<PAGE>
As filed with the Securities and Exchange Commission on February 24, 1999
Registration No. 2-25618
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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. 54 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 30 [X]
LINCOLN NATIONAL VARIABLE ANNUITY FUND A (GROUP)
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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:
Kimberly J. Smith
Sutherland, Asbill & Brennan LLP
1275 Pennsylvania Avenue, N.W.
Washington, DC 20004
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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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on 4/30/98 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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X 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
Group variable annuity contracts
Home Office: Mailing Address:
1300 South Clinton Street P.O. Box 2340
Fort Wayne, Indiana 46802 Fort Wayne, Indiana 46801
Telephone: 1-800-454-6265
This Prospectus describes the group variable annuity contract that is issued
by Lincoln National Life Insurance Company (Lincoln Life). It is 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 fixed amount or a combination of both. If the
contractowner or annuitant dies before the annuity commencement date, we will
pay the beneficiary 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
contract.
All purchase payments for benefits on a variable basis will be placed in Lin-
coln National Variable Annuity Fund A (the fund). The fund is a segregated in-
vestment account of Lincoln Life. If the contractowner puts all or some of the
purchase payments into the fund, the contractowner takes all the investment
risk on the contract value and the retirement income. If the fund makes money,
the contract value goes up; if it loses money, it goes down. How much it 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.
The main investment objective of the fund is the long-term growth of capital
in relation to the changing value of the dollar. A secondary investment objec-
tive is the production of current income. The fund seeks to accomplish these
objectives by investing in equity securities, primarily common stocks.
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) about the contracts has more in-
formation about the contracts, and its terms are made part of this Prospectus.
For a free copy, write: Annuities Customer Service, The Lincoln 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 payout options 11
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More information about the fund 13
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Federal tax matters 14
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Voting rights 18
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Distribution of the contracts 18
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State regulation 18
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Restrictions under the Texas Optional Retirement Program 18
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Records and reports 18
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Other information 18
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Appendix A 20
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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 payments.
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 ben-
efits 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 com-
mencement date.
Contractowner -- An employer or a trustee of a trust or a custodian of a quali-
fied pension or profit-sharing plan or an Individual Retirement Annuity (under
Sections 401(a) and 408 of the Internal Revenue Code, or "tax code") , or where
a Contract is issued in connection with a deferred compensation plan (under
Section 457 of the tax code).
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 trad-
ing.
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 (valuation
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> <C>
Sales load on purchase payments 2% + $50 4.25%
Administrative expenses $65 1.00%
Minimum death benefit rider (if elected) .75% .75%
We may waive these charges in certain situations. See Charges and
other deductions.
Fund A annual expenses (as a percentage of average net assets)
Management fees 32%
Mortality and expense risk charge 1.00%
-----
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> <C> <C> <C> <C> <C> <C> <C> <C>
S.P. P.P. S.P. P.P. S.P. P.P. S.P. P.P.
- --------------------------------------------
</TABLE>
The Contractowner would pay the following expenses
on a $1,000 investment, assuming 5% annual
return on assets:
We provide these examples, which are unaudited, to help the contractowner and
participant understand the direct and indirect costs and expenses of the con-
tract 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. [We
also reserve the right to impose a charge on transfers between variable and
fixed accounts -- currently, we do not.] These examples should not be consid-
ered a representation of past or future expenses. Actual expenses may be more
or less than those shown.
3
<PAGE>
Synopsis
What kind of contract is this? It is a group annuity contract between the
contractowner and Lincoln Life, and is one of two types: an immediate annuity
or a deferred annuity. Deferred annuities are single payment or periodic pay-
ment. It may provide for a fixed annuity and/or a variable annuity. The con-
tracts 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
- -- Investment advisor.
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 advisor.
How does the contract work? When a contractowner makes purchase payments dur-
ing the accumulation phase, accumulation units are bought. If the
contractowner decides to purchase retirement income payments, the accumulation
units are converted to annuity units. The retirement income payments will be
based on the number of annuity units received and the value of each annuity
unit on payout days. See The contracts.
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 de-
ductions.
We will also deduct any applicable premium tax from purchase payments.
The fund pays a management fee to us equal to 0.323%, and 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
purchase annuity benefits, the contractowner may select an annuity option and
start receiving retirement income payments from the contract as a fixed option
or variable option or a combination of both. See Annuity payouts -- Annuity
options. Remember that participants in the fund benefit from any gain, and
take a risk of any loss, in the value of the securities in the fund's portfo-
lio.
What happens if an annuitant dies before annuitization? If the minimum death
benefit is in effect, the beneficiary will receive the greater of purchase
payments (less rider premiums) or contract value. If the minimum death benefit
is not in effect, the beneficiary will receive contract value. The beneficiary
has options as to how the death benefit is paid. See The contracts -- 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 -- Transfer from the
fund on or before the annuity commencement date, and The contracts -- Transfer
after the annuity commencement date.
May the contractowner surrender the contract or make a withdrawal? Yes, sub-
ject to contract requirements and to the restrictions of any qualified retire-
ment plan for which the contract was purchased. See The contracts -- Surren-
ders 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 a
distribution is made before age 59 1/2, 10% Internal Revenue Service (IRS) tax
penalty may apply. A surrender or a withdrawal also may be subject to 20%
withholding. See Federal tax matters -- Withholding.
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 the partial year ended December 31, 1998
comes from the fund's financial statements. It should be read along with the
fund's financial statements and notes which are all 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 $ .286 $ .267 $ .251 $ .217 $ .204 $ .206 $ .181 $ .146 $ .183
Expenses .178 .139 .114 .095 .090 .083 .076 .064 .062
------- ------- ------ ------ ------ ------ ------ ------ ------
Net investment income .108 .128 .137 .122 .114 .123 .105 .082 .121
Net realized and
unrealized gain (loss)
on investments 3.755 1.735 2.539 (.040) .522 (.099) 1.402 (.102) .786
------- ------- ------ ------ ------ ------ ------ ------ ------
Net increase
(decrease)in
accumulation unit
value 3.863 1.863 2.676 .082 .636 .024 1.507 (.020) .907
Accumulation unit value
at beginning of year 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 $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 1.27% 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 .77% 1.17% 1.65% 1.75% 1.72% 2.01% 1.85% 1.72% 2.63%
Portfolio turnover rate 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) 7,723 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 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.
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
experience of the fund. The general account is subject to regulation and su-
pervision by the Indiana Insurance Department 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 com-
pany under the Investment Company Act of 1940 (the 1940 Act). Accordingly,
neither the general account nor any interests in it are regulated under the
1933 Act or the 1940 Act. Lincoln Life has been advised that the staff of the
SEC has not made a review of the disclosures which are included in this Pro-
spectus which relate to our general account and to the fixed account under the
contract. These disclosures, however, may be subject to certain provisions of
the federal securities laws relating to the accuracy and completeness of
statements made in the Prospectus. This Prospectus is generally intended to
serve as a disclosure document only for aspects of the contract involving the
fund, and therefore contains only selected information regarding the fixed
side of the contract. Complete de-
tails regarding the fixed side of the contract are in the contract.
Net purchase payments allocated to the fixed side of the contract are guaran-
teed to be credited with a minimum interest rate, specified in the contract,
of at least 3.0%. A net purchase payment allocated to the fixed side of the
contract is credited with interest beginning on the next calendar day follow-
ing the date of receipt 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 3.0% WILL BE DECLARED IN ADVANCE IN LINCOLN LIFE'S
SOLE DISCRETION. CONTRACTOWNERS BEAR THE RISK THAT NO INTEREST IN EXCESS OF
3.0% 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, diver-
sified management investment company under the provisions of the 1940 Act. Di-
versified 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 business that we
may conduct. Income, gains and losses, whether realized or not, from assets
allocated to the fund are, in accordance with the applicable contracts, cred-
ited to or charged against the fund. They are credited or charged without re-
gard to any other income, gains or losses 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 as-
sumes 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, below.) A majority of these managers are not otherwise in-
terested persons of Lincoln Life as the term "interested persons" is defined
in the 1940 Act. The Board is responsible for authorizing investment programs
for the fund; for recommending any appropriate changes to those ob-
6
<PAGE>
jectives and policies; and for contracting for certain services necessary to
the operation of the fund.
In performing investment management services, we continuously 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 business 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 primarily
responsible for investment decisions affecting the fund, and no additional com-
pensation from the assets of the fund is assessed as a result of this agree-
ment.
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 produc-
tion of current income. Generally, we will reinvest income and realized capital
gains. We will usually invest the fund's assets in a portfolio of equity secu-
rities, mainly common stocks, diversified over industries and companies. Diver-
sification means that we will keep the investments spread out over different
industries, and different companies within each industry. We will not concen-
trate any more than 25% of the fund's assets in any one industry. Diversifica-
tion, however, does not eliminate the risks inherent in the making of equity
investments. 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 se-
curities have declined while the cost of living was rising.
The value of the investments held in the fund fluctuates daily and is subject
to the risks of changing economic conditions as well as the risks inherent in
the ability of management to anticipate changes in such investments necessary
to meet changes in economic conditions.
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 investment
advisory fees of $ in 1998, and $394,625 in 1997.
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 services include:
salaries, rent, postage, telephone, travel, legal, actuarial and accounting
fees, office equipment, and stationery. The risks we assume include: the risk
that annuitants receiving annuity payouts under 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 qualify for reduced sales
or administrative charges; and the risk that our costs in providing the serv-
ices 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 charge is made for. 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. Under
single payment contracts, we deducted 2% plus $50 from the single purchase pay-
ment for sales and administrative expenses and $65 for administrative expenses.
Deductions for sales expenses made from purchase payments applied to purchase
fixed-dollar accumulation units are the same as those made from payments ap-
plied to the fund.
If the contractowner elected the minimum death benefit, we make an additional
deduction of .75% from each
7
<PAGE>
purchase payment. We expect to make a profit from the sale of this death bene-
fit.
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 adminis-
trative 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
and that expenses may be higher than the deductions for such expenses. In ei-
ther 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, above.
We may modify the amount of periodic deductions and annuity rates. See The
contracts, below. However, we may increase deductions for investment advisory
services only after approval by a vote of the majority of contractowners, as
defined in the 1940 Act.
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 associ-
ated with (1) the use of mass enrollment procedures, (2) the performance of
administrative or sales functions by the employer, (3) the use by an employer
of automated techniques in submitting deposits or information related to de-
posits on behalf of its employees or (4) any other circumstances which reduce
distribution or administrative expenses. The exact amount of sales and admin-
istrative charges applicable to a particular contract will be stated in that
contract.
The contracts
Purchase of contracts
We no longer offer contracts for sale. However, existing contractowners can
make periodic purchase payments under the periodic purchase payment contracts.
Two types of group variable annuity contracts are described in this Prospec-
tus:
1. Regular group variable annuity contracts, under which we allocate payments
to the accounts of individual participants. Each participant under the reg-
ular group variable annuity contract receives a certificate which summa-
rizes the provisions of the group contract and is proof of participation.
2. Group variable annuity deposit administration contracts, designed for use
with defined benefit pension plans and defined benefit H.R.-10 plans.
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 con-
tract. However, we may terminate the contract as allowed by the
contractowner's state's non-forfeiture law for deferred annuities.
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, accord-
ing to the contractowner's instructions. Under the regular group variable an-
nuity contract, purchase payments, less deductions, allocated to the fund are
converted into accumulation units and are credited to the account of each par-
ticipant. Under the group variable annuity deposit administration contract,
net payments are converted into accumulation units and credited to the account
of the contractowner. The number of accumulation units credited is determined
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 of-
fice if received before 4:00 p.m., New York time. If the purchase payment is
received at or after 4:00 p.m., New York time, we will use the accumulation
unit value computed on the next valuation date. The number of accumulation
units determined in this way is not changed by any subsequent change in the
value of an accumulation unit. However, the dollar
8
<PAGE>
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 respect to any taxes paid or reserved for by us that
we determine result from the operations of the fund); and
(3) The result of (2) is divided by the number of fund units outstanding 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. The value of an annuity unit for the period ending
March 1, 1967 was established at $1. We determine the value of the annuity unit
for any following valuation period by multiplying (a) the value from the previ-
ous 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 AIR built into the annuity table contained in
the contract which is not applicable as actual net investment income is cred-
ited 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 permit calculation of amounts of annuity
payments and mailing of 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
If an annuitant dies before the annuity commencement date, we will pay the ben-
eficiary a death benefit equal to the contract value, or, if greater and you
have elected it and the participant dies before age 65, the minimum death bene-
fit.
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 sum of all purchase payments made on
behalf of the participant (minus any withdrawals, partial annuitizations, pre-
mium taxes incurred, and rider premiums).
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 1940 Act.
Payment will be made in accordance with applicable laws and regulations gov-
erning payment of death benefits.
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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
participant's estate.
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, in-
dependently 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 participant
If the participant under a nonqualified contract dies before the annuity com-
mencement date, then, in compliance with the tax code, the participant's cash
surrender value will be paid as follows:
1. Upon the death of a nonannuitant participant, 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 participant, who is also the annuitant, the death will
be treated as death of the annuitant and the provisions of this contract
regarding death of annuitant will control. If the beneficiary is the sur-
viving spouse of the participant, the contract may be continued in the name
of that spouse as the new participant. If the surviving spouse elects to
continue the contract, the contract will continue as though no death bene-
fit had been payable.
The tax code requires that any distribution be paid within five years of the
death of the participant unless the beneficiary begins receiving, within one
year of the participant's death, the distribution in the form of a life annu-
ity or an annuity for a designated period not exceeding the beneficiary's life
expectancy.]
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 1940 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 purchase payment's frequency or the con-
tract's value falls below the contractowner's state's minimum standards.
For contracts issued in connection with qualified plans, including H.R.-10
plans and tax-deferred annuity plans, participants should consult the terms of
the plan for limitations on early surrender or payment. See Federal tax status
below, and in the SAI.
For other contracts, if the contractowner stops making purchase payments for a
participant before the annuity commencement date, a participant has the fol-
lowing options:
1. We may apply the participant's account value to provide annuity payments
under the selected annuity option. See Annuity payouts -- Annuity options, be-
low.
2. A participant may surrender all or any portion of the participant's account
value by submitting a written request for surrender and the certificate to our
home office. The participant will receive account value determined as of the
day of the surrender.
3. The participant may continue to participate in the fund. When the annuity
commencement date arrives, the participant can annuitize. See Annuity payouts
- -- Annuity options, below. Before then, the participant can surrender account
value.
If the participant becomes an employee of another employer or a member of an
association which has a similar variable annuity contract in force with us,
the participant may transfer account value to the other contract.
A participant may also purchase an individual variable annuity contract we are
issuing at that time after making any required payments.
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
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<PAGE>
must represent to us that the proceeds being used to make the purchase have re-
tained 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
receipt of the proceeds and request for reinvestment at our home office. The
contractowner may utilize the reinvestment privilege only once. For tax report-
ing purposes, we will treat a surrender/withdrawal and a subsequent reinvest-
ment purchase as separate transactions. A tax advisor should be consulted be-
fore 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 1940
Act or other applicable federal or state laws or regulations. The contractowner
will be notified in writing of any changes, modifications or waivers.
Otherwise, we cannot modify the contract without contractowner approval until
the contract has been in force for at least three years. We also cannot modify
the contract as it applies to retired participants unless we get their written
consent.
Commissions
The commissions paid to dealers are a maximum of % of each purchase pay-
ment; plus an annual continuing commission of up to % of contract value. At
times, additional sales incentives (up to % of purchase payments and an an-
nual continuing % of contract value) may be provided to dealers maintaining
certain sales volume levels. Upon annuitization, an annual continuing commis-
sion of up to % (or up to % for dealers maintaining certain sales vol-
ume levels) of statutory reserves can be paid to dealers. These commissions are
not deducted from purchase payments or contract value; they are paid by us.
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, participants, and their designated beneficiaries; and the as-
sets of the fund are not chargeable with liabilities arising from any other
business that we may conduct. Qualified contracts may not be assigned or trans-
ferred 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 collaterally 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 under
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 payouts options available.
Payouts for guaranteed period. This option guarantees periodic payouts during a
guaranteed 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 participant 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
fitted payout.)
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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 ex-
hausted. The minimum amount withdrawable under this option is not necessarily
the recommended amount. This option is not available under contracts issued in
connection with Section 403(b) plans. (Not available as a fitted 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 available
payout.)
Annuity settlement. This option offers payouts in the form provided by any
single payment immediate annuity contract issued by us on the date the pro-
ceeds 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 calculating the first payment under the single payment immediate annuity
contract selected under this option, we assume that a deduction for sales and
administrative 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 minimum number of payouts or provision for a death benefit for beneficia-
ries. However, there is the risk under this option that the recipient would
receive no payouts if the annuitant dies before the date set for the first
payout; only one payout if death occurs before the second scheduled payout,
and so on.
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
person. 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 elec-
tion option): the present value of unpaid payments under the payouts for guar-
anteed period or life income with guarantee period; the amount payable at the
death of the payee under the unit refund; or the proceeds remaining with Lin-
coln Life under the payouts of designated amount or interest income. If the
annuity settlement 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 estate (unless otherwise specified in the election option).
Present values will be based on the Assumed Investment Rate (see Annuity peri-
od) used in determining annuity payments. The mortality and expense risk
charge and the charge for administrative services will be assessed on all an-
nuity options, including those that do not have a life contingency and thus no
mortality risks.
If any payee dies after a Settlement Option 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 First or Sec-
ond Option; the amount payable at the death of the payee under the Third Op-
tion; or the proceeds remaining with Lincoln Life under the Fourth or Fifth
Option. If the Sixth Option 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 estate (unless otherwise specified in the election option).
Present values will be based on the Assumed Investment Rate (see Annuity peri-
od) used in determining annuity payments. The mortality and expense risk
charge and the charge for administrative services will be assessed on all an-
nuity options, including those that do not have a life contingency and thus no
mortality risks.
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 lest 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, vari-
able or combi-
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nation fixed and variable basis, in proportion to the account allocations 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 beneficiary as
payouts become due.
Assumed investment rate (AIR)
The contractowner may elect an AIR of 3.5%, 4.5%, 5% or 6%, as state law or
regulations permit. These AIRs are used to determine the required level of em-
ployer contributions in connection with certain pension plans. They do not re-
flect 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
different AIRs:
<TABLE>
<CAPTION>
Annuity Unit Values
Assumed Investment Rate
December 31 3.5% 4.5% 5% 6%
<S> <C> <C> <C> <C>
1989.................................................. 2.300 1.855 1.667 1.348
1990.................................................. 2.175 1.739 1.556 1.247
1991.................................................. 2.565 2.031 1.809 1.436
1992.................................................. 2.705 2.120 1.476 1.476
1993.................................................. 2.870 2.227 1.964 1.529
1994.................................................. 2.805 2.156 1.892 1.459
1995.................................................. 3.718 2.830 2.472 1.888
1996.................................................. 4.268 3.218 2.797 2.117
1997.................................................. 5.482 4.094 3.541 2.654
1998..................................................
------ ----- ----- -----
</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.
For purposes of calculating the first payment under a single payment immediate
annuity contract, it is assumed that a deduction for sales and administrative
expenses (which currently amounts to 2% plus $115 for single payment variable
annuity contracts) has been made from the amount applied under this provision.
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
immediate variable annuity contracts, and then (b) dividing by the value of
the annuity unit based on the net investment factor calculated on the valua-
tion date of the day or the day after the contract was issued. This number of
annuity units does not change during the annuity period, and we determine the
dollar 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
report 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 as-
sets for which market quotations are not readily available are valued at fair
value as determined in good faith by the Board of Managers.
Modification of charges and deductions. With respect to the regular group
variable annuity contracts, for existing holders of periodic payment con-
tracts, we will not change the promised annuity rate, expense rate, or the de-
ductions from what they were at the time of the participant's entry into the
plan. This applies for any year's payment that is no more than twice the orig-
inal year's payment. For any amount of a year's payment above twice the origi-
nal year's payment, we may charge higher rates.
With respect to the group variable annuity deposit administration contract,
for existing holders of periodic payment contracts, we will not change the
promised annuity rate, expense rate, and the deductions from what
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<PAGE>
they were at the time of issue. This applies for all payments made during the
first 14 contract years following the first contract year, so long as that
year's payment is no more than twice the original year's payment. For any
amount of a year's payment above twice the original year's payment, we may
charge higher rates.
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 $ in 1998, $9,784 in 1997, and
$12,259 in 1996.
With respect to the regular group variable annuity contracts, for existing
holders of periodic payment contracts, we may only increase the combined sales
and administrative expense charge up to 5.25% for any year's payment that is
no more than twice the original year's payment. For any amount of the year's
payment above twice the original year's payment, we may charge a higher rate.
With respect to the group variable annuity deposit administration contract,
for existing holders of periodic payment contracts, we may only increase the
combined sales and administrative expense charge up to 5.25% for any year's
payment made in the first 14 contract years following the first contract year,
so long as that year's payment is no more than twice the original year's pay-
ment. For any amount of the year's payment above twice the original year's
payment, we may charge a higher rate.
The variable annuity contracts allow us to grant an "experience rating cred-
it." 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.
Custodian
[Bankers Trust Company, 14 Wall Street, 4th Floor, New York, New York 10005
("Bankers") is Custodian for the fund pursuant to a Custodian Agreement effec-
tive March 4, 1985. It is anticipated that Custodian for the fund will change
to Chase Manhattan Bank, New York, New York, in approximately mid-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 the contractowner, participant and contract. This discussion
also does not address other Federal tax consequences, or state or local tax
consequences, associated with the contract. As a result, contractowner and/or
participant should always consult a tax advisor about the application of tax
rules to their individual situation.
Taxation of nonqualified annuities
This part of the discussion describes some of the Federal income tax rules 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 the contract
value until contractowner or participant receives a contract distribution.
However, for this general rule to apply, certain requirements must be satis-
fied:
. An individual must own the contract (or the tax law must treat the contact
as owned by an individual).
. The investments of the VAA must be "adequately diversified" in accordance
with IRS regulations.
. The right to choose particular investments for 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 contributions for the contract. Ex-
amples 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.
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 ade-
quately diversified. If the VAA fails to comply with these diversification
standards, participant could be required to pay tax currently on the excess of
the contract value over the contract contributions. Although we do not control
the investments of the under-
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<PAGE>
lying investment options, we expect that the underlying investment options
will comply with the IRS regulations so that the VAA will be considered "ade-
quately diversified."
Restrictions
Federal income tax law limits contractowner's and participant's rights to
choose particular investments for the contract. Because the IRS has not issued
guidance specifying those limits, the limits are uncertain and your right to
allocate contract values among the subaccounts may exceed those limits. If so,
contractowner and/or participant would be treated as the owner of the assets
of the VAA and thus subject to current taxation on the income and gains from
those assets. We do not know what limits may be set by the IRS in any guidance
that it may issue and whether any such limits will apply to existing con-
tracts. We reserve the right to modify the contract without contractowner's or
participant's consent to try to prevent the tax law from considering them as
the owner of the assets of the VAA.
Age at which annuity payouts begin
Federal income tax rules do not expressly identify a particular age by which
annuity payouts must begin. However, those rules do require that an annuity
contract provide for amortization, through annuity payouts, of the contract's
contributions 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 possi-
ble that the tax law will not treat the contract as an annuity for Federal in-
come tax purposes. In that event, contractowner and/or participant would be
currently taxable on the excess of the contract value over the contributions
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 the contract will be treated as an annuity for Federal income tax pur-
poses and that the tax law will not tax any increase in the contract value un-
til there is a distribution from the contract.
Taxation of withdrawals and surrenders
Contractowner and/or participant will pay tax on withdrawals to the extent
their contract value exceeds contributions in the contract. This income (and
all other income from the contract) is considered ordinary income. A higher
rate of tax is paid on ordinary income than on capital gains. Contractowner
and/or participant will pay tax on a surrender to the extent the amount re-
ceived exceeds contributions. In certain circumstances contributions are re-
duced by amounts received from the contract 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 contributions
in the contract. We will notify you annually of the taxable amount of your an-
nuity payout. Once you have recovered the total amount of the contribution in
the contract, contractowner and/or participant 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 contributions in the contract has
been received, the amount not received generally will be deductible.
Taxation of death benefits
We may distribute amounts from the contract because of the death of a
contractowner or a participant. The tax treatment of these amounts depends on
whether participant or the annuitant dies before or after the annuity com-
mencement 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
contributions not yet distributed from the contract. All annuity payouts
in excess of the contributions 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 contributions
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 the con-
tract which contractowner and/or participant must include in gross income. The
10% penalty tax does not apply if one of several exceptions exists. These ex-
ceptions include withdrawals, surrenders, or annuity payouts that:
. participant receives on or after they reach age 59 1/2,
. participant receives because they became disabled (as defined in the tax
law),
. a beneficiary receives on or after participant's death, or
. participant receives as a series of substantially equal periodic payments
for their life (or life expectancy).
15
<PAGE>
Special rules if you own more than one annuity contract
In certain circumstances, we must combine some or all of the nonqualified an-
nuity contracts participant owns in order to determine the amount of an annu-
ity payout, a surrender, or a withdrawal that participant must include in in-
come. For example, if contractowner and/or participant purchase two or more
deferred annuity contracts from the same life insurance company (or its affil-
iates) during any calendar year, the tax code treats all such contracts as one
contract. Treating two or more contracts as one contract could affect the
amount of a surrender, a withdrawal or an annuity payout that participant must
include in income and the amount that might be subject to the penalty tax de-
scribed 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 participant's contract value, as a with-
drawal of such amount or portion.
Gifting a contract
If contractowner and participant transfer ownership of the contract to a per-
son other than participant's spouse (or to participant's former spouse inci-
dent to divorce), and receive a payment less than the contract's value, par-
ticipant will pay tax on their contract value to the extent it exceeds
contractowner's and participant's contributions not previously received. The
new owner's contributions in the contract would then be increased to reflect
the amount included in contractowner's and/or participant's income.
Charges for a contract's death benefit
The contract may have an EGMDB, for which contractowner and/or participant pay
an annual charge, computed daily. It is possible that the tax law may treat
all or a portion of the EGMDB 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 contributions that can be made, and
the tax deduction or exclusion that may be allowed for the contributions.
These limits vary depending on the type of qualified plan and the plan par-
ticipant's specific circumstances, e.g., the participant's compensation.
16
<PAGE>
. Under most qualified plans, e.g., 403(b) plans and Traditional IRAs, the
participant must begin receiving payments from the contract in certain mini-
mum amounts by a certain age, typically age 70 1/2. However, these "minimum
distribution rules" do not apply to a Roth IRA.
. Loans are allowed under certain types of qualified plans, but Federal income
tax rules prohibit loans under other types of qualified plans. For example,
Federal income tax rules permit loans under some section 403(b) plans, but
prohibit loans under Traditional and Roth IRAs. If allowed, loans are 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 participant's income as ordinary income. These taxable distribu-
tions will include contributions that were deductible or excludible from in-
come. Thus, under many qualified contracts the total amount received is in-
cluded in income since a deduction or exclusion from income was taken for con-
tributions. There are exceptions. For example, participant does not include
amounts received from a Roth IRA in income if certain conditions are satis-
fied.
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 purchased. For example, in the
case of an IRA, exceptions provide that the penalty tax does not apply to a
withdrawal, surrender, or annuity payout:
. received on or after the participant reaches age 59 1/2,
. received on or after the participant's death or because of the participant's
disability (as defined in the tax law),
. received as a series of substantially equal periodic payments for the par-
ticipant'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, par-
ticipant may suffer adverse Federal income tax consequences, including paying
taxes which might not otherwise have had to be paid. A qualified advisor
should always be consulted before contractowner or participant move or attempt
to move funds between any qualified plan or contract and another qualified
plan or contract.
The direct rollover rules apply to certain payments (called "eligible rollover
distributions") from section 401(a) plans, section 403(a) or (b) plans, HR 10
plans, and contracts used in connection with these types of plans. (The direct
rollover rules do not apply to distributions from IRAs or section 457 plans).
The direct rollover rules require that we withhold Federal income tax equal to
20% of the eligible rollover distribution from the distribution amount, unless
participant elects to have the amount directly transferred to certain quali-
fied plans or contracts. Before we send a rollover distribution, we will pro-
vide the participant with a notice explaining these requirements and how the
20% withholding can be avoided by electing a direct rollover.
The EGMDB and IRAs
Pursuant to IRS regulations, IRAs may not invest in life insurance contracts.
We do not believe that these regulations prohibit the EGMDB from being pro-
vided under the contracts when we issue the contracts as Traditional IRAs or
Roth IRAs. However, the law is unclear and it is possible that the presence of
the EGMDB under a contract issued as a Traditional or Roth IRA could result in
increased taxes to participant.
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 participant 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
participant 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
17
<PAGE>
that it will incur any Federal income tax liability on the income and gains
earned by the VAA. We, therefore, do not impose a charge for Federal income
taxes. If Federal income tax law changes and we must pay tax on some or all of
the income and gains earned by the VAA, we may impose a charge against the VAA
to pay the taxes.
Changes in the law
The above discussion is based on the 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.
Voting rights
Contractowners cast votes on behalf of participants. The voting will be done
according to the instructions of the participants who have interests in the
fund. The number of votes the contractowners have the right to cast will be
determined as follows: for participants in the accumulation period, the number
of votes is equal to the number of accumulation units; for annuitants receiv-
ing annuity payments, the number of votes is equal to (a) the amount of assets
in the fund established to meet the annuity obligations related to such
annuitants divided by (b) the value of an accumulation unit. In determining
the number of votes, fractional shares will be recognized.
During the annuity period, every participant 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 participant. If a
contractowner receives no instructions from the relevant participant, or if
there is no participant entitled to give voting instructions, the
contractowner may cast the votes in his or her sole discretion.
Whenever a meeting of the fund is called, each contractowner and each partici-
pant having a voting interest in the fund will receive proxy voting material,
reports, and other materials.
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 indepen-
dent broker-dealers which in turn have selling agreements with us and have
been licensed by state insurance departments to represent us. We are regis-
tered with the SEC under the Securities Exchange Act of 1934 as a broker-
dealer and are a member of the National Association of Securities Dealers
(NASD).
State regulation
As a life insurance company organized and operating under Indiana law, the
Company 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
Insurance Department (the Department) at all times. A full examination of our
operations is conducted by the Department 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
variable annuity contract issued under the ORP only upon: (1) termination of
employment in all institutions as defined in Texas law, (2) retirement, or (3)
death. Accordingly, a participant in the ORP will be required to obtain a 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 1940 Act and applicable regulations, we are re-
sponsible for maintaining all records and accounts relating to the fund. We
have entered into an agreement with the Delaware Management Company, 2005 Mar-
ket 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 1940 Act or any other ap-
plicable law or regulation.
Other information
A Registration Statement has been filed with the SEC, under the Securities Act
of 1933 as amended, for the contracts being offered here. This Prospectus does
not contain all the information in the Registration Statement, its amendments
and exhibits. Please refer to the Registration Statement for further informa-
tion 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 documents as filed with the SEC.
18
<PAGE>
Preparing for Year 2000
Many existing computer programs use only two digits to identify a year in the
date field. These programs were designed and developed without considering the
impact of the upcoming change in the century. If not corrected, many computer
applications could fail or create erroneous results by or at the year 2000.
The year 2000 issue affects virtually all companies and organizations. Lincoln
Life, as part of its year 2000 updating process, is responsible for the updat-
ing of the fund related computer systems. An affiliate of Lincoln Life, Dela-
ware Service Company (Delaware), provides substantially all of the necessary
accounting and valuation services for the fund. Delaware, for its part, is re-
sponsible for updating all of its computer systems, including those which
service the fund, to accommodate the year 2000. Lincoln Life and Delaware have
begun formal discussions with each other to assess the requirements for their
respective systems to interface properly in order to facilitate the accurate
and orderly operation of the fund beginning in the year 2000.
The year 2000 issue is pervasive and complex and affects virtually every as-
pect of the businesses of both Lincoln Life and Delaware (the Companies). The
computer systems of the Companies and their interfaces with the computer sys-
tems of vendors, suppliers, customers and other business partners are particu-
larly vulnerable. The inability to properly recognize date-sensitive elec-
tronic information and to transfer data between systems could cause errors or
even complete failure of systems, which would result in a temporary inability
to process transactions correctly and engage in normal business activities for
the fund. The Companies respectively are redirecting significant portions of
their internal information technology efforts and are contracting, as needed,
with outside consultants to help update their systems to accommodate the year
2000. Also, in addition to the discussions with each other noted above, the
Companies have respectively initiated formal discussions with other critical
parties that interface with their systems to gain an understanding of the pro-
gress by those parties in addressing year 2000 issues. While the Companies are
making substantial efforts to address their own systems and the systems with
which they interface, it is not possible to provide assurance that operational
problems will not occur. The Companies presently believe that, with the modi-
fication of existing computer systems, updates by vendors and conversion to
new software and hardware, the year 2000 issue will not pose significant oper-
ations problems for their respective computer systems. In addition, the Compa-
nies are incorporating potential issues surrounding year 2000 into their con-
tingency planning process, in the event that, despite these substantial ef-
forts, there are unresolved year 2000 problems. If the remediation efforts
noted above are not completed timely or properly, the year 2000 issue could
have a material adverse impact on the operation of the businesses of Lincoln
Life or Delaware, or both.
The cost of addressing year 2000 issues and the timeliness of completion will
be closely monitored by management of the respective Companies and, for each
company, will be based on its management's best estimates which are derived
utilizing numerous assumptions of future events, including the continued
availability of certain resources, third-party modification plans and other
factors. Nevertheless, there can be no guarantee either by Lincoln Life or by
Delaware that estimated costs will be achieved, and actual results could dif-
fer significantly from those anticipated. Specific factors that might cause
such differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer problems, and other uncertainties.
Legal proceedings
Lincoln Life is involved in various pending or threatened legal proceedings
arising from the conduct of its business. Most of these proceedings are rou-
tine and in the ordinary course of business. In some instances these proceed-
ings include claims for unspecified or substantial punitive damages and simi-
lar 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 lia-
bility, if any, under these suits will not have a material adverse effect on
the financial position of Lincoln Life.
Two lawsuits involve alleged fraud in the sale of interest-sensitive universal
and whole life insurance policies. These two suits have been filed as class
actions against Lincoln Life, although as of the date of this Prospectus the
court had not certified a class in either case. Plaintiffs seek unspecified
damages and penalties for themselves and on behalf of the putative class. Al-
though the relief sought in these cases is substantial, the cases are in the
early stages of litigation, and it is premature to make assessments about po-
tential loss, if any. Management intends to defend these suits vigorously. The
amount of liability, if any, which may arise as a result of these suits cannot
be reasonably estimated at this time.
19
<PAGE>
Appendix A
Restrictions
The investments of the fund are subject to the provisions of the Indiana Insur-
ance Law concerning earnings records, preferred stock overage, self-dealing,
real estate holdings and concentration.
Loans will not be made, but the purchase of a portion of an issue of bonds, de-
bentures or other securities publicly distributed or privately placed with fi-
nancial 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 manage-
ment or control.
10. Place emphasis upon obtaining short-term trading profits, but it may engage
in short-term transactions in the event that a change in economic condi-
tions or a rapid appreciation or depreciation of stock prices occurs. (See
the fund's portfolio turnover rates set forth in the Per accumulation unit
Income and Capital Changes Table.) The securities markets in general have
experienced volatility due to rapidly shifting economic trends. This vola-
tility 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.
20
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION (SAI)
LINCOLN NATIONAL VARIABLE ANNUITY FUND A (Group)
(Registrant)
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
(Depositor)
This Statement of Additional Information should be read in conjunction with
the Prospectus of Lincoln National Variable Annuity Fund A (Group) dated April
30, 1998. You may obtain a copy of the Fund A (Group) 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, 1998
Form 10547 (SAI) 4/98
SAI-AG
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION (SAI)
LINCOLN NATIONAL VARIABLE ANNUITY FUND A (GROUP)
GENERAL INFORMATION AND HISTORY OF
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
The Lincoln National Life Insurance Company (the Company) is an Indiana
insurance corporation, engaged primarily in the direct issuance of life
insurance contracts and annuities, and is also a professional reinsurer. The
Company is wholly owned by Lincoln National Corporation, a publicly-held
insurance holding company domiciled in Indiana.
SPECIAL TERMS
The Special terms used in this SAI are the ones defined in the Prospectus.
INVESTMENT OBJECTIVES AND POLICIES OF THE FUND
See that heading in the Prospectus.
MANAGEMENT
Managers and Officers of the Fund
The Fund is managed by a Board of Managers, whose Members are elected
annually by the Contract Owners. The affairs of the Fund are conducted in
accordance with Rules and Regulations adopted by the Board of Managers.
<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 64 Retired (formerly Associate Vice President -- Investments,
1776 Sherwood Road Northwestern University, Evanston, Illinois)
Des Plaines, IL 60016
*Kelly D. Clevenger Chairman and 45 Vice President, Lincoln National Life Insurance Company
1300 S. Clinton Street Member
Fort Wayne, IN 46802
*Barbara S. Kowalczyk Member 46 Senior Vice President, Lincoln National Corporation (formerly
200 East Berry Street Senior Vice President, Lincoln Investment Management, Inc.)
Fort Wayne, IN 46802
Nancy L. Frisby, CPA Member 56 Regional Vice President/Chief Financial Officer (formerly Vice
700 Broadway President -- Finance; Regional Controller of Finance),
Fort Wayne, IN 46802 St. Joseph Medical Center, Fort Wayne, Indiana
Kenneth G. Stella Member 54 President, Indiana Hospital and Health Association,
One American Square Indianapolis, Indiana
Indianapolis, IN 46282
*Cynthia A. Rose Secretary to the Board 44 Assistant Secretary, Lincoln National Corporation
200 East Berry Street of Managers
Fort Wayne, IN 46802
*Janet C. Whitney Vice President and 49 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).
B-2
SAI-AG
<PAGE>
Control of the Fund
No person is the record or beneficial owner of 5% or more of the Fund. In
addition, Members of the Board of Managers and officers of the Fund as a group
own less than 1% of the Registrant.
INVESTMENT ADVISORY AND RELATED SERVICES
This information is disclosed in the Prospectus.
BROKERAGE ALLOCATION
The Company places orders for the purchase and sale of securities for the
Fund's portfolio. It is the Fund's policy to have orders placed with brokers
or dealers who will give the best execution of such orders at prices and under
conditions most favorable to the Fund. The Company will customarily deal with
principal market makers in purchasing over-the-counter securities. In the
allocation of brokerage business, preference may be given to those brokers and
dealers who provide statistical, research, or other services -- so long as
there is no sacrifice in getting the best price and execution.
Consistent with the policy of seeking best price and execution for the
transaction size and the risk involved, in selecting brokers or dealers or
negotiating the commissions to be paid, the Company considers each firm's
financial responsibility and reputation, range and quality of the service made
available to the Fund and the broker's or dealer's professional services,
including execution, clearance procedures, wire service quotations and ability
to provide performance, statistical and other 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 $78,697 in 1997, $124,820 in 1996 and
$101,171 in 1995.
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-AG
<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 Participant at the
date of retirement has credited to his individual account 30,000 Accumulation
Units, and that the value of an Accumulation Unit on the 14th day preceding
the last day of the valuation period in which annuity payments commence was
$1.15 producing a total value of his individual account of $34,500. Assume
also that the Participant elects an option for which the table in the variable
annuity contract indicates the first monthly payment is $6.57 per $1,000 of
value applied; the Participant's first monthly payment would thus be 34.5
multiplied by $6.57 or $226.67.
Assume that the Annuity Unit value for the valuation period in which the
first payment was due was $1.10. When this is divided into the first monthly
payment the number of Annuity Units represented by that payment is determined
to be 206.064. The value of this same number of Annuity Units will be paid in
each subsequent month.
Assume further that the net investment factor for the Fund for the 14th day
preceding the last day of the valuation period in which the next annuity
payment is due is 1.0019. Multiplying this factor by .99990575 (for a one 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 net capital gains on the assets of the
Fund are reinvested and taken into account in determining the accumulation and
annuity unit values. As a result, such investment income and realized capital
gains are automatically applied to increase reserves under the Contract. Under
existing federal income tax law, separate account investment income and
capital gains are not taxed to the extent they are applied to increase
reserves under a contract issued in connection with the Fund. Accordingly, the
Company does not anticipate that it will incur any federal income tax
liability attributable to the Fund, and therefore the Company does not intend
to make provisions for any such taxes. However, if changes in the federal tax
laws or
B-4
SAI-AG
<PAGE>
interpretations thereof result in the Company being taxed on income or gains
attributable to the Fund or certain types of Contracts, then the Company may
impose a charge against the Fund (with respect to some or all Contracts) in
order to make provision for payment of such taxes. The terms of the plan may
limit the rights otherwise available under the Contracts.
Qualified Contracts
The rules governing the tax treatment of contributions and distributions
under such plans, as set forth in the Code and applicable rulings and
regulations, are complex and subject to change. These rules also vary
according to the type of plan and the terms and conditions of the plan itself.
Therefore, no attempt is made herein to provide more than general information
about the use of Contracts with the various types of plans, based on the
Company's understanding of the current Federal tax laws as interpreted by the
Internal Revenue Service. Purchasers of Contracts for use with such a plan and
plan participants and beneficiaries should consult counsel and other competent
advisers as to the suitability of the plan and the Contract to their specific
needs, and as to applicable Code limitations and tax consequences.
Participants under such plans, as well as Contract Owners, annuitants, and
beneficiaries, should also be aware that the rights of any person to any
benefits under such plans may be subject to the terms and conditions of the
plans themselves regardless of the terms and conditions of the Contract.
Following are brief descriptions of the various types of plans and of the use
of Contracts in connection therewith.
Public School Systems and Section 501(c)(3) Organizations [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-AG
<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 its 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-AG
<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 the person designated by the
Contract Owner as a beneficiary and to whom Contract ownership passes by
reason of death, and must be a natural person. However, if the recipient of
the proceeds is the surviving spouse of the Contract Owner, the Contract may
be continued in the name of such surviving spouse as the Contract Owner.
Contracts issued after January 18, 1985 contain provisions intended to comply
with these Code requirements, although regulations interpreting these
requirements have not yet been issued. The Company intends to review such
provisions and modify them if necessary to assure that they comply with the
requirements of Section 72(s) when clarified by regulation or otherwise.
Other Considerations
It should be understood that the foregoing comments about the federal tax
consequences under these Contracts are not exhaustive and that special rules
are provided with respect to other tax situations not discussed herein.
Further, the foregoing discussion does not address any applicable state,
local, or foreign tax laws. Before an investment is made in any of the above
plans, a tax adviser should be consulted.
OTHER SERVICES
Custodian
This information is disclosed in the Prospectus.
Independent Auditors
The financial statements of the Fund and the statutory-basis financial
statements and schedules of Lincoln Life, which have been included in this
Statement of Additional Information, and the Per-Accumulation-Unit Income and
Capital Changes Table appearing in the Prospectus, have been audited by Ernst
& Young LLP, 2300 Fort Wayne National Bank Building, Fort Wayne, Indiana
46802, independent auditors, as set forth in their reports thereon appearing
elsewhere herein and in the Registration Statement, and are included in
reliance upon such reports given upon the authority of such firm as experts in
accounting and auditing.
Keeper of Records
All accounts, books, records and other documents which are required to be
maintained for the Fund are maintained by the Company 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 Year's 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 and schedules of Lincoln Life appear on the following pages. For
more information about the financial statements for Lincoln Life provided in
this SAI, please see the cover page of this SAI.
B-7
SAI-AG
<PAGE>
FINANCIAL STATEMENTS
LINCOLN NATIONAL VARIABLE ANNUITY FUND A
Statement of Operations
Year Ended December 31, 1997
<TABLE>
<S> <C> <C>
Investment Income:
Dividends.......................................... $ 2,455,559
Interest........................................... 48,577
------------
2,504,136
Expenses:
Investment management services..................... $ 394,625
Mortality and expense guarantees................... 1,163,876 1,558,501
------------ ------------
<CAPTION>
NET INVESTMENT INCOME 945,635
<S> <C> <C>
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments................... 15,561,276
Increase in net unrealized appreciation of
investments....................................... 17,892,073
------------
<CAPTION>
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 33,453,349
<S> <C> <C>
------------
<CAPTION>
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 34,398,984
<S> <C> <C>
============
Statements of Changes in Net Assets
<CAPTION>
Year Ended December 31
1997 1996
------------ ------------
<S> <C> <C>
Changes from operations:
Net investment income.............................. $ 945,635 $ 1,248,519
Net realized gain on investments................... 15,561,276 9,896,271
Increase in net unrealized appreciation of
investments....................................... 17,892,073 7,531,873
------------ ------------
<CAPTION>
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 34,398,984 18,676,663
<S> <C> <C>
Net decrease from equity transactions............... (11,845,771) (13,726,463)
------------ ------------
<CAPTION>
TOTAL INCREASE IN NET ASSETS 22,553,213 4,950,200
<S> <C> <C>
Net assets at beginning of year .................... 108,904,850 103,954,650
------------ ------------
<CAPTION>
NET ASSETS AT END OF YEAR $131,458,063 $108,904,850
<S> <C> <C>
============ ============
</TABLE>
See accompanying notes to financial statements.
B-8
SAI-AI
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY FUND A
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
Percent Number
of of
Net Assets Shares Market Value
---------- ------ ------------
<S> <C> <C> <C>
INVESTMENTS
Common Stocks:
Aerospace:..................................... 1.9%
General Dynamics............................... 9,500 $ 821,156
United Technologies Corp....................... 22,800 1,660,125
------------
2,481,281
Automobiles and Auto Parts:.................... 4.4%
Cooper Industries.............................. 25,100 1,229,900
Ford Motor..................................... 42,900 2,088,694
General Motors................................. 15,600 945,750
Johnson Controls............................... 33,000 1,575,750
------------
5,840,094
Banking and Insurance: ........................ 17.3%
AmSouth Bancorporation......................... 26,000 1,412,125
Bank of Boston................................. 20,500 1,925,719
Bank of New York............................... 8,800 508,750
Bankers Trust of New York...................... 14,000 1,574,125
Bear Stearns................................... 37,015 1,758,212
Chase Manhattan................................ 22,800 2,496,600
Cigna.......................................... 8,600 1,488,338
First Chicago NBD.............................. 18,639 1,556,357
MBIA........................................... 10,400 694,850
Marsh & McLennan............................... 18,200 1,357,037
Nations Bank................................... 20,600 1,252,738
PaineWebber Group.............................. 30,150 1,042,059
SLM Holding.................................... 11,800 1,641,675
Torchmark...................................... 39,800 1,674,088
Travelers Group................................ 44,799 2,413,546
------------
22,796,219
Buildings and Materials:....................... 1.2%
Armstrong World Industries..................... 3,600 269,100
Centex......................................... 5,200 327,275
Lafarge........................................ 22,500 665,156
Masco.......................................... 7,100 361,212
------------
1,622,743
Cable, Media, and Publishing:.................. 3.4%
Dun & Bradstreet............................... 19,200 594,000
McGraw-Hill.................................... 15,900 1,176,600
New York Times................................. 15,200 1,005,100
Omnicom Group.................................. 38,400 1,627,200
------------
4,402,900
Chemicals:..................................... 2.9%
Avery Dennison................................. 21,795 975,326
Dow Chemical Co................................ 18,200 1,847,300
Lyondell Petrochemicals........................ 36,700 972,550
------------
3,795,176
Computers and Technology:...................... 7.5%
American Power Conversion*..................... 27,100 641,931
Bay Networks*.................................. 18,300 467,794
Cadence Design Systems*........................ 35,750 875,875
Compaq Computer................................ 33,950 1,916,053
HBO............................................ 10,400 498,875
Network Associates Inc.*....................... 5,100 269,184
PeopleSoft*.................................... 33,200 1,290,650
Storage Technology*............................ 27,100 1,678,506
Sun Microsystems*.............................. 42,400 1,693,350
Western Digital*............................... 32,700 525,244
------------
9,857,462
Consumer Products:............................. 6.6%
Clorox......................................... 14,600 1,154,313
General Electric............................... 59,600 4,373,150
Maytag......................................... 12,000 447,750
Procter & Gamble............................... 33,600 2,681,700
------------
8,656,913
Electronics and Electrical: ................... 1.1%
Honeywell...................................... 11,400 780,900
Raytheon-Class A............................... 995 49,057
Xerox.......................................... 9,100 671,694
------------
1,501,651
</TABLE>
B-9
SAI-AI
<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>
Energy: ....................................... 9.2%
Atlantic Richfield............................. 17,200 1,378,150
Exxon.......................................... 47,500 2,906,406
Halliburton.................................... 26,500 1,376,344
Occidental Petroleum........................... 36,000 1,055,250
Royal Dutch Petroleum.......................... 46,800 2,535,975
Texaco......................................... 31,600 1,718,250
USX-Marathon Group............................. 33,200 1,120,500
------------
12,090,875
Food, Beverage, and Tobacco: .................. 8.2%
Campbell Soup.................................. 16,800 $ 976,500
Coca Cola. .................................... 24,800 1,652,300
ConAgra........................................ 16,400 538,125
Fortune Brands................................. 16,500 611,531
Heinz (H.J.)................................... 19,250 978,141
Hershey Foods.................................. 17,000 1,052,937
Philip Morris.................................. 82,200 3,724,688
RJR Nabisco Holdings........................... 32,500 1,218,750
------------
10,752,972
Healthcare and Pharmaceuticals: ............... 10.7%
Amgen*......................................... 29,300 1,585,863
Bristol-Myers Squibb........................... 35,900 3,397,038
Dura Pharmaceuticals*.......................... 7,600 350,550
Johnson & Johnson.............................. 23,900 1,574,412
Lincare Holdings*.............................. 12,400 709,900
Merck & Company................................ 27,800 2,953,750
Oxford Health Plans*........................... 19,300 299,753
Phycor*........................................ 27,500 743,359
Schering-Plough................................ 39,000 2,422,875
------------
14,037,500
Industrial Machinery: ......................... 2.8%
Caterpillar.................................... 35,800 1,738,538
Deere & Co..................................... 17,200 1,002,975
Ingersoll-Rand................................. 23,250 941,625
------------
3,683,138
Leisure, Lodging, and Entertainment: .......... 1.7%
Boston Chicken*................................ 25,400 163,116
Callaway Golf.................................. 35,500 1,013,969
King World Productions*........................ 19,200 1,108,800
------------
2,285,885
Metals and Mining: ............................ 1.0%
ASARCO......................................... 16,600 372,463
Phelps Dodge................................... 15,400 958,650
------------
1,331,113
Miscellaneous: ................................ .4%
Cendant*....................................... 15,288 525,525
Retail: ....................................... 5.6%
CompUSA*....................................... 45,600 1,413,600
Gap............................................ 18,600 659,136
Jostens........................................ 33,000 761,062
Liz Claiborne.................................. 13,000 543,562
Ross Stores.................................... 19,600 714,175
Safeway*....................................... 24,600 1,555,950
TJX............................................ 51,500 1,770,313
------------
7,417,798
Telecommunications: ........................... 8.7%
AT&T........................................... 14,600 894,250
Ameritech...................................... 29,000 2,334,500
Bell Atlantic.................................. 25,958 2,362,178
BellSouth...................................... 44,600 2,511,538
PairGain Technologies*......................... 5,000 97,031
SBC Communications............................. 13,599 996,127
Telltabs*...................................... 26,000 1,372,312
U.S. West Communications Group................. 17,700 798,713
------------
11,366,649
Transportation and Shipping: .................. 1.2%
AMR*........................................... 8,000 1,028,000
UAL*........................................... 5,800 536,500
------------
1,564,500
</TABLE>
B-10
SAI-AI
<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>
Utilities: ................................... 3.3%
FirstEnergy*.................................. 32,100 $ 930,900
General Public Utilities...................... 33,600 1,415,400
Minnesota Power and Light..................... 8,200 357,212
Texas Utilities............................... 38,500 1,600,156
------------
4,303,668
Total Common Stocks 99.1% 130,314,062
----- ------------
(Cost--$78,612,415)
TOTAL INVESTMENTS
(Cost--$78,612,415) 99.1% 130,314,062
Excess of other assets over liabilities 0.9% 1,144,001
----- ------------
NET ASSETS 100.0% $131,458,063
===== ============
Net assets are represented by:
Value of accumulation units:
7,722,501 units at $15.600 unit value $120,467,202
Annuity reserves:
217,841 units at $15.600 unit value 3,398,212
382,478 units at $19.851 unit value 7,592,649
------------
600,319 $131,458,063
======= ============
</TABLE>
*Non-income producing
See accompanying notes to financial statements.
B-11
SAI-AI
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY FUND A
Notes to Financial Statements
December 31, 1997
1. Significant Accounting Policies
The Fund: Lincoln National Variable Annuity Fund A (Fund) is a segregated
investment account of The Lincoln National Life Insurance Company. The Fund is
registered under the Investment Company Act of 1940, as amended, as an open-
end, diversified management investment company. 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: Security transactions are accounted for on the date the
securities are purchased or sold. Stocks are valued at the closing sales
prices for those traded on a national stock exchange and the mean between the
quoted bid and asked prices for those traded over-the-counter. Short-term
investments are stated at cost which approximates market. The cost of
investments sold is determined using the specific identification method.
Federal Income Taxes: Operations of the Fund 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
disclosure of contingent assets and liabilities at the date of the financial
statements 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, 1997 amounted to $39,024,799 and $50,216,101, 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 $9,784 from the proceeds of the sale of annuity contracts during 1997
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, 1997, 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, 1997 consisted of the following:
<TABLE>
<S> <C>
Equity transactions $(153,292,578)
Accumulated net investment income 73,282,387
Accumulated net realized gain on investments 161,684,979
Net unrealized appreciation of investments 49,783,275
-------------
$ 131,458,063
=============
</TABLE>
B-12
SAI-AI
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY FUND A
Notes to Financial Statements--Continued
5. Summary of Changes in Equity Transactions
<TABLE>
<CAPTION>
1997 1996
------------------------ -------------------------
Units Amount Units Amount
--------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Accumulation Units:
Balance at beginning of
year ................... 8,462,449 $(135,982,849) 9,568,929 $(123,869,196)
Contract purchases....... 152,590 2,092,826 153,035 1,603,060
Terminated contracts..... (892,538) (12,324,266) (1,259,515) (13,029,596)
--------- ------------- ---------- -------------
Balance at End of Year 7,722,501 $(146,214,289) 8,462,449 $(135,982,849)
========= ============= ========== =============
Annuity Reserves:
Balance at beginning of
year.................... 699,953 $ (5,463,958) 831,033 $ (3,851,148)
Annuity payments......... (88,185) (1,400,844) (66,369) (1,207,775)
Receipt of guarantee
mortality adjustments... (11,449) (213,487) (64,711) (1,092,152)
--------- ------------- ---------- -------------
Balance at End of Year 600,319 $ (7,078,289) 699,953 $ (5,463,958)
========= ============= ========== =============
</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>
1997 1996 1995 1994 1993
------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Investment income....................... $ 0.286 $ 0.267 $0.251 $0.217 $0.204
Expenses................................ 0.178 0.139 0.114 0.095 0.090
------- ------- ------ ------ ------
Net investment income................... 0.108 0.128 0.137 0.122 0.114
Net realized and unrealized gain (loss)
on investments......................... 3.755 1.735 2.539 (0.040) 0.522
------- ------- ------ ------ ------
Increase in accumulation unit value..... 3.863 1.863 2.676 0.082 0.636
Accumulation unit value at beginning of
year................................... 11.737 9.874 7.198 7.116 6.480
------- ------- ------ ------ ------
Accumulation unit value at end of year.. $15.600 $11.737 $9.874 $7.198 $7.116
======= ======= ====== ====== ======
Ratio of expenses to average net assets. 1.27% 1.28% 1.28% 1.27% 1.27%
Ratio of net investment income to
average net assets..................... .77% 1.17% 1.65% 1.75% 1.72%
Portfolio turnover rate................. 32.56% 49.94% 48.95% 64.09% 49.90%
Number of units outstanding at end of
year (in thousands)
Accumulation units...................... 7,723 8,462 9,569 9,908 11,538
Reserve units........................... 600 700 831 863 945
</TABLE>
B-13
SAI-AI
<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, 1997, 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 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, 1997, by correspondence with the custodian. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements 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, 1997,
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 then ended
in conformity with generally accepted accounting principles.
Ernst & Young LLP
Fort Wayne, Indiana
February 13, 1998
B-14
SAI-AI
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY FUND A (GROUP)
Post-Effective Amendment No. 54 on Form N-3
PART C--OTHER INFORMATION
Item 28.
(a) LIST OF FINANCIAL STATEMENTS (to be filed by Amendment)
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 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 Years ended December 31, 1998 and 1997
Statements of Income -- 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
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. 53 to this Registration Statement)
(2) Fund Bylaws or Instruments corresponding thereto (Filed with
Post-Effective Amendment No. 53 to this Registration Statement)
(3) Custodian Agreement (Filed with Post-Effective Amendment No. 53 to
this Registration Statement)
(4) (a) Investment Advisory Contract (Filed with Post-Effective Amendment
No. 53 to this Registration Statement)
(b) Investment Sub-advisory Contract (Filed with Post-Effective Amendment
No. 53 to this Registration Statement)
(5) Not applicable
(6) (a) Variable Annuity Contract (Filed with Post-Effective Amendment No. 53
to this Registration Statement)
(b) Participant Certificate (Filed with Post-Effective Amendment No. 53
to this Registration Statement)
(7) Application (Filed with Post-Effective Amendment No. 53 to this
Registration Statement)
(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. 53 to this Registration Statement)
(13) Consent of Ernst & Young LLP, Independent Auditors (to be filed by
amendment)
(14) Not applicable
(15) Not applicable
(16) Not applicable
(17) Financial Data Schedule (to be filed by amendment)
(18) General
(a) Organizational Chart of the Lincoln National Insurance Holding Company
System is incorporated herein by reference to the Registration
Statement on Form N-4 (33-27783) to be filed by amendment.
(b) Books and Records Report to be filed by amendment
Item 29.
DIRECTORS AND OFFICERS OF THE INSURANCE COMPANY
<TABLE>
<CAPTION>
Positions and
Name and Principal Positions and Offices Offices with
Business Address with Insurance Company Registrant
- ---------------- ---------------------- ----------
<S> <C> <C>
GABRIEL L. SHAHEEN* President, Chief
Executive Officer
and Director
JON A. BOSCIA** Director
CAROLYN P. BRODY* Vice President
THOMAS L. CLAGG* Vice President and Associate
General Counsel
KELLY D. CLEVENGER* Vice President Chairman and Member
JEFFREY K. DELLINGER* Vice President
JOHN H. GOTTA**** Senior Vice President
</TABLE>
<PAGE>
JACK D. HUNTER** Executive Vice President
and General Counsel,
Lincoln National
Corporation and The Lincoln
National Life Insurance Company
DONALD E. KELLER* Vice President
STEPHEN H. LEWIS* Senior Vice President
H. THOMAS MCMEEKIN** Director
REED P. MILLER* Vice President
IAN M. ROLLAND** Director
CYNTHIA A. ROSE** Secretary, Secretary
The Lincoln National
Life Insurance Company and
Lincoln National Corporation
LAWRENCE T. ROWLAND*** Executive Vice President and
Director
KEITH J. RYAN* Assistant Treasurer, Senior
Vice President and Chief
Financial Officer
RICHARD C. VAUGHAN** Director
JANET C. CHRZAN** Vice President and Vice President and
Treasurer Treasurer
C. SUZANNE WOMACK** Secretary and Assistant
Vice President
Footnotes:
* Principal business address is 1300 S. Clinton Street, Fort Wayne, Indiana
46802
** Principal business address is 200 E. Berry Street, Fort Wayne, Indiana
46802
*** Principal business address is 1700 Magnavox Way, One Reinsurance Place,
Fort Wayne,
**** Principal business address is 900 Cottage Grove Road, Bloomfield, CT
06152-2321
<PAGE>
Indiana 46804
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 _____ group contractowners of qualified
contracts. The Fund does not offer non-qualified contracts. (to be filed by
amendment)
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 (Lincoln Life), 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 Life 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 (Individual) 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
Exhibit 18(b) incorporated by reference herein, in response to this Item.
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
Pursuant to the requirement of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this amendment to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Fort Wayne, and State of Indiana, on the 24th
day of February, 1999.
LINCOLN NATIONAL 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 (Lincoln Life)
(Depositor)
By /s/ Gabriel L. Shaheen
----------------------------------------
Gabriel L. Shaheen
President
(Name and title of officer of Depositor)
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
the Registration Statement has been signed below on February 24, 1999, by the
following persons in the capacities indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Gabriel L. Shaheen President, Chief Executive February 24, 1999
- ---------------------------- Officer and Director
Gabriel L. Shaheen (Principal Executive Officer)
/s/ Jon A. Boscia Director February 24, 1999
- ----------------------------
Jon A. Boscia
/s/ Lawrence T. Rowland Executive Vice President February 24, 1999
- ---------------------------- and Director
Lawrence T. Rowland
/s/ Richard C. Vaughan Director February 24, 1999
- ----------------------------
Richard C. Vaughan
/s/ H. Thomas McMeekin Director February 24, 1999
- ----------------------------
H. Thomas McMeekin
/s/ Keith J. Ryan Senior Vice President, February 24, 1999
- ---------------------------- Assistant Treasurer, and
Keith J. Ryan Chief Financial Officer
(Principal Financial Officer
and Principal Accounting
Officer)
Director
- ----------------------------
Jack D. Hunter
</TABLE>
