------- ---------- ---------
<S> <C> <C> <C>
SOAPS, CLEANERS AND COSMETICS: .......................... 3.6%
Clorox Company ........................................ 5,000 $ 294,375
Colgate--Palmolive Company ............................ 19,000 1,204,125
Procter & Gamble Company .............................. 21,600 1,339,200
-----------
2,837,700
TELECOMMUNICATIONS: ..................................... 8.4
American Telephone & Telegraph Company ................ 26,300 1,321,575
Ameritech Corporation ................................. 38,100 1,538,287
Bellsouth Corporation ................................. 22,700 1,228,637
Pacific Telesis Group ................................. 44,000 1,254,000
Southwestern Bell Corp. ............................... 3,200 129,200
Sprint Corporation .................................... 41,800 1,154,725
-----------
6,626,424
TEXTILES--APPAREL MANUFACTURING: ........................ 0.3
VF Corp. .............................................. 4,700 228,538
TRANSPORTATION: ......................................... 1.3
Illinois Central Corporation .......................... 17,200 528,900
PHH Corporation ....................................... 13,500 469,125
-----------
998,025
TRUCKING COMPANIES: ..................................... 0.2
Ryder System, Inc. .................................... 8,700 191,400
----- -----------
TOTAL COMMON STOCKS
(Cost--$69,955,419) 98.1 77,034,433
PAR
AMOUNT
------
SHORT-TERM INVESTMENTS:
(Cost--$1,034,316)
Paccar Financial Corp.
5.95%, 1/3/95 ..................................... 1.3 $1,035,000 1,034,316
----- -----------
TOTAL INVESTMENTS
(Cost--$70,989,735) 99.4 78,068,749
Excess of other assets over total liabilities 0.6 465,519
----- -----------
NET ASSETS 100.0% $78,534,268
===== ===========
Net assets are represented by:
Value of accumulation units:
9,907,664 units at $7.198 unit value $71,315,546
Annuity reserves:
282,538 units at $7.198 unit value 2,033,708
580,251 units at $8.936 unit value 5,185,014
--------- -----------
862,789 7,218,722
========= -----------
$78,534,268
===========
</TABLE>
*Non-income producing
See accompanying notes to financial statements.
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY FUND A
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
1. SIGNIFICANT ACCOUNTING POLICIES
The Fund: Lincoln National Variable Annuity Fund A (Fund) is a segregated
investment account of The Lincoln National Life Insurance Company. The Fund is
registered under the Investment Company Act of 1940, as amended, as an open-end,
diversified management investment company.
Investments: Security transactions are accounted for on the date the securities
are purchased or sold. Stocks are valued at the closing sales prices for those
traded on a national stock exchange and the mean between the quoted bid and
asked prices for those traded over-the-counter. Short-term investments are
stated at cost which approximates market. The cost of investments sold is
determined using the specific identification method.
Federal Income Taxes: Operations of the Fund will form a part of, and be taxed
with, operations of The Lincoln National Life Insurance 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 investment income
and gains on investments of the Fund. Accordingly, no provision for any such
liability has been made.
Income: Dividends are recorded as earned on the ex-dividend date and interest is
accrued as earned.
Annuity Reserves: Reserves on contracts not involving life contingencies are
calculated using assumed investment rates of 3.5%, 4.5%, 5%, or 6%. Reserves on
contracts involving life contingencies are calculated using the Progressive
Annuity Table with the age adjusted for persons born before 1900 or after 1919
and assumed investment rates of 3.5%, 4.5%, 5%, or 6%.
2. INVESTMENTS
The aggregate cost of investments purchased and the aggregate proceeds from
investments sold (exclusive of short-term investments) during 1994 amounted to
$53,384,055 and $63,381,804, respectively.
3. EXPENSES AND SALES CHARGES
Amounts are paid to The Lincoln National Life Insurance Company for investment
management services at the rate of .000885% of the current value of the Fund per
day (.323% on an annual basis) and for mortality and expense guarantees at the
rate of .002745% of the current value of the Fund per day (1.002% on an annual
basis).
Amounts retained from the proceeds of the sale of annuity contracts by The
Lincoln National Life Insurance Company, an affiliated underwriter, for sales
and administrative charges were $14,573 during 1994.
4. NET ASSETS
Net assets at December 31, 1994 consisted of the following:
Equity transactions $(125,374,081)
Accumulated net investment income 69,615,181
Accumulated net realized gain on investments 127,214,154
Net unrealized appreciation of investments 7,079,014
-------------
$ 78,534,268
=============
<PAGE>
<TABLE>
<CAPTION>
LINCOLN NATIONAL VARIABLE ANNUITY FUND A
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
5. SUMMARY OF CHANGES IN EQUITY TRANSACTIONS
1994 1993
---------------------------- ----------------------------
UNITS AMOUNT UNITS AMOUNT
---------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
Accumulation Units:
Balance at beginning of year......... 11,538,380 $(109,744,849) 12,742,253 $(101,572,684)
Contract purchases................... 118,031 997,597 86,307 556,538
Terminated contracts................. (1,748,747) (12,673,787) (1,290,180) (8,728,703)
---------- ------------- ---------- -------------
BALANCE AT END OF YEAR............ 9,907,664 $(121,421,039) 11,538,380 $(109,744,849)
========== ============= ========== =============
Annuity Reserves:
Balance at beginning of year......... 945,353 $ (3,273,590) 1,037,156 $ (2,574,809)
Annuity payments..................... (103,958) (853,903) (117,852) (908,174)
Receipt of guarantee
mortality adjustments.............. 21,394 174,451 26,049 209,393
---------- ------------- ---------- -------------
BALANCE AT END OF YEAR............ 862,789 $ (3,953,042) 945,353 $ (3,273,590)
========== ============= ========== =============
</TABLE>
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Managers and Contract Owners
Lincoln National Variable Annuity Fund A
We have audited the accompanying statement of net assets of Lincoln National
Variable Annuity Fund A as of December 31, 1994, the related statement of
operations for the year then ended, and the statements of changes in net assets
for each of the two years in the period then ended. These financial statements
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1994, by correspondence with
the custodian. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Lincoln National Variable
Annuity Fund A at December 31, 1994, the results of its operations for the year
then ended, and the changes in its net assets for each of the two years in the
period then ended in conformity with generally accepted accounting principles.
We have also previously audited, in accordance with generally accepted auditing
standards, the financial statements for each of the nine years in the period
ended December 31, 1993 (none of which are presented herein, except for the
statement of changes in net assets for the year ended December 31, 1993); and we
expressed unqualified opinions on those financial statements. In our opinion,
the per-accumulation-unit income and capital changes table for each of the ten
years in the period ended December 31, 1994, appearing on page 5 of the
Prospectus, is fairly stated in all material respects in relation to the
financial statements from which it has been derived.
/S/ ERNST & YOUNG LLP
Fort Wayne, Indiana
January 25, 1995
<PAGE>
Exhibit B
Fund B Statement of Additional Information
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION (SAI)
LINCOLN NATIONAL VARIABLE ANNUITY FUND B (INDIVIDUAL)
(REGISTRANT)
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
(DEPOSITOR)
THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE
PROSPECTUS OF LINCOLN NATIONAL VARIABLE ANNUITY FUND B (INDIVIDUAL) DATED APRIL
30, 1995. YOU MAY OBTAIN A COPY OF THE FUND B (INDIVIDUAL) PROSPECTUS ON
REQUEST AND WITHOUT CHARGE. PLEASE WRITE KIM OAKMAN, THE LINCOLN NATIONAL LIFE
INSURANCE COMPANY, P.O. BOX 2340, FORT WAYNE, INDIANA 46801 OR CALL 1-800-348-
1212, EXTENSION 4912.
____________
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS.
TABLE OF CONTENTS
ITEM PAGE
General Information and History B-2
Special Terms B-2
Investment Objectives and Policies of the Fund B-2
Management B-2
Investment Advisory and Related Services B-3
Brokerage Allocation B-3
Purchase and Pricing of Securities Being Offered B-3
Distribution of Variable Annuity Contracts B-4
Federal Tax Status B-4
Other Services B-5
Underwriters B-5
Determination of Net Asset Value B-5
Financial Statements B-6
____________
THE DATE OF THIS STATEMENT OF ADDITIONAL INFORMATION IS APRIL 30, 1995
FORM 10734 (SAI) 4/95
B-1
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION (SAI)
LINCOLN NATIONAL VARIABLE ANNUITY FUND B (INDIVIDUAL)
GENERAL INFORMATION AND HISTORY OF
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
The Lincoln National Life Insurance Company (the Company) is an Indiana
insurance corporation, engaged primarily in the direct issuance of life
insurance contracts and annuities, and is also a professional reinsurer. The
Company is wholly owned by Lincoln National Corporation, a publicly-held
insurance holding company domiciled in Indiana.
SPECIAL TERMS
The Special terms used in this SAI are the ones defined in the Prospectus.
INVESTMENT OBJECTIVES AND POLICIES OF THE FUND
See that heading in the Prospectus.
MANAGEMENT
MANAGERS AND OFFICERS OF THE FUND
The Fund is managed by a Board of Managers, whose Members are elected annually
by the Contract Owners. The affairs of the Fund are conducted in accordance
with Rules and Regulations adopted by the Board of Managers.
<PAGE>
<TABLE>
<CAPTION>
POSITION PRESENT POSITION AND PRINCIPAL
NAME AND ADDRESS WITH THE FUND OCCUPATION DURING LAST FIVE YEARS
<S> <C> <C>
John B. Borsch, Jr. Member Retired (formerly Associate Vice President--Investments,
1776 Sherwood Road Northwestern University, Evanston, Illinois)
Des Plaines, IL 60016
Nancy L. Frisby, CPA Chairman and Regional Vice President/Chief Financial Officer (formerly
700 Broadway Member Vice President--Finance; Regional Controller of Finance),
Fort Wayne, IN 46802 St. Joseph Medical Center, Fort Wayne, Indiana
Stanley R. Nelson Member Executive in Residence, Program in Health Services Adminis-
University of Minnesota tration, University of Minnesota, Minneapolis, Minnesota
(Mayo Box 97) (formerly President, Henry Ford Health Care Corporation,
420 Delaware Street, S.E. Detroit, Michigan)
Minneapolis, MN 55455
*Max A. Roesler Vice President and Vice President and Treasurer, Lincoln National Corporation;
1300 S. Clinton Street Treasurer Vice President and Treasurer (formerly Assistant Vice
Fort Wayne, IN 46802 President), The Lincoln National Life Insurance Company
*C. Suzanne Womack Secretary to the Board Secretary, Lincoln National Corporation; Secretary, The
200 East Berry Street of Managers Lincoln National Life Insurance Company
Fort Wayne, IN 46802
</TABLE>
*An "interested person" of the Fund as that term is defined in the Investment
Company Act of 1940.
+Merged into the Company in 1989.
REMUNERATION OF CERTAIN AFFILIATED PERSONS
No person receives any remuneration from the Fund. The Company pays all
expenses relative to the operation of the Fund,
for which it deducts certain amounts (see the Prospectus).
CONTROL OF THE FUND
No person is the record or beneficial owner of 5% or more of the Fund. In
addition, Members of the Board of Managers
and officers of the Fund as a group own less than 1% of the Registrant.
B-2
<PAGE>
INVESTMENT ADVISORY AND RELATED SERVICES
This information is disclosed in the Prospectus.
BROKERAGE ALLOCATION
The Company places orders for the purchase and sale of securities for the Fund's
portfolio. It is the Fund's policy to have orders placed with brokers or
dealers who will give the best execution of such orders at prices and under
conditions most favorable to the Fund. The Company will customarily deal with
principal market makers in purchasing over-the-counter securities. In the
allocation of brokerage business, preference may be given to those brokers and
dealers who provide statistical, research, or other services--so long as there
is no sacrifice in getting the best price and execution.
Consistent with the policy of seeking best price and execution for the
transaction size and the risk involved, in selecting brokers or dealers or
negotiating the commissions to be paid, the Company considers each firm's
financial responsibility and reputation, range and quality of the service made
available to the Fund and the broker's or dealer's professional services,
including execution, clearance procedures, wire service quotations and ability
to provide performance, statistical and other research information for
consideration, analysis and evaluation by the Company. In accordance with this
policy, the Company does not execute brokerage transactions solely on the basis
of the lowest commission rates available for a particular transaction.
The Fund paid brokerage fees of $15,000 for 1994, $13,872 for 1993, and $15,317
for 1992.
PURCHASE AND PRICING OF SECURITIES BEING OFFERED
OFFERING TO PUBLIC; SALES LOAD
This information is disclosed in the Prospectus.
GENERAL FORMULAS FOR DETERMINING VALUE OF THE ACCUMULATION UNIT
The following formulas set out in general terms the computation of the
Accumulation Unit value at the close of trading on any day upon which the New
York Stock Exchange is open.
Gross Investment Rate = Investment Income+Capital Gains-Capital Losses-Taxes
----------------------------------------------------
Value of Fund at Beginning of Valuation Period
Net Investment Rate = Gross Investment Rate-.0000363
(for a 1 day Valuation Period)
Net Investment Factor = Net Investment Rate+1.00000000
Accumulation Unit Value = Accumulation Unit Value x Net Investment Factor
on Preceding Valuation Date
<PAGE>
CALCULATION OF ACCUMULATION UNIT VALUE USING HYPOTHETICAL EXAMPLE
The above computations may be illustrated by the following hypothetical example.
Assume that the value of the assets of the Fund at the beginning of a 1 day
valuation period was $5,000,000; that the value of an Accumulation Unit on that
date was $1.135; and that during the valuation period the investment income was
$4,000, the net unrealized capital gains were $6,000 and the net realized
capital losses were $3,000. Assuming these figures are net after provision for
applicable taxes, the value of the assets of the Fund at the end of the
valuation period, before adding payments received during the period, would thus
be $5,007,000 ($5,000,000 plus $4,000 plus $6,000 minus $3,000).
The gross investment rate for the valuation period would be equal to (a) $7,000
($4,000 plus $6,000 less $3,000) divided by (b) $5,000,000 which produces .14%
(.0014). The net investment rate for the valuation period is determined by
deducting .00363% (.0000363) from the gross investment rate, which results in a
net investment rate of .13637% (.0013637). The net investment factor for the
valuation period would be determined as the net investment rate plus 1.0, or
1.0013637.
The value of the Accumulation Unit at the end of the valuation period would be
equal to the value at the beginning of the period ($1.135) multiplied by the net
investment factor for the period (1.0013637), which produces $1.1365478.
GENERAL FORMULAS FOR DETERMINING DOLLAR AMOUNT OF ANNUITY PAYMENTS
Number of Annuity Units = Dollar Amount of First Monthly Payment
----------------------------------------
Annuity Unit Value on Date of First Payment
Annuity Unit Value of Annuity Factor to Net Investment Factor for
Value = Unit on Preceding x Neutralize x 14th Day Preceding Current
Valuation Date AIR Valuation Date
Dollar Amount of Number of Annuity Unit Value
Second and Subsequent = Annuity x for Period in Which
Annuity Payment Units Payment is Due
B-3
CALCULATION OF ANNUITY PAYMENTS USING HYPOTHETICAL EXAMPLE
The determination of the Annuity Unit value and the annuity payment may be
illustrated by the following hypothetical example. Assume a Participant at the
date of retirement has credited to his individual account 30,000
Accumulation Units, and that the value of an Accumulation Unit on the 14th
<PAGE>
day preceding the last day of the valuation period in which annuity payments
commence was $1.15 producing a total value of his individual account of $34,500.
Assume also that the Participant elects an option for which the table in the
variable annuity contract indicates the first monthly payment is $6.57 per
$1,000 of value applied; the Participant's first monthly payment would thus be
34.5 multiplied by $6.57 or $226.67.
Assume that the Annuity Unit value for the valuation period in which the first
payment was due was $1.10. When this is divided into the first monthly payment
the number of Annuity Units represented by that payment is determined to be
206.064. The value of this same number of Annuity Units will be paid in each
subsequent month.
Assume further that the net investment factor for the Fund for the 14th day
preceding the last day of the valuation period in which the next annuity payment
is due is 1.0019. Multiplying this factor by .99990575 (for a 1 day valuation
period) to neutralize the AIR of 3.5% per year built into the number of Annuity
Units determined as per above, produces a result of 1.00180557. This is then
multiplied by the Annuity Unit value for the valuation period preceding the
period in which the next annuity payment is due (assume $1.105) to produce an
Annuity Unit value for the current valuation period of $1.10699515.
The current monthly payment is then determined by multiplying the fixed number
of Annuity Units by the current Annuity Unit value or 206.064 times $1.10699515,
which produces a current monthly payment of $228.11.
DISTRIBUTION OF VARIABLE ANNUITY CONTRACTS
Variable annuity contracts will be sold by registered representatives of the
Company who have been licensed by the state insurance departments, by certain
employees of the Company and through selected dealers who are members of the
National Association of Securities Dealers, Inc. (NASD). The Company is
registered with the SEC under the Securities Exchange Act of 1934 as a broker-
dealer and is a member of the NASD. For contracts of the Fund sold through
other broker-dealers, the Company will pay the broker-dealer an amount
equivalent to the amount deducted for sales expenses. The amount paid to the
broker-dealer may be greater during the first year of a variable annuity
contract than the amount deducted for sales expenses. The Company pays any
excess over the amount deducted for sales expenses.
<PAGE>
FEDERAL TAX STATUS
GENERAL
The operations of the Fund form a part of, and are taxed with, the operations of
the Company under the Internal Revenue Code of 1986, as amended (the "Code").
Investment income and realized net capital gains on the assets of the Fund 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, the Company believes that the Fund 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, the Company
does not anticipate that it will incur any federal income tax liability
attributable to the Fund, 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 the Company's being taxed on income or gains attributable to
the Fund, then the Company may impose a charge against the Fund in order to make
provision for payment of such taxes.
TAX STATUS OF THE CONTRACTS
Section 817(h) of the Code provides that separate account investments underlying
the Contract be "adequately diversified" in accordance with Treasury regulations
in order for the Contract to qualify as an annuity contract under Section 72 of
the Code. The Fund intends to comply with the diversification requirements
prescribed in regulations, which affect how the assets in the Fund may be
invested. The Company believes that the Fund will meet the diversification
requirements and that therefore the Contracts will be treated as annuities under
the Code.
In addition to the requirements of Section 817(h), the Code (Section 72(s))
provides that Contracts issued after January 18, 1985, will not be treated as
annuity contracts for purposes of Section 72 unless the Contract provides that
(A) if any Contract Owner dies on or after the annuity starting date but prior
to the time the entire interest in the Contract has been distributed, the
remaining portion of such interest must be distributed at least as rapidly as
under the method of distribution in effect at the time of the Contract Owner's
death; and (B) if any Contract Owner dies prior to the annuity starting date,
the entire interest must be distributed within five years after the death of the
Contract Owner. These requirements are considered satisfied if any portion of
the Contract Owner's interest that is payable to or for the benefit of a
"designated beneficiary" is distributed over that designated beneficiary's life,
or a period not extending beyond the designated beneficiary's life expectancy,
and if that distribution begins within one year of the Contract Owner's death.
The "designated beneficiary" is the person designated by the Contract Owner as a
beneficiary and to whom Contract ownership passes by reason of death, and must
be a natural person. However, if the recipient of the proceeds is the surviving
spouse of the Contract Owner, the Contract may be continued in the name of
such surviving spouse as the Contract Owner. Contracts issued after January
<PAGE>
18, 1985 contain provisions intended to comply with these Code requirements,
although regulations interpreting these requirements have not yet been issued.
The Company 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.
B-4
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. Before an investment is made in any of the Contracts, a competent tax
adviser should be consulted.
OTHER SERVICES
CUSTODIAN
The Custodian for the securities purchased by the Eligible Funds is Bankers
Trust Company, 14 Wall Street, 4th Floor, New York, New York 10005. Custodian
will perform those functions outlined in the Prospectus.
INDEPENDENT AUDITORS
The financial statements of the Fund and the consolidated financial statements
and schedules of the Company, which have been included in this Statement of
Additional Information, and the Per-Accumulation-Unit Income and Capital Changes
Table appearing in the Prospectus, have been audited by Ernst & Young LLP, 2300
Fort Wayne National Bank Building, Fort Wayne, Indiana 46802, independent
auditors, as set forth in their reports thereon appearing elsewhere herein and
in the Registration Statement, and are included in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.
KEEPER OF RECORDS
All accounts, books, records and other documents which are required to be
maintained for the Fund are maintained by the Company. No separate charge
against the assets of the Fund is made by the Company for this service.
UNDERWRITERS
The Company is the principal underwriter for the variable annuity contracts. The
offering of the Contracts is continuous. The Company retains no underwriting
commissions from the sale of the variable annuity contracts.
DETERMINATION OF NET ASSET VALUE
A description of the days on which the Fund's net asset value per share will be
determined is given in the Prospectus. The New York Stock Exchange's most
recent announcement (which is subject to change) states that it will be closed
on President's Day, February 20; Good Friday, April 14; Memorial Day, May 29;
Independence Day, July 4; Labor Day, September 4; Thanksgiving Day, November 23;
and Christmas Day, December 25. It may also be closed on other days.
B-5
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION (SAI)
LINCOLN NATIONAL VARIABLE ANNUITY FUND B (GROUP)
(REGISTRANT)
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
(DEPOSITOR)
This Statement of Additional Information should be read in conjunction with the
Prospectus of Lincoln National Variable Annuity Fund B (Group) dated April 30,
1995. You may obtain a copy of the Fund B (Group) Prospectus on request and
without charge. Please write Kimberly Oakman, The Lincoln National Life
Insurance Company, P.O. Box 2340, Fort Wayne, Indiana 46801 or call 1-800-348-
1212, Extension 4912.
____________
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS.
TABLE OF CONTENTS
ITEM PAGE
General Information and History B-2
Special Terms B-2
Investment Objectives and Policies of the Fund B-2
Management B-2
Investment Advisory and Related Services B-3
Brokerage Allocation B-3
Purchase and Pricing of Securities Being Offered B-3
Distribution of Variable Annuity Contracts B-4
Federal Tax Status B-4
Other Services B-5
Underwriters B-5
Determination of Net Asset Value B-5
Financial Statements B-6
____________
THE DATE OF THIS STATEMENT OF ADDITIONAL INFORMATION IS APRIL 30, 1995.
Form 10737 (SAI) 4/95
B-1
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION (SAI)
LINCOLN NATIONAL VARIABLE ANNUITY FUND B (GROUP)
GENERAL INFORMATION AND HISTORY OF
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
The Lincoln National Life Insurance Company (the Company) is an Indiana
insurance corporation, engaged primarily in the direct issuance of life
insurance contracts and annuities, and is also a professional reinsurer. The
Company is wholly owned by Lincoln National Corporation, a publicly-held
insurance holding company domiciled in Indiana.
SPECIAL TERMS
The Special terms used in this SAI are the ones defined in the Prospectus.
INVESTMENT OBJECTIVES AND POLICIES OF THE FUND
See that heading in the Prospectus.
MANAGEMENT
MANAGERS AND OFFICERS OF THE FUND
The Fund is managed by a Board of Managers, whose Members are elected annually
by the Contract Owners. The affairs of the Fund are conducted in accordance
with Rules and Regulations adopted by the Board of Managers.
<TABLE>
<CAPTION>
<S> <C> <C>
POSITION PRESENT POSITION AND PRINCIPAL
NAME AND ADDRESS WITH THE FUND OCCUPATION DURING LAST FIVE YEARS
John B. Borsch, Jr. Member Retired (formerly Associate Vice
1776 Sherwood Road President--Investments, Northwestern
Des Plaines, IL 60016 University, Evanston, Illinois)
Nancy L. Frisby, CPA Chairperson and Regional Vice President/Chief
700 Broadway Member Financial Officer (formerly Vice
Fort Wayne, IN 46802 President--Finance; Regional
Controller of Finance), St. Joseph
Medical Center, Fort Wayne, Indiana
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Stanley R. Nelson Member Executive in Residence, Program in
University of Minnesota Health Services Administration,
(Mayo Box 97) University of Minnesota,
420 Delaware St., S.E. Minneapolis, Minnesota, (formerly
Minneapolis, MN 55455 President, Henry Ford Health Care
Corporation, Detroit, Michigan)
*Max A. Roesler Vice Presi- Vice President and Treasurer,
1300 S. Clinton dent and Lincoln National Corporation; Vice
Fort Wayne, IN 46802 Treasurer President and Treasurer (formerly
Assistant Vice President), The
Lincoln National Life Insurance
Company
*C. Suzanne Womack Secretary to Secretary, Lincoln National
200 East Berry Street the Board of Corporation; Secretary, The Lincoln
Fort Wayne, IN 46802 Managers National Life Insurance Company
</TABLE>
*An "interested person" of the Fund as that term is defined in the Investment
Company Act of 1940.
+Merged into the Company in 1989.
REMUNERATION OF CERTAIN AFFILIATED PERSONS
No person receives any remuneration from the Fund. The Company pays all expenses
relative to the operation of the Fund, for which it deducts certain amounts (see
the Prospectus).
B-2
CONTROL OF THE FUND
No person is the record or beneficial owner of 5% or more of the Fund. In
addition, Members of the Board of Managers and officers of the Fund as a group
own less than 1% of the Registrant.
INVESTMENT ADVISORY AND RELATED SERVICES
This information is disclosed in the Prospectus.
BROKERAGE ALLOCATION
The Company places orders for the purchase and sale of securities for the Fund's
portfolio. It is the Fund's policy to have orders placed with brokers or
dealers who will give the best execution of such orders at prices and under
conditions most favorable to the Fund. The Company will customarily deal with
principal market makers in purchasing over-the-counter securities. In the
allocation of brokerage business, preference may be given to those brokers and
dealers who provide statistical, research, or other services--so long as there
is no sacrifice in getting the best price and execution.
<PAGE>
Consistent with the policy of seeking best price and execution for the
transaction size and the risk involved, in selecting brokers or dealers or
negotiating the commissions to be paid, the Company considers each firm's
financial responsibility and reputation, range and quality of the service made
available to the Fund and the broker's or dealer's professional services,
including execution, clearance procedures, wire service quotations and ability
to provide performance, statistical and other research information for
consideration, analysis and evaluation by the Company. In accordance with this
policy, the Company does not execute brokerage transactions solely on the basis
of the lowest commission rates available for a particular transaction.
The Fund paid brokerage fees of $15,000 for 1994, $13,872 for 1993, and $15,317
for 1992.
PURCHASE AND PRICING OF SECURITIES BEING OFFERED
OFFERING TO PUBLIC; SALES LOAD
This information is disclosed in the Prospectus.
GENERAL FORMULAS FOR DETERMINING VALUE OF THE ACCUMULATION UNIT
The following formulas set out in general terms the computation of the
Accumulation Unit value at the close of trading on any day upon which the New
York Stock Exchange is open.
Investment Income+Capital Gains-Capital Losses-Taxes
----------------------------------------------------
Gross Investment Rate= Value of Fund at Beginning of Valuation Period
Net Investment Rate=Gross Investment Rate-.0000363 (for a 1 day Valuation
Period)
Net Investment Factor=Net Investment Rate+1.00000000
Accumulation Unit Value x Net Investment Factor
Accumulation Unit Value=on Preceding Valuation Date
CALCULATION OF ACCUMULATION UNIT VALUE USING HYPOTHETICAL EXAMPLE
The above computations may be illustrated by the following hypothetical example.
Assume that the value of the assets of the Fund at the beginning of a 1 day
valuation period was $5,000,000; that the value of an Accumulation Unit on that
date was $1.135; and that during the valuation period the investment income was
$4,000, the net unrealized capital gains were $6,000 and the net realized
capital losses were $3,000. Assuming these figures are net after provision for
applicable taxes, the value of the assets of the Fund at the end of the
valuation period, before adding payments received during the period, would thus
be $5,007,000 ($5,000,000 plus $4,000 plus $6,000 minus $3,000).
<PAGE>
The gross investment rate for the valuation period would be equal to (a) $7,000
($4,000 plus $6,000 less $3,000) divided by (b) $5,000,000 which produces .14%
(.0014). The net investment rate for the valuation period is determined by
deducting .00363% (.0000363) from the gross investment rate, which results in a
net investment rate of .13637% (.0013637). The net investment factor for the
valuation period would be determined as the net investment rate plus 1.0, or
1.0013637.
The value of the Accumulation Unit at the end of the valuation period would be
equal to the value at the beginning of the period ($1.135) multiplied by the net
investment factor for the period (1.0013637), which produces $1.1365478.
B-3
GENERAL FORMULAS FOR DETERMINING DOLLAR AMOUNT OF ANNUITY PAYMENTS
Dollar Amount of First Monthly Payment
--------------------------------------
Number of Annuity Units=Annuity Unit Value on Date of First Payment
Net Investment
Value of Annuity Unit Factor to Factor for 14th
Annuity Unit Value=on Preceding Valuation x Neutralize x Day Preceding
Date AIR Current Valuation
Date
Dollar Amount of Annuity Unit Value
Second and Subsequent=Number of Annuity Units x for Period in Which
Annuity Payment Payment is Due
CALCULATION OF ANNUITY PAYMENTS USING HYPOTHETICAL EXAMPLE
The determination of the Annuity Unit value and the annuity payment may be
illustrated by the following hypothetical example. Assume a Participant at the
date of retirement has credited to his individual account 30,000 Accumulation
Units, and that the value of an Accumulation Unit on the 14th day preceding the
last day of the valuation period in which annuity payments commence was $1.15
producing a total value of his individual account of $34,500. Assume also that
the Participant elects an option for which the table in the variable annuity
contract indicates the first monthly payment is $6.57 per $1,000 of value
applied; the Participant's first monthly payment would thus be 34.5 multiplied
by $6.57 or $226.67.
Assume that the Annuity Unit value for the valuation period in which the first
payment was due was $1.10. When this is divided into the first monthly payment
the number of Annuity Units represented by that payment is determined to be
206.064. The value of this same number of Annuity Units will be paid in each
subsequent month.
Assume further that the net investment factor for the Fund for the 14th day
preceding the last day of the valuation period in which the next annuity payment
is due is 1.0019. Multiplying this factor by .99990575 (for a 1 day valuation
period) to neutralize the AIR of 3.5% per year built into the number of Annuity
Units determined as per above, produces a result of
<PAGE>
1.00180557. This is then multiplied by the Annuity Unit value for the valuation
period preceding the period in which the next annuity payment is due (assume
$1.105) to produce an Annuity Unit value for the current valuation period of
$1.10699515.
The current monthly payment is then determined by multiplying the fixed number
of Annuity Units by the current Annuity Unit value or 206.064 times $1.10699515,
which produces a current monthly payment of $228.11.
DISTRIBUTION OF VARIABLE ANNUITY CONTRACTS
Variable annuity contracts will be sold by registered representatives of the
Company who have been licensed by the state insurance departments, by certain
employees of the Company and through selected dealers who are members of the
National Association of Securities Dealers, Inc. (NASD). The Company is
registered with the SEC under the Securities Exchange Act of 1934 as a broker-
dealer and is a member of the NASD. For contracts of the Fund sold through other
broker-dealers, the Company will pay the broker-dealer an amount equivalent to
the amount deducted for sales expenses. The amount paid to the broker-dealer may
be greater during the first year of a variable annuity contract than the amount
deducted for sales expenses. The Company pays any excess over the amount
deducted for sales expenses.
FEDERAL TAX STATUS
GENERAL
The operations of the Fund form a part of, and are taxed with, the operations of
the Company under the Internal Revenue Code of 1986, as amended (the "Code").
Investment income and realized net capital gains on the assets of the Fund 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, the Company believes that the Fund 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, the Company
does not anticipate that it will incur any federal income tax liability
attributable to the Fund, 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 the Company's being taxed on income or gains attributable to
the Fund, then the Company may impose a charge against the Fund in order to make
provision for payment of such taxes.
B-4
TAX STATUS OF THE CONTRACTS
Section 817(h) of the Code provides that separate account investments underlying
the Contract be "adequately diversified" in accordance with Treasury regulations
in order for the Contract to qualify as an annuity contract under Section 72 of
the Code. The Fund intends to comply with the diversification requirements
prescribed in temporary regulations, which affect how the assets in the Fund may
be invested. The Company believes
<PAGE>
that the Fund will meet the diversification requirements and that therefore the
Contracts will be treated as annuities under the Code.
In addition to the requirements of Section 817(h), the Code (Section 72(s))
provides that Contracts issued after January 18, 1985, will not be treated as
annuity contracts for purposes of Section 72 unless the Contract provides that
(A) if any Contract Owner dies on or after the annuity starting date but prior
to the time the entire interest in the Contract has been distributed, the
remaining portion of such interest must be distributed at least as rapidly as
under the method of distribution in effect at the time of the Contract Owner's
death; and (B) if any Contract Owner dies prior to the annuity starting date,
the entire interest must be distributed within five years after the death of the
Contract Owner. These requirements are considered satisfied if any portion of
the Contract Owner's interest that is payable to or for the benefit of a
"designated beneficiary" is distributed over that designated beneficiary's life,
or a period not extending beyond the designated beneficiary's life expectancy,
and if that distribution begins within one year of the Contract Owner's death.
The "designated beneficiary" is the person designated by the Contract Owner as a
beneficiary and to whom Contract ownership passes by reason of death, and must
be a natural person. However, if the recipient of the proceeds is the surviving
spouse of the Contract Owner, the Contract may be continued in the name of such
surviving spouse of the Contract Owner. Contracts issued after January 18, 1985
contain provisions intended to comply with these Code requirements, although
regulations interpreting these requirements have not yet been issued. The
Company 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.
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. Before an investment is made in any of the Contracts, a competent tax
adviser should be consulted.
OTHER SERVICES
CUSTODIAN
The Custodian for the securities purchased by the Eligible Funds is Bankers
Trust Company, 14 Wall Street, 4th Floor, New York, New York 10005. Custodian
will perform those functions outlined in the Prospectus.
<PAGE>
INDEPENDENT AUDITORS
The financial statements of the Fund and the consolidated financial statements
and schedules of the Company, which have been included in this Statement of
Additional Information, and the Per-Accumulation-Unit Income and Capital Changes
Table appearing in the Prospectus, have been audited by Ernst & Young LLP, 2300
Fort Wayne National Bank Building, Fort Wayne, Indiana 46802, independent
auditors, as set forth in their reports thereon appearing elsewhere herein and
in the Registration Statement, and are included in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.
KEEPER OF RECORDS
All accounts, books, records and other documents which are required to be
maintained for the Fund are maintained by the Company. No separate charge
against the assets of the Fund is made by the Company for this service.
UNDERWRITERS
The Company is the principal underwriter for the variable annuity contracts. The
offering of the contracts is continuous. The Company retains no underwriting
commissions from the sale of the variable annuity contracts.
DETERMINATION OF NET ASSET VALUE
A description of the days on which the Fund's net asset value per share will be
determined is given in the Prospectus. The New York Stock Exchange's most
recent announcement (which is subject to change) states that it will be closed
on President's Day, February 20; Good Friday, April 14; Memorial Day, May 29;
Independence Day, July 4; Labor Day, September 4; Thanksgiving Day, November 23;
and Christmas Day, December 25. It may also be closed on other days.
B-5
<PAGE>
FINANCIAL STATEMENTS
LINCOLN NATIONAL VARIABLE ANNUITY FUND B
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME
Income:
Dividends............................................. $ 218,566
Interest.............................................. 158
-----------
218,724
Expenses:
Investment management services........................ $ 24,105
Mortality and expense guarantees...................... 74,767 98,872
----------- -----------
NET INVESTMENT INCOME 119,852
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on investments........................ 549,563
Decrease in net unrealized appreciation of investments.. (747,573)
-----------
NET REALIZED AND UNREALIZED
LOSS ON INVESTMENTS (198,010)
-----------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ (78,158)
===========
STATEMENTS OF CHANGES IN NET ASSETS
Year Ended December 31
1994 1993
----------- -----------
Changes from operations:
Net investment income................................... $ 119,852 $ 137,501
Net realized gain on investments........................ 549,563 706,604
Decrease in net unrealized appreciation of investments.. (747,573) (57,549)
----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS (78,158) 786,556
Net decrease from equity transactions..................... (1,407,953) (1,242,649)
----------- -----------
TOTAL DECREASE IN NET ASSETS (1,486,111) (456,093)
Net assets at beginning of year........................... 8,193,249 8,649,342
----------- -----------
NET ASSETS AT END OF YEAR $ 6,707,138 $ 8,193,249
=========== ===========
</TABLE>
See accompanying notes to financial statements.
B-6
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY FUND B
STATEMENT OF NET ASSETS
DECEMBER 31, 1994
<TABLE>
<CAPTION>
Percent Number
of of Market
Net Assets Shares Value
---------- ---------- ---------
<S> <C> <C> <C>
INVESTMENTS
COMMON STOCKS:
AEROSPACE: ............................. 0.6%
McDonnell Douglas Corporation ........ 300 $ 42,600
Air Transportation: .................... 1.6
Airborne Freight Corp. ............... 1,700 34,850
Federal Express Corporation* ......... 1,200 72,300
--------
107,150
BANKING AND INSURANCE: ................. 10.5
American General Corporation ......... 2,900 81,925
Bank of New York ..................... 3,000 87,000
Chase Manhattan Corporation .......... 3,100 106,562
Cigna Corporation .................... 1,400 89,075
First Interstate Bank ................ 1,300 87,912
MBNA Corp. ........................... 4,300 100,513
Nationsbank Corporation .............. 1,800 81,225
SunAmerica Inc. ...................... 2,000 72,500
--------
706,712
BUILDING MATERIALS: .................... 1.1
Armstrong World Inc. ................. 1,900 73,150
CHEMICALS: ............................. 5.0
DuPont E I De Nemours & Co. .......... 1,600 90,000
Georgia Gulf Corp.* .................. 2,400 93,300
Lyondell Petrochemical ............... 2,500 64,688
Olin Corp. ........................... 1,700 87,550
--------
335,538
CONSUMER PRODUCTS AND SERVICES: ........ 4.5
American Brands, Inc. ................ 3,100 116,250
Phillip Morris Companies Inc. ........ 3,200 184,000
--------
300,250
DRUG AND HOSPITAL SUPPLIES: ............ 7.4
Baxter International Inc. ............ 3,200 90,400
Bristol-Myers Squibb Company ......... 1,500 86,812
Lilly (Eli) & Company ................ 1,600 105,000
Schering-Plough Corporation .......... 1,900 140,600
Upjohn Co. ........................... 2,400 73,800
--------
496,612
ELECTRICAL AND ELECTRONICS: ............ 4.8
Advanced Micro Devices, Inc.* ........ 1,800 44,775
General Electric Company ............. 3,800 193,800
Texas Instruments Inc. ............... 1,100 82,362
--------
320,937
ENTERTAINMENT: ......................... 1.4
Mattel, Inc. ......................... 2,000 50,250
Mirage Resorts Inc.* ................. 2,000 41,000
--------
91,250
FINANCE: ............................... 1.4
Clayton Homes Inc. ................... 5,781 91,051
FINANCIAL SERVICES: .................... 0.8
Dean Witter Discover & Co. ........... 1,500 50,813
FOOD AND BEVERAGE: ..................... 6.8
Campbell Soup Company ................ 700 30,888
Coca Cola Company .................... 1,600 82,400
Coors (Adolph) C.B. .................. 4,000 67,500
Fleming Companies, Inc. .............. 1,800 41,850
IBP, Inc. ............................ 2,900 87,725
Safeway Inc.* ........................ 3,200 102,000
Universal Foods Corporation .......... 1,600 44,000
--------
456,363
</TABLE>
B-7
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY FUND B
STATEMENT OF NET ASSETS-CONTINUED
<TABLE>
<CAPTION>
Percent Number
of of Market
Net Assets Shares Value
---------- ---------- ---------
<S> <C> <C> <C>
HOUSEHOLD APPLIANCES: .................... 1.2%
Maytag Corporation ..................... 5,300 $ 79,500
MACHINERY & EQUIPMENT: ................... 1.6
Briggs & Stratton Corporation .......... 2,200 72,050
Clark Equipment Company* ............... 600 32,550
--------
104,600
METALS AND MINING: ....................... 2.2
Cleveland-Cliffs, Inc. ................. 900 33,300
Phelps Dodge Corporation ............... 1,800 111,375
--------
144,675
MISCELLANEOUS: ........................... 0.4
Omnicom Group, Inc. .................... 500 25,875
MOTOR VEHICLES AND EQUIPMENT: ............ 4.7
Chrysler Corporation ................... 2,400 117,600
Ford Motor Company ..................... 3,800 106,400
TRW Inc. ............................... 1,400 92,400
--------
316,400
OFFICE AND BUSINESS EQUIPMENT: ........... 6.4
Compaq Computer Corporation* ........... 3,300 130,350
Computer Associates International Inc. . 400 19,400
Micron Technology Inc. ................. 2,100 92,663
Reynolds & Reynolds Co. ................ 4,200 105,000
Tandem Computers Inc.* ................. 4,800 82,200
--------
429,613
PETROLEUM AND PETROLEUM RELATED: ......... 10.6
Amoco Corp. ............................ 300 17,737
Ashland Oil, Inc. ...................... 1,900 65,550
Exxon Corporation ...................... 2,500 151,875
Halliburton Co. ........................ 1,700 56,313
Mobil Corp. ............................ 800 67,400
Royal Dutch Petroleum Company .......... 1,100 118,250
Tenneco, Inc. .......................... 2,600 110,500
Ultramar Corporation ................... 3,400 86,700
Williams Companies, Inc. ............... 1,600 40,200
--------
714,525
PRINTING AND PUBLISHING: ................. 0.3
Banta Corporation ...................... 700 21,088
PUBLIC UTILITIES: ........................ 4.6
Baltimore Gas & Electric Company ....... 3,400 75,225
Consolidated Edison Company ............ 2,600 66,950
General Public Utilities Corp. ......... 1,600 42,000
Ohio Edison Company .................... 2,600 48,100
Portland General ....................... 4,100 78,925
--------
311,200
REAL ESTATE: ............................. 0.2
Lennar Corporation ..................... 1,050 16,275
RETAIL: .................................. 4.4
Federated Department Stores* ........... 3,400 65,450
Kroger Co.* ............................ 2,000 48,250
Penney (J.C.) Company, Inc. ............ 1,900 84,787
Sears, Roebuck and Co. ................. 500 23,000
Wal-Mart Stores ........................ 3,600 76,500
--------
297,987
</TABLE>
B-8
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY FUND B
STATEMENT OF NET ASSETS-CONTINUED
<TABLE>
<CAPTION>
Percent Number
of of Market
Net Assets Shares Value
---------- ---------- ---------
<S> <C> <C> <C>
SOAPS, CLEANERS AND COSMETICS: 3.9%
Clorox Company ........................................ 2,300 $135,413
Colgate-Palmolive Company ............................. 2,050 129,919
--------
265,332
TELECOMMUNICATIONS:...................................... 9.1
American Telephone & Telegraph Company ................ 2,400 120,600
Ameritech Corporation ................................. 3,800 153,425
Bellsouth Corporation ................................. 2,500 135,312
Comsat Corporation .................................... 2,000 37,250
Pacific Telesis Group ................................. 2,600 74,100
Sprint Corporation .................................... 3,300 91,162
--------
611,849
TRANSPORTATION: ......................................... 0.7
PHH Corporation ....................................... 1,300 45,175
TRUCKING COMPANIES: ..................................... 1.2
Ryder System, Inc. .................................... 3,600 79,200
----- ----------
TOTAL COMMON STOCKS
(Cost-$6,198,908) 97.4 6,535,720
PAR
AMOUNT
------
SHORT-TERM INVESTMENTS:
(Cost-$89,940)
Paccar Financial Corp.
5.95%, 1/3/95...................................... 1.4 $ 90,000 89,940
----- ----------
TOTAL INVESTMENTS
(Cost-$6,288,848) 98.8 6,625,660
Excess of other assets over total liabilities 1.2 81,478
----- ----------
NET ASSETS 100.0% $6,707,138
===== ==========
Net assets are represented by:
Value of accumulation units:
950,570 units at $6.118 unit value $5,815,311
Annuity reserves:
145,778 units at $6.118 unit value 891,827
----------
$6,707,138
==========
*Non-income producing
See accompanying notes to financial statements.
</TABLE>
B-9
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY FUND B
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
1. SIGNIFICANT ACCOUNTING POLICIES
The Fund: Lincoln National Variable Annuity Fund B (Fund) is a segregated
investment account of The Lincoln National Life Insurance Company. The Fund is
registered under the Investment Company Act of 1940, as amended, as an open-end,
diversified management investment company.
Investments: Security transactions are accounted for on the date the securities
are purchased or sold. Stocks are valued at the closing sales prices for those
traded on a national stock exchange and the mean between the quoted bid and
asked prices for those traded over-the-counter. Short-term investments are
stated at cost which approximates market. The cost of investments sold is
determined using the specific identification method.
Federal Income Taxes: Operations of the Fund will form a part of, and be taxed
with, operations of The Lincoln National Life Insurance 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 investment income
and gains on investments of the Fund. Accordingly, no provision for any such
liability has been made.
Income: Dividends are recorded as earned on the ex-dividend date and interest is
accrued as earned.
Annuity Reserves: Reserves on contracts not involving life contingencies are
calculated using assumed investment rates of 3.5%, 4.5%, 5%, or 6%. Reserves on
contracts involving life contingencies are calculated using the Progressive
Annuity Table with the age adjusted for persons born before 1900 or after 1919
and assumed investment rates of 3.5%, 4.5%, 5%, or 6%.
2. INVESTMENTS
The aggregate cost of investments purchased and the aggregate proceeds from
investments sold (exclusive of short-term investments) during 1994 amounted to
$4,806,282 and $6,109,153, respectively.
3. EXPENSES AND SALES CHARGES
Amounts are paid to The Lincoln National Life Insurance Company for investment
management services at the rate of .000885% of the current value of the Fund per
day (.323% on an annual basis) and for mortality and expense guarantees at the
rate of .002745% of the current value of the Fund per day (1.002% on an annual
basis).
Amounts retained from the proceeds of the sale of annuity contracts by The
Lincoln National Life Insurance Company, an affiliated underwriter, for sales
and administrative charges were $1,994 during 1994.
4. NET ASSETS
Net assets at December 31, 1994 consisted of the following:
Equity transactions $(7,899,750)
Accumulated net investment income 7,772,529
Accumulated net realized gain on investments 6,497,547
Net unrealized appreciation of investments 336,812
-----------
$ 6,707,138
===========
B-10
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY FUND B
NOTES TO FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1994
5. SUMMARY OF CHANGES IN EQUITY TRANSACTIONS
<TABLE>
<CAPTION>
1994 1993
----------------------------- ------------------------------
Units Amount Units Amount
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Accumulation Units:
Balance at beginning of year..... 1,151,371 $(5,521,042) 1,333,229 $(4,496,363)
Contract purchases............... 10,492 48,164 9,220 54,664
Terminated contracts............. (211,293) (1,297,565) (191,078) (1,079,343)
---------- ----------- ---------- -----------
BALANCE AT END OF YEAR 950,570 $(6,770,443) 1,151,371 $(5,521,042)
========== =========== ========== ===========
Annuity Reserves:
Balance at beginning of year..... 171,412 $ (970,755) 199,575 $ (752,785)
Annuity payments................. (27,474) (169,808) (32,194) (242,937)
Receipt of guarantee mortality
adjustments.................... 1,840 11,256 4,031 24,967
---------- ----------- ---------- -----------
BALANCE AT END OF YEAR 145,778 $(1,129,307) 171,412 $ (970,755)
========== =========== ========== ===========
</TABLE>
B-11
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Managers and Contract Owners
Lincoln National Variable Annuity Fund B
We have audited the accompanying statement of net assets of Lincoln National
Variable Annuity Fund B as of December 31, 1994, and the related statement of
operations for the year then ended, and the statements of changes in net assets
for each of the two years in the period then ended. These financial statements
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1994, by correspondence with
the custodian. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Lincoln National Variable
Annuity Fund B at December 31, 1994, the results of its operations for the year
then ended, and the changes in its net assets for each of the two years in the
period then ended in conformity with generally accepted accounting principles.
We have also previously audited, in accordance with generally accepted auditing
standards, the financial statements for each of the nine years in the period
ended December 31, 1993 (none of which are presented herein, except for the
statement of changes in net assets for the year ended December 31, 1993); and we
expressed unqualified opinions on those financial statements. In our opinion,
the per-accumulation-unit income and capital changes table for each of the ten
years in the period ended December 31, 1994, appearing on page 7 of the
Prospectus, is fairly stated in all material respects in relation to the
financial statements from which it has been derived.
/s/ ERNST & YOUNG LLP
Fort Wayne, Indiana
January 25, 1995
<PAGE>
The Lincoln National Life Insurance Company
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1994 1993
------------------------
(000's omitted)
<S> <C> <C>
ASSETS
Investments:
Securities available-for-sale, at
fair value:
Fixed maturity (cost:
1994-$18,193,928;
1993-$18,177,467) $17,692,214 $19,579,414
Equity (cost: 1994-$416,351;
1993-$360,333) 456,333 426,363
Mortgage loans on real estate 2,795,914 3,238,965
Real estate 679,512 600,386
Policy loans 528,731 569,646
Other investments 158,196 140,102
------------------------
Total investments 22,310,900 24,554,876
Cash and invested cash 990,880 590,315
Property and equipment 54,989 108,820
Deferred acquisition costs 1,736,526 1,297,913
Premiums and fees receivable 123,494 160,129
Accrued investment income 367,370 341,692
Assets held in separate accounts 13,000,540 11,195,577
Amounts recoverable from reinsurers 2,069,292 1,213,622
Federal income taxes 134,463 -
Goodwill 3,385 76,322
Other assets 233,708 169,102
------------------------
Total assets $41,025,547 $39,708,368
========================
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31
1994 1993
-------------------------
<S> <C> <C>
(000's omitted)
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Policy liabilities and accruals:
Future policy benefits, claims
and claims expenses $ 7,540,772 $ 8,798,230
Unearned premiums 61,472 59,660
-------------------------
Total policy liabilities and accruals 7,602,244 8,857,890
Contractholder funds 17,028,628 14,862,876
Liabilities related to separate
accounts 13,000,540 11,195,577
Federal income taxes - 196,691
Short-term debt 68,789 66,113
Long-term debt 200 5,721
Other liabilities 1,404,191 1,751,724
-------------------------
Total liabilities 39,104,592 36,936,592
Shareholder's equity:
Common stock, $2.50 par value:
Authorized, issued and outstanding
shares--10 million (owned by Lincoln
National Corporation) 25,000 25,000
Paid-in surplus 791,605 791,444
Earned surplus 1,428,969 1,334,171
Net unrealized gain (loss) on
available-for-sale securities (324,619) 621,161
-------------------------
Total shareholder's equity 1,920,955 2,771,776
-------------------------
Total liabilities and shareholder's
equity $41,025,547 $39,708,368
=========================
</TABLE>
See accompanying notes.
3
<PAGE>
The Lincoln National Life Insurance Company
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
------------------------------------
(000's omitted)
<S> <C> <C> <C>
Revenues:
Insurance premiums $1,099,480 $1,972,630 $1,863,019
Insurance fees 390,384 425,083 359,859
Net investment income 1,673,981 1,823,459 1,650,824
Realized gain (loss) on investments (138,522) 92,150 89,537
Gain (loss) on sale of subsidiary 68,954 (98,500) -
Other 20,946 35,781 39,554
------------------------------------
Total revenues 3,115,223 4,250,603 4,002,793
Benefits and expenses:
Benefits and settlement expenses 2,194,047 3,033,139 2,825,378
Underwriting, acquisition, insurance
and other expenses 660,363 881,703 776,038
Interest expense 615 96 414
------------------------------------
Total benefits and expenses 2,855,025 3,914,938 3,601,830
Income before federal income taxes and
cumulative effect of accounting change 260,198 335,665 400,963
Federal income taxes 40,400 142,544 116,781
------------------------------------
Income before cumulative effect of
accounting change 219,798 193,121 284,182
Cumulative effect of accounting change
(postretirement benefits) - 45,582 -
------------------------------------
Net income $ 219,798 $ 147,539 $ 284,182
====================================
Earnings per share:
Income before cumulative effect of
accounting change $ 21.98 $ 19.31 $ 28.42
Cumulative effect of accounting
change (postretirement benefits) - (4.56) -
------------------------------------
Net income $ 21.98 $ 14.75 $ 28.42
====================================
</TABLE>
See accompanying notes.
4
<PAGE>
The Lincoln National Life Insurance Company
Consolidated Statements of Shareholder's Equity
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
------------------------------------
<S> <C> <C> <C>
(000's omitted)
Common stock--balance
at beginning and end of year $ 25,000 $ 25,000 $ 25,000
Paid-in surplus:
Balance at beginning of year 791,444 791,223 690,062
Contribution from Lincoln
National Corporation 161 221 101,161
------------------------------------
Balance at end of year 791,605 791,444 791,223
Earned surplus:
Balance at beginning of year 1,334,171 1,198,632 914,450
Net income 219,798 147,539 284,182
Dividends declared (125,000) (12,000) -
------------------------------------
Balance at end of year 1,428,969 1,334,171 1,198,632
Net unrealized gain (loss) on
securities available-for-sale:
Balance at beginning of year 621,161 47,303 80,881
Cumulative effect of accounting
change - 564,153 -
Other change during year (945,780) 9,705 (33,578)
------------------------------------
Balance at end of year (324,619) 621,161 47,303
------------------------------------
Total shareholder's equity at end of
year $1,920,955 $2,771,776 $2,062,158
====================================
</TABLE>
See accompanying notes.
5
<PAGE>
The Lincoln National Life Insurance Company
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
-------------------------------------------
<S> <C> <C> <C>
(000's omitted)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 219,798 $ 147,539 $ 284,182
Adjustments to reconcile net income
to net cash provided by operating
activities:
Deferred acquisition costs (171,063) (92,183) (154,143)
Premiums and fees receivable 10,755 80,582 60,226
Accrued investment income (54,434) (18,827) (36,395)
Policy liabilities and 114,038 345,142 120,525
accruals
Contractholder funds 1,769,240 1,248,058 698,561
Amounts recoverable from (884,388) (700,622) -
reinsurers
Federal income taxes 8,364 (130,308) (125,588)
Provisions for depreciation 38,870 41,516 41,014
Amortization of discount and 7,928 (100,274) (55,637)
premium
Realized loss (gain) on 219,682 (115,881) (89,537)
investments
Loss (gain) on sale of (68,954) 98,500 -
subsidiaries
Cumulative effect of - 45,582 -
accounting change
Other (4,599) 51,369 36,058
-------------------------------------------
Net adjustments 985,439 752,654 495,084
-------------------------------------------
Net cash provided by operating 1,205,237 900,193 779,266
activities
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available-for-sale:
Purchases (12,100,213) (7,171,684) (6,858,845)
Sales 9,326,809 7,139,781 6,615,714
Maturities 958,065 42,707 14,265
Fixed maturity securities held for
investment:
Purchases - (5,903,805) (6,705,560)
Sales - 2,805,980 3,619,999
Maturities - 1,639,739 1,446,447
Purchases of other investments (1,421,321) (1,936,013) (1,324,691)
Sales or maturity of other investments 1,457,157 1,142,872 1,008,666
Sale of subsidiaries 520,340 - -
Increase (decrease) in cash collateral
on loaned securities (163,872) (40,454) 307,360
Other (37,606) 83,751 (104,722)
-------------------------------------------
Net cash used in investing activities (1,460,641) (2,197,126) (1,981,367)
</TABLE>
6
<PAGE>
The Lincoln National Life Insurance Company
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
-----------------------------------------
<S> <C> <C> <C>
(000's omitted)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt $ (200) $ (1,138) $ (200)
Issuance of long-term debt - 10,314 -
Net increase (decrease) in short-term 3,629 13,047 (68,104)
debt
Universal life and investment contract 2,381,829 2,418,037 3,113,420
deposits
Universal life and
investment contract withdrawals (1,604,450) (1,503,105) (1,213,435)
Capital contribution from
Lincoln National Corporation 161 221 101,161
Dividends paid to shareholder (125,000) (12,000) -
-----------------------------------------
Net cash provided by financing
activities 655,969 925,376 1,932,842
-----------------------------------------
Net increase (decrease) in cash and
invested cash 400,565 (371,557) 730,741
Cash and invested cash at beginning of
year 590,315 961,872 231,131
-----------------------------------------
Cash and invested cash at end of year $ 990,880 $ 590,315 $ 961,872
=========================================
</TABLE>
See accompanying notes.
7
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements
December 31, 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements of Lincoln National Life
Insurance Company (the Company) and its majority owned subsidiaries have been
prepared in conformity with generally accepted accounting principles.
INVESTMENTS
Recognizing the need for the ability to respond to changes in market conditions
and tax position, the Company has classified its fixed maturity securities and
equity securities (common and non-redeemable preferred stocks) as available-for-
sale and, accordingly, such securities are carried at fair value. The cost of
fixed maturity securities is adjusted for amortization of premiums and
discounts. The cost of fixed maturity and equity securities is adjusted for
declines in value that are other than temporary.
For the mortgage-backed bond portion of the fixed maturity securities portfolio,
the Company recognizes income using a constant effective yield based on
anticipated prepayments and the estimated economic life of the securities. When
actual prepayments differ significantly from anticipated prepayments, the
effective yield is recalculated to reflect actual payments to date and
anticipated future payments. The net investment in the securities is adjusted
to an amount that would have existed had the new effective yield been applied
since the acquisition of the securities. This adjustment is reflected in net
investment income.
Mortgage loans on real estate are carried at outstanding principal balances less
unaccrued discounts. Property and equipment owned for company use are carried
at cost less allowances for depreciation. Policy loans are carried at the
aggregate unpaid balances. All such investments are carried net of reserves for
declines in value that are other than temporary. The change in these reserves
is reported as a realized gain (loss) on investments.
Investment real estate is carried at cost less allowances for depreciation.
Such real estate is carried net of reserves for declines in value that are other
than temporary. Real estate acquired through foreclosure proceedings is
recorded at fair value at the date of acquisition which establishes a new cost
basis. If a subsequent valuation of a foreclosed property indicates the fair
value less estimated costs to sell is lower than the value at acquisition, the
carrying value is adjusted to the lower amount.
8
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash and invested cash are carried at cost, which approximates fair value, and
consist of all highly liquid debt instruments purchased with a maturity of three
months or less, including participation in a short-term investment pool
administered by Lincoln National Corporation (LNC), the Company's parent.
Realized gains (losses) on investments are recognized in income, net of related
amortization (restoration) of deferred acquisition costs, using the specific-
identification method. Changes in the fair values of securities carried at fair
value are reflected directly in shareholder's equity after adjustments for
deferred acquisition costs and amounts required to satisfy policyholder
commitments that would have been recorded if these securities would have been
sold at their fair value, and after deferred taxes or credits to the extent
deemed recoverable.
DERIVATIVES
The Company hedges certain portions of its exposure to fluctuations in interest
and foreign exchange risks by entering into derivative transactions. The
premium paid for interest rate caps is deferred and amortized on a straight-line
basis as an adjustment to net investment income over the term of the interest
rate caps. Any settlement received in accordance with the terms of the interest
rate caps is recorded as investment income. Spread-lock agreements, interest
rate swaps, mortgage-backed securities total return swaps, financial futures
contracts, options on financial futures, and United Kingdom forward swaps, which
hedge fixed maturity securities available-for-sale, are carried at fair value
with changes in fair values reflected directly in shareholder's equity.
Realized gains (losses) from the settlement of such derivatives are deferred and
amortized over the life of the hedged assets as an adjustment to net investment
income.
PREMIUMS AND FEES
Group health premiums are prorated over the contract term of the policies.
Revenues for universal life and other interest-sensitive life insurance policies
consist of policy charges for cost of insurance, policy initiation and
administration and surrender charges that have been assessed. Traditional
individual life-health and annuity premiums are recognized as revenue over the
premium-paying period of the policies.
9
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ASSETS HELD IN SEPARATE ACCOUNTS AND LIABILITIES RELATED TO SEPARATE ACCOUNTS
Separate account assets and liabilities represent segregated funds administered
and invested by the Company for the exclusive benefit of pension and variable
life and annuity contractholders. The Company receives fees for such investment
services which are recorded as revenues.
DEFERRED ACQUISITION COSTS
Commissions and other costs of acquiring group health insurance, universal life
and other interest-sensitive life insurance and traditional life insurance and
annuities, which vary with and are primarily related to the production of new
business, have been deferred to the extent recoverable. Acquisition costs for
universal life and other interest-sensitive life insurance policies are
amortized over the lives of the policies in relation to the incidence of
estimated gross profits from surrender charges and investment, mortality,
expense margins, and actual realized gain (loss) on investments. That
amortization is adjusted retrospectively when estimates of current or future
gross profits to be realized from a group of policies are revised. The
traditional life-health and annuity acquisition costs are amortized over the
premium-paying period of the related policies using assumptions consistent with
those used in computing policy reserves.
EXPENSES
Expenses for universal life and other interest-sensitive life insurance policies
include interest credited to policy account balances and benefits incurred
during the period in excess of policy account balances. Interest crediting
rates associated with funds invested in the Company's general account during
1992 through 1994 ranged from 6.1% to 8.7%.
INTANGIBLE ASSETS
The costs of acquired subsidiaries in excess of the fair value of net assets
(goodwill) are amortized using the straight-line method over periods that
correspond with the benefits expected to be derived from the acquisition
(generally over 20-25 years). The carrying value of intangible assets is
reviewed regularly for indicators of impairment in value.
10
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
POLICY LIABILITIES AND ACCRUALS
The liabilities for future policy benefits and expenses for universal life and
other interest-sensitive life insurance policies consist of policy account
balances that accrue to the benefit of the policyholders, excluding surrender
charges. Liabilities for future policy benefits and expenses for traditional
life and health policies and annuities are computed using a net level premium
method and assumptions for investment yields, mortality, morbidity and
withdrawals based principally on Company experience projected at the time of
policy issue, with provision for possible adverse deviations. Interest
assumptions for traditional direct individual life reserves for all policies
range from 2.3% to 11.7% graded to 5.7% after 30 years depending on time of
policy issue. Interest rate assumptions from reinsurance reserves range from
5.0% to 11.0% graded to 8.0% after 20 years.
REINSURANCE
The Company enters into reinsurance agreements with other companies in the
normal course of their business. The Company may assume reinsurance from
unaffiliated companies and/or cede insurance to such companies. Assets and
liabilities from reinsurance agreements written on a funds withheld basis have
been netted in the balance sheet since there is a right of offset. Assets and
liabilities from other reinsurance agreements are reported on a gross basis.
Reinsurance agreements are reported gross in the accompanying income statement,
except that initial reserves are netted against premiums, when an in-force block
of business is reinsured.
DEPRECIATION
Provisions for depreciation of investment real estate and property and equipment
owned for Company use are computed principally on the straight-line method over
the estimated useful lives of the assets.
POSTRETIREMENT MEDICAL AND LIFE INSURANCE BENEFITS
Effective January 1, 1993, the Company changed its method of accounting for its
postretirement medical and life insurance benefits to the full accrual method
(see Note 2). Prior to January 1, 1993, the Company accounted for such benefits
on a pay-as-you-go method.
11
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company and eligible subsidiaries have elected to file consolidated federal
and state income tax returns with their parent, LNC. Pursuant to an
intercompany tax sharing agreement with LNC, the Company and its eligible
subsidiaries provide for income taxes on a separate return filing basis. The
tax sharing agreement also provides that the Company and eligible subsidiaries
will receive benefit for net operating losses, capital losses and tax credits
which are not usable on a separate return basis to the extent such items may be
utilized in the consolidated income tax returns of LNC.
The Company uses the liability method of accounting for income taxes. Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax return purposes. The Company establishes a
valuation allowance for any portion of its deferred tax assets which are
unlikely to be realized.
2. CHANGES IN ACCOUNTING PRINCIPLES AND CHANGES IN ESTIMATES
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Effective January 1, 1993, the Company changed its method of accounting for
postretirement medical and life insurance benefits for its eligible active and
retired employees and agents from a pay-as-you-go method to a full accrual
method in accordance with Financial Accounting Standards No. 106 entitled
"Employers' Accounting for Postretirement Benefits Other Than Pensions" (FAS
106). This full accrual method recognizes the estimated obligation for retired
employees and agents and active employees and agents who are expected to retire
in the future. The effect of the change was to increase net periodic
postretirement benefit cost in 1993 by $7,800,000 and decrease income before
cumulative effect of accounting change by $5,100,000 ($0.51 per share). The
implementation of FAS 106 resulted in a one-time charge to 1993 net income of
$45,582,000 ($69,063,000 pretax) or $4.56 per share for the cumulative effect of
the accounting change. Prior year data has not been restated for the accounting
change. See Note 6 for additional disclosures regarding postretirement benefits
other than pensions.
12
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
2. CHANGES IN ACCOUNTING PRINCIPLES AND CHANGES IN ESTIMATES (CONTINUED)
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN
Financial Accounting Standards No. 114 entitled "Accounting by Creditors for
Impairment of a Loan" (FAS 114) issued in May 1993, was adopted by the Company
effective January 1, 1993. FAS 114 requires that if an impaired mortgage loan's
fair value is less than the recorded investment in the loan, the difference is
recorded in the mortgage loan allowance for losses account. The adoption of FAS
114 resulted in additions to the mortgage loan allowance for losses account and
reduced 1993 income before cumulative effect of accounting change and net income
by $37,700,000, or $3.77 per share ($57,175,000 pre-tax). Most of the effect of
this change in accounting was within the Life Insurance and Annuities segment.
See Note 3 for further mortgage loan disclosures.
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES
Financial Accounting Standards No. 115 entitled "Accounting for Certain
Investments in Debt and Equity Securities" (FAS 115) issued in May 1993, was
adopted by the Company as of December 31, 1993. In accordance with the new
rules, the prior year financial statements have not been restated to reflect the
change in accounting principle. Under FAS 115, securities can be classified as
available-for-sale, trading or held-to-maturity according to the holder's
intent. The Company classified its entire fixed maturity securities portfolio
as "available-for-sale." Securities classified as available-for-sale are
carried at fair value and unrealized gains and losses on such securities are
carried as a separate component of shareholder's equity. The ending balance of
shareholder's equity was increased by $564,153,000 (net of $377,450,000 of
related adjustments to deferred acquisition costs, $50,695,000 of policyholder
commitments and $303,703,000 in deferred income taxes, all of which would have
been recognized if those securities had been sold at their fair value, net of
amounts applicable to Security-Connecticut Corporation) to reflect the net
unrealized gain on fixed maturity securities classified as available-for-sale
previously carried at amortized cost. Prior to the adoption of FAS 115, the
Company carried a portion of its fixed maturity securities at fair value with
unrealized gains and losses included as a separate component of stockholder's
equity. The remainder of the Company's fixed income securities were carried at
amortized cost.
CHANGES IN ESTIMATE FOR NET INVESTMENT INCOME RELATED TO MORTGAGE-BACKED BONDS
At December 31, 1993, the Company had $5,942,132,000 invested in mortgage-backed
bonds. As indicated in Note 1, the Company recognizes income on these
securities using a constant effective yield based on anticipated prepayments.
With the implementation of new investment software in December 1993, the Company
was able to significantly refine its estimate of the
13
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
2. CHANGES IN ACCOUNTING PRINCIPLES AND CHANGES IN ESTIMATES (CONTINUED)
effective yield on such securities to better reflect actual prepayments and
estimates of future prepayments. This resulted in an increase in the
amortization of purchase discount on these securities of $58,036,000 and, after
related amortization of deferred acquisition costs ($18,279,000) and income
taxes ($14,257,000), increased 1993's income before cumulative effect of
accounting change and net income by $25,500,000 or $2.55 per share. Most of the
effect of this change in estimate was within the Life Insurance and Annuities
business segment.
CHANGE IN ESTIMATE FOR REINSURANCE DISABILITY INCOME RESERVES
During December 1993, income before cumulative effect of accounting change and
net income decreased by $15,535,000 or $1.55 per share as the result of
strengthening reinsurance disability income reserves by $23,900,000. The need
for this reserve increase within the Life-Health Reinsurance business segment
was identified as the result of management's assessment of current expectations
for morbidity trends and the impact of lower investment income due to lower
interest rates.
3. INVESTMENTS
The major categories of net investment income are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
------------------------------------
<S> <C> <C> <C>
(000's omitted)
Fixed maturity securities $1,357,402 $1,497,639 $1,346,524
Equity securities 7,384 4,267 5,015
Mortgage loans on real estate 271,344 294,166 289,883
Real estate 97,762 75,162 47,184
Policy loans 32,661 35,978 33,918
Invested cash 46,383 24,794 16,776
Other investments 7,315 8,055 21,898
------------------------------------
1,820,251 1,940,061 1,761,198
Investment expenses 146,270 116,602 110,374
------------------------------------
Net investment income $1,673,981 $1,823,459 $1,650,824
====================================
</TABLE>
14
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
Realized gain (loss) on investments is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
-----------------------------------
<S> <C> <C> <C>
(000's omitted)
Fixed maturity securities
available-for-sale:
Gross gain $ 69,621 $ 91,075 $ 82,650
Gross loss (294,180) (8,421) (34,847)
Equity securities available-for-sale:
Gross gain 50,238 88,368 46,692
Gross loss (50,485) (33,728) (23,511)
Fixed maturity securities held for
investment:
Gross gain - 209,877 194,546
Gross loss - (69,520) (40,843)
Other investments 5,124 (161,770) (135,150)
Related restoration (amortization)
of deferred acquisition costs (81,160) (23,731) -
-----------------------------------
$(138,522) $ 92,150 $ 89,537
===================================
</TABLE>
Write-downs and provisions for losses on investments, which are included in
realized gain (loss) shown above, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
-----------------------------
<S> <C> <C> <C>
(000's omitted)
Fixed maturity securities
(interest only mortgage-backed bonds) $ 704 $ 36,284 $ -
Other fixed maturity securities 13,505 19,354 19,392
Equity securities 6,845 7 -
Mortgage loans on real estate 19,464 136,717 67,643
Real estate 13,058 21,776 53,667
Other long-term investments 262 3,905 18,206
Guarantees 4,280 1,674 5,700
-----------------------------
$58,118 $219,717 $164,608
=============================
</TABLE>
15
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
The change in unrealized appreciation (depreciation) on investments in fixed
maturity and equity securities is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
--------------------------------------
<S> <C> <C> <C>
(000's omitted)
Fixed maturity securities $(1,903,661) $1,387,089 $ (49,658)
available-for-sale
Equity securities available-for-sale (26,048) 9,266 (1,208)
Fixed maturity securities held for - (959,714) (116,748)
investment
--------------------------------------
$(1,929,709) $ 436,641 $(167,614)
======================================
</TABLE>
The cost, gross unrealized gain, gross unrealized loss and fair value of
securities available-for-sale are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994
------------------------------------------------------
GROSS UNREALIZED
---------------------------- FAIR
COST GAIN LOSS VALUE
------------------------------------------------------
<S> <C> <C> <C> <C>
(000's omitted)
Corporate bonds $11,519,299 $143,284 $514,363 $11,148,220
U.S. government bonds 1,048,404 6,889 25,508 1,029,785
Foreign government bonds 541,179 4,700 12,554 533,325
Mortgage-backed bonds 5,017,332 88,929 192,789 4,913,472
State and municipal bonds 16,297 361 - 16,658
Redeemable preferred stocks 51,417 209 872 50,754
------------------------------------------------------
Total fixed maturity securities 18,193,928 244,372 746,086 17,692,214
Equity securities 416,351 56,434 16,452 456,333
------------------------------------------------------
$18,610,279 $300,806 $762,538 $18,148,547
======================================================
</TABLE>
16
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1993
----------------------------------------------------------
GROSS UNREALIZED
------------------------------- FAIR
COST GAIN LOSS VALUE
----------------------------------------------------------
(000's omitted)
<S> <C> <C> <C> <C>
Corporate bonds $11,046,342 $1,037,275 $ (67,254) $12,016,363
U.S. government bonds 1,096,837 29,329 (9,241) 1,116,925
Foreign government bonds 414,639 49,077 (3,741) 459,975
Mortgage-backed bonds 5,578,455 439,852 (76,175) 5,942,132
State and municipal bonds 6,784 737 - 7,521
Redeemable preferred stocks 34,410 12,485 (10,397) 36,498
----------------------------------------------------------
Total fixed maturity securities 18,177,467 1,568,755 (166,808) 19,579,414
Equity securities 360,333 75,777 (9,747) 426,363
----------------------------------------------------------
$18,537,800 $1,644,532 $ (176,555) $20,005,777
==========================================================
</TABLE>
Future maturities of fixed maturity securities available-for-sale are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994
--------------------------
FAIR
COST VALUE
--------------------------
(000's omitted)
<S> <C> <C>
Due in one year or less $ 190,091 $ 194,205
Due after one year through five years 3,226,481 3,168,937
Due after five years through ten years 5,052,886 4,883,436
Due after ten years 4,707,138 4,532,164
--------------------------
13,176,596 12,778,742
Mortgage-backed bonds 5,017,332 4,913,472
--------------------------
$18,193,928 $17,692,214
==========================
</TABLE>
The foregoing data is based on stated maturities. Actual maturities will differ
in some cases because borrowers may have the right to call or pre-pay
obligations.
17
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
At December 31, 1994, the par, amortized cost and estimated fair value of
investments in mortgage-backed bonds summarized by interest rates of the
underlying collateral are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994
------------------------------------
FAIR
PAR COST VALUE
------------------------------------
<S> <C> <C> <C>
(000's omitted)
Below 7% $ 88,581 $ 79,114 $ 74,858
7%-8% 1,330,538 1,296,444 1,210,303
8%-9% 1,642,115 1,582,083 1,535,659
Above 9% 2,157,721 2,059,691 2,092,652
------------------------------------
$5,218,955 $5,017,332 $4,913,472
====================================
</TABLE>
At December 31, 1994, the Company's fixed maturity portfolio consists of
securities with credit quality ratings in the following proportions.
<TABLE>
<CAPTION>
<S> <C>
Treasuries and AAA 35.8%
AA 7.4
A 25.8
BBB 23.9
BB 4.1
Less than BB 3.0
----------
100.0%
==========
</TABLE>
Mortgage loans on real estate are considered impaired when, based on current
information and events, it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. When the Company determines that a loan is impaired a provision for
loss is established for the difference between the carrying value of the
mortgage loan and the estimated value. Estimated value is based on either the
present value of expected future cash flows discounted at the loan's effective
interest rate, the loan's observable market price or the fair value of the
loan's collateral. The provision for losses is reported as realized gain (loss)
on investments. Mortgage loans deemed to be uncollectible are charged against
the provision for losses and subsequent recoveries, if any, are credited to the
provision for losses.
18
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
The provision for losses is maintained at a level believed adequate by
management to absorb estimated probable credit losses. Management's periodic
evaluation of the adequacy of the provision for losses is based on the Company's
past loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay (including the timing
of future payments), the estimated value of the underlying collateral,
composition of the loan portfolio, current economic conditions and other
relevant factors. This evaluation is inherently subjective as it requires
estimating the amounts and timing of future cash flows expected to be received
on impaired loans that may be susceptible to significant change.
Impaired loans along with the related provision for losses is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1994 1993
----------------------
<S> <C> <C>
(000's omitted)
Impaired loans with provision for losses $246,000 $ 703,900
Provision for losses (56,614) (220,671)
Impaired loans with no provision for
losses 2,200 7,800
----------------------
Net impaired loans $191,586 $ 491,029
======================
</TABLE>
Impaired loans without provision for losses are a result of direct write-downs
or for collateral dependent loans where the fair value of the collateral is
greater than the recorded investment in loans.
A reconciliation of the mortgage loan provision for losses for these impaired
mortgage loans is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
---------------------------------
<S> <C> <C> <C>
(000's omitted)
Balance at beginning of year $ 220,671 $129,093 $ 68,437
Provisions for losses 19,464 79,542 90,183
Provision for adoption of FAS 114 - 57,175 -
Releases due to sales (164,605) (12,253) (6,987)
Releases due to foreclosures (18,916) (32,886) (22,540)
---------------------------------
Balance at end of year $ 56,614 $220,671 $129,093
=================================
</TABLE>
19
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
The average recorded investment in impaired loans and the interest income
recognized on impaired loans were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993
------------------------
<S> <C> <C>
(000's omitted)
Average recorded investment in impaired
loans $467,500 $703,600
Interest income recognized on impaired
loans 36,100 47,300
</TABLE>
All interest income on impaired loans was recognized on the cash basis of income
recognition.
As of December 31, 1994 and 1993, the Company had restructured loans of
$36,209,000 and $88,913,000, respectively. The Company recorded $800,000 and
$6,610,000 interest income on these restructured loans in 1994 and 1993,
respectively. Interest income in the amount of $3,861,000 and $9,564,000 would
have been recorded on these loans according to their original terms in 1994 and
1993, respectively. As of December 31, 1993, the Company had commitments to
lend $132,000 on restructured loans. No such commitments were outstanding as of
December 31, 1994.
As of December 31, 1994, the Company's investment commitments for fixed maturity
securities (primarily private placements), mortgage loans on real estate and
real estate were $307,677,000.
Fixed maturity securities available-for-sale, mortgage loans on real estate and
real estate with a combined carrying value at December 31, 1994 of $38,571,000
were non-income producing for the year ended December 31, 1994.
20
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
The cost information for mortgage loans on real estate, real estate and other
long-term investments are net of provisions for losses. The balance sheet
account for other liabilities includes a reserve for guarantees of third-party
debt. The amount of provisions and reserves for such items is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1994 1993
--------------------
<S> <C> <C>
(000's omitted)
Mortgage loans on real estate $ 56,614 $220,671
Real estate 65,186 121,427
Other long-term investments 13,492 26,730
Guarantees - 1,804
--------------------
$135,292 $370,632
====================
</TABLE>
Details underlying the balance sheet caption "Net Unrealized Gain (Loss) on
Securities Available-for-Sale," are as follows:
<TABLE>
<CAPTION>
1994 1993
---------------------------
<S> <C> <C>
(000's omitted)
Fair value of securities
available-for-sale $18,148,547 $20,005,777
Cost of securities available-for-sale 18,610,279 18,537,800
---------------------------
Unrealized gain (loss) (461,732) 1,467,977
Adjustments to deferred acquisition
costs 158,223 (421,969)
Adjustments to amounts required
to satisfy policyholder commitments 8,590 (46,138)
Amounts related to disposal of
subsidiary included in other
liabilities - (30,051)
Deferred income credits (taxes) 105,900 (348,658)
Valuation allowance on deferred income
tax assets (135,600) -
---------------------------
Net unrealized gain (loss) on
securities available-for-sale $ (324,619) $ 621,161
===========================
</TABLE>
Adjustments to deferred acquisition costs and amounts required to satisfy
policyholder commitments are netted against the deferred acquisition costs and
included with the future policy benefits and claims liabilities in the balance
sheet, respectively.
21
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
4. FEDERAL INCOME TAXES
The federal income tax before cumulative effect of accounting change is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
--------------------------------
(000's omitted)
<S> <C> <C> <C>
Current income tax expense (credit) $(93,469) $ 261,334 $ 239,365
Deferred income tax expense (credit) 133,869 (118,790) (122,584)
--------------------------------
$ 40,400 $ 142,544 $ 116,781
================================
</TABLE>
Cash paid for federal income taxes in 1994, 1993 and 1992 was $41,373,000,
$272,637,000 and $241,753,000, respectively.
The Omnibus Reconciliation Act of 1993 (1993 Act) changed the Company's
prevailing corporate federal income tax rate from 34% to 35% effective January
1, 1993. The application of this new tax rate to the December 31, 1992 deferred
tax recoverable balance resulted in a decrease in federal income taxes of
$400,000 for 1993.
The effective tax rate on pre-tax income before cumulative effect of accounting
change is lower than the prevailing corporate federal income tax rate. A
reconciliation of this difference is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
------------------------------
(000's omitted)
<S> <C> <C> <C>
Tax rate times pre-tax income $ 91,069 $117,483 $136,327
Effect of:
Tax-exempt investment income (21,451) (16,165) (11,304)
Participating policyholders' share 3,378 4,149 (2,530)
Gain (loss) on sale of subsidiary (24,134) 34,475 -
Other items (8,462) 2,602 (5,712)
------------------------------
Provision for income taxes $ 40,400 $142,544 $116,781
==============================
Effective tax rate 15.5% 42.5% 29.1%
==============================
</TABLE>
22
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
4. FEDERAL INCOME TAXES (CONTINUED)
The federal income tax recoverable (liability) is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1994 1993
-------------------
(000's omitted)
<S> <C> <C>
Current $118,172 $ (29,243)
Deferred 16,291 (167,448)
-------------------
$134,463 $(196,691)
===================
</TABLE>
Significant components of the Company's net deferred tax asset (liability) are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1994 1993
-------------------
(000's omitted)
<S> <C> <C>
Deferred tax assets:
Policy liabilities and accruals and
contractholder funds $430,900 $ 532,700
Loss on investments 16,800 135,900
Net unrealized loss on securities
available-for-sale 161,600 -
Postretirement benefits other than
pensions 24,200 15,500
Other 34,600 70,100
-------------------
Total deferred tax assets 668,100 754,200
Valuation allowance for deferred tax
assets 135,600 -
-------------------
Net deferred tax assets 532,500 754,200
Deferred tax liabilities:
Deferred acquisition costs 475,500 325,400
Net unrealized gain on securities
available-for-sale - 509,000
Tax over book depreciation - 19,400
Other 40,709 67,848
-------------------
Total deferred tax liabilities 516,209 921,648
-------------------
Net deferred tax (liability) asset $ 16,291 $(167,448)
===================
</TABLE>
23
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
4. FEDERAL INCOME TAXES (CONTINUED)
The Company is required to establish a "valuation allowance" for any portion of
its deferred tax assets which are unlikely to be realized. At December 31,
1994, $161,600,000 of deferred tax assets relating to net unrealized capital
losses on fixed maturity and equity securities available-for-sale were available
to be recorded in shareholder's equity before considering a valuation allowance.
For federal income tax purposes, capital losses may only be used to offset
capital gains in the current year or during a three-year carryback and five-year
carryforward period. Due to these restrictions, and the uncertainty of future
capital gains, these deferred tax assets have been substantially offset by a
valuation allowance of $135,600,000. With the exception of the deferred tax
assets relating to unrealized capital losses on available-for-sale securities,
management believes it is more likely than not that the Company will realize the
benefit of its deferred tax assets. Accordingly, a valuation allowance was
established in shareholder's equity as of December 31, 1994 relating to
unrealized capital losses on available-for-sale securities.
Prior to 1984, a portion of the life companies' current income was not subject
to current income tax, but was accumulated for income tax purposes in a
memorandum account designated as "policyholders' surplus." The total of the life
companies' balances in their respective "policyholders' surplus" accounts at
December 31, 1983 of $204,800,000 was "frozen" by the Tax Reform Act of 1984
and, accordingly, there have been no additions to the accounts after that date.
That portion of current income on which income taxes have been paid will
continue to be accumulated in a memorandum account designated as "shareholder
surplus," and is available for dividends to the shareholder without additional
payment of tax. The December 31, 1994 total of the life companies' account
balances for their respective "shareholder surplus" was $1,455,100,000. Should
dividends to the shareholder for each life company exceed its respective
"shareholder surplus," amounts would need to be transferred from its respective
"policyholders' surplus" and would be subject to federal income tax at that
time. In connection with the 1993 sale of Security-Connecticut (see Note 10),
$8,800,000 was transferred from policyholders' surplus to shareholder surplus
and current income tax of $3,100,000 was paid. Under existing or foreseeable
circumstances, the Company neither expects nor intends that distributions will
be made from the remaining balance in "policyholders' surplus" of $196,000,000
that will result in any such tax. Accordingly, no provision for deferred income
taxes has been provided by the Company on its "policyholders' surplus" account.
In the event that such excess distributions were made, it is estimated that
income taxes of approximately $68,600,000 would be due.
24
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
5. SUPPLEMENTAL FINANCIAL DATA
The balance sheet captions, "Real Estate," "Other Investments" and "Property and
Equipment" are shown net of allowances for depreciation as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1994 1993
---------------------
(000's omitted)
<S> <C> <C>
Real estate $ 36,991 $ 31,541
Other investments 12,182 12,321
Property and equipment 104,657 144,046
</TABLE>
Details underlying the balance sheet caption, "Contractholder Funds," are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1994 1993
------------------------
(000's omitted)
<S> <C> <C>
Premium deposit funds $16,770,332 $14,546,622
Undistributed earnings on participating
business 63,575 88,009
Other 194,721 228,245
------------------------
$17,028,628 $14,862,876
========================
</TABLE>
Details underlying the balance sheet captions, "Short-term and Long-term Debt,"
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1994 1993
--------------------
(000's omitted)
<S> <C> <C>
Short-term debt:
Short-term notes $68,589 $64,775
Current portion of long-term debt 200 1,338
--------------------
Total short-term debt $68,789 $66,113
====================
Long-term debt less current portion:
12% notes payable, due 1996 $ 200 $ 400
6.17% notes payable, due 1998 - 5,321
--------------------
Total long-term debt $ 200 $ 5,721
====================
</TABLE>
25
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
5. SUPPLEMENTAL FINANCIAL DATA (CONTINUED)
Cash paid for interest for 1994, 1993 and 1992 was $615,000, $96,000 and
$414,000, respectively.
Reinsurance transactions included in the income statement caption, "Insurance
Premiums," are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
------------------------------
<S> <C> <C> <C>
(000's omitted)
Reinsurance assumed $910,838 $807,503 $907,293
Reinsurance ceded 716,768 568,612 620,978
------------------------------
Net reinsurance premiums $194,070 $238,891 $286,315
==============================
</TABLE>
The income statement caption, "Benefits and Settlement Expenses," is net of
reinsurance recoveries of $524,000, $438,000 and $508,000 for the years ended
December 31, 1994, 1993 and 1992, respectively.
The income statement caption, "Underwriting, Acquisition, Insurance and Other
Expenses," includes amortization of deferred acquisition costs of $115,174,000,
$240,989,000 and $186,251,000 for the years ended December 31, 1994, 1993 and
1992, respectively. An additional $81,160,000 and $(23,731,000) of deferred
acquisition costs was restored (amortized) and netted against "Realized Gain
(Loss) on Investments" for the years ended December 31, 1994 and 1993,
respectively.
26
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
6. EMPLOYEE BENEFIT PLANS
PENSION PLANS
LNC administers funded defined benefit pension plans for most of its eligible
employees and, prior to January 1, 1995, full-time agents. The benefits for
employees are based on total years of service and the highest 60 months of
compensation during the last 10 years of employment. The benefits for agents
were based on a percentage of each agent's yearly earnings. The plans are funded
by contributions to tax-exempt trusts. The Company's funding policy is
consistent with the funding requirements of federal laws and regulations.
Contributions are intended to provide not only the benefits attributed to
service to date, but also those expected to be earned in the future. Plan assets
consist principally of listed equity securities and corporate obligations and
Government bonds.
All benefits applicable to the funded defined benefit plan for agents were
frozen as of December 31, 1994. The curtailment of this plan did not have a
significant effect on net pension cost for 1994. Effective January 1, 1995,
pension benefits for agents will be provided by a new defined contribution plan.
Contributions to this plan will be based on 2.3% of an agent's earnings up to
the social security wage base and 4.6% of any excess.
LNC also administers two types of unfunded, nonqualified, defined benefit plans
for certain employees and agents. A supplemental retirement plan provides
defined benefit pension benefits in excess of limits imposed by federal tax law.
A salary continuation plan provides certain officers of the Company defined
pension benefits based on years of service and final monthly salary upon death
or retirement.
27
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
6. EMPLOYEE BENEFIT PLANS (CONTINUED)
The status of the funded defined benefit pension plans and the amounts
recognized on the balance sheets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1994 1993
-----------------------
<S> <C> <C>
(000's omitted)
Actuarial present value of benefit
obligation:
Vested benefits $(130,517) $(142,507)
Nonvested benefits (7,285) (6,680)
-----------------------
Accumulated benefit obligation (137,802) (149,187)
Effect of projected future compensation
increases (24,310) (40,955)
-----------------------
Projected benefit obligation (162,112) (190,142)
Plan assets at fair value 159,287 175,338
-----------------------
Projected benefit obligation in excess
of plan assets (2,825) (14,804)
Unrecognized transition asset - (2,666)
Unrecognized net loss (gain) (451) 8,720
Unrecognized prior service cost 1,063 3,259
-----------------------
Accrued pension cost included in other
liabilities $ (2,213) $ (5,491)
=======================
</TABLE>
The status of the unfunded defined benefit pension plans and the amounts
recognized on the balance sheets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1994 1993
--------------------
<S> <C> <C>
(000's omitted)
Actuarial present value of benefit
obligation:
Vested benefits $(5,430) $ (6,580)
Nonvested benefits (1,026) (1,616)
--------------------
Accumulated benefit obligation (6,456) (8,196)
Effect of projected future compensation
increases (2,479) (2,583)
--------------------
Projected benefit obligation (8,935) (10,779)
Unrecognized transition obligation 49 203
Unrecognized net loss (gain) (328) 1,395
Unrecognized prior service cost
(reduction in benefits) 849 (678)
--------------------
Accrued pension costs included in other
liabilities $(8,365) $ (9,859)
====================
</TABLE>
28
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
6. EMPLOYEE BENEFIT PLANS (CONTINUED)
The determination of the projected benefits obligation for the defined benefit
plans was based on the following assumptions:
<TABLE>
<CAPTION>
1994 1993 1992
----------------------------
<S> <C> <C> <C>
Weighted-average discount rate 8.0% 7.0% 7.5%
Rate of increase in compensation:
Salary continuation plan 6.5 6.0 6.5
Pension plans 5.0 5.0 5.5
Expected long-term rate of return on
plan assets 9.0 9.0 9.0
</TABLE>
The components of net pension cost for the defined benefit pension plans are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
-------------------------------
(000's omitted)
<S> <C> <C> <C>
Service cost-benefits earned during the year $ 8,912 $ 8,496 $ 6,592
Interest cost on projected benefit obligation 12,898 12,433 9,129
Actual return on plan assets 4,666 (20,069) (5,511)
Net amortization (deferral) (18,576) 6,065 (5,726)
-------------------------------
Net pension cost $ 7,900 $ 6,925 $ 4,484
===============================
</TABLE>
401K
LNC administers contributory defined contribution plans for eligible employees
and agents. The Company's contributions to the plans are equal to each
participant's pretax contribution, not to exceed 6% of base pay, multiplied by a
percentage, ranging from 25% to 150%, which varies according to certain
incentive criteria. Expense for these plans amounted to $13,185,000,
$11,770,000 and $6,005,000 in 1994, 1993 and 1992, respectively.
29
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
6. EMPLOYEE BENEFIT PLANS (CONTINUED)
POSTRETIREMENT MEDICAL AND LIFE INSURANCE BENEFIT PLANS
LNC administers unfunded defined benefit plans that provide postretirement
medical and life insurance benefits to full-time employees and agents who,
depending on the plan, have worked for the Company 10 to 15 years and attained
age 55 to 60. Medical benefits are also available to spouses and other
dependents of employees and agents. For medical benefits, limited contributions
are required from individuals retired prior to November 1, 1988; contributions
for later retirees, which can be adjusted annually, are based on such items as
years of service at retirement and age at retirement. The life insurance
benefits are noncontributory, although participants can elect supplemental
contributory benefits.
The status of the postretirement medical and life insurance benefit plans and
the amount recognized in the balance sheets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1994 1993
----------------------
(000's omitted)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $(34,881) $(37,121)
Fully eligible active plan participants (7,063) (8,967)
Other active plan participants (14,968) (25,959)
----------------------
Accumulated postretirement benefit obligation (56,912) (72,047)
Unrecognized net loss (gain) (5,487) 4,023
Unrecognized transition obligation -- --
----------------------
Accrued plan cost included in other liabilities $(62,399) $(68,024)
======================
</TABLE>
The components of periodic postretirement benefit cost are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
------------------------------
(000's omitted)
<S> <C> <C> <C>
Service cost $1,727 $2,584
Interest cost 4,155 4,628
Net amortization 130 --
------------------------------
Net periodic postretirement benefit cost $6,012 $7,212 $2,736
==============================
</TABLE>
30
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
6. EMPLOYEE BENEFIT PLANS (CONTINUED)
The costs for postretirement benefits for the year ended December 31, 1992 shown
above are prior to the adoption of FAS 106 (see Note 2) and, therefore,
represent the total amount of claims and premiums actually paid.
The calculation of the accumulated postretirement benefit obligation assumes a
weighted-average annual rate of increase in the per capita cost of covered
benefits (i.e., health care cost trend rate) of 10.0% for 1995 gradually
decreasing to 5.5% by 2004 and remaining at that level thereafter. The health
care cost trend rate assumption has a significant affect on the amounts
reported. For example, increasing the assumed health care cost trend rates by
one percentage point each year would increase the accumulated postretirement
benefit obligation as of December 1994 and 1993 by $4,088,000 and $6,878,000,
respectively, and the aggregate of the estimated service and interest cost
components of net periodic postretirement benefit cost for the year ended
December 31, 1994 by $483,000. The calculation assumes a long-term rate of
increase in compensation of 5.0% for both December 31, 1994 and 1993. The
weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 8.0% and 7.0% at December 31, 1994 and
1993, respectively.
7. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY RESTRICTIONS
Generally, the net assets available for transfer to LNC are limited to the
amounts that net assets, as determined in accordance with statutory accounting
practices, exceed minimum statutory capital requirements; however, payments of
such amounts as dividends may be subject to approval by regulatory authorities.
As of December 31, 1994, $350,000,000 of consolidated shareholder's equity
represents net assets that cannot be transferred in the form of dividends, loans
or advances to LNC.
Net income as determined in accordance with statutory accounting practices for
the Company and its insurance subsidiaries in 1994, 1993 and 1992 was
$366,724,000, $236,985,000 and $190,074,000, respectively. The Company's
shareholder's equity as determined in accordance with statutory accounting
practices at December 31, 1994 and 1993 was $1,679,667,000 and $1,302,513,000,
respectively.
31
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
ESTIMATES RELATED TO CERTAIN LIABILITIES
Included in the liability for future policy benefits, claims and claim expenses
and the asset for amounts recoverable from reinsurers at December 31, 1994 and
1993 is a net liability for disability income business of $441,700,000 and
$398,100,000, respectively (net of amounts ceded to LNC affiliates of
$368,600,000 and $329,700,000, respectively). If incidence levels do not
improve, or claim termination rates deteriorate, substantial reserve additions
may be required in the future. It is not possible to provide a meaningful range
of estimates of possible additional losses at this time. The Company reviews
and updates the level of these reserves on an on-going basis.
LEASES
The Company and certain of its subsidiaries lease their home office properties
through sale-leaseback agreements. The agreements provide for a 25 year lease
period with options to renew for six additional terms of five years each. The
agreements also provide the Company with the right of first refusal to purchase
the properties during the term of the lease, including renewal periods, at a
price as defined in the agreements. In addition, the Company has the option to
purchase the leased properties at fair market value as defined in the agreements
on the last day of the initial 25 year lease period ending in 2009 or the last
day of any of the renewal periods.
Rental expense under operating leases in 1994, 1993 and 1992 was $21,679,000,
$27,051,000 and $30,043,000. Future minimum rental commitments are as follows
(000's omitted):
<TABLE>
<CAPTION>
<S> <C>
1995 $ 20,244,000
1996 20,156,000
1997 18,593,000
1998 17,329,000
1999 16,481,000
Thereafter 183,320,000
--------------
$276,123,000
==============
</TABLE>
32
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
REINSURANCE CEDED AND ASSUMED
The Company cedes reinsurance to other companies, including certain affiliates.
The portion of risks exceeding each company's retention limit is reinsured with
other insurers. The Company seeks reinsurance coverage within the business
segment that sell life insurance, that limits its liabilities on an individual
insured to $3,000,000. To cover products other than life insurance, the Company
acquires other reinsurance coverages with retentions and limits which management
believes are appropriate for the circumstances. The accompanying financial
statements reflect premiums, benefits and settlement expenses and deferred
acquisition costs, net of reinsurance ceded (see Note 5). The Company and its
subsidiaries remain liable if their reinsurers are unable to meet their
contractual obligations under the applicable reinsurance agreements.
The Company assumes reinsurance from other companies, including certain
affiliates. At December 31, 1994, the Company has granted $137,099,000 of
statutory surplus relief to other insurance companies under financial
reinsurance transactions. Generally, such amounts are offset by corresponding
receivables from the ceding company, which are secured by future profits on the
reinsured business. However, the Company is subject to the risk that the ceding
company may become insolvent and the right of offset would not be permitted.
OTHER CONTINGENCY MATTERS
The Company and its subsidiaries are involved in various pending or threatened
legal proceedings arising from the conduct of their business. In some
instances, these proceedings include claims for punitive damages and similar
types of relief in unspecified or substantial amounts, in addition to amounts
for alleged contractual liability or requests for equitable relief. After
consultation with counsel and a review of available facts, it is management's
opinion that these proceedings ultimately will be resolved without materially
affecting the consolidated financial statements of the Company.
Tax authorities have recently focused increased attention on compliance of
qualified annuity plans marketed by insurance companies. If sponsoring
employers cannot demonstrate compliance and the insurance company is held
responsible due to its marketing efforts, the Company and other insurers may be
subject to potential liability. It is not possible to provide a meaningful
estimate of the range of possible liability at this time. In addition, the
Company is analyzing the extent to which insurance coverage may offset any
liability which may develop. Management continues to monitor this matter and
to take steps to minimize any potential liability.
33
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
The number of insurance companies that are under regulatory supervision has
resulted, and is expected to continue to result, in assessments by state
guaranty funds to cover losses to policyholders of insolvent or rehabilitated
companies. Mandatory assessments may be partially recovered through a reduction
in future premium taxes in some states. The Company has accrued for expected
assessments for companies known to be insolvent, net of estimated future premium
tax deductions.
GUARANTEES
The Company has guarantees with off-balance-sheet risks whose contractual
amounts represent credit exposure.
Outstanding guarantees with off-balance-sheet risks, shown in notional or
contract amounts along with their carrying values and estimated fair values, are
as follows:
<TABLE>
<CAPTION>
ASSETS (LIABILITIES)
-------------------------------------------
NOTIONAL OR CARRYING FAIR CARRYING FAIR
CONTRACT AMOUNTS VALUE VALUE VALUE VALUE
-------------------------------------------------------------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1994 1993 1994 1994 1993 1993
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(000's omitted)
Real estate
partnerships $17,658 $ 16,355 $-- $-- $(1,804) $(1,803)
Mortgage loan pass-
through certificates 78,175 96,030 -- -- -- --
--------------------------------------------------------------------
$95,833 $112,385 $-- $-- $(1,804) $(1,803)
====================================================================
</TABLE>
The Company has invested in real estate partnerships that use conventional
mortgage loans. In some cases, the terms of these arrangements involve
guarantees by each of the partners to indemnify the mortgagor in the event a
partner is unable to pay its principal and interest payments. In addition, the
Company has sold commercial mortgage loans through grantor trusts which issued
pass-through certificates. The Company has agreed to repurchase any mortgage
loans which remain delinquent for 90 days at a repurchase price substantially
equal to the outstanding principal balance plus accrued interest thereon to the
date of repurchase. It is management's opinion that the value of the properties
underlying these commitments is sufficient that in the event of default the
impact would not be material to the Company.
34
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
DERIVATIVES
The Company has derivatives with off-balance-sheet risks whose notional or
contract amounts exceed credit exposure. The Company has entered into
derivative transactions to reduce its exposure to fluctuations in interest rates
and foreign exchange risks. In addition, the Company is subject to the risks
associated with changes in the value of its derivatives; however, such changes
in the value generally are offset by changes in the value of the items being
hedged by such contracts. Outstanding derivatives with off-balance-sheet risks,
shown in notional or contract amounts along with their carrying value and
estimated fair values, are as follows:
<TABLE>
<CAPTION>
ASSETS (LIABILITIES)
-----------------------------------------------
NOTIONAL OR CARRYING FAIR CARRYING FAIR
CONTRACT AMOUNTS VALUE VALUE VALUE VALUE
----------------------------------------------------------------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1994 1993 1994 1994 1993 1993
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(000's omitted)
Interest Rate Derivatives:
Interest rate
cap agreements $4,400,000 $3,800,000 $23,361 $34,472 $24,367 $18,535
Spread-lock
agreements 1,300,000 1,700,000 3,199 3,199 -- (5,588)
Financial
futures contracts:
Portfolio
duration hedges 354,300 -- (7,400) (7,400) -- --
Other 28,200 33,100 (100) (100) -- --
Interest rate swaps 5,000 57,016 164 164 -- (1,180)
United Kingdom
forward swaps -- 20,000 -- -- -- 380
Mortgage-backed
securities
total return swaps -- 47,602 -- -- -- 864
----------------------------------------------------------------------
6,087,500 5,657,718 19,224 30,335 24,367 13,011
Foreign exchange
forward contracts 21,527 -- 168 168 -- --
----------------------------------------------------------------------
$6,109,027 $5,657,718 $19,392 $30,503 $24,367 $13,011
======================================================================
</TABLE>
35
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
A reconciliation of the notional or contract amounts for the significant
agreements and contracts is as follows:
<TABLE>
<CAPTION>
INTEREST RATE CAPS SPREAD LOCKS
----------------------------------------------------
DECEMBER 31 DECEMBER 31
1994 1993 1994 1993
----------------------------------------------------
<S> <C> <C> <C> <C>
(000's omitted)
Balance at beginning of year $3,800,000 $1,200,000 $1,700,000 $ 600,000
New contracts 600,000 2,600,000 - 2,000,000
Terminated contracts - - (400,000) (900,000)
----------------------------------------------------
Balance at end of year $4,400,000 $3,800,000 $1,300,000 $1,700,000
====================================================
</TABLE>
<TABLE>
<CAPTION>
OPTIONS ON
FINANCIAL FINANCIAL
FUTURES FUTURES
----------------------------------------------------
1994 1993 1994 1993
----------------------------------------------------
<S> <C> <C> <C> <C>
(000's omitted)
Balance at beginning of year $ -- $-- $ -- $--
New contracts 404,300 -- 308,000 --
Terminated contracts (50,000) -- (308,000) --
----------------------------------------------------
Balance at end of year $354,300 $-- $ -- $--
====================================================
</TABLE>
INTEREST RATE CAPS
The interest rate cap agreements, which expire in 1997 through 2003, entitle the
Company to receive payments from the counterparties on specified future reset
dates, contingent on future interest rates. For each cap, the amount of such
quarterly payments, if any, is determined by the excess of a market interest
rate over a specified cap rate times the notional amount divided by four. The
purpose of the Company's interest rate cap agreement program is to protect its
annuity line of business from the effect of fluctuating interest rates. The
premium paid for the interest rate caps is included in other assets ($23,400,000
as of December 31, 1994) and is being amortized over the terms of the agreements
and is included in net investment income.
36
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
The revenue that the Company receives from interest rate caps depends on the
future levels of interest rates on U.S. Treasury securities with maturities of
two, five, seven and ten years and on U.S. dollar swap rates for similar
maturities. The table below analyzes the amount of cap revenue the Company would
receive if those rates were 1%, 2%, 3%, or 4% higher than they were at December
31, 1994 and remain at those levels throughout the remaining lives of the caps
owned by the Company. In relation to the level of these rates at December 31,
1994, the cap rates were from .42% to 2.58% out of the money, i.e., higher.
Revenue from interest rate caps under these scenarios is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1996 1997 1998 1999 THEREAFTER
------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(000's omitted)
No Change $ -- $ -- $ -- $ -- $ -- $ --
Up 1% 7,100 4,200 1,500 500 -- --
Up 2% 30,100 28,300 24,200 15,500 3,700 --
Up 3% 66,500 67,000 62,300 44,200 16,500 6,400
Up 4% 104,800 107,500 102,500 76,400 34,000 17,600
</TABLE>
SPREAD-LOCKS
Spread-lock agreements in place as of December 31, 1994 will expire in 1995.
Spread-lock agreements provide for a lump sum payment to, or by, the Company
depending on whether the spread between the swap rate and a specified U.S.
Treasury note is larger or smaller than a contractually specified spread. Cash
payments are based on the product of the notional amount, the spread between the
swap rate and the yield of an equivalent maturity U.S. Treasury security and the
price sensitivity of the swap at that time, expressed in dollars per basis
point. The purpose of the Company's spread-lock program is to protect a portion
of its fixed maturity securities against widening of spreads.
Over the past five years, swap spreads have typically traded within an annual
range of 30 basis points, i.e., a range of plus or minus 15 basis points around
the mean level. At December 31, 1994, the cash-settlement value of the spread-
locks would have changed by approximately $11,200,000 for each 15 basis point
change in swap spreads.
37
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
FINANCIAL FUTURES AND OPTION ON FINANCIAL FUTURES
The Company uses exchange-traded financial futures contracts and options on
those financial futures to hedge against interest rate risks and to manage
duration of a portion of its fixed maturity securities. Short positions in
financial futures contracts obligate the Company to sell a financial instrument
at a specified future date for a specified price and may be settled in cash or
through delivery of the financial instrument. Cash settlements on the change in
market values of financial futures contracts are made daily. Options on
financial futures give the Company the right, but not the obligation, to assume
a short position in the underlying futures at a specified price during a
specified time period.
At December 31, 1994, the Company had short positions in the March 1995 five
year note, ten year note, and bond futures with an aggregate face amount of
$354,300,000. As the yields on the underlying Treasury securities rise (fall),
the value of these short positions to the Company will increase (decrease) by
approximately $2,700,000 for each 10 basis point parallel shift in the yield
curve.
ADDITIONAL DERIVATIVE INFORMATION
Expenses for the three agreements and contracts described in the preceding
subsections amounted to $5,356,000 and $3,562,000 in 1994 and 1993,
respectively. Deferred losses of $2,700,000 as of December 31, 1994, resulting
from (1) terminated and expired spread-lock agreements, (2) financial futures
contracts, and (3) options on financial futures, are included with the related
fixed maturity securities to which the hedge applied and are being amortized
over the life of such securities.
The Company is exposed to credit loss in the event of nonperformance by
counterparties on interest rate cap agreements, spread-lock agreements, interest
rate swaps, United Kingdom forward swaps, foreign exchange forward contracts and
mortgage-backed securities total return swaps, but the Company does not
anticipate nonperformance by any of these counterparties. The credit risk
associated with such agreements is minimized by purchasing such agreements from
financial institutions with long-standing, superior performance records. The
amount of such exposure is essentially their replacement cost, which is
approximated by the unrealized gains in such contracts, which was $38,000,000 at
December 31, 1994.
At December 31, 1994, the Company did not have a material concentration of
financial instruments in a single investee, industry or geographic location.
38
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following discussion outlines the methodologies and assumptions used to
determine the estimated fair values of the Company's financial instruments.
Considerable judgment is required to develop these fair values and, accordingly,
the estimates shown are not necessarily indicative of the amounts that would be
realized in a one-time, current market exchange of all of the Company's
financial instruments.
FIXED MATURITY AND EQUITY SECURITIES
Fair values for fixed maturity securities are based on quoted market prices
where available. For fixed maturity securities not actively traded, fair values
are estimated using values obtained from independent pricing services or, in the
case of private placements, are estimated by discounting expected future cash
flows using a current market rate applicable to the coupon rate, credit quality,
and maturity of the investments. The fair values for equity securities are
based on quoted market prices.
MORTGAGE LOANS ON REAL ESTATE
The estimated fair value of mortgage loans on real estate was established using
a discounted cash flow method based on rating, maturity and future income when
compared to the expected yield for mortgages having similar characteristics.
The rating for mortgages in good standing are based on property type, location,
market conditions, occupancy, debt service coverage, loan to value, caliber of
tenancy, borrower and payment record. Fair values for impaired mortgage loan
are measured based either on the present value of expected future cash flows
discounted at the loan's effective interest rate, at the loan's observable
market price or the fair value of the collateral if the loan is collateral
dependent.
POLICY LOANS
The estimated fair value of investments in policy loans was calculated on a
composite discounted cash flow basis using Treasury interest rates consistent
with the maturity durations assumed. These durations were based on historical
experience.
OTHER INVESTMENTS, AND CASH AND INVESTED CASH
The carrying value for assets classified as other investments, and cash and
invested cash in the accompanying balance sheet approximates their fair value.
39
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
8. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
INVESTMENT TYPE INSURANCE CONTRACTS
The balance sheet captions, "Future Policy Benefits and Claims" and
"Contractholder Funds," include investment type insurance contracts (i.e.,
deposit contracts and guaranteed interest contracts). The fair values for the
deposit contracts and certain guaranteed interest contracts are based on their
approximate surrender values. The fair values for the remaining guaranteed
interest and similar contracts are based on their approximate surrender values.
The fair values for the remaining guaranteed interest and similar contracts are
estimated using discounted cash flow calculations based on interest rates
currently being offered on similar contracts with maturities consistent with
those remaining for the contracts being valued.
The remainder of the balance sheet captions "Future Policy Benefits and Claims"
and "Contractholder Funds," that do not fit the definition of "investment type
insurance contracts" are considered insurance contracts. Fair value disclosures
are not required for these insurance contracts and have not been determined by
the Company. It is the Company's position that the disclosure of the fair value
of these insurance contracts is important in that readers of these financial
statements could draw inappropriate conclusions about the Company's
shareholder's equity determined on a fair value basis if only the fair value of
assets and liabilities defined as financial instruments are disclosed. The
Company and other companies in the insurance industry are monitoring the related
actions of the various standard-setting bodies and attempting to determine an
appropriate methodology for estimating and disclosing the "fair value" of their
insurance contract liabilities.
SHORT-TERM AND LONG-TERM DEBT
Fair values for long-term debt issues are estimated using discounted cash flow
analysis based on the Company's current incremental borrowing rate for similar
types of borrowing arrangements. For short-term debt, the carrying value
approximates fair value.
40
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
8. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
GUARANTEES
The Company's guarantees include guarantees related to real estate partnerships
and mortgage loan pass-through certificates. Based on historical performance
where repurchases have been negligible and the current status, which indicates
none of the loans are delinquent, the fair value liability for the guarantees
related to the mortgage loan pass-through certificates is insignificant. Fair
values for all other guarantees are based on fees that would be charged
currently to enter into similar agreements, taking into consideration the
remaining terms of the agreements and the counterparties' credit standing.
DERIVATIVES
The Company's derivatives include interest rate cap agreements, spread-lock
agreements, foreign currency exchange contracts, financial futures contracts,
options on financial futures, interest rate swaps, United Kingdom forward swaps
and mortgage-backed securities total return swaps. Fair values for these
contracts is based on current settlement values. The current settlement values
are based on quoted market prices for the foreign currency exchange contracts
and financial future contracts, and options on financial futures, and on
brokerage quotes, which utilized pricing models or formulas using current
assumptions, for all other swaps and agreements.
INVESTMENT COMMITMENTS
Fair values for commitments to make investment in fixed maturity securities
(primarily private placements), mortgage loans on real estate and real estate
are based on the difference between the value of the committed investments as of
the date of the accompanying balance sheets and the commitment date, which would
take into account changes in interest rates, the counterparties' credit standing
and the remaining terms of the commitments.
41
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
8. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying values and estimated fair values of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1994 1993
-----------------------------------------------------------
CARRYING FAIR CARRYING FAIR
ASSETS (LIABILITIES) VALUE VALUE VALUE VALUE
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(000's omitted)
Fixed maturity securities $ 17,692,214 $ 17,692,214 $ 19,579,414 $ 19,579,414
Equity securities 456,333 456,333 426,363 426,363
Mortgage loans on real estate 2,795,914 2,720,580 3,238,965 3,403,913
Policy loans 528,731 508,079 569,646 600,093
Other investments 158,196 158,196 140,102 140,102
Cash and invested cash 990,880 990,880 590,315 590,315
Investment type
insurance contracts:
Deposit contracts and
certain guaranteed
interest contracts (14,294,713) (14,052,479) (12,517,166) (11,960,400)
Remaining guaranteed
interest and
similar contracts (2,485,473) (2,423,880) (2,419,500) (2,564,300)
Short-term debt (68,789) (68,789) (66,113) (66,113)
Long-term debt (200) (200) (5,721) (5,743)
Guarantees -- -- (1,804) (1,803)
Derivatives 19,392 30,503 24,367 13,011
Investment commitments -- (500) -- (2,433)
</TABLE>
As of December 31, 1994 and 1993, the carrying values of the deposit contracts
and certain guaranteed contracts are net of deferred acquisition costs of
$399,016,000 and $297,825,000, respectively. The carrying values of these
contracts are stated net of deferred acquisition costs in order that they be
comparable with the fair value basis.
42
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
9. SEGMENT INFORMATION
The Company has three major business segments: Life Insurance and Annuities,
Life-Health Reinsurance and Employee Life-Health Benefits. The Life Insurance
and Annuities segment offers universal life, pension products and other
individual coverages through a network of career agents, independent general
agencies and insurance agencies located within a variety of financial
institutions. Life-Health Reinsurance sells reinsurance products and services
to life insurance companies, HMOs, self-funded employers and other primary risk
accepting organizations in the U.S. and economically attractive international
markets. Prior to the sale of 100% of the ownership of its primary underwriter
of employee life-health benefit coverages in 1994 (see Note 10), the Employee
Life-Health Benefits segment distributed group life and health insurance,
managed health care and other related coverages through career agents and
independent general agencies. Activity which is not included in the major
business segments is shown as "Other Operations."
"Other Operations" includes miscellaneous property-casualty business and certain
other operations not directly related to business segments and unallocated
corporate items (i.e., corporate investment income, interest expense on
corporate debt and unallocated corporate overhead expenses). Prior to 1993, all
realized gain (loss) on investments were included in "Other Operations" and
corporate investment income was net of amounts allocated to the business
segments in lieu of realized gain (loss) on investments.
The revenue, pretax income and assets by segment for 1992 through 1994 are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
-------------------------------------
<S> <C> <C> <C>
(000's omitted)
Revenues:
Life Insurance and Annuities $2,065,324 $2,341,848 $2,078,239
Life-Health Reinsurance 660,418 610,698 580,541
Employee Life-Health Benefits 314,932 1,326,827 1,241,572
Other Operations 74,549 (28,770) 102,441
-------------------------------------
$3,115,223 $4,250,603 $4,002,793
=====================================
Income (loss) before income taxes and
cumulative effect of accounting change:
Life Insurance and Annuities $ 75,619 $ 265,319 $ 183,168
Life-Health Reinsurance 93,838 31,609 61,387
Employee Life-Health Benefits 22,905 82,944 62,907
Other Operations 67,836 (44,207) 93,501
-------------------------------------
$ 260,198 $ 335,665 $ 400,963
=====================================
</TABLE>
43
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
9. SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31
1994 1993 1992
---------------------------------------
<S> <C> <C> <C>
(000's omitted)
Assets:
Life Insurance and Annuities $37,675,970 $36,020,977 $29,178,157
Life-Health Reinsurance 2,311,499 2,328,954 1,774,084
Employee Life-Health Benefits -- 588,455 553,856
Other Operations 1,038,078 769,982 697,103
---------------------------------------
$41,025,547 $39,708,368 $32,203,200
=======================================
</TABLE>
Provisions for depreciation and capital additions were not material.
10. SALE OF SUBSIDIARIES
In December 1993, the Company recorded a provision for loss of $98,500,000 (also
$98,500,000, after-tax) in the "Other Operations" segment for the sale of
Security-Connecticut Life Insurance Company (Security-Connecticut). The sale
was completed on February 2, 1994 through an initial public offering and the
Company received cash and notes, net of related expenses, totaling $237,700,000.
The loss on sale and disposal expenses did not differ materially from the
estimate recorded in the fourth quarter of 1993. For the years ended December
31, 1993 and 1992, Security-Connecticut, which operated in the Life Insurance
and Annuities segment, had revenues of $274,500,000 and $252,400,000,
respectively and net income of $24,000,000 and $26,200,000, respectively. As of
December 31, 1993, Security-Connecticut had assets of $1,830,600,000 and
liabilities of $1,504,900,000.
In 1994, the Company completed the sale of 100% of the common stock of EMPHESYS
(parent company of Employers Health Insurance Company, which comprised the
Employee Life-Health Benefits segment) $348,200,000 of cash, net of related
expenses, and a $50,000,000 promissory note. LNC retained 29% ownership of
EMPHESYS. A gain on sale of $68,954,000 (also $68,954,000 pretax) was
recognized in 1994 in "Other Operations". For the years ended December 31, 1993
and 1992, EMPHESYS had revenues of $1,304,700,000 and $1,247,600,000, and net
income of $55,300,000 and $43,900,000, respectively. EMPHESYS had revenues and
net income of $314,900,000 and $14,400,000, respectively, during the three
months of ownership in 1994. As of December 31, 1993, Employers Health had
assets of $793,700,000 and liabilities of $453,400,000.
44
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
11. SUBSEQUENT EVENTS
On February 13, 1995, the Company declared a dividend of $310,000,000 payable to
LNC. Approximately $195,000,000 of this amount is subject to approval by the
Indiana Department of Insurance.
12. TRANSACTIONS WITH AFFILIATES
A wholly owned subsidiary of LNC, Lincoln Financial Group, Inc. (LFGI), has a
nearly exclusive general agents contract with the Company under which it sells
the Company's products and provides the service that otherwise would be provided
by a home office marketing department and regional offices. For providing these
selling and marketing services, the Company paid LFGI override commissions and
operating expense allowances of $78,485,000, $74,514,000 and $65,640,000 in
1994, 1993 and 1992, respectively.
Cash and invested cash at December 31, 1994 and 1993 include the Company's
participation in a short-term investment pool with LNC of $428,312,000 and
$177,245,000, respectively. Related investment income amounted to $17,149,000,
$9,054,000 and $9,490,000 in 1994, 1993 and 1992, respectively. Short-term debt
at December 31, 1994 and 1993 includes $68,589,000 and $64,775,000,
respectively, borrowed from LNC. The Company paid interest to LNC of $8,000,
$137,000 and $365,000 in 1994, 1993 and 1992, respectively.
The Company provides services to and receives services from affiliated companies
which resulted in a net receipt (payment) of $13,883,000, $18,865,000 and
$(60,987,000) in 1994, 1993 and 1992, respectively.
45
<PAGE>
FINANCIAL SCHEDULES
The following consolidated financial statement schedules of The Lincoln
National Life Insurance Company and subsidiaries are included on Pages B-39
through B-43:
I--Summary of Investments--Other than Investments in Related Parties--
December 31, 1994
III--Supplementary Insurance Information--Years ended December 31, 1994,
1993 and 1992
IV--Reinsurance--Years ended December 31, 1994, 1993 and 1992
V--Valuation and Qualifying Accounts--Years ended December 31, 1994, 1993
and 1992
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions, are inapplicable, or the required information is included
in the consolidated financial statements, and therefore have been omitted.
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
Schedule I - Summary of Investments - Other Than Investments in Related Parties
December 31, 1994
(000's omitted)
<TABLE>
<CAPTION>
Column A Column B Column C Column D
---------------------------------------------------- ---------- ---------- -------------
Amount at
Which Shown
in the
Type of Investment Cost Value Balance Sheet
------------------ ----------- ---------- -------------
<S> <C> <C> <C>
Fixed maturity securities available-for-sale:
Bonds:
United States Government and government agencies
and authorities................................. $ 1,048,404 $1,029,785 $ 1,029,785
States, municipalities and political
subdivisions.................................... 16,297 16,658 16,658
Mortgage-backed securities........................ 5,017,332 4,913,472 4,913,472
Foreign governments............................... 541,179 533,325 533,325
Public utilities.................................. 2,622,718 2,500,127 2,500,127
Convertibles and bonds with warrants attached..... 115,539 117,591 117,591
All other corporate bonds......................... 8,781,042 8,530,502 8,530,502
Redeemable preferred stocks......................... 51,417 50,754 50,754
----------- ---------- -----------
Total fixed maturity securities....................... 18,193,928 17,692,214 17,692,214
Equity securities available-for-sale:
Common stocks:
Public utilities.................................. 11,244 12,155 12,155
Banks, trusts, and insurance companies............ 23,531 25,284 25,284
Industrial, miscellaneous and all other........... 299,899 335,683 335,683
Nonredeemable preferred stocks...................... 81,677 83,211 83,211
----------- ---------- -----------
Total equity securities............................... 416,351 456,333 456,333
Mortgage loans on real estate......................... 2,852,528 2,795,914 (A)
Real estate:
Investment properties............................... 544,532 544,532
Acquired in satisfaction of debt.................... 199,660 134,980 (A)
Policy loans.......................................... 528,731 528,731
Other investments..................................... 171,688 158,196 (A)
----------- -----------
Total investments................................... $22,907,418 $22,310,900
=========== ===========
</TABLE>
(A) Investments which are deemed to have declines in value that are other than
temporary are written down or reserved for to reduce their carrying value to
their estimated realizable value.
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
Schedule III - Supplementary Insurance Information
(000's omitted)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
---------------------------------------------- ----------- ------------- ------------ ---------- -----------
Future Policy Other
Benefits, Policy
Deferred Claims Claims and
Acquisition and Claim Unearned Benefits Premium
Segment Costs Expenses (A) Premiums (A) Payable Revenue (B)
---------------------------------------------- ----------- ------------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994:
Life Insurance and Annuities................ $1,427,692 $5,888,581 $11,201 $ -- $ 647,416
Life-Health Reinsurance..................... 304,913 1,626,033 51,618 -- 542,034
Employee Life-Health Benefits (D)........... -- -- -- -- $ 299,338
Other (including
consolidating adjustments)................ 3,921 26,158 (1,347) -- 1,076
---------- ---------- ------- ---------- ----------
Total....................................... $1,736,526 $7,540,772 $61,472 $ -- $1,489,864
========== ========== ======= ========== ==========
Year ended December 31, 1993:
Life Insurance and Annuities................ $ 999,126 $6,782,207 $ 5,188 $ -- $ 662,353
Life-Health Reinsurance..................... 298,787 1,616,088 54,157 -- 491,397
Employee Life-Health Benefits............... -- 228,892 -- -- 1,243,576
Other (including
consolidating adjustments)................ -- 171,043 315 -- 387
---------- ---------- ------- ---------- ----------
Total....................................... $1,297,913 $8,798,230 $59,660 $ -- $2,397,713
========== ========== ======= ========== ==========
Year ended December 31, 1992:
Life Insurance and Annuities................ $1,314,586 $6,245,514 $ 4,586 $ -- $ 572,163
Life-Health Reinsurance..................... 307,838 1,148,012 43,298 -- 466,264
Employee Life-Health Benefits............... -- 269,045 13 -- $1,184,183
Other (including
consolidating adjustments)................ 5,275 79,679 5 -- 268
---------- ---------- ------- ---------- ----------
Total....................................... $1,627,699 $7,742,250 $47,902 $ -- $2,222,878
========== ========== ======= ========== ==========
</TABLE>
(A) Following the adoption of FAS 113 in 1993, the 1993 and 1994 amounts are
presented on a gross-of-reinsurance basis; the 1992 amounts are presented on
a net-of-reinsurance basis.
(B) Includes insurance fees on universal life and other interest sensitive
products.
(C) The allocation of expenses between investments and other operations are
based on a number of assumptions and estimates. Results would change if
different methods were applied.
(D) Includes data through the March 21, 1994 date of sale of the direct writer
of employee life-health coverages.
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
Schedule III - Supplementary Insurance Information (continued)
(000's omitted)
<TABLE>
<CAPTION>
Column A Column G Column H Column I Column J Column K
------------------------------------ ---------- ---------- ------------ ------------ --------
Benefits,
Claims, Amortization
Net and of Deferred Other
Investment Claim Acquisition Operating Premiums
Segment Income (C) Expenses Costs Expenses (C) Written
------------------------------------- ---------- ---------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994:
Life Insurance and Annuities....... $1,542,552 $1,554,479 $ 85,697 $349,529 $ --
Life-Health Reinsurance............ 116,957 419,266 29,477 117,238 --
Employee Life-Health Benefits (D).. 10,838 218,672 -- 73,355 --
Other (including
consolidating adjustments)....... 3,634 1,630 -- 5,682 --
---------- ---------- -------- -------- --------
Total.............................. $1,673,981 $2,194,047 $115,174 $545,804 $ --
========== ========== ======== ======== ========
Year ended December 31, 1993:
Life Insurance and Annuities....... $1,676,163 $1,615,883 $197,363 $268,066 $ --
Life-Health Reinsurance............ 115,582 467,824 38,351 72,840 --
Employee Life-Health Benefits...... 54,513 943,235 -- 300,648 --
Other (including
consolidating adjustments)....... (22,799) 6,197 5,275 (840) --
---------- ---------- -------- -------- --------
Total.............................. $1,823,459 $3,033,139 $240,989 $640,714 $ --
========== ========== ======== ======== ========
Year ended December 31, 1992:
Life Insurance and Annuities....... $1,496,666 $1,542,268 $152,811 $201,437 $ --
Life-Health Reinsurance............ 105,649 374,278 23,819 120,922 --
Employee Life-Health Benefits...... 37,716 902,095 -- 276,569 --
Other (including
consolidating adjustments)....... 10,793 6,737 9,621 (9,141) --
---------- ---------- -------- -------- --------
Total.............................. $1,650,824 $2,825,378 $186,251 $589,787 $ --
========== ========== ======== ======== ========
</TABLE>
-------------
(C) The allocation of expenses between investments and other operations are
based on a number of assumptions and estimates. Results would change if
different methods were applied.
(D) Includes data through the March 21, 1994 date of sale of the direct writer
of employee life-health coverages.
<PAGE>
<TABLE>
<CAPTION>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
Schedule IV - Reinsurance (A)
(000's omitted)
Column A Column B Column C Column D Column E Column F
---------------------------- ------------ ----------- ------------ ------------ -----------
Percentage
Ceded Assumed of Amount
Gross to Other from Other Net Assumed
Amount Companies Companies Amount to Net
------------ ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994:
Life insurance in force... $ 79,802,000 $45,822,000 $125,640,000 $159,620,000 78.7%
Premiums:
Health insurance........ $ 666,609 $ 496,090 $ 359,659 $ 530,178 67.8%
Life insurance (B)...... 626,591 220,678 553,773 959,686 57.7%
------------ ----------- ------------ ------------
Total..................... $ 1,293,200 $ 716,768 $ 913,432 $ 1,489,864
============ =========== ============ ============
Year ended December 31, 1993:
Life insurance in force... $135,401,000 $61,401,000 $109,257,000 $183,257,000 59.6%
Premiums:
Health insurance........ $ 1,387,414 $ 217,705 $ 262,171 $ 1,431,880 18.3%
Life insurance (B)...... 771,408 350,907 545,332 965,833 56.5%
------------ ----------- ------------ ------------
Total..................... $ 2,158,822 $ 568,612 $ 807,503 $ 2,397,713
============ =========== ============ ============
Year ended December 31, 1992:
Life insurance in force... $122,358,000 $57,897,000 $106,619,000 $171,080,000 62.3%
Premiums:
Health insurance........ $ 1,274,609 $ 204,988 $ 317,126 $ 1,386,747 22.9%
Life insurance (B)...... 661,954 415,990 590,167 836,131 70.6%
------------ ----------- ------------ ------------
Total..................... $ 1,936,563 $ 620,978 $ 907,293 $ 2,222,878
============ =========== ============ ============
(A) Special-purpose bulk reinsurance transactions have been excluded.
(B) Includes insurance fees on universal life and other interest sensitive products.
</TABLE>
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
Schedule V - Valuation and Qualifying Accounts
(000's omitted)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
------------------------------------------------ --------- ----------- ----------- ----------
Additions
(1) (2)
Charged to
Balance at Charged to Other Balance at
Beginning Costs & Accounts- Deductions- End of
Description Of Period Expenses Describe(A) Describe(B) Period
------------------------------------------------ ---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994:
Deducted from Asset Accounts:
Reserve for Mortgage Loans on Real Estate... $220,671 $19,464 $ -- ($183,521) $56,614
Reserve for Real Estate..................... 121,427 13,058 -- (69,299) 65,186
Reserve for Other Long-term
Investments............................... 26,730 262 -- (13,500) 13,492
Included in Other Liabilities:
Investment Guarantees....................... 1,804 4,280 -- (6,084) --
Year ended December 31, 1993:
Deducted from Asset Accounts:
Reserve for Mortgage Loans on Real Estate... $129,093 $136,717 $ -- ($45,139) $220,671
Reserve for Real Estate..................... 114,178 21,776 -- (14,527) 121,427
Reserve for Other Long-term
Investments............................... 31,582 3,905 -- (8,757) 26,730
Included in Other Liabilities:
Investment Guarantees....................... 12,550 1,674 -- (12,420) 1,804
Year ended December 31, 1992:
Deducted from Asset Accounts:
Reserve for Mortgage Loans on Real Estate... $68,437 $90,183 ($22,540) ($6,987) $129,093
Reserve for Real Estate..................... 80,025 31,127 22,540 (19,514) 114,178
Reserve for Other Long-term Investments..... 15,830 18,206 -- (2,454) 31,582
Included in Other Liabilities:
Investment Guarantees....................... 6,850 5,700 -- -- 12,550
(A) Transfer between investment classifications.
(B) Deductions reflect sales or foreclosures of the underlying holding.
</TABLE>
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP]
Report of Ernst & Young LLP, Independent Auditors
Board of Directors
The Lincoln National Life Insurance Company
We have audited the accompanying consolidated balance sheets of The Lincoln
National Life Insurance Company (a wholly owned subsidiary of Lincoln National
Corporation) as of December 31, 1994 and 1993, and the related consolidated
statements of income, shareholder's equity, and cash flows for each of the three
years in the period ended December 31, 1994. Our audits also included the
financial statement schedules listed on B-38. These financial statements and
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedules based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Lincoln
National Life Insurance Company at December 31, 1994 and 1993, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic financial
statements as a whole, present fairly, in all material respects, the information
set forth therein.
As discussed in Note 2 to the consolidated financial statements, in 1993 the
Company changed its method of accounting for postretirement benefits other than
pensions, accounting for impairment of loans, and accounting for certain
investments in debt and equity securities.
/s/Ernst & Young LLP
February 8, 1995, except for
Note 11, as to which the
date is February 13, 1995
1
<PAGE>
PART C -- OTHER INFORMATION
Item 15. Indemnification
---------------
Current information regarding indemnification provisions relating to
Fund A is incorporated by reference herein to post-effective amendment
No. 30 to Fund A's Registration Statement on Form N-1 (File No.
2-25618) filed with the Securities and Exchange Commission on
December 20, 1979 and post-effective amendment No. 36 to Fund A's
Registration Statement on Form N-3 (File No. 2-26348) filed with the
Securities and Exchange Commission on April 28, 1988.
Item 16. Exhibits
--------
(1) Resolution of the Lincoln National Life Insurance Company Board of
Directors establishing Fund A
(2) Fund A -- Rules and Regulations
(3) Not applicable
(4) Agreement and Plan of Reorganization -- Included as Exhibit A to
the Prospectus/Proxy Statement
(5) Fund A Annuity Contract Form Rider to be issued to Fund B Annuity
Contract Owners
(6) Investment Management Services Agreement -- Incorporated herein by
reference to pre-effective amendment No. 2 to Fund A's
Registration Statement on Form N-8b-1 (File No. 2-25618) filed
with the Securities and Exchange Commission on October 13, 1966.
Sub-advisory Agreement -- Incorporated herein by reference to
post-effective amendment No. 1 to Fund A's Registration Statement
on Form N-8b-1 (File No. 2-25618) filed with the Securities and
Exchange Commission on October 27, 1967.
(7) Underwriting Agreement -- Incorporated herein by reference to
[pre]post-effective amendment No. 30 to Fund A's Registration
Statement on Form N-1 (File No. 2-25618) filed with the
Securities and Exchange Commission on December 20, 1979.
(8) Not applicable
(9) Custodian Agreement -- Incorporated herein by reference to pre-
effective amendment No. 2 to Fund A's Registration Statement on
Form N-8b-1 (File No. 2-25618) filed with the Securities and
Exchange Commission on October 13, 1966.
<PAGE>
(10) Not applicable
(11) Opinion and consent of counsel as to the legality of the
securities
(12) Opinion and consent of counsel supporting tax matters
(13) Not applicable
(14) Opinion and consent of independent auditors
(15) Not applicable
(16) Not applicable
(17) Proxy Cards
(99) Financial Data Schedules for Fund A, Fund B and the Lincoln
National Life Insurance Company
Item 17 Undertakings
------------
(1) The undersigned registrant agrees that prior to any public
reoffering of the securities registered through the use of a
prospectus which is part of this registration statement by any
person or party who is deemed to be an underwriter within the
meaning of rule 145(c) under the Securities Act of 1933, the
reoffering prospectus will contain the information called for by
the applicable registration form for reofferings by persons who
may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(2) The undersigned registrant agrees that every prospectus that is
filed under paragraph (1) above will be filed as a part of an
amendment to the registration statement and will not be used until
the amendment is effective, and that, in determining any liability
under the Securities Act of 1933, each post-effective amendment
shall be deemed to be a new registration statement for the
securities offered therein, and the offering of the securities at
that time shall be deemed to be the initial bona fide offering of
them.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this registration statement has
been signed on behalf of the registrant, in the City of Fort Wayne and State of
Indiana on the 16th day of May, 1995.
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
By: /S/ KELLY D. CLEVENGER
------------------------
Kelly D. Clevenger
Vice President
As required by the Securities Act of 1933, this registration statement has been
signed by the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/S/ ROBERT A. ANKER Chairman, Chief May 16, 1995
------------------------- Executive Officer and
Robert A. Anker Director (Principal
Executive Officer)
/S/ JON A. BOSCIA President, Chief Operating May 16, 1995
------------------------- Officer and Director
Jon A. Boscia
/S/ O DOUGLAS WORTHINGTON Vice President, May 16, 1995
------------------------- Controller, and
O. Douglas Worthington Assistant Treasurer
(Principal Financial
and Accounting
Officer)
/S/ H THOMAS MCMEEKIN Executive Vice President May 16, 1995
------------------------- and Director
H. Thomas McMeekin
/S/ IAN M. ROLLAND Director May 16, 1995
-------------------------
Ian M. Rolland
</TABLE>
3
<PAGE>
<TABLE>
<S> <C> <C>
Executive Vice President _________ __, 1995
------------------------- and Director
Gabriel L. Shaheen
/S/ RICHARD C. VAUGHAN Director May 16, 1995
-------------------------
Richard C. Vaughan
/S/ JACK D. HUNTER Executive Vice President May 16, 1995
------------------------- General Counsel and
Jack D. Hunter Director
</TABLE>
4
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this registration statement has
been signed on behalf of the registrant, in the City of Fort Wayne and State of
Indiana on the 18th day of May, 1995.
LINCOLN NATIONAL VARIABLE ANNUITY FUND A
By: /S/ NANCY L. FRISBY
-------------------------
Nancy L. Frisby, Chairperson
Board of Managers
As required by the Securities Act of 1933, this registration statement has been
signed by the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/S/ NANCY L. FRISBY Chairperson and May 18, 1995
------------------------- Member of the Board
Nancy L. Frisby (Principal Executive Officer)
/S/ JOHN B BORSCH, JR Member of the Board May 18, 1995
-------------------------
John B. Borsch, Jr.
/S/ STANLEY R. NELSON Member of the Board May 18, 1995
-------------------------
Stanley R. Nelson
/S/ MAX A. ROESLER Vice President and May 18, 1995
------------------------- Treasurer (Principal
Max A. Roesler Financial Officer)
/S/ CYNTHIA A. ROSE Secretary to the May 18, 1995
------------------------- Board of Managers
Cynthia A. Rose
/S/ LANTZ M. MINTCH Principal Accounting May 23, 1995
------------------------- Officer
Lantz M. Mintch
</TABLE>
5
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this registration statement has
been signed on behalf of the registrant, in the City of Fort Wayne and State of
Indiana on the 18th day of May, 1995.
LINCOLN NATIONAL VARIABLE ANNUITY FUND B
By: /S/ NANCY L. FRISBY
-----------------------------
Nancy L. Frisby, Chairperson
Board of Managers
As required by the Securities Act of 1933, this registration statement has been
signed by the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/S/ NANCY L. FRISBY Chairperson and May 18, 1995
------------------------- Member of the Board
Nancy L. Frisby (Principal Executive Officer)
/S/ JOHN B. BORSCH, JR. Member of the Board May 18, 1995
-------------------------
John B. Borsch, Jr.
/S/ STANLEY R. NELSON Member of the Board May 18, 1995
-------------------------
Stanley R. Nelson
/S/ MAX A. ROESLER Vice President and May 18, 1995
------------------------- Treasurer (Principal
Max A. Roesler Financial Officer)
/S/ CYNTHIA A. ROSE Secretary to the May 18, 1995
------------------------- Board of Managers
Cynthia A. Rose
/S/ LANTZ M. MINTCH Principal Accounting May 23, 1995
------------------------- Officer
Lantz M. Mintch
</TABLE>
6
<PAGE>
Part C Exhibit Number
1. Resolution of the Lincoln National Life Insurance Company Board of
Directors establishing Fund A
2. Fund A Rules and Regulations
5. Fund A Annuity Contract Form Rider to be issued to Fund B Annuity Contract
Owners
11. Opinion and consent of counsel as to the legality of the securities
12. Opinion and consent of counsel supporting tax matters
14. Opinion and consent of independent auditors
17. Proxy Cards
99. Financial Data Schedules for Fund A, Fund B and the Lincoln National Life
Insurance Company
7
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
THE BOARD OF DIRECTORS
RESOLUTIONS ON VARIABLE ANNUITIES
ADOPTED SEPTEMBER 16, 1966
The Company proposes to issue variable annuity contracts by means of a
segregated investment account and to act as sponsor, investment advisor and
underwriter of the segregated investment account.
NOW, THEREFORE, BE IT RESOLVED:
A. That the Company hereby establishes a segregated investment
account in accordance with the provisions of Section 59 of an Act of
the Legislature of the State of Indiana entitled "An Act concerning
insurance, and declaring an emergency", approved March 8, 1935, as
amended.
B. That the segregated investment account be registered as an
investment company under the Investment Company Act of 1940, as
amended, and application be made for the exemptions from such
provisions of that Act as may be desirable.
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY FUND A
FORT WAYNE, INDIANA
------------------------
RULES AND REGULATIONS
(Amended January 24, 1989)
ARTICLE I
GENERAL
SECTION 1. Name. The name of this segregated investment account
shall be Lincoln National Variable Annuity Fund A ("Fund").
SECTION 2. Offices. The principal office of the Fund shall be at
1300 South Clinton Street, Fort Wayne, Indiana 46801. (Amended February 15,
1978)
SECTION 3. Purposes. The purposes of the Fund are to provide in
accordance with the provisions of Section 59 of an Act of the Legislature of the
State of Indiana entitled "An Act concerning insurance, and declaring an
emergency", approved March 8, 1935, as amended, a segregated investment account
for the assets set aside separate and apart for the sole benefit of the annuity
contracts (a) sold by The Lincoln National Life Insurance Company ("The
Lincoln") and (b) designated by The Lincoln as contracts for which reserves
shall be maintained in the Fund ("Contracts").
ARTICLE II
VARIABLE ANNUITY CONTRACT OWNERS
SECTION 1. Annual Meeting. (a) The annual meeting of the persons
holding the Contracts ("Contract Owners") [if such meeting be held] shall be
held at such hour and on such date (before May 31 in each year) as the Board of
Managers may select in each year, for the purpose of electing a Board of
Managers and for the transaction of such other business as
-1-
<PAGE>
may properly come before the meeting. If such date is a legal holiday in any
year, then the annual meeting shall be held on the next succeeding full business
day. All meetings shall be held at the principal office of the Fund, or at such
other place as the Board of Managers may determine.
(b) Upon the affirmative vote of a majority of the whole Board of
Managers, the annual meeting may be dispensed with in any year in which none of
the following is required to be acted upon by Contract Owners pursuant to the
Investment Company Act of 1940:
i. Election of Board of Managers;
ii. Approval of an investment advisory
agreement;
iii. Ratification of the selection of
independent public accountants; and
iv. Approval of a distribution agreement.
(Last amended January 24, 1989)
SECTION 2. Special Meetings. Special meetings of the Contract Owners
may be called by a majority of the Board of Managers. The notice of the meeting
shall state the purpose of the meeting and no business shall be transacted at
the meeting except matters coming into such purpose. All special meetings of
the Contract Owners shall be held at the principal office of the Fund or at such
other place as may be determined by the Board of Managers, at the time and place
stated in the notice of the meeting.
Special meetings of the Contract Owners shall be called for the
purpose of removing one or more Members of the Board of Managers when requested
by Participants holding the requisite number of shares of beneficial interest in
the Fund pursuant to Section 16(c) of the Investment Company Act of 1940.
Whenever Participants apply to the Board for assistance in communicating with
the other Participants for this purpose, the Board shall facilitate that
communication pursuant to that Section 16(c).
Should the Board of Managers change the independent public accountant
for the Fund, a meeting of Contract Owners shall be called by the Board for the
purpose of ratifying or rejecting the selection of the new accountant. (Amended
January 24, 1989)
SECTION 3. Notice of Meeting. A written or printed notice stating
the place, day and hour of the meeting, and in case of a special meeting, the
purpose or purposes for which the meeting is called, shall be given to each
Contract Owner and to each participating employee under a Contract
-2-
<PAGE>
("Participant") who is entitled pursuant to SECTION 6 of this Article II to
instruct a Contract Owner with respect to votes. Such notice shall be deemed
given when mailed, postage prepaid, as of a date within 90 days (but not less
than 20 days) prior to the date of the meeting and addressed to the Contract
Owners and Participants at the addresses of such persons as are carried on the
records of The Lincoln.
SECTION 4. Quorum. Contract Owners entitled to cast twenty-five
percent of the votes which may be cast for all Participants in accordance with
SECTION 6 of this ARTICLE II, shall constitute a quorum for the transaction of
business at any annual or special meeting of the Contract Owners. If a quorum
shall not be present, Contract Owners entitled to cast a majority of the votes
represented at the meeting may adjourn the meeting to some later time. When a
quorum is present, the vote of a majority of the votes represented in person or
by proxy shall determine any question except as may be otherwise provided by
these Rules and Regulations or by law. (Amended February 15, 1978)
SECTION 5. Proxies. A Contract Owner may vote either in person or by
proxy duly executed in writing by the Contract Owner. A proxy for any meeting
shall be valid for any adjournment of such meeting.
SECTION 6. Voting. The number of votes which a Contract Owner may
cast for Participants under a Group Variable Annuity Contract or a Group
Retirement Annuity Contract in the accumulation period is equal to the number of
accumulation units under the Contract. For Participants receiving annuity
payments, the Contract Owner of a Group Variable Annuity Contract may cast the
number of votes equal to (i) the amount of the assets established in the Fund to
meet the annuity obligations related to such Participants divided by (ii) the
value of an accumulation unit. For Participants receiving annuity payments, the
Contract Owner of a Group Retirement Annuity Contract is not entitled to cast
any votes. The number of votes which a Contract Owner of an Individual Variable
Annuity Contract or an Individual Retirement Annuity Contract in the
accumulation period may cast is equal to the number of accumulation units under
the contract. In the annuity period, the Contract Owner of an Individual
Variable Annuity Contract may cast the number of votes equal to (i) the amount
of assets established in the Fund to meet the annuity obligations related to
such contract divided by (ii) the value of an accumulation unit. In the annuity
period, a Contract Owner of an Individual Retirement Annuity Contract is not
entitled to cast any votes. Fractional votes shall be counted but each Contract
Owner shall have at least one vote.
-3-
<PAGE>
The number of votes which each Contract Owner may cast shall be
determined as of a date, to be chosen by the Board of Managers, within 90 days
of the date of the meeting. To be entitled to vote, a Contract Owner must have
been an Owner on both the date as of which the number of votes was determined
and the date of the written notice of the meeting.
During the accumulation period, a Participant under a Group Variable
Annuity Contract or a Group Retirement Annuity Contract will have the right to
instruct the Contract Owner with respect to the votes attributable to his
individual account.
During the annuity period, a Participant under a Group Variable
Annuity Contract or an employee under an Individual Variable Annuity Contract
will have the right to instruct the Contract Owner with respect to the votes
attributable to the amount of the assets established in the Fund to meet the
annuity obligations to such Participant or employee. Each Contract Owner and
each employee and Participant having the right to instruct a Contract Owner with
respect to any votes will be sent all proxy materials.
Contract Owners shall cast the votes for which instructions have been
received in accordance with such instructions. All votes for which instructions
have not been received (other than those as to which no employee or Participant
is entitled to give instructions) shall be cast in the same proportions as those
for which instructions were received. Votes as to which no employee or
Participant is entitled to give instructions shall be cast in the sole
discretion of the Contract Owner.
SECTION 7. Order of Business. The order of business at the meetings
of the Contract Owners shall be determined by the presiding officer to
accomplish the purpose or purposes of the meeting.
SECTION 8. Inspectors. At each meeting of the Contract Owners the
polls shall be opened and closed, the proxies and ballots shall be received and
be taken in charge, and all questions touching the qualification of voters or
the validity of proxies and the acceptance or rejection of votes shall be
decided by three inspectors. Such inspectors, who need not be Contract Owners,
shall be appointed by the Board of Managers before the meeting, or if no such
appointment shall have been made, then by the presiding officer of the meeting.
In the event of failure, refusal or inability of any inspector previously
appointed to serve, the presiding officer may appoint any person to fill such
vacancy.
-4-
<PAGE>
ARTICLE III
BOARD OF MANAGERS
SECTION 1. Composition. The Board of Managers shall consist of not
less than three nor more than seventeen Members. The initial Board of Managers
and Chairman thereof and the Secretary thereto (see SECTION 6) shall be
appointed as provided by a resolution of the Board of Directors of The Lincoln
adopted December 1, 1966. Thereafter, the Members of the Board of Managers
shall be elected and shall serve until their successors are duly elected and
qualified. (Last amended January 24, 1989)
SECTION 2. Powers. The Board of Managers shall have the following
duties, responsibilities and powers:
a. To select and approve an independent public accountant whose employment
shall be approved by the Contract Owners when required by law;
(Amended January 24, 1989)
b. To approve annually an agreement providing for sales and administrative
services;
c. To approve annually an agreement providing for investment management
services. Such agreements as initially adopted, and any amendments
thereto shall be subject to approval by Contract Owners casting a
majority of the votes which may be cast by all Contract Owners in
accordance with SECTION 6 of ARTICLE II;
d. To recommend from time to time any changes deemed appropriate in the
fundamental investment policy of the Fund, to be submitted to the
Contract Owners at their next meeting;
e. To authorize investment programs for the Fund in accordance with the
investment objectives and policies of the Fund.
SECTION 3. Committees. The Board of Managers may elect by vote of a
majority of the whole Board which majority shall include a majority of the
Members who are not affiliated with The Lincoln, two or more of its Members to
constitute an Executive Committee which committee shall have and may exercise
when the Board is not in session, any or all powers of the Board of Managers in
the management of the business and affairs of the Fund.
-5-
<PAGE>
The Board of Managers may elect by a majority of the whole Board, two
or more of its number to constitute an Investment Committee, which committee
shall approve all investment transactions relative to the Fund.
The Board of Managers likewise may appoint from their number other
committees from time to time, the number (not less than two) composing such
committees, and the functions to be performed by the same to be determined by
the vote of the Board of Managers.
Each committee may make rules for the notice and conduct of its
meetings and the keeping of the records thereof. The term of any member of any
committee shall be fixed by the Board of Managers, but no member of a committee
shall hold office for more than one year unless reappointed by the Board of
Managers. (Amended January 24, 1989)
SECTION 4. Meetings. Regular meetings of the Board of Managers shall
be held at such places within or without the State of Indiana, and at such times
as the Board, by vote, may determine from time to time, and if so determined, no
call or notice thereof need be given except that at least two days' notice shall
be given of the first regular meeting following a change in the date of regular
meetings. Special meetings of the Board may be held at any time or place,
whenever called by the Chairman of the Board of Managers, or three or more
Members of the Board of Managers. Notice thereof shall be given to each Member
by the person calling the meeting, unless all Members are present or unless
those not present shall have waived notice thereof in writing prior to such
meeting which waivers shall be filed with the records of the meeting. Notice of
special meetings stating the time and place thereof shall be given by mail to
each Member at his residence or business address at least two days before the
meeting, or by delivering or telephoning the same to him personally or by
telegramming the same to him at his residence or business address at least one
day before the meeting; provided, that the Chairman of the Board of Managers may
prescribe a shorter notice to be given personally or by telephone or telegram to
each Member at his residence or business address. The Chairman of the Board of
Managers shall preside at all meetings of the Board of Managers at which he is
present.
SECTION 5. Quorum. A majority of the Members of the Board of
Managers shall constitute a quorum for the transaction of business. When a
quorum is present at any meeting, a majority of the Members present shall decide
any question brought before such meeting except as otherwise provided by law, or
by these Rules and Regulations.
-6-
<PAGE>
SECTION 6. Chairman of, and Secretary to the Board of Managers. At
the first meeting of the Board of Managers and annually thereafter, the Board of
Managers shall elect one of its Members to act as Chairman of The Board of
Managers, and he shall hold office until his successor is elected and qualified.
(Amended January 24, 1989)
The Board of Managers may appoint a Secretary to the Board, who need
not be a member of the Board. The Secretary shall have the power to certify the
minutes of the proceedings of the Contract Owners and the Board of Managers and
portions thereof and shall perform such other duties and have such other powers
as the Board of Managers shall designate from time to time. In the absence of a
Secretary, a temporary Secretary shall perform such duties and have such powers.
SECTION 7. Resignations and Removals. Any Member of the Board of
Managers, the Chairman, or the Secretary may resign their membership or office
at any time by mailing or delivering his resignation in writing to the Chairman
of the Board of Managers or to a meeting of the Board of Managers. Any Member
of any committee may resign as aforesaid or by delivering his resignation in
writing to the committee from which he wishes to resign or to the Chairman
thereof. Contract Owners may, at any meeting called for the purpose, remove any
Member of the Board of Managers or the Secretary. A Member of the Board of
Managers may be thus removed by vote of Contract Owners casting no less than two
thirds of the votes which may be cast by all Participants in accordance with
SECTION 6 of ARTICLE II; the same requirements apply for removal of the
Secretary, except that the vote must be by Contract Owners casting at least a
majority of the votes which may be cast. The Board of Managers may, by vote of
a majority of the Members then in office, remove the Chairman and/or the
Secretary from their offices. No Member of the Board of Managers, the Chairman
or a Secretary who resigns and no Member, the Chairman or a Secretary who is
removed shall have any right to any compensation as such Member, Chairman, or
Secretary for any period following his resignation or removal, or any right to
damages on account of such removal (except where a right to receive compensation
for a definite future period shall be expressly provided in a written agreement
duly approved by the Board of Managers). Any such resignation shall take effect
at the time specified therein or, if the time be not specified, upon acceptance
thereof by the Board of Managers. (Amended January 24, 1989)
SECTION 8. Vacancies. Vacancies occurring by reason of death,
resignation, or otherwise (except removal) of duly elected Members of the Board
of Managers occurring between meetings of the Contract Owners may be filled for
any
-7-
<PAGE>
unexpired term by a majority vote of all the remaining Members if immediately
after so filling any such vacancy at least two-thirds of the Members then
holding office shall have been elected to such office by ballot of the Contract
Owners at an annual or special meeting. (Amended January 24, 1989)
In the event that at any time after the first annual meeting of the
Contract Owners, less than a majority of the Members holding office at that time
have been so elected by a ballot of the Contract Owners, the Board of Managers
shall forthwith cause to be held as promptly as possible (and in any event
within sixty days) a meeting of the Contract Owners for the purpose of electing
Members to fill the existing vacancies in the Board of Managers. The Board of
Managers shall have and may exercise all its powers notwithstanding the
existence of one or more vacancies in its number as fixed by the Contract
Owners, provided there be at least two Members in office. If the office of any
Member of the Executive Committee, Investment or any other committee, or the
Chairman of the Board of Managers or the Secretary becomes vacant, the Board of
Managers may elect a successor by vote of a majority of the Members then in
office. Each such successor shall hold office for the unexpired term and until
his successor shall be elected or appointed and qualified, or until he sooner
dies, resigns, is removed or becomes disqualified.
The Contract Owners, at any meeting called for the purpose, may, with
or without cause, remove any Manager or the Secretary by the affirmative vote of
not less than two-thirds of the outstanding votes which may be cast by all
Participants which are entitled to be represented at such meeting. (Amended
January 24, 1989)
The Contract Owners may, at any meeting called for the purpose, fill
the vacancy in the Board thus caused, by the affirmative vote of a majority of
the outstanding votes
-8-
<PAGE>
which may be cast for all Participants entitled to be represented at such
meeting. (Amended January 24, 1989)
Notwithstanding anything in these Rules and Regulations to the
contrary, the process of removing a Manager shall be governed by Section 16(c)
of the Investment Company Act of 1940. (Amended January 24, 1989)
ARTICLE IV
AMENDMENT AND TERMINATION OF INVESTMENT
MANAGEMENT AGREEMENT
Any investment management agreement referred to in Paragraph c of
SECTION 2 of ARTICLE III shall provide that it may not be amended without the
prior approval of Contract Owners casting a majority of the votes which may be
cast by all Contract Owners in accordance with SECTION 6 of ARTICLE II and that
it may not be terminated by the investment manager without the prior approval of
a new investment advisory agreement by Contract Owners casting a majority of the
votes which may be cast by all Contract Owners in accordance with SECTION 6 of
ARTICLE II.
ARTICLE V
VALUE OF THE FUND
The value of the assets of the Fund at the end of any valuation
period shall be the aggregate of the following:
(1) The face amount of cash; plus
(2) The total market value of any securities, valued at the closing price
for the business day ending the valuation period for securities traded
on organized exchanges, and at the mean of the bid and asked prices
for the business day ending the valuation period for non-traded
securities and securities not traded on an organized exchange; plus
(3) The fair market value as determined in good faith by the Fund's Board
of Managers of any other assets; minus
-9-
<PAGE>
(4) An amount for taxes on realized and unrealized capital gains and any
other taxes based on income of, assets in, or the existence of, the
Fund which may be applicable; and minus
-10-
<PAGE>
(5) Liabilities of the Fund other than Contract liabilities. (Amended
February 27, 1973)
ARTICLE VI
AMENDMENTS
These Rules and Regulations, subject to applicable law, may be
altered, amended or repealed by vote of a majority of the Board of Managers as
is necessary and appropriate to carry out the purposes of the Fund.
-11-
<PAGE>
NOTICE AND
CERTIFICATE OF POLICY CHANGE
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY ("Lincoln Life") hereby
certifies that it has entered into an Agreement and Plan of Reorganization ("the
Agreement") with LINCOLN NATIONAL VARIABLE ANNUITY FUND A ("Fund A") and LINCOLN
NATIONAL VARIABLE ANNUITY FUND B ("Fund B") whereby effective at 5:00 p.m.,
Eastern Standard Time, on October 4, 1995 Fund B transferred all of its assets
and liabilities to Fund A in exchange for crediting to owners of Fund B
Contracts, full and fractional accumulation and annuity reserve units of Fund A.
Subject to the terms of the Agreement, this means that Fund A has been
substituted for Fund B in all matters and documents arising out of the
referenced policy, including the rights and liabilities and obligations
originally held by Fund B under the referenced policy. Subject to the terms of
the Agreement, your rights, liabilities and obligations shall remain in full
force and effect. Your liabilities and obligations shall run to Fund A and
Lincoln Life and your rights shall be enforceable against Fund A and Lincoln
Life, not Fund B.
In all other respects, your Annuity contract will remain the same.
THIS CERTIFICATE BECOMES PART OF YOUR POLICY AND SHOULD BE ATTACHED
THERETO.
THE LINCOLN NATIONAL LIFE
INSURANCE COMPANY
By:___________________________
Its:__________________________
<PAGE>
[Letterhead of Lincoln Life]
May 11, 1995
Securities and Exchange Commission
Division of Corporation Finance
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Lincoln National Variable Annuity Funds A and B
Registration Nos. 2-26342(I), 2-25618(G) and 2-27460
Ladies and Gentlemen:
I have acted as counsel for The Lincoln National Life Insurance Company, an
Indiana corporation ("Issuer"), in connection with the registration of an
indefinite number of shares of Lincoln National Variable Annuity Fund A to be
offered to the Shareholders of Lincoln National Variable Annuity Fund B pursuant
to the Agreement and Plan of Reorganization adopted by the respective Boards of
Managers of Lincoln National Variable Fund A and Lincoln National Variable
Annuity Fund B at their May 2, 1995 Board meetings.
At the request of the management of The Lincoln National Life Insurance Company
and the Board of Managers of Lincoln National Variable Annuity Fund A, I have
made such examination of law and have examined such records and documents as I
have deemed necessary to render the opinion expressed below.
The shares of Lincoln National Variable Annuity Fund A to be issued to the
Shareholders of Lincoln National Variable Annuity Fund B, pursuant to the
Agreement and Plan of Reorganization adopted by the respective Boards of
Managers of Lincoln National Variable Fund A and Lincoln National Variable Fund
B at their May 2, 1995 Board meetings, are legally issued, fully paid and non-
assessable.
I hereby consent to the inclusion of this opinion as an exhibit to this
Registration Statement on Form N-14.
Sincerely,
/S/ JONATHAN J. MYERS
Jonathan J. Myers
Assistant General Counsel
Lincoln National Life Insurance Co. is part of Lincoln National Corp.
<PAGE>
[Letterhead of Lincoln Life]
Direct Dial: (219) 455-2487
Fax : (219) 455-5135
May 3, 1995
Securities and Exchange Commission
Division of Corporation Finance
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: Merger of Lincoln National Variable Annuity Funds A and B
Registration Nos. 2-26342(I), 2-25618(G) and 2-27460
Ladies and Gentlemen:
I am Senior Counsel of the Lincoln National Life Insurance Company, an Indiana
Corporation, and am authorized to practice law in the state of Indiana. I have
acted as tax counsel for The Lincoln National Life Insurance Company in
connection with the merger of Lincoln National Variable Annuity Fund A ("Fund
A") into Lincoln National Variable Annuity Fund B ("Fund B").
As such counsel, I have reviewed copies of the annuity contracts issued to
contract holders of Fund A and Fund B and examined such other documents, made
investigations of fact, and considered such questions of law as, in my judgment,
have been necessary to enable me to render this opinion. Based upon the
foregoing, I am of the opinion that the merger will result in no adverse tax
consequences to the contract holders of either Fund A or Fund B annuity
contracts.
My opinion is based upon existing provisions of the Internal Revenue Code of
1986, as amended (the "Code"), existing and currently effective Treasury
Regulations promulgated under the Code, applicable legislative history of the
Code, and existing judicial decisions and present administrative rulings and
practices, all of which are subject to change and differing interpretations at
any time. Any change in the state of existing tax law may render inaccurate my
opinion.
<PAGE>
Securities and Exchange Commission
May 3, 1995
Page 2
I hereby consent to the inclusion of this opinion as an exhibit to this
Registration Statement on Form N-14
Respectfully submitted,
/S/SANDRA G. LAMP
Sandra G. Lamp
Senior Counsel
Law Division
<PAGE>
Exhibit 14
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the captions "III. Ratification or
Rejection of the Selection of Independent Auditors," "Experts," "Article III
Reorganization," "Article V Representations and Warranties," "Per-Accumulation-
Unit Income and Capital Changes," and "Independent Auditors" in the Registration
Statement (Form N-14 Nos. 2-26342 and 2-25618) and related Prospectus/Proxy
Statement and Statement of Additional Information pertaining to Lincoln National
Variable Annuity Fund A (Group and Individual) dated June 22, 1995, and to the
use therein of our reports (a) dated February 8, 1995, except for Note 11, as to
which the date is February 13, 1995, with respect to the consolidated financial
statements of The Lincoln National Life Insurance Company included therein, (b)
dated January 25, 1995 with respect to the financial statements of Lincoln
National Variable Annuity Fund A (Group and Individual) included therein, and
(c) dated January 25, 1995 with respect to the financial statements of Lincoln
National Variable Annuity Fund B (Group and Individual) included therein.
/S/Ernst & Young LLP
Fort Wayne, Indiana
May 19, 1995
<PAGE>
LINCOLN LIFE PARTICIPANT'S VOTE CERTIFICATION
LINCOLN NATIONAL VARIABLE ANNUITY FUNDS
Fort Wayne, Indiana
Remitter Number:
Addressee:
Dear Contract Owner:
Recently we sent you a notice concerning the Special Meeting of Contract Owners.
Below is our certification of the manner in which participants under your
contract have indicated that the votes attributable to their accounts should be
cast at that meeting. The enclosed MASTER CONTRACT OWNER'S PROXY FORM MUST BE
SIGNED BY YOU AND RETURNED BY JULY 26, 1995, in order to direct the manner in
which the votes attributable to your contract should be cast at the SPECIAL
MEETING OF CONTRACT OWNERS.
VOTE CERTIFICATION
Item
No Proposal
1. Election of John B. Borsch, Jr.
members of Kelly D. Clevenger
the Board of Nancy L. Frisby
Managers: Barbara S. Kowalcyzk
Stanley R. Nelson
Votes from Returned Votes from Returned Votes From
Instructions Cast Instructions Withheld Instructions
For: From: Not Returned:
2. Ratification of the selection of Ernst & Young LLP as the independent
auditors for the Fund until the next annual meeting of contract owners.
Votes from Returned Votes from Returned Votes From Returned
Instructions Cast Instructions Cast Instructions Cast
For: Against: Abstain:
<PAGE>
Votes From
Instructions Not Returned:
3. Merger of Lincoln National Variable Annuity Fund B into Lincoln
National Variable Annuity Fund A.
I HEREBY CERTIFY THAT TO MY BEST KNOWLEDGE AND BELIEF THE ABOVE TOTALS ARE
CORRECT.
Jon C. Geist, 2nd Vice President
to the Board of Managers of the Fund
LINCOLN NATIONAL LIFE INSURANCE CO.
<PAGE>
MASTER CONTRACT OWNER'S POLICY
LINCOLN NATIONAL VARIABLE ANNUITY FUNDS
Fort Wayne, Indiana
Remitter Number:
Addressee: PLEASE SIGN THIS PROXY AND
RETURN IT BY JULY 26, 1995,
IN THE ENCLOSED ENVELOPE.
I hereby constitute and appoint JOHN B. BORSCH, JR., KELLY D. CLEVENGER, NANCY
L. FRISBY, BARBARA S. KOWALCYZK, and STANLEY R. NELSON, or any one of them, as
my true and lawful attorney in fact and proxy with full powers of substitution
and revocation to all or any one of them, to act for me and in my name, place,
and stead, and to cast the number of votes which I am entitled to cast at the
SPECIAL MEETING OF CONTRACT OWNERS or at any adjournment thereof, with all the
powers I would possess, if personally present, subject to directions indicated
below. THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF MANAGERS OF THE FUND.
VOTE TO BE CAST AS FOLLOWS:
<TABLE>
<CAPTION>
Item
No Proposal
<S> <C> <C>
1. Election of members John B. Borsch, Jr.
of the Board of Kelly D. Clevenger
Managers: Nancy L. Frisby
Barbara S. Kowalcyzk
Stanley R. Nelson
Number of Votes
To Be Cast: Votes For: Votes Withheld:
Number of Votes
To Be Cast: Votes For: Votes Withheld: Votes Abstaining:
2. Ratification of the selection of
Ernst & Young LLP as the independent auditors
for the Fund until the next annual meeting of
contract owners.
3. Merger of Lincoln National Variable
Annuity Fund B into Lincoln National
Variable Annuity Fund A
4. In their discretion, transact such other business as may
properly come before the meeting or any adjournment thereof.
</TABLE>
The undersigned hereby acknowledges receipt of the Notice of
<PAGE>
Contract Owners of Special Meeting and the Proxy Statement issued by the Board
of Managers and revokes any proxy heretofore given with respect to the votes
covered by this proxy.
If this proxy is signed and returned without discretion as to For, Against,
Abstain or Withhold, you will be deemed to have given instructions to vote FOR
these proposals. Failure to return this proxy could result in the failure to
attain a quorum. Failure to attain a quorum would require the scheduling of
another Special Meeting. This proxy confers authority only with respect to the
meeting (and any adjournment thereof) to which it pertains.
By (Authorized Person)______________________________ Date___________________
<PAGE>
VOTING RIGHTS
What are the rights of the Group Contract Participant, Group Contract Owner, and
a Individual Contract Owner when a Proxy questionaire is received?
If you are a Group Participant, you have the right to furnish instructions to
Lincoln National Life Insurance Company, so we may then relay your desires, to
your Group Contract Owner on how to vote your variable units. After all, it is
your money in which is invested, and it is in your best interest to exercise
your right to instruct the Contract Owner how to vote on the various issues.
If you are a Group Contract Owner, you have an obligation to the participants
covered under your contract to execute the proxy in accordance with instructions
provided by the participants.
If you are an Individual Contract Owner, you have a right to vote directly on
all matters shown on the reverse side.
Refer to the section entitled "Voting Rights" in your prospectus for a more
detailed description of your voting rights.
Lincoln National Life Insurance Co.
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY FUND X
FORT WAYNE, INDIANA INDIVIDUAL CONTRACT OWNER'S PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF MANAGERS OF THE FUND.
Addressee: Policy Number:
Number of Votes:
(The number of votes shown above represents variable
accumulation units in force as of May 4, 1995 and IS NOT
the dollar value of the account.)
Meeting: SPECIAL MEETING OF CONTRACT OWNERS OF LINCOLN NATIONAL VARIABLE
ANNUITY FUND
Time: 11:30 a.m., Eastern Standard Time, Tuesday, August 1, 1985
Place: 200 East Berry Street, Fort Wayne, Indiana
I hereby constitute and appoint JOHN B. BORSCH, JR., KELLY D. CLEVENGER, NANCY
L. FRISBY, BARBARA S. KOWALCZYK and STANLEY R. NELSON or any one of them, as my
true and lawful attorney in fact and proxy with full powers of substitution and
revocation to all or any one of them, to act for me in my name, place, and
stead, and to cast the number of votes which I am entitled to cast at the
SPECIAL MEETING OF CONTRACT OWNERS or at any adjournment thereof, with all the
powers I would possess if personally present, subject to directions indicated
below:
1. ELECTION OF BOARD OF MANAGERS
Nominees: John B. Borsch, Jr., Kelly D. Clevenger, Nancy L. Frisby,
Barbara S. Kowalczyk and Stanley R. Nelson
*VOTE FOR all nominees listed, except as marked to the contrary above. (TO
WITHHOLD YOUR VOTE FROM ANY INDIVIDUAL NOMINEE STRIKE A LINE THROUGH THE
NOMINEE'S NAME IN THE LIST ABOVE.)
*VOTE WITHHELD from all nominees.
2. *FOR *AGAINST *ABSTAIN ratifying the selection of Ernst & Young LLP
as the independent auditors for the Fund until the
next annual meeting of contract owners.
3. *FOR *AGAINST *ABSTAIN merger of Lincoln National Variable Annuity Fund
B into Lincoln National Variable Annuity Fund A.
4. In their discretion, transact such other business as may properly come
before the meeting or any adjournment thereof.
PLEASE SIGN THIS PROXY AND RETURN IT BY JULY 26, 1995, IN THE ENCLOSED ENVELOPE.
<PAGE>
If this proxy is signed and returned without direction, as to For, Against,
Abstain, or Withhold, you will be deemed to have given instructions to vote FOR
these proposals. Failure to return this proxy could result in the failure to
attain a quorum. Failure to attain a quorum would require the scheduling of
another Special Meeting. This proxy confers authority only with respect to the
meeting (or any adjournment thereof) cited above.
If you have questions concerning this proxy, please call 1-800-348-1212.
I acknowledge receipt of the Notice to Contract Owners of the Special Meeting
and the Proxy Statement issued by the Board of Managers. I execute this proxy,
revoking any proxy heretofore given with respect to such meeting.
SIGNATURE___________________ DATE______________
<PAGE>
VOTING RIGHTS
What are the rights of the Group Contract Participant, Group Contract Owner, and
a Individual Contract Owner when a Proxy questionaire is received?
If you are a Group Participant, you have the right to furnish instructions to
Lincoln National Life Insurance Company, so we may then relay your desires, to
your Group Contract Owner on how to vote your variable units. After all, it is
your money which is invested, and it is in your best interest to exercise your
right to instruct the Contract Owner how to vote on the various issues.
If you are a Group Contract Owner, you have an obligations to the participants
covered under your contract to execute the proxy in accordance with instructions
provided by the participants.
If you are an Individual Contract Owner, you have a right to vote directly on
all matters shown on the reverse side.
Refer to the section entitled "Voting Rights" in your prospectus for a more
detailed description of your voting rights.
Lincoln National Life Insurance Co.
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY FUND X
FORT WAYNE, INDIANA PARTICIPANT's INSTRUCTIONS
THE PROXY TO WHICH THESE INSTRUCTIONS RELATE IS SOLICITED ON BEHALF OF THE BOARD
OF MANAGERS OF THE FUND.
Addressee: Policy Number:
Number of Votes:
(The number of votes shown above represents variable
accumulation units in force as of May 4, 1995 and IS NOT the
dollar value of the account.)
I instruct the Owner of the contract identified above to cast votes attributable
to my account at the Special Meeting of Contract Owners of this LINCOLN NATIONAL
VARIABLE ANNUITY FUND on Tuesday, August 1, 1995, as follows:
1. ELECTION OF BOARD OF MANAGERS
Nominees: John B. Borsch, Jr., Kelly D. Clevenger, Nancy L. Frisby,
Barbara S. Kowalczyk, and Stanley R. Nelson
*VOTE FOR all nominees listed, except as marked to the contrary above.
(TO WITHHOLD YOUR VOTE FROM ANY INDIVIDUAL NOMINEE STRIKE A LINE THROUGH THE
NOMINEE'S NAME IN THE LIST ABOVE.)
*VOTE WITHHELD from all nominees.
2. *FOR *AGAINST *ABSTAIN ratifying the selection of Ernst & Young LLP
as the independent auditors for the Fund
until the next annual meeting of contract
owners.
3. *FOR *AGAINST *ABSTAIN merger of Lincoln National Variable Annuity
Fund B into Lincoln National Variable
Annuity Fund A.
4. In their discretion, transact such other business as may properly come
before the meeting or any adjournment thereof.
PLEASE SIGN THIS INSTRUCTION FORM AND RETURN IT BY JUNE 27, 1995, IN THE
ENCLOSED ENVELOPE.
If this form is signed and returned without direction, as to For, Against,
Abstain or Withhold, you will be deemed to have given instructions to vote FOR
these proposals. Failure to return this form could result in the failure to
attain a quorum. Failure to attain a quorum would require the scheduling of
another Special Meeting.
If you have any questions concerning this instruction form,
<PAGE>
please call 1-800-348-1212.
I acknowledge receipt of the Notice to Contract Owners of the Special Meeting
and the Proxy Statement issued by the Board of Managers. I execute these
instructions, revoking any instruction heretofore given with respect to such
meeting. This instruction form confers authority only with respect to the
meeting (or any adjournment thereof) cited above.
SIGNATURE__________________ DATE_____________
<PAGE>
VOTING RIGHTS
What are the rights of the Group Contract Participant, Group Contract Owner, and
a Individual Contract Owner when a Proxy questionaire is received?
If you are a Group Participant, you have the right to furnish instructions to
Lincoln National Life Insurance Company, so we may then relay your desires, to
your Group Contract Owner on how to vote your variable units. After all, it is
your money which is invested, and it is in your best interest to exercise your
right to instruct the Contract Owner how to vote on the various issues.
If you are a Group Contract Owner, you have an obligation to the participants
covered under your contract to execute the proxy in accordance with instructions
provided by the participants.
If you are an Individual Contract Owner, you have a right to vote directly on
all matters shown on the reverse side.
Refer to the section entitled "Voting Rights" in your prospectus for a more
detailed description of your voting rights.
Lincoln National Life Insurance Co.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
LINCOLN NATIONAL VARIABLE ANNUITY FUND A AS OF DECEMBER 31, 1994
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 011
<NAME> LINCOLN NATIONAL VARIABLE ANNUITY FUND A
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 70,989,735
<INVESTMENTS-AT-VALUE> 78,068,749
<RECEIVABLES> 256,518
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 209,001
<TOTAL-ASSETS> 78,534,268
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> (125,374,081)
<SHARES-COMMON-STOCK> 9,907,664
<SHARES-COMMON-PRIOR> 11,538,380
<ACCUMULATED-NII-CURRENT> 69,615,181
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 127,214,154
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 7,079,014
<NET-ASSETS> 78,534,268
<DIVIDEND-INCOME> 2,531,456
<INTEREST-INCOME> 23,845
<OTHER-INCOME> 0
<EXPENSES-NET> 1,074,820
<NET-INVESTMENT-INCOME> 1,480,481
<REALIZED-GAINS-CURRENT> 7,201,941
<APPREC-INCREASE-CURRENT> (7,661,756)
<NET-CHANGE-FROM-OPS> 1,020,666
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 118,031
<NUMBER-OF-SHARES-REDEEMED> 1,831,311
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (11,334,976)
<ACCUMULATED-NII-PRIOR> 68,134,700
<ACCUMULATED-GAINS-PRIOR> 120,012,213
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 272,740
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,074,820
<AVERAGE-NET-ASSETS> 84,526,000
<PER-SHARE-NAV-BEGIN> 7.116
<PER-SHARE-NII> 0.122
<PER-SHARE-GAIN-APPREC> (0.040)
<PER-SHARE-DIVIDEND> 0.000
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 7.198
<EXPENSE-RATIO> .013
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
LINCOLN NATIONAL VARIABLE ANNUITY FUND B AS OF DECEMBER 31, 1994
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 012
<NAME> LINCOLN NATIONAL VARIABLE ANNUITY FUND B
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 6,288,848
<INVESTMENTS-AT-VALUE> 6,625,660
<RECEIVABLES> 29,930
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 51,548
<TOTAL-ASSETS> 6,707,138
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> (7,899,750)
<SHARES-COMMON-STOCK> 950,570
<SHARES-COMMON-PRIOR> 1,151,371
<ACCUMULATED-NII-CURRENT> 7,772,529
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 6,497,547
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 336,812
<NET-ASSETS> 6,707,138
<DIVIDEND-INCOME> 218,566
<INTEREST-INCOME> 158
<OTHER-INCOME> 0
<EXPENSES-NET> 98,872
<NET-INVESTMENT-INCOME> 119,852
<REALIZED-GAINS-CURRENT> 549,563
<APPREC-INCREASE-CURRENT> (747,573)
<NET-CHANGE-FROM-OPS> (78,158)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 10,492
<NUMBER-OF-SHARES-REDEEMED> 236,927
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (1,486,111)
<ACCUMULATED-NII-PRIOR> 7,652,677
<ACCUMULATED-GAINS-PRIOR> 5,947,984
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 24,105
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 98,872
<AVERAGE-NET-ASSETS> 7,542,000
<PER-SHARE-NAV-BEGIN> 6,194.000
<PER-SHARE-NII> 0.099
<PER-SHARE-GAIN-APPREC> (0.175)
<PER-SHARE-DIVIDEND> 0.000
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 6.118
<EXPENSE-RATIO> .013
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
LINCOLN NATIONAL LIFE INSURANCE COMPANY CONSOLIDATED FINANCIAL
STATEMENTS AS OF DECEMBER 31, 1994 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<DEBT-HELD-FOR-SALE> 17,692,214
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 456,333
<MORTGAGE> 2,795,914
<REAL-ESTATE> 679,512
<TOTAL-INVEST> 22,310,900
<CASH> 990,880
<RECOVER-REINSURE> 2,069,292
<DEFERRED-ACQUISITION> 1,736,526
<TOTAL-ASSETS> 41,025,547
<POLICY-LOSSES> 7,540,772
<UNEARNED-PREMIUMS> 61,472
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 17,028,628
<NOTES-PAYABLE> 68,989
<COMMON> 25,000
0
0
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