<PAGE>
As filed with the Securities and Exchange Commission on April 28, 1999
Registration No. 2-26342
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 48 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 28 [X]
LINCOLN NATIONAL VARIABLE ANNUITY FUND A (INDIVIDUAL)
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[Exact Name of Registrant]
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
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[Name of Insurance Company]
1300 South Clinton Street, P.O. Box 1110, Fort Wayne, Indiana 46801
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(Address of Insurance Company's Principal Executive Offices) (Zip Code)
Insurance Company's Telephone Number, including Area Code (219)455-2000
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Jack D. Hunter, Esq.
The Lincoln National Life Insurance Company
200 East Berry Street
Fort Wayne, Indiana 46802
(Name and Address of Agent for Service)
Copy to:
Patrice M. Pitts, Esq.
Porter, Wright, Morris & Arthur
1667 K Street, NW, Suite 1100
Washington, DC 20006-1605
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It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b) of Rule 485
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X on 4/30/99 pursuant to paragraph (b) of Rule 485
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60 days after filing pursuant to paragraph (a)(1) of Rule 485
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on April 30, 1999 pursuant to paragraph (a)(1) of Rule 485
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75 days after filing pursuant to paragraph (a)(2) of Rule 485
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on pursuant to paragraph (a)(2) of Rule 485.
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If appropriate, check the following box:
this Post-Effective Amendment designates a new effective date
- ----- for a previously filed Post-Effective Amendment.
<PAGE>
Lincoln National
Variable Annuity Fund A
Individual variable annuity contracts
Home Office:
1300 South Clinton Street
Fort Wayne, Indiana 46802
Telephone: 1-800-454-6265
This Prospectus describes an individual variable annuity contract issued by
Lincoln National Life Insurance Company (Lincoln Life) for use with certain
qualified and non-qualified retirement plans. The contractowner does not pay
federal income tax on the contract's growth until it is paid out. The contract
is designed to accumulate contract value and to provide retirement income that
the contractowner cannot outlive or for an agreed upon time. These benefits may
be a variable or a fixed amount, or a combination of both. If the contractowner
or annuitant dies before the annuity commencement date, we will pay the benefi-
ciary a death benefit.
Additional purchase payments may be made to periodic payment contracts and must
be at least $25 per payment, and total $600 annually.
The contractowner chooses whether the contract value accumulates on a variable
or a fixed (guaranteed) basis or both. If the contractowner puts all purchase
payments into the fixed account, we guarantee the principal and a minimum in-
terest rate. We limit withdrawals and transfers from the fixed side of the con-
tract.
All purchase payments for benefits on a variable basis will be placed in Lin-
coln National Variable Annuity Fund A (the fund), a segregated investment ac-
count of Lincoln Life. The main investment objective of the fund is the long-
term growth of capital in relation to the changing value of the dollar. A sec-
ondary investment objective is the production of current income. The fund seeks
to accomplish these objectives by investing in equity securities, primarily
common stocks.
The contractowner takes all the investment risk on the contract value and the
retirement income derived from purchase payments into the fund. If the fund
makes money, the contract value goes up; if the fund loses money, the contract
value goes down. How much the contract value goes up or down depends on the
performance of the fund. We do not guarantee how the fund will perform. Also,
neither the U.S. Government nor any federal agency insures or guarantees any
investment in the contract.
This Prospectus gives information about the contracts that one should know be-
fore deciding to buy a contract and make purchase payments. This Prospectus
should be kept for future reference.
Neither the SEC nor any state securities commission has approved this contract
or determined that this Prospectus is accurate or complete. Any representation
to the contrary is a criminal offense.
A Statement of Additional Information (SAI) dated April 30, 1999 about the con-
tracts has more information about the contracts, and its terms are made part of
this Prospectus. For a free copy, write: Annuities Customer Service, The Lin-
coln National Life Insurance Company, P.O. Box 2340, Fort Wayne, Indiana 46801,
or call: 1-800-454-6265. The SAI and other information about Lincoln Life and
the fund are also available on the SEC's web site (http://www.sec.gov). There
is a table of contents for the SAI on the last page of this Prospectus.
April 30, 1999
1
<PAGE>
Table of contents
<TABLE>
<CAPTION>
Page
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<S> <C>
Special terms 2
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Expense tables 3
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Summary 4
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Condensed financial information for the fund 5
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Investment results 6
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Financial statements 6
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Lincoln National Life Insurance Co. 6
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Fixed side of the contract 6
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Fund A 6
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Charges and other deductions 7
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The contracts 8
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</TABLE>
<TABLE>
<CAPTION>
Page
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<S> <C>
Annuity payouts 10
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More information about the fund 12
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Federal tax matters 13
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Voting rights 16
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Distribution of the contracts 16
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State regulation 16
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Restrictions under the Texas Optional Retirement Program 17
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Records and reports 17
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Other information 17
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Table of Contents for SAI 18
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</TABLE>
Special terms
(Throughout this Prospectus, we have italicized the special terms.)
Accumulation unit - A measure used to calculate contract value for the vari-
able side of the contract before the commencement of annuity date.
Annuitant - The person on whose life the annuity benefit payments are based
and made to after the annuity commencement date.
Annuity Commencement Date - The valuation date when funds are withdrawn or
converted into annuity units or fixed dollar payout for payment of annuity
benefits under the annuity payout option you select.
Annuity unit - A measure used to calculate the amount of annuity payouts after
the annuity commencement date.
Beneficiary - The person the contractowner chooses to receive the death bene-
fit that is paid if the contractowner or annuitant dies before the annuity
commencement date.
Contractowner - The annuitant or other designated person, except in cases
where a contract is issued to a trustee of a trust or a custodian (1) of a
qualified pension or profit-sharing plan or (2) of an Individual Retirement
Annuity (under Sections 401(a) and 408 of the Internal Revenue Code, or "tax
code"), or (3) where a contract is issued in connection with a deferred com-
pensation plan (under Section 457 of the tax code). In these cases, the
contractowner is the trustee or custodian.
Contract value - At a given time, the total value of all accumulation units
for a contract plus the value of the fixed side of the contract.
Contract year - Each one-year period starting with the effective date of the
contract and starting with each contract anniversary after that.
Death benefit - The amount payable to the designated beneficiary if the
contractowner or annuitant dies before the annuity commencement date.
Lincoln Life (the Company, we, us, our) - Lincoln National Life Insurance Com-
pany.
Purchase payments - Amounts paid into the contract.
Participant - The individual participating in the qualified pension or profit-
sharing plan, deferred compensation plan, tax deferred annuity, or tax shel-
tered annuity.
Valuation date -- Each day the New York Stock Exchange (NYSE) is open for
trading.
Valuation period -- The period starting at the close of trading (currently
4:00 p.m. New York time) on each day that the NYSE is open for trading (valua-
tion date) and ending at the close of such trading on the next valuation date.
2
<PAGE>
Expense tables
Summary of Contractowner expenses:
(as a percentage of purchase payments unless otherwise indicated)
<TABLE>
<CAPTION>
Single Periodic
Premium Premium
<S> <C> <C>
Sales load on purchase payments 2%+$50 4.25%
Administrative expense $65 1.00%
Minimum death benefit rider (if elected) .75% .75%
</TABLE>
We may waive or reduce these charges in certain situations. See Charges and
other deductions. For existing holders of periodic payment contracts, we may
increase the combined sales and administrative expense charge above 5.25% for
any year's payment that is more than twice the original year's payment.
Fund A annual expenses (as a percentage of average net assets)
<TABLE>
<S> <C>
Management fees 0.32%
Mortality and expense risk charge 1.00%
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Total Annual Expenses 1.32%
</TABLE>
Examples
(expenses of the contract and the fund)
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
S.P. P.P. S.P. P.P. S.P. P.P. S.P. P.P.
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
Contractowner would pay the following
expenses on a $1,000 investment,
assuming 5% annual return on assets: $154 $73 $178 $99 $205 $128 $279 $209
</TABLE>
We provide this table and these examples to help the contractowner and partici-
pant understand the direct and indirect costs and expenses of the contract and
the fund. The example assumes that the minimum death benefit is in effect.
Without this benefit, expenses would be lower.
For more information, see Charges and other deductions in this Prospectus. Pre-
mium taxes may also apply, although they do not appear in the examples. These
examples should not be considered a representation of past or future expenses.
Actual expenses may be more or less than those shown.
3
<PAGE>
Summary
What kind of contract is this? It is an individual annuity contract between the
contractowner and Lincoln Life, and is one of two types: an immediate annuity
or a deferred annuity. Immediate annuities may only be purchased with a single
payment; deferred annuities may be purchased with a single payment or periodic
payments. It may provide for a fixed annuity and/or a variable annuity. The
contracts are no longer being sold to new contractowners.
What is the fund? It is a separate account we established under Indiana insur-
ance law, and registered with the SEC as a management investment company. Fund
assets are not chargeable with liabilities arising out of any other business
which Lincoln Life may conduct. See Fund A.
Who invests the money? The investment advisor for the fund is Lincoln Life. The
sub-advisor for the fund is Vantage Investment Advisors, Inc. See Fund A.
How is the money invested? The principal investment objective of the fund is
the long-term growth of capital in relation to the changing value of the dol-
lar. A secondary investment objective is the production of current income. See
Fund A -- The investment advisor.
How does the contract work? A contractowner purchases accumulation units with
purchase payments during the accumulation phase. If the contractowner decides
to purchase annuity payouts, the accumulation units are converted to annuity
units. The amount of an annuity payout will be based on the number of annuity
units received and the value of each annuity unit on payout days. See The con-
tracts.
What charges are there under the contract? We deduct sales load from each pur-
chase payment (2% +$50 from a single payment, 4.25% from each periodic pay-
ment), along with an administrative expense ($65 from a single payment, 1.00%
from each periodic premium); and if the contractowner elects the minimum death
benefit, an additional charge of 0.75% from each purchase payment. We may re-
duce or waive these charges in certain situations. See Charges and other deduc-
tions.
We also will deduct any applicable premium tax from purchase payments.
The fund pays to us a management fee equal to 0.323%, and a mortality and ex-
pense risk charge of 1.00% of the average daily net asset value of the fund.
See Fund A -- Investment management. The fund also has other operating ex-
penses.
What purchase payments must be made, and how often? Subject to the minimum and
maximum payment amounts, the payments are completely flexible. See The con-
tracts -- Periodic Purchase payments.
How will the annuity payouts be calculated? If the contractowner decides to
annuitize, he or she may select an annuity option and start receiving annuity
payouts from the contract on a fixed basis, a variable basis, or a combination
of both. See Annuity payout options. Remember that participants in the fund
benefit from any gain, and take a risk of any loss, in the value of the securi-
ties in the fund's portfolio.
What happens if the contractowner or annuitant dies before annuitization? If
the contractowner elects the minimum death benefits the beneficiary will re-
ceive the greater of purchase payments (less rider premiums) or contract value.
If the contractowner does not elect the minimum death benefit, the beneficiary
will receive contract value. The beneficiary has options as to how the death
benefit is paid. See Death benefit before the annuity commencement date.
May contract value be transferred between the variable and fixed sides of the
contract? Yes, with certain limits. See The contracts -- Transfers.
May the contractowner surrender the contract or make a withdrawal? Yes, subject
to contract requirements and to the restrictions of any qualified retirement
plan for which the contract was purchased. See Surrenders and withdrawals. If
the contractowner surrenders the contract or makes a withdrawal, certain
charges may apply. See Charges and other deductions. A portion of
surrender/withdrawal proceeds may be taxable. In addition, if the contractowner
decides to take a distribution before age 59 1/2, a 10% Internal Revenue Serv-
ice (IRS) tax penalty may apply. A surrender or a withdrawal also may be sub-
ject to 20% withholding. See Federal tax matters--Federal income tax withhold-
ing.
4
<PAGE>
Condensed financial information for the fund
(For an accumulation unit outstanding throughout the year)
Accumulation unit values
The following information relating to accumulation unit values and number of
accumulation units for the fund for periods ending December 31st, is derived
from the fund's financial statements which have been audited by Ernst & Young
LLP, independent auditors. It should be read along with the fund's financial
statements, notes and report of independent auditors which are included in the
SAI.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income....... $ .301 $ .286 $ .267 $ .251 $ .217 $ .204 $ .206 $ .181 $ .146 $ .183
Expenses................ .217 .178 .139 .114 .095 .090 .083 .076 .064 .062
------- ------- ------- ------ ------ ------ ------ ------ ------ ------
Net investment income... .084 .108 .128 .137 .122 .114 .123 .105 .082 .121
Net realized and
unrealized gain (loss)
on investments......... 3.028 3.755 1.735 2.539 (.040) .522 (.099) 1.402 (.102) .786
------- ------- ------- ------ ------ ------ ------ ------ ------ ------
Net increase (decrease)
in accumulation unit
value.................. 3.112 3.863 1.863 2.676 .082 .636 .024 1.507 (.020) .907
Accumulation unit value
at beginning of year... 15.600 11.737 9.874 7.198 7.116 6.480 6.456 4.949 4.969 4.062
------- ------- ------- ------ ------ ------ ------ ------ ------ ------
ACCUMULATION UNIT VALUE
AT END OF YEAR......... $18.712 $15.600 $11.737 $9.874 $7.198 $7.116 $6.480 $6.456 $4.949 $4.969
======= ======= ======= ====== ====== ====== ====== ====== ====== ======
<CAPTION>
RATIOS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ratio of expenses to
average net assets..... 1.28% 1.27% 1.28% 1.28% 1.27% 1.27% 1.27% 1.27% 1.28% 1.28%
Ratio of net investment
income to average net
assets................. .54% .77% 1.17% 1.65% 1.75% 1.72% 2.01% 1.85% 1.72% 2.63%
Portfolio turnover rate. 31.10% 32.56% 49.94% 48.95% 64.09% 49.90% 70.97% 36.99% 59.57% 201.20%
Number of accumulation
units outstanding at
end of year (expressed
in thousands).......... 7,176 7,723 8,462 9,569 9,908 11,538 12,742 14,185 16,554 19,522
</TABLE>
5
<PAGE>
Investment results
At times, the fund may compare its investment results to various unmanaged in-
dices or other variable annuities in reports to shareholders, sales literature
and advertisements. The results will be calculated on a total return basis for
various periods. Total returns include the reinvestment of all distributions,
which are reflected in changes in unit value. See the SAI for further informa-
tion.
Financial statements
The financial statements for the fund and the statutory-basis financial state-
ments for Lincoln Life are located in the SAI. For a free copy of the SAI, call
1-800-454-6265.
Lincoln National Life Insurance Co.
Lincoln Life was founded in 1905 and is organized under Indiana law. We are one
of the largest stock life insurance companies in the United States. We are
owned by Lincoln National Corp. (LNC) which is also organized under Indiana
law. LNC's primary businesses are insurance and financial services.
Our home office is located at 1300 South Clinton Street, Fort Wayne, Indiana.
The home office mailing address is P.O. Box 2340, Fort Wayne, Indiana 46801
Fixed side of the contract
Net purchase payments allocated to the fixed side of the contract become part
of Lincoln Life's general account, and do not participate in the investment ex-
perience of the fund. The general account is subject to regulation and supervi-
sion by the Indiana Department of Insurance as well as the insurance laws and
regulations of the jurisdictions in which the contracts are distributed.
In reliance on certain exemptions, exclusions and rules, Lincoln Life has not
registered interests in the general account as securities under the Securities
Act of 1933 and has not registered the general account as an investment company
under the Investment Company Act of 1940. Accordingly, neither the general ac-
count nor any interests in it are regulated under the Securities Act or the In-
vestment Company Act. Lincoln Life has been advised that the staff of the SEC
has not reviewed the disclosures included in this Prospectus which relate to
our general account and to the fixed account under the contract. Certain provi-
sions of the federal securities laws relating to the accuracy and completeness
of statements made in the Prospectus may apply to these disclosures, however.
This Prospectus serves as a disclosure document only for aspects of the con-
tract involving the fund, and therefore contains only selected information re-
garding the fixed side of the contract. Complete details regarding the fixed
side of the contract are in the contract.
The contract specifies that net purchase payments allocated to the fixed side
of the contract will be credited with a minimum interest rate of at least 3.5%.
A net purchase payment allocated to the fixed side of the contract is credited
with interest beginning on the next calendar day following the date of receipt
of that purchase payment, if all data is complete. Lincoln Life may vary the
way in which it credits interest to the fixed side of the contract from time to
time.
ANY INTEREST IN EXCESS OF 3.5% WILL BE DECLARED IN ADVANCE IN LINCOLN LIFE'S
SOLE DISCRETION. CONTRACTOWNERS BEAR THE RISK THAT NO INTEREST IN EXCESS OF
3.5% WILL BE DECLARED.
Fund A
On September 16, 1966, we established the fund as a segregated investment ac-
count under Indiana Law. It is registered with the SEC as an open-end, diversi-
fied management investment company under the provisions of the Investment Com-
pany Act. Diversified means not owning too great a percentage of the securities
of any one company. The fund is a segregated investment account, meaning that
its assets may not be charged with liabilities resulting from any other busi-
ness that we may conduct. Income, gains and losses, whether realized or not,
from assets allocated to the fund are, in accordance with the applicable con-
tracts, credited to or charged against the fund. They are credited or charged
without regard to any other income, gains or losses of Lincoln Life. The obli-
gations arising under the contract are obligations of Lincoln Life. The fund
satisfies the definition of separate account under the federal securities laws.
We do not guarantee the investment performance of the fund. Any investment gain
or loss depends on the investment performance of the fund. The contractowner
assumes the full investment risk for all amounts placed in the fund.
The fund is used to support annuity contracts offered by Lincoln Life other
than the contracts described in this prospectus. The other annuity contracts
may have different charges that could affect performance.
Investment advisor
We are the investment advisor for the fund. We have been registered under the
Investment Advisers Act of 1940 since 1967. For more information about us, see
Lincoln National Life Insurance Co., above; and Management, in the SAI.
The current board of managers for the fund was elected by the contractowners
(See Voting rights.) A majority of these managers are not otherwise interested
persons of Lincoln Life as the term "interested persons" is defined in the In-
vestment Company Act. The Board is responsible for authorizing investment pro-
grams for the fund, for recommending any appropriate changes to those objec-
tives and policies, and for contracting for certain services necessary to the
operation of the fund.
6
<PAGE>
In performing investment management services, we provide the board of managers
with an investment program for its approval. Once the investment program is
approved, we execute the program by placing orders for the purchase or sale of
the assets of the fund. We also provide overall management of the fund's busi-
ness affairs, subject to the authority of the board of managers.
A sub-advisory agreement is in effect between Lincoln Life and Vantage Invest-
ment Advisors, Inc. ("Vantage"), 630 5th Ave., Suite 2670, New York, NY 10111,
a Delaware corporation. Under it, Vantage may perform substantially all of the
investment advisory services required by the fund. However, we remain primar-
ily responsible for investment decisions affecting the fund, and no additional
compensation from the assets of the fund is assessed as a result of this
agreement.
Investment management
The primary investment objective of the fund is long-term growth of capital in
relation to the changing value of the dollar. We will make investments with
the objective of providing annuity payments which reflect changes in the value
of the dollar over the long term. A secondary investment objective is the pro-
duction of current income. Generally, we will reinvest income and realized
capital gains.
We usually will invest the fund's assets in a portfolio of equity securities,
mainly common stocks, diversified over industries and companies. Diversifica-
tion means that we will keep the investments spread out over different indus-
tries, and different companies within each industry. We will not concentrate
any more than 25% of the fund's assets in any one industry. Diversification,
however, does not eliminate the risks inherent in the making of equity invest-
ments. These investment objectives and policies are "fundamental." That is,
they may not be changed without approval by a majority of contractowners.
For more detailed information on how we invest the assets of the fund, see Ap-
pendix A of this Prospectus and Investment objectives and policies in the SAI.
Risks
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 economicconditions.
We will not invest more than 10% of the fund's assets in securities which are
privately placed with financial institutions (and cannot be sold to the public
without registering with the SEC) ("restricted securities"). We limit invest-
ment in restricted securities because the fund may not be able to sell them
quickly at a reasonable price.
Other information
For providing investment services to the fund, we make deductions aggregating
.323% annually of the average daily value of the fund. The fund paid invest-
ment advisory fees of $441,232 in 1998, $394,625 in 1997, and $345,624 in
1996.
Charges and other deductions
We will deduct the charges described below to cover our costs and expenses,
services provided and risks assumed under the contracts. We incur certain
costs and expenses for the distribution and administration of the contracts
and for paying the benefits under the contracts. Our administrative costs in-
clude: salaries, rent, postage, telephone, travel, legal, actuarial and ac-
counting fees, office equipment, and stationery. The risks we assume include:
the risk that annuitants receiving annuity payouts under a contract live
longer than we assumed when we calculated our guaranteed rates (these rates
are incorporated in the contract and cannot be changed); the risk that death
benefits paid under the minimum death benefit option (see below) will exceed
the actual contract value; the risk that more owners than expected will qual-
ify for reduced sales or administrative charges; and the risk that our costs
in providing the services will exceed our revenues from contract charges. The
amount of a charge may not necessarily correspond to the costs associated with
providing the services or benefits the for which charge is made. For example,
the sales expense charge may not fully cover all of the sales and distribution
expenses actually incurred by us.
Deductions from purchase payments
Under periodic payment contracts, we deduct 4.25% for sales expenses and 1%
for administrative expenses from each purchase payment when it is received. We
may deduct a higher combined sales and administrative expense charge from any
year's payment that is more than twice the original year's payment. Under sin-
gle payment contracts, we deduct 2% plus $50 from the single purchase payment
for sales and administrative expenses and $65 for administrative expenses. De-
ductions for sales expenses made from purchase payments applied to purchase
fixed-dollar accumulation units are the same as those made from purchase pay-
ments applied to the fund.
If the contractowner elected the minimum death benefit, we make an additional
deduction of .75% from each purchase payment. We expect to make a profit from
the sale of this death benefit.
7
<PAGE>
We will deduct from purchase payments any premium tax or other tax levied by
any governmental entity with regard to the contracts of the fund. The applica-
ble premium tax rates that states and other governmental entities impose on the
purchase of an annuity are subject to change by legislation, by administrative
interpretation or by judicial action. These premium taxes generally depend upon
the law of the contractowner's state of residence. The tax ranges from 0% to
4.0%.
Deductions from average daily value of the fund
We assume the risk that annuitants as a class may live longer than expected
(mortality risk) and that expenses may be higher than the deductions for such
expenses (expense risk). In either case, the loss will fall on us. Conversely,
if such deductions are higher than expenses, the excess will be a profit to us.
In return for the assumption of these risks, deductions aggregating 1.002% an-
nually of the average daily value of the fund are made consisting of .9% for
mortality risk and .102% for expense risk.
We also deduct a management fee equal to 0.323% annually of the average daily
value of the fund. See Fund A -- Other information.
Additional Information
The sales and administrative charges described previously may be reduced or
eliminated for any particular contract. However, these charges will be reduced
only to the extent that we anticipate lower distribution and/or administrative
expenses, or that we perform fewer sales or administrative services than those
originally contemplated in establishing the level of those charges. Lower dis-
tribution and administrative expenses may be the result of economies associated
with (1) the use of mass enrollment procedures, (2) the performance of adminis-
trative or sales functions by the employer, (3) the use by an employer of auto-
mated techniques in submitting deposits or information related to deposits on
behalf of its employees or (4) any other circumstances which reduce distribu-
tion or administrative expenses. The exact amount of sales and administrative
charges applicable to a particular contract will be stated in that contract.
Experience Rating Credit
The variable annuity contracts allow us to grant an "experience rating credit."
Essentially, the experience rating credit allows (but does not require) us to
return any sales and administrative charges that were in excess of the actual
costs. During 1998, we did not pay any experience rating credits. The granting
of experience rating credits in any year in no way obligates us to grant such
credits in ensuing years.
The contracts
Purchase of contracts
We no longer offer contracts for sale. However, existing contractowners can
make periodic purchase payments of at least $25 each under the periodic pur-
chase payment contracts. The total of periodic purchase payments made in a sin-
gle year must be at least $600.
Periodic purchase payments
Periodic purchase payments are payable to us at a frequency and in an amount
the contractowner selected in the application. If the contractowner stops mak-
ing purchase payments, the contract will remain in force as a paid-up contract.
However, we may terminate the contract as allowed by the contractowner's
state's non-forfeiture law for individual deferred annuities. Payments may be
made or, if stopped, resumed at any time until the annuity commencement date,
the surrender of the contract, maturity date or the death of the contractowner
(or joint owner, if applicable), whichever comes first.
Valuation date
Accumulation and annuity units will be valued once daily at the close of trad-
ing (currently 4:00 p.m., New York time) on each day the New York Stock Ex-
change is open (valuation date). On any date other than a valuation date, the
accumulation unit value and the annuity unit value will not change.
Allocation of purchase payments
Purchase payments are placed into the fund or into the fixed account, according
to the contractowner's instructions. Purchase payments, less deductions, allo-
cated to the fund are converted into accumulation units and are credited to the
account of each contractowner. The number of accumulation units credited is de-
termined by dividing the net purchase payment by the value of an accumulation
unit on the valuation date on which the purchase payment is received at our
home office if received before 4:00 p.m., New York time. If the purchase pay-
ment is received at or after 4:00 p.m., New York time, we will use the accumu-
lation unit value computed on the next valuation date. The number of accumula-
tion units determined in this way is not changed by any subsequent change in
the value of an accumulation unit. However, the dollar value of an accumulation
unit will vary depending not only upon how well the fund's investments perform,
but also upon the expenses of the fund.
Valuation of accumulation units
Purchase payments allocated to the fund are converted into accumulation units.
This is done by dividing each purchase payment by the value of an accumulation
unit for the valuation period during which the purchase payment is allocated to
the fund. The accumulation unit value for the fund was established on March 1,
1967, at $1. It may increase or decrease from valuation period to valuation pe-
riod. We determine the value of an accumulation unit on the last day of any
following valuation period as follows:
(1) The total value of the fund by its net asset value at end of the valuation
period; minus
(2) The liabilities of the fund at the end of the valuation period; these lia-
bilities include, daily charges imposed on the fund, and may include a
charge or credit with re -
8
<PAGE>
spect to any taxes paid or reserved for by us that we determine result from
the operations of the fund); and
(3) The result of steps (1) and (2) is divided by the number of fund units out-
standing at the beginning of the valuation period.
The daily charges imposed on the fund for any valuation period are equal to the
daily mortality and expense risk charge and the daily management fee multiplied
by the number of calendar days in the valuation period.
Valuation of annuity units. We set the value of an annuity unit for the period
ending March 1, 1967, at $1. We determine the value of the annuity unit for any
following valuation period by multiplying (a) the annuity unit value from the
previous valuation period by (b) the net investment factor for the valuation
period containing the 14th day prior to the last day of the current valuation
period by (c) a factor to neutralize the assumed investment rate (AIR) built
into the annuity table contained in the contract which is not applicable as ac-
tual net investment income is credited instead.
The value of an annuity unit on any date on which the NYSE is closed is its
value on the next day on which the NYSE is open. We use the net investment fac-
tor for the 14th day prior to the current valuation date in calculating the
value of an annuity unit in order to calculate amounts of annuity payments and
to mail checks in advance of their due dates. We normally issue and mail such
checks at least three days before the due date.
Transfer from the fund on or before the annuity commencement date
The contractowner may transfer all or any part of the contract value from the
fund to the fixed side of the contract.
The contractowner may also transfer all or any part of the contract value from
the fixed side of the contract to the fund subject to the following restric-
tions: (1) the sum of the percentages of fixed value transferred is limited to
25% of the value of the fixed side in any 12-month period; (2) the minimum
amount which can be transferred is $300 or the amount in the fixed account; and
(3) a transfer cannot be made during the first 30 days after the issue date of
the contract.
Transfers after the annuity commencement date
The contractowner may transfer all or a portion of his or her investment in the
fund to the fixed side of the contract. Those transfers will be limited to
three times per contract year. Currently, there is no charge for these trans-
fers. However, we reserve the right to impose a charge. No transfers are al-
lowed from the fixed side of the contract to the fund.
Death benefit before the annuity commencement date
The contractowner may designate a beneficiary during the life of the annuitant
and change the beneficiary by filing a written request with our home office.
Each change of beneficiary revokes any previous designation. We reserve the
right to request that the contract for endorsement of a change of beneficiary
be sent to us.
If the annuitant dies before the annuity commencement date, we will pay the
beneficiary a death benefit equal to the contract value, or, if greater and you
have elected it, the minimum death benefit.
The value of the death benefit will be determined as of the date on which the
death claim is approved for payment. This payment will occur upon receipt of:
(1) proof, satisfactory to us, of the death of the annuitant; (2) written au-
thorization for payment; and (3) our receipt of all required claim forms, fully
completed.
The minimum death benefit is equal to the total purchase payments applied minus
any withdrawals, partial annuitizations, premium taxes incurred and rider pre-
miums.
If the death benefit becomes payable, the beneficiary may elect to receive pay-
ment either in the form of a lump sum settlement or an annuity payout. Federal
tax law requires that an annuity election be made no later than 60 days after
we receive satisfactory notice of death as discussed previously.
If a lump sum settlement is requested, the proceeds will be mailed within seven
days of receipt of satisfactory claim documentation as discussed previously,
subject to the laws and regulations governing payment of death benefits. If an
election has not been made by the end of the 60 day period, a lump sum settle-
ment will be made to the beneficiary at that time. This payment may be post-
poned as permitted by the Investment Company Act.
Payment will be made in accordance with applicable laws and regulations gov-
erning payment of death benefits.
Unless otherwise provided in the beneficiary designation, one of the following
procedures will take place on the death of a beneficiary:
1. If any beneficiary dies before the annuitant, that beneficiary's interest
will go to any other beneficiaries named, according to their respective in-
terests (There are no restrictions on the beneficiary's use of the pro-
ceeds.); and/or
2. If no beneficiary survives the annuitant, the proceeds will be paid to the
contractowner, or to the contractowner's estate, as applicable.
Joint/contingent ownership
If a joint owner is named in the application, the joint owners shall be treated
as having equal undivided interests in the contract. Either owner, indepen-
dently of the other, may exercise any ownership rights in this contract.
A contingent owner may not exercise ownership rights in this contract while the
contractowner is living.
Death of contractowner
If the contractowner of a nonqualified contract dies before the annuity com-
mencement date, then, in compliance
9
<PAGE>
with the tax code, the cash surrender value of the contract will be paid as
follows:
1. Upon the death of a nonannuitant contractowner, the cash surrender value
shall be paid to any surviving joint or contingent owner(s). If no joint or
contingent owner has been named, then the cash surrender value shall be
paid to the annuitant named in the contract; and
2. Upon the death of a contractowner, who is also the annuitant, the death
will be treated as death of the annuitant and the provisions of this con-
tract regarding death of annuitant will control. If the beneficiary is the
surviving spouse of the contractowner, the surviving spouse may elect to
continue the contract, in his or her name as the new contractowner, and the
contract will continue as though no death benefit had been payable.
The tax code requires that any distribution be paid within five years of the
death of the contractowner unless the beneficiary begins receiving, within one
year of the contractowner's death, the distribution in the form of a life an-
nuity or an annuity for a designated period not exceeding the beneficiary's
life expectancy.
Contract proceeds from the VAA will be paid within seven days, except (i) when
the NYSE is closed (except weekends and holidays); (ii) times when market
trading is restricted or the SEC declares an emergency, and we cannot value
units or the funds cannot redeem shares; or (iii) when the SEC so orders to
protect contract owners.
Surrenders and withdrawals
Before the annuity commencement date, we will allow the surrender of the con-
tract or a withdrawal of a portion of the contract value upon the
contractowner's written request, subject to the rules discussed below. Surren-
der or withdrawal rights after the annuity commencement date depend upon the
annuity option elected by the contractowner.
The contract value available upon surrender/withdrawal is the contract value
at the end of the valuation period during which the written request for
surrender/withdrawal is received at the home office. Unless prohibited,
surrender/withdrawal payments will be mailed within seven days after we re-
ceive a valid written request at the home office. The payment may be postponed
as permitted by the Investment Company Act.
The tax consequences of a surrender are discussed later in this Prospectus.
See Federal tax matters.
Participants in the Texas Optional Retirement Program should refer to the Re-
strictions under the Texas Optional Retirement Program, later in this Prospec-
tus.
We may terminate the contract, if the frequency of purchase payments or the
contract value falls below the contractowner's state's minimum standards.
Reinvestment privilege
The contractowner may elect to make a reinvestment purchase with any part of
the proceeds of a surrender/withdrawal, and we will re-credit the
surrender/withdrawal charges previously deducted. This election must be made
within 30 days of the date of the surrender/withdrawal, and the repurchase
must be of a contract covered by this Prospectus. The contractowner must rep-
resent to us that the proceeds being used to make the purchase have retained
their tax-favored status under an arrangement for which the contracts offered
by this Prospectus are designed. The number of accumulation units which will
be credited when the proceeds are reinvested will be based on the value of the
accumulation units on the next valuation date (see More information about the
fund -- Valuing the fund's assets). This computation will occur following re-
ceipt of the proceeds and request for reinvestment at our home office. The
contractowner may utilize the reinvestment privilege only once. For tax re-
porting purposes, we will treat a surrender/withdrawal and a subsequent rein-
vestment purchase as separate transactions. A tax advisor should be consulted
before a request for surrender/withdrawal or subsequent reinvestment purchase
is made.
Amendment of contract
We reserve the right to amend the contract to meet the requirements of the In-
vestment Company Act or other applicable federal or state laws or regulations.
The contractowner will be notified in writing of any changes, modifications or
waivers.
Commissions
The commissions paid to dealers are a maximum of 5.25% of each purchase pay-
ment.
Ownership
The contractowner has all rights under the contract. According to Indiana law,
the assets of the fund are held for the exclusive benefit of all
contractowners and their designated beneficiaries; and the assets of the fund
are not chargeable with liabilities arising from any other business that we
may conduct. Qualified contracts may not be assigned or transferred except as
permitted by the Employee Retirement Income Security Act (ERISA) of 1974 and
upon written notification to us. Non-qualified contracts may not be collater-
ally assigned. We assume no responsibility for the validity or effect of any
assignment. Consult a tax advisor about the tax consequences of an assignment.
Contractowner questions
The obligations to purchasers under the contracts are those of Lincoln Life.
Questions about the contracts should be directed to us at 1-800-454-6265.
Annuity payout options
When you applied for a contract, you could select any annuity commencement
date permitted by law. (Please note the following exception: Contracts issued
un-
10
<PAGE>
der qualified employee pension and profit-sharing trusts [described in Section
401(a) and tax exempt under Section 501(a) of the tax code] and qualified annu-
ity plans [described in Section 403(a) of the tax code], including H.R. 10
trusts and plans covering self-employed individuals and their employees, pro-
vide for annuity payouts to start at the date and under the option specified in
the plan.)
The contract provides optional forms of payouts of annuities (annuity options),
each of which is payable on a variable basis, a fixed basis or a combination of
both. The contract provides that all or part of the contract value may be used
to purchase an annuity.
You may elect annuity payouts in monthly, quarterly, semi-annual or annual in-
stallments. If the payouts would be or become less than $50, we have the right
to reduce their frequency until the payouts are at least $50 each. Following
are explanations of the annuity payout options available.
Payouts for guaranteed period. This option guarantees periodic payouts during a
designated period, usually 10 or 20 years. However, under contracts issued in
connection with Section 403(b) plans, this option is not available if the sum
of the number of years over which monthly payouts would be made and the age of
the annuitant on the first scheduled payment date is greater than 95.
Life income with payouts for guaranteed period. This option guarantees periodic
payouts during a designated period of 10, 15 or 20 years, and then continues
throughout the lifetime of the annuitant. The contractowner selects the desig-
nated period.
Unit refund life annuity. This option offers a periodic payout during the life-
time of the annuitant with the guarantee that upon death a payout 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 payouts begin, divided by (b) the annuity units represented
by each payout to the annuitant multiplied by the number of payouts paid before
death. The value of the number of annuity units is computed on the date the
death claim is approved for payment by the home office. (Not available as a
fixed payout).
Payouts of designated amount. This option offers equal annual, semi-annual,
quarterly or monthly payouts of a designated amount (not less than $50 per year
per $1,000 of original proceeds left with us) until the proceeds are exhausted.
The minimum amount withdrawable under this option is not necessarily the recom-
mended amount. This option is not available under contracts issued in connec-
tion with Section 403(b) plans. (Not available as a fixed payout).
Interest income. Under this option, the proceeds may be left on deposit with
us, subject to withdrawal upon demand, and interest will be paid annually,
semi-annually, quarterly or monthly as the contractowner elects. We guarantee
an interest rate of 3% per year. This option is not available under contracts
issued in connection with Section 403(b) plans. (Not available as a variable
payout).
Annuity settlement. This option offers payouts in the form provided by any sin-
gle payment immediate annuity contract issued by us on the date 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. In calcu-
lating the first payment under the single payment immediate annuity contract
selected under this option, we assume that a deduction for sales and adminis-
trative expenses has been made from the amount applied.
Life annuity. This option offers a periodic payouts during the lifetime of the
annuitant and ends with the last payout before the death of the annuitant. This
option offers the highest periodic payout since there is no guarantee of a min-
imum number of payouts or provision for a death benefit for beneficiaries. How-
ever, there is the risk under this option that the recipient would receive no
payouts if the annuitant dies before the date set for the first payout; only
one payout if death occurs before the second scheduled payout, and so on.
Joint and last survivor annuity. This option offers a periodic payouts during
the joint lifetime of the annuitant and a designated second person. The payouts
continue during the lifetime of the survivor.
Joint and two-thirds to survivor annuity. This option provides a periodic
payouts during the joint lifetime of the annuitant and a designated second per-
son. When one of the joint annuitants dies, the survivor receives two thirds of
the periodic payout made when both were alive.
If any payee dies after an annuity payout becomes operative, then we will pay
the following to the payee's estate (unless otherwise specified in the election
option): the present value of unpaid payments under the payouts for guaranteed
period or life income with guaranteed period; the amount payable at the death
of the payee under the unit refund; or the proceeds remaining with Lincoln Life
under the payouts of designated amount or interest income. If the annuity set-
tlement has been selected and becomes operative, when the last payee dies, we
will pay the remainder of the contract in a single sum to the last payee's es-
tate (unless otherwise specified in the election option).
Present values will be based on the Assumed Investment Rate (see [Assumed in-
vestment 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.
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<PAGE>
General information
None of the options listed above currently provides withdrawal features, per-
mitting the contractowner to withdraw commuted values as a lump sum payment.
Other options, with or without withdrawal features, may be made available by
us. Options are only available to the extent they are consistent with the re-
quirements of the contract as well as Sections 72(s) and 401(a)(9) of the tax
code, if applicable. The mortality and expense risk charge and the charge for
administrative services will be assessed on all variable annuity payouts, in-
cluding options that may be offered that do not have a life contingency and
therefore no mortality risk.
The annuity commencement date is usually on or before the annuitant's 85th
birthday. The annuity commencement date may be changed upon written notice to
our home office. We must be given at least 30 days notice before the date on
which payouts are to begin. If proceeds become available to a beneficiary in a
lump sum, the beneficiary may choose any annuity payout option.
Unless another option is selected, the contract automatically provides for a
life annuity with annuity payouts guaranteed for 10 years (on a fixed, variable
or combination fixed and variable basis, in proportion to the account alloca-
tions at the time of annuitization) except when a joint life payout is required
by law. Under any option providing for guaranteed payouts, the number of
payouts which remain unpaid at the date of the annuitant's death (or surviving
annuitant's death in the case of a joint life annuity) will be paid to the ben-
eficiary as payouts become due.
Assumed investment rate (AIR)
The contractowner may elect an AIR of 3.5%, 4.5% or 5%, as state law or regula-
tions permit. These AIRs are used to determine the required level of employer
contributions in connection with certain pension plans. They do not reflect how
the value of the fund's investments has grown or will grow.
The contractowner's choice of AIR affects the pattern of annuity payments. A
higher AIR will produce a higher initial payment but a more slowly rising se-
ries of subsequent payments (or a more rapidly falling series of subsequent
payments) than a lower AIR.
The following table shows the annuity unit values at each year end for the dif-
ferent AIRs:
Annuity Unit Values Assumed Investment Rate
<TABLE>
<CAPTION>
December
31 3.5% 4.5% 5%
- ----------------------------
<S> <C> <C> <C>
1989 2.300 1.855 1.6667
1990 2.175 1.739 1.556
1991 2.565 2.031 1.809
1992 2.705 2.120 1.476
1993 2.870 2.227 1.964
1994 2.805 2.156 1.892
1995 3.718 2.830 2.472
1996 4.268 3.218 2.797
1997 5.482 4.094 3.541
1998 6.353 4.699 4.045
</TABLE>
Variable annuity payouts
Variable annuity payouts will be determined using:
1. The contract value on the annuity commencement date;
2. The annuity tables contained in the contract;
3. The annuity option selected; and
4. The investment performance of the fund(s) selected.
To determine the amount of payouts, we make this calculation:
1. Determine the dollar amount of the first periodic payout; then
2. Credit the contract with a fixed number of annuity units equal to the first
periodic payout divided by the annuity unit value; and
3. Calculate the value of the annuity units each period thereafter.
We may use sex distinct tables in contracts that are not associated with em-
ployer sponsored plans.
When calculating the first payment under a single payment immediate annuity
contract, you should assume that a deduction for sales and administrative ex-
penses (which currently amounts to 2% plus $115 for single payment variable an-
nuity contracts) has been made from the amount applied under this provision.
Immediate annuity contracts. For immediate annuities, the number of annuity
units purchased is specified in the contract. We determine the number of annu-
ity units by (a) multiplying the net single payment (after deductions) by the
applicable annuity factor from the annuity table that we are then using for im-
mediate variable annuity contracts, and then (b) dividing by the value of the
annuity unit based on the net investment factor calculated on the valuation
date of the day or the day after the contract was issued. This number of annu-
ity units does not change during the annuity period, and we determine the dol-
lar amount of the annuity payment by multiplying the number of annuity units by
the then value of an annuity unit.
More information about the fund
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 that day,
then the value of the security is taken to be the average of the reported bid
and asked prices at the time which the value is being determined.
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 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.
12
<PAGE>
Restrictions
The investments of the fund are subject to the provisions of the Indiana In-
surance Law concerning earnings records, preferred stock overage, self-deal-
ing, 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 instru-
mentalities 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 neces-
sary for the clearance of transactions.
9. Invest in the securities of a company for the purpose of exercising man-
agement or control.
10. Place emphasis upon obtaining short-term trading profits, but it may en-
gage in short-term transactions in the event that a change in economic
conditions or a rapid appreciation or depreciation of stock prices occurs.
(See the fund's portfolio turnover rates set forth in Condensed financial
information for the fund.) The securities markets in general have experi-
enced volatility due to rapidly shifting economic trends. This volatility
can affect turnover.
11. Plan to make investments in securities of other investment companies. How-
ever, 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.
Sales and administrative charges and agreements
The administrative and sales services are provided under a Sales and Adminis-
trative Services Agreement executed by the Company and the fund. For sales and
administrative expenses, the fund paid $10,852 in 1998, $9,784 in 1997, and
$12,259 in 1996.
Custodian
Chase Manhattan Bank, N.A., 4 Chase MetroTech Center, Brooklyn, NY 11245
("Chase") is Custodian for the fund pursuant to a Custodian Agreement effec-
tive October 1, 1998.
Federal tax matters
Introduction
The Federal income tax treatment of the contract is complex and sometimes un-
certain. The Federal income tax rules may vary with your particular circum-
stances. This discussion does not include all the Federal income tax rules
that may affect you and your contract. This discussion also does not address
other Federal tax consequences, or state or local tax consequences, associated
with the contract. As a result, you should always consult a tax adviser about
the application of tax rules to your individual situation.
Taxation of nonqualified annuities
This part of the discussion describes some of the Federal income tax rules ap-
plicable to nonqualified annuities. A nonqualified annuity is a contract not
issued in connection with a qualified retirement plan receiving special tax
treatment under the tax code, such as an IRA or a section 403(b) plan.
Tax Deferral on Earnings
The Federal income tax law generally does not tax any increase in your con-
tract value until you receive a contract distribution. However, for this gen-
eral rule to apply, certain requirements must be satisfied:
. An individual must own the contract (or the tax law must treat the contract
as owned by an individual).
. The investments of the VAA must be "adequately diversified" in accordance
with IRS regulations.
. Your right to choose particular investments for a contract must be limited.
. The annuity commencement date must not occur near the end of the annuitant's
life expectancy.
Contracts not owned by an individual
If a contract is owned by an entity (rather than an individual), the tax code
generally does not treat it as an annuity contract for Federal income tax pur-
poses. This means that the entity owning the contract pays tax currently on
the excess of the contract value over the purchase payments for the contract.
Examples of contracts where the owner pays current tax on the contract's earn-
ings are contracts issued to a corporation or a trust. Exceptions to this rule
exist. For example, the tax code treats a contract as owned by an individual
if the named owner is a trust or other entity that holds the contract as an
agent for an individual. However, this exception does not apply in the case of
any employer that owns a contract to provide deferred compensation for its em-
ployees.
13
<PAGE>
Investments in the VAA must be diversified
For a contract to be treated as an annuity for Federal income tax purposes, the
investments of the VAA must be "adequately diversified." IRS regulations define
standards for determining whether the investments of the VAA are adequately di-
versified. If the VAA fails to comply with these diversification standards, you
could be required to pay tax currently on the excess of the contract value over
the contract purchase payments. Although we do not control the investments of
the underlying investment options, we expect that the underlying investment op-
tions will comply with the IRS regulations so that the VAA will be considered
"adequately diver-sified."
Restrictions
Federal income tax law limits your right to choose particular investments for
the contract. Because the I.R.S. has not issued guidance specifying those lim-
its, the limits are uncertain and your right to allocate contract values among
the subaccounts may exceed those limits. If so, you would be treated as the
owner of the assets of the VAA and thus subject to current taxation on the in-
come and gains from those assets. We do not know what limits may be set by the
I.R.S. in any guidance that it may issue and whether any such limits will apply
to existing contracts. We reserve the right to modify the contract without your
consent to try to prevent the tax law from considering you as the owner of the
assets of the VAA.
Age at which annuity payouts begin
Federal income tax rules do not expressly identify a particular age by which
annuity payouts must begin. However, those rules do require that an annuity
contract provide for amortization, through annuity payouts, of the contract's
purchase payments and earnings. If annuity payouts under the contract begin or
are scheduled to begin on a date past the annuitant's 85th birthday, it is pos-
sible that the tax law will not treat the contract as an annuity for Federal
income tax purposes. In that event, you would be currently taxable on the ex-
cess of the contract value over the purchase payments of the contract.
Tax Treatment of Payments
We make no guarantees regarding the tax treatment of any contract or of any
transaction involving a contract. However, the rest of this discussion assumes
that your contract will be treated as an annuity for Federal income tax pur-
poses and that the tax law will not tax any increase in your contract value un-
til there is a distribution from your contract.
Taxation of withdrawals and surrenders
You will pay tax on withdrawals to the extent your contract value exceeds your
purchase payments in the contract. This income (and all other income from your
contract) is considered ordinary income. A higher rate of tax is paid on ordi-
nary income than on capital gains. You will pay tax on a surrender to the ex-
tent the amount you receive exceeds your purchase payments. In certain circum-
stances your purchase payments are reduced by amounts received from your con-
tract that were not included in income.
Taxation of annuity payouts
The tax code imposes tax on a portion of each annuity payout (at ordinary in-
come tax rates) and treats a portion as a nontaxable return of your purchase
payments in the contract. We will notify you annually of the taxable amount of
your annuity payout. Once you have recovered the total amount of the purchase
payment in the contract, you will pay tax on the full amount of your annuity
payouts. If annuity payouts end because of the annuitant's death and before the
total amount of the purchase payments in the contract has been received, the
amount not received generally will be deductible.
Taxation of death benefits
We may distribute amounts from your contract because of the death of a
contractowner or an annuitant. The tax treatment of these amounts depends on
whether you or the annuitant dies before or after the annuity commencement
date.
. Death prior to the annuity commencement date--
. If the beneficiary receives death benefits under an annuity payout op-
tion, they are taxed in the same manner as annuity payouts.
. If the beneficiary does not receive death benefits under an annuity pay-
out option, they are taxed in the same manner as a withdrawal.
. Death after the annuity commencement date--
. If death benefits are received in accordance with the existing annuity
payout option, they are excludible from income if they do not exceed the
purchase payments not yet distributed from the contract. All annuity
payouts in excess of the purchase payments not previously received are
includible in income.
. If death benefits are received in a lump sum, the tax law imposes tax on
the amount of death benefits which exceeds the amount of purchase pay-
ments not previously received.
Penalty taxes payable on withdrawals, surrenders, or annuity payouts
The tax code may impose a 10% penalty tax on any distribution from your con-
tract which you must include in your gross income. The 10% penalty tax does not
apply if one of several exceptions exists. These exceptions include withdraw-
als, surrenders, or annuity payouts that:
. you receive on or after you reach age 59 1/2,
. you receive because you became disabled (as defined in the tax law),
14
<PAGE>
. a beneficiary receives on or after your death, or
. you receive as a series of substantially equal periodic payments for your
life (or life expectancy).
Special rules if you own more than one annuity contract
In certain circumstances, you must combine some or all of the nonqualified an-
nuity contracts you own in order to determine the amount of an annuity payout,
a surrender, or a withdrawal that you must include in income. For example, if
you purchase two or more deferred annuity contracts from the same life insur-
ance company (or its affiliates) during any calendar year, the tax code treats
all such contracts as one contract. Treating two or more contracts as one con-
tract could affect the amount of a surrender, a withdrawal or an annuity pay-
out that you must include in income and the amount that might be subject to
the penalty tax described above.
Loans and assignments
Except for certain qualified contracts, the tax code treats any amount re-
ceived as a loan under a contract, and any assignment or pledge (or agreement
to assign or pledge) any portion of your contract value, as a withdrawal of
such amount or portion.
Gifting a contract
If you transfer ownership of your contract to a person other than your spouse
(or to your former spouse incident to divorce), and receive a payment less
than your contract's value, you will pay tax on your contract value to the ex-
tent it exceeds your purchase payments not previously received. The new own-
er's purchase payments in the contract would then be increased to reflect the
amount included in your income.
Charges for a contract's death benefit
Your contract may have a minimum death benefit rider, for which you pay an an-
nual charge, computed daily. It is possible that the tax law may treat all or
a portion of the minimum death benefit rider charge as a contract withdrawal.
Loss of interest deduction
After June 8, 1997, if a contract is issued to a taxpayer that is not an indi-
vidual, or if a contract is held for the benefit of an entity, the entity will
lose a portion of its deduction for otherwise deductible interest expenses.
This disallowance does not apply if you pay tax on the annual increase in the
contract value. Entities that are considering purchasing a contract, or enti-
ties that will benefit from someone else's ownership of a contract, should
consult a tax advisor.
Qualified retirement plans
We also designed the contracts for use in connection with certain types of re-
tirement plans that receive favorable treatment under the tax code. Contracts
issued to or in connection with a qualified retirement plan are called "quali-
fied contracts." We issue contracts for use with different types of qualified
plans. The Federal income tax rules applicable to those plans are complex and
varied. As a result, this Prospectus does not attempt to provide more than
general information about use of the contract with the various types of quali-
fied plans. Persons planning to use the contract in connection with a quali-
fied plan should obtain advice from a competent tax advisor.
Types of Qualified Contracts and Terms of Contracts
Currently, we issue contracts in connection with the following types of quali-
fied plans:
. Individual Retirement Accounts and Annuities ("Traditional IRAs")
. Roth IRAs
. Simplified Employee Pensions ("SEPs")
. Savings Incentive Matched Plan for Employees ("SIMPLE 401(k) plans")
. Public school system and tax-exempt organization annuity plans ("403(b)
plans")
. Qualified corporate employee pension and profit-sharing plans ("401(a)
plans") and qualified annuity plans ("403(a) plans")
. Self-employed individual plans ("H.R. 10 plans" or "Keogh Plans")
. Deferred compensation plans of state and local governments and tax-exempt
organizations ("457 plans").
We may issue a contract for use with other types of qualified plans in the fu-
ture.
We will amend contracts to be used with a qualified plan as generally neces-
sary to conform to tax law requirements for the type of plan. However, the
rights of a person to any qualified plan benefits may be subject to the plan's
terms and conditions, regardless of the contract's terms and conditions. In
addition, we are not bound by the terms and conditions of qualified plans to
the extent such terms and conditions contradict the contract, unless we con-
sent.
Tax Treatment of Qualified Contracts
The Federal income tax rules applicable to qualified plans and qualified con-
tracts vary with the type of plan and contract. For example,
. Federal tax rules limit the amount of purchase payments that can be made,
and the tax deduction or exclusion that may be allowed for the purchase pay-
ments. These limits vary depending on the type of qualified plan and the
plan participant's specific circumstances, e.g., the participant's compensa-
tion.
15
<PAGE>
. Under most qualified plans, e.g., 403(b) plans and Traditional IRAs, the an-
nuitant must begin receiving payments from the contract in certain minimum
amounts by a certain age, typically age 70 1/2. However, these "minimum dis-
tribution rules" do not apply to a Roth IRA.
. Loans are allowed under certain types of qualified plans, but Federal income
tax rules prohibit loans under other types of qualified plans. For example,
Federal income tax rules permit loans under some section 403(b) plans, but
prohibit loans under Traditional and Roth IRAs. If allowed, loans are sub-
ject to a variety of limitations, including restrictions as to the loan
amount, the loan's duration, and the manner of repayment. Your contract or
plan may not permit loans.
Tax treatment of payments
Federal income tax rules generally include distributions from a qualified con-
tract in the recipient's income as ordinary income. These taxable distribu-
tions will include purchase payments that were deductible or excludible from
income. Thus, under many qualified contracts the total amount received is in-
cluded in income since a deduction or exclusion from income was taken for pur-
chase payments. There are exceptions. For example, you do not include amounts
received from a Roth IRA in income if certain conditions are satisfied.
Failure to comply with the minimum distribution rules applicable to certain
qualified plans, such as Traditional IRAs, will result in the imposition of an
excise tax. This excise tax generally equals 50% of the amount by which a min-
imum required distribution exceeds the actual distribution from the qualified
plan.
Federal penalty taxes payable on distributions
The tax code may impose a 10% penalty tax on the amount received from the
qualified contract that must be included in income. The tax code does not im-
pose the penalty tax if one of several exceptions applies. The exceptions vary
depending on the type of qualified contract you purchase. For example, in the
case of an IRA, exceptions provide that the penalty tax does not apply to a
withdrawal, surrender, or annuity payout:
.received on or after the annuitant reaches age 59 1/2,
. received on or after the annuitant's death or because of the annuitant's
disability (as defined in the tax law),
. received as a series of substantially equal periodic payments for the
annuitant's life (or life expectancy), or
. received as reimbursement for certain amounts paid for medical care.
These exceptions, as well as certain others not described here, generally ap-
ply to taxable distributions from other qualified plans. However, the specific
requirements of the exception may vary.
Transfers and direct rollovers
In many circumstances, money may be moved between qualified contracts and
qualified plans by means of a rollover or a transfer. Special rules apply to
such rollovers and transfers. If the applicable rules are not followed, you
may suffer adverse Federal income tax consequences, including paying taxes
which might not otherwise have had to be paid. A qualified advisor should al-
ways be consulted before you move or attempt to move funds between any quali-
fied plan or contract and another qualified plan or contract.
The direct rollover rules apply to certain payments (called "eligible rollover
distributions") from section 401(a) plans, section 403(a) or (b) plans, HR 10
plans, and contracts used in connection with these types of plans. (The direct
rollover rules do not apply to distributions from IRAs or section 457 plans.)
The direct rollover rules require that we withhold Federal income tax equal to
20% of the eligible rollover distribution from the distribution amount, unless
you elect to have the amount directly transferred to certain qualified plans
or contracts. Before we send a rollover distribution, we will provide the re-
cipient with a notice explaining these requirements and how the 20% withhold-
ing can be avoided by electing a direct rollover.
Federal income tax withholding
We will withhold and remit to the IRS a part of the taxable portion of each
distribution made under a contract unless the distributee notifies us at or
before the time of the distribution that tax is not to be withheld. In certain
circumstances, Federal income tax rules may require us to withhold tax. At the
time a withdrawal, surrender, or annuity payout is requested, we will give the
recipient an explanation of the withholding requirements.
Tax status of Lincoln Life
Under existing Federal income tax laws, Lincoln Life does not pay tax on in-
vestment income and realized capital gains of the VAA. Lincoln Life does not
expect that it will incur any Federal income tax liability on the income and
gains earned by the VAA. We, therefore, do not impose a charge for Federal in-
come taxes. If Federal income tax law changes and we must pay tax on some or
all of the income and gains earned by the VAA, we may impose a charge against
the VAA to pay the taxes.
Changes in the law
The above discussion is based on the tax code, IRS regulations, and interpre-
tations existing on the date of this Prospectus. However, Congress, the IRS,
and the courts may modify these authorities, sometimes retroactively.
16
<PAGE>
Voting rights
Contractowners who have interests in the fund may cast votes. The number of
votes the contractowners have the right to cast will be determined as follows:
in the accumulation period, the number of votes equals the number of accumula-
tion units; in the annuity payout period, the number of votes equals (a) the
amount of assets in the fund established to meet the annuity obligations re-
lated to the annuitant divided by (b) the value of an accumulation unit. Frac-
tional shares will be recognized in determining the number of votes.
During the annuity period, every contractowner has the right to give instruc-
tions regarding all votes attributable to the assets established in the fund to
meet the annuity obligations related to that contractowner.
Whenever a meeting of the fund is called, each contractowner having a voting
interest in the fund will receive proxy voting material, reports, and other ma-
terials.
Distribution of the contracts
We are the distributor and principal underwriter of the contracts. The con-
tracts were sold by properly licensed registered representatives of independent
broker-dealers which in turn have selling agreements with us and have been li-
censed by state insurance departments to represent us. We are registered with
the SEC as a broker-dealer, under the Securities Exchange Act of 1934, and are
a member of the National Association of Securities Dealers (NASD).
State regulation
As a life insurance company organized and operating under Indiana law, the Com-
pany is subject to provisions governing life insurers and to regulation by the
Indiana Commissioner of Insurance.
Our books and accounts are subject to review and examination by the Indiana In-
surance Department at all times. A full examination of our operations is con-
ducted by the Indiana Department of Insurance at least once every five years.
Restrictions under the Texas Optional Retirement Program
Title 8, Section 830.105 of the Texas Government Code permits participants in
the Texas Optional Retirement Program (ORP) to redeem their interest in a vari-
able annuity contract issued under the ORP only upon: (1) termination of em-
ployment 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 cer-
tificate of termination from his or her employer before he or she can redeem
his or her account.
Records and reports
As presently required by the Investment Company Act and applicable regulations,
we are responsible for maintaining all records and accounts relating to the
fund. We have entered into an agreement with the Delaware Management Company,
2005 Market Street, Philadelphia, PA, 19203, to provide accounting services to
the fund. We will mail to each contractowner, at his or her last known address
of record at the home office, at least semiannually after the first contract
year, reports containing information required by the Investment Company Act or
any other applicable law or regu-lation.
Other information
A Registration Statement has been filed with the SEC, under the Securities Act,
for the contracts being offered here. This Prospectus does not contain all the
information in the Registration Statement, its amendments and exhibits. Please
refer to the Registration Statement for further information about the fund,
Lincoln Life, and the contracts offered. Statements in this Prospectus about
the content of the contracts and other legal instruments are summaries. For the
complete text of those contracts and instruments, please refer to those docu-
ments as filed with the SEC.
Preparing for Year 2000
Many existing computer programs use only two digits in the date field to iden-
tify the year. If left uncorrected these programs, which were designed and de-
veloped without considering the impact of the upcoming change in the century,
could fail to operate or could produce erroneous results when processing dates
after December 31, 1999. For example, for a bond with a stated maturity date of
July 1, 2000, a computer program could read and store the maturity date as July
1, 1900. This problem is known by many names, such as the "Year 2000 Problem",
"Y2K", and the "Millenium Bug".
The Year 2000 Problem affects virtually all computer programs worldwide. It can
cause a computer system to suddenly stop operating. It can also result in a
computer corrupting vital company records, and the problem could go undetected
for a long time. For our products, if left unchecked it could cause such prob-
lems as purchase payment collection and deposit errors; claim payment difficul-
ties; accounting errors; erroneous unit values; and difficulties or delays in
processing transfers,
17
<PAGE>
surrenders and withdrawals. In a worst case scenario, this could result in a
material disruption to the operations both of Lincoln Life and of Delaware
Service Company, Inc. (Delaware), the provider of the accounting and valuation
services for the VAA.
However, both companies are wholly owned by Lincoln National Corporation (LNC),
which has had Year 2000 processes in place since 1996. LNC projects aggregate
expenditures in excess of $92 million for its Y2K efforts through the year
2000. Both Lincoln Life and Delaware have dedicated Year 2000 teams and steer-
ing committees that are answerable to their counterparts in LNC.
In light of the potential problems discussed above, Lincoln Life, as part of
its Year 2000 updating process, has assumed responsibility for correcting all
high-priority Information Technology (IT) systems which service the VAA. Dela-
ware is responsible for updating all its high-priority IT systems to support
these vital services. The Year 2000 effort, for both IT and non-IT systems, is
organized into four phases:
. awareness-raising and inventory of all assets (including third-party agent
and vendor relationships)
.assessment and high-level planning and strategy
.remediation of affected systems and equipment; and
.testing to verify Year 2000 readiness.
Both companies are currently on schedule to have their high-priority IT systems
remediated and tested to demonstrate readiness by June 30, 1999. During the
third and fourth quarters of 1999 additional testing of the environment will
continue. Both companies are currently on schedule to have their high-priority
non-IT systems (elevators, heating and ventilation, security systems, etc.)
remediated and tested by October 31, 1999.
The work on Year 2000 issues has not suffered significant delays; however, some
uncertainty remains. Specific factors that give rise to this uncertainty in-
clude (but are certainly not limited to) a possible loss of technical resources
to perform the work; failure to identify all susceptible systems; and non-com-
pliance by third parties whose systems and operations impact Lincoln Life. In a
report dated February 26, 1999, entitled, Investigating the Impact of the Year
2000 Technology Problem. S. Prt. 106-10, the U.S. Senate Special Committee on
the Year 2000 Technology Problem expressed its concern that "Financial services
firms...are particularly vulnerable to...the risk that a material customer or
business partner will fail, as a result of the computer problems, to meet its
obligations".
One important source of uncertainty is the extent to which the key trading
partners of Lincoln Life and of Delaware will be successful in their own
remediation and testing efforts. Lincoln Life and Delaware have been monitoring
the progress of their trading partners; however, the efforts of these partners
are beyond our control.
Lincoln Life and Delaware expect to have completed their necessary remediation
and testing efforts prior to December 31, 1999. However, given the nature and
complexity of the problem, there can be no guarantee by either company that
there will not be significant computer problems after December 31, 1999.
Legal proceedings
Lincoln Life is involved in various pending or threatened legal proceedings
arising from the conduct of its business. Most of those proceedings are routine
and in the ordinary course of business. In some instances they include claims
for unspecified or substantial punitive damages and similar types of relief in
addition to amounts for equitable relief. After consultation with legal counsel
and a review of available facts, it is management's opinion that the ultimate
liability, if any, under these suits will not have a material adverse effect on
the financial position of Lincoln Life.
Lincoln Life is presently defending three lawsuits in which Plaintiffs seek to
represent national classes of policyholders in connection with alleged fraud,
breach of contract and other claims relating to the sale of interest-sensitive
universal and participating whole life insurance policies. As of the date of
this prospectus, the courts have not certified a class in any of the suits.
Plaintiffs seek unspecified damages and penalties for themselves and on behalf
of the putative class. Although the relief sought in these cases is substan-
tial, the cases are in the preliminary stages of litigation, and it is prema-
ture to make assessments about potential loss. If any, Management is defending
these suits vigorously. The amount of liability, if any, which may ultimately
arise as a result of these suits cannot be reasonably determined at his time.
Table of Contents for SAI
<TABLE>
<CAPTION>
Item
<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>
<TABLE>
<CAPTION>
Item
<S> <C>
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-7
</TABLE>
18
<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, 1999. You may obtain a copy of the Fund A (Individual) Prospectus on
request and without charge. Please write Annuities Customer Service, The
Lincoln National Life Insurance Company, P.O. Box 2340, Fort Wayne, Indiana
46801 or call 1-800-454-6265.
---------
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS.
TABLE OF CONTENTS
<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
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-7
</TABLE>
---------
The date of this Statement of Additional Information is April 30, 1999
Form 10586 (SAI) 4/99
SAI-AI
<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
This information is discussed 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>
Position Present Position and Principal
Name and Address With the Fund Age Occupation During Last Five Years
<S> <C> <C> <C>
John B. Borsch, Jr. Member 65 Retired (formerly Associate Vice President -- Investments,
1776 Sherwood Road Northwestern University, Evanston, Illinois)
Des Plaines, IL 60016
*Kelly D. Clevenger Chairman and 46 Vice President, Lincoln National Life Insurance Company
1300 S. Clinton Street Member
Fort Wayne, IN 46802
*Barbara S. Kowalczyk Member 47 Senior Vice President, Lincoln National Corporation
200 East Berry Street (formerly
Fort Wayne, IN 46802 Senior Vice President Lincoln Investment Management, Inc.)
Nancy L. Frisby, CPA Member 57 Regional Vice President/Chief Financial Officer (formerly
700 Broadway Vice
Fort Wayne, IN 46802 President --Finance; Regional Controller of Finance),
St. Joseph Medical Center, Fort Wayne, Indiana
Kenneth G. Stella Member 55 President, Indiana Hospital and Health Association,
One American Square Indianapolis, Indiana
Indianapolis, IN 46282
*Cynthia A. Rose Secretary to the Board 45 Assistant Secretary, Lincoln National Corporation
200 East Berry Street of Managers
Fort Wayne, IN 46802
*Janet C. Chrzan Vice President and 50 Vice President and Treasurer, Lincoln National Corporation
200 East Berry Street Treasurer
Fort Wayne, IN 46802
</TABLE>
*An "interested person" of the Fund as that term is defined in the Investment
Company Act of 1940.
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
SAI-AI
<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.
Securities of the same issuer may be purchased, held or sold at the same time
by the Fund or other accounts or companies for which the Advisor provides
investment advice (including affiliates of the Advisor). On occasions when the
Advisor deems the purchase or sale of a security to be in the best interest of
the Fund, as well as the other clients of the Advisor, the Advisor, to the
extent permitted by applicable laws and regulations, may aggregate such
securities to be sold or purchased for the Fund with those to be sold or
purchased for other clients in order to obtain best execution and lower
brokerage commissions, if any. In such event, allocation of the securities so
purchased or sold, as well as the expenses incurred in the transaction, will
be made by the Advisor in the manner it considers to be equitable and
consistent with its fiduciary obligations to all such clients, including the
Fund. In some instances, the procedures may impact the price and size of the
position obtainable for the Fund.
The Fund paid brokerage fees of $89,107 in 1998, $78,697 in 1997, and
$124,820 in 1996.
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 one 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
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
one 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
B-3
SAI-AI
<PAGE>
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
Dollar Amount of First
Monthly Payment
Number of Annuity Units =
------------------------------
Annuity Unit Value on Date of
First Payment
Value of Annuity Unit
Factor to Net Investment Factor for
Annuity Unit Value = on Preceding Valuation X Neutralize X 14th Day Preceding
Current
Date AIR 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 Contractowner or
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 Contractowner or 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 Annuitant's or
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.
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
B-4
SAI-AI
<PAGE>
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 [(403(b) Annuity)]
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 [401(a)]
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. For plan years beginning after December 31, 1996,
tax exempt organizations may have 401(k) plans.
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. For tax years beginning in 1997, the limit is raised from $250
to $2,000 for non-working spouses. 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
B-5
SAI-AI
<PAGE>
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. Plans of state or local governments
established on August 20, 1996 or later, must hold all assets and income in
trust (or custodial accounts or an annuity contract) for the exclusive benefit
of participants and their beneficiaries. Section 457 plans that were in
existence before August 20, 1996 are allowed until January 1, 1999 to meet
this requirement. 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 (as indexed) 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
employee pension plan (SEP) as provided by Section 408(k) of the Code. The
contributions and distribution dates are limited by the Code provisions. All
distributions from the plan will be taxed as ordinary income. Any distribution
before the employee attains age 59 1/2 (except in the event of death or
disability) or the failure to satisfy certain other Code requirements may
result in adverse tax consequences.
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.
Distributions from qualified plans, 403(b) plans, IRAs, SEPs and Keoghs will
be subject to a 10% penalty tax if made before age 59 1/2 unless certain other
exceptions apply. Failure to meet certain minimum distribution requirements
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.
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
B-6
SAI-AI
<PAGE>
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 a natural person designated by
the Contract Owner as a beneficiary and to whom Contract ownership passes by
reason of death. 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
This information is disclosed in the Prospectus.
Independent Auditors
The financial statements of the Fund and the statutory-basis financial
statements of Lincoln Life which have been included in their SAI and
Registration Statement, and the Condensed Financial Information for the Fund
appearing in the Prospectus, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports which also appear
elsewhere in this document and in the Registration Statement. The financial
statements audited by Ernst & Young LLP have been included in this document in
reliance on their reports given on their authority as experts in accounting
and auditing.
Keeper of Records
All accounts, books, records and other documents which are required to be
maintained for the Fund are maintained by the Company or by third parties
responsible to the Company. The Company has entered into an agreement with the
Delaware Management Company, 2005 Market Street, Philadelphia, PA 19203, to
provide accounting services to the Fund. 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 Contracts are no longer being offered. 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, Martin Luther King's Birthday, President's Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas
Day. It may also be closed on other days.
FINANCIAL STATEMENTS
Financial statements for the Fund and the statutory-basis financial
statements of Lincoln Life appear on the following pages.
B-7
SAI-AI
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY FUND A
Statement of Net Assets
December 31, 1998
<TABLE>
<CAPTION>
Percent Number
of of
Net Assets Shares Market Value
---------- ------ ------------
<S> <C> <C> <C>
INVESTMENTS
Common Stock:
Aerospace & Defense:........................... 2.3%
Gulfstream Aerospace*.......................... 16,700 $ 889,275
United Technologies............................ 22,800 2,479,500
------------
3,368,775
Automobiles and Auto Parts:.................... 2.0%
Ford Motor..................................... 25,200 1,478,925
Hertz Class A.................................. 2,800 127,750
Navistar International*........................ 25,000 712,500
Republic Industries*........................... 39,400 581,150
------------
2,900,325
Banking, Finance & Insurance: ................. 14.8%
Allstate....................................... 8,600 332,175
AmSouth Bancorporation......................... 39,000 1,779,375
American International Group................... 16,200 1,565,325
Bank One....................................... 22,095 1,128,235
Bank of Boston................................. 35,700 1,390,069
BankAmerica.................................... 20,600 1,238,575
Bankers Trust of New York...................... 14,000 1,196,125
Chase Manhattan................................ 39,600 2,695,275
Citigroup...................................... 44,799 2,217,550
Conseco........................................ 44,600 1,363,087
Dime Bancorp................................... 32,000 846,000
March & McLennan............................... 21,600 1,262,250
MBIA........................................... 10,400 681,850
Metris......................................... 13,594 682,228
PaineWebber Group.............................. 34,050 1,315,181
SLM Holding.................................... 41,300 1,982,400
------------
21,675,700
Buildings & Materials:......................... 1.6%
Centex......................................... 31,200 1,405,950
Lafarge........................................ 22,500 911,250
------------
2,317,200
Cable, Media & Publishing:..................... 4.1%
Donnelley & Sons............................... 16,200 709,762
McGraw-Hill.................................... 19,700 2,006,937
New York Times................................. 40,800 1,415,250
Omnicom Group.................................. 30,400 1,763,200
R.H. Donnelley................................. 3,840 55,920
------------
5,951,069
Chemicals:..................................... 1.6%
Dow Chemical................................... 18,200 1,655,063
Lyondell Petrochemicals........................ 36,700 660,600
------------
2,315,663
Computers & Technology:........................ 11.2%
American Power Conversion*..................... 16,000 774,500
Apple Computer*................................ 40,000 1,638,750
Cisco Systems*................................. 2,000 185,687
Dell Computer*................................. 24,800 1,815,825
Electronics Arts*.............................. 7,300 409,256
HBO & Co.*..................................... 20,800 597,350
International Business Machines................ 8,200 1,514,950
Keane*......................................... 7,900 315,506
Lexmark International Group A*................. 16,200 1,628,100
Microsoft*..................................... 17,400 2,410,444
Network Associates*............................ 7,650 507,530
Storage Technology*............................ 19,000 675,688
Sun Microsystems*.............................. 30,700 2,626,769
Symantec*...................................... 8,800 190,850
Xerox.......................................... 9,100 1,073,800
------------
16,365,005
Consumer Products:............................. 7.2%
Clorox......................................... 14,600 1,705,462
General Electric............................... 48,600 4,960,237
Maytag......................................... 12,000 747,000
Procter & Gamble............................... 33,600 3,068,100
------------
10,480,799
</TABLE>
F-1
SAI
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY FUND A
Statement of Net Assets--Continued
<TABLE>
<CAPTION>
Percent Number
of of
Net Assets Shares Market Value
---------- ------ ------------
<S> <C> <C> <C>
Electronics & Electrical Equipment:............ 2.8%
FirstEnergy.................................... 32,100 $ 1,045,256
Honeywell...................................... 20,300 1,528,844
Intel.......................................... 12,600 1,493,494
------------
4,067,594
Energy:........................................ 7.2%
Atlantic Richfield............................. 17,200 1,122,300
ENSCO International............................ 44,600 476,663
Exxon.......................................... 47,500 3,473,437
Occidental Petroleum........................... 36,000 607,500
Royal Dutch Petroleum.......................... 46,800 2,240,550
Texaco......................................... 31,600 1,670,850
USX-Marathon Group............................. 33,200 1,000,150
------------
10,591,450
Food, Beverage & Tobacco: ..................... 7.7%
CKE Restaurants................................ 20,790 612,006
Coca-Cola...................................... 19,800 1,324,125
ConAgra........................................ 3,300 103,950
General Mills.................................. 16,200 1,259,550
Heinz (H.J.)................................... 31,650 1,792,181
Philip Morris.................................. 76,600 4,098,100
Quaker Oats.................................... 11,200 666,400
Suiza Foods*................................... 27,800 1,416,063
------------
11,272,375
Healthcare & Pharmaceuticals:.................. 12.8%
Amgen*......................................... 22,000 2,299,000
Arterial Vascular Engineering*................. 42,400 2,222,025
Bristol-Myers Squibb........................... 15,900 2,127,619
Health Management Associates Class A*.......... 5,650 122,181
Lilly (Eli).................................... 12,200 1,084,275
Lincare Holdings*.............................. 24,800 1,005,175
Merck & Company................................ 19,800 2,924,213
Pfizer......................................... 9,500 1,191,656
Rexall Sundown*................................ 6,500 90,594
Schering-Plough................................ 62,000 3,425,500
Tyco International............................. 29,300 2,210,319
------------
18,702,557
Industrial Machinery:.......................... 0.6%
Ingersoll-Rand................................. 18,750 880,078
Leisure, Lodging & Entertainment: ............. 0.2%
Eastman Kodak.................................. 3,700 266,400
Metals and Mining: ............................ 0.6%
Bethlehem Steel*............................... 17,600 147,400
USX-U.S. Steel Group........................... 30,900 710,700
------------
858,100
Retail: ....................................... 6.2%
Best Buy*...................................... 2,900 177,987
Fingerhut...................................... 6,900 106,519
Gap............................................ 27,900 1,569,375
Jostens........................................ 33,000 864,188
Kroger*........................................ 5,800 350,900
Lowe's Companies............................... 8,500 435,094
Ross Stores.................................... 27,800 1,093,756
Safeway*....................................... 21,000 1,279,688
TJX............................................ 53,500 1,551,500
Wal-Mart Stores................................ 20,000 1,628,750
------------
9,057,757
Telecommunications: ........................... 11.2%
ADC Telecommunications......................... 21,800 754,825
Ameritech...................................... 44,000 2,788,500
AT&T........................................... 23,800 1,790,950
Bell Atlantic.................................. 51,916 2,949,478
BellSouth...................................... 89,200 4,448,850
Lucent Technologies............................ 3,400 374,000
SBC Communications............................. 13,599 729,246
Tellabs*....................................... 20,000 1,371,250
U.S. West...................................... 17,700 1,143,863
------------
16,350,962
</TABLE>
F-2
SAI
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY FUND A
Statement of Net Assets--Continued
<TABLE>
<CAPTION>
Percent Number
of of
Net Assets Shares Market Value
---------- ------ ------------
<S> <C> <C> <C>
Textiles, Apparel & Furniture: ............... 1.5%
Johnson Controls.............................. 26,500 $ 1,563,500
Tommy Hilfiger*............................... 11,400 684,000
------------
2,247,500
Transportation & Shipping: ................... 1.0%
Alaska Air Group.............................. 9,900 438,075
AMR........................................... 16,000 950,000
------------
1,388,075
Utilities: ................................... 2.5%
General Public Utilities...................... 33,600 1,484,700
Minnesota Power and Light..................... 8,200 360,800
Texas Utilities............................... 38,500 1,797,469
------------
3,642,969
Total Common Stocks 99.1% 144,700,353
----- ------------
(Cost--$83,630,615)
TOTAL INVESTMENTS
(Cost--$83,630,615) 99.1% 144,700,353
Other Assets Over Liabilities: 0.9% 1,366,830
----- ------------
NET ASSETS 100.0% $146,067,183
===== ============
Net assets are represented by:
Value of accumulation units:
7,176,135 units at $18.712 unit value $134,281,654
Annuity reserves:
178,649 units at $18.712 unit value 3,342,925
351,631 units at $24.010 unit value 8,442,604
------------
530,280 $146,067,183
======= ============
</TABLE>
*Non-income producing security
See accompanying notes to financial statements.
F-3
SAI
<PAGE>
FINANCIAL STATEMENTS
LINCOLN NATIONAL VARIABLE ANNUITY FUND A
Statement of Operations
Year Ended December 31, 1998
<TABLE>
<S> <C> <C>
Investment Income:
Dividends.......................................... $ 2,358,504
Interest........................................... 61,960
------------
2,420,464
Expenses:
Investment management services..................... $ 441,232
Mortality and expense guarantees................... 1,304,517 1,745,749
------------ ------------
<CAPTION>
NET INVESTMENT INCOME 674,715
<S> <C> <C>
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments................... 15,158,708
Increase in net unrealized appreciation of
investments....................................... 9,368,090
------------
<CAPTION>
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 24,526,798
<S> <C> <C>
------------
<CAPTION>
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 25,201,513
<S> <C> <C>
============
Statements of Changes in Net Assets
<CAPTION>
Year Ended December 31
1998 1997
------------ ------------
<S> <C> <C>
Changes from operations:
Net investment income.............................. $ 674,715 $ 945,635
Net realized gain on investments................... 15,158,708 15,561,276
Increase in net unrealized appreciation of
investments....................................... 9,368,090 17,892,073
------------ ------------
<CAPTION>
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 25,201,513 34,398,984
<S> <C> <C>
Net decrease from equity transactions............... (10,592,393) (11,845,771)
------------ ------------
<CAPTION>
TOTAL INCREASE IN NET ASSETS 14,609,120 22,553,213
<S> <C> <C>
Net assets at beginning of period .................. 131,458,063 108,904,850
------------ ------------
<CAPTION>
NET ASSETS AT END OF PERIOD $146,067,183 $131,458,063
<S> <C> <C>
============ ============
</TABLE>
See accompanying notes to financial statements.
F-4
SAI
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY FUND A
Notes to Financial Statements
December 31, 1998
1. Significant Accounting Policies
The Fund: The 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. The Fund's investment
objective is to maximize long-term growth of capital. The Fund invests
primarily in equity securities diversified over industries and companies.
Investments: Investment transactions are accounted for on the date the
securities are purchased or sold. Common 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 form a part of, and are taxed
with, operations of The Lincoln National Life Insurance Company, which is
taxed as a "life insurance company" under the Internal Revenue Code. Under
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%.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the reported amounts of increases and decreases in net assets from operations
during the reporting period. Actual results could differ from those estimates.
2. Investments
The aggregate cost of investments purchased and the aggregate proceeds from
investments sold (exclusive of short-term investments) during the year ended
December 31, 1998 amounted to $41,571,993 and $51,892,501, 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). In addition, The Lincoln National Life Insurance Company
retained $10,852 from the proceeds of the sale of annuity contracts during the
period for sales and administrative charges. Accordingly, The Lincoln National
Life Insurance Company is responsible for all sales, general, and
administrative expenses applicable to the Fund.
The custodian bank of the Fund has agreed to waive its custodial fees when the
Fund maintains a prescribed amount of cash on deposit in certain non-interest
bearing accounts. For the year ended December 31, 1998, the custodial fee
offset arrangement was not material to either total expenses or to the
calculation of average net assets and the ratio of expenses to average net
assets.
4. Net Assets
Net assets at December 31, 1998 consisted of the following:
<TABLE>
<S> <C>
Equity transactions $(165,803,344)
Accumulated net investment income 73,957,102
Accumulated net realized gain on investments 176,843,687
Net unrealized appreciation of investments 61,069,738
-------------
$ 146,067,183
=============
</TABLE>
F-5
SAI
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY FUND A
Notes to Financial Statements--Continued
5. Summary of Changes in Equity Transactions
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1998 1997
------------------------- ------------------------
Units Amount Units Amount
--------- -------------- --------- -------------
<S> <C> <C> <C> <C>
Accumulation Units:
Balance at beginning of
period ................. 7,722,501 $ (146,214,289) 8,462,449 $(135,982,849)
Contract purchases....... 95,911 1,611,124 152,590 2,092,826
Terminated contracts..... (642,277) (12,586,365) (892,538) (12,324,266)
--------- -------------- --------- -------------
Balance at End of Period 7,176,135 $(157,189,530) 7,722,501 $(146,214,289)
========= ============== ========= =============
Annuity Reserves:
Balance at beginning of
period.................. 600,319 $ (7,078,289) 699,953 $ (5,463,958)
Annuity payments......... (84,509) (1,535,525) (88,185) (1,400,844)
Receipt of guarantee
mortality adjustments... 14,470 -- (11,449) (213,487)
--------- -------------- --------- -------------
Balance at End of Period 530,280 $ (8,613,814) 600,319 $ (7,078,289)
========= ============== ========= =============
</TABLE>
6. Supplemental Information--Selected Per Unit Data and Ratios
The following is selected financial data for an accumulation unit outstanding
throughout each year:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Investment income...................... $ 0.301 $ 0.286 $ 0.267 $0.251 $0.217
Expenses............................... 0.217 0.178 0.139 0.114 0.095
------- ------- ------- ------ ------
Net investment income.................. 0.084 0.108 0.128 0.137 0.122
Net realized and unrealized gain (loss)
on investments........................ 3.028 3.755 1.735 2.539 (0.040)
------- ------- ------- ------ ------
Increase in accumulation unit value.... 3.112 3.863 1.863 2.676 0.082
Accumulation unit value at beginning of
year.................................. 15.600 11.737 9.874 7.198 7.116
------- ------- ------- ------ ------
Accumulation unit value at end of year. $18.712 $15.600 $11.737 $9.874 $7.198
======= ======= ======= ====== ======
Ratio of expenses to average net
assets................................ 1.28% 1.27% 1.28% 1.28% 1.27%
Ratio of net investment income to
average net assets.................... 0.54% 0.77% 1.17% 1.65% 1.75%
Portfolio turnover rate................ 31.10% 32.56% 49.94% 48.95% 64.09%
Number of accumulation units
outstanding at end of year (expressed
in thousands)
Accumulation units..................... 7,176 7,723 8,462 9,569 9,908
Reserve units.......................... 530 600 700 831 863
</TABLE>
F-6
SAI
<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, 1998, and the related statement of
operations for the year then ended, the statements of changes in net assets
for each of the two years in the period then ended, and the selected per unit
data and ratios (Note 6 to financial statements) for each of the five years in
the period then ended. These financial statements and per unit data and ratios
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and per unit data and ratios
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 and per
unit data and ratios 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, 1998, 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 and selected per unit data and ratios
referred to above present fairly, in all material respects, the financial
position of the Lincoln National Variable Annuity Fund A at December 31, 1998,
the results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and the selected
per unit data and ratios for each of the five years in the period in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Fort Wayne, Indiana
February 9, 1999
F-7
SAI
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
BALANCE SHEETS -- STATUTORY BASIS
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------- ---------
(IN MILLIONS)
--------------------
<S> <C> <C>
ADMITTED ASSETS
CASH AND INVESTMENTS:
Bonds $23,830.9 $18,560.7
- ------------------------------------------------------------------------------------
Preferred stocks 236.0 257.3
- ------------------------------------------------------------------------------------
Unaffiliated common stocks 259.3 436.0
- ------------------------------------------------------------------------------------
Affiliated common stocks 322.1 412.1
- ------------------------------------------------------------------------------------
Mortgage loans on real estate 3,932.9 3,012.7
- ------------------------------------------------------------------------------------
Real estate 473.8 584.4
- ------------------------------------------------------------------------------------
Policy loans 1,606.0 660.5
- ------------------------------------------------------------------------------------
Other investments 434.4 335.5
- ------------------------------------------------------------------------------------
Cash and short-term investments 1,725.4 2,133.0
- ------------------------------------------------------------------------------------ --------- ---------
Total cash and investments 32,820.8 26,392.2
- ------------------------------------------------------------------------------------
Premiums and fees in course of collection 33.3 42.4
- ------------------------------------------------------------------------------------
Accrued investment income 432.8 343.5
- ------------------------------------------------------------------------------------
Reinsurance recoverable 171.6 71.1
- ------------------------------------------------------------------------------------
Funds withheld by ceding companies 53.7 44.1
- ------------------------------------------------------------------------------------
Federal income taxes recoverable from parent company 64.7 6.9
- ------------------------------------------------------------------------------------
Goodwill 49.5 52.4
- ------------------------------------------------------------------------------------
Other admitted assets 89.3 85.6
- ------------------------------------------------------------------------------------
Separate account assets 36,907.0 31,330.9
- ------------------------------------------------------------------------------------ --------- ---------
Total admitted assets $70,622.7 $58,369.1
- ------------------------------------------------------------------------------------ --------- ---------
--------- ---------
LIABILITIES AND CAPITAL AND SURPLUS
LIABILITIES:
Future policy benefits and claims $12,310.6 $ 5,872.9
- ------------------------------------------------------------------------------------
Other policyholder funds 16,647.5 16,360.1
- ------------------------------------------------------------------------------------
Amounts withheld or retained by Company as agent or trustee 897.6 878.2
- ------------------------------------------------------------------------------------
Funds held under reinsurance treaties 795.8 720.4
- ------------------------------------------------------------------------------------
Asset valuation reserve 484.5 450.0
- ------------------------------------------------------------------------------------
Interest maintenance reserve 159.7 135.4
- ------------------------------------------------------------------------------------
Other liabilities 504.5 294.7
- ------------------------------------------------------------------------------------
Short-term loan payable to parent company 140.0 120.0
- ------------------------------------------------------------------------------------
Net transfers due from separate accounts (789.0) (761.9)
- ------------------------------------------------------------------------------------
Separate account liabilities 36,907.0 31,330.9
- ------------------------------------------------------------------------------------ --------- ---------
Total liabilities 68,058.2 55,400.7
- ------------------------------------------------------------------------------------
CAPITAL AND SURPLUS:
Common stock, $2.50 par value:
Authorized, issued and outstanding shares -- 10 million (owned by Lincoln National
Corporation) 25.0 25.0
- ------------------------------------------------------------------------------------
Surplus notes due to Lincoln National Corporation 1,250.0 --
- ------------------------------------------------------------------------------------
Paid-in surplus 1,930.1 1,821.8
- ------------------------------------------------------------------------------------
Unassigned surplus (deficit) (640.6) 1,121.6
- ------------------------------------------------------------------------------------ --------- ---------
Total capital and surplus 2,564.5 2,968.4
- ------------------------------------------------------------------------------------ --------- ---------
Total liabilities and capital and surplus $70,622.7 $58,369.1
- ------------------------------------------------------------------------------------ --------- ---------
--------- ---------
</TABLE>
See accompanying notes. S-1
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
--------- --------- ---------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
PREMIUMS AND OTHER REVENUES:
Premiums and deposits $12,737.6 $ 5,589.0 $ 7,268.5
- ----------------------------------------------------------------------------
Net investment income 2,107.2 1,847.1 1,756.3
- ----------------------------------------------------------------------------
Amortization of interest maintenance reserve 26.4 41.5 27.2
- ----------------------------------------------------------------------------
Commissions and expense allowances on reinsurance ceded 179.9 99.7 90.9
- ----------------------------------------------------------------------------
Expense charges on deposit funds 134.6 119.3 100.7
- ----------------------------------------------------------------------------
Separate account investment management and administration service fees 396.3 325.5 244.6
- ----------------------------------------------------------------------------
Other income 31.3 21.3 16.8
- ---------------------------------------------------------------------------- --------- --------- ---------
Total revenues 15,613.3 8,043.4 9,505.0
- ----------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Benefits and settlement expenses 13,964.1 4,522.1 5,989.9
- ----------------------------------------------------------------------------
Underwriting, acquisition, insurance and other expenses 2,919.4 3,053.9 3,123.1
- ---------------------------------------------------------------------------- --------- --------- ---------
Total benefits and expenses 16,883.5 7,576.0 9,113.0
- ---------------------------------------------------------------------------- --------- --------- ---------
Gain (loss) from operations before dividends to policyholders, income taxes
and net realized gain on investments (1,270.2) 467.4 392.0
- ----------------------------------------------------------------------------
Dividends to policyholders 67.9 27.5 27.3
- ---------------------------------------------------------------------------- --------- --------- ---------
Gain (loss) from operations before federal income taxes and net realized
gain on investments (1,338.1) 439.9 364.7
- ----------------------------------------------------------------------------
Federal income taxes (credit) (141.0) 78.3 83.6
- ---------------------------------------------------------------------------- --------- --------- ---------
Gain (loss) from operations before net realized gain on investments (1,197.1) 361.6 281.1
- ----------------------------------------------------------------------------
Net realized gain on investments, net of income tax expense and excluding
net transfers to the interest maintenance reserve 46.8 31.3 53.3
- ---------------------------------------------------------------------------- --------- --------- ---------
Net income (loss) $(1,150.3) $ 392.9 $ 334.4
- ---------------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
S-2
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
--------- --------- ---------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Capital and surplus at beginning of year $ 2,968.4 $ 1,962.6 $ 1,732.9
- -----------------------------------------------------------------------------
Correction of prior year's asset valuation reserve -- (37.6) --
- -----------------------------------------------------------------------------
Correction of prior year's admitted assets -- (57.0) --
- ----------------------------------------------------------------------------- --------- --------- ---------
2,968.4 1,868.0 1,732.9
CAPITAL AND SURPLUS INCREASE (DECREASE):
Net income (loss) (1,150.3) 392.9 334.4
- -----------------------------------------------------------------------------
Difference in cost and admitted investment amounts (304.8) (36.2) 38.6
- -----------------------------------------------------------------------------
Nonadmitted assets (17.1) (0.4) (3.0)
- -----------------------------------------------------------------------------
Regulatory liability for reinsurance (35.2) (3.9) 0.6
- -----------------------------------------------------------------------------
Life policy reserve valuation basis (0.4) (0.9) (0.4)
- -----------------------------------------------------------------------------
Asset valuation reserve (34.5) (36.9) (105.5)
- -----------------------------------------------------------------------------
Proceeds from surplus notes from shareholder 1,250.0 -- --
- -----------------------------------------------------------------------------
Paid-in surplus, including contribution of common stock of affiliated
company in 1997 108.4 938.4 100.0
- -----------------------------------------------------------------------------
Separate account receivable due to change in valuation -- (2.6) --
- -----------------------------------------------------------------------------
Dividends to shareholder (220.0) (150.0) (135.0)
- ----------------------------------------------------------------------------- --------- --------- ---------
Capital and surplus at end of year $ 2,564.5 $ 2,968.4 $ 1,962.6
- ----------------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes. S-3
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
---------- ---------- ----------
(IN MILLIONS)
----------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums, policy proceeds and other considerations received $ 13,495.2 $ 6,364.3 $ 8,059.4
- -----------------------------------------------------------------------
Allowances and reserve adjustments paid on reinsurance ceded (632.4) (649.2) (767.5)
- -----------------------------------------------------------------------
Investment income received 2,003.9 1,798.8 1,700.6
- -----------------------------------------------------------------------
Separate account investment management and administration service fees 396.3 325.5 244.6
- -----------------------------------------------------------------------
Benefits paid (7,395.8) (5,345.2) (4,050.4)
- -----------------------------------------------------------------------
Insurance expenses paid (2,909.7) (3,193.0) (3,216.8)
- -----------------------------------------------------------------------
Federal income taxes recovered (paid) 84.2 (87.0) (72.3)
- -----------------------------------------------------------------------
Dividends to policyholders (12.9) (28.4) (27.7)
- -----------------------------------------------------------------------
Other income received and expenses paid, net 207.0 (8.7) 117.0
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net cash provided by (used in) operating activities 5,235.8 (822.9) 1,986.9
- -----------------------------------------------------------------------
INVESTING ACTIVITIES
Sale, maturity or repayment of investments 10,926.5 12,142.6 12,542.0
- -----------------------------------------------------------------------
Purchase of investments (16,950.0) (10,345.0) (14,175.4)
- -----------------------------------------------------------------------
Other sources (uses) including reinsured policy loans (778.3) 529.1 (377.2)
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net cash provided by (used in) investing activities (6,801.8) 2,326.7 (2,010.6)
- -----------------------------------------------------------------------
FINANCING ACTIVITIES
Surplus paid-in 108.4 -- 100.0
- -----------------------------------------------------------------------
Proceeds from surplus notes from shareholder 1,250.0 -- --
- -----------------------------------------------------------------------
Proceeds from borrowings from shareholder 140.0 120.0 100.0
- -----------------------------------------------------------------------
Repayment of borrowings from shareholder (120.0) (100.0) (63.0)
- -----------------------------------------------------------------------
Dividends paid to shareholder (220.0) (150.0) (135.0)
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net cash provided by (used in) financing activities 1,158.4 (130.0) 2.0
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net increase (decrease) in cash and short-term investments (407.6) 1,373.8 (21.7)
- -----------------------------------------------------------------------
Cash and short-term investments at beginning of year 2,133.0 759.2 780.9
- ----------------------------------------------------------------------- ---------- ---------- ----------
Cash and short-term investments at end of year $ 1,725.4 $ 2,133.0 $ 759.2
- ----------------------------------------------------------------------- ---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes.
S-4
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
ORGANIZATION AND OPERATIONS
The Lincoln National Life Insurance Company ("Company") is a wholly owned
subsidiary of Lincoln National Corporation ("LNC") and is domiciled in
Indiana. As of December 31, 1998, the Company owns 100% of the outstanding
common stock of four insurance company subsidiaries: First Penn-Pacific Life
Insurance Company ("First Penn"), Lincoln National Health & Casualty
Insurance Company ("LNH&C"), Lincoln National Reassurance Company ("LNRAC")
and Lincoln Life & Annuity Company of New York ("LLANY").
The Company's principal businesses consist of underwriting annuities,
deposit-type contracts and life and health insurance through multiple
distribution channels and the reinsurance of individual and group life and
health business. The Company is licensed and sells its products in 49
states, Canada and several U.S. territories.
USE OF ESTIMATES
The nature of the insurance and investment management businesses requires
management to make estimates and assumptions that affect the amounts
reported in the statutory-basis financial statements and accompanying notes.
Actual results could differ from those estimates.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity with
accounting practices prescribed or permitted by the Indiana Department of
Insurance ("Insurance Department"), which practices differ from generally
accepted accounting principles ("GAAP"). The more significant variances from
GAAP are as follows:
INVESTMENTS
Bonds are reported at cost or amortized cost or fair value based on their
National Association of Insurance Commissioners ("NAIC") rating. For GAAP,
the Company's bonds are classified as available-for-sale and, accordingly,
are reported at fair value with changes in the fair values reported directly
in shareholder's equity after adjustments for related amortization of
deferred acquisition costs, additional policyholder commitments and deferred
income taxes.
Investments in real estate are reported net of related obligations rather
than on a gross basis. Real estate owned and occupied by the Company is
classified as a real estate investment rather than reported as an operating
asset, and investment income and operating expenses include rent for the
Company's occupancy of those properties. Changes between cost and admitted
asset investment amounts are credited or charged directly to unassigned
surplus rather than to a separate surplus account.
Under a formula prescribed by the NAIC, the Company defers the portion of
realized capital gains and losses on sales of fixed income investments,
principally bonds and mortgage loans, attributable to changes in the general
level of interest rates and amortizes those deferrals over the remaining
period to maturity of the individual security sold. The net deferral is
reported as the Interest Maintenance Reserve ("IMR") in the accompanying
balance sheets. Realized capital gains and losses are reported in income net
of federal income tax and transfers to the IMR. The asset valuation reserve
("AVR") is determined by an NAIC prescribed formula and is reported as a
liability rather than unassigned surplus. Under GAAP, realized capital gains
and losses are reported in the income statement on a pre-tax basis in the
period in which the asset giving rise to the gain or loss is sold and
valuation allowances are provided when there has been a decline in value
deemed other than temporary, in which case, the provision for such declines
are charged to income.
SUBSIDIARIES
The accounts and operations of the Company's subsidiaries are not
consolidated with the accounts and operations of the Company as would be
required by GAAP. Under statutory accounting principles, the Company's
subsidiaries are carried at their statutory-basis net equity and presented
in the balance sheet as affiliated common stocks.
POLICY ACQUISITION COSTS
The costs of acquiring and renewing business are expensed when incurred.
Under GAAP, acquisition costs related to traditional life insurance, to the
extent recoverable from future policy revenues, are deferred and amortized
over the premium-paying
S-5
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
period of the related policies using assumptions consistent with those used
in computing policy benefit reserves. For universal life insurance, annuity
and other investment-type products, deferred policy acquisition costs, to
the extent recoverable from future gross profits, are amortized generally in
proportion to the present value of expected gross profits from surrender
charges and investment, mortality and expense margins.
NONADMITTED ASSETS
Certain assets designated as "nonadmitted," principally furniture and
equipment and certain receivables, are excluded from the accompanying
balance sheets and are charged directly to unassigned surplus.
PREMIUMS
Revenues for universal life policies consist of the entire premium received.
Under GAAP, premiums received in excess of policy charges are not recognized
as premium revenue.
Premiums and deposits with respect to annuity and other investment-type
contracts are reported as premium revenues; whereas, under GAAP, such
premiums and deposits are treated as liabilities and policy charges
represent revenues.
BENEFIT RESERVES
Certain policy reserves are calculated based on statutorily required
interest and mortality assumptions rather than on estimated expected
experience or actual account balances as would be required under GAAP.
Death benefits paid, policy and contract withdrawals, and the change in
policy reserves on universal life policies, annuity and other
investment-type contracts are reported as benefits and settlement expenses
in the accompanying statements of income; whereas, under GAAP, withdrawals
are treated as a reduction of the policy or contract liabilities and
benefits would represent the excess of benefits paid over the policy account
value and interest credited to the account values.
REINSURANCE
Premiums, claims and policy benefits and contract liabilities are reported
in the accompanying financial statements net of reinsurance amounts. For
GAAP, all assets and liabilities related to reinsurance ceded contracts are
reported on a gross basis.
A liability for reinsurance balances has been provided for unsecured policy
and contract liabilities and unearned premiums ceded to reinsurers not
authorized by the Insurance Department to assume such business. Changes to
those amounts are credited or charged directly to unassigned surplus. Under
GAAP, an allowance for amounts deemed uncollectible is established through a
charge to income.
Commissions on business ceded are reported as income when received rather
than deferred and amortized with deferred policy acquisition costs. Business
assumed under 100% indemnity and assumption reinsurance agreements is
accounted for as a purchase for GAAP reporting purposes and the ceding
commission represents the purchase price. Under purchase accounting, assets
acquired and liabilities assumed are reported at fair value at the date of
the transaction and the excess of the purchase price over the sum of the
amounts assigned to assets acquired less liabilities assumed is recorded as
goodwill. On a statutory-basis, the ceding commission is expensed when paid
and reinsurance premiums and benefits are accounted for on bases consistent
with those used in accounting for the original policies issued and the terms
of the reinsurance contracts.
Certain reinsurance contracts meeting risk transfer requirements under
statutory-basis accounting practices have been accounted for using
traditional reinsurance accounting whereas such contracts would be accounted
for using deposit accounting under GAAP.
INCOME TAXES
Deferred income taxes are not provided for differences between financial
statement amounts and tax bases of assets and liabilities.
POLICYHOLDER DIVIDENDS
Policyholder dividends are recognized when declared rather than over the
term of the related policies.
S-6
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
SURPLUS NOTES DUE TO LNC
Surplus notes due to LNC are reported as surplus rather than as liabilities.
On a statutory-basis, interest on surplus notes is not accrued until
approval is received from the Indiana Insurance Commissioner whereas under
GAAP, interest would be accrued periodically based on the outstanding
principal and the interest rate.
STATEMENTS OF CASH FLOWS
Cash and short-term investments in the statements of cash flows represent
cash balances and investments with initial maturities of one year or less.
Under GAAP, the corresponding captions of cash and cash equivalents include
cash balances and investments with initial maturities of three months or
less.
A reconciliation of the Company's net income (loss) and capital and surplus
determined on a statutory-basis with amounts determined in accordance with
GAAP is as follows:
<TABLE>
<CAPTION>
CAPITAL AND SURPLUS NET INCOME (LOSS)
-----------------------------------------------------
DECEMBER 31 YEAR ENDED DECEMBER 31
1998 1997 1998 1997 1996
-----------------------------------------------------
(IN MILLIONS)
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amounts reported on a statutory-basis $ 2,564.5 $ 2,968.4 $(1,150.3) $ 392.9 $ 334.4
- -------------------------------------------
GAAP adjustments:
Deferred policy acquisition costs,
present value of future profits and
goodwill 3,085.2 958.3 48.5 (98.9) 66.7
----------------------------------------
Policy and contract reserves (2,299.9) (1,672.9) 1,743.4 (48.6) (57.1)
----------------------------------------
Interest maintenance reserve 159.7 135.4 24.4 58.7 (39.7)
----------------------------------------
Deferred income taxes 181.6 (13.0) (218.6) 70.3 1.8
----------------------------------------
Policyholders' share of earnings and
surplus on participating business (132.8) (79.8) 3.2 5.3 (.3)
----------------------------------------
Asset valuation reserve 484.5 450.0 -- -- --
----------------------------------------
Net realized gain (loss) on investments (174.1) (91.5) (116.7) (20.4) 78.7
----------------------------------------
Unrealized gain on investments 1,335.1 1,245.5 -- -- --
----------------------------------------
Nonadmitted assets, including nonadmitted
investments 119.1 61.0 -- -- --
----------------------------------------
Investments in subsidiary companies 490.4 188.8 41.3 (80.5) 29.9
----------------------------------------
Surplus notes and related interest (1,251.5) -- (1.5) -- --
----------------------------------------
Other, net (120.1) (162.5) 103.6 (35.0) (82.6)
---------------------------------------- --------- --------- --------- --------- ---------
Net increase (decrease) 1,877.2 1,019.3 1,627.6 (149.1) (2.6)
- ------------------------------------------- --------- --------- --------- --------- ---------
Amounts on a GAAP basis $ 4,441.7 $ 3,987.7 $ 477.3 $ 243.8 $ 331.8
- ------------------------------------------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
S-7
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Other significant accounting practices are as follows:
INVESTMENTS
Bonds not backed by loans are principally stated at amortized cost and the
discount or premium is amortized using the interest method.
Mortgage-backed bonds are valued at amortized cost and income is recognized
using a constant effective yield based on anticipated prepayments and the
estimated economic life of the securities. When actual prepayments differ
significantly from anticipated prepayments, the effective yield is
recalculated to reflect actual payments to date and anticipated future
payments. The net investment in the securities is adjusted to the amount
that would have existed had the new effective yield been applied since the
acquisition of the securities.
Short-term investments include investments with maturities of less than one
year at the date of acquisition. The carrying amounts for these investments
approximate their fair values.
Preferred stocks are reported at cost or amortized cost.
Unaffiliated common stocks are reported at fair value as determined by the
Securities Valuation Office of the NAIC and the related unrealized gains
(losses) are reported in unassigned surplus without adjustment for federal
income taxes.
Policy loans are reported at unpaid balances.
The Company uses various derivative instruments as part of its overall
liability-asset management program for certain investments and life
insurance and annuity products. The Company values all derivative
instruments on a basis consistent with that of the hedged item. Upon
termination, gains and losses on those instruments are included in the
carrying values of the underlying hedged items and are amortized over the
remaining lives of the hedged items as adjustments to investment income or
benefits from the hedged items through the IMR. Any unamortized gains or
losses are recognized when the underlying hedged items are sold. The
premiums paid for interest rate caps and swaptions are deferred and
amoritized to net investment income on a straight-line basis over the term
of the respective derivative.
Hedge accounting is applied as indicated above after the Company determines
that the items to be hedged expose the Company to interest rate
fluctuations, the widening of bond yield spreads over comparable maturity
U.S. government obligations, increased liabilities associated with certain
reinsurance agreements and foreign exchange risk. Moreover, the derivatives
used are designated as a hedge and reduce the indicated risk by having a
high correlation between changes in the value of the derivatives and the
items being hedged at both the inception of the hedge and throughout the
hedge period. Should such criteria not be met or if the hedged items have
been sold, terminated or matured, the change in value of the derivatives is
included in net income.
Mortgage loans on real estate are reported at unpaid balances, less
allowances for impairments. Real estate is reported at depreciated cost.
Realized investment gains and losses on investments sold are determined
using the specific identification method. Changes in admitted asset carrying
amounts of bonds, mortgage loans and common and preferred stocks are
credited or charged directly in unassigned surplus.
LOANED SECURITIES
Securities loaned are treated as collateralized financing transactions and a
liability is recorded equal to the repurchase price. It is the Company's
policy to take possession of securities with a market value at least equal
to the securities loaned. Securities loaned are recorded at amortized cost
as long as the value of the related collateral is sufficient. The Company's
agreements with third parties generally contain contractual provisions to
allow for additional collateral to be obtained when necessary. The Company
values collateral daily and obtains additional collateral when deemed
appropriate.
GOODWILL
Goodwill, which represents the excess, subject to certain limitations, of
the ceding commission over statutory-basis net assets of business purchased
S-8
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
under an assumption reinsurance agreement, is amortized on a straight-line
basis over ten years.
PREMIUMS
Life insurance and annuity premiums are recognized as revenue when due.
Accident and health premiums are earned pro rata over the contract term of
the policies.
BENEFITS
Life, annuity and accident and health benefit reserves are developed by
actuarial methods and are determined based on published tables using
statutorily specified interest rates and valuation methods that will
provide, in the aggregate, reserves that are greater than or equal to the
minimum or guaranteed policy cash values or the amounts required by the
Insurance Department. The Company waives deduction of deferred fractional
premiums on the death of life and annuity policy insureds and returns any
premium beyond the date of death, except for policies issued prior to March
1977. Surrender values on policies do not exceed the corresponding benefit
reserves. Additional reserves are established when the results of cash flow
testing under various interest rate scenerios indicate the need for such
reserves. If net premiums exceed the gross premiums on any insurance
in-force, additional reserves are established. Benefit reserves for policies
underwritten on a substandard basis are determined using the multiple table
reserve method.
The tabular interest, tabular less actual reserve released and the tabular
cost have been determined by formula or from the basic data for such items.
Tabular interest funds not involving life contingencies were determined
using the actual interest credited to the funds plus the change in accrued
interest.
Liabilities related to guaranteed investment contracts and policyholder
funds left on deposit with the Company generally are equal to fund balances
less applicable surrender charges.
CLAIMS AND CLAIM ADJUSTMENT EXPENSES
Unpaid claims and claim adjustment expenses on accident and health policies
represent the estimated ultimate net cost of all reported and
unreported claims incurred during the year. The Company does not discount
claims and claim adjustment expense reserves. The reserves for unpaid claims
and claim adjustment expenses are estimated using individual case-basis
valuations and statistical analyses. Those estimates are subject to the
effects of trends in claim severity and frequency. Although considerable
variability is inherent in such estimates, management believes that the
reserves for claims and claim adjustment expenses are adequate. The
estimates are continually reviewed and adjusted as necessary as experience
develops or new information becomes known; such adjustments are included in
current operations.
REINSURANCE CEDED AND ASSUMED
Reinsurance premiums, benefits and claims and claim adjustment expenses are
accounted for on bases consistent with those used in accounting for the
original policies issued and the terms of the reinsurance contracts. Certain
business is transacted on a funds withheld basis and investment income on
investments managed by the Company are reported in net investment income.
PENSION BENEFITS
Costs associated with the Company's defined benefit pension plans are
systematically accrued during the expected period of active service of the
covered employees.
INCOME TAXES
The Company and eligible subsidiaries have elected to file consolidated
federal and state income tax returns with LNC and certain LNC subsidiaries.
Pursuant to an intercompany tax sharing agreement with LNC, the Company
provides for income taxes on a separate return filing basis. The tax sharing
agreement also provides that the Company will receive benefit for net
operating losses, capital losses and tax credits which are not usable on a
separate return basis to the extent such items may be utilized in the
consolidated income tax returns of LNC.
STOCK OPTIONS
The Company recognizes compensation expense for its stock option incentive
plans using the intrinsic value method of accounting. Under the terms of
S-9
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
the intrinsic value method, compensation cost is the excess, if any, of the
quoted market price of LNC's common stock at the grant date, or other
measurement date, over the amount an employee must pay to acquire the stock.
ASSETS HELD IN SEPARATE ACCOUNTS AND LIABILITIES RELATED TO SEPARATE
ACCOUNTS
Separate account assets and liabilities reported in the accompanying balance
sheets represent funds that are separately administered for variable life
and variable annuity contracts and for which the contractholder, rather than
the Company, bears the investment risk. Separate account assets are reported
at fair value. The operations of the separate accounts are not included in
the accompanying financial statements. Policy administration and investment
management fees charged on separate account policyholder deposits are
included in income from separate account investment management and
administration service fees. Mortality charges on variable universal life
contracts are included in income from expense charges on deposit funds. Fees
charged relative to variable annuity and variable universal life
administration agreements for separate account products sold by other
insurance companies and not recorded on the Company's financial statements
are included in income from separate account investment management and
administration service fees.
RECLASSIFICATION
Certain amounts in the 1997 financial statements have been reclassified to
conform with the 1998 presentation. These reclassifications had no effect on
unassigned surplus or net income previously reported.
2. PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company's statutory-basis financial statements are prepared in
accordance with accounting practices prescribed or permitted by the
Insurance Department. "Prescribed" statutory accounting practices are
interspersed throughout state insurance laws and regulations, the NAIC's
ACCOUNTING PRACTICES AND PROCEDURES MANUAL and a variety of other NAIC
publications. "Permitted" statutory accounting practices encompass all
accounting practices that are not prescribed; such practices may differ from
state to state, may differ from company to company within a state and may
change in the future.
In 1998, the NAIC adopted codified statutory accounting principles
("Codification"). Codification will likely change, to some extent,
prescribed statutory accounting practices and may result in changes to the
accounting practices that the Company uses to prepare its statutory-basis
financial statements. Codification will require adoption by the various
states before it becomes the prescribed statutory-basis of accounting for
insurance companies domesticated within those states. Accordingly, before
Codification becomes effective for the Company, the state of Indiana must
adopt Codification as the prescribed basis of accounting on which domestic
insurers must report their statutory-basis results to the Insurance
Department. At this time, it is anticipated that Indiana will adopt
Codification, however, based on current guidance, management believes that
the impact of Codification will not be material to the Company's
statutory-basis financial statements.
The Company has received written approval from the Insurance Department to
record surrender charges applicable to separate account liabilities for
variable life and annuity products as a liability in the separate account
financial statements payable to the Company's general account. In the
accompanying financial statements, a corresponding receivable is recorded
with the related income impact recorded in the accompanying Statement of
Operations as a change in reserves or change in premium and other deposit
funds.
S-10
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS
The major categories of net investment income are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Income:
Bonds $ 1,714.3 $ 1,524.4 $ 1,442.2
----------------------------------------------------------------
Preferred stocks 19.7 23.5 9.6
----------------------------------------------------------------
Unaffiliated common stocks 10.6 8.3 6.5
----------------------------------------------------------------
Affiliated common stocks 5.2 15.0 9.5
----------------------------------------------------------------
Mortgage loans on real estate 323.6 257.2 269.3
----------------------------------------------------------------
Real estate 81.4 92.2 114.4
----------------------------------------------------------------
Policy loans 86.5 37.5 35.0
----------------------------------------------------------------
Other investments 26.5 28.2 22.4
----------------------------------------------------------------
Cash and short-term investments 104.7 70.3 48.9
---------------------------------------------------------------- --------- --------- ---------
Total investment income 2,372.5 2,056.6 1,957.8
- -------------------------------------------------------------------
Expenses:
Depreciation 19.3 21.0 25.0
----------------------------------------------------------------
Other 246.0 188.5 176.5
---------------------------------------------------------------- --------- --------- ---------
Total investment expenses 265.3 209.5 201.5
- ------------------------------------------------------------------- --------- --------- ---------
Net investment income $ 2,107.2 $ 1,847.1 $ 1,756.3
- ------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</TABLE>
Nonadmitted accrued investment income at December 31, 1997
amounted to $2,600,000, consisting principally of interest
on bonds in default and mortgage loans. No accrued
investment income was nonadmitted at December 31, 1998.
S-11
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
The cost or amortized cost, gross unrealized gains and
losses and the fair value of investments in bonds are
summarized as follows:
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------------------------------------------
(IN MILLIONS)
----------------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1998:
Corporate $17,658.4 $ 1,159.8 $ 148.2 $18,670.0
------------------------------------------------
U.S. government 900.7 88.8 3.4 986.1
------------------------------------------------
Foreign government 947.8 59.9 61.2 946.5
------------------------------------------------
Mortgage-backed 4,312.1 171.6 33.4 4,450.3
------------------------------------------------
State and municipal 11.9 .7 -- 12.6
------------------------------------------------ --------- ----------- ----------- ---------
$23,830.9 $ 1,480.8 $ 246.2 $25,065.5
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
At December 31, 1997:
Corporate $13,003.8 $ 942.2 $ 60.1 $13,885.9
------------------------------------------------
U.S. government 436.3 67.9 -- 504.2
------------------------------------------------
Foreign government 1,202.1 104.9 5.4 1,301.6
------------------------------------------------
Mortgage-backed 3,874.3 215.2 27.1 4,062.4
------------------------------------------------
State and municipal 44.2 .3 -- 44.5
------------------------------------------------ --------- ----------- ----------- ---------
$18,560.7 $ 1,330.5 $ 92.6 $19,798.6
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
</TABLE>
The carrying amount of bonds in the balance sheets at
December 31, 1998 and 1997 reflects adjustments of
$11,800,000 and $5,500,000, respectively, to decrease
amortized cost as a result of the Securities Valuation
Office of the NAIC ("SVO") designating certain investments
as low or lower quality.
A summary of the cost or amortized cost and fair value of
investments in bonds at December 31, 1998, by contractual
maturity, is as follows:
<TABLE>
<CAPTION>
COST OR
AMORTIZED FAIR
COST VALUE
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Maturity:
In 1999 $ 705.6 $ 712.6
--------------------------------------------------------------------------
In 2000-2003 4,041.9 4,142.8
--------------------------------------------------------------------------
In 2004-2008 6,652.0 6,860.1
--------------------------------------------------------------------------
After 2008 8,119.3 8,899.7
--------------------------------------------------------------------------
Mortgage-backed securities 4,312.1 4,450.3
-------------------------------------------------------------------------- --------- ---------
Total $23,830.9 $25,065.5
- ----------------------------------------------------------------------------- --------- ---------
--------- ---------
</TABLE>
S-12
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
The expected maturities may differ from the contractual
maturities in the foregoing table because certain borrowers
may have the right to call or prepay obligations with or
without call or prepayment penalties.
Proceeds from sales of investments in bonds during 1998,
1997 and 1996 were $9,395,000,000, $9,715,000,000 and
$10,996,900,000, respectively. Gross gains during 1998, 1997
and 1996 of $186,300,000, $218,100,000 and $169,700,000,
respectively, and gross losses of $138,000,000, $78,000,000
and $177,000,000, respectively, were realized on those
sales.
At December 31, 1998 and 1997, investments in bonds, with an
admitted asset value of $97,800,000 and $76,200,000,
respectively, were on deposit with state insurance
departments to satisfy regulatory requirements.
Unrealized gains and losses on investments in unaffiliated
common stocks and preferred stocks are reported directly in
unassigned surplus and do not affect operations. The cost or
amortized cost, gross unrealized gains and losses and the
fair value of investments in unaffiliated common stocks and
preferred stocks are as follows:
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------------------------
(IN MILLIONS)
--------------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1998:
Preferred stocks $236.0 $ 8.9 $ 2.4 $242.5
- ----------------------------------------
Unaffiliated common stocks 223.3 62.0 26.0 259.3
- ----------------------------------------
At December 31, 1997:
Preferred stocks $257.3 $12.1 $ .7 $268.7
- ----------------------------------------
Unaffiliated common stocks 357.0 98.5 19.5 436.0
- ----------------------------------------
</TABLE>
The carrying amount of preferred stocks in the balance
sheets at December 31, 1998 and 1997 reflects adjustments of
$5,800,000 and $4,000,000, respectively, to decrease
amortized cost as a result of the SVO designating certain
investments as low or lower quality.
During 1998, the minimum and maximum lending rates for
mortgage loans were 6.41% and 8.08%, respectively. At the
issuance of a loan, the percentage of loan to value on any
one loan does not exceed 75%. At December 31, 1998, the
Company did not hold any mortgages with interest overdue
beyond one year. All properties covered by mortgage loans
have fire insurance at least equal to the excess of the loan
over the maximum loan that would be allowed on the land
without the building.
S-13
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
The components of the Company's real estate are summarized
as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Occupied by the Company:
Land $ 2.5 $ 2.5
--------------------------------------------------------------------------------
Buildings 9.0 8.4
--------------------------------------------------------------------------------
Less accumulated depreciation (1.7) (1.2)
-------------------------------------------------------------------------------- --------- ---------
Net real estate occupied by the Company 9.8 9.7
- -----------------------------------------------------------------------------------
Other:
Land 93.2 124.1
--------------------------------------------------------------------------------
Buildings 413.0 491.6
--------------------------------------------------------------------------------
Other 7.9 8.1
--------------------------------------------------------------------------------
Less accumulated depreciation (50.1) (49.1)
-------------------------------------------------------------------------------- --------- ---------
Net other real estate 464.0 574.7
- ----------------------------------------------------------------------------------- --------- ---------
Net real estate $ 473.8 $ 584.4
- ----------------------------------------------------------------------------------- --------- ---------
--------- ---------
</TABLE>
Realized capital gains are reported net of federal income
taxes and amounts transferred to the IMR as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Realized capital gains $ 179.7 $ 209.3 $ 69.3
- ------------------------------------------------------------------------
Less amount transferred to IMR (net of related taxes (credit) of $27.3,
$54.0 and $(6.7) in 1998, 1997 and 1996, respectively) 50.8 100.2 (12.4)
- ------------------------------------------------------------------------ --------- --------- ---------
128.9 109.1 81.7
Less federal income taxes on realized gains 82.1 77.8 28.4
- ------------------------------------------------------------------------ --------- --------- ---------
Net realized capital gains $ 46.8 $ 31.3 $ 53.3
- ------------------------------------------------------------------------ --------- --------- ---------
--------- --------- ---------
</TABLE>
S-14
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
4. SUBSIDIARIES
Statutory-basis financial information related to the
Company's four wholly owned insurance subsidiaries is
summarized as follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
--------------------------------------------
<S> <C> <C> <C> <C>
Cash and invested assets $ 1,221.1 $ 333.9 $ 403.6 $ 1,938.0
- ---------------------------------------------------------
Other assets 40.3 31.3 490.0 270.2
- --------------------------------------------------------- --------- ----------- --------- ---------
Total admitted assets $ 1,261.4 $ 365.2 $ 893.6 $ 2,208.2
- --------------------------------------------------------- --------- ----------- --------- ---------
--------- ----------- --------- ---------
Insurance reserves $ 1,149.8 $ 266.3 $ 281.8 $ 1,814.5
- ---------------------------------------------------------
Other liabilities 42.0 24.0 553.7 45.1
- ---------------------------------------------------------
Liabilities related to separate accounts -- -- -- 236.9
- ---------------------------------------------------------
Capital and surplus 69.6 74.9 58.1 111.7
- --------------------------------------------------------- --------- ----------- --------- ---------
Total liabilities and capital and surplus $ 1,261.4 $ 365.2 $ 893.6 $ 2,208.2
- --------------------------------------------------------- --------- ----------- --------- ---------
--------- ----------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
--------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 310.4 $ 165.0 $ 150.3 $ 1,402.6
- -----------------------------------------------------------
Expenses 310.6 164.4 139.5 1,656.1
- -----------------------------------------------------------
Net realized gains (losses) (0.3) 0.9 (0.1) (0.7)
- ----------------------------------------------------------- --------- ----------- --------- ---------
Net income (loss) $ (0.5) $ 1.5 $ 10.7 $ (254.2)
- ----------------------------------------------------------- --------- ----------- --------- ---------
--------- ----------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
------------------------------------------------
<S> <C> <C> <C> <C>
Cash and invested assets $ 1,154.4 $ 284.8 $ 399.0 $ 796.3
- -----------------------------------------------------------
Other assets 36.9 77.3 481.6 130.8
- ----------------------------------------------------------- --------- ----------- ----------- -----------
Total admitted assets $ 1,191.3 $ 362.1 $ 880.6 $ 972.1
- ----------------------------------------------------------- --------- ----------- ----------- -----------
--------- ----------- ----------- -----------
Insurance reserves $ 1,072.2 $ 266.7 $ 279.3 $ 588.7
- -----------------------------------------------------------
Other liabilities 48.4 21.7 546.4 5.8
- -----------------------------------------------------------
Liabilities related to separate accounts -- -- -- 164.7
- -----------------------------------------------------------
Capital and surplus 70.7 73.7 54.9 212.9
- ----------------------------------------------------------- --------- ----------- ----------- -----------
Total liabilities and capital and surplus $ 1,191.3 $ 362.1 $ 880.6 $ 972.1
- ----------------------------------------------------------- --------- ----------- ----------- -----------
--------- ----------- ----------- -----------
</TABLE>
S-15
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
4. SUBSIDIARIES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
----------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 267.6 $ 135.4 $ 125.3 $ 230.0
- -------------------------------------------------------------
Expenses 262.6 244.2 114.6 224.4
- -------------------------------------------------------------
Net realized gains (losses) .1 .6 (.1) (.1)
- ------------------------------------------------------------- --------- --------- ----------- -----------
Net income (loss) $ 5.1 $ (108.2) $ 10.6 $ 5.5
- ------------------------------------------------------------- --------- --------- ----------- -----------
--------- --------- ----------- -----------
</TABLE>
The Company also owns three non-insurance subsidiaries, all
of which were formed or acquired in 1998. AnnuityNet, Inc.
was formed for the distribution of variable annuities over
the internet and is valued on the equity method with an
admitted asset value of $1,500,000 at December 31, 1998.
Lincoln National Insurance Associates was purchased for
$600,000 and is valued on the equity method with an admitted
asset value of $600,000 at December 31, 1998. Sagemark
Consulting, Inc. ("Sagemark") was purchased in 1998 and is a
broker dealer acquired in connection with a reinsurance
transaction completed in 1998. Sagemark is valued on the
equity method with an admitted asset value of $5,700,000 at
December 31, 1998.
The carrying value of all affiliated common stocks, was
$322,100,000 and $412,100,000 at December 31, 1998 and 1997,
respectively. The insurance affiliates are carried at
statutory-basis net equity while other affiliates are
recorded at GAAP basis net equity, adjusted for certain
items which would be non-admitted under statutory accounting
principles. The cost basis of investments in subsidiaries as
of December 31, 1998 and 1997 was $631,100,000 and
$466,200,000, respectively.
During 1998, 1997 and 1996 the Company's insurance
subsidiaries paid dividends of $5,200,000, $15,000,000 and
$10,500,000, respectively.
5. FEDERAL INCOME TAXES
The effective federal income tax rate in the accompanying
statements of operations differs from the prevailing
statutory tax rate principally due to tax-exempt investment
income, dividends received tax deductions and differences
between statutory accounting and tax return recognition
relative to policy acquisition costs, policy and contract
liabilities and reinsurance ceding commissions.
In 1997 and 1996, federal income taxes incurred totaled
$78,300,000 and $83,600,000, respectively. In 1998, a
federal income tax net operating loss of $103,800,000 and
tax credits of $19,300,000 were incurred and carried back to
recover taxes paid in prior years.
The Company paid $2,300,000, $164,500,000 and $100,400,000
to LNC in 1998, 1997 and 1996, respectively, for federal
income taxes.
Under prior income tax law, one-half of the excess of a life
insurance company's income from operations over its taxable
investment income was not taxed, but was set aside in a
special tax account designated as "Policyholders' Surplus."
The Company has approximately $187,000,000 of untaxed
"Policyholders' Surplus" on which no payment of federal
income taxes will be required unless it is distributed as a
dividend, or under other specified conditions. Barring the
passage of unfavorable legislation, the Company does not
believe that any significant portion of the account will be
taxed in the foreseeable future and no related tax liability
has been recognized. If the entire balance of the account
S-16
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
5. FEDERAL INCOME TAXES (CONTINUED)
became taxable under the current federal income tax rate,
the tax would be approximately $65,500,000.
6. SUPPLEMENTAL FINANCIAL DATA
The balance sheet caption, "Other admitted assets", includes
amounts recoverable from other insurers for claims paid by
the Company, and the balance sheet caption, "Future policy
benefits and claims," has been reduced for insurance ceded
as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Insurance ceded $ 4,081.8 $ 1,431.0
- -------------------------------------------------------------------------------
Amounts recoverable from other insurers 79.9 35.9
- -------------------------------------------------------------------------------
</TABLE>
Reinsurance transactions, excluding assumption reinsurance,
included in the income statement caption, "Premiums and
deposits," are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Insurance assumed $ 9,018.9 $ 727.2 $ 241.3
- ----------------------------------------------------------------------
Insurance ceded 877.1 302.9 193.3
- ---------------------------------------------------------------------- --------- --------- ---------
Net amount included in premiums $ 8,141.8 $ 424.3 $ 48.0
- ---------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</TABLE>
The income statement caption, "Benefits and settlement
expenses," is net of reinsurance recoveries of
$2,098,800,000, $1,240,500,000 and $787,900,000 for 1998,
1997 and 1996, respectively.
Details underlying the balance sheet caption "Other
policyholder funds" are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Premium deposit funds $16,285.2 $16,201.8
- -----------------------------------------------------------------------------
Undistributed earnings on participating business 348.4 142.0
- -----------------------------------------------------------------------------
Other 13.9 16.3
- ----------------------------------------------------------------------------- --------- ---------
$16,647.5 $16,360.1
--------- ---------
--------- ---------
</TABLE>
S-17
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
6. SUPPLEMENTAL FINANCIAL DATA (CONTINUED)
Deferred and uncollected life insurance premiums and annuity
considerations included in the balance sheet caption,
"Premiums and fees in course of collection," are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------
NET OF
GROSS LOADING LOADING
-----------------------------------
(IN MILLIONS)
-----------------------------------
<S> <C> <C> <C>
Ordinary new business $ 9.5 $ 3.4 $ 6.1
- -----------------------------------------------------------------------
Ordinary renewal (13.7) 11.3 (25.0)
- -----------------------------------------------------------------------
Group life 14.2 .2 14.0
- ----------------------------------------------------------------------- --------- ----- -----------
$ 10.0 $ 14.9 $ (4.9)
--------- ----- -----------
--------- ----- -----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------
NET OF
GROSS LOADING LOADING
-----------------------------------
(IN MILLIONS)
-----------------------------------
<S> <C> <C> <C>
Ordinary new business $ 3.2 $ 2.4 $ .8
- ------------------------------------------------------------------------
Ordinary renewal 17.8 3.2 14.6
- ------------------------------------------------------------------------
Group life 10.6 .2 10.4
- ------------------------------------------------------------------------ --------- --- -----
$ 31.6 $ 5.8 $ 25.8
--------- --- -----
--------- --- -----
</TABLE>
The Company has entered into non-exclusive managing general
agent agreements with International Benefit Services Corp.,
HRM Claim Management, Inc. and Pediatrics Insurance
Consultants, Inc. to write group life and health business.
Direct premiums written related to the agreements amounted
to $11,900,000 and $13,400,000 in 1998 and 1997,
respectively. During 1996, LNC Administrative Services
Corporation, an affiliate, entered into a similar agreement
with the Company with direct premiums written amounting to
$7,000,000 and $7,200,000 in 1998 and 1997, respectively.
Authority granted by the managing general agents agreements
include underwriting, claims adjustment and claims payment
services.
S-18
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
7. ANNUITY RESERVES
At December 31, 1998, the Company's annuity reserves and
deposit fund liabilities, including separate accounts, that
are subject to discretionary withdrawal with adjustment,
subject to discretionary withdrawal without adjustment and
not subject to discretionary withdrawal provisions are
summarized as follows:
<TABLE>
<CAPTION>
AMOUNT PERCENT
----------------------
(IN MILLIONS)
----------------------
<S> <C> <C>
Subject to discretionary withdrawal with adjustment:
With market value adjustment $ 2,659.5 5%
-----------------------------------------------------------------------------
At book value, less surrender charge 2,959.2 5
-----------------------------------------------------------------------------
At market value 35,472.0 63
----------------------------------------------------------------------------- --------- ---
41,090.7 73
Subject to discretionary withdrawal without adjustment at book value with
minimal or no charge or adjustment 12,747.3 22
- --------------------------------------------------------------------------------
Not subject to discretionary withdrawal 2,625.1 5
- -------------------------------------------------------------------------------- --------- ---
Total annuity reserves and deposit fund liabilities -- before reinsurance 56,463.1 100%
- -------------------------------------------------------------------------------- ---
---
Less reinsurance 1,683.8
- -------------------------------------------------------------------------------- ---------
Net annuity reserves and deposit fund liabilities, including separate accounts $54,779.3
- -------------------------------------------------------------------------------- ---------
---------
</TABLE>
A reconciliation of the total net annuity reserves and
deposit fund liabilities to the amounts reported in the
Company's 1998 Annual Statement and the Company's Separate
Accounts Annual Statement is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
-------------
(IN MILLIONS)
-------------
<S> <C>
Per 1998 Annual Statement:
Exhibit 8, Section B -- Total (net) $ 2,554.6
- ----------------------------------------------------------------
Exhibit 8, Section C -- Total (net) 26.0
- ----------------------------------------------------------------
Exhibit 10, Column 1, Line 19 16,579.6
- ---------------------------------------------------------------- -------------
19,160.2
- ---------------------------------------------------------------- -------------
Per Separate Accounts Annual Statement
Exhibit 6, Column 2, Line 0299999 146.4
- ----------------------------------------------------------------
Page 3, Line 3 35,472.7
- ---------------------------------------------------------------- -------------
35,619.1
- ---------------------------------------------------------------- -------------
Total net annuity reserves and deposit fund liabilities $54,779.3
- ---------------------------------------------------------------- -------------
-------------
</TABLE>
8. CAPITAL AND SURPLUS
In 1998, the Company issued two surplus notes to LNC in return for cash of
$1,250,000,000. The first note for $500,000,000 was issued to LNC in
connection with the CIGNA indemnity reinsurance transaction on January 5,
1998. This note calls for the Company to pay the principal amount of the
notes on or before March 31, 2028 and interest to be paid quarterly at an
annual rate of 6.56%. Subject to approval by the Indiana Insurance
Commissioner, LNC also has a right to redeem the note for immediate
repayment in total or in part once per year on the anniversary date of the
note, but not before January 5, 2003. Any payment of interest or
S-19
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
8. CAPITAL AND SURPLUS (CONTINUED)
repayment of principal may be paid only out of the Company's earnings, only
if the Company's surplus exceeds specified levels ($2,315,700,000 at
December 31, 1998), and subject to approval by the Indiana Insurance
Commissioner. No interest payments were approved by the Indiana Insurance
Commissioner as of December 31, 1998 and, thus, no amounts were accrued at
that date.
The second note for $750,000,000 was issued on December 18, 1998 to LNC in
connection with the Aetna indemnity reinsurance transaction. This note calls
for the Company to pay the principal amount of the notes on or before
December 31, 2028 and interest to be paid quarterly at an annual rate of
6.03%. Subject to approval by the Indiana Insurance Commissioner, LNC also
has a right to redeem the note for immediate repayment in total or in part
once per year on the anniversary date of the note, but not before December
18, 2003. Any payment of interest or repayment of principal may be paid only
out of the Company's earnings, only if the Company's surplus exceeds
specified levels ($2,379,600,000 at December 31, 1998), and subject to
approval by the Indiana Insurance Commissioner. No interest payments were
approved by the Indiana Insurance Commissioner as of December 31, 1998 and,
thus, no amounts were accrued at that date.
A summary of the terms of these surplus notes follows:
<TABLE>
<CAPTION>
CURRENT YEAR
PRINCIPAL PRINCIPAL INTEREST
DATE ISSUED AMOUNT OF NOTE OUTSTANDING PAID
------------------------------- -------------- ------------- ------------
<S> <C> <C> <C>
January 5, 1998 $500,000,000 $ 500,000,000 $ 32,300,000
-------------------------------
December 18, 1998 750,000,000 750,000,000 --
-------------------------------
</TABLE>
Life insurance companies are subject to certain Risk-Based Capital ("RBC")
requirements as specified by the NAIC. Under those requirements, the amount
of capital and surplus maintained by a life insurance company is to be
determined based on the various risk factors related to it. At December 31,
1998, the Company exceeds the RBC requirements.
The payment of dividends by the Company is limited and cannot be made except
from earned profits. The maximum amount of dividends that may be paid by
life insurance companies without prior approval of the Indiana Insurance
Commissioner is subject to restrictions relating to statutory surplus and
net gain from operations. In January 1998, the Company assumed a block of
individual life insurance and annuity business from CIGNA and in October
1998, the Company assumed a block of individual life insurance business from
Aetna (SEE NOTE 10). The statutory accounting regulations do not allow
goodwill to be recognized on indemnity reinsurance transactions and
therefore, the related ceding commission was expensed in the accompanying
Statement of Operations and resulted in the reduction of unassigned surplus.
As a result of these transactions, the Company's statutory-basis unassigned
surplus is negative as of December 31, 1998 and it will be necessary for the
Company to obtain prior approval of the Indiana Insurance Commissioner
before paying any dividends to LNC until such time as statutory-basis
unassigned surplus is positive. It is expected that statutory-basis
unassigned surplus will return to a positive position within two to three
years from the closing of the Aetna transaction assuming a level of
statutory-basis earnings coinciding with recent earnings patterns. If
statutory-basis earnings are less then recent patterns due to adverse
operating conditions or further indemnity reinsurance transactions of this
nature or other factors, or if dividends are approved and paid at amounts
higher than recent history, the statutory-basis unassigned surplus may not
return to a positive position as soon as expected. Although no assurance can
be given, management believes that the approvals for the payment of such
dividends in amounts consistent with those paid in the past can be obtained.
S-20
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
9. EMPLOYEE BENEFIT PLANS
LNC maintains defined benefit pension plans for its employees (including
Company employees) and a defined contribution plan for the Company's agents.
LNC also maintains 401(k) plans, deferred compensation plans and
postretirement medical and life insurance plans for its employees and agents
(including the Company's employees and agents). The aggregate expenses and
accumulated obligations for the Company's portion of these plans are not
material to the Company's statutory-basis financial statements of income or
financial position for any of the periods shown.
LNC has various incentive plans for key employees, agents and directors of
LNC and its subsidiaries that provide for the issuance of stock options,
stock appreciation rights, restricted stock awards and stock incentive
awards. These plans are comprised primarily of stock option incentive plans.
Stock options granted under the stock option incentive plans are at the
market value at the date of grants and, subject to termination of
employment, expire ten years from the date of grant. Such options are
transferable only upon death and are exercisable one year from the date of
grant for options issued prior to 1992. Option issued subsequent to 1991 are
exercisable in 25% increments on the option issuance anniversary in the four
years following issuance.
As of December 31, 1998, 885,252 and 504,369 shares of LNC common stock were
subject to options granted to Company employees and agents, respectively,
under the stock option incentive plans of which 430,053 and 87,160,
respectively, were exercisable on that date. The exercise prices of the
outstanding options range from $23.50 to $96.41. During 1998, 1997 and 1996,
136,469, 170,789 and 72,405 options were exercised, respectively, and
18,288, 1,846 and 10,950 options were forfeited, respectively.
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES
DISABILITY INCOME CLAIMS
The liability for disability income claims net of the related asset for
amounts recoverable from reinsurers at December 31, 1998 and 1997 is a net
liability of $670,100,000 and $516,900,000, respectively. This liability is
based on the assumption that the recent experience will continue in the
future. If incidence levels and/or claim termination rates fluctuate
significantly from the assumptions underlying reserves, adjustments to
reserves could be required in the future. Accordingly, this liability may
prove to be deficient or excessive. The Company reviews reserve levels on an
ongoing basis. However, it is management's opinion that such future
development will not materially affect the financial position of the
Company.
During 1997, the Company conducted an in-depth review of loss experience on
its disability income business. As a result of this study, the reserve level
was deemed to be inadequate to meet future obligations if current incident
levels were to continue in the future. In order to address this situation,
the Company strengthened its disability income reserves by $80,000,000 in
1997.
MARKETING AND COMPLIANCE ISSUES
Regulators continue to focus on market conduct and compliance issues. Under
certain circumstances companies operating in the insurance and financial
services markets have been held responsible for providing incomplete or
misleading sales materials and for replacing existing policies with policies
that were less advantageous to the policyholder. The Company's management
continues to monitor the Company's sales materials and compliance procedures
and is making an extensive effort to minimize any potential liability. Due
to the uncertainty surrounding such matters, it is not possible to provide a
meaningful estimate of the range of potential outcomes at this time;
however, it is management's opinion that such future development will not
materially affect the financial position of the Company.
GROUP PENSION ANNUITIES
The liabilities for guaranteed interest and group pension annuity contracts,
which are no longer being sold by the Company, are supported by a single
portfolio of assets that attempts to match the duration of these
liabilities. Due to the long-term nature of group pension annuities and the
resulting inability to exactly match cash flows, a risk exists that future
cash flows from investments will not be reinvested at rates as high as
currently earned by the portfolio. Accordingly, these liabilities may prove
to be deficient or excessive. However, it is management's opinion that such
future
S-21
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
development will not materially affect the financial position of the
Company.
LEASES
The Company leases its home office properties through sale-leaseback
agreements. The agreements provide for a 25 year lease period with options
to renew for six additional terms of five years each. The agreements also
provide the Company with the right of first refusal to purchase the
properties during the term of the lease, including renewal periods, at a
price as defined in the agreements. The Company also has the option to
purchase the leased properties at fair market value as defined in the
agreements on the last day of the initial 25-year lease ending in 2009 or on
the last day of any of the renewal periods.
Total rental expense on operating leases in 1998, 1997 and 1996 was
$34,000,000, $29,300,000 and $26,400,000, respectively. Future minimum
rental commitments are as follows (in millions):
<TABLE>
<S> <C>
1999 $ 18.9
- --------------------------------------
2000 18.4
- --------------------------------------
2001 18.7
- --------------------------------------
2002 18.7
- --------------------------------------
2003 18.6
- --------------------------------------
Thereafter 116.6
- -------------------------------------- ---------
$ 209.9
---------
---------
</TABLE>
INFORMATION TECHNOLOGY COMMITMENT
In February 1998, the Company signed a seven-year contract with IBM Global
Services for information technology services for the Fort Wayne operations.
Total costs incurred in 1998 were $54,800,000. Future minimum annual costs
range from $33,600,000 to $56,800,000, however future costs are dependent on
usage and could exceed these amounts.
INSURANCE CEDED AND ASSUMED
The Company cedes insurance to other companies, including certain
affiliates. The portion of risks exceeding the Company's retention limit is
reinsured with other insurers. Prior to December 31, 1997, the Company
limited its maximum coverage that it retained on an individual to
$3,000,000. Based on a review of the capital and business in-force effective
in January 1998, the Company changed the amount it will retain on an
individual to $10,000,000. Portions of the Company's deferred annuity
business have also been reinsured with other companies to limit its exposure
to interest rate risks. At December 31, 1998, the reserves associated with
these reinsurance arrangements totaled $1,608,500,000. To cover products
other than life insurance, the Company acquires other insurance coverages
with retentions and limits that management believes are appropriate for the
circumstances. The accompanying statutory-basis financial statements reflect
premiums, benefits and policy acquisition expenses net of reinsurance ceded.
The Company remains liable if its reinsurers are unable to meet their
contractual obligations under the applicable reinsurance agreements.
Proceeds from the sale of common stock of American Statements Financial
Corporation ("American States") and proceeds from the January 5, 1998
surplus note, were used to finance an indemnity reinsurance transaction
whereby the Company and LLANY reinsured 100% of a block of individual life
insurance and annuity business from CIGNA Corporation ("CIGNA"). The Company
paid $1,264,400,000 to CIGNA on January 2, 1998 under the terms of the
reinsurance agreement and recognized a ceding commission expense of
$1,127,700,000 in 1998, which is included in the Statement of Operations
line item "Underwriting, acquisition, insurance and other expenses." At the
time of closing, this block of business had statutory liabilities of
$4,658,200,000 that became the Company's obligation. The Company also
received assets, measured on a historical statutory basis, equal to the
liabilities.
Pursuant to the terms of the reinsurance agreement, the Company, LLANY and
CIGNA are in the final stages of agreeing to the statutory-basis values of
these assets and liabilities. Any changes to these values that may occur in
future periods will not be material to the Company's financial position.
Subsequent to this transaction, the Company and LLANY announced that they
had reached an agreement to sell the administration rights to a variable
S-22
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
annuity portfolio that had been acquired as part of the block of business
assumed on January 2, 1998. This sale closed on October 12, 1998 with an
effective date of August 1, 1998.
In connection with the completion of the CIGNA reinsurance transaction, the
Company recorded a charge of $31,000,000 to cover certain costs of
integrating the existing operations with the new block of business.
On October 1, 1998, the Company and LLANY entered into an indemnity
reinsurance transaction whereby the Company and LLANY reinsured 100% of a
block of individual life insurance business from Aetna, Inc. The Company
paid $856,300,000 to Aetna on October 1, 1998 under the terms of the
reinsurance agreement and recognized a ceding commission expense of
$815,300,000 in 1998, which is included in the Statement of Operations line
item "Underwriting, acquisition, insurance and other expenses." At the time
of closing, this block of business had statutory liabilities of
$2,813,300,000 that became the Company's obligation. The Company also
received assets, measured on a historical statutory basis, equal to the
liabilities. The Company financed this reinsurance transaction with proceeds
from short-term debt borrowings from LNC until the December 18, 1998 surplus
note was approved by the Insurance Department. Subsequent to the Aetna
transaction, the Company and LLANY announced that they had reached an
agreement to retrocede the sponsored life business assumed for $87,600,000.
The retrocession agreement closed on October 14, 1998 with an effective date
of October 1, 1998.
The Company assumes insurance from other companies, including certain
affiliates. At December 31, 1998, the Company has provided $44,900,000 of
statutory-basis surplus relief to other insurance companies under
reinsurance transactions. The Company has retroceded 100% of this accepted
surplus relief to its off-shore reinsurance affiliates. Generally, such
amounts are offset by corresponding receivables from the ceding company,
which are secured by future profits on the reinsured business. However, the
Company is subject to the risk that the ceding company may become insolvent
and the right of offset would not be permitted.
The regulatory required liability for unsecured reserves ceded to
unauthorized reinsurers was $43,400,000 and $8,200,000 at December 31, 1998
and 1997, respectively.
VULNERABILITY FROM CONCENTRATIONS
At December 31, 1998, the Company did not have a material concentration of
financial instruments in a single investee or industry. The Company's
investments in mortgage loans principally involve commercial real estate. At
December 31, 1998, 25% of such mortgages ($980,500,000) involved properties
located in Texas and California. Such investments consist of first mortgage
liens on completed income-producing properties and the mortgage outstanding
on any individual property does not exceed $58,200,000.
At December 31, 1998, the Company did not have a concentration of: 1)
business transactions with a particular customer, lender or distributor; 2)
revenues from a particular product or service; 3) sources of supply of labor
or services used in the business; or 4) a market or geographic area in which
business is conducted that makes it vulnerable to an event that is at least
reasonably possible to occur in the near term and which could cause a severe
impact to the Company's financial condition.
OTHER CONTINGENCY MATTERS
The Company is involved in various pending or threatened legal proceedings
arising from the conduct of business. Most of these proceedings are routine
in the ordinary course of business. The Company maintains professional
liability insurance coverage for claims in excess of $5,000,000. The degree
of applicability of this coverage will depend on the specific facts of each
proceeding. In some instances, these proceedings include claims for
compensatory and punitive damages and similar types of relief in addition to
amounts for alleged contractual liability or requests for equitable relief.
After consultation with legal counsel and a review of available facts, it is
management's opinion that the ultimate liability, if any, under these suits
will not have a material adverse affect on the financial position of the
Company.
S-23
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
Four lawsuits involving alleged fraud in the sale of interest sensitive
universal life and whole life insurance have been filed as class actions
against the Company, although the court has not certified a class in any of
these cases. Plaintiffs seek unspecified damages and penalties for
themselves and on behalf of the putative class. While the relief sought in
these cases is substantial, it is premature to make assessments about the
potential loss, if any, because the status of the cases ranges from the
early states of litigation to the dismissal and appeals stage. Management
intends to defend these suits vigorously. The amount of liability, if any,
which may arise as a result of these suits cannot be reasonably estimated at
this time.
The number of insurance companies that are under regulatory supervision has
resulted, and is expected to continue to result, in assessments by state
guaranty funds to cover losses to policyholders of insolvent or
rehabilitated companies. Mandatory assessments may be partially recovered
through a reduction in future premium taxes in some states. The Company has
accrued for expected assessments net of estimated future premium tax
deductions.
GUARANTEES
The Company has guarantees with off-balance-sheet risks whose contractual
amounts represent credit exposure. Outstanding guarantees with off-
balance-sheet risks at December 31, 1998 relate to mortgage loan
pass-through certificates. 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. The
outstanding guarantees as of December 31, 1998 and 1997 were $30,900,000 and
$41,600,000, respectively. It is management's opinion that the value of the
properties underlying these commitments is sufficient that in the event of
default the impact would not be material to the Company. Accordingly, both
the carrying value and fair value of these guarantees is zero at December
31, 1998 and 1997.
The Company's wholly owned subsidiary, LNH&C, accepts personal accident
reinsurance programs from other insurance companies. Most of these programs
are presented to LNH&C by independent brokers who represent the ceding
companies. Certain excess of loss personal accident reinsurance programs
created in the London market during 1993 through 1996 have produced and have
potential to produce significant losses. At December 31, 1998 and 1997,
liabilities of $177,400,000 and $186,300,000, respectively, have been
established for such programs. These reserves are based on various estimates
that are subject to considerable uncertainty. Accordingly, this reserve may
prove to be deficient or excessive. However, it is management's opinion that
such future development will not materially affect the financial position of
the Company.
The Company and LNH&C continue to investigate the personal accident
reinsurance programs to determine if there are additional programs including
certain workers compensation programs, which may produce losses. At this
time, the Company and LNH&C do not have sufficient information to determine
whether or not it is probable that additional losses have been incurred nor
can the Company and LNH&C accurately estimate the ultimate cost or timing of
the outcome on these programs.
DERIVATIVES
The Company has derivatives with off-balance-sheet risks whose notional or
contract amounts exceed the credit exposure. The Company has entered into
derivative transactions to reduce its exposure to fluctuations in interest
rates, the widening of bond yield spreads over comparable maturity U.S.
government obligations, commodity risk, credit risk, increased liabilities
associated with reinsurance agreements and foreign exchange risks. In
addition, the Company is subject to the risks associated with changes in the
value of its derivatives; however, such changes in value generally are
offset by changes in the value of the items
S-24
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
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>
NOTIONAL OR ASSETS (LIABILITIES)
CONTRACT AMOUNTS -----------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------------------------------------------------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1998 1997 1998 1998 1997 1997
-------------------------------------------------------
(IN MILLIONS)
-------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate derivatives:
Interest rate cap agreements $4,108.8 $4,900.0 $ 9.3 $ .9 $13.9 $ .9
---------------------------------
Swaptions 1,899.5 1,752.0 16.2 2.5 6.9 6.9
---------------------------------
Interest rate swaps 258.3 10.0 -- 9.9 -- (1.8)
---------------------------------
Put options 21.3 -- -- 2.2 -- --
--------------------------------- -------- -------- -------- ----- -------- ------
6,287.9 6,662.0 25.5 15.5 20.8 6.0
Foreign currency derivatives:
Forward contracts 1.5 163.1 -- -- 5.4 5.4
---------------------------------
Foreign currency swaps 47.2 15.0 -- .3 -- (2.1)
--------------------------------- -------- -------- -------- ----- -------- ------
48.7 178.1 -- .3 5.4 3.3
Commodity derivatives:
Commodity swaps 8.1 -- -- 2.4 -- --
--------------------------------- -------- -------- -------- ----- -------- ------
$6,344.7 $6,840.1 $25.5 $18.2 $26.2 $ 9.3
-------- -------- -------- ----- -------- ------
-------- -------- -------- ----- -------- ------
</TABLE>
A reconciliation of the notional or contract amounts for the significant
programs using derivative agreements and contracts at December 31 is as
follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------
INTEREST RATE CAPS SPREAD LOCKS SWAPTIONS
1998 1997 1998 1997 1998 1997
------------------------------------------------------------------
(IN MILLIONS)
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $ 4,900.0 $ 5,500.0 $ -- $ -- $ 1,752.0 $ 672.0
- ------------------------------------
New contracts 708.8 -- -- 50.0 218.3 1,080.0
- ------------------------------------
Terminations and maturities (1,500.0) (600.0) -- (50.0) (70.8) --
- ------------------------------------ --------- --------- --- --------- --------- ---------
Balance at end of year $ 4,108.8 $ 4,900.0 $ -- $ -- $ 1,899.5 $ 1,752.0
- ------------------------------------ --------- --------- --- --------- --------- ---------
--------- --------- --- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL FUTURES
CONTRACTS INTEREST RATE SWAPS
--------------------------------------------
1998 1997 1998 1997
--------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $ -- $ 147.7 $ 10.0 $ --
- -------------------------------------------------------------
New contracts -- 88.3 2,226.6 10.0
- -------------------------------------------------------------
Terminations and maturities -- (236.0) (1,978.3) --
- ------------------------------------------------------------- --- --------- --------- ---------
Balance at end of year $ -- $ -- $ 258.3 $ 10.0
- ------------------------------------------------------------- --- --------- --------- ---------
--- --------- --------- ---------
</TABLE>
S-25
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
<TABLE>
<CAPTION>
PUT OPTIONS COMMODITY SWAPS
------------------------------------------------
1998 1997 1998 1997
------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $ -- $ -- $ -- $ --
- --------------------------------------------------------------------
New contracts 21.3 -- 8.1 --
- --------------------------------------------------------------------
Terminations and maturities -- -- -- --
- -------------------------------------------------------------------- --------- --- --- ---
Balance at end of year $ 21.3 $ -- $ 8.1 $ --
- -------------------------------------------------------------------- --------- --- --- ---
--------- --- --- ---
</TABLE>
<TABLE>
<CAPTION>
FOREIGN CURRENCY DERIVATIVES (FOREIGN INVESTMENTS)
------------------------------------------------------------------
FOREIGN EXCHANGE FOREIGN CURRENCY FOREIGN CURRENCY
FORWARD CONTRACTS OPTIONS SWAPS
1998 1997 1998 1997 1998 1997
------------------------------------------------------------------
(IN MILLIONS)
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $ 163.1 $ 251.5 $ -- $ 43.9 $ 15.0 $ 15.0
- -------------------------------------------
New contracts 419.8 833.1 -- -- 39.2 --
- -------------------------------------------
Terminations and maturities (581.4) (921.6) -- (43.9) (7.0) --
- ------------------------------------------- --------- --------- --- --------- --------- ---------
Balance at end of year $ 1.5 $ 163.0 $ -- $ -- $ 47.2 $ 15.0
- ------------------------------------------- --------- --------- --- --------- --------- ---------
--------- --------- --- --------- --------- ---------
</TABLE>
INTEREST RATE CAP AGREEMENTS
The interest rate cap agreements, which expire in 1999 through 2006, entitle
the Company to receive quarterly payments from the counterparties on
specified future reset dates, contingent on future interest rates. For each
cap, the amount of such payments, if any, is determined by the excess of a
market interest rate over a specified cap rate multiplied by the notional
amount divided by four. The purpose of the Company's interest rate cap
agreement program is to protect its annuity line of business from the effect
of rising interest rates. The premium paid for the interest rate caps is
included in other assets ($9,300,000 as of December 31, 1998) and is being
amortized over the terms of the agreements. This amortization is included in
net investment income.
SWAPTIONS
Swaptions, which expire in 1999 through 2003, entitle the Company to receive
settlement payments from the counterparties on specified expiration dates,
contingent on future interest rates. For each swaption, the amount of such
settlement payments, if any, is determined by the present value of the
difference between the fixed rate on a market rate swap and the strike rate
multiplied by the notional amount. The purpose of the Company's swaption
program is to protect its annuity line of business from the effect of rising
interest rates. The premium paid for the swaptions is included in other
assets ($16,200,000 as of December 31, 1998) and is being amortized over the
terms of the agreements. This amortization is included in net investment
income.
SPREAD LOCK AGREEMENTS
Spread-lock agreements provide for a lump sum payment to or by the Company,
depending on whether the spread between the swap rate and a specified
government note is larger or smaller than a contractually specified spread.
Cash payments are based on the product of the notional amount, the spread
between the swap rate and the yield of an equivalent maturity government
security and the price sensitivity of the swap at that time. The purpose of
the Company's spread-lock program is to protect a portion of its fixed
maturity securities against widening of spreads.
FINANCIAL FUTURE CONTRACTS
The Company uses exchange-traded financial futures contracts to hedge
against interest rate risks and to manage duration of a portion of its
S-26
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
fixed maturity securities. Financial futures contracts obligate the Company
to buy or sell a financial instrument at a specified future date for a
specified price. They may be settled in cash or through delivery of the
financial instrument. Cash settlements on the change in market values of
financial futures contracts are made daily.
INTEREST RATE SWAP AGREEMENTS
The Company uses interest rate swap agreements to hedge its exposure to
floating rate bond coupon payments, replicating a fixed rate bond. An
interest rate swap is a contractual agreement to exchange payments at one or
more times based on the actual or expected price, level, performance or
value of one or more underlying interest rates. The Company is required to
pay the counterparty to the agreements the stream of variable coupon
payments generated from the bonds, and in turn, receives a fixed payment
from the counterparty at a predetermined interest rate. The net
receipts/payments from interest rate swaps are recorded in net investment
income.
The Company also uses interest rate swap agreements to hedge its exposure to
interest rate fluctuations related to the anticipated purchase of assets to
support newly acquired or assumed blocks of business. Once the assets are
purchased, the gains resulting from the termination of the swap agreements
are applied to the basis of the assets purchased. The gains are recognized
in earnings over the life of the assets.
PUT OPTION
The Company uses put options, combined with various perpetual fixed income
securities, and interest rate swaps to replicate a fixed income, fixed
maturity investment. The put options give the Company the right, but not the
obligation, to sell to the counterparty of the agreement the specified
securities on a specified date at a fixed price.
FOREIGN CURRENCY DERIVATIVES (FOREIGN INVESTMENTS)
The Company uses a combination of foreign exchange forward contracts,
foreign currency options and foreign currency swaps, all of which are traded
over-the-counter, to hedge some of the foreign exchange risk of investments
in fixed maturity securities denominated in foreign currencies. The foreign
currency forward contracts obligate the Company to deliver a specified
amount of currency at a future date at a specified exchange rate. Foreign
currency options give the Company the right, but not the obligation, to buy
or sell a foreign currency at a specific exchange rate during a specified
time period. A foreign currency swap is a contractual agreement to exchange
the currencies of two different countries pursuant to an agreement to
re-exchange the two currencies at the same rate of exchange at a specified
future date.
COMMODITY SWAP
The Company uses a commodity swap to hedge its exposure to fluctuations in
the price of gold, which is the underlying variable in determining the
periodic interest payments associated with a fixed income security. A
commodity swap is a contractual agreement to exchange a certain amount of a
particular commodity for a fixed amount of cash. The Company owns a fixed
income security that meets its coupon payment obligations in gold bullion.
The Company is obligated to pay to the counterparty the gold bullion, and in
return, receives from the counterparty a stream of fixed income payments.
The fixed income payments are the product of the swap notional multiplied by
the fixed rate stated in the swap agreement. The net receipts/payments from
commodity swaps are recorded in net investment income.
ADDITIONAL DERIVATIVE INFORMATION
Expenses for the agreements and contracts described above amounted to
$10,000,000, $7,000,000 and $6,900,000 in 1998, 1997 and 1996, respectively.
Deferred losses of $48,200,000 as of December 31, 1998, were the result of:
1) terminated and expired spread-lock agreements and; 2) terminated interest
rate swaps. These losses are included with the related fixed maturity
securities to which the hedge applied and are being amortized over the life
of such securities.
The Company is exposed to credit loss in the event of nonperformance by
counterparties on interest rate cap agreements, swaptions, spread-lock
agreements, financial futures, interest rate swaps, put options and foreign
currency derivatives. However, the Company does not anticipate
nonperformance
S-27
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
by any of the counterparties. The credit risk associated with such
agreements is minimized by purchasing such agreements from financial
institutions with long-standing, superior performance records. The amount of
such exposure is essentially the net replacement cost or market value for
such agreements with each counterparty if the net market value is in the
Company's favor. At December 31, 1998, the exposure was $21,100,000.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following discussion outlines the methodologies and assumptions used to
determine the estimated fair values of the Company's financial instruments.
Considerable judgment is required to develop these fair values. Accordingly,
the estimates shown are not necessarily indicative of the amounts that would
be realized in a one-time, current market exchange of all of the Company's
financial instruments.
BONDS AND UNAFFILIATED COMMON STOCK
Fair values of bonds are based on quoted market prices, where available. For
bonds not actively traded, fair values are estimated using values obtained
from independent pricing services. In the case of private placements, fair
values are estimated by discounting expected future cash flows using a
current market rate applicable to the coupon rate, credit quality and
maturity of the investments. The fair values of unaffiliated common stocks
are based on quoted market prices.
PREFERRED STOCK
Fair values of preferred stock are based on quoted market prices, where
available. For preferred stock not actively traded, fair values are based on
values of issues of comparable yield and quality.
MORTGAGE LOANS ON REAL ESTATE
The estimated fair value of mortgage loans on real estate was established
using a discounted cash flow method based on credit rating, maturity and
future income. The ratings for mortgages in good standing are based on
property type, location, market conditions, occupancy, debt service
coverage, loan to value, caliber of tenancy, borrower and payment record.
Fair values for impaired mortgage loans are based on: 1) the present value
of expected future cash flows discounted at the loan's effective interest
rate; 2) the loan's market price; or 3) the fair value of the collateral if
the loan is collateral dependent.
POLICY LOANS
The estimated fair values of investments in policy loans are calculated on a
composite discounted cash flow basis using Treasury interest rates
consistent with the maturity durations assumed. These durations are based on
historical experience.
OTHER INVESTMENTS AND CASH AND SHORT-TERM INVESTMENTS
The carrying values for assets classified as other investments and cash and
short-term investments in the accompanying statutory-basis balance sheets
approximate their fair value.
INVESTMENT-TYPE INSURANCE CONTRACTS
The balance sheet captions, "Future policy benefits and claims" and "Other
policyholder funds," include investment type insurance contracts (i.e.,
deposit contracts and guaranteed interest contracts). The fair values for
the deposit contracts and certain guaranteed interest contracts are based on
their approximate surrender values. The fair values for the remaining
guaranteed interest and similar contracts are estimated using discounted
cash flow calculations. These calculations are based on interest rates
currently offered on similar contracts with maturities that are consistent
with those remaining for the contracts being valued.
The remainder of the balance sheet captions "Future policy benefits and
claims" and "Other policyholder funds," that do not fit the definition of
"investment-type insurance contracts" are considered insurance contracts.
Fair value disclosures are not required for these insurance contracts and
have not been determined by the Company. It is the Company's position that
the disclosure of the fair value of these insurance contracts is important
because readers of these financial statements could draw inappropriate
conclusions about the Company's capital and surplus determined on a fair
value basis. It could be misleading if only the fair value of assets and
liabilities defined as financial instruments are disclosed. The Company and
other
S-28
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
companies in the insurance industry are monitoring the related actions of
the various rule-making bodies and attempting to determine an appropriate
methodology for estimating and disclosing the "fair value" of their
insurance contract liabilities.
SHORT-TERM DEBT
For short-term debt, the carrying value approximates fair value.
SURPLUS NOTES DUE TO LNC
Fair values for surplus notes are estimated using discounted cash flow
analysis based on the Company's current incremental borrowing rate for
similar types of borrowing arrangements.
GUARANTEES
The Company's guarantees include guarantees related to mortgage loan
pass-through certificates. Based on historical performance where repurchases
have been negligible and the current status, which indicates none of the
loans are delinquent, the fair value liability for the guarantees related to
the mortgage loan pass-through certificates is zero.
DERIVATIVES
The Company employs several different methods for determining the fair value
of its derivative instruments. Fair values for these contracts are based on
current settlement values. These values are based on quoted market prices
for the foreign currency exchange contracts and financial future contracts
and; 2) industry standard models that are commercially available for
interest rate cap agreements, swaptions, spread lock agreements, interest
rate swaps, commodity swaps and put options.
INVESTMENT COMMITMENTS
Fair values for commitments to make investment in fixed maturity securities
(primarily private placements), mortgage loans on real estate and real
estate are based on the difference between the value of the committed
investments as of the date of the accompanying balance sheets and the
commitment date. These estimates would take into account changes in interest
rates, the counterparties' credit standing and the remaining terms of the
commitments.
SEPARATE ACCOUNTS
Assets held in separate accounts are reported in the accompanying
statutory-basis balance sheets at fair value. The related liabilities are
also reported at fair value in amounts equal to the separate account assets.
S-29
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying values and estimated fair values of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------
1998 1997
----------------------------------------------
CARRYING CARRYING
ASSETS (LIABILITIES) VALUE FAIR VALUE VALUE FAIR VALUE
- -----------------------------------------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------
<S> <C> <C> <C> <C>
Bonds $ 23,830.9 $ 25,065.5 $ 18,560.7 $ 19,798.6
- -----------------------------------------------
Preferred stocks 236.0 242.5 257.3 268.7
- -----------------------------------------------
Unaffiliated common stocks 259.3 259.3 436.0 436.0
- -----------------------------------------------
Mortgage loans on real estate 3,932.9 4,100.1 3,012.7 3,179.2
- -----------------------------------------------
Policy loans 1,606.0 1,685.9 660.5 648.3
- -----------------------------------------------
Other investments 434.4 434.4 335.5 335.5
- -----------------------------------------------
Cash and short-term investments 1,725.4 1,725.4 2,133.0 2,133.0
- -----------------------------------------------
Investment-type insurance contracts:
Deposit contracts and certain guaranteed
interest contracts (17,845.8) (17,486.4) (17,324.2) (16,887.6)
--------------------------------------------
Remaining guaranteed interest and similar
contracts (714.4) (738.2) (1,267.0) (1,294.6)
--------------------------------------------
Short-term debt (140.0) (140.0) (120.0) (120.0)
- -----------------------------------------------
Surplus notes due to LNC (1,250.0) (1,335.1) -- --
- -----------------------------------------------
Derivatives 25.5 18.2 26.2 9.3
- -----------------------------------------------
Investment commitments -- (0.6) -- (0.5)
- -----------------------------------------------
Separate account assets 36,907.0 36,907.0 31,330.9 31,330.9
- -----------------------------------------------
Separate account liabilities (36,907.0) (36,907.0) (31,330.9) (31,330.9)
- -----------------------------------------------
</TABLE>
12. ACQUISITIONS AND SALES OF SUBSIDIARIES
In October 1996, the Company and LLANY purchased a block of group
tax-qualified annuity business from UNUM Corporation affiliates. The bulk of
the transaction was completed in the form of an assumption reinsurance
transaction, which resulted in a ceding commission of $71,800,000. The
ceding commission resulted in admissible goodwill of $62,300,000, which is
being amortized on a straight-line basis over 10 years. LLANY was required
by the New York Department of Insurance to expense its portion of the ceding
commission in 1996. Policy liabilities and related accruals of the Company
and its wholly owned subsidiary increased by $3,200,000,000 as a result of
this transaction.
In 1997, LNC contributed 25,000,000 shares of common stock of American
States to the Company. American States is a property casualty insurance
holding company of which LNC owned 83.3%. The contributed common stock was
accounted for as a capital contribution equal to the fair value of the
common stock received by the Company. Subsequently, the American States
common stock owned by the Company, along with all other American States
common stock owned by LNC and its affiliates, was sold. The Company received
proceeds from the sale in the amount of $1,175,000,000. The Company
recognized no gain or loss on the sale of its portion of the common stock
due to the receipt of the stock at fair value. The proceeds from this sale
of stock were used to partially finance the CIGNA indemnity reinsurance
transaction.
S-30
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
13. TRANSACTIONS WITH AFFILIATES
A wholly owned subsidiary of LNC, Lincoln Life and Annuity Distributors,
Inc. ("LLAD"), has a nearly exclusive general agent's contract with the
Company under which it sells the Company's products and provides the service
that otherwise would be provided by a home office marketing department and
regional offices. For providing these selling and marketing services, the
Company paid LLAD override commissions of $76,700,000 in 1998 and override
commissions and operating expense allowances of $61,600,000 and $56,300,000
in 1997 and 1996, respectively. LLAD incurred expenses of $102,400,000,
$5,500,000 and $15,700,000 in 1998, 1997 and 1996, respectively, in excess
of the override commissions and operating expense allowances received from
the Company, which the Company is not required to reimburse. Effective in
January 1998, the Company and LLAD agreed to increase the override
commission expense and eliminate the operating expense allowance.
Cash and short-term investments at December 31, 1998 and 1997 include the
Company's participation in a short-term investment pool with LNC of
$383,600,000 and $325,600,000, respectively. Related investment income
amounted to $16,800,000, $15,500,000 and $15,300,000 in 1998, 1997 and 1996,
respectively. Short-term loan payable to parent company at December 31, 1998
and 1997 represent notes payable to LNC.
The Company provides services to and receives services from affiliated
companies which resulted in a net payment of $92,100,000, $48,500,000 and
$34,100,000 in 1998, 1997 and 1996, respectively.
The Company cedes and accepts reinsurance from affiliated companies.
Premiums in the accompanying statements of income include premiums on
insurance business accepted under reinsurance contracts and exclude premiums
ceded to other affiliated companies, as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Insurance assumed $ 13.7 $ 11.9 $ 17.9
- ----------------------
Insurance ceded 290.1 100.3 302.8
- ----------------------
</TABLE>
The balance sheets include reinsurance balances with affiliated companies as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Future policy benefits
and claims assumed $ 197.3 $ 245.5
- ------------------------
Future policy benefits
and claims ceded 1,125.0 997.2
- ------------------------
Amounts recoverable on
paid and unpaid losses 84.2 30.4
- ------------------------
Reinsurance payable on
paid losses 6.0 5.3
- ------------------------
Funds held under
reinsurance treaties --
net liability 1,375.4 1,115.4
- ------------------------
</TABLE>
Substantially all reinsurance ceded to affiliated companies is with
unauthorized companies. To take a reserve credit for such reinsurance, the
Company holds assets from the reinsurer, including funds held under
reinsurance treaties, and is the beneficiary on letters of credit
aggregating $318,300,000 and $280,900,000 at December 31, 1998 and 1997,
respectively. The letters of credit are issued by banks and represent
guarantees of performance under the reinsurance agreement. At December 31,
1998 and 1997, LNC had guaranteed $237,000,000 and $229,100,000,
respectively, of these letters of credit. At December 31, 1998, the Company
has a receivable (included in the foregoing amounts) from affiliated
insurance companies in the amount of $122,400,000 for statutory surplus
relief received under financial reinsurance ceded agreements.
14. SEPARATE ACCOUNTS
Separate account assets held by the Company consist primarily of long-term
bonds, common stocks, short-term investments and mutual funds and are
carried at market value. Substantially all of the separate accounts do not
have any minimum guarantees and the investment risks associated with market
value changes are borne entirely by the policyholder.
Separate account premiums, deposits and other considerations amounted to
$3,953,300,000, $4,821,800,000 and $4,148,700,000 in 1998, 1997
S-31
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
14. SEPARATE ACCOUNTS (CONTINUED)
and 1996, respectively. Reserves for separate accounts with assets at fair
value were $36,145,900,000 and $30,560,700,000 at
December 31, 1998 and 1997, respectively. All reserves are subject to
discretionary withdrawal at market value.
A reconciliation of transfers to (from) separate accounts is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997
------------------------
(IN MILLIONS)
------------------------
<S> <C> <C>
Transfers as reported in the Summary of Operations of the
various separate accounts:
Transfers to separate accounts $ 3,954.9 $ 4,824.0
- ------------------------------------------------------------
Transfers from separate accounts (4,069.8) (2,943.8)
- ------------------------------------------------------------ --------- ---------
Net transfers to (from) separate accounts as reported in the
Summary of Operations $ (114.9) $ 1,880.2
- ------------------------------------------------------------ --------- ---------
--------- ---------
</TABLE>
15. RECONCILIATION OF ANNUAL STATEMENT TO AUDITED FINANCIAL STATEMENTS
In 1997, certain errors were identified by the Illinois
Insurance Department in the calculation of the AVR as of
December 31, 1996 and 1995. The effects of the AVR errors
also resulted in the need for revisions in the calculation
of certain investment limitation thresholds, the results of
which indicated that additional assets should have been
nonadmitted as of December 31, 1996. As discussed by the
Company with the Indiana and Illinois Insurance Departments,
corrections were made to affected pages of the Company's
NAIC Annual Statement which were refiled with various state
insurance departments. However, due to immateriality of the
corrections in relation to the financial statements taken as
a whole, the audited 1996 and 1995 statutory-basis financial
statements were not corrected and re-issued.
The Company's 1997 NAIC Annual Statement, as filed with
various state insurance departments, also includes the
corrected balances for 1996 and 1995. The following is a
reconciliation of total admitted assets, total liabilities
and capital and surplus as of December 31, 1996 as presented
in the 1997 NAIC Annual Statement (as corrected) to the
accompanying audited financial statements.
<TABLE>
<CAPTION>
TOTAL CAPITAL
ADMITTED TOTAL AND
ASSETS LIABILITIES SURPLUS
---------------------------------
<S> <C> <C> <C>
Balance as of December 31, 1996 as
reported in the accompanying audited
financial statements $50,016.6 $ 48,054.0 $1,962.6
- ----------------------------------------
Effect of AVR errors -- 37.6 (37.6)
- ----------------------------------------
Effect of change in investment
limitations (57.0) -- (57.0)
- ---------------------------------------- --------- ----------- --------
Balance as of December 31, 1996 as
reported in the 1997 NAIC Annual
Statement $49,959.6 $ 48,091.6 $1,868.0
- ---------------------------------------- --------- ----------- --------
--------- ----------- --------
</TABLE>
S-32
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
16. CENTURY COMPLIANCE (UNAUDITED)
The Year 2000 issue is pervasive and complex and affects virtually every
aspect of the Company's business. The Company's computer systems and
interfaces with the computer systems of vendors, suppliers, customers and
business partners are particularly vulnerable. The Company has been
redirecting a large portion of internal Information Technology efforts and
contracting with outside consultants to update systems to address Year 2000
issues. Experts have been engaged to assist in developing work plans and
cost estimates and to complete remediation activities.
For the year ended December 31, 1998, the Company identified expenditures of
$26,300,000 to address this issue. This brings the expenditures for 1996
through 1998 to $34,200,000 million. The Company's financial plans for 1999
and 2000 include expected expenditures of an additional $38,300,000 bringing
estimated overall Year 2000 expenditures to $72,500,000. Because updating
systems and procedures is an integral part of the Company's on-going
operations, approximately 50% of expenditures shown above are expected to
continue after all Year 2000 issues have been resolved. Actual Year 2000
expenditures through December 31, 1998 and future Year 2000 expenditures are
expected to be funded from operating cash flows. The anticipated cost of
addressing Year 2000 issues is based on management's current best estimates
which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third party
modification plans and other factors. Such costs will be closely monitored
by management. Nevertheless, there can be no guarantee that actual costs
will not be higher than these estimated costs. Specific factors that might
cause such differences include, but are not limited to, the availability and
cost of personnel trained in this area, the ability to locate and correct
all relevant computer problems and other uncertainties. The total
expenditures identified represent only the Company's portion of LNC's larger
expenditures to address the Year 2000 issue.
The current scope of the overall Year 2000 program includes the following
four major project areas: 1) addressing the readiness of business
applications, operating systems and hardware on mainframe, personal computer
and Local Area Network platforms (IT); 2) addressing the readiness of non-IT
embedded software and equipment (non-IT); 3) addressing the readiness of key
business partners and 4) establishing Year 2000 contingency plans.
The projects to address IT and non-IT readiness have four major phases.
Phase one involves raising awareness and creating an inventory of all IT and
non-IT assets. The second phase consists of assessing all items inventoried
to initially determine whether they are affected by the Year 2000 issue and
preparing general plans and strategies. The third phase entails the detailed
planning and remediation of affected systems and equipment. The last phase
consists of testing to verify Year 2000 readiness.
The Company has completed those four phases for over two-thirds of its high
priority IT systems, including those provided by software vendors. While the
Company's year 2000 program for nearly all high priority IT systems is
expected to be completed in the first quarter 1999, phase four, for a small
but important subset of these systems, will continue through the end of the
second quarter 1999. As of December 31, 1998, the status of projects
addressing readiness of IT assets is: 100% of IT assets have been
inventoried (Phase 1) and assessed (Phase 2); 94% of IT projects have been
through the remediation phase (Phase 3) with the last project scheduled for
completion by the end of March 1999; and 69% of IT projects have completed
the testing phase (Phase 4) with the last project scheduled to finish
testing by the end of June 1999. A portion of the effort that extends into
1999 is dependent on outside third parties and is behind the original
schedule. The Company is working with these parties to modify the completion
schedule.
As of December 31, 1998, the status of projects that address readiness of
high priority non-IT assets is: 100% of non-IT assets have been inventoried
(Phase 1) and assessed (Phase 2); 79% of non-IT projects addressing
remediation (Phase 3) have been completed and 21% of non-IT projects have
completed the testing phase (Phase 4). The Company expects to have all
phases related to high priority non-IT completed by the end of October 1999.
S-33
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
16. CENTURY COMPLIANCE (UNAUDITED) (CONTINUED)
Concurrent with the IT and non-IT projects, the readiness of key business
partners is being reviewed and Year 2000 contingency plans are being
developed. The most significant categories of key business partners are
financial institutions, software vendors and utility providers (gas,
electric and telecommunications). Surveys have been mailed to these key
business partners. Based on responses received, current levels of readiness
are being assessed, follow-up contacts are underway, alternative strategies
are being developed and testing is being scheduled where feasible. This
effort is expected to continue well into 1999. As noted above, software
vendor assessments are considered part of the IT projects and, therefore,
would follow the schedule shown above for such projects.
While the Company is working to meet the schedules outlined above, some
uncertainty remains. Specific factors that give rise to this uncertainty
include a possible loss of technical resources to perform the work, failure
to identify all susceptible systems, non-compliance by third parties whose
systems and operations impact the Company and other similar uncertainties.
A worst case scenario might include the Company's inability to achieve Year
2000 readiness with respect to one or more of the Company's significant
policyholder systems resulting in a material disruption to the Company's
operations. Specifically, the Company could experience an interruption in
its ability to collect and process premiums or deposits, process claim
payments, accurately maintain policyholder information, accurately maintain
accounting records and/or perform adequate customer service. Should the
worst case scenario occur, it could, depending on its duration, have a
material impact on the Company's results of operations and financial
position. Simple failures can be repaired and returned to production within
a matter of hours with no material impact. Unanticipated failures with a
longer service disruption period would have a more serious impact. For this
reason, the Company is placing significant emphasis on risk management and
Year 2000 contingency planning. The Company is in the process of modifying
its contingency plans to address potential Year 2000 issues. Where these
efforts identify high risks due either to unacceptable work around
procedures or significant readiness risks, appropriate risk management
techniques are being developed. These techniques, such as resource shifting
or use of alternate providers, will be employed to provide stronger
assurances of readiness. The Company has gone through exercises to identify
worst case scenario failures. At this time, the Company believes its plans
are sufficient to mitigate identified worst case scenarios.
S-34
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The Lincoln National Life Insurance Company
We have audited the accompanying statutory-basis balance sheets
of The Lincoln National Life Insurance Company (a wholly owned
subsidiary of Lincoln National Corporation) as of December 31,
1998 and 1997, and the related statutory-basis statements of
operations, changes in capital and surplus and cash flows for
each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
As described in Note 1 to the financial statements, the Company
presents its financial statements in conformity with accounting
practices prescribed or permitted by the Indiana Department of
Insurance, which practices differ from generally accepted
accounting principles. The variances between such practices and
generally accepted accounting principles and the effects on the
accompanying financial statements are also described in Note 1.
In our opinion, because of the effects of the matter described
in the preceding paragraph, the financial statements referred to
above do not present fairly, in conformity with generally
accepted accounting principles, the financial position of The
Lincoln National Life Insurance Company at December 31, 1998 and
1997, or the results of its operations or its cash flows for
each of the three years in the period ended December 31, 1998.
However, in our opinion, the financial statements referred to
above present fairly, in all material respects, the financial
position of The Lincoln National Life Insurance Company at
December 31, 1998 and 1997, and the results of its operations
and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with accounting practices
prescribed or permitted by the Indiana Department of Insurance.
/s/ Ernst & Young LLP
February 1, 1999
S-35
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY FUND A (INDIVIDUAL)
Post-Effective Amendment No. 48 on Form N-3
PART C--OTHER INFORMATION
Item 28.
(a) LIST OF FINANCIAL STATEMENTS
1. The Table of Per-Accumulation-Unit Income and
Capital Changes for Fund A is included in Part
A of this Registration Statement.
2. The following Financial Statements of Fund A
are included in Part B of this Registration
Statement:
Statement of Net Assets--December 31, 1998
Statement of Operations--Year ended
December 31, 1998
Statements of Changes in Net Assets--
Years ended December 31, 1998 and 1997
Statement of Net Assets--
December 31, 1998
Notes to Financial Statements--
December 31, 1998
Report of Ernst & Young LLP, Independent Auditors
<PAGE>
3.
The following Statutory - Basis Financial Statements and Schedules of Lincoln
National Life Insurance Company are included in Part B of this Registration
Statement:
Balance Sheets -- Statutory - Basis December 31, 1998 and 1997
Statement of Operations -- Statutory Basis -- Years ended December 31,
1998, 1997 and 1996
Statements of Capital and Surplus -- Statutory Basis - Years ended December 31,
1998, 1997 and 1996
Statement of Cash Flows -- Statutory Basis -- Years ended December 31, 1998,
1997, and 1996
Notes to Statutory Basis Financial Statements -- December 31, 1998 Supplemental
Schedule of Selected Statutory Basis Financial Data -- December 31, 1998
Report of Ernst & Young LLP, Independent Auditors
(b) LIST OF EXHIBITS
(1) Separate Account Resolution of the Board of Directors of the Insurance
Company authorizing the establishment of the Registrant (filed with
Post-Effective Amendment No. 46 to this Registration Statement, on April
28, 1998)
(2) Fund Bylaws or Instruments corresponding thereto (filed with Post-Effective
Amendment No. 46 to this Registration Statement, on April 28, 1998)
(3) Custodian Agreement (filed with Post-Effective Amendment No. 46 to this
Registration Statement, on April 28, 1998)
(4) (a) Investment Advisory Contract (filed with Post-Effective Amendment No.
46 to this Registration Statement, on April 28, 1998)
(b) Investment Sub-advisory Contract (filed with Post-Effective Amendment
No. 46 to this Registration Statement, on April 28, 1998)
(5) Not applicable
(6) Variable Annuity Contract (filed with Post-Effective Amendment No. 46 to
this Registration Statement, on April 28, 1998)
(7) Application (filed with Post-Effective Amendment No. 46 to this
Registration Statement, on April 28, 1998)
(8) Articles of Incorporation and Bylaws Lincoln National Life Insurance
Company are incorporated herein by reference to the Registration Statement
on Form N-4 (33-27783) filed on December 5, 1996.
(9) Not applicable
(10) Not applicable
(11) Services Agreement between Delaware Management Holdings, Inc., Delaware
Service Company, Inc. and Lincoln National Life Insurance Company is
incorporated herein by reference to the Registration Statement on Form S-6
(333-40745) filed on November 21, 1997.
(12) Opinion and Consent of Counsel--Robert H. Carpenter, Esquire (filed with
Post-Effective Amendment No. 46 to this Registration Statement, on April
28, 1998)
(13) Consent of Ernst & Young LLP, Independent Auditors
(14) Not applicable
(15) Not applicable
(16) Not applicable
(17) Financial Data Schedule
(18) General
(a) Organizational Chart of the Lincoln National Insurance Holding Company
System
(b) Books and Records Report
(19) (a) Power of Attorney - Gabriel Shaheen
(b) Power of Attorney - Lawrence T. Rowland
(c) Power of Attorney - Keith J. Ryan
(d) Power of Attorney - H. Thomas McMeekin
(e) Power of Attorney - Richard C. Vaughn
(f) Power of Attorney - Jon A. Boscia
Item 29.
DIRECTORS AND OFFICERS OF THE INSURANCE COMPANY
Name and Principal Positions and Offices Positions and Offices
Business Address with Insurance Company with Registrant
- ---------------- ---------------------- ---------------------
GABRIEL L. SHAHEEN* President and Chief
Executive Officer
and Director
JON A. BOSCIA** Director
JOHN H. GOTTA**** Senior Vice President
<PAGE>
STEPHEN LEWIS* Senior Vice President
H. THOMAS MCMEEKIN** Director
CYNTHIA A. ROSE** Secretary and Assistant Vice President
LAWRENCE T. ROWLAND*** Executive Vice President and Director
KEITH J. RYAN* Assistant Treasurer, Senior
Vice President and Chief
Financial Officer
ELDON J. SUMMERS** Assistant Vice President and Treasurer
RICHARD C. VAUGHAN** Director
ROY V. WASHINGTON**** Vice President and Chief Compliance Officer
Footnotes:
* The principal business address is 1300 South Clinton Street, Fort Wayne,
Indiana 46802-3506.
** Principal business address is 200 E. Berry Street, Fort Wayne, Indiana
46802-2706.
*** Principal business address is 1700 Magnavox Way, One Reinsurance Place,
Fort Wayne, Indiana 46804-1538
**** Principal business address is 350 Church Street, Hartford, CT 06103
<PAGE>
This list is also designed to satisfy the requirements of Item 33.
Item 30.
PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE INSURANCE COMPANY
OR REGISTRANT
See Exhibit 18(a): Organizational Chart of the Lincoln National Insurance
Holding Company System. The Fund is a segregated account established pursuant
to Indiana Law, and thus does not appear on the Chart.
Item 31.
NUMBER OF CONTRACTOWNERS
As of February 28, 1999, there were 1,520 individual contractowners of qualified
contracts. The Fund does not offer non-qualified contracts.
Item 32.
INDEMNIFICATION--UNDERTAKING
(a) Brief description of indemnification provisions.
See prior filings.
(b) Undertaking pursuant to Rule 484 of Regulation C under the
Securities Act of 1933:
See prior filings.
Item 33. Business and Other Connections of Investment Adviser.
The Lincoln National Life Insurance Company, the Investment Adviser, is
principally engaged in the sale of life insurance, annuities, and related
products and services, and is a professional reinsurer.
Information concerning other activities of certain directors and officers of
Lincoln National Life Insurance Company is set out in item 29 above.
Item 34. Principal Underwriters
(a) Lincoln Life also currently serves as Principal Underwriter for Lincoln
National Variable Annuity Fund A (group); and is the Sponsor of Lincoln National
Flexible Premium Variable Life Accounts D, F, G, J, K, M, and R and Lincoln
National Variable Annuity Accounts C, E, H, L, N, Q, 50, 51 and 52.
(b) Not Applicable.
Item 35. Location of Accounts and Records
See Exhibit 18(b)
Item 36. Management Services
See Exhibit 9(d)
Item 37. Undertakings
(a) Not Applicable.
(b) See prior filings.
(c) See prior filings.
(d) Lincoln National Life Insurance Company hereby represents that the fees and
charges deducted under the contract, in the aggregate, are reasonable in
relation to the services rendered, the expenses expected to be incurred, and
the risks assumed by the Lincoln National Life Insurance Company.
<PAGE>
SIGNATURES
(a) As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant certifies that it meets the requirements of Securities Act
Rule 485(b) for effectiveness of this Amendment and has caused this Amendment to
the Registration Statement to be signed on its behalf, in the City of Fort
Wayne, and the State of Indiana on this 28th day of April, 1999.
LINCOLN LIFE VARIABLE ANNUITY
Variable Annuity Fund A (Group)
By: /s/ Kelly D. Clevenger
----------------------------------------
Kelly D. Clevenger, Chairperson
Board of Managers
(Signature and Title)
By: THE LINCOLN NATIONAL LIFE
INSURANCE COMPANY
(Depositor)
By: /s/ Stephen H. Lewis
----------------------------------------
Stephen H. Lewis
Senior Vice President, LNL
(Name and title of officer of Depositor)
(b) As required by the Securities Act of 1933, this Amendment to the
Registration Statement has been signed for the Depositors by the following
persons in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
* Chief Executive Officer, April 28, 1999
- --------------------------- President & Director
Gabriel L. Shaheen (Principal Executive Officer)
* Executive Vice President April 28, 1999
- --------------------------- and Director
Lawrence T. Rowland
* Senior Vice President, Chief April 28, 1999
- --------------------------- Financial Officer and Assistant
Keith J. Ryan Treasurer (Principal Accounting
Officer and Principal Financial
Officer)
* Director April 28, 1999
- ---------------------------
Jon A. Boscia
* Director April 28, 1999
- ---------------------------
H. Thomas McMeekin
* Director April 28, 1999
- ---------------------------
Richard C. Vaughan
*By /s/ Steven M. Kluever pursuant to a Power of Attorney
- --------------------------- filed with this Registration
Steven M. Kluever Statement
<PAGE>
Exhibit 13
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the captions "Supplemental
Information-Selected Per Unit Data and Ratios" and "Independent Auditors" in the
Post-Effective Amendment No. 48 to the Registration Statement (Form N-3 No. 2-
26342) and related Prospectus and Statement of Additional Information appearing
therein and pertaining to the Lincoln National Variable Annuity Fund A
(Individual) and to the use therein of our reports dated (a) February 1, 1999,
with respect to the statutory-basis financial statements of The Lincoln National
Life Insurance Company, and (b) February 9, 1999, with respect to the financial
statements of Lincoln National Variable Annuity Fund A.
Fort Wayne, Indiana
April 23, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> LINCOLN NATIONAL VARIABLE ANNUITY FUND A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 83,630,615
<INVESTMENTS-AT-VALUE> 144,700,353
<RECEIVABLES> 1,494,609
<ASSETS-OTHER> 998,673
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 147,193,635
<PAYABLE-FOR-SECURITIES> 1,078,016
<SENIOR-LONG-TERM-DEBT> 48,435
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 1,126,452
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> (36,164,627)
<SHARES-COMMON-STOCK> 7,706,415
<SHARES-COMMON-PRIOR> 8,322,820
<ACCUMULATED-NII-CURRENT> 674,715
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 120,487,357
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 61,069,737
<NET-ASSETS> 146,067,183
<DIVIDEND-INCOME> 2,358,504
<INTEREST-INCOME> 18,580
<OTHER-INCOME> 43,380
<EXPENSES-NET> 1,745,749
<NET-INVESTMENT-INCOME> 674,715
<REALIZED-GAINS-CURRENT> 15,158,708
<APPREC-INCREASE-CURRENT> 9,368,090
<NET-CHANGE-FROM-OPS> 25,201,513
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 36,697
<NUMBER-OF-SHARES-REDEEMED> 653,103
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 14,609,120
<ACCUMULATED-NII-PRIOR> 2,194,153
<ACCUMULATED-GAINS-PRIOR> 103,134,497
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 441,232
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,745,749
<AVERAGE-NET-ASSETS> 136,682,182
<PER-SHARE-NAV-BEGIN> 15.600
<PER-SHARE-NII> 0.084
<PER-SHARE-GAIN-APPREC> 3.270
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 18.954
<EXPENSE-RATIO> 2.58
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S><C>
ORGANIZATIONAL CHART OF THE
LINCOLN NATIONAL INSURANCE HOLDING COMPANY SYSTEM
All the members of the holding company system are corporations, with
the exception of, Delaware Distributors, L.P and Founders CBO, L.P.
--------------------------------
| |
| Lincoln National Corporation |
| Indiana - Holding Company |
--------------------------------
| ---------------------------------------------
|--| Lincoln National Management Corporation |
| | 100% - Pennsylvania - Management Company |
| ---------------------------------------------
| ---------------------------------------------
|--| City Financial Partners Ltd. |
| | 100% - England/Wales - Distribution of life |
| | assurance & pension products |
| ---------------------------------------------
| ------------------------------------------------
|--| LNC Administrative Services Corporation |
| | 100% - Indiana - Third Party Administrator |
| ------------------------------------------------
| ---------------------------------------------------
|--|Lincoln National Financial Institutions Group, Inc.|
| |(fka The Richard Leahy Corporation) |
| |100% - Indiana - Insurance Agency |
| ---------------------------------------------------
| | ---------------------------------
| |--| The Financial Alternative, Inc. |
| | | 100% - Utah- Insurance Agency |
| | ---------------------------------
| | ---------------------------------------
| |--| Financial Alternative Resources, Inc. |
| | | 100% - Kansas - Insurance Agency |
| | ---------------------------------------
| | -----------------------------------------
| |--| Financial Choices, Inc. |
| | | 100% - Pennsylvania - Insurance Agency |
| | -----------------------------------------
| | -----------------------------------------------
| | | Financial Investment Services, Inc. |
| |--| (formerly Financial Services Department, Inc.)|
| | | 100% - Indiana - Insurance Agency |
| | -----------------------------------------------
| | -----------------------------------------
| | | Financial Investments, Inc. |
| |--| (formerly Insurance Alternatives, Inc.) |
| | | 100% - Indiana - Insurance Agency |
| | -----------------------------------------
| | -------------------------------------------
| |--| The Financial Resources Department, Inc. |
| | | 100% - Michigan - Insurance Agency |
| | -------------------------------------------
| | -----------------------------------------
| |--| Investment Alternatives, Inc. |
| | | 100% - Pennsylvania - Insurance Agency |
| | -----------------------------------------
| | --------------------------------------
| |--| The Investment Center, Inc. |
| | | 100% - Tennessee - Insurance Agency |
| | --------------------------------------
| | --------------------------------------
| |--| The Investment Group, Inc. |
| | | 100% - New Jersey - Insurance Agency |
--------------------------------------
<PAGE>
-------------------------------
| |
| Lincoln National Corporation |
| Indiana - Holding Company |
-------------------------------
| ---------------------------------------------------
|--|Lincoln National Financial Institutions Group, Inc.|
| |(fka The Richard Leahy Corporation) |
| |100% - Indiana - Insurance Agency |
| ---------------------------------------------------
| | ------------------------------------
| |--| Personal Financial Resources, Inc. |
| | | 100% - Arizona - Insurance Agency |
| | ------------------------------------
| | ----------------------------------------
| |--| Personal Investment Services, Inc. |
| | 100% - Pennsylvania - Insurance Agency |
| ----------------------------------------
| -------------------------------------------
|--| LincAm Properties, Inc. |
| | 50% - Delaware - Real Estate Investment |
| -------------------------------------------
| ----------------------------------------------
| | Lincoln Life and Annuity Distributors, Inc. |
|--| (formerly Lincoln Financial Group, Inc.) |
| | 100% - Indiana - Insurance Agency |
| ----------------------------------------------
| | ----------------------------------------
| |--| Lincoln Financial Advisors Corporation |
| | | (formerly LNC Equity Sales Corporation)|
| | | 100% - Indiana - Broker-Dealer |
| | ----------------------------------------
| | -------------------------------------------------------------
| | |Corporate agencies: Lincoln Life and Annuity Distributors, |
| | |Inc. ("LLAD")has subsidiaries of which LLAD owns from |
| | |80%-100% of the common stock (see Attachment #1). These |
| | |subsidiaries serve as the corporate agency offices for the |
| | |marketing and servicing of products of The Lincoln National |
| | |Life Insurance Company. Each subsidiary's assets are less |
| | |than 1% of the total assets of the ultimate controlling |
| | |person. |
| | -------------------------------------------------------------
| | ------------------------------------------------
| |--| Professional Financial Planning, Inc. |
| | 100% - Indiana - Financial Planning Services |
| ------------------------------------------------
| ---------------------------------------
|--| Lincoln Life Improved Housing, Inc. |
| | 100% - Indiana |
| ---------------------------------------
|
| -----------------------------------------------
|--| Lincoln National (China) Inc. |
| | 100% - Indiana - China Representative Office |
| -----------------------------------------------
|
| ---------------------------------------------
|--| Lincoln National Intermediaries, Inc. |
| | 100% - Indiana - Reinsurance Intermediary |
| ---------------------------------------------
|
| --------------------------------------------------
|__| Lincoln National Investments, Inc. |
| | (fka Lincoln National Investment Companies, Inc.)|
| | 100% - Indiana - Holding Company |
| --------------------------------------------------
| |
| | --------------------------------------------
| |--| Lincoln National Investment Companies, Inc.|
| | |(fka Lincoln National Investments, Inc.) |
| | | 100% - Indiana - Holding Company |
--------------------------------------------
<PAGE>
-------------------------------
| |
| Lincoln National Corporation |
| Indiana - Holding Company |
-------------------------------
| --------------------------------------------------
|__| Lincoln National Investments, Inc. |
| | (fka Lincoln National Investment Companies, Inc.)|
| | 100% - Indiana - Holding Company |
| --------------------------------------------------
| | --------------------------------------------
| |--| Lincoln National Investment Companies, Inc.|
| | |(fka Lincoln National Investments, Inc.) |
| | | 100% - Indiana - Holding Company |
| | --------------------------------------------
| | | ----------------------------------
| | |--|Delaware Management Holdings, Inc.|
| | | |100% - Delaware - Holding Company |
| | | ----------------------------------
| | | | ------------------------------------
| | | |--| DMH Corp. |
| | | | 100% - Delaware - Holding Company |
| | | ------------------------------------
| | | | ----------------------------------------
| | | ---| Delaware International Advisers Ltd. |
| | | | 81.1% - England - Investment Advisor |
| | | ----------------------------------------
| | | --------------------------------------
| | |--| Delaware Management Trust Company |
| | | | 100% - Pennsylvania - Trust Service |
| | | --------------------------------------
| | | | -------------------------------------------------
| | | |__| Delaware International Holdings, Ltd. |
| | | | | 100% - Bermuda - Investment Advisor |
| | | | -------------------------------------------------
| | | | | --------------------------------------
| | | | |--| Delaware International Advisers, Ltd.|
| | | | | 18.9% - England - Investment Advisor |
| | | | --------------------------------------
| | | | -------------------------------------------------
| | | |__| Delvoy, Inc. |
| | | | | 100% - Minnesota - Holding Company |
| | | | -------------------------------------------------
| | | | | ---------------------------------------
| | | | |--| Delaware Management Company, Inc. |
| | | | | | 100% - Delaware - Investment Advisor |
| | | | | ---------------------------------------
| | | | | | ------------------------------------------------------
| | | | | |--| Delaware Distributors, L.P. |
| | | | | | | 98%-Delaware-Mutual Fund Distributor & Broker/Dealer |
| | | | | | | 1% Equity-Delaware Capital Management, Inc. |
| | | | | | | 1% Equity-Delaware Distributors, Inc. |
| | | | | | ------------------------------------------------------
| | | | | | ------------------------------------
| | | | | |--| Founders Holdings, Inc. |
| | | | | | | 100% - Delaware - General Partner |
| | | | | | ------------------------------------
| | | | | | | -----------------------------------------
| | | | | | |--| Founders CBO, L.P. |
| | | | | | | 1% - Delaware - Investment Partnership |
| | | | | | | 99% held by outside investors |
| | | | | | -----------------------------------------
| | | | | | | ------------------------------------------
| | | | | | |--|Founders CBO Corporation |
| | | | | | | |100%-Delaware-Co-Issuer with Founders CBO |
| | | | | | | ------------------------------------------
<PAGE>
--------------------------------
| |
| Lincoln National Corporation |
| Indiana - Holding Company |
--------------------------------
| --------------------------------------------------
|__| Lincoln National Investments, Inc. |
| | (fka Lincoln National Investment Companies, Inc.)|
| | 100% - Indiana - Holding Company |
| --------------------------------------------------
| | --------------------------------------------
| |--| Lincoln National Investment Companies, Inc.|
| | |(fka Lincoln National Investments, Inc.) |
| | | 100% - Indiana - Holding Company |
| | --------------------------------------------
| | | ----------------------------------
| | |--|Delaware Management Holdings, Inc.|
| | | |100% - Delaware - Holding Company |
| | | ----------------------------------
| | | | -----------------------------------
| | | |--| DMH Corp. |
| | | | | 100% - Delaware - Holding Company |
| | | | -----------------------------------
| | | | -------------------------------------------------
| | | |__| Delvoy, Inc. |
| | | | | 100% - Minnesota - Holding Company |
| | | | -------------------------------------------------
| | | | | ------------------------------------
| | | | |--| Delaware Distributors, Inc. |
| | | | | | 100% - Delaware - General Partner |
| | | | | ------------------------------------
| | | | | | -------------------------------------------------------
| | | | | |--| Delaware Distributors, L.P. |
| | | | | | | 98%-Delaware-Mutual Fund Distributor & Broker/Dealer |
| | | | | | 1% Equity-Delaware Capital Management, Inc. |
| | | | | | 1% Equity-Delaware Distributors, Inc. |
| | | | | -------------------------------------------------------
| | | | | -----------------------------------------------
| | | | |--| Delaware Capital Management, Inc. |
| | | | | |(formerly Delaware Investment Counselors, Inc.)|
| | | | | | 100% - Delaware - Investment Advisor |
| | | | | -----------------------------------------------
| | | | | | -----------------------------------------------------------
| | | | | |--| Delaware Distributors, L.P. |
| | | | | | | 98%-Delaware-Mutual Fund Distributor & Broker/Dealer |
| | | | | | | 1% Equity-Delaware Capital Management, Inc. |
| | | | | | | 1% Equity-Delaware Distributors, Inc. |
| | | | | -----------------------------------------------------------
| | | | | -----------------------------------------------------
| | | | |--| Delaware Service Company, Inc. |
| | | | | | 100%-Delaware-Shareholder Services & Transfer Agent |
| | | | | -----------------------------------------------------
| | | | | -------------------------------------------------
| | | | |__| Delaware Investment & Retirement Services, Inc. |
| | | | | | 100% - Delaware - Registered Transfer Agent |
| | | | | -------------------------------------------------
| | | -----------------------------------------
| | |--| Lynch & Mayer, Inc. |
| | | | 100% - Indiana - Investment Adviser |
| | | -----------------------------------------
| | | | ---------------------------------------
| | | |--| Lynch & Mayer Securities Corp. |
| | | | 100% - Delaware - Securities Broker |
| | | ---------------------------------------
| | | ----------------------------------------------------
| | | | Vantage Global Advisors, Inc. |
| | |--| (formerly Modern Portfolio Theory Associates, Inc.)|
| | | | 100% - Delaware - Investment Adviser |
----------------------------------------------------
<PAGE>
--------------------------------
| |
| Lincoln National Corporation |
| Indiana - Holding Company |
--------------------------------
| --------------------------------------------------
|__| Lincoln National Investments, Inc. |
| | (fka Lincoln National Investment Companies, Inc.)|
| | 100% - Indiana - Holding Company |
| --------------------------------------------------
| | -----------------------------------------------------------
| | | Lincoln Investment Management, Inc. |
| |--| (formerly Lincoln National Investment Management Company) |
| | | 100% - Illinois - Mutual Fund Manager and |
| | | Registered Investment Adviser |
| | -----------------------------------------------------------
| -----------------------------------------------
|--| The Lincoln National Life Insurance Company |
| | 100% - Indiana |
| -----------------------------------------------
| | --------------------------------------------------
| |--|AnnuityNet, Inc. |
| | |100% - Indiana - Distribution of annuity products |
| | --------------------------------------------------
| | | -------------------------------------
| | |--| AnnuityNet Insurance Agency, Inc. |
| | | | 100% - Indiana - Insurance Agency |
| | -------------------------------------
| | -------------------------------------------
| |--|Lincoln National Insurance Associates, Inc.|
| | |(fka Cigna Associates, Inc.) |
| | |100% - Connecticut - Insurance Agency |
| | -------------------------------------------
| | | --------------------------------------------------------
| | |--|Lincoln National Insurance Associates of Alabama, Inc. |
| | | |100% - Alabama - Insurance Agency |
| | | --------------------------------------------------------
| | | -------------------------------------------------------------
| | | | Lincoln National Insurance Associates of Massachusetts, Inc.|
| | | | (formerly Cigna Associates of Massachusetts, Inc.) |
| | |--| 100% - Massachusetts - Insurance Agency |
| | -------------------------------------------------------------
| | -------------------------------------------
| |--| Sagemark Consulting, Inc. |
| | | (fka Cigna Financial Advisors, Inc.) |
| | | 100% - Connecticut - Broker Dealer |
| | -------------------------------------------
| | -------------------------------------------
| |--| First Penn-Pacific Life Insurance Company |
| | | 100% - Indiana |
| | -------------------------------------------
| | -----------------------------------------------
| |--| Lincoln Life & Annuity Company of New York |
| | | 100% - New York |
| | -----------------------------------------------
| | ------------------------------------------------
| |--| Lincoln National Aggressive Growth Fund, Inc. |
| | | 100% - Maryland - Mutual Fund |
| | ------------------------------------------------
| | -----------------------------------
| |--| Lincoln National Bond Fund, Inc. |
| | | 100% - Maryland - Mutual Fund |
| | -----------------------------------
| | --------------------------------------------------
| |--| Lincoln National Capital Appreciation Fund, Inc. |
| | | 100% - Maryland - Mutual Fund |
| | --------------------------------------------------
| | --------------------------------------------
| |--| Lincoln National Equity-Income Fund, Inc. |
| | | 100% - Maryland - Mutual Fund |
| | --------------------------------------------
| | ------------------------------------------------------
| | | Lincoln National Global Asset Allocation Fund, Inc. |
| |--| (formerly Lincoln National Putnam Master Fund, Inc.) |
| | | 100% - Maryland - Mutual Fund |
| | ------------------------------------------------------
<PAGE>
--------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
--------------------------------
| -----------------------------------------------
|--| The Lincoln National Life Insurance Company |
| | 100% - Indiana |
| -----------------------------------------------
| | ------------------------------------------------
| | | Lincoln National Growth and Income Fund, Inc. |
| |--| (formerly Lincoln National Growth Fund, Inc.) |
| | | 100% - Maryland - Mutual Fund |
| | ------------------------------------------------
| | --------------------------------------------------------
| |--| Lincoln National Health & Casualty Insurance Company |
| | | 100% - Indiana |
| | --------------------------------------------------------
| | -----------------------------------------------
| |--| Lincoln Re, S.A. |
| | | 1% Argentina - General Business Corp |
| | | (Remaining 99% owned by Lincoln National |
| | | Reassurance Company) |
| | -----------------------------------------------
| | -------------------------------------------
| |--| Lincoln National International Fund, Inc. |
| | | 100% - Maryland - Mutual Fund |
| | -------------------------------------------
| | ---------------------------------------
| |--| Lincoln National Managed Fund, Inc. |
| | | 100% - Maryland - Mutual Fund |
| | ---------------------------------------
| | --------------------------------------------
| |--| Lincoln National Money Market Fund, Inc. |
| | | 100% - Maryland - Mutual Fund |
| | --------------------------------------------
| | -----------------------------------------------
| |--| Lincoln National Social Awareness Fund, Inc. |
| | | 100% - Maryland - Mutual Fund |
| | -----------------------------------------------
| | -----------------------------------------------------
| |--| Lincoln National Special Opportunities Fund, Inc. |
| | | 100% - Maryland - Mutual Fund |
| | -----------------------------------------------------
| | ------------------------------------------------------
| |--| Lincoln National Reassurance Company |
| | 100% - Indiana - Life Insurance |
| ------------------------------------------------------
| | -----------------------------------------------
| |--| Lincoln Re, S.A. |
| | | 99% Argentina - General Business Corp |
| | | (Remaining 1% owned by Lincoln National Health|
| | | & Casualty Insurance Company) |
| | -----------------------------------------------
| | -----------------------------------------------
| |--| Special Pooled Risk Administrators, Inc. |
| | 100% - New Jersey - Catastrophe Reinsurance |
| | Pool Administrator |
| -----------------------------------------------
| ---------------------------------------------------------
|--| Lincoln National Management Services, Inc. |
| | 100% - Indiana - Underwriting and Management Services |
| ---------------------------------------------------------
| ---------------------------------------
|--| Lincoln National Realty Corporation |
| | 100% - Indiana - Real Estate |
| ---------------------------------------
| -----------------------------------------------------------
|--| Lincoln National Reinsurance Company (Barbados) Limited |
| | 100% - Barbados |
| -----------------------------------------------------------
| ----------------------------------------------
|--| Lincoln National Reinsurance Company Limited |
| | (formerly Heritage Reinsurance, Ltd.) |
| | 100% ** - Bermuda |
----------------------------------------------
<PAGE>
--------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
--------------------------------
| ----------------------------------------------
|--| Lincoln National Reinsurance Company Limited |
| | (formerly Heritage Reinsurance, Ltd.) |
| | 100% ** - Bermuda |
| ----------------------------------------------
| | ---------------------------------------------------------
| | | Lincoln National Underwriting Services, Ltd. |
| |--| 90% - England/Wales - Life/Accident/Health Underwriter |
| | | (Remaining 10% owned by Old Fort Ins. Co. Ltd.) |
| | ---------------------------------------------------------
| | --------------------------------------------------------
| | | Servicios de Evaluacion de Riesgos, S. de R.L. de C.V. |
| |--| 51% - Mexico - Reinsurance Underwriter |
| | (Remaining 49% owned by Lincoln National Corp.) |
| --------------------------------------------------------
| ---------------------------------------------
|--| Lincoln National Risk Management, Inc. |
| | 100% - Indiana - Risk Management Services |
| ---------------------------------------------
| ------------------------------------------------
|--| Lincoln National Structured Settlement, Inc. |
| | 100% - New Jersey |
| ------------------------------------------------
| -----------------------------------------
|--| Lincoln National (UK) PLC |
| | 100% - England/Wales - Holding Company |
| -----------------------------------------
| | -------------------------------------------------------
| |--| Allied Westminster & Company Limited |
| | | (formerly One Olympic Way Financial Services Limited) |
| | | 100% - England/Wales - Sales Services |
| | -------------------------------------------------------
| | --------------------------------------------------------
| |--| Culverin Property Services Limited |
| | | 100% - England/Wales - Property Development Services |
| | --------------------------------------------------------
| | ---------------------------------------------------------
| |--| HUTM Limited |
| | | 100% - England/Wales - Unit Trust Management (Inactive) |
| | ---------------------------------------------------------
| | --------------------------------------------
| |--| ILI Supplies Limited |
| | | 100% - England/Wales - Computer Leasing |
| | --------------------------------------------
| | ------------------------------------------------
| |--| Lincoln Financial Advisers Limited |
| | | (formerly: Laurentian Financial Advisers Ltd.) |
| | | 100% - England/Wales - Sales Company |
| | ------------------------------------------------
| | --------------------------------------------------
| |--| Lincoln Financial Group PLC |
| | | (formerly: Laurentian Financial Group PLC) |
| | | 100% - England/Wales - Holding Company |
| | --------------------------------------------------
| | | ----------------------------------------------------
| | |--| Lincoln ISA Management Limited |
| | | | (formerly Lincoln Unit Trust Management Limited; |
| | | | Laurentian Unit Trust Management Limited) |
| | | | 100% - England/Wales - Unit Trust Management |
----------------------------------------------------
<PAGE>
--------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
--------------------------------
| -----------------------------------------
|--| Lincoln National (UK) PLC |
| | 100% - England/Wales - Holding Company |
| -----------------------------------------
| | --------------------------------------------------
| |--| Lincoln Financial Group PLC |
| | | (formerly: Laurentian Financial Group PLC) |
| | | 100% - England/Wales - Holding Company |
| | --------------------------------------------------
| | | ---------------------------------------
| | |--| Lincoln Milldon Limited |
| | | | (formerly: Laurentian Milldon Limited)|
| | | | 100% - England/Wales - Sales Company |
| | | ---------------------------------------
| | | -----------------------------------------------------------
| | |--| Laurtrust Limited |
| | | | 100% - England/Wales - Pension Scheme Trustee (Inactive) |
| | | -----------------------------------------------------------
| | | --------------------------------------------------
| | |--|Lincoln Management Services Limited |
| | | |(formerly: Laurentian Management Services Limited)|
| | | |100% - England/Wales - Management Services |
| | | --------------------------------------------------
| | | | ------------------------------------------------
| | | |--|Laurit Limited |
| | | | |100% - England/Wales - Data Processing Systems |
| | | | ------------------------------------------------
| | --------------------------------------------------------
| |--| Liberty Life Pension Trustee Company Limited |
| | | 100% - England/Wales - Corporate Pension Fund (Dormat) |
| | --------------------------------------------------------
| | ----------------------------------------------------------
| |--| LN Management Limited |
| | | 100% - England/Wales - Administrative Services (Dormat) |
| | ----------------------------------------------------------
| | | -----------------------------------
| | |--| UK Mortgage Securities Limited |
| | | 100% - England/Wales - Inactive |
| | -----------------------------------
| | ------------------------------------------
| |--| Liberty Press Limited |
| | | 100% - England/Wales - Printing Services |
------------------------------------------
<PAGE>
--------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
--------------------------------
| -----------------------------------------
|--| Lincoln National (UK) PLC |
| | 100% - England/Wales - Holding Company |
| -----------------------------------------
| | ----------------------------------------------
| |--| Lincoln General Insurance Co. Ltd. |
| | | 100% - Accident & Health Insurance |
| | ----------------------------------------------
| | --------------------------------------------
| |--|Lincoln Assurance Limited |
| | |100% ** - England/Wales - Life Assurance |
| | --------------------------------------------
| | | | ---------------------------------------------
| | | |--|Barnwood Property Group Limited |
| | | | |100% - England/Wales - Property Management Co|
| | | | ---------------------------------------------
| | | | | ------------------------------------------
| | | | |--| Barnwood Developments Limited |
| | | | | | 100% England/Wales - Property Development|
| | | | | ------------------------------------------
| | | | | --------------------------------------------
| | | | |--| Barnwood Properties Limited |
| | | | | | 100% - England/Wales - Property Investment |
| | | | | --------------------------------------------
| | | | -----------------------------------------------------
| | | |--|IMPCO Properties G.B. Ltd. |
| | | | |100% - England/Wales - Property Investment (Inactive)|
| | | -----------------------------------------------------
| | | ----------------------------------------------------
| | |--| Lincoln Insurance Services Limited |
| | | | 100% - Holding Company |
| | | ----------------------------------------------------
| | | | ---------------------------------
| | | |--| British National Life Sales Ltd.|
| | | | | 100% - Inactive |
| | | | ---------------------------------
| | | | ----------------------------------------------------------
| | | |--| BNL Trustees Limited |
| | | | | 100% - England/Wales - Corporate Pension Fund (Inactive) |
| | | | ----------------------------------------------------------
| | | | -------------------------------------
| | | |--| Chapel Ash Financial Services Ltd. |
| | | | | 100% - Direct Insurance Sales |
-------------------------------------
<PAGE>
--------------------------------
| |
| Lincoln National Corporation |
| Indiana - Holding Company |
--------------------------------
| -----------------------------------------
|--| Lincoln National (UK) PLC |
| | 100% - England/Wales - Holding Company |
| -----------------------------------------
| | |----------------------------------------------
| |--| Lincoln Unit Trust Managers Limited |
| | | 100% - England/Wales - Investment Management |
| | ----------------------------------------------
| | ----------------------------------------------------------
| |--| LIV Limited (formerly Lincoln Investment Management Ltd.)|
| | | 100% - England/Wales - Investment Management Services |
| | ----------------------------------------------------------
| | | -----------------------------------------------
| | |--| CL CR Management Ltd. |
| | | 50% - England/Wales - Administrative Services |
| | -----------------------------------------------
| | -----------------------------------------------------------
| |--| Lincoln Independent Limited |
| | | (formerly: Laurentian Independent Financial Planning Ltd.)|
| | | 100% - England/Wales - Independent Financial Adviser |
| | -----------------------------------------------------------
| | ----------------------------------------------
| |--| Lincoln Investment Management Limited |
| | | (formerly: Laurentian Fund Management Ltd.) |
| | | 100% - England/Wales - Investment Management |
| | ----------------------------------------------
| | ------------------------------------------
| |--| LN Securities Limited |
| | | 100% - England/Wales - Nominee Company |
| | ------------------------------------------
| | --------------------------------------------
| |--| Niloda Limited |
| | | 100% - England/Wales - Investment Company |
| | --------------------------------------------
| | ------------------------------------------------
| |--| Lincoln National Training Services Limited |
| | | 100% - England/Wales - Training Company |
| | ------------------------------------------------
| | ------------------------------------------------
| |--| Lincoln Pension Trustees Limited |
| | | 100% - England/Wales - Corporate Pension Fund |
| | ------------------------------------------------
| | ------------------------------------------------
| |--| Lincoln Independent (Jersey) Limited |
| | | (formerly Lincoln National (Jersey) Limited) |
| | | 100% - England/Wales - Dormat |
| | ------------------------------------------------
| | ------------------------------------------------
| |--| Lincoln National(Guernsey) Limited |
| | | 100% - England/Wales - Dormat |
| | ------------------------------------------------
| | ------------------------------------------------
| |--| Lincoln SBP Trustee Limited |
| | | 100% - England/Wales |
------------------------------------------------
<PAGE>
--------------------------------
| |
| Lincoln National Corporation |
| Indiana - Holding Company |
--------------------------------
| -------------------------------------------------
| | Linsco Reinsurance Company |
|--| (formerly Lincoln National Reinsurance Company) |
| | 100% - Indiana - Property/Casualty |
| -------------------------------------------------
| ------------------------------------
|--| Old Fort Insurance Company, Ltd. |
| | 100% ** - Bermuda |
| ------------------------------------
| | --------------------------------------------------------
| | | Lincoln National Underwriting Services, Ltd. |
| |--| 10% - England/Wales - Life/Accident/Health Underwriter |
| | | (Remaining 90% owned by Lincoln Natl. Reinsurance Co.) |
| | --------------------------------------------------------
| | ---------------------------------------------------
| | | Solutions Holdings, Inc. |
| |--| 100% - Delaware - General Business Corporation |
| | ---------------------------------------------------
| | | -----------------------------------------
| | |--|Solutions Reinsurance Limited |
| | | |100% - Bermuda - Class III Insurance Co |
| -----------------------------------------
| ----------------------------------------------------------
| | Seguros Serfin Lincoln, S.A. |
|--| 49% - Mexico - Insurance |
| ----------------------------------------------------------
| ----------------------------------------------------------
| | Servicios de Evaluacion de Riesgos, S. de R.L. de C.V. |
|--| 49% - Mexico - Reinsurance Underwriter |
| | (Remaining 51% owned by Lincoln Natl. Reinsurance Co.) |
| ----------------------------------------------------------
| --------------------------------------------
|--| Underwriters & Management Services, Inc. |
| 100% - Indiana - Underwriting Services |
--------------------------------------------
</TABLE>
FOOTNOTES:
* The funds contributed by the Underwriters were, and continue to be subject
to trust agreements between American States Insurance Company, the grantor,
and each Underwriter, as trustee.
** Except for director-qualifying shares
# Lincoln National Corporation has subscribed for and paid for 100 shares of
Common Stock (with a par value of $1.00 per share) at a price of $10 per
share, as part of the organizing of the fund. As such stock is further
sold, the ownership of voting securities by Lincoln National Corporation
will decline and fluctuate.
<PAGE>
ATTACHMENT #1
LINCOLN LIFE AND ANNUITY DISTRIBUTORS, INC.
CORPORATE AGENCY SUBSIDIARIES
1) Lincoln Financial Group, Inc. (AL)
2) Lincoln Financial and Insurance Services Corporation (Walnut Creek, CA)
3) California Fringe Benefit and Insurance Marketing Corporation
DBA/California Fringe Benefit Company (Walnut Creek, CA)
4) Colorado-Lincoln Financial Group, Inc. (Denver, CO)
5) Lincoln National Financial Services, Inc. (Lake Worth, FL)
6) CMP Financial Services, Inc. (Chicago, IL)
7) Lincoln Financial Group of Northern Indiana, Inc. (Fort Wayne, IN)
8) Financial Planning Partners, Ltd. (Mission, KS)
9) The Lincoln National Financial Group of Louisiana, Inc. (Shreveport,
LA)
10) Benefits Marketing Group, Inc. (D.C. & Chevy Chase, MD)
11) Lincoln Financial Services and Insurance Brokerage of New England, Inc.
(formerly: Lincoln National of New England Insurance Agency, Inc.)
(Worcester, MA)
12) Financial Consultants of Michigan, Inc. (Troy, MI)
13) Lincoln Financial Group of Missouri, Inc. (formerly: John J. Moore &
Associates, Inc.) (St. Louis, MO)
14) Beardslee & Associates, Inc. (Clifton, NJ)
15) Lincoln Financial Group, Inc. (formerly: Resources/Financial, Inc.
(Albuquerque, NM)
16) Lincoln Cascades, Inc. (Portland, OR)
17) Lincoln Financial Group, Inc. (Salt Lake City, (UT)
<PAGE>
Summary of Changes to Organizational Chart:
JANUARY 1, 1995-DECEMBER 31, 1995
SEPTEMBER 1995
a. Lincoln National (Jersey) Limited was incorporated on September 18, 1995.
Company is dormat and was formed for tax reasons per Barbara Benoit,
Assistant Corporate Secretary at Lincoln UK.
JANUARY 1, 1996-DECEMBER 1, 1996
MARCH 1996
a. Delaware Investment Counselors, Inc. changed its name to Delaware Capital
Management, Inc. effective March 29, 1996.
AUGUST 1996
a. Lincoln National (Gernsey) Limited was incorporated on August 9, 1996;
company is dormat and was formed for tax reasons.
SEPTEMBER 1996
a. Morgan Financial Group, Inc. changed its name to Lincoln National Sales
Corporation of Maryland effective September 23, 1996.
OCTOBER 1996
a. Addition of Lincoln National (India) Inc., incorporated as an Indiana
corporation on October 17, 1996.
NOVEMBER 1996
a. Lincoln National SBP Trustee Limited was bought "off the shelf" and was
incorporated on November 26, 1996; it was formed to act as Trustee for
Lincoln Staff Benefits Plan.
DECEMBER 1996
a. Addition of Lincoln National Investments, Inc., incorporated as an Indiana
corporation on December 12, 1996.
JANUARY 1, 1997-DECEMBER 31, 1997
JANUARY 1997
a. Delaware Management Holdings, Inc., Lynch & Mayer, Inc. and Vantage Global
Advisors, Inc. were transferred via capital contribution to Lincoln
National Investments, Inc. effective January 2, 1997.
b. Lincoln National Investments, Inc. changed its name to Lincoln National
Investment Companies, Inc. effective January 24, 1997.
c. Lincoln National Investment Companies, Inc. changed its named to Lincoln
National Investments, Inc. effective January 24, 1997.
JANUARY 1997 CON'T
<PAGE>
d. The following Lincoln National (UK) subsidiaries changed their name
effective January 1, 1997: Lincoln Financial Group PLC (formerly Laurentian
Financial Group PLC); Lincoln Milldon Limited (formerly Laurentian Milldon
Limited); Lincoln Management Services Limited (formerly Laurentian
Management Services Limited).
FEBRUARY 1997
a. Removal of Lincoln National Financial Group of Philadelphia, Inc. which was
dissolved effective February 25, 1997.
MARCH 1997
a. Removal of Lincoln Financial Services, Inc. which was dissolved effective
March 4, 1997.
APRIL 1997
a. Acquisition of Dougherty Financial Group, Inc. on April 30, 1997. Company
then changed its name to Delvoy, Inc. The acquisition included the mutual
fund group of companies as part of the Voyager acquisition. The following
companies all then were moved under the newly formed holding company,
Delvoy, Inc. effective April 30, 1997: Delaware Management Company, Inc.,
Delaware Distributors, Inc., Delaware Capital Management, Inc., Delaware
Service Company, Inc. and Delaware Investment & Retirement Services, Inc.
b. Acquisition of Voyager Fund Managers, Inc. and Voyager Fund Distributors,
Inc. on April 30, 1997; merger is scheduled for May 31, 1997 for Voyager
Fund Managers, Inc. into Delaware Management Company, Inc. and Voyager Fund
Distributors, Inc. is to merge into Delaware Distributors, L.P.
c. Removal of Aseguradora InverLincoln, S.A. Compania de Seguros y Reaseguros,
Grupo Financiero InverMexico. Stock was sold to Grupo Financiero
InverMexico effective April 18, 1997.
MAY 1997
a. Name change of The Richard Leahy Corporation to Lincoln National Financial
Institutions Group, Inc. effective May 6, 1997.
b. Voyager Fund Managers, Inc. merged into Delaware Management Company, Inc.
effective May 30, 1997 at 10:00 p.m. with Delaware Management Company, Inc.
surviving.
c. On May 31, 1997 at 2:00 a.m., Voyager Fund Distributors, Inc. merged into a
newly formed company Voyager Fund Distributors (Delaware), Inc.,
incorporated as a Delaware corporation on May 23, 1997. Voyager Fund
Distributors (Delaware), Inc. then merged into Delaware Distributors, L.P.
effective May 31, 1997 at 2:01 a.m. Delaware Distributors, L.P. survived.
JUNE 1997
a. Removal of Lincoln National Sales Corporation of Maryland -- company
dissolved June 13, 1997.
b. Addition of Lincoln Funds Corporation, incorporated as a Delaware
corporation on June 10, 1997 at 2:00 p.m.
c. Addition of Lincoln Re, S.A., incorporated as an Argentina company on June
30, 1997.
<PAGE>
JULY 1997
a. LNC Equity Sales Corporation changed its name to Lincoln Financial Advisors
Corporation effective July 1, 1997.
b. Addition of Solutions Holdings, Inc., incorporated as a Delaware
corporation on July 27, 1997.
SEPTEMBER 1997
a. Addition of Solutions Reinsurance Limited, incorporated as a Bermuda
corporation on September 29, 1997.
OCTOBER 1997
a. Removal of the following companies: American States Financial Corporation,
American States Insurance Company, American Economy Insurance Company,
American States Insurance Company of Texas, American States Life Insurance
Company, American States Lloyds Insurance Company, American States
Preferred Insurance Company, City Insurance Agency, Inc. and Insurance
Company of Illinois -- all were sold 10-1-97 to SAFECO Corporation.
b. Liberty Life Assurance Limited was sold to Liberty International Holdings
PLC effective 10-6-97.
c. Addition of Seguros Serfin Lincoln, S.A., acquired by LNC on 10-15-97.
DECEMBER 1997
a. Addition of City Financial Partners Ltd. as a result of its acquisition by
Lincoln National Corporation on December 22, 1997. This company will
distribute life assurance and pension products of Lincoln Assurance
Limited.
b. Removal of Lynch & Mayer Asia, Inc. which was dissolved December 24, 1997.
JANUARY 1998
a. Addition of Cigna Associates, Inc., Cigna Financial Advisors, Inc. and
Cigna Associates of Massachusetts, Inc., acquired by The Lincoln National
Life Insurance Company on January 1, 1998. Cigna Associates of
Massachusetts is 100% owned by Cigna Associates, Inc.
b. Removal of Lincoln National Mezzanine Corporation and Lincoln National
Mezzanine Fund, L.P. Lincoln National Mezzanine Corporation was dissolved
on January 12, 1998 and Lincoln National Mezzanine Fund, L.P. was cancelled
January 12, 1998.
c. Corporate organizational changes took place in the UK group of companies on
January 21, 1998: Lincoln Insurance Services Limited and its subsidiaries
were moved from Lincoln National (UK) PLC to Lincoln Assurance Limited;
Lincoln General Insurance Co. Ltd. was moved from Lincoln Insurance
Services Limited to Lincoln National (UK) PLC.
d. Addition of AnnuityNet, Inc., incorporated as an Indiana corporation on
January 16, 1998 and a wholly-owned subsidiary of The Lincoln National Life
Insurance Company.
JUNE 1998
<PAGE>
a. Name Change of CIGNA Financial Advisors, Inc. to Sagemark Consulting, Inc.
effective June 1, 1998.
b. Name Change of CIGNA Associates, Inc. to Lincoln National Insurance
Associates, Inc. effective June 1, 1998.
c. Addition of Lincoln National Insurance Associates of Alabama, Inc.,
incorporated as a wholly-owned subsidiary of Lincoln National Insurance
Associates, Inc. as an Alabama domiciled corporation.
d. Dissolution of LUTM Nominees Limited effective June 10, 1998.
e. Dissolution of Cannon Fund Managers Limited June 16, 1998.
f. Dissolution of P.N. Kemp Gee & Co. Ltd. June 2, 1998.
JULY 1998
a. Name change of CIGNA Associates of Massachusetts, Inc. to Lincoln National
Insurance Associates of Massachusetts, Inc. effective July 22, 1998.
SEPTEMBER 1998
a. Removal of Lincoln Financial Group of Michigan, Inc., voluntarily dissolved
September 15, 1998.
b. Name change of Lincoln Financial Group, Inc. to Lincoln Life and Annuity
Distributors, Inc. on September 29, 1998.
c. Removal of Lincoln European Reinsurance S.A. -- company dissolved September
30, 1998.
d. Removal of Lincoln Funds Corporation -- company voluntarily dissolved
September 30, 1998.
OCTOBER 1998
a. Addition of AnnuityNet Insurance Agency, Inc., incorporated as an Indiana
corporation October 2, 1998., a wholly-owned subsidiary of AnnuityNet, Inc.
b. Removal of Lincoln National (India) Inc., voluntarily dissolved October 26,
1998.
DECEMBER 1998
a. Removal of The Insurers' Fund, Inc., voluntarily dissolved December 10,
1998.
b. Addition of Lincoln National Management Corporation, a Pennsylvania
corporation and a wholly-owned subsidiary of Lincoln National Corporation,
incorporated on December 17, 1998.
JANUARY 1999
Lincoln Unit Trust Management changed its name on January 5, 1999 to Lincoln ISA
Management Limited.
FEBRUARY 1999
Removal of Lincoln Soutwest Financial Group, Inc. -- company's term of existence
expired July 18, 1998.
<PAGE>
BOOKS AND RECORDS
LINCOLN NATIONAL VARIABLE ANNUITY FUND A
RULES UNDER SECTION 31 OF THE INVESTMENT COMPANY ACT OF 1940
Records to Be Maintained by Registered Investment Companies, Certain
Majority-Owned Subsidiaries Thereof, and Other Persons Having Transactions with
Registered Investment Companies.
Reg. 270.31a-1. (a) Every registered investment company, and every
underwriter, broker, dealer, or investment advisor which is a majority-owned
subsidiary of such a company, shall maintain and keep current the accounts,
books, and other documents relating to its business which constitute the record
forming the basis for financial statements required to be filed pursuant to
Section 30 of the Investment Company Act of 1940 and of the auditor's
certificates relating thereto.
<TABLE>
<CAPTION>
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
<S> <C> <C> <C>
Annual Reports Finance Eric Jones Permanently, the first two
To Shareholders years in an easily accessible
place
Semi-Annual Finance Eric Jones Permanently, the first two
Reports years in an easily accessible
place
Form N-SAR Finance Eric Jones Permanently, the first two
years in an easily accessible
place
</TABLE>
(b) Every registered investment company shall maintain and keep current the
following books, accounts, and other documents:
Type of Record
- --------------
(1) Journals (or other records of original entry) containing an itemized daily
record in detail of all purchases and sales of securities (including sales and
redemptions of its own securities), all receipts and deliveries of securities
(including certificate numbers if such detail is not recorded by custodian or
transfer agent), all receipts and disbursements of cash and all other debits and
credits. Such records shall show for each such transaction the name and quantity
of securities, the unit and aggregate purchase or sale price, commission paid,
the market on which effected, the trade date, the settlement date, and the name
of the person through or from whom purchased or received or to whom sold or
delivered.
Purchases and Sales Journals
- ----------------------------
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Daily reports Delaware Fund Accounting Permanently, the first two
of securities years in an easily accessible
transactions place
Portfolio Securities
- --------------------
Equity Notifi- Delaware Fund Accounting Permanently, the first two
cations years in an easily accessible
place
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
<S> <C> <C> <C>
Public Bond Delaware Fund Accounting Permanently, the first two
Trades years in an easily accessible
Notifications place
(Bank Statement)
Receipts and Deliveries of Securities (units)
- ---------------------------------------------
Not Applicable.
Portfolio Securities
- --------------------
Debit and Delaware Fund Accounting Permanently, the first two
Credit Advices years in an easily accessible
from Bankers place
Trust Company
Receipts and Disbursements of Cash and other Debits and Credits
- -----------------------------------------------------------------
Investment Delaware Fund Accounting Permanently, the first two
Journal years in an easily accessible
place
Daily Journals Delaware Fund Accounting Permanently, the first two
years in an easily accessible
place
</TABLE>
(2) General and auxiliary ledgers (or other record) reflecting all asset,
liability, reserve, capital, income and expense accounts, including:
(i) Separate ledger accounts (or other records) reflecting the following:
(a) Securities in transfer;
(b) Securities in physical possession;
(c) Securities borrowed and securities loaned;
(d) Monies borrowed and monies loaned (together with a record of the
collateral therefore and substitutions in such collateral);
(e) Dividends and interest received;
(f) Dividends receivable and interest accrued.
Instructions. (a) and (b) shall be stated in terms of securities quantities
only; (c) and (d) shall be stated in dollar amounts and securities quantities as
appropriate; (e) and (f) shall be stated in dollar amounts only.
<PAGE>
<TABLE>
<CAPTION>
General Ledger
- --------------
<S> <C> <C> <C>
LNL trial Delaware Fund Accounting Permanently, the first
balance (4000 two years in an easily
series) accessible place
Securities in Transfer
- ----------------------
Bank Advices Delaware Fund Accounting Permanently, the first
two years in an easily
accessible place
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
Notification Treasurers- Ken Hobson Permanently, the first
of Securities Sec. Custody two years in an easily
Transactions. accessible place
(Original
records main-
tained by
custodian bank.)
Securities in Physical Possession
- ---------------------------------
Securities Treasurers- Ken Hobson Permanently, the first
Ledger. Sec. Custody two years in an easily
(Portfolio accessible place
report
available on
request from
Bankers Trust
Company -
Keeper of
original
records).
Monthly Securities Nate Wagley Permanently, the first
Portfolio Compliance two years in an easily
Listings accessible place
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Securities Borrowed and Loaned
- ------------------------------
<S> <C> <C> <C>
AOS file Treasurers- Ken Hobson Permanently, the first
Sec. Custody two years in an easily
accessible place
Monies Borrowed and Loaned
- --------------------------
Not Applicable.
Dividends and Interest Received
- -------------------------------
Interest File Delaware Fund Accounting Permanently, the first
Accrual Activity two years in an easily
Journal accessible place
Dividend Master Delaware Fund Accounting Permanently, the first
File Display two years in an easily
accessible place
Dividends Receivable and Interest Accrued
- -----------------------------------------
Interest File Delaware Fund Accounting Permanently, the first
Accrual Activity two years in an easily
Journal accessible place
Dividend Master Delaware Fund Accounting Permanently, the first
File Display two years in an easily
accessible place
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
Investment Delaware Fund Accounting Permanently, the first
Journal two years in an easily
accessible place
</TABLE>
(ii) Separate ledger accounts (or other records) for each portfolio security,
showing (as of trade dates), (a) the quantity and unit and aggregate price for
each purchase, sale, receipt, and delivery of securities and commodities
<PAGE>
for such accounts, and (b) all other debits and credits for such accounts.
Securities positions and money balances in such ledger accounts (or other
records) shall be brought forward periodically but not less frequently than at
the end of fiscal quarters. Any portfolio security, the salability of which is
conditioned, shall be so noted. A memorandum record shall be available setting
forth, with respect to each portfolio security accounts, the amount and
declaration, ex-dividend, and payment dates of each dividend declared thereon.
<TABLE>
<CAPTION>
Ledger Account for each portfolio Security
- ------------------------------------------
<S> <C> <C> <C>
Inventory Delaware Fund Accounting Permanently, the first
two (on line) years in an
easily accessible place
(iii) Separate ledger accounts (or other records) for each broker-dealer, bank
or other person with or through which transactions in portfolio securities are
affected, showing each purchase or sale of securities with or through such
persons, including details as to the date of the purchase or sale, the quantity
and unit and aggregate prices of such securities, and the commissions or other
compensation paid to such persons. Purchases or sales effected during the same
day at the same price may be aggregated.
Broker-Dealer Delaware Fund Accounting Permanently, the first
Ledger two years in an easily
accessible place
(iv) Separate ledger accounts (or other records), which may be maintained by a
transfer agent or registrar, showing for each shareholder of record of the
investment company the number of shares of capital stock of the company held.
in respect of share accumulation accounts (arising from periodic investment
plans, dividend reinvestment plans, deposit of issued shares by the owner
thereof, etc.), details shall be available as to the dates and number of shares
of each accumulation, and except with respect to already issued shares deposited
by the owner thereof, prices of each such accumulation.
Shareholder Accounts
- --------------------
Master file Finance Eric Jones Permanently, the first
CS&RM Nancy Alford two record years in an
easily accessible place
</TABLE>
(3) A securities record or ledger reflecting separately for each portfolio
security as of trade date all "long" and "short" positions carried by the
investment company for its own account and showing the location of all
securities long and the off-setting position to all securities short. The
record called for by this paragraph shall not be required in circumstances
under which all portfolio securities are maintained by a bank or banks or a
member or members of a national securities exchange as custodian under a
custody agreement or as agent for such custodian.
<PAGE>
<TABLE>
<CAPTION>
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
<S> <C> <C> <C>
Securities Position Record
- --------------------------
Maintained by Bankers Mutual Funds Division Permanently, the first
Custodian of Trust two years in an easily
Securities Company accessible place
(4) Corporate charters, certificates of incorporation or trust agreements, and
bylaws, and minute books of stockholders' and directors' or trustees' meetings;
and minute books of directors' or trustees' committee and advisory board or
advisory committee meetings.
Corporate Documents
- -------------------
Bylaws and Secretary Cindy Rose Permanently, the first
minute books. two years in an easily
accessible place
(5) A record of each brokerage order given by or in behalf of the investment
company for, or in connection with, the purchase or sale of securities, whether
executed or unexecuted. Such record shall include the name of the broker, the
terms and conditions of the order and of any modification or cancellation
thereof, the time of entry or cancellation, the price at which executed, and the
time of receipt of report of execution. The record shall indicate the name of
the person who placed the order in behalf of the investment company.
Sales Order or Vantage Mutual Funds Six years, the first
Purchase Order Global Operation two years in an easily
accessible place
Confirmations Vantage Mutual Funds Six years, the first
Global Operation two years in an easily
accessible place
Notification Investment Pat Roller Six years, the first
Form (Generate Admin. two years in an easily
from AOS accessible place
trading system)
(6) A record of all other portfolio purchase or sales showing details
comparable to those prescribed in paragraph 5 above.
Short-Term Investments
Notification Investment Pat Roller Six years, the first
Form (Generate Admin. two years in an easily
from AOS accessible place
trading system)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Bank Advice and LIM Ann Warner Six years, the first
Issuer two years in an easily
Confirmation accessible place
(7) A record of all puts, calls, spreads, straddles, and other options in which
the investment company has any direct or indirect interest or which the
investment company has granted or guaranteed; and a record of any contractual
commitments to purchase, sell, receive or deliver securities or other property
(but not including open orders placed with broker-dealers for the purchase or
sale of securities, which may be cancelled by the company on notices without
penalty or cost of any kind); containing at least an identification of the
security, the number of units involved, the option price, the date of maturity,
the date of issuance, and the person to whom issued.
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
Record of Puts, Calls, Spreads, Etc.
- ------------------------------------
Not Applicable.
(8) A record of the proof of money balances in all ledger accounts (except
shareholder accounts), in the form of trial balances. Such trial balances shall
be prepared currently at least once a month.
Trial Balance
- -------------
General Ledger Delaware Fund Accounting Permanently, the first
two years in an easily
accessible place
(9) A record for each fiscal quarter, which shall be completed within 10 days
after the end of such quarter, showing specifically the basis or bases upon
which the allocation of orders for the purchase and sale of portfolio securities
to named brokers or dealers and the division of brokerage commissions or other
compensation on such purchase and sale orders among named persons were made
during such quarter. The record shall indicate the consideration given to (a)
sales of shares of the investment company by brokers or dealers, (b) the
supplying of services or benefits by brokers or dealers to the investment
company, its investment advisor or principal underwriter or any persons
affiliated therewith, and (c) any other considerations other than the technical
qualifications of the brokers and the dealers as such. The record shall show the
nature of their services or benefits made available, and shall describe in
detail the application of any general or specific formula or other determinant
used in arriving at such allocation of purchase and sales orders and such
division of brokerage commissions or other compensation. The record shall also
include the identifies of the person responsible for the determination of such
allocation and such division of brokerage commissions or other compensation.
Brokerage LIM Gina Rohrbacher Six years, the first
Allocation two years in an easily
Report accessible place
(10) A record in the form of an appropriate memorandum identifying the person
or persons, committees, or groups authorizing the purchase or sale of portfolio
securities. Where an authorization is made by a committee or group,
</TABLE>
<PAGE>
a record shall be kept in the names of its members who participated in the
authorization. There shall be retained a part of the record required by this
paragraph any memorandum, recommendation, or instruction supporting or
authorizing the purchase or sale of portfolio securities. The requirements of
this paragraph are applicable to the extent they are not met by compliance with
the requirements of paragraph 4 of this Rule 31a1(b).
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Trading LIM/ Mutual Funds Six years, the first
Authorization Vantage Operation two years in an easily
Global accessible place
Advisory Law Division Jeremy Sachs Six years, the first
Agreements two years in an easily
accessible place
(11) Files of all advisory material received from the investment advisor, any
advisory board or advisory committee, or any other persons from whom the
investment company accepts investment advice publications distributed generally.
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
Issue Folders LIM/ Mutual Funds Six years, the first
Vantage Operation two years in an easily
Global accessible place
(12) The term "other records" as used in the expressions "journals (or other
records of original entry)" and "ledger accounts (or other records)" shall be
construed to include, where appropriate, copies of voucher checks,
confirmations, or similar documents which reflect the information required by
the applicable rule or rules in appropriate sequence and in permanent form,
including similar records developed by the use of automatic data processing
systems.
Correspondence Product Nancy Alford Six years, the first
Admin. two years in an easily
accessible place
Product
Management
Pricing Sheets Delaware Fund Accounting Permanently, the first
two years in an easily
</TABLE>
<PAGE>
accessible place
Bank State- Delaware Fund Accounting Six years, the first
ments two years in easily
and Cash accessible place
Reconciliations
Proxy State- Annuities Nancy Alford Six years, the first
ments and Division - two years in an easily
Proxy Cards Admin. accessible place
March 24, 1999
<PAGE>
POWER OF ATTORNEY
We, the undersigned directors and officers of The Lincoln National Life
Insurance Company, hereby revoke all powers of attorney authorizing any person
to act as attorney-in-fact relative to Lincoln National Variable Annuity Fund A
(Individual) which were previously executed by us and do hereby severally
constitute and appoint Kelly D. Clevenger, Jeffrey K. Dellinger, and Steven M.
Kluever, our true and lawful attorneys-in-fact, with full power in each of them
to sign for us, in our names and in the capacities indicated below, any and all
amendments to Registration Statement No. 2-26342 filed with the Securities and
Exchange Commission under the Securities Act of 1933, on behalf of the Company
in its own name or in the name of one of its Separate Accounts, hereby ratifying
and confirming our signatures as they may be singed by any of our attorneys-in-
fact to any such amendment to that Registration Statement. The power of
attorney was signed by us on February 3, 1999.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
/s/ Gabriel L. Shaheen President, Chief Executive Officer and Director
- ------------------------------------- (Principal Executive Officer)
Gabriel L. Shaheen
Executive Vice President and Director
- -------------------------------------
Lawrence T. Rowland
Senior Vice President, Assistant Treasurer and
- ------------------------------------- Chief Financial Officer
Keith J. Ryan (Principal Financial Officer and Principal
Accounting Officer)
Director
- -------------------------------------
H. Thomas McMeekin
Director
- -------------------------------------
Richard C. Vaughan
Director
- -------------------------------------
Jon A. Boscia
STATE OF INDIANA )
)SS:
COUNTY OF ALLEN )
Subscribed and sworn to before me this
3rd day of February, 1999.
/s/Janet L. Lindenberg
--------------------------------------
Notary public
Commission Expires: 7-10-2001
---------
</TABLE>
<PAGE>
POWER OF ATTORNEY
We, the undersigned directors and officers of The Lincoln National Life
Insurance Company, hereby revoke all powers of attorney authorizing any person
to act as attorney-in-fact relative to Lincoln National Variable Annuity Fund A
(Individual) which were previously executed by us and do hereby severally
constitute and appoint Kelly D. Clevenger, Jeffrey K. Dellinger, and Steven M.
Kluever, our true and lawful attorneys-in-fact, with full power in each of them
to sign for us, in our names and in the capacities indicated below, any and all
amendments to Registration Statement No. 2-26342 filed with the Securities and
Exchange Commission under the Securities Act of 1933, on behalf of the Company
in its own name or in the name of one of its Separate Accounts, hereby ratifying
and confirming our signatures as they may be singed by any of our attorneys-in-
fact to any such amendment to that Registration Statement. The power of
attorney was signed by us on February 3, 1999.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
President, Chief Executive Officer and Director
- ------------------------------------- (Principal Executive Officer)
Gabriel L. Shaheen
/s/ Lawrence T. Rowland Executive Vice President and Director
- -------------------------------------
Lawrence T. Rowland
Senior Vice President, Assistant Treasurer and
- ------------------------------------- Chief Financial Officer
Keith J. Ryan (Principal Financial Officer and Principal
Accounting Officer)
Director
- -------------------------------------
H. Thomas McMeekin
Director
- -------------------------------------
Richard C. Vaughan
Director
- -------------------------------------
Jon A. Boscia
STATE OF INDIANA )
)SS:
COUNTY OF ALLEN )
Subscribed and sworn to before me this
3rd day of February, 1999.
/s/Janet L. Lindenberg
--------------------------------------
Notary public
Commission Expires: 7-10-2001
---------
</TABLE>
<PAGE>
POWER OF ATTORNEY
We, the undersigned directors and officers of The Lincoln National Life
Insurance Company, hereby revoke all powers of attorney authorizing any person
to act as attorney-in-fact relative to Lincoln National Variable Annuity Fund A
(Individual) which were previously executed by us and do hereby severally
constitute and appoint Kelly D. Clevenger, Jeffrey K. Dellinger, and Steven M.
Kluever, our true and lawful attorneys-in-fact, with full power in each of them
to sign for us, in our names and in the capacities indicated below, any and all
amendments to Registration Statement No. 2-26342 filed with the Securities and
Exchange Commission under the Securities Act of 1933, on behalf of the Company
in its own name or in the name of one of its Separate Accounts, hereby ratifying
and confirming our signatures as they may be singed by any of our attorneys-in-
fact to any such amendment to that Registration Statement. The power of
attorney was signed by us on February 3, 1999.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
President, Chief Executive Officer and Director
- ------------------------------------- (Principal Executive Officer)
Gabriel L. Shaheen
Executive Vice President and Director
- -------------------------------------
Lawrence T. Rowland
/s/ Keith J. Ryan Senior Vice President, Assistant Treasurer and
- ------------------------------------- Chief Financial Officer
Keith J. Ryan (Principal Financial Officer and Principal
Accounting Officer)
Director
- -------------------------------------
H. Thomas McMeekin
Director
- -------------------------------------
Richard C. Vaughan
Director
- -------------------------------------
Jon A. Boscia
STATE OF INDIANA )
)SS:
COUNTY OF ALLEN )
Subscribed and sworn to before me this
3rd day of February, 1999.
/s/Janet L. Lindenberg
--------------------------------------
Notary public
Commission Expires: 7-10-2001
---------
</TABLE>
<PAGE>
POWER OF ATTORNEY
We, the undersigned directors and officers of The Lincoln National Life
Insurance Company, hereby revoke all powers of attorney authorizing any person
to act as attorney-in-fact relative to Lincoln National Variable Annuity Fund A
(Individual) which were previously executed by us and do hereby severally
constitute and appoint Kelly D. Clevenger, Jeffrey K. Dellinger, and Steven M.
Kluever, our true and lawful attorneys-in-fact, with full power in each of them
to sign for us, in our names and in the capacities indicated below, any and all
amendments to Registration Statement No. 2-26342 filed with the Securities and
Exchange Commission under the Securities Act of 1933, on behalf of the Company
in its own name or in the name of one of its Separate Accounts, hereby ratifying
and confirming our signatures as they may be singed by any of our attorneys-in-
fact to any such amendment to that Registration Statement. The power of
attorney was signed by us on February 3, 1999.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
President, Chief Executive Officer and Director
- ------------------------------------- (Principal Executive Officer)
Gabriel L. Shaheen
Executive Vice President and Director
- -------------------------------------
Lawrence T. Rowland
Senior Vice President, Assistant Treasurer and
- ------------------------------------- Chief Financial Officer
Keith J. Ryan (Principal Financial Officer and Principal
Accounting Officer)
/s/ H. Thomas McMeekin Director
- -------------------------------------
H. Thomas McMeekin
Director
- -------------------------------------
Richard C. Vaughan
Director
- -------------------------------------
Jon A. Boscia
STATE OF INDIANA )
)SS:
COUNTY OF ALLEN )
Subscribed and sworn to before me this
3rd day of February, 1999.
/s/Janet L. Lindenberg
--------------------------------------
Notary public
Commission Expires: 7-10-2001
---------
</TABLE>
<PAGE>
POWER OF ATTORNEY
We, the undersigned directors and officers of The Lincoln National Life
Insurance Company, hereby revoke all powers of attorney authorizing any person
to act as attorney-in-fact relative to Lincoln National Variable Annuity Fund A
(Individual) which were previously executed by us and do hereby severally
constitute and appoint Kelly D. Clevenger, Jeffrey K. Dellinger, and Steven M.
Kluever, our true and lawful attorneys-in-fact, with full power in each of them
to sign for us, in our names and in the capacities indicated below, any and all
amendments to Registration Statement No. 2-26342 filed with the Securities and
Exchange Commission under the Securities Act of 1933, on behalf of the Company
in its own name or in the name of one of its Separate Accounts, hereby ratifying
and confirming our signatures as they may be singed by any of our attorneys-in-
fact to any such amendment to that Registration Statement. The power of
attorney was signed by us on February 3, 1999.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
President, Chief Executive Officer and Director
- ------------------------------------- (Principal Executive Officer)
Gabriel L. Shaheen
Executive Vice President and Director
- -------------------------------------
Lawrence T. Rowland
Senior Vice President, Assistant Treasurer and
- ------------------------------------- Chief Financial Officer
Keith J. Ryan (Principal Financial Officer and Principal
Accounting Officer)
Director
- -------------------------------------
H. Thomas McMeekin
/s/ Richard C. Vaughan Director
- -------------------------------------
Richard C. Vaughan
Director
- -------------------------------------
Jon A. Boscia
STATE OF INDIANA )
)SS:
COUNTY OF ALLEN )
Subscribed and sworn to before me this
3rd day of February, 1999.
/s/Janet L. Lindenberg
--------------------------------------
Notary public
Commission Expires: 7-10-2001
---------
</TABLE>
<PAGE>
POWER OF ATTORNEY
We, the undersigned directors and officers of The Lincoln National Life
Insurance Company, hereby revoke all powers of attorney authorizing any person
to act as attorney-in-fact relative to Lincoln National Variable Annuity Fund A
(Individual) which were previously executed by us and do hereby severally
constitute and appoint Kelly D. Clevenger, Jeffrey K. Dellinger, and Steven M.
Kluever, our true and lawful attorneys-in-fact, with full power in each of them
to sign for us, in our names and in the capacities indicated below, any and all
amendments to Registration Statement No. 2-26342 filed with the Securities and
Exchange Commission under the Securities Act of 1933, on behalf of the Company
in its own name or in the name of one of its Separate Accounts, hereby ratifying
and confirming our signatures as they may be singed by any of our attorneys-in-
fact to any such amendment to that Registration Statement. The power of
attorney was signed by us on February 3, 1999.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
President, Chief Executive Officer and Director
- ------------------------------------- (Principal Executive Officer)
Gabriel L. Shaheen
Executive Vice President and Director
- -------------------------------------
Lawrence T. Rowland
Senior Vice President, Assistant Treasurer and
- ------------------------------------- Chief Financial Officer
Keith J. Ryan (Principal Financial Officer and Principal
Accounting Officer)
Director
- -------------------------------------
H. Thomas McMeekin
Director
- -------------------------------------
Richard C. Vaughan
/s/ Jon A. Boscia Director
- -------------------------------------
Jon A. Boscia
STATE OF INDIANA )
)SS:
COUNTY OF ALLEN )
Subscribed and sworn to before me this
3rd day of February, 1999.
/s/Janet L. Lindenberg
--------------------------------------
Notary public
Commission Expires: 7-10-2001
---------
</TABLE>
