<PAGE>
As filed with the Securities and Exchange Commission on April 28, 1998
Registration No. 33-26032
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / /
Post-Effective Amendment No. 13 / X /
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / /
AMENDMENT NO. 17 / X /
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT E
-------------------------------------------
(Exact Name of Registrant)
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
-------------------------------------------
(Name of Depositor)
1300 South Clinton Street
Fort Wayne, Indiana 46802
--------------------------
(Address of Depositor's Principal Executive Offices)
Depositor's Telephone Number, including Area Code: (219)455-2000
JACK D. HUNTER, ESQ.
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 Ave., N.W.
Washington, D.C. 20004
---------------------------------------
Title of secrities being registered:
Interests in a separate account under individual flexible premium deferred
variable annuity contracts.
---------------------------------------
It is proposed that this filing will become effective
immediately upon filing pursuant to paragraph (b) of Rule 485
---
X On April 30, 1998*, pursuant to paragraph (b) of Rule 485
---
60 days after filing pursuant to paragraph (a)(1) of Rule 485
---
On , 1998 Pursuant to paragraph (a)(1) of Rule 485
---
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT E
CROSS REFERENCE SHEET
(PURSUANT TO RULE 495 OF REGULATION C
UNDER THE SECURITIES ACT OF 1933)
RELATING TO ITEMS REQUIRED BY FORM N-4
<TABLE>
<CAPTION>
N-4 ITEM CAPTION IN PROSPECTUS (PART A)
- -------- ------------------------------
<S> <C>
1. Cover Page
2. Special terms
3. (a) Expense Table
(b) Not Applicable
(c) Not Applicable
(d) For Your Information (top of page 2)
4. (a) Condensed Financial Information
(b) Not Applicable
(c) Financial Statements
5. (a) Cover Page; The Lincoln National Life Insurance Company;
(b) Variable Annuity Account; Investments of the Variable Annuity
Account; Cover Page
(c) Investments of the Variable Annuity Account
(d) Cover Page
(e) Voting Rights
(f) Not Applicable
6. (a) For Your Information; Charges and Other Deductions
(b) Charges and Other Deductions
(c) Charges and Other Deductions
(d) Charges and Other Deductions
(e) Charges and Other Deductions
(f) Charges and Other Deductions
(g) Not Applicable
7. (a) The Contracts; Investments of the Variable Annuity Account;
Annuity Payouts; Voting Rights; Return Privilege
(b) Investments of the Variable Annuity Account; The Contracts;
Cover Page
(c) The Contracts
(d) The Contracts
</TABLE>
<PAGE>
CROSS REFERENCE SHEET TO ITEMS REQUIRED BY FORM N-4
<TABLE>
<CAPTION>
N-4 ITEM CAPTION IN PROSPECTUS (PART A)
- ---------- ------------------------------
<S> <C>
8. (a) Annuity Payouts
(b) Annuity Payouts
(c) Annuity Payouts
(d) Annuity Payouts
(e) Cover Page; Annuity Payouts
(f) The Contracts; Annuity Payouts
9. (a) The Contracts; Annuity Payouts
(b) The Contracts; Annuity Payouts
10. (a) The Contracts; Cover Page; Charges and Other Deductions
(b) The Contracts; Investments of the Variable Annuity Account
(c) The Contracts
(d) Distribution of the Contracts
11. (a) The Contracts
(b) Restrictions Under the Texas Optional Retirement Program
(c) The Contracts
(d) The Contracts
(e) Return Privilege
12. (a) Federal Tax Status
(b) Cover Page; Federal Tax Status
(c) Federal Tax Status
13. Legal Proceedings
14. Table of Contents to the Statement of Additional Information
(SAI) for Lincoln National Variable Annuity Account E
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
N-4 ITEM CAPTION IN STATEMENT OF ADDITIONAL
- -------- INFORMATION (PART B)
----------------------------------
<S> <C>
15. Cover Page for Part B
16. Cover Page for Part B
17. (a) Not Applicable
(b) Not Applicable
(c) General Information and History of The
Lincoln National Life Insurance
Company Lincoln Life (Lincoln Life)
</TABLE>
CROSS REFERENCE SHEET TO ITEMS REQUIRED BY FORM N-4
<TABLE>
<CAPTION>
N-4 ITEM CAPTION IN STATEMENT OF ADDITIONAL
- ---------- INFORMATION (PART B)
----------------------------------
<S> <C>
18. (a) Not Applicable
(b) Not Applicable
(c) Services
(d) Not Applicable
(e) Not Applicable
(f) Not Applicable
19. (a) Purchase of Securities Being Offered
(b) Purchase of Securities Being Offered
20. (a) Not Applicable
(b) Principal Underwriter
(c) Not Applicable
(d) Not Applicable
21. Not Applicable
22. Annuity Payouts [Also see that heading in the Prospectus]
23. (a) Financial Statements -- Lincoln National Variable Annuity Account E
(b) Financial Statements -- The Lincoln National Life Insurance Company
</TABLE>
<PAGE>
THE AMERICAN LEGACY
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT E
INDIVIDUAL VARIABLE ANNUITY CONTRACTS
issued by:
Lincoln National Life Insurance Co.
1300 South Clinton Street
Fort Wayne, Indiana 46802
This Prospectus describes the individual flexible premium deferred variable
annuity contract (contract or variable annuity contract) issued by Lincoln Na-
tional Life Insurance Co. (Lincoln Life). It is for use with the following re-
tirement plans qualified for special tax treatment (qualified plans) under the
Internal Revenue Code of 1986, as amended (the code):
1. Public school systems and certain tax-exempt organizations 403(b);
2. Qualified corporate employee pension and profit-sharing trusts and quali-
fied annuity plans;
3. Corresponding plans of self-employed individuals (H.R. 10 or Keogh);
4. Individual retirement annuities (IRA);
5. Government deferred compensation plans (457); and
6. Simplified employee pension plans (SEP).
Section 403(b) business under number (1.) will normally be accepted only for
purchase payments qualifying as 403(b) lump sum transfers or rollovers.
The contract described in this Prospectus is also offered to plans established
by persons who are not entitled to participate in one of the previously men-
tioned plans (nonqualified contracts).
The contract offers you the accumulation of contract value and payment of pe-
riodic annuity benefits. These benefits may be paid on a variable or fixed ba-
sis or a combination of both. Benefits start at an annuity commencement date
which you select. If the annuitant dies before the annuity commencement date,
the greater of: 1) the contract value; or 2) the guaranteed minimum death ben-
efit (GMDB) or, if in effect, the enhanced guaranteed minimum death benefit
(EGMDB) will be paid to the beneficiary. (See Death benefit before the annuity
commencement date)
The minimum initial purchase payment for the contract is:
1. $1,500 for a nonqualified plan and a 403(b) transfer/rollover or
2. $300 for a qualified plan.
The minimum subsequent purchase payment for the contract is $25 per payment,
subject to a $300 annual minimum.
All investments (purchase payments) for benefits on a variable basis will be
placed in Lincoln National Variable Annuity Account E (Variable annuity ac-
count [VAA]). The VAA is a segregated investment account of Lincoln Life,
which is the depositor. Based upon your instructions, the VAA invests purchase
payments (at net asset value) in shares of a class of one or more specified
funds of the American Variable Insurance Series (series): Global Growth Fund,
Global Small Capitalization Fund, Growth Fund, International Fund, Growth-In-
come Fund, Asset Allocation Fund, High-Yield Bond Fund, Bond Fund, U.S.
Government/AAA-Rated Securities Fund and Cash Management Fund. (See Descrip-
tion of the series). Both the value of a contract before the annuity commence-
ment date and the amounts applied for afterward will depend upon the invest-
ment performance of the fund(s) selected. Investments in these funds are nei-
ther insured or guaranteed by the U.S. Government nor by any other person or
entity.
Purchase payments for benefits on a fixed basis will be placed in the fixed
side of the contract, which is part of our General Account. However, this Pro-
spectus deals only with those elements of the contracts relating to the VAA,
except where reference to the fixed side is made.
Special limits apply to withdrawals and transfers from the fixed side of the
contract.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (SEC) NOR HAS THE SEC PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus details the information regarding the VAA that you should know
before investing. This booklet also includes a current Prospectus of the se-
ries. Both should be read carefully before investing and kept for future ref-
erence.
A statement of additional information (SAI), dated April 30, 1998, concerning
the VAA has been filed with the SEC and is incorporated by this reference into
this Prospectus. If you would like a free copy, complete and mail the enclosed
card, or call 1-800-942-5500. A table of contents for the SAI appears on the
last page of this Prospectus.
This Prospectus is dated April 30, 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
- ----------------------------------------------------------------------
<S> <C>
Special terms 3
- ----------------------------------------------------------------------
Expense tables 4
- ----------------------------------------------------------------------
Synopsis 6
- ----------------------------------------------------------------------
Condensed financial information for the variable annuity account 8
- ----------------------------------------------------------------------
Financial statements 9
- ----------------------------------------------------------------------
Lincoln National Life Insurance Co. 9
- ----------------------------------------------------------------------
Fixed side of the contract 9
- ----------------------------------------------------------------------
Variable annuity account (VAA) 9
- ----------------------------------------------------------------------
Investments of the variable annuity account 9
- ----------------------------------------------------------------------
Charges and other deductions 11
- ----------------------------------------------------------------------
The contracts 13
- ----------------------------------------------------------------------
Annuity payouts 17
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
- --------------------------------------------------------------
<S> <C>
Federal tax status 18
- --------------------------------------------------------------
Voting rights 19
- --------------------------------------------------------------
Distribution of the contracts 20
- --------------------------------------------------------------
Return privilege 20
- --------------------------------------------------------------
State regulation 20
- --------------------------------------------------------------
Restrictions under the Texas Optional Retirement Program 20
- --------------------------------------------------------------
Records and reports 21
- --------------------------------------------------------------
Other information 21
- --------------------------------------------------------------
Statement of Additional Information
table of contents for
Separate Account E 22
</TABLE>
- --------------------------------------------------------------------------------
2
<PAGE>
SPECIAL TERMS
(Throughout this Prospectus, in order to make the following documents more un-
derstandable to you, we have italicized the special terms.)
Account or variable annuity account (VAA) -- The segregated investment ac-
count, Account E, into which Lincoln Life sets aside and invests the assets
for the variable side of the contract offered in this Prospectus.
Accumulation unit -- A measure used to calculate contract value for the vari-
able side of the contract before the annuity commencement date. See The con-
tracts.
Advisor or investment advisor -- Capital Research and Management Co. (CRMC),
which provides investment management services to the series. See Investment
advisor.
Annuitant -- The person upon whose life the annuity benefit payouts made after
the annuity commencement date will be based.
Annuity commencement date -- The valuation date when funds are withdrawn or
converted into annuity units or fixed dollar payout for payout of annuity ben-
efits under the annuity payout option selected. For purposes of determining
whether an event occurs before or after the annuity commencement date, the an-
nuity commencement date is deemed to begin at close of business on the valua-
tion date.
Annuity payout option -- An optional form of payout of the annuity available
within the contract. See Annuity payouts.
Annuity payout -- An amount paid at regular intervals after the annuity com-
mencement date under one of several options available to the annuitant and/or
any other payee. This amount may be paid on a variable or fixed basis, or a
combination of both.
Annuity unit -- A measure used to calculate the amount of annuity payouts af-
ter the annuity commencement date. See Annuity payouts.
Beneficiary -- The person whom you designate to receive the death benefit, if
any, in case of the annuitant's death.
Cash surrender value -- Upon surrender, the contract value less any applicable
charges, fees and taxes.
Code -- The Internal Revenue Code of 1986, as amended.
Contract (variable annuity contract) -- The agreement between you and us pro-
viding a variable annuity.
Contractowner (you, your, owner) -- The person who has the ability to exercise
the rights within the contract (decides on investment allocations, transfers,
payout options; designates the beneficiary, etc.). Usually, but not always,
the contractowner is also the annuitant.
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 your designated beneficiary if the an-
nuitant dies before the annuity commencement date. See The contracts.
Depositor -- Lincoln National Life Insurance Co.
Enhanced guaranteed minimum death benefit (EGMDB) -- The EGMDB is the greater
of: (1) contract value as of the day on which Lincoln Life approves the pay-
ment of a death benefit claim; or (2) the highest contract value on any policy
anniversary date (including the inception date) from the time the EGMDB takes
effect up to and including the annuitant's age 75. The highest contract value
so determined is then increased by purchase payments and decreased by partial
withdrawals, partial annuitizations, and any premium taxes made, effected or
incurred subsequent to the anniversary date on which the highest contract
value is obtained.
Flexible premium deferred contract -- An annuity contract with an initial pur-
chase payment, allowing additional purchase payments to be made, and with an-
nuity payouts beginning at a future date.
Fund -- Any of the underlying investment options available in the series in
which your purchase payments are invested.
Guaranteed minimum death benefit (GMDB) -- The GMDB is equal to the sum of all
purchase payments plus any attributable gain, minus any withdrawals, partial
annuitizations and premium taxes incurred. We determine the attributable gain
separately for each contract year on its seventh anniversary (once its surren-
der charge period has expired). See Death benefit before the annuity commence-
ment date.
Home office -- The headquarters of Lincoln National Life Insurance Co., lo-
cated at 1300 South Clinton Street, Fort Wayne, Indiana 46802.
Lincoln Life (we, us, our) -- Lincoln National Life Insurance Co.
Purchase payments -- Amounts paid into the contract.
Series -- American Variable Insurance Series (series), the funds in which pur-
chase payments are invested.
Statement of additional information (SAI) -- A document required by the SEC to
be provided upon request to a prospective purchaser of a contract, you. This
free document gives more information about Lincoln Life, the VAA and the vari-
able annuity contract.
Subaccount -- That portion of the VAA that reflects investments in accumula-
tion and annuity units of a class of a particular fund. There is a separate
subaccount which corresponds to each class of a fund under the contracts.
Surrender -- A contract right that allows you to terminate your contract and
receive your cash surrender value. See The contracts.
Valuation date -- Each day the New York Stock Exchange (NYSE) is open for
trading.
Valuation period -- The period starting at the close of trading (currently
4:00 pm New York time) on each day that the NYSE is open for trading (valua-
tion date) and ending at the close of such trading on the next valuation date.
Withdrawal -- A contract right that allows you to obtain a portion of your
cash surrender value.
3
<PAGE>
EXPENSE TABLES
CONTRACTOWNER TRANSACTION EXPENSES:
The maximum contingent deferred sales charge
(as a percentage of purchase payments surrendered/withdrawn): 6%
The contingent deferred sales charge percentage is reduced over time. The later
a redemption occurs, the lower the contingent deferred sales charge with re-
spect to that surrender or withdrawal. See Contingent deferred sales charges.
(Note: This charge may be waived in certain cases. See Contingent deferred
sales charges.)
- --------------------------------------------------------------------------------
ANNUAL CONTRACT FEE: $35
This is a single charge assessed against the contract value on the last valua-
tion date of each contract year and upon full surrender; it is not a separate
charge for each subaccount.
- --------------------------------------------------------------------------------
VARIABLE ANNUITY ACCOUNT E ANNUAL EXPENSES
(as a percentage of average account value for each subaccount*).
<TABLE>
<CAPTION>
Contracts with EGMDB Contracts without EGMDB
<S> <C> <C>
Mortality and expense risk fees 1.25% 1.25%
EGMDB charge 0.15% --
----- -----
Total Account E annual expenses 1.40% 1.25%
</TABLE>
ANNUAL EXPENSES OF THE FUNDS FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1997
(as a percentage of each fund's average net assets):
<TABLE>
<CAPTION>
Management + Other = Total
fees expenses expenses
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1. Global Growth .71% .05% .76%
- --------------------------------------------------------------------------
2. Global Small Capitalization** .80 .06 .86
- --------------------------------------------------------------------------
3. Growth .41 .01 .42
- --------------------------------------------------------------------------
4. International .58 .09 .67
- --------------------------------------------------------------------------
5. Growth-Income .36 .01 .37
- --------------------------------------------------------------------------
6. Asset Allocation .45 .02 .47
- --------------------------------------------------------------------------
7. High-Yield Bond .50 .02 .52
- --------------------------------------------------------------------------
8. Bond .53 .02 .55
- --------------------------------------------------------------------------
9. U.S. Govt./AAA-Rated Securities .51 .02 .53
- --------------------------------------------------------------------------
10. Cash Management .45 .02 .47
</TABLE>
- --------------------------------------------------------------------------------
*The VAA is divided into ten separately-named subaccounts, which are available
under the contracts. Each subaccount, in turn, invests purchase payments in its
respective fund.
**These expenses are estimated amounts for the current fiscal year.
4
<PAGE>
EXAMPLES
(reflecting expenses both of The American Legacy subaccounts and of the funds):
If you surrender your contract at the end of the applicable time period, you
would pay the following expenses* on a $1,000 investment, assuming a 5% annual
return:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
- -------------------------------------------------------------------
<S> <C> <C> <C> <C>
1. Global Growth $80 $113 $139 $237
- -------------------------------------------------------------------
2. Global Small Capitalization** 81 116 144 248
- -------------------------------------------------------------------
3. Growth 77 103 121 197
- -------------------------------------------------------------------
4. International 79 110 134 224
- -------------------------------------------------------------------
5. Growth-Income 76 101 118 192
- -------------------------------------------------------------------
6. Asset Allocation 77 104 123 202
- -------------------------------------------------------------------
7. High-Yield Bond 78 106 126 208
- -------------------------------------------------------------------
8. Bond 78 107 128 212
- -------------------------------------------------------------------
9. U.S. Govt./AAA-Rated Securities 78 106 126 209
- -------------------------------------------------------------------
10. Cash Management 77 104 123 202
</TABLE>
- --------------------------------------------------------------------------------
If you do not surrender your contract, you would pay the following expenses* on
a $1,000 investment, assuming a 5% annual return:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
- -------------------------------------------------------------------
<S> <C> <C> <C> <C>
1. Global Growth $20 $63 $109 $237
- -------------------------------------------------------------------
2. Global Small Capitalization** 21 66 114 248
- -------------------------------------------------------------------
3. Growth 17 53 91 197
- -------------------------------------------------------------------
4. International 19 60 104 224
- -------------------------------------------------------------------
5. Growth-Income 16 51 88 192
- -------------------------------------------------------------------
6. Asset Allocation 17 54 93 202
- -------------------------------------------------------------------
7. High-Yield Bond 18 56 96 208
- -------------------------------------------------------------------
8. Bond 18 57 98 212
- -------------------------------------------------------------------
9. U.S. Govt./AAA-Rated Securities 18 56 96 209
- -------------------------------------------------------------------
10. Cash Management 17 54 93 202
</TABLE>
- --------------------------------------------------------------------------------
*These expenses, calculated as mandated by the SEC, reflect the annual contract
fee as the ratio of the total contract fees collected in the most recent fiscal
year to the total average net assets of the account.
**These expenses are estimated for the current fiscal year.
All of the figures provided under the subheading annual expenses of the funds
and part of the data used to produce the figures in the examples were supplied
by the underlying portfolio company (series) through the VAA's principal under-
writer, American Funds Distributors, Inc. We have not independently verified
this information.
These examples are provided to assist you in understanding the various costs
and expenses that you will bear directly or indirectly. These examples reflect
expenses both of the VAA and of the underlying funds. These examples reflect
expenses assuming that the EGMDB is NOT in effect. If the EGMDB is in effect,
these expenses will be higher.
For more complete descriptions of the various costs and expenses involved, see
Charges and other deductions in this Prospectus, and Fund Organization and Man-
agement in the Prospectus for the series. Premium taxes may also be applicable,
although they do not appear in the table. THE EXAMPLES SHOULD NOT BE CONSIDERED
A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE MORE OR
LESS THAN THOSE SHOWN. These examples are unaudited.
5
<PAGE>
SYNOPSIS
WHAT TYPE OF CONTRACT AM I BUYING? It is an individual annuity contract issued
by Lincoln Life. It may provide for a fixed annuity and/or a variable annuity.
This Prospectus is intended to provide disclosure only about the variable por-
tion of the contract. See The contracts.
WHAT IS THE VARIABLE ANNUITY ACCOUNT (VAA)? It is a segregated asset account
established under Indiana insurance law, and registered with the SEC as a unit
investment trust. The assets of the VAA are allocated to one or more
subaccounts, according to your investment choice. Those assets are not charge-
able with liabilities arising out of any other business which Lincoln Life may
conduct. See Variable annuity account.
WHAT ARE MY INVESTMENT CHOICES? Through its various subaccounts, the VAA uses
your purchase payments to purchase series shares, at your direction, in one or
more of the following investment funds of the series: Global Growth, Global
Small Capitalization, Growth, International, Growth-Income, Asset Allocation,
High-Yield Bond, Bond, U.S. Government/ AAA-Rated Securities and Cash Manage-
ment. In turn, each fund holds a portfolio of securities consistent with its
own particular investment policy. See Investments of the variable annuity ac-
count and Description of the series.
WHO INVESTS MY MONEY? The investment advisor for the series is CRMC, Los Ange-
les, California. CRMC is a long-established investment management organization,
and is registered as an investment advisor with the SEC. See Investments of the
variable annuity account and Investment advisor.
HOW DOES THE CONTRACT WORK? Once we approve your application, you will be is-
sued your individual annuity contract. During the accumulation period, while
you are paying in, purchase payments will buy accumulation units under the con-
tract. Should you decide to annuitize (that is, change your contract to a pay-
out mode rather than an accumulation mode), your accumulation units will be
converted to annuity units. Your periodic annuity payout will be based upon the
number of annuity units to which you became entitled at the time you decided to
annuitize, and the value of each unit on the valuation date. See The contracts.
WHAT CHARGES ARE ASSOCIATED WITH THIS CONTRACT? At the end of each contract
year and at the time of surrender, we will deduct $35 from your contract value
as a maintenance charge.
Should you decide to withdraw contract value before your purchase payments have
been in your contract for a certain minimum period, you will incur a contingent
deferred sales charge of anywhere from 1% to 6%, depending upon how many full
contract years those payments have been in the contract. (Note: This sales
charge is not assessed upon: the first withdrawal of contract value during a
contract year to the extent the withdrawal does not exceed 10% of the purchase
payments (this 10% withdrawal exception does not apply to a surrender of the
contract); automatic withdrawals, not in excess of 10% of the purchase payments
during a contract year, made by non-trustee contractowners who are at least 59
1/2; a surrender of a contract or withdrawal of contract value as a result of
the annuitant's permanent and total disability [as defined in Section 22(e)(3)
of the code], after the effective date of the contract and before the
annuitant's 65th birthday; a surrender of the contract as a result of the death
of the annuitant; or annuitization.
If your state assesses a premium tax with respect to your contract, then at the
time the tax is incurred (or at such other time as we may choose), we will de-
duct those amounts from purchase payments or contract value, as applicable.
We assess an annual charge in the amount of 1.25% as a mortality and expense
risk charge against the daily net asset value of the VAA, including that por-
tion of the account attributable to your purchase payments. If the EGMDB is in
effect, the aggregate charge against the VAA is 1.40% consisting of a 1.25%
mortality and expense risk charge and a 0.15% risk charge for the EGMDB. For a
complete discussion of the charges associated with the contract, see Charges
and other deductions.
The series pays a fee to its investment advisor, CRMC, based upon the average
daily net asset value of each fund in the series. (See Investments of the vari-
able annuity account-Investment advisor.) In addition, there are other expenses
associated with the daily operations of the series. These are more fully de-
scribed in the Prospectus for the series.
HOW MUCH MUST I PAY, AND HOW OFTEN? Subject to the minimum and maximum payments
stated on the first page of the Prospectus, the amount and frequency or your
payments are completely flexible. See The contracts--Purchase payments.
HOW WILL MY ANNUITY PAYOUTS BE CALCULATED? If you decide to annuitize, you
elect an annuity payout option. Once you have done so, your periodic payout
will be based upon a number of factors. If you participate in the VAA, the
changing values of the funds in which you have invested will be one factor. See
Annuity payouts. REMEMBER THAT PARTICIPANTS IN THE VAA BENEFIT FROM ANY GAIN,
AND TAKE A RISK OF ANY DROP, IN THE VALUE OF THE SECURITIES IN THE FUNDS' PORT-
FOLIOS.
WHAT HAPPENS IF I DIE BEFORE I ANNUITIZE? If you are the annuitant and also the
contractowner, then the beneficiary whom you designate will receive either the
GMDB, or the then current value of the contract, whichever is greater. If the
EGMDB is in effect, the beneficiary
6
<PAGE>
will receive either the EGMDB or the then current value of the contract, which-
ever is greater. Your beneficiary will have certain options for how the money
is to be paid out. If a contractowner is not also the annuitant, certain spe-
cial rules apply. See The contracts--Death benefit before the annuity commence-
ment date and Death of contractowner.
MAY I TRANSFER CONTRACT VALUE BETWEEN FUNDS IN THE SERIES? Yes; however, there
are limits on how often you may do so. See The contracts--Transfers between
subaccounts on or before the annuity commencement date and Transfers after the
annuity commencement date.
MAY I TRANSFER CONTRACT VALUE FROM THE FIXED TO THE VARIABLE SIDE OF THE CON-
TRACT, AND VICE-VERSA? Yes, subject once again to specific restrictions in the
contract. See The contracts--Transfers of accumulation units to and from the
General Account.
MAY I SURRENDER THE CONTRACT OR MAKE A WITHDRAWAL? Yes, subject to contract re-
quirements and to restrictions imposed under certain qualified retirement plans
for which the contract is purchased. See The contracts--Surrenders and with-
drawals.
If you surrender the contract or make a withdrawal, certain charges may be as-
sessed, as discussed above and under Charges and other deductions. In addition,
the Internal Revenue Service (IRS) may assess a 10% premature withdrawal pen-
alty tax. A surrender or a withdrawal may be subject to 20% withholding. See
Federal tax status and withholding.
DO I GET A FREE LOOK AT THIS CONTRACT? Yes. If within 20 days (or a longer pe-
riod if required by law) of the date you first receive the contract you return
it, postage pre-paid to the home office of Lincoln Life, it will be canceled.
However, except in some states, during this period, you assume the risk of a
market drop with respect to purchase payments which you allocate to the vari-
able side of the contract. See Return privilege.
7
<PAGE>
CONDENSED FINANCIAL INFORMATION FOR THE VARIABLE ANNUITY ACCOUNT ACCUMULATION
UNIT VALUES
(FOR AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT THE PERIOD)
The following information relating to accumulation unit values and number of
accumulation units for The American Legacy subaccounts for each of the ten
years in the period ended December 31, 1997 comes from the VAA's financial
statements. It should be read in conjunction with the VAA's financial state-
ments and notes which are all included in the SAI.
<TABLE>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Global Growth
subaccount*+
Accumulation unit value
.Beginning of period............................................................................ $ 1.000
.End of period.................................................................................. 1.077
Number of accumulation
units
.End of period (000's omitted).................................................................. 3,207
- ---------------------------------------------------------------------------------------------------------
Growth subaccount
Accumulation unit value
.Beginning of period.... $ .818 .925 1.200 1.133 1.492 1.632 1.875 1.861 2.450 2.743
.End of period.......... $ .925 1.200 1.133 1.492 1.632 1.875 1.861 2.450 2.743 3.525
Number of accumulation
units
.End of period (000's
omitted)............... 54,124 93,979 99,094 106,335 110,169 111,230 105,312 101,710 90,842 79,939
- ---------------------------------------------------------------------------------------------------------
International
subaccount*
Accumulation unit value
.Beginning of period.................................................... $ 1.000 1.001 1.114 1.294
.End of period.......................................................... $ 1.001 1.114 1.294 1.393
Number of accumulation
units
.End of period (000's omitted).......................................... 27,787 31,592 38,351 36,787
- ---------------------------------------------------------------------------------------------------------
Growth-Income subaccount
Accumulation unit value
.Beginning of period.... $ .842 .952 1.180 1.136 1.392 1.484 1.646 1.659 2.180 2.556
.End of period.......... $ .952 1.180 1.136 1.392 1.484 1.646 1.659 2.180 2.556 3.177
Number of accumulation
units
.End of period (000's
omitted)............... 111,918 195,478 199,880 203,868 201,913 199,178 183,608 172,288 158,861 144,738
- ---------------------------------------------------------------------------------------------------------
Asset Allocation
subaccount*
Accumulation unit value
.Beginning of period.................................................... $ 1.000 .986 1.262 1.443
.End of period.......................................................... $ .986 1.262 1.443 1.717
Number of accumulation
units
.End of period (000's omitted).......................................... 3,807 5,168 7,199 9,568
- ---------------------------------------------------------------------------------------------------------
High-Yield Bond
subaccount
Accumulation unit value
.Beginning of period.... $ .974 1.103 1.204 1.234 1.543 1.714 1.971 1.819 2.188 2.447
.End of period.......... $ 1.103 1.204 1.234 1.543 1.714 1.971 1.819 2.188 2.447 2.716
Number of accumulation
units
.End of period (000's
omitted)............... 23,858 34,050 29,430 28,254 27,823 29,951 25,988 23,867 20,767 18,911
- ---------------------------------------------------------------------------------------------------------
Bond subaccount**
Accumulation unit value
.Beginning of period.................................................................... $ 1.000 1.046
.End of period.......................................................................... $ 1.046 1.137
Number of accumulation
units
.End of period (000's omitted).......................................................... 1,681 2,352
- ---------------------------------------------------------------------------------------------------------
U.S. Government/AAA-Rated
subaccount
Accumulation unit value
.Beginning of period.... $ .948 1.012 1.108 1.187 1.359 1.444 1.586 1.498 1.707 1.738
.End of period.......... $ 1.012 1.108 1.187 1.359 1.444 1.586 1.498 1.707 1.738 1.862
Number of accumulation
units
.End of period (000's
omitted)............... 26,477 42,915 43,779 44,335 42,291 39,387 31,118 29,062 22,652 18,125
- ---------------------------------------------------------------------------------------------------------
Cash Management
subaccount
Accumulation unit value
.Beginning of period.... $ 1.037 1.097 1.179 1.256 1.309 1.335 1.353 1.388 1.447 1.502
.End of period.......... $ 1.097 1.179 1.256 1.309 1.335 1.353 1.388 1.447 1.502 1.560
Number of accumulation
units
.End of period (000's
omitted)............... 26,381 31,446 29,312 19,913 21,963 13,982 14,312 10,001 9,605 7,318
</TABLE>
- --------------------------------------------------------------------------------
*The International subaccount and Asset Allocation subaccount began operations
on January 3, 1994.
**The Bond subaccount began operations on January 2, 1996 so the figures for
1996 represent experience of less than one year.
*+The Global Growth subaccount began operations on April 30, 1997 so the
figures for 1997 represent experience of less than one year.
There is a Global Small Capitalization subaccount but it is not in the chart
because it did not begin activity until 1998.
Unit Values are for contracts without the EGMDB. For those contracts with the
EGMDB, the unit values are lower.
8
<PAGE>
FINANCIAL STATEMENTS
The financial statements for the VAA and Lincoln Life are located in the SAI.
If you would like a free copy, complete and mail the enclosed card, or call 1-
800-942-5500.
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
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 expe-
rience of the VAA. The general account is subject to regulation and supervi-
sion 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 a security under the Securities
Act of 1933 and has not registered the general account as an investment com-
pany under the 1940 Act. Accordingly, neither the general account nor any in-
terests therein are subject to regulation 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 Prospectus which relate to our
general account and to the fixed account under the contract. These disclo-
sures, however, may be subject to certain generally applicable provisions of
the federal securities laws relating to the accuracy and completeness of
statements made in Prospectuses. This Prospectus is generally intended to
serve as a disclosure document only for aspects of the contract involving the
VAA, and therefore contains only selected information regarding the fixed side
of the contract. Complete details regarding the fixed side of the contract are
in the contract.
Purchase payments allocated to the fixed side of the contract are guaranteed
to be credited with a minimum interest rate, specified in the contract, of at
least 3.0%. A purchase payment allocated to the fixed side of the contract is
credited with interest beginning on the next calendar day following the date
of receipt 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.
VARIABLE ANNUITY ACCOUNT
(VAA)
On September 26, 1986, the VAA was established as an insurance company sepa-
rate account under Indiana law. It is registered with the SEC as a unit in-
vestment trust under the provisions of the Investment Company Act of 1940
(1940 Act). The SEC does not supervise the VAA or Lincoln Life. The VAA is a
segregated investment account, meaning that its assets may not be charged with
liabilities resulting from any other business that we may conduct. Income,
gains and losses, whether realized or not, from assets allocated to the VAA
are, in accordance with the applicable annuity contracts, credited to or
charged against the VAA. They are credited or charged without regard to any
other income, gains or losses of Lincoln Life. The VAA satisfies the defini-
tion of separate account under the federal securities laws. We do not guaran-
tee the investment performance of the VAA. Any investment gain or loss depends
on the investment performance of the funds. YOU ASSUME THE FULL INVESTMENT
RISK FOR ALL AMOUNTS PLACED IN THE VAA.
INVESTMENTS OF THE VARIABLE
ANNUITY ACCOUNT
You decide the subaccount(s) to which you allocate purchase payments. There is
a separate subaccount which corresponds to each class of each fund in the se-
ries. You may change your allocation without penalty or charges. Shares of the
funds will be sold at net asset value with no initial sales charge to the VAA
in order to fund the contracts. The series is required to redeem fund shares
at net asset value upon our request. We reserve the right to add, delete or
substitute funds.
INVESTMENT ADVISOR
The investment advisor for the series is CRMC, 333 South Hope Street, Los An-
geles, California 90071. CRMC is one of the nation's largest and oldest in-
vestment management organizations. As compensation for its services to the se-
ries, the investment advisor receives a fee from the series which is accrued
daily and paid monthly. This fee is based on the net assets of each fund, as
defined under Purchases and redemptions of shares, in the Prospectus for the
series.
9
<PAGE>
DESCRIPTION OF THE SERIES
The series was organized as a Massachusetts business trust in 1983 and is reg-
istered as a diversified, open-end management investment company under the
1940 Act. Diversified means not owning too great a percentage of the securi-
ties of any one company. An open-end company is one which, in this case, per-
mits Lincoln Life to sell its shares back to the series when you make a with-
drawal, surrender the contract or transfer from one fund to another. Manage-
ment investment company is the legal term for a mutual fund. These definitions
are very general. The precise legal definitions for these terms are contained
in the 1940 Act.
The series has ten separate portfolios of funds. The series has adopted a plan
pursuant to Rule 18f-3 under the 1940 Act to permit the series to establish a
multiple class distribution system for all of its portfolios. The series'
Board of Trustees may at any time establish additional funds or classes, which
may or may not be available to the VAA. Fund assets are segregated and a
shareholder's interest is limited to those funds in which the shareholder owns
shares.
Under the multi-class system adopted by the series, shares of each multi-class
fund represent an equal pro rata interest in that fund and, generally, have
identical voting, dividend, liquidation and other rights, preferences, powers,
restrictions, limitations, qualifications and terms and conditions, except
that: (1) each class has a different designation; (2) each class of shares
bears its class expenses; (3) each class has exclusive voting rights on any
matter submitted to shareholders that relates solely to its distribution ar-
rangement; and (4) each class has separate voting rights on any matter submit-
ted to shareholders in which the interests of one class differ from the inter-
ests of any other class. Expenses currently designated as class expenses by
the series' Board of Trustees under the plan pursuant to Rule 18f-3 include,
for example, service fees paid under a 12b-1 plan to cover servicing fees paid
to dealers selling the contracts.
Each fund has two classes of shares, designated as Class 1 and Class 2 shares.
Class 1 and 2 differ primarily in that Class 2 but not Class 1 shares are sub-
ject to a
12b-1 plan. Only Class 1 shares are available under
the contracts.
The investment objectives and policies of certain funds are similar to the in-
vestment objectives and policies of portfolios, other than the funds, that are
advised by the advisor. The investment results of the funds, however, may be
higher or lower than the other portfolios that are advised by the advisor.
There can be no assurance, and no representation is made, that the investment
results of any of the funds will be comparable to the investment results of
any other portfolio advised by the advisor.
Following are brief summaries of the investment objectives and policies of the
funds. Each fund is subject to certain investment policies and restrictions
which may not be changed without a majority vote of shareholders of that fund.
More detailed information may be obtained from the current Prospectus for the
series, which is included in this booklet. PLEASE BE ADVISED THAT THERE IS NO
ASSURANCE THAT ANY OF THE FUNDS WILL ACHIEVE THEIR STATED OBJECTIVES.
1. Global Growth Fund--The investment objective is to achieve long-term growth
of capital by investing in securities of issuers domiciled around the
world. The fund will invest primarily in common stocks but may invest in
other securities such as preferred stock, debt securities and securities
convertible into common stock. PLEASE NOTE: THIS FUND IS NOT YET AVAILABLE
IN CALIFORNIA. PLEASE CONSULT YOUR INVESTMENT DEALER FOR CURRENT INFORMA-
TION ABOUT THE GLOBAL GROWTH FUND'S AVAILABILITY.
2. Global Small Capitalization Fund--This fund seeks long-term growth of capi-
tal by investing primarily in equity securities of companies domiciled
around the world with relatively small market capitalizations (share price
times the number of equity securities outstanding). The fund may also in-
vest in securities convertible into common stocks, straight debt securi-
ties, government securities or nonconvertible preferred stocks. PLEASE
NOTE: THIS FUND IS NOT YET AVAILABLE IN ALL STATES. PLEASE CONSULT YOUR IN-
VESTMENT DEALER FOR CURRENT INFORMATION ABOUT ITS AVAILABILITY.
3. Growth Fund--This fund seeks to provide growth of capital. Whatever current
income is generated by the fund is likely to be incidental to the objective
of capital growth. Ordinarily, accomplishment of the fund's objective of
capital growth will be sought by investing primarily in common stocks or
securities with common stock characteristics.
4. International Fund--The investment objective is long-term growth of capital
by investing primarily in securities of issuers domiciled outside the
United states.
5. Growth-Income Fund--The investment objective is growth of capital and in-
come. In the selection of securities for investment, the possibilities of
appreciation and potential dividends are given more weight than current
yield. Ordinarily, the assets of the Growth-Income Fund consist principally
of a diversified group of common stocks, but other types of securities may
be held when deemed advisable including preferred stocks and corporate
bonds, including convertible bonds.
6. Asset Allocation Fund--This fund seeks total return (including income and
capital gains) and preservation of capital over the long-term by investing
in a diversified portfolio of securities. These securities
10
<PAGE>
can include common stocks and other equity-type securities (such as convert-
ible bonds and preferred stocks), bonds and other intermediate and long-term
fixed-income securities and money market instruments.
7. High-Yield Bond Fund--The investment objective is a fully managed, diversi-
fied bond portfolio. It seeks high current income and secondarily seeks
capital appreciation. This fund will generally be invested substantially in
intermediate-and long-term corporate obligations, with emphasis on higher
yielding, higher risk, lower rated or unrated securities.
8. Bond Fund--The fund seeks a high level of current income as is consistent
with the preservation of capital by investing in a broad variety of fixed
income securities including: marketable corporate debt securities, loan
participations, U.S. Government securities, mortgage-related securities,
other asset-backed securities and cash or money market instruments.
9. U.S. Government/AAA-Rated Securities Fund--This fund seeks a high level of
current income consistent with prudent investment risk and preservation of
capital by investing primarily in a combination of securities guaranteed by
the U.S. Government and other debt securities rated AAA or Aaa.
10. Cash Management Fund--The investment objective is high yield while pre-
serving capital by investing in a diversified selection of money market
instruments.
SALE OF FUND SHARES BY THE SERIES
We will purchase shares of the funds at net asset value and direct them to the
appropriate subaccounts of the VAA. We will redeem sufficient shares of the
appropriate funds to pay annuity payouts, death benefits, surrender/ with-
drawal proceeds or for other purposes described in the contract. If you want
to transfer all or part of your investment from one subaccount to another, we
may redeem shares held in the first and purchase shares of the other. The
shares are retired, but they may be reissued later.
Shares of the funds are not sold directly to the general public. They are sold
to Lincoln Life, and may be sold to other insurance companies, for investment
of the assets of the subaccounts established by those insurance companies to
fund variable annuity and variable life insurance contracts.
When the series sells shares in any of its funds both to variable annuity and
to variable life insurance separate accounts, it is said to engage in mixed
funding. When the series sells shares in any of its funds to separate accounts
of unaffiliated life insurance companies, it is said to engage in shared fund-
ing.
The series currently engages in mixed and shared funding. Therefore, due to
differences in redemption rates or tax treatment, or other considerations, the
interests of various contractowners participating in a fund could conflict.
The series' Board of Trustees will monitor for the existence of any material
conflicts, and determine what action, if any, should be taken. See the Pro-
spectus for the series.
REINVESTMENT OF DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS
All dividend and capital gain distributions of the funds are automatically re-
invested in shares of the distributing funds at their net asset value on the
date of distribution. Dividends are not paid out to contractowners as addi-
tional units, but are reflected in changes in unit values.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
We reserve the right, within the law, to make additions, deletions and substi-
tutions for the series and/or any funds within the series in which the VAA
participates. (We may substitute shares of other funds for shares already pur-
chased, or to be purchased in the future, under the contract. This substitu-
tion might occur if shares of a fund should no longer be available, or if in-
vestment in any fund's shares should become inappropriate, in the judgment of
our management, for the purposes of the contract.) No substitution of the
shares attributable to your account may take place without notice to you and
before approval of the SEC, in accordance with the 1940 Act.
CHARGES AND OTHER DEDUCTIONS
We will deduct the charges described below to cover our costs and expenses,
services provided and risks assumed under the contract. We incur certain costs
and expenses for the distribution and administration of the contracts and for
providing the benefits payable thereunder. Our administrative services in-
clude: processing applications for and issuing the contracts, processing pur-
chases and redemptions of fund shares as required (including dollar cost aver-
aging, cross-reinvestment, and automatic withdrawal services), maintaining
records, administering annuity payouts, furnishing accounting and valuation
services (including the calculation and monitoring of daily subaccount val-
ues), reconciling and depositing cash receipts, providing contract confirma-
tions, providing toll-free inquiry services and furnishing telephone fund
transfer services. The benefits we provide include death benefits, annuity
payout benefits and cash surrender value benefits. The risks we assume in-
clude: the risk that the actual life span of persons receiving annuity payouts
under contract guarantees will exceed the assumptions reflected in our guaran-
teed rates (these rates are incorporated in the contract and cannot be
changed); the risk that death benefits paid under the EGMDB or GMDB, will ex-
ceed actual contract value; the
11
<PAGE>
risk that more owners than expected will qualify for waivers of the contingent
deferred sales charge; and the risk that our costs in providing the services
will exceed our revenues from contract charges (which cannot be changed by
us). The amount of a charge may not necessarily correspond to the costs asso-
ciated with providing the services or benefits indicated by the designation of
the charge or associated with a particular contract. For example, the contin-
gent deferred sales charge collected may not fully cover all of the sales and
distribution expenses actually incurred by us.
MAINTENANCE CHARGE
We will deduct a contract maintenance charge of $35 per contract year. This
charge will be deducted from the contract value on the last valuation date of
each contract year. This charge will also be deducted from the contract value
upon surrender.
CONTINGENT DEFERRED SALES CHARGE
A contingent deferred sales charge applies (except as described below) to sur-
renders and withdrawals of purchase payments that have been invested for the
periods indicated as follows:
<TABLE>
<CAPTION>
Number of complete contract years that
a
purchase
payment
has
been
invested
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Less At
than least
2 2 3 4 5 6 7+
Contingent deferred sales
charge as a percentage of
the surrendered or withdrawn purchase
payments 6% 5 4 3 2 1 0
</TABLE>
A contingent deferred sales charge does not apply to:
1. A surrender or withdrawal of purchase payments that have been invested at
least seven full contract years.
2. The first withdrawal of contract value during a contract year to the extent
the withdrawal does not exceed 10% of the purchase payments (this 10% with-
drawal exception does not apply to a surrender of a contract);
3. Automatic withdrawals, not in excess of 10% of the purchase payments during
a contract year, made by non-trustee contractowners who are at least 59
1/2;
4. A surrender of a contract or withdrawal of contract value as a result of
the annuitant's permanent and total disability [as defined in Section
22(e)(3) of the code], after the effective date of the contract and before
the annuitant's 65th birthday.
5. A surrender of a contract or withdrawal of contract value of a contract is-
sued to employees and registered representatives of any member of the sell-
ing group and their spouses and minor children, or to officers, directors,
trustees or bona-fide full-time employees of Lincoln National Corp. or The
Capital Group, Inc. or their affiliated or managed companies (based upon
the contractowner's status at the time the contract was purchased); and
6. A surrender of the contract as a result of the death of the annuitant.
However, the contingent deferred sales charge is not waived as a result of the
death of a contractowner who is not the annuitant.
The contingent deferred sales charge is calculated separately for each con-
tract year's purchase payments to which a charge applies. (FOR PURPOSES OF
CALCULATING THIS CHARGE, WE ASSUME THAT PURCHASE PAYMENTS ARE WITHDRAWN ON A
FIRST IN-FIRST OUT BASIS, AND THAT ALL PURCHASE PAYMENTS ARE WITHDRAWN BEFORE
ANY EARNINGS ARE WITHDRAWN.) The contingent deferred sales charges associated
with surrender or withdrawal are paid to us to compensate us for the loss we
experience on contract distribution costs when contractowners surrender or
withdraw before distribution costs have been recovered.
DEDUCTIONS FROM THE VAA FOR ASSUMPTION OF MORTALITY AND EXPENSE RISKS
We deduct from the VAA an amount, computed daily, which is equal to an annual
rate of 1.25% of the daily net asset value as a mortality and expense risk
charge. For those contracts which include the EGMDB, the aggregate charge
against the VAA is 1.40% consisting of a 1.25% mortality and expense risk
charge and a 0.15% risk charge for the EGMDB.
DEDUCTIONS FOR PREMIUM TAXES
Any premium tax or other tax levied by any governmental entity as a result of
the existence of the contracts or the VAA will be deducted from the contract
value when incurred, or at another time of our choosing.
The applicable premium tax rates that states and other governmental entities
impose on the purchase of an annuity are subject to change by legislation, by
administrative interpretation or by judicial action. These premium taxes gen-
erally depend upon the law of your state of residence. The tax ranges from
0.5% to 4.0%.
OTHER CHARGES AND DEDUCTIONS
There are deductions from and expenses paid out of the assets of the under-
lying series that are described in the Prospectus for the series.
ADDITIONAL INFORMATION
The administrative and contingent deferred sales 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 distribu-
tion and/or administrative expenses, or that we perform fewer sales or admin-
istrative services than those originally contemplated in establishing the
level of those charges. Lower distribution and administrative expenses may be
the result of economies associated with (1) the use of mass enrollment proce-
dures, (2) the performance of administrative or sales functions by the employ-
er, (3) the use by an em-
12
<PAGE>
ployer of automated techniques in submitting deposits or information related to
deposits on behalf of its employees or (4) any other circumstances which reduce
distribution or administrative expenses. The exact amount of administrative and
contingent deferred sales charges applicable to a particular contract will be
stated in that contract.
THE CONTRACTS
PURCHASE OF CONTRACTS
If you wish to purchase a contract, you must apply for it through a sales rep-
resentative authorized by us. The completed application is sent to us and we
decide whether to accept or reject it. If the application is accepted, a con-
tract is prepared and executed by our legally authorized officers. The contract
is then sent to you through your sales representative. See Distribution of the
contracts.
If a completed application and all other information necessary for processing a
purchase order are received, an initial purchase payment will be priced no
later than two business days after we receive the order. While attempting to
finish an incomplete application, we may hold the initial purchase payment for
no more than five business days. If the incomplete application cannot be com-
pleted within those five days, you will be informed of the reasons, and the
purchase payment will be returned immediately (unless you specifically autho-
rize us to keep it until the application is complete). Once the application is
complete, the initial purchase payment must be priced within two business days.
WHO CAN INVEST?
To apply for a contract, you must be of legal age in a state where the con-
tracts may be lawfully sold and also be eligible to participate in any of the
qualified or nonqualified plans for which the contracts are designed. The annu-
itant cannot be older than age 85 (or older than age 80 in Pennsylvania).
PURCHASE PAYMENTS
Purchase payments are payable to us at a frequency and in an amount selected by
you in the application. The minimum initial purchase payment is $1,500 for non-
qualified contracts and Section 403(b) transfers/rollovers; and $300 for quali-
fied contracts. The minimum annual amount for subsequent purchase payments is
$300 for nonqualified and qualified contracts, with a minimum of $25 per pay-
ment. Purchase payments in total may not exceed $1 million for each annuitant.
If you stop making purchase payments, the contract will remain in force as a
paid-up contract as long as the total contract value is at least $300. Payments
may be resumed at any time until the annuity commencement date, the surrender
of the contract, the maturity date, the death of the contractowner or the death
of the annuitant, whichever comes first.
VALUATION DATE
Accumulation and annuity units will be valued once daily at the close of trad-
ing (currently 4:00 p.m., New York time) on each day the NYSE is open (valua-
tion date). On any date other than a valuation date, the accumulation unit
value and the annuity unit value will not change.
ALLOCATION OF PURCHASE PAYMENTS
Purchase payments are placed into the VAA's subaccounts, each of which invests
in shares of the class of its corresponding fund of the series, according to
your instructions.
The minimum amount of any purchase payment which can be put into any one
subaccount is $20 under the contract. Upon allocation to the appropriate
subaccount, purchase payments are converted into accumulation units. The number
of accumulation units credited is determined by dividing the amount allocated
to each subaccount by the value of an accumulation unit for that subaccount on
the valuation date on which the purchase payment is received at the home office
if received before 4:00 p.m., New York time. If the purchase payment is re-
ceived 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 de-
termined in this way shall not be changed by any subsequent change in the value
of an accumulation unit. However, the dollar value of an accumulation unit will
vary depending not only upon how well the investments perform, but also upon
the expenses of the VAA and the underlying funds.
VALUATION OF ACCUMULATION UNITS
Purchase payments allocated to the VAA 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 VAA. The accumulation unit value for each subaccount was or will be estab-
lished at the inception of the subaccount. It may increase or decrease from
valuation period to valuation period. The accumulation unit value for a
subaccount for a later valuation period is determined as follows:
(1) The total value of the fund shares held in the subaccount is calculated by
multiplying the number of fund shares owned by the subaccount at the begin-
ning of the valuation period by the net asset value per share of the fund
at the end of the valuation period and adding any dividend or other distri-
bution of the fund if an ex-dividend date occurs during the valuation peri-
od; minus
(2) The liabilities of the subaccount at the end of the valuation period; these
liabilities include daily charges imposed on the subaccount, and may in-
clude a charge or credit with respect to any taxes paid or reserved for by
us that we determine result from the operations of the VAA; and
13
<PAGE>
(3) The result of (2) is divided by the number of subaccount units outstanding
at the beginning of the valuation period.
The daily charge imposed on a subaccount for any valuation period are equal to
the daily mortality and expense risk charge multiplied by the number of calen-
dar days in the valuation period. Because a different daily charge is made for
contracts with the EGMDB than for those without, each of the two types of con-
tracts will have different corresponding accumulation unit values on any given
day.
TRANSFERS BETWEEN SUBACCOUNTS ON OR BEFORE THE ANNUITY COMMENCEMENT DATE
You may transfer all or a portion of your investment from one subaccount to
another. A transfer involves the surrender of accumulation units in one
subaccount and the purchase of accumulation units in the other subaccount. A
transfer will be done using the respective accumulation unit values as of the
valuation date we receive your request provided that your request is received
by 4 p.m. New York time. If your request is received after 4 p.m. New York
time, the transfer will be done using the accumulation unit values as of the
next valuation date.
Transfers between subaccounts are restricted to six times every contract year.
We reserve the right to waive this six-time limit. This limit does not apply
to transfers made under a dollar cost averaging or cross-reinvestment program
elected on forms available from us. The minimum amount which may be trans-
ferred between subaccounts is $300 (or the entire amount in the subaccount, if
less than $300). If the transfer from a subaccount would leave you with less
than $300 in the subaccount, we may transfer the total balance of the
subaccount.
A transfer may be made by writing to the home office or, if a telephone ex-
change authorization form (available from us) is on file with us, by a toll-
free telephone call. In order to prevent unauthorized or fraudulent telephone
transfers, we may require the caller to provide certain identifying informa-
tion before we will act upon their instructions. We may also assign the
contractowner a Personal Identification Number (PIN) to serve as identifica-
tion. We will not be liable for following telephone instructions we reasonably
believe are genuine. Telephone requests may be recorded and written confirma-
tion of all transfer requests will be mailed to the contractowner on the next
valuation date. Telephone transfers will be processed on the valuation date
that they are received when they are received at our customer service center
before 4 p.m. New York time.
When thinking about a transfer of contract value, you should consider the in-
herent risk involved. Frequent transfers based on short-term expectations may
increase the risk that a transfer will be made at an inopportune time.
TRANSFERS TO AND FROM THE GENERAL ACCOUNT ON OR BEFORE THE ANNUITY
COMMENCEMENT DATE
You may transfer all or any part of the contract value from the subaccount(s)
to the fixed side of the contract. These transfers cannot be elected more than
six times every contract year. We reserve the right to waive this six-time
limit. The minimum amount which can be transferred to the fixed side is $300
or the total amount in the subaccount, if less than $300. However, if a trans-
fer from a subaccount would leave you with less than $300 in the subaccount,
we may transfer the total amount to the fixed side.
You may also transfer all or any part of the contract value from the fixed
side of your contract to the various subaccount(s) subject to the following
restrictions: (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 ac-
count; and (3) a transfer cannot be made during the first 30 days after the
issue date of the contract.
These transfers cannot be elected more than six times every contract year. We
reserve the right to waive these restrictions. These restrictions do not apply
to transfers made under a dollar cost averaging or cross-reinvestment program
elected on forms available from us.
TRANSFERS AFTER THE ANNUITY COMMENCEMENT DATE
You may transfer all or a portion of your investment in one subaccount to an-
other subaccount or to the fixed side of the contract. Those transfers will be
limited to three times per contract year. However, no transfers are allowed
from the fixed side of the contract to the subaccounts.
DEATH BENEFIT BEFORE THE ANNUITY COMMENCEMENT DATE
You may designate a beneficiary during the life of the annuitant and change
the beneficiary by filing a written request with the home office. Each change
of beneficiary revokes any previous designation. We reserve the right to re-
quest that you send us the contract for endorsement of a change of beneficia-
ry.
If the annuitant dies before the annuity commencement date, a death benefit
equal to the greater of: (1) the GMDB or, if elected, the EGMDB; or (2) the
current value of the contract, will be paid to your designated beneficiary.
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.
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The GMDB is equal to the sum of all purchase payments plus any attributable
gain, minus any withdrawals, partial annuitizations and premium taxes in-
curred. We determine the attributable gain separately for each contract year
on its seventh anniversary (once its surrender charge period has expired). The
attributable gain consists of the earnings on a contract year's net purchase
payment(s) [purchase payment(s) minus any withdrawals and partial
annuitizations, applied on a first-in-first-out basis] as of the valuation
date just before its seventh anniversary. This amount will then be included in
the GMDB calculation.
If contract conditions are met, the GMDB will be increased automatically by us
according to the prescribed formula based upon the contract's internal rate of
return. For this to occur, the annuitant, as of the seventh anniversary of
each eligible contract year, must still be living and must be less than 81
years of age. For more information about GMDB calculations, please refer to
the SAI.
The EGMDB is an alternative to the GMDB for owners of nonqualified contracts
or contracts used under an IRA plan. Under the EGMDB, the death benefit pay-
able is the amount equal to the greater of: (1) contract value as of the day
on which Lincoln Life approves the payment of the claim; or (2) the highest
contract value which the contract attains on any policy anniversary date (in-
cluding the inception date) from the time the EGMDB takes effect up to and in-
cluding the annuitant's age up to and including 75. The highest contract value
so determined is then increased by purchase payments and decreased by partial
withdrawals, partial annuitizations and any premium taxes made, effected or
incurred subsequent to the anniversary date on which the highest contract
value is obtained.
You can elect the EGMDB during a limited period ending six months after the
benefit is approved in your state or ending December 31, 1997, whichever is
later. Please see your investment dealer for assistance.
If you elect the EGMDB during this limited period, the benefit will take ef-
fect as of the valuation time on the next policy anniversary date following
our receipt of the election of this benefit, and we will begin deducting the
charge for the EGMDB as of that date. If we receive an election for this bene-
fit on a policy anniversary date, the EGMDB will take effect and we will begin
deducting the charge for the benefit at the valuation time on that date.
If you elect the EGMDB, you may discontinue the benefit at any time by com-
pleting the Enchanced Guaranteed Minimum Death Benefit Discontinuance form and
sending it to Lincoln Life. The benefit will be discontinued effective at the
valuation time on the next policy anniversary date after we receive the re-
quest, and we will cease deducting the charge for the benefit as of that date.
If the benefit is discontinued on the policy anniversary date, the benefit and
the charge will terminate at the valuation time on that date. If you discon-
tinue the benefit, it cannot be reinstated. If you do not elect the EGMDB or
you discontinue the benefit after electing it, the GMDB will apply instead and
will determine what death benefit is payable.
If the death benefit becomes payable, the beneficiary may elect to receive
payment either in the form of a lump-sum settlement or an annuity payout. Fed-
eral 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 previ-
ously, subject to the laws and regulations governing payment of death bene-
fits. If an election has not been made by the end of the 60-day period, a
lump-sum settlement will be made to the beneficiary at that time. This payment
may be postponed as permitted by the 1940 Act.
Payment will be made in accordance with applicable laws and regulations gov-
erning payment of death benefits.
Unless otherwise provided in the beneficiary designation, one of the following
procedures will take place on the death of a beneficiary:
1. If any beneficiary dies before the annuitant, that beneficiary's interest
will go to any other beneficiaries named, according to their respective in-
terests (There are no restrictions on the beneficiary's use of the pro-
ceeds.); and/or
2. If no beneficiary survives the annuitant, the proceeds will be paid to the
contractowner or to his/her estate, as applicable.
JOINT/CONTINGENT OWNERSHIP
If a joint owner is named in the application, the joint owners shall be
treated as having equal undivided interests in the contract. Either owner, 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 CONTRACTOWNER
If the contractowner of a nonqualified contract dies before the annuity com-
mencement date, then, in compliance with the code, the cash surrender value of
the contract will be paid as follows:
1. Upon the death of a non-annuitant contractowner, the cash surrender value
shall be paid to any surviving joint or contingent owner(s). If no joint or
contingent owner has been named, then the cash surrender value shall be
paid to the annuitant named in the contract; and
2. Upon the death of a contractowner, who is also the annuitant, the death
will be treated as death of the annuitant and the provisions of this con-
tract regarding
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death of annuitant will control. If the beneficiary is the surviving spouse of
the contractowner, the contract may be continued in the name of that spouse as
the new contractowner. If the surviving spouse elects to continue the con-
tract, the contract will continue as though no death benefit had been payable.
The code requires that any distribution be paid within five years of the death
of the contractowner unless the beneficiary begins receiving, within one year
of the contractowner's death, the distribution in the form of a life annuity or
an annuity for a designated period not exceeding the beneficiary's life expec-
tancy.
SURRENDERS AND WITHDRAWALS
Before the annuity commencement date, we will allow the surrender of the con-
tract or a withdrawal of the contract value upon your written request, subject
to the rules discussed below. Surrender or withdrawal rights after the annuity
commencement date depend upon the annuity payout option you select.
Special restrictions on surrenders/withdrawals apply if your contract is pur-
chased as part of a retirement plan of a public school system or 501(c)(3) or-
ganization under Section 403(b) of the code. Beginning January 1, 1989, in or-
der for a contract to retain its tax-qualified status, Section 403(b) prohibits
a withdrawal from a 403(b) contract of post-1988 contributions (and earnings on
those contributions) pursuant to a salary reduction agreement. However, this
restriction does not apply if the annuitant (a) attains age 59 1/2, (b) sepa-
rates from service, (c) dies, (d) becomes totally and permanently disabled
and/or (e) experiences financial hardship (in which event the income attribut-
able to those contributions may not be withdrawn).
Pre-1989 contributions and earnings through December 31, 1988, are not subject
to the previously stated restriction. Funds transferred to the contract from a
403(b)(7) custodial account will be subject to the restrictions.
The contract value available upon surrender/withdrawal is the cash surrender
value of the contract at the end of the valuation period during which the writ-
ten request for surrender/withdrawal is received at the home office. Unless a
request for withdrawal specifies otherwise, withdrawals will be made from all
subaccounts within the VAA and from the General Account in the same proportion
that the amount of withdrawal bears to the total contract value. The minimum
amount which can be withdrawn is $300, and the remaining contract value must be
at least $300. Unless prohibited, surrender/withdrawal payments will be mailed
within seven days after we receive a valid written request at the home office.
The payment may be postponed as permitted by the 1940 Act.
There are charges associated with the surrender of a contract or withdrawal of
contract value. You may specify whether these charges are deducted from the
amount you request to be withdrawn or from the remaining contract value. See
Charges and other deductions.
The tax consequences of a surrender/withdrawal are discussed later in this
booklet. See Federal tax status.
Participants in the Texas Optional Retirement Program should refer to Restric-
tions under the Texas Optional Retirement Program, later in this Prospectus
booklet.
If the total contract value is less than $300, and if no purchase payments have
been made for at least two years, we reserve the right to terminate the con-
tract.
REINVESTMENT PRIVILEGE
You may elect to make a reinvestment purchase with any part of the proceeds of
a surrender/withdrawal, and we will recredit 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. A representation must be made that the proceeds being used to
make the purchase have retained their tax-favored status under an arrangement
for which the contracts offered by this Prospectus are designed. The number of
accumulation units which will be credited when the proceeds are reinvested will
be based on the value of the accumulation unit(s) on the next valuation date.
This computation will occur following receipt of the proceeds and request for
reinvestment at the home office. You may utilize the reinvestment privilege
only once. For tax reporting purposes, we will treat a surrender/withdrawal and
a subsequent reinvestment purchase as separate transactions. You should consult
a tax advisor before you request a surrender/withdrawal or subsequent reinvest-
ment purchase.
AMENDMENT OF CONTRACT
We reserve the right to amend the contract to meet the requirements of the 1940
Act or other applicable federal or state laws or regulations. You will be noti-
fied in writing of any changes, modifications or waivers.
COMMISSIONS
The maximum commission which will be paid to dealers is equal to 4.0% of each
purchase payment; plus an annual continuing commission equal to 0.25% of the
value of contract purchase payments invested for at least 15 months; plus an
annual persistency bonus equal to 0.40% of each contract year's increased GMDB
(regardless of whether or not the EGMDB is in effect), paid over a period of
eight years. At times, additional sales incentives (up to 0.30% of purchase
payments and up to 0.05% of the contract value in the VAA while the EGMDB is in
effect) may be provided to dealers maintaining certain sales volume levels. In
addition, the equivalent of 4.0% of contract value can be paid to dealers upon
annuitization. These commissions are not deducted from purchase payments or
contract value; they are paid by us.
OWNERSHIP
As contractowner, you have all rights under the contract. According to Indiana
law, the assets of the VAA are held for the exclusive benefit of all
contractowners and their designated beneficiaries; and the assets of the VAA
are not chargeable with liabilities arising from any other business that we may
conduct. Qualified contracts may not be assigned or transferred except as per-
mitted by the Employee Retirement Income Security Act (ERISA) of 1974 and upon
written notification to us. Non-qualified contracts may not be collaterally as-
signed. We assume no responsibility for the validity or effect of any assign-
ment. Consult your tax advisor about the tax consequences of an assignment.
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CONTRACTOWNER QUESTIONS
The obligations to purchasers under the contracts are those of Lincoln Life.
Questions about your contract should be directed to us at 1-800-942-5500.
ANNUITY PAYOUTS
When you apply for a contract, you may 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 code] and qualified annuity
plans [described in Section 403(a) of the code], including H.R.10 trusts and
plans covering self-employed individuals and their employees, provide for an-
nuity payouts to start at the date and under the option specified in the
plan.)
The contract provides optional forms of payouts of annuities (annuity op-
tions), each of which is payable on a variable basis, a fixed basis or a com-
bination 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, semiannual or annual in-
stallments. If the payouts from any subaccount 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 options available:
ANNUITY OPTIONS
LIFE ANNUITY. This option offers a periodic payout during the lifetime of the
annuitant and ends with the last payout before the death of the annuitant.
This option offers the highest periodic payout since there is no guarantee of
a minimum number of payouts or provision for a death benefit for beneficia-
ries. HOWEVER, THERE IS THE RISK UNDER THIS OPTION THAT THE ANNUITANT WOULD
RECEIVE NO PAYOUTS IF HE/SHE DIES BEFORE THE DATE SET FOR THE FIRST PAYOUT;
ONLY ONE PAYOUT IF DEATH OCCURS BEFORE THE SECOND SCHEDULED PAYOUT, AND SO ON.
LIFE INCOME WITH PAYOUTS GUARANTEED FOR DESIGNATED PERIOD. This option guaran-
tees periodic payouts during a designated period, usually 10 or 20 years, and
then continues throughout the lifetime of the annuitant. The designated period
is selected by the contractowner.
JOINT LIFE ANNUITY. This option offers a periodic payout during the joint
lifetime of the annuitant and a designated joint annuitant. The payouts con-
tinue during the lifetime of the survivor.
JOINT LIFE ANNUITY WITH GUARANTEED PERIOD. This option guarantees periodic
payouts during a designated period, usually 10 or 20 years, and continues dur-
ing the joint lifetime of the annuitant and a designated joint annuitant. The
payouts continue during the lifetime of the survivor. The designated period is
selected by the contractowner.
JOINT-AND-TWO-THIRDS SURVIVOR ANNUITY. This option provides a periodic payout
during the joint lifetime of the annuitant and a designated joint annuitant.
When one of the joint annuitants dies, the survivor receives two thirds of the
periodic payout made when both were alive.
UNIT REFUND LIFE ANNUITY. This option offers a periodic payout during the
lifetime of the annuitant with the guarantee that upon death a payout will be
made of the value of the number of annuity units (see Variable annuity
payouts) 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, di-
vided 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 pay-
ment by the home office.
GENERAL INFORMATION
None of the options listed above currently provide 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
code, if applicable. The mortality and expense risk charge will be assessed on
all variable annuity payouts, including options that may be offered that do
not have a life contingency and therefore no mortality risk.
The annuity commencement date is usually on or before the annuitant's 85th
birthday. You may change the annuity commencement date, change the annuity op-
tion or change the allocation of the investment among subaccounts up to 30
days before the scheduled annuity commencement date, upon written notice to
the home office. You must give us at least 30 days notice before the date on
which you want payouts to begin. If proceeds become available to a beneficiary
in a lump sum, the beneficiary may choose any annuity payout option.
Unless you select another option, the contract automatically provides for a
life annuity with annuity payouts guaranteed for 10 years (on a fixed, vari-
able or combination fixed and variable basis, in proportion to the account al-
locations at the time of annuitization) except when a joint life payout is re-
quired 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 sur-
viving annuitant's death in case of a joint life annuity) will be paid to your
beneficiary as payouts become due.
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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 assume an investment return of 4% per year, as applied to the applicable
mortality table. The amount of each payout after the initial payout will depend
upon how the underlying fund(s) perform, relative to the 4% assumed rate. There
is a more complete explanation of this calculation in the SAI.
FEDERAL TAX STATUS
This section is a discussion of the Federal income tax rules applicable to the
contracts as of the date of this Prospectus. More information is provided in
the SAI. THESE DISCUSSIONS AND THOSE IN THE SAI ARE NOT INTENDED AS TAX ADVICE.
This section does not discuss the Federal tax consequences resulting from every
possible situation. No attempt has been made to consider any applicable state,
local or foreign tax law, other than the imposition of any state premium taxes
(See Deductions for premium taxes). If you are concerned about the tax implica-
tions with respect to the contracts, you should consult a tax advisor. The fol-
lowing discussion is based upon our understanding of the present Federal income
tax laws as they are currently interpreted by the IRS. No representation is
made about the likelihood of continuation of the present Federal income tax
laws or their current interpretations by the IRS.
TAXATION OF NONQUALIFIED CONTRACTS
You are generally not taxed on increases in the value of your contract until a
distribution occurs. This distribution can be in the form of a lump sum payout
received by requesting all or part of the cash surrender value (i.e.
surrenders/withdrawals) or as annuity payouts. For this purpose, the assignment
or pledge of, or the agreement to assign or pledge, any portion of the value of
a contract will be treated as a distribution. A transfer of ownership of a con-
tract, or designation of an annuitant (or other beneficiary) who is not also
the contractowner, may also result in tax consequences. The taxable portion of
a distribution (in the form of a lump sum payout or an annuity) is taxed as or-
dinary income. For purchase payments made after February 28, 1986, a
contractowner who is not a natural person (for example, a corporation), subject
to limited exceptions, will be taxed on any increase in the contract's cash
value over the investment in the contract during the taxable year, even if no
distribution occurs. [See Section 72(u) of the code.] The next discussion ap-
plies to contracts owned by natural persons.
In the case of a surrender under the contract or withdrawal of contract value,
generally amounts received are first treated as taxable income to the extent
that the cash value of the contract immediately before the surrender exceeds
the investment in the contract at that time. Any additional amount withdrawn is
not taxable. The investment in the contract generally equals the portion, if
any, of any purchase payment paid by or on behalf of an individual under a con-
tract which is not excluded from the individual's gross income.
Even though the tax consequences may vary depending on the form of annuity pay-
out selected under the contract, the contractowner of an annuity payout gener-
ally is taxed on the portion of such payout that exceeds the investment in the
contract. For variable annuity payouts, the taxable portion is determined by a
formula that establishes a specific dollar amount of each payout that is not
taxed. The dollar amount is determined by dividing the investment in the con-
tract by the total number of expected periodic payouts. For fixed annuity
payouts, there generally is no tax on the portion of each payout that repre-
sents the same ratio that the investment in the contract bears to the total ex-
pected value of payouts for the term of the annuity; the remainder of each pay-
out is taxable. For individuals whose annuity starting date is after December
31, 1986, the entire distribution (whether fixed or variable) will be fully
taxable once the recipient is deemed to have recovered the dollar amount of the
investment in the contract.
All or a portion of a withdrawal may be taxable. Additionally, there may be im-
posed a penalty tax on distributions equal to 10% of the amount treated as tax-
able income. The penalty tax is not imposed in certain circumstances, which
generally are distributions:
1. Received on or after the contractowner attaining age 59 1/2;
2. Made as a result of death or disability of the contractowner;
3. Received in substantially equal periodic payments such as a life annuity
(subject to special recapture rules if the series of payouts is subsequently
modified);
4. Under a qualified funding asset in a structured settlement;
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5. Under an immediate annuity contract as defined in the code;
6. Under a contract purchased in connection with the termination of certain
retirement plans.
TAXATION OF QUALIFIED CONTRACTS
The contracts may be purchased in connection with the following types of tax-
favored retirement plans:
1. Contracts purchased for employees of public school systems and certain tax-
exempt organizations, qualified under Section 403(b) of the code (normally
for transfers or rollovers only);
2. Pension and profit-sharing plans of self-employed individuals (H.R. 10 or
Keogh plans) or corporations, qualified under Section 401(a) or 403(a) of
the code;
3. IRAs, qualified under Section 408 of the code;
4. Deferred compensation plans of state or local governments, qualified under
Section 457 of the code; and/or
5. SEPs, qualified under Section 408(k) of the code.
The tax rules applicable to these plans, including restrictions on contribu-
tions and benefits, taxation of distributions and any tax penalties, vary ac-
cording to the type of plan and its terms and conditions. Participants under
such plans, as well as contractowners, annuitants and beneficiaries, should 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 contracts. Purchasers of contracts for use with
any qualified plan, as well as plan participants, should consult counsel and
other advisors as to the suitability of the contracts to their specific needs,
and as to applicable code limitations and tax consequences.
MULTIPLE CONTRACTS
All contracts entered into after October 21, 1988, and issued by the same in-
surance company (or its affiliates) to the same contractowner during any cal-
endar year will be treated as a single contract for tax purposes.
INVESTOR CONTROL
The Treasury Department has indicated that guidelines may be issued under
which a variable annuity contract will not be treated as an annuity contract
for tax purposes if the contractowner has excessive control over the invest-
ments underlying the contract. They may consider the number of investment op-
tions or the number of transfer opportunities available between options as
relevant when determining excessive control. The issuance of those guidelines
may require us to impose limitations on your right to control the investment.
We do not know whether any such guidelines would have a retroactive effect.
Section 817(h) of the code and the related regulations that the Treasury De-
partment has adopted require that assets underlying a variable annuity con-
tract be adequately diversified. The regulations provide that a variable annu-
ity contract which does not satisfy the diversification standards will not be
treated as an annuity contract, unless the failure to satisfy the regulations
was inadvertent, the failure is corrected, and the contractowner or we pay an
amount to the IRS. The amount will be based on the tax that would have been
paid by the contractowner if the income, for the period the contract was not
diversified, had been received by the contractowner. If the failure to diver-
sify is not corrected in this manner, the contractowner of an annuity contract
will be deemed to be the owner of the underlying securities and will be taxed
on the earnings of his or her account. We believe, under our interpretation of
the code and regulations thereunder, that the investments underlying this con-
tract meet these diversification standards.
WITHHOLDING
Generally, pension and annuity distributions are subject to withholding for
the recipient's Federal income tax liability at rates that vary according to
the type of distribution and the recipient's tax status. Recipients, however,
generally are provided the opportunity to elect not to have tax withheld from
distributions. Under the Unemployment Compensation Amendments of 1992 (UCA),
20% income tax withholding may apply to eligible rollover distributions. All
taxable distributions from qualified plans (except IRAs) and Section 403(b)
annuities are eligible rollover distributions, except (1) annuities paid out
over life or life expectancy, (2) installments paid for a period spanning 10
years or more, and (3) required minimum distributions. The UCA imposes a man-
datory 20% income tax withholding on any eligible rollover distribution that
the contractowner does not elect to have paid in a direct rollover to another
qualified plan, Section 403(b) annuity or individual retirement account. Dis-
tributions from Section 457 plans are subject to the general wage withholding
rules.
VOTING RIGHTS
As required by law, we will vote the series shares held in the VAA at meetings
of the shareholders of the series. The voting will be done according to the
instructions of contractowners who have interests in any subaccounts which in-
vest in funds of the series. If the 1940 Act or any regulation under it should
be amended or if present interpretations should change, and if as a result we
determine that we are permitted to vote the series shares in our own right, we
may elect to do so.
The number of votes which you have the right to cast will be determined by ap-
plying your percentage interest in a subaccount to the total number of votes
attributable to the subaccount. In determining the number of votes, fractional
shares will be recognized. After the an-
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nuity commencement date, the votes attributable to a contract will decrease.
Series shares of a class held in a subaccount for which no timely instructions
are received will be voted by us in proportion to the voting instructions
which are received for all contracts participating in that subaccount. Voting
instructions to abstain on any item to be voted on will be applied on a pro-
rata basis to reduce the number of votes eligible to be cast.
Whenever a shareholder's meeting is called, each person having a voting inter-
est in a subaccount will receive proxy voting material, reports and other ma-
terials relating to the series. Since the series engages in shared funding,
other persons or entities beside Lincoln Life may vote series shares. See Sale
of fund shares by the series.
DISTRIBUTION OF THE CONTRACTS
American Funds Distributors, Inc. (AFD), 333 South Hope Street, Los Angeles,
Ca 90071, is the distributor and principal underwriter of the contracts. They
will be sold by properly licensed registered representatives of independent
broker-dealers which in turn have selling agreements with AFD and have been
licensed by state insurance departments to represent us. AFD is registered
with the SEC under the Securities Exchange Act of 1934 as a broker-dealer and
is a member of the National Association of Securities Dealers (NASD). Lincoln
Life will offer contracts in all states where it is licensed to do business.
RETURN PRIVILEGE
Within the free-look period after you receive the contract, you may cancel it
for any reason by delivering or mailing it postage pre-paid, to the home of-
fice at P.O. Box 2348, 1300 South Clinton Street, Fort Wayne, Indiana, 46801.
A contract canceled under this provision will be void. With respect to the
fixed portion of a contract, we will return purchase payments. With respect to
the VAA, except as explained in the following paragraph, we will return the
contract value as of the date of receipt of the cancellation, plus any con-
tract maintenance and administrative fees and any premium taxes which had been
deducted. No contingent deferred sales charge will be assessed. A purchaser
who participates in the VAA is subject to the risk of a market loss during the
free-look period.
For contracts written in those states whose laws require that we assume this
market risk during the free-look period, a contract may be canceled, subject
to the conditions explained before, except that we will return only the pur-
chase payment(s).
STATE REGULATION
As a life insurance company organized and operated under Indiana law, we are
subject to provisions governing life insurers and to regulation by the Indiana
Commissioner of Insurance.
Our books and accounts are subject to review and examination by the Indiana
Insurance Department at all times. A full examination of our operations is
conducted by that Department at least every five years.
RESTRICTIONS UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM
Title 8, Section 830.105 of the Texas Government Code, consistent with prior
interpretations of the Attorney General of the State of Texas, permits partic-
ipants 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 of higher education as de-
fined in Texas law;
2. Retirement; or
3. Death.
Accordingly, participants in the ORP will be required to obtain a certificate
of termination from their employer(s) before accounts can be redeemed.
20
<PAGE>
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 VAA. We
have entered into an agreement with the Delaware Management Company, 2005 Mar-
ket Street, Philadelphia, PA 19203, to provide accounting services, to the
VAA. We will mail to you, at your last known address of record at the home of-
fice, at least semiannually after the first contract year, reports containing
information required by the 1940 Act or any other applicable law or regula-
tion.
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 VAA, Lincoln Life and the contracts offered. Statements in this
Prospectus about the content of contracts
and other legal instruments are summaries. For the complete text of those con-
tracts and instruments, please refer to those documents as filed with the SEC.
Lincoln National Variable Annuity Account H and Lincoln National Flexible Pre-
mium Variable Life Accounts F, G and J (all registered as investment companies
under the 1940 Act) and Lincoln National Flexible Premium Group Variable Annu-
ity Accounts 50, 51 and 52 are all segregated investment accounts of Lincoln
Life which also invest in the series. The series also offers shares of the
funds to other segregated investment accounts.
PREPARING FOR YEAR 2000
Lincoln Life, as part of its year 2000 updating process, is responsible for
the updating of the VAA related computer systems. An affiliate of Lincoln
Life, Delaware Service Company (Delaware), provides substantially all of the
necessary accounting and valuation services for the VAA. Delaware, for its
part, is responsible for updating all of its computer systems, including those
which service the VAA, to accommodate the year 2000. Lincoln Life and Delaware
have begun formal discussions with each other to assess the requirements for
their respective systems to interface properly in order to facilitate the ac-
curate and orderly operation of the VAA 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 to systems, which would result in a temporary inability
to process transactions correctly and engage in normal business activities for
the VAA. The Companies respectively are redirecting significant portions of
their internal information technology efforts and are contracting, as needed,
with outside consultants to help update their systems to accommodate the year
2000. Also, in addition to the discussions with each other noted above, the
Companies have respectively initiated formal discussions with other critical
parties that interface with their systems to gain an understanding of the 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.
21
<PAGE>
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 ac-
tions 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.
Although the relief sought in these cases is substantial, the cases are in the
early stages of litigation, and it is premature to make assessments about
potential loss, if any. Management 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.
STATEMENT OF ADDITIONAL
INFORMATION TABLE OF
CONTENTS FOR
SEPARATE ACCOUNT E
<TABLE>
<CAPTION>
Item
- -----------------------------------------
<S> <C>
General information and history of
Lincoln Life
- -----------------------------------------
Special terms
- -----------------------------------------
Services
- -----------------------------------------
Principal underwriter
- -----------------------------------------
Purchase of securities being offered
- -----------------------------------------
</TABLE>
For a free copy of the SAI please see page one of this booklet.
<TABLE>
<CAPTION>
Item
- -------------------------------------------------
<S> <C>
Annuity payouts
- -------------------------------------------------
Federal tax status
- -------------------------------------------------
Automatic increase in the guaranteed minimum
death benefit
- -------------------------------------------------
Financial statements
- -------------------------------------------------
</TABLE>
22
<PAGE>
THE AMERICAN LEGACY
LINCOLN NATIONAL
VARIABLE ANNUITY ACCOUNT E (REGISTRANT)
LINCOLN NATIONAL
LIFE INSURANCE CO. (DEPOSITOR)
STATEMENT OF ADDITIONAL INFORMATION (SAI)
This SAI should be read in conjunction with the Prospectus of Lincoln National
Variable Annuity Account E dated April 30, 1998. You may obtain a copy of the
Account E Prospectus on request and without charge. Please write American Leg-
acy Customer Service, Lincoln National Life Insurance Co., P.O. Box 2348, Fort
Wayne, Indiana 46801 or call 1-800-942-5500.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
- ------------------------------------------
<S> <C>
GENERAL INFORMATION AND HISTORY OF
LINCOLN LIFE B-2
- ------------------------------------------
SPECIAL TERMS B-2
- ------------------------------------------
SERVICES B-2
- ------------------------------------------
PRINCIPAL UNDERWRITER B-2
- ------------------------------------------
PURCHASE OF SECURITIES BEING OFFERED B-2
- ------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Page
-
<S> <C>
ANNUITY PAYOUTS B-2
-
FEDERAL TAX STATUS B-3
-
AUTOMATIC INCREASE IN THE GUARANTEED
MINIMUM DEATH BENEFIT B-6
-
FINANCIAL STATEMENTS B-6
-
</TABLE>
The date of this SAI is April 30, 1998.
<PAGE>
GENERAL INFORMATION AND HISTORY OF LINCOLN NATIONAL LIFE INSURANCE CO.
(LINCOLN LIFE)
The prior Depositor of the Account, Lincoln National Pension Insurance Compa-
ny, was merged into Lincoln Life, effective January 1, 1989. Lincoln Life, or-
ganized in 1905, is an Indiana stock insurance corporation, engaged primarily
in the direct issuance of annuities and life and health insurance contracts,
and is also a professional reinsurer. Lincoln Life is wholly owned by Lincoln
National Corporation (LNC), a publicly held insurance holding company domi-
ciled in Indiana.
SPECIAL TERMS
The special terms used in this SAI are the ones defined in the Prospectus. In
connection with the term, valuation date, the NYSE is currently closed on
weekends and on these holidays: 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. If any of these holidays occurs on a week-
end day, the Exchange may also be closed on the business day occurring just
before or just after the holiday.
SERVICES
INDEPENDENT AUDITORS
The financial statements of the variable annuity account (VAA) and the statu-
tory-basis financial statements and schedules of Lincoln Life appearing in
this SAI and registration statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports which also appear else-
where in this document and in the Registration Statement. The financial state-
ments and schedules audited by Ernst & Young, LLP have been included in this
document in reliance on their report given on their authority as experts in
accounting and auditing.
KEEPER OF RECORDS
All accounts, books, records and other documents which are required to be
maintained for the VAA are maintained by Lincoln Life or by third parties re-
sponsible to Lincoln Life. We have entered into an agreement with the Delaware
Management Company, 2005 Market Street, Philadelphia, PA 19203, to provide
accounting services to the VAA. No separate charge against the assets of the
VAA is made by Lincoln Life for this service.
PRINCIPAL UNDERWRITER
Lincoln Life has contracted with American Funds Distributors, Inc. (AFD), 333
South Hope St., Los Angeles, California 90071, a licensed broker-dealer, to
distribute the contracts through certain legally authorized sales persons and
organizations (brokers). AFD and its brokers are compensated under a standard
compensation schedule.
PURCHASE OF SECURITIES BEING OFFERED
The contracts are no longer being offered. Although there are no special pur-
chase plans for any class of prospectus buyers, the contingent deferred sales
charge normally assessed upon surrender or withdrawal of contract value will
be waived for officers, directors or bona fide full time employees of the LNC,
the Capital Group, Inc., their affiliated or managed companies and certain
other persons. See Contingent deferred sales charges in the Prospectus.
Both before and after the annuity commencement date, there are exchange privi-
leges between subaccounts, and from the VAA to the General Account, subject to
restrictions set out in the Prospectus. See The contracts, in the Prospectus.
No exchanges are permitted between the VAA and other separate accounts.
ANNUITY PAYOUTS
VARIABLE ANNUITY PAYOUTS
Variable annuity payouts will be determined on the basis of: (1) the dollar
value of the contract before the annuity commencement date; (2) the annuity
tables contained in the contract; (3) the type of annuity option selected; and
(4) the investment results of the fund(s) selected. In order to determine the
amount of variable annuity payouts, Lincoln Life makes the following calcula-
tion: first, it determines the dollar amount of the first payout; second, it
credits the contract with a fixed number of annuity units based on the amount
of the first payout; and third, it calculates the value of the annuity units
each period thereafter. These steps are explained as follows.
The dollar amount of the first periodic variable annuity payout is determined
by applying the total value of the accumulation units credited under the con-
tract valued as of the annuity commencement date (less any premium taxes) to
the annuity tables contained in the contract. The first variable annuity pay-
out will be paid 14 days after the annuity commencement date. This day of the
month will become the day on which all future annuity payouts will be paid.
Amounts shown in the tables are based on
B-2
<PAGE>
the 1971 Individual Annuity Mortality Tables, modified, with an assumed in-
vestment return at the rate of 4% per annum. The first annuity payout is de-
termined by multiplying the benefit per $1,000 of value shown in the contract
tables by the number of thousands of dollars of value accumulated under the
contract. These annuity tables vary according to the form of annuity selected
and the age of the annuitant at the annuity commencement date. The 4% interest
rate stated above is the measuring point for subsequent annuity payouts. If
the actual net investment rate (annualized) exceeds 4%, the payout will in-
crease at a rate equal to the amount of such excess. Conversely, if the actual
rate is less than 4%, annuity payouts will decrease. If the assumed rate of
interest were to be increased, annuity payouts would start at a higher level
but would decrease more rapidly or increase more slowly.
Lincoln Life may use sex distinct annuity tables in contracts that are not as-
sociated with employer sponsored plans and where not prohibited by law.
At the annuity commencement date, the contract is credited with annuity units
for each subaccount on which variable annuity payouts are based. The number of
annuity units to be credited is determined by dividing the amount of the first
periodic payout by the value of an annuity unit in each subaccount selected.
Although the number of annuity units is fixed by this process, the value of
such units will vary with the value of the underlying fund. The amount of the
second and subsequent annuity payouts is determined by multiplying the
contractowner's fixed number of annuity units in each subaccount by the appro-
priate annuity unit value for the valuation date ending 14 days before the
date that payout is due.
The value of each subaccount's annuity unit will be set initially at $1.00.
The annuity unit value for each subaccount at the end of any valuation date is
determined by multiplying the subaccount annuity unit value for the immedi-
ately preceding valuation date by the product of:
a. The net investment factor of the subaccount for the valuation period for
which the annuity unit value is being determined, and
b. A factor to neutralize the assumed investment return in the annuity table.
The value of the annuity units is determined as of a valuation date 14 days
before the payout date in order to permit calculation of amounts of annuity
payouts and mailing of checks in advance of their due dates. Such checks will
normally be issued and mailed at least three days before the due date.
PROOF OF AGE, SEX AND SURVIVAL
Lincoln Life may require proof of age, sex or survival of any payee upon whose
age, sex or survival payouts depend.
FEDERAL TAX STATUS
GENERAL
The operations of the VAA form a part of, and are taxed with, the operations
of Lincoln Life under the Internal Revenue Code of 1986, as amended (the
code). Investment income and realized net capital gains on the assets of the
VAA are reinvested and taken into account in determining the accumulation and
annuity unit values. As a result, such investment income and realized net cap-
ital gain are automatically retained as part of the reserves under the con-
tract. Under existing federal income tax law, Lincoln Life believes that the
VAA investment income and realized net capital gain are not taxed to the ex-
tent they are retained as part of the reserves under the contract. According-
ly, Lincoln Life does not anticipate that it will incur any federal income tax
liability attributable to the VAA, and therefore it does not intend to make
any provision for such taxes. However, if changes in the federal tax laws or
interpretations thereof result in Lincoln Life's being taxed on income or gain
attributable to the VAA, then Lincoln Life may impose a charge against the VAA
(with respect to some or all contracts) in order to make provision for payment
of such taxes.
TAX STATUS OF NONQUALIFIED CONTRACTS
Section 817(h) of the code provides that separate account investments (or the
investments of a mutual fund the shares of which are owned by separate ac-
counts of insurance companies) underlying the contract be adequately diversi-
fied in accordance with Treasury regulations in order for the contract to
qualify as an annuity contract under Section 72 of the code. The VAA, through
each of the funds, intends to comply with the diversification requirements
prescribed in regulations, which affect how the assets in each of the funds in
which the VAA invests may be invested. Capital Research and Management Company
is not affiliated with Lincoln Life and Lincoln Life does not have control
over the series or its investments. However, Lincoln Life believes that each
fund in which the VAA owns shares will meet the diversification requirements
and that therefore the contracts will be treated as annuities under the code.
The regulations relating to diversification requirements do not provide guid-
ance concerning the extent to which contractowners may direct their invest-
ments to particular subaccounts of a separate account. When guidance is pro-
vided, the contract may need to be modified to comply with that guidance. For
these reasons, Lincoln Life reserves the right to modify the contract as nec-
essary to prevent the contractowner from being considered the owner of the as-
sets of the VAA.
In addition, Section 72(s) of the code provides that contracts issued after
January 18, 1995, will not be treated
B-3
<PAGE>
as annuity contracts for purposes of Section 72 unless the contract provides
that (1) if any contractowner dies on or after the annuity starting date be-
fore the time the entire interest in the contract has been distributed, the
remaining portion of such interest must be distributed at least as rapidly as
under the method of distribution in effect at the time of the contractowner's
death; and (2) if any contractowner dies before the annuity starting date, the
entire interest must be distributed within five years after the death of the
contractowner. These requirements are considered satisfied if any portion of
the contractowner's interest that is payable to or for the benefit of a desig-
nated 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 contractowner's death. The
designated beneficiary must be a natural person. However, the contract may be
continued in the name of the contractowner's surviving spouse as the
contractowner. Contracts issued after January 18, 1995, contain provisions in-
tended to comply with these code requirements. No regulations interpreting
these requirements have yet been issued. Thus, no assurance can be given that
the provisions contained in contracts issued after January 18, 1995 satisfy
all such code requirements. However, Lincoln Life believes that such provi-
sions in such contracts meet these requirements. Lincoln Life intends to re-
view such provisions and modify them as necessary to assure that they comply
with the requirements of Section 72(s) when clarified by regulation or other-
wise.
TAX STATUS OF CONTRACTS USED WITH CERTAIN PLANS
The rules governing the tax treatment of contributions and distributions under
qualified plans, as set forth in the code and applicable rulings and regula-
tions, 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 Lincoln Life's un-
derstanding of the current federal tax laws as interpreted by the IRS. Pur-
chasers of contracts for use with such a plan and plan participants should
consult counsel and other competent advisors as to the suitability of the plan
and the contract to their specific needs, and as to applicable code limita-
tions and tax consequences. Participants under such plans, as well as
contractowners, 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 con-
ditions 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 501(C)(3)
ORGANIZATIONS [SECTION 403(B) PLANS]
Payments made to purchase annuity contracts by public school systems or
501(c)(3) organizations for their employees are excludable from the gross in-
come 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
over-all 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 ei-
ther in the form of annuity payments, in a single sum, or a withdrawal.
If an employee's individual account is surrendered, usually the full amount
received would be includable in income for that year at ordinary rates.
QUALIFIED CORPORATE EMPLOYEE'S PENSION
AND PROFIT-SHARING TRUSTS AND QUALIFIED
ANNUITY PLANS
Payments made by a corporate employer and the increments on all payments for
qualified corporate plans are not taxable as income to the employee until dis-
tributed. However, the employee may be required to include these amounts in
gross income before distribution if the qualified plan or trust loses its
qualification. Corporate plans qualified under Section 401(a) or 403(a) of the
code are subject to extensive rules, including limitations on maximum contri-
butions or benefits. For plan years beginning after December 31, 1996, tax ex-
empt organizations, except state and local governments, 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 59 1/2, taxable gain may be eligible for
special lump sum averaging treatment. These special tax rules are not avail-
able 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
B-4
<PAGE>
rules in addition to those applicable to qualified corporate plans, although
certain of these rules have been repealed or modified effective in 1984. Pur-
chasers of the contracts for use with H.R. 10 plans should seek competent ad-
vice 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 (or $4,000 if IRAs
are maintained for both the individual and his nonworking spouse) or 100% of
compensation. However, IRA contributions may be nondeductible in whole or in
part if (1) the individual or his spouse is an active participant in certain
other retirement programs and (2) the income of the individual (or of the in-
dividual and his spouse) exceeds a specified amount. Distributions from cer-
tain other IRA plans or qualified plans may be rolled over to an IRA on a tax
deferred basis without regard to the limit on contributions, provided certain
requirements are met. Distributions from IRA's are subject to certain restric-
tions. Deductible IRA contributions and all IRA earnings will be taxed as or-
dinary income when distributed. The failure to satisfy certain code require-
ments with respect to an IRA may result in adverse tax consequences.
DEFERRED COMPENSATION PLANS
(SECTION 457 PLANS)
Under the code provisions, employees and independent contractors (partici-
pants) performing services for state and local governments and tax-exempt or-
ganizations may establish deferred compensation plans. 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 sponsor-
ing 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 as-
sets 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 bene-
ficiary. Deferrals are taxed as compensation from the employer when they are
actually or constructively received by the employee. As a general rule, the
maximum amount which can be deferred in any one year is the lesser of $7,500
or 33 1/3% of the participant's includable compensation. However, in the lim-
ited circumstances, up to $15,000 may be deferred in each of the last three
years before retirement.
SIMPLIFIED EMPLOYEE PENSION PLANS [SECTION 408(K)]
An employer may make contributions on behalf of employees to a simplified em-
ployee pension plan (SEP) as provided by Section 408(k) of the code. The con-
tributions and distribution dates are limited by the code provisions. All dis-
tributions 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 dis-
ability) or the failure to satisfy certain other code requirements may result
in adverse tax consequences. For tax years after 1996, salary reductions SEPs
(SAR/SEP) may no longer be established. However, SAR/SEPs in existence before
January 1, 1997 may continue to receive contributions.
TAX ON DISTRIBUTIONS FROM QUALIFIED CONTRACTS
The following rules generally apply to distributions from contracts purchased
in connection with the plans discussed above, other than 457 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 (gen-
erally, the employee's own nondeductible contributions) constitutes his in-
vestment in the contract. If a distribution is made in the form of annuity
payouts, the employee's investment in the contract (adjusted for certain re-
fund provisions) divided by his life expectancy (or other period for which an-
nuity payouts are expected to be made) constitutes a tax-free return of capi-
tal each year. The dollar amount of annuity payouts 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. Notwithstanding the above, if the
employee's annuity starting date was on or before July 1, 1986 and if his in-
vestment in the contract will be recovered within three years of his annuity
starting date, no amount is included in income until he has fully recovered
such investment. For amounts distributed after 1986, new rules generally pro-
vide that all distributions which are not received as an annuity will be taxed
as a pro rata distribution of taxable and nontaxable amounts (rather than as a
distribution first of nontaxable amounts).
If a surrender of or withdrawal from the contract is effected and a distribu-
tion is made in a single payout, the proceeds may qualify for special lump-sum
distribution treatment under certain qualified plans, as discussed previously.
Otherwise, the amount by which the payout exceeds the investment in the con-
tract (adjusted for any prior withdrawals) allocated to that payout, if any,
will be taxed as ordinary income in the year of receipt.
B-5
<PAGE>
Distributions from qualified plans, 403(b) plans and IRAs will be subject to
(1) a 10% penalty tax if made before age 59 1/2 unless certain other excep-
tions apply, and (2) except during 1997, 1998, and 1999, a 15% penalty tax on
combined annual distributions in excess of $150,000 (as indexed), subject to
various special rules. Failure to meet certain minimum distribution require-
ments 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 annuitant's death, the taxation of benefits payable to his beneficiary
generally follow these same principles, subject to a variety of special rules.
OTHER CONSIDERATIONS
It should be understood that the foregoing comments about the federal tax con-
sequences 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 for-
eign tax laws. In recent years, numerous changes have been made in the federal
income tax treatment of contracts and retirement plans, which are not fully
discussed above. Before an investment is made in any of the above plans, a tax
advisor should be consulted.
AUTOMATIC INCREASE IN THE GUARANTEED MINIMUM DEATH BENEFIT
Subject to the following terms and conditions, once a contract has been in
force for a certain period, Lincoln Life will automatically increase the guar-
anteed minimum death benefit (GMDB):
Lincoln Life will automatically increase the GMDB, separately for each con-
tract year's purchase payment(s), effective upon the seventh anniversary of
each eligible contract year in which those payments were made (as the contin-
gent deferred sales charge expires on those payments).
The attributable gain (AG), used to increase the GMDB, will be calculated
based on the contract value at the close of business on the last valuation
date preceding the seventh anniversary of the contract year for which the in-
crease is made. The AG will be the amount which results from allocating the
total appreciation in the contract to each contract year's purchase payments
adjusted by withdrawals on a first-in-first out (FIFO) basis based on Lincoln
Life's internal rate of return (IRR) calculation (as described below).
If a single purchase payment was deposited or multiple deposits were made in
the first contract year only, then, upon adjustment, the increased GMDB will
be the contract value on the seventh contract anniversary. However, if con-
tract value is less than net purchase payments, the GMDB will not be adjusted.
If purchase payments have been deposited in multiple contract years, then,
upon adjustment, the increased GMDB will be the sum of all purchase payments
plus any attributable gain, as calculated for each contract year which has
reached its seventh anniversary, minus any withdrawals, partial annuitizations
and premium taxes incurred.
The IRR is the level compound rate of return, calculated by Lincoln Life, at
which purchase payments less withdrawals will accumulate to the contract value
on the contract anniversary beginning with the seventh anniversary. The appli-
cation of the IRR methodology to any particular contract year could allocate
gain, if any, in a manner which does not precisely correlate with the con-
tract's actual investment experience for a particular contract year or
subaccount. The calculation of the IRR assumes all purchase payments and with-
drawals occur at the beginning of the contract year in which they were made.
Once the IRR has been determined, the gain attributable to each contract year
is calculated by applying the IRR to the purchase payments, less any withdraw-
als applied on a FIFO basis.
FINANCIAL STATEMENTS
Financial statements for the VAA and Lincoln Life appear on the following
pages. For more information about the financial statements for the company
provided in this SAI, please see the cover page of this SAI.
B-6
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT E
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Percent Growth-
of Net Income Growth
Assets Combined Account Account
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments in American
Variable Insurance Series at
net asset value:
. Growth-Income Fund-
12,695,837,077 shares at
$36.42 per share (cost-
$309,899,216) 50.4% $462,382,386 $462,382,386
-------------------------------
. Growth Fund-6,295,754, 525
shares at $44.98 per share
(cost-$194,316,712) 30.9 283,183,488 $283,183,488
-------------------------------
. Asset Allocation Fund-
1,085,551,796 shares at
$15.32 per share (cost-
$15,070,247) 1.8 16,630,654
-------------------------------
. High-Yield Bond Fund-
3,525,026,878 shares at
$14.66 per share (cost-
$47,845,751) 5.6 51,676,925
-------------------------------
. U.S. Government/AAA-Rated
Securities Fund-3,057,872,962
shares at $11.10 per share
(cost-$33,456,334) 3.7 33,940,170
-------------------------------
. Cash Management Fund-
1,044,378,380 shares at
$11.01 per share (cost-
$11,570,736) 1.3 11,498,606
-------------------------------
. International Fund-
3,553,046,565 shares at
$14.48 per share (cost-
$50,128,583) 5.6 51,448,114
-------------------------------
. Bond Fund-266,011,478 shares
at $10.43 per share (cost-
$2,709,839) 0.3 2,774,500
-------------------------------
. Global Growth Fund-
322,300,484 shares at $10.78
per share (cost-$3,487,921) 0.4 3,474,399
------------------------------- ----- ------------ ------------ ------------
TOTAL INVESTMENTS AND TOTAL
ASSETS
(Cost-$668,285,139) 100.0 917,009,242 462,382,386 283,183,488
- --------------------------------
LIABILITY--Payable to The
Lincoln National Life Insurance
Company 0.0 31,374 15,813 9,661
- -------------------------------- ----- ------------ ------------ ------------
NET ASSETS 100.0% $916,977,868 $462,366,573 $283,173,827
===== ============ ============ ============
Net assets are represented by:
Legacy I without guaranteed
minimum death benefit
. Units in accumulation period 143,541,423 79,286,918
-------------------------------
. Annuity reserves units 807,815 395,292
-------------------------------
. Unit value $ 3.177 $ 3.525
-------------------------------
. Value in accumulation period 456,000,283 279,484,697
-------------------------------
. Annuity reserves 2,566,255 1,393,392
------------------------------- ------------ ------------
458,566,538 280,878,089
------------ ------------
Legacy I with guaranteed
minimum death benefit
. Units in accumulation period 1,196,919 651,636
-------------------------------
. Unit value $ 3.175 $ 3.523
-------------------------------
. Value in accumulation period 3,800,035 2,295,738
------------------------------- ------------ ------------
TOTAL NET ASSETS $462,366,573 $283,173,827
============ ============
</TABLE>
See accompanying notes.
B-7
<PAGE>
<TABLE>
<CAPTION>
U.S.
Government/
Asset High-Yield AAA-Rated Cash Global
Allocation Bond Securities Management International Bond Growth
Account Account Account Account Account Account Account
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$16,630,654
$51,676,925
$33,940,170
$11,498,606
$51,448,114
$2,774,500
$3,474,399
----------- ----------- ----------- ----------- ----------- ---------- ----------
16,630,654 51,676,925 33,940,170 11,498,606 51,448,114 2,774,500 3,474,399
569 1,771 1,161 395 1,791 95 118
----------- ----------- ----------- ----------- ----------- ---------- ----------
$16,630,085 $51,675,154 $33,939,009 $11,498,211 $51,446,323 $2,774,405 $3,474,281
=========== =========== =========== =========== =========== ========== ==========
9,518,993 18,707,397 17,974,764 7,105,104 36,401,025 2,350,047 3,197,019
117,167 112,784 105,204 52,457 132,812 87,195 19,619
$ 1.717 $ 2.716 $ 1.862 $ 1.560 $ 1.393 $ 1.137 $ 1.077
16,344,709 50,816,152 33,463,941 11,083,987 50,724,285 2,672,963 3,441,970
201,183 306,361 195,859 81,834 185,071 99,178 21,123
----------- ----------- ----------- ----------- ----------- ---------- ----------
16,545,892 51,122,513 33,659,800 11,165,821 50,909,356 2,772,141 3,463,093
----------- ----------- ----------- ----------- ----------- ---------- ----------
49,069 203,599 150,093 213,244 385,609 1,992 10,400
$ 1.716 $ 2.714 $ 1.860 $ 1.559 $ 1.393 $ 1.136 $ 1.076
84,193 552,641 279,209 332,390 536,967 2,264 11,188
----------- ----------- ----------- ----------- ----------- ---------- ----------
$16,630,085 $51,675,154 $33,939,009 $11,498,211 $51,446,323 $2,774,405 $3,474,281
=========== =========== =========== =========== =========== ========== ==========
</TABLE>
B-8
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT E
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Growth- Asset
Income Growth Allocation
Combined Account Account Account
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Investment Income:
.Dividends from investment
income $ 19,279,249 $ 8,571,925 $ 1,541,526 $ 493,992
- ---------------------------
.Dividends from net
realized gains on
investments 84,381,126 43,720,729 33,874,592 891,458
- ---------------------------
Mortality and expense
guarantees:
.Legacy I without
guaranteed minimum death
benefit (11,003,344) (5,518,736) (3,334,730) (170,022)
- ---------------------------
.Legacy I with guaranteed
minimum death benefit (19,520) (10,836) (4,653) (195)
- --------------------------- ------------ ----------- ----------- ----------
NET INVESTMENT INCOME 92,637,511 46,763,082 32,076,735 1,215,233
- ---------------------------
Net realized and unrealized
gain (loss) on investments:
.Net realized gain (loss)
on investments 36,167,339 18,719,451 15,157,912 195,674
- ---------------------------
.Net change in unrealized
appreciation or
depreciation on
investments 47,580,272 29,836,639 19,220,263 818,918
- --------------------------- ------------ ----------- ----------- ----------
NET GAIN (LOSS) ON
INVESTMENTS 83,747,611 48,556,090 34,378,175 1,014,592
- --------------------------- ------------ ----------- ----------- ----------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING FROM
OPERATIONS $176,385,122 $95,319,172 $66,454,910 $2,229,825
- --------------------------- ============ =========== =========== ==========
</TABLE>
See accompanying notes.
B-9
<PAGE>
<TABLE>
<CAPTION>
U.S.
Government/
High-Yield AAA-Rated Cash Global
Bond Securities Management International Bond Growth
Account Account Account Account Account Account
- ----------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <S>
$4,401,863 $2,398,267 $ 643,099 $ 1,074,837 $137,349 $ 16,391
535,506 -- -- 5,320,222 31,624 6,995
(634,880) (449,029) (160,929) (689,831) (28,226) (16,961)
(907) (907) (1,075) (891) (15) (41)
---------- ---------- --------- ----------- -------- --------
4,301,582 1,948,331 481,095 5,704,337 140,732 6,384
594,175 33,776 26,232 1,422,318 18,252 (451)
413,269 426,825 (17,868) (3,134,977) 30,725 (13,522)
---------- ---------- --------- ----------- -------- --------
1,007,444 460,601 8,364 (1,712,659) 48,977 (13,973)
---------- ---------- --------- ----------- -------- --------
$5,309,026 $2,408,932 $ 489,459 $ 3,991,678 $189,709 $ (7,589)
========== ========== ========= =========== ======== ========
</TABLE>
B-10
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT E
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Growth- Asset
Income Growth Allocation
Combined Account Account Account
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSETS AT JANUARY 1,
1996 $785,886,436 $377,008,450 $250,263,703 $ 6,613,785
Changes from operations:
. Net investment income 59,473,574 33,061,425 16,167,805 897,804
- --------------------------
. Net realized gain
(loss) on investments 29,343,024 14,407,411 13,669,140 183,214
- --------------------------
. Net change in
unrealized appreciation
or depreciation on
investments 15,593,387 14,952,347 (2,339,414) 111,594
- -------------------------- ------------ ------------ ------------ -----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 104,409,985 62,421,183 27,497,531 1,192,612
- --------------------------
Net increase (decrease)
from unit transactions (68,622,458) (33,352,157) (28,546,710) 2,581,154
- -------------------------- ------------ ------------ ------------ -----------
TOTAL INCREASE (DECREASE)
IN NET ASSETS 35,787,527 29,069,026 (1,049,179) 3,773,766
- -------------------------- ------------ ------------ ------------ -----------
NET ASSETS AT DECEMBER 31,
1996 821,673,963 406,077,476 249,214,524 10,387,551
- --------------------------
Changes from operations:
. Net investment income 92,637,511 46,763,082 32,076,735 1,215,233
- --------------------------
. Net realized gain
(loss) on investments 36,167,339 18,719,451 15,157,912 195,674
- --------------------------
. Net change in
unrealized appreciation
or depreciation on
investments 47,580,272 29,836,639 19,220,263 818,918
- -------------------------- ------------ ------------ ------------ -----------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING FROM
OPERATIONS 176,385,122 95,319,172 66,454,910 2,229,825
- --------------------------
Net increase (decrease)
from unit transactions (81,081,217) (39,030,075) (32,495,607) 4,012,709
- -------------------------- ------------ ------------ ------------ -----------
TOTAL INCREASE (DECREASE)
IN NET ASSETS 95,303,905 56,289,097 33,959,303 6,242,534
- -------------------------- ------------ ------------ ------------ -----------
NET ASSETS AT DECEMBER 31,
1997 $916,977,868 $462,366,573 $283,173,827 $16,630,085
- -------------------------- ============ ============ ============ ===========
</TABLE>
See accompanying notes.
B-11
<PAGE>
<TABLE>
<CAPTION>
U.S.
Government/
High-Yield AAA-Rated Cash Global
Bond Securities Management International Bond Growth
Account Account Account Account Account Account
- ----------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <S>
$52,323,004 $49,690,451 $14,771,446 $35,215,597 $ -- $ --
3,902,701 2,646,843 501,647 2,257,758 37,591 --
546,963 196,545 33,734 307,274 (1,257) --
1,230,568 (2,286,249) 15,487 3,874,918 34,136 --
----------- ----------- ----------- ----------- ---------- ----------
5,680,232 557,139 550,868 6,439,950 70,470 --
(7,187,721) (10,873,838) (894,132) 7,963,293 1,687,653 --
----------- ----------- ----------- ----------- ---------- ----------
(1,507,489) (10,316,699) (343,264) 14,403,243 1,758,123 --
----------- ----------- ----------- ----------- ---------- ----------
50,815,515 39,373,752 14,428,182 49,618,840 1,758,123 --
4,301,582 1,948,331 481,095 5,704,337 140,732 6,384
594,175 33,776 26,232 1,422,318 18,252 (451)
413,269 426,825 (17,868) (3,134,977) 30,725 (13,522)
----------- ----------- ----------- ----------- ---------- ----------
5,309,026 2,408,932 489,459 3,991,678 189,709 (7,589)
(4,449,387) (7,843,675) (3,419,430) (2,164,195) 826,573 3,481,870
----------- ----------- ----------- ----------- ---------- ----------
859,639 (5,434,743) (2,929,971) 1,827,483 1,016,282 3,474,281
----------- ----------- ----------- ----------- ---------- ----------
$51,675,154 $33,939,009 $11,498,211 $51,446,323 $2,774,405 $3,474,281
=========== =========== =========== =========== ========== ==========
</TABLE>
B-12
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
B-13
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT E
NOTES TO FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
THE ACCOUNT: Lincoln National Variable Annuity Account E (the Variable Ac-
count) is a segregated investment account of The Lincoln National Life Insur-
ance Company (the Company) and is registered under the Investment Company Act
of 1940, as amended, as a unit investment trust. The Variable Account consists
of one product offering a guaranteed minimum death benefit (GMDB) rider op-
tion.
INVESTMENTS: The Variable Account invests in the American Variable Insurance
Series (AVIS) which consist of nine funds: Growth-Income Fund, Growth Fund,
Asset Allocation Fund, High-Yield Bond Fund, U.S. Government/AAA Rated Securi-
ties Fund, Cash Management Fund, International Fund, Bond Fund and Global
Growth Fund (the Funds). Investments in the funds are stated at the closing
net asset value per share on December 31, 1997. AVIS is registered as an open-
ended management investment company.
Investment transactions are accounted for on a trade date-basis and dividend
income is recorded on the ex-dividend date. The cost of investments sold is
determined by the average-cost method.
DIVIDENDS: Dividends paid to the Variable Account are automatically reinvested
in shares of the Funds on the payable date.
FEDERAL INCOME TAXES: Operations of the Variable Account form a part of and
are taxed with operations of the Company, which is taxed as a "life insurance
company" under the Internal Revenue Code. Using current law, no federal income
taxes are payable with respect to the Variable Account's net investment income
and the net realized gain on investments.
ANNUITY RESERVES: Reserves on contracts not involving life contingencies are
calculated using an assumed investment rate of 4%. Reserves on contracts in-
volving life contingencies are calculated using a modification of the 1971 In-
dividual Annuitant Mortality Table and an assumed investment rate of 4%.
2. MORTALITY AND EXPENSE GUARANTEES AND OTHER TRANSACTIONS WITH AFFILIATE
Amounts are paid to the Company for mortality and expense guarantees at a per-
centage of the Variable Account each day. The rates are as follows:
. Legacy I at a daily rate of .0034247% (1.25% on an annual basis)
. Legacy I with GMDB at a daily rate of .00383561643% (1.40% on an annual ba-
sis)
In addition, amounts retained by the Company from the proceeds of the sales of
annuity contracts for contract charges and surrender charges were as follows
during 1997.
<TABLE>
<S> <C>
Growth-Income Account $358,605
- --------------------------------------------
Growth Account 234,360
- --------------------------------------------
Asset Allocation Account 8,549
- --------------------------------------------
High-Yield Bond Account 40,106
- --------------------------------------------
U.S. Government/AAA-Rated Securities Account 30,592
- --------------------------------------------
Cash Management Account 23,807
- --------------------------------------------
International Account 44,824
- --------------------------------------------
Bond Account 2,006
- --------------------------------------------
Global Growth 821
- -------------------------------------------- --------
$743,670
========
</TABLE>
Accordingly, the Company is responsible for all sales, general, and adminis-
trative expenses applicable to the Variable Account.
B-14
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT E
NOTES TO FINANCIAL STATEMENTS CONTINUED
3. NET ASSETS
Net Assets at December 31, 1997 consisted of the following:
<TABLE>
<CAPTION>
Growth- Asset
Income Growth Allocation
Combined Account Account Account
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Unit Transactions:
Accumulation units $192,185,335 $ 82,238,133 $ 41,905,428 $11,842,135
- ---------------------------
Annuity reserves 1,996,818 973,539 191,060 167,086
- --------------------------- ------------ ------------ ------------ -----------
194,182,153 83,211,672 42,096,488 12,009,221
Accumulated net investment
income 345,155,335 170,189,236 87,871,828 2,639,184
- ---------------------------
Accumulated net realized
gain (loss) on investments 128,916,277 56,282,495 64,338,735 421,273
- ---------------------------
Net unrealized appreciation
(depreciation) on
investments 248,724,103 152,683,170 88,866,776 1,560,407
- --------------------------- ------------ ------------ ------------ -----------
$916,977,868 $462,366,573 $283,173,827 $16,630,085
============ ============ ============ ===========
</TABLE>
B-15
<PAGE>
<TABLE>
<CAPTION>
U.S.
Government/
High-Yield AAA-Rated Cash Global
Bond Securities Management International Bond Growth
Account Account Account Account Account Account
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$8,512,096 $2,700,471 $ 839,282 $38,270,884 $2,415,310 $3,461,596
186,782 141,164 54,983 163,014 98,916 20,274
- ----------- ----------- ----------- ----------- ---------- ----------
8,698,878 2,841,635 894,265 38,433,898 2,514,226 3,481,870
36,672,962 28,029,342 9,448,894 10,119,182 178,323 6,384
2,472,140 2,584,196 1,227,182 1,573,712 16,995 (451)
3,831,174 483,836 (72,130) 1,319,531 64,861 (13,522)
- ----------- ----------- ----------- ----------- ---------- ----------
$51,675,154 $33,939,009 $11,498,211 $51,446,323 $2,774,405 3,474,281
=========== =========== =========== =========== ========== ==========
</TABLE>
4. SUMMARY OF CHANGES FROM UNIT TRANSACTIONS
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996
Units Amount Units Amount
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GROWTH-INCOME ACCOUNT
Accumulation Units:
Contract purchases 9,515,366 $27,854,605 10,540,136 $24,373,803
- --------------------------
Terminated contracts and
transfers to annuity
reserves (22,897,340) (67,107,967) (24,707,912) (57,905,158)
- -------------------------- ----------- ----------- ----------- -----------
(13,381,974) (39,253,362) (14,167,776) (33,531,355)
Annuity Reserves:
Transfers from
accumulation units and
between accounts 186,169 569,607 216,750 490,036
- --------------------------
Annuity payments (121,199) (352,637) (106,398) (214,250)
- --------------------------
Reimbursement of mortality
guarantee adjustment 2,034 6,317 (38,281) (96,588)
- -------------------------- ----------- ----------- ----------- -----------
67,004 223,287 72,071 179,198
GROWTH ACCOUNT
Accumulation Units:
Contract purchases 7,413,667 23,374,570 12,024,738 30,187,898
- --------------------------
Terminated contracts and
transfers to annuity
reserves (17,898,720) (55,799,816) (23,311,473) (58,691,504)
- -------------------------- ----------- ----------- ----------- -----------
(10,485,053) (32,425,246) (11,286,735) (28,503,606)
Annuity Reserves:
Transfers from
accumulation units and
between accounts 38,047 123,024 45,043 118,037
- --------------------------
Annuity payments (61,157) (192,532) (60,964) (162,288)
- --------------------------
Receipt (reimbursement) of
mortality guarantee
adjustment (250) (853) 415 1,147
- -------------------------- ----------- ----------- ----------- -----------
(23,360) (70,361) (15,506) (43,104)
</TABLE>
B-16
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT E
NOTES TO FINANCIAL STATEMENTS CONTINUED
4. SUMMARY OF CHANGES FROM UNIT TRANSACTIONS CONTINUED
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996
Units Amount Units Amount
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSET ALLOCATION ACCOUNT
Accumulation Units:
Contract purchases 4,674,927 6,947,952 3,807,410 5,011,478
- ---------------------------
Terminated contracts and
transfers to annuity
reserves (2,249,293) (3,037,757) (1,832,754) (2,404,180)
- --------------------------- ---------- ----------- ---------- -----------
2,425,634 3,910,195 1,974,656 2,607,298
Annuity Reserves:
Transfers from accumulation
units and between accounts 96,585 163,028 8,829 11,835
- ---------------------------
Annuity payments (35,734) (60,514) (26,398) (37,979)
- --------------------------- ---------- ----------- ---------- -----------
60,851 102,514 (17,569) (26,144)
HIGH-YIELD BOND ACCOUNT
Accumulation Units:
Contract purchases 2,099,112 5,624,882 1,860,645 4,292,963
- ---------------------------
Terminated contracts and
transfers to annuity
reserves (3,877,455) (10,168,247) (5,038,600) (11,563,870)
- --------------------------- ---------- ----------- ---------- -----------
(1,778,343) (4,543,365) (3,177,955) (7,270,907)
Annuity Reserves:
Transfers from accumulation
units and between accounts 60,368 160,790 64,776 150,749
- ---------------------------
Annuity payments (25,820) (67,342) (23,781) (55,464)
- ---------------------------
Reimbursement of mortality
guarantee adjustment 196 530 (4,983) (12,099)
- --------------------------- ---------- ----------- ---------- -----------
34,744 93,978 36,012 83,186
U.S. GOVERNMENT/AAA-RATED
SECURITIES ACCOUNT
Accumulation Units:
Contract purchases 1,124,622 1,975,014 2,518,074 4,157,391
- ---------------------------
Terminated contracts and
transfers to annuity
reserves (5,581,799) (9,884,586) (8,997,754) (15,068,410)
- --------------------------- ---------- ----------- ---------- -----------
(4,457,177) (7,909,572) (6,479,680) (10,911,019)
Annuity Reserves:
Transfers from accumulation
units and between accounts 54,132 99,012 35,915 61,658
- ---------------------------
Annuity payments (18,882) (33,755) (11,047) (19,166)
- ---------------------------
Receipt (reimbursement) of
mortality guarantee
adjustment 344 640 (3,051) (5,311)
- --------------------------- ---------- ----------- ---------- -----------
35,594 65,897 21,817 37,181
</TABLE>
B-17
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT E
NOTES TO FINANCIAL STATEMENTS CONTINUED
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996
Units Amount Units Amount
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH MANAGEMENT ACCOUNT
Accumulation Units:
Contract purchases 9,588,206 14,793,214 12,030,851 17,751,903
- --------------------------
Terminated contracts and
transfers to annuity
reserves (11,786,541) (18,157,160) (12,515,148) (18,474,236)
- -------------------------- ----------- ----------- ----------- -----------
(2,198,335) (3,363,946) (484,297) (722,333)
Annuity Reserves:
Transfers from
accumulation units and
between accounts 0 0 (79,045) (116,265)
- --------------------------
Annuity payments (35,908) (55,568) (37,345) (55,673)
- --------------------------
Receipt of mortality
guarantee adjustment 54 84 92 139
- -------------------------- ----------- ----------- ----------- -----------
(35,854) (55,484) (116,298) (171,799)
INTERNATIONAL ACCOUNT
Accumulation Units:
Contract purchases 9,147,633 13,126,908 14,756,117 17,417,127
- --------------------------
Terminated contracts and
transfers to annuity
reserves (10,589,509) (15,306,258) (8,119,189) (9,595,403)
- -------------------------- ----------- ----------- ----------- -----------
(1,441,876) (2,179,350) 6,636,928 7,821,724
Annuity Reserves:
Transfers from
accumulation units and
between accounts 39,020 56,495 143,251 166,145
- --------------------------
Annuity payments (29,121) (41,491) (25,552) (23,120)
- --------------------------
Receipt (reimbursement) of
mortality guarantee
adjustment 111 151 (1,171) (1,456)
- -------------------------- ----------- ----------- ----------- -----------
10,010 15,155 116,528 141,569
BOND ACCOUNT
Accumulation Units:
Contract purchases 1,298,894 1,391,251 1,989,096 2,042,272
- --------------------------
Terminated contracts and
transfers to annuity
reserves (627,983) (663,594) (307,968) (354,619)
- -------------------------- ----------- ----------- ----------- -----------
670,911 727,657 1,681,128 1,687,653
Annuity Reserves:
Transfers from
accumulation units and
between accounts 95,597 108,430 -- --
- --------------------------
Annuity payments (8,402) (9,514) -- --
- --------------------------
Receipt (reimbursement) of
mortality guarantee
adjustment -- 0 -- --
- -------------------------- ----------- ----------- ----------- -----------
87,195 98,916 -- --
</TABLE>
B-18
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT E
NOTES TO FINANCIAL STATEMENTS CONTINUED
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996
Units Amount Units Amount
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GLOBAL GROWTH ACCOUNT
Accumulation Units:
Contract purchases 3,805,637 4,125,375 -- --
- -----------------------------
Terminated contracts and
transfers to annuity reserves (598,218) (663,779) -- --
- ----------------------------- --------- ------------ --------- ------------
3,207,419 3,461,596 0 0
Annuity Reserves:
Transfers from accumulation
units and between accounts 22,542 23,364 -- --
- -----------------------------
Annuity payments (833) (898) -- --
- -----------------------------
Receipt (reimbursement) of
mortality guarantee
adjustment (2,090) (2,192) -- --
- ----------------------------- --------- ------------ --------- ------------
19,619 20,274 -- --
NET DECREASE FROM UNIT
TRANSACTIONS ($81,081,217) ($68,622,458)
============ ============
</TABLE>
5. PURCHASES AND SALES OF SECURITIES
The aggregate cost of investments purchased and the aggregate
proceeds from investments sold were as follows for 1997.
<TABLE>
<CAPTION>
Aggregate Aggregate
Cost of Proceeds
Purchases from Sales
- -----------------------------------------------------------------------
<S> <C> <C>
Growth-Income Account $ 56,444,674 $ 49,129,296
- --------------------------------------------
Growth Account 41,512,387 42,191,755
- --------------------------------------------
Asset Allocation Account 6,717,167 1,499,629
- --------------------------------------------
High-Yield Bond Account 6,847,225 7,047,245
- --------------------------------------------
U.S. Government/AAA-Rated Securities Account 3,064,432 9,000,773
- --------------------------------------------
Cash Management Account 11,518,185 14,471,840
- --------------------------------------------
International Account 12,949,775 9,459,484
- --------------------------------------------
Bond Account 1,490,408 524,794
- --------------------------------------------
Global Growth 3,703,462 215,090
- -------------------------------------------- ------------ ------------
$144,247,715 $133,539,906
============ ============
</TABLE>
6. NEW INVESTMENT FUND
Effective January 1, 1996, the AVIS Bond Fund became available as an investment
option for Variable Account contract owners. Effective April 25, 1997, the AVIS
Global Growth Fund became available as an investment option for Variable Ac-
count contract owners.
7. DAILY VALUATION CALCULATIONS
Effective October 1996, the daily unit value calculation process was
transferred from the Company to the Delaware Group, an affiliate of the
Company. Costs associated with the calculation of the unit value are paid by
the Company.
B-19
<PAGE>
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
Board of Directors of The Lincoln National Life Insurance Company and
Contract Owners of Lincoln National Variable Annuity Account E
We have audited the accompanying statement of net assets of Lincoln National
Variable Annuity Account E (Variable Account) as of December 31, 1997, and the
related statement of operations for the year then ended, and the statements of
changes in net assets for each of the two years in the period then ended. These
financial statements are the responsibility of the Variable Account's manage-
ment. Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting the amounts and disclosures in the financial statements. Our procedures
included confirmation of securities owned as of December 31, 1997, by corre-
spondence with the custodian. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evalu-
ating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Lincoln National Variable An-
nuity Account E at December 31, 1997, the results of its operations for the
year then ended, and the changes in its net assets for each of the two years in
the period then ended in conformity with generally accepted accounting princi-
ples.
Fort Wayne, Indiana
April 7, 1998
B-20
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
BALANCE SHEETS -- STATUTORY BASIS
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------- ---------
(IN MILLIONS)
--------------------
<S> <C> <C>
ADMITTED ASSETS
CASH AND INVESTMENTS:
Bonds $18,560.7 $19,389.6
- ------------------------------------------------------------------------------------
Preferred stocks 257.3 239.7
- ------------------------------------------------------------------------------------
Unaffiliated common stocks 436.0 358.3
- ------------------------------------------------------------------------------------
Affiliated common stocks 412.1 241.5
- ------------------------------------------------------------------------------------
Mortgage loans on real estate 3,012.7 2,976.7
- ------------------------------------------------------------------------------------
Real estate 584.4 621.3
- ------------------------------------------------------------------------------------
Policy loans 660.5 626.5
- ------------------------------------------------------------------------------------
Other investments 335.5 282.7
- ------------------------------------------------------------------------------------
Cash and short-term investments 2,133.0 759.2
- ------------------------------------------------------------------------------------ --------- ---------
Total cash and investments 26,392.2 25,495.5
- ------------------------------------------------------------------------------------
Premiums and fees in course of collection 42.4 60.9
- ------------------------------------------------------------------------------------
Accrued investment income 343.5 343.6
- ------------------------------------------------------------------------------------
Funds withheld by ceding companies 44.1 25.8
- ------------------------------------------------------------------------------------
Other admitted assets 216.0 355.7
- ------------------------------------------------------------------------------------
Separate account assets 31,330.9 23,735.1
- ------------------------------------------------------------------------------------ --------- ---------
Total admitted assets $58,369.1 $50,016.6
- ------------------------------------------------------------------------------------ --------- ---------
--------- ---------
LIABILITIES AND CAPITAL AND SURPLUS
LIABILITIES:
Future policy benefits and claims $ 5,872.9 $ 5,954.0
- ------------------------------------------------------------------------------------
Other policyholder funds 16,360.1 17,262.4
- ------------------------------------------------------------------------------------
Amounts withheld or retained by Company as agent or trustee 878.2 250.2
- ------------------------------------------------------------------------------------
Funds held under reinsurance treaties 720.4 564.6
- ------------------------------------------------------------------------------------
Asset valuation reserve 450.0 375.5
- ------------------------------------------------------------------------------------
Interest maintenance reserve 135.4 76.7
- ------------------------------------------------------------------------------------
Other liabilities 413.9 490.9
- ------------------------------------------------------------------------------------
Federal income taxes 0.8 4.3
- ------------------------------------------------------------------------------------
Net transfers due from separate accounts (761.9) (659.7)
- ------------------------------------------------------------------------------------
Separate account liabilities 31,330.9 23,735.1
- ------------------------------------------------------------------------------------ --------- ---------
Total liabilities 55,400.7 48,054.0
- ------------------------------------------------------------------------------------
CAPITAL AND SURPLUS:
Common stock, $2.50 par value:
Authorized, issued and outstanding shares -- 10 million (owned by Lincoln National
Corporation) 25.0 25.0
- ------------------------------------------------------------------------------------
Paid-in surplus 1,821.8 883.4
- ------------------------------------------------------------------------------------
Unassigned surplus 1,121.6 1,054.2
- ------------------------------------------------------------------------------------ --------- ---------
Total capital and surplus 2,968.4 1,962.6
- ------------------------------------------------------------------------------------ --------- ---------
Total liabilities and capital and surplus $58,369.1 $50,016.6
- ------------------------------------------------------------------------------------ --------- ---------
--------- ---------
</TABLE>
See accompanying notes. S-1
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF INCOME -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
--------- --------- ---------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
PREMIUMS AND OTHER REVENUES:
Premiums and deposits $ 5,589.0 $ 7,268.5 $ 4,899.1
- -----------------------------------------------------------------------------
Net investment income 1,847.1 1,756.3 1,772.2
- -----------------------------------------------------------------------------
Amortization of interest maintenance reserve 41.5 27.2 34.0
- -----------------------------------------------------------------------------
Commissions and expense allowances on reinsurance ceded 99.7 90.9 98.3
- -----------------------------------------------------------------------------
Expense charges on deposit funds 119.3 100.7 83.2
- -----------------------------------------------------------------------------
Other income 21.3 16.8 14.5
- ----------------------------------------------------------------------------- --------- --------- ---------
Total revenues 7,717.9 9,260.4 6,901.3
- -----------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Benefits and settlement expenses 4,522.1 5,989.9 4,184.0
- -----------------------------------------------------------------------------
Underwriting, acquisition, insurance and other expenses 2,728.4 2,878.5 2,345.7
- ----------------------------------------------------------------------------- --------- --------- ---------
Total benefits and expenses 7,250.5 8,868.4 6,529.7
- ----------------------------------------------------------------------------- --------- --------- ---------
Gain from operations before dividends to policyholders, income taxes and net
realized gain on investments 467.4 392.0 371.6
- -----------------------------------------------------------------------------
Dividends to policyholders 27.5 27.3 27.3
- ----------------------------------------------------------------------------- --------- --------- ---------
Gain from operations before federal income taxes and net realized gain on
investments 439.9 364.7 344.3
- -----------------------------------------------------------------------------
Federal income taxes 78.3 83.6 103.7
- ----------------------------------------------------------------------------- --------- --------- ---------
Gain from operations before net realized gain on investments 361.6 281.1 240.6
- -----------------------------------------------------------------------------
Net realized gain on investments, net of income tax expense and excluding net
transfers to the interest maintenance reserve 31.3 53.3 43.9
- ----------------------------------------------------------------------------- --------- --------- ---------
Net income $ 392.9 $ 334.4 $ 284.5
- ----------------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
S-2
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
--------- --------- ---------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Capital and surplus at beginning of year $ 1,962.6 $ 1,732.9 $ 1,679.6
- -----------------------------------------------------------------------------
Correction of prior years' asset valuation reserve (Note 15) (37.6) -- --
- -----------------------------------------------------------------------------
Correction of prior year's admitted assets (Note 15) (57.0) -- --
- ----------------------------------------------------------------------------- --------- --------- ---------
1,868.0 1,732.9 1,679.6
CAPITAL AND SURPLUS INCREASE (DECREASE):
Net income 392.9 334.4 284.5
- -----------------------------------------------------------------------------
Difference in cost and admitted investment amounts (36.2) 38.6 143.2
- -----------------------------------------------------------------------------
Nonadmitted assets (0.4) (3.0) 2.9
- -----------------------------------------------------------------------------
Regulatory liability for reinsurance (3.9) 0.6 (2.0)
- -----------------------------------------------------------------------------
Life policy reserve valuation basis (0.9) (0.4) 2.9
- -----------------------------------------------------------------------------
Asset valuation reserve (36.9) (105.5) (112.5)
- -----------------------------------------------------------------------------
Mortgage loan, real estate and other investment reserves -- -- 2.2
- -----------------------------------------------------------------------------
Paid-in surplus, including contribution of common stock of affiliated
company in 1997 938.4 100.0 15.1
- -----------------------------------------------------------------------------
Separate account receivable due to change in valuation (2.6) -- 27.0
- -----------------------------------------------------------------------------
Dividends to shareholder (150.0) (135.0) (310.0)
- ----------------------------------------------------------------------------- --------- --------- ---------
Capital and surplus at end of year $ 2,968.4 $ 1,962.6 $ 1,732.9
- ----------------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes. S-3
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
---------- ---------- ----------
(IN MILLIONS)
----------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums, policy proceeds and other considerations received $ 6,364.3 $ 8,059.4 $ 5,430.9
- -----------------------------------------------------------------------
Allowances and reserve adjustments paid on reinsurance ceded (649.2) (767.5) (383.6)
- -----------------------------------------------------------------------
Investment income received 1,798.8 1,700.6 1,713.2
- -----------------------------------------------------------------------
Benefits paid (5,345.2) (4,050.4) (3,239.6)
- -----------------------------------------------------------------------
Insurance expenses paid (2,867.5) (2,972.2) (2,513.5)
- -----------------------------------------------------------------------
Federal income taxes recovered (paid) (87.0) (72.3) 38.4
- -----------------------------------------------------------------------
Dividends to policyholders (28.4) (27.7) (16.5)
- -----------------------------------------------------------------------
Other income received and expenses paid, net (42.7) 6.3 14.4
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net cash provided by (used in) operating activities (856.9) 1,876.2 1,043.7
- -----------------------------------------------------------------------
INVESTING ACTIVITIES
Sale, maturity or repayment of investments 12,142.6 12,542.0 13,183.9
- -----------------------------------------------------------------------
Purchase of investments (10,345.0) (14,175.4) (14,049.6)
- -----------------------------------------------------------------------
Other sources (uses) 563.1 (266.5) (64.0)
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net cash provided by (used in) investing activities 2,360.7 (1,899.9) (929.7)
- -----------------------------------------------------------------------
FINANCING ACTIVITIES
Surplus paid-in -- 100.0 15.1
- -----------------------------------------------------------------------
Proceeds from borrowings from shareholder 120.0 100.0 63.0
- -----------------------------------------------------------------------
Repayment of borrowings from shareholder (100.0) (63.0) (63.0)
- -----------------------------------------------------------------------
Dividends paid to shareholder (150.0) (135.0) (310.0)
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net cash provided by (used in) financing activities (130.0) 2.0 (294.9)
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net increase (decrease) in cash and short-term investments 1,373.8 (21.7) (180.9)
- -----------------------------------------------------------------------
Cash and short-term investments at beginning of year 759.2 780.9 961.8
- ----------------------------------------------------------------------- ---------- ---------- ----------
Cash and short-term investments at end of year $ 2,133.0 $ 759.2 $ 780.9
- ----------------------------------------------------------------------- ---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes.
S-4
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
ORGANIZATION AND OPERATIONS
The Lincoln National Life Insurance Company ("Company") is a wholly owned
subsidiary of Lincoln National Corporation ("LNC") and is domiciled in
Indiana. As of December 31, 1997, the Company owns 100% of the outstanding
common stock of four insurance company subsidiaries: First Penn-Pacific Life
Insurance Company ("First Penn"), Lincoln National Health & Casualty
Insurance Company ("LNH&C"), Lincoln National Reassurance Company ("LNRAC")
and Lincoln Life & Annuity Company of New York ("LLANY").
The Company's principal businesses consist of underwriting annuities,
deposit-type contracts and life and health insurance through multiple
distribution channels and the reinsurance of individual and group life and
health business. The Company is licensed and sells its products in 49
states, Canada and several U.S. territories.
USE OF ESTIMATES
The nature of the insurance and investment management businesses requires
management to make estimates and assumptions that affect the amounts
reported in the statutory-basis financial statements and accompanying notes.
Actual results could differ from those estimates.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity with
accounting practices prescribed or permitted by the Indiana Department of
Insurance ("Department"), which practices differ from generally accepted
accounting principles ("GAAP"). The more significant variances from GAAP are
as follows:
INVESTMENTS
Bonds are reported at cost or amortized cost or fair value based on their
National Association of Insurance Commissioners ("NAIC") rating. For GAAP,
the Company's bonds are classified as available-for-sale and, accordingly,
are reported at fair value with changes in the fair values reported directly
in shareholder's equity after adjustments for related amortization of
deferred acquisition costs, additional policyholder commitments and deferred
income taxes.
Investments in real estate are reported net of related obligations rather
than on a gross basis.
Changes between cost and admitted asset investment amounts are credited or
charged directly to unassigned surplus rather than to a separate surplus
account.
Under a formula prescribed by the NAIC, the Company defers the portion of
realized capital gains and losses on sales of fixed income investments,
principally bonds and mortgage loans, attributable to changes in the general
level of interest rates and amortizes those deferrals over the remaining
period to maturity of the individual security sold. The net deferral is
reported as the Interest Maintenance Reserve ("IMR") in the accompanying
balance sheets. Realized capital gains and losses are reported in income net
of federal income tax and transfers to the IMR. The asset valuation reserve
("AVR") is determined by an NAIC prescribed formula and is reported as a
liability rather than unassigned surplus. Under GAAP, realized capital gains
and losses are reported in the income statement on a pre-tax basis in the
period that the asset giving rise to the gain or loss is sold and valuation
allowances are provided when there has been a decline in value deemed other
than temporary, in which case, the provision for such declines are charged
to income.
SUBSIDIARIES
The accounts and operations of the Company's subsidiaries are not
consolidated with the accounts and operations of the Company as would be
required by GAAP. Under statutory accounting principles, the Company's
subsidiaries are carried at their statutory basis net equity and presented
in the balance sheet as affiliated common stocks.
POLICY ACQUISITION COSTS
The costs of acquiring and renewing business are expensed when incurred.
Under GAAP, acquisition costs related to traditional life insurance, to the
extent recoverable from future policy revenues, are deferred and amortized
over the premium-paying period of the related policies using assumptions
consistent with those used in computing policy benefit reserves. For
universal life insurance, annuity and other investment-type products,
deferred
S-5
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
policy acquisition costs, to the extent recoverable from future gross
profits, are amortized generally in proportion to the present value of
expected gross profits from surrender charges and investment, mortality and
expense margins.
NONADMITTED ASSETS
Certain assets designated as "nonadmitted," principally furniture and
equipment and certain receivables, are excluded from the accompanying
balance sheets and are charged directly to unassigned surplus.
PREMIUMS
Premiums and deposits with respect to universal life policies and annuity
and other investment-type contracts are reported as premium revenues;
whereas, under GAAP, such premiums and deposits are treated as liabilities
and policy charges represent revenues.
BENEFIT RESERVES
Certain policy reserves are calculated based on statutorily required
interest and mortality assumptions rather than on estimated expected
experience or actual account balances as would be required under GAAP.
Death benefits paid, policy and contract withdrawals, and the change in
policy reserves on universal life policies, annuity and other
investment-type contracts are reported as benefits and settlement expenses
in the accompanying statements of income; whereas, under GAAP, withdrawals
are treated as a reduction of the policy or contract liabilities and
benefits would represent the excess of benefits paid over the policy account
value and interest credited to the account values.
REINSURANCE
Premiums, claims and policy benefits and contract liabilities are reported
in the accompanying financial statements net of reinsurance amounts. For
GAAP, all assets and liabilities related to reinsurance ceded contracts are
reported on a gross basis.
A liability for reinsurance balances has been provided for unsecured policy
and contract liabilities and unearned premiums ceded to reinsurers not
authorized by the Department to assume such business. Changes to those
amounts are credited or charged directly to unassigned surplus. Under GAAP,
an allowance for amounts deemed uncollectible is established through a
charge to income.
Commissions on business ceded are reported as income when received rather
than deferred and amortized with deferred policy acquisition costs.
Certain reinsurance contracts meeting risk transfer requirements under
statutory-basis accounting practices have been accounted for using
traditional reinsurance accounting whereas such contracts would be accounted
for using deposit accounting under GAAP.
INCOME TAXES
Deferred income taxes are not provided for differences between financial
statement amounts and tax bases of assets and liabilities.
POLICYHOLDER DIVIDENDS
Policyholder dividends are recognized when declared rather than over the
term of the related policies.
STATEMENTS OF CASH FLOWS
Cash and short-term investments in the statements of cash flows represent
cash balances and investments with initial maturities of one year or less.
Under GAAP, the corresponding captions of cash and cash equivalents include
cash balances and investments with initial maturities of three months or
less.
S-6
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
A reconciliation of the Company's net income and capital and surplus
determined on a statutory accounting basis with amounts determined in
accordance with GAAP is as follows:
<TABLE>
<CAPTION>
CAPITAL AND SURPLUS NET INCOME
-----------------------------------------------------
DECEMBER 31 YEAR ENDED DECEMBER 31
1997 1996 1997 1996 1995
-----------------------------------------------------
(IN MILLIONS)
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amounts reported on a statutory basis $ 2,968.4 $ 1,962.6 $ 392.9 $ 334.4 $ 284.5
- ---------------------------------------------
GAAP adjustments:
Deferred policy acquisition costs and
present value of future profits 958.3 1,119.1 (98.9) 66.7 (63.0)
------------------------------------------
Policy and contract reserves (1,672.9) (1,405.3) (48.6) (57.1) (55.3)
------------------------------------------
Interest maintenance reserve 135.4 76.7 58.7 (39.7) 60.9
------------------------------------------
Deferred income taxes (13.0) (27.4) 70.3 1.8 38.3
------------------------------------------
Policyholders' share of earnings and
surplus on participating business (79.8) (81.9) 5.3 (.3) .2
------------------------------------------
Asset valuation reserve 450.0 375.5 -- -- --
------------------------------------------
Net realized gain (loss) on investments (91.5) (72.0) (20.4) 78.7 30.0
------------------------------------------
Unrealized gain on investments 1,245.5 825.2 -- -- --
------------------------------------------
Nonadmitted assets, including nonadmitted
investments 61.0 (7.1) -- -- --
------------------------------------------
Investments in subsidiary companies 188.8 156.6 (80.5) 29.9 34.3
------------------------------------------
Other, net (162.5) (99.0) (35.0) (82.6) (7.3)
------------------------------------------ --------- --------- --------- --------- ---------
Net increase (decrease) 1,019.3 860.4 (149.1) (2.6) 38.1
- --------------------------------------------- --------- --------- --------- --------- ---------
Amounts on a GAAP basis $ 3,987.7 $ 2,823.0 $ 243.8 $ 331.8 $ 322.6
- --------------------------------------------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
S-7
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Other significant accounting practices are as follows:
INVESTMENTS
The discount or premium on bonds is amortized using the interest method. For
mortgage-backed bonds, the Company recognizes income using a constant
effective yield based on anticipated prepayments and the estimated economic
life of the securities. When actual prepayments differ significantly from
anticipated prepayments, the effective yield is recalculated to reflect
actual payments to date and anticipated future payments. The net investment
in the securities is adjusted to the amount that would have existed had the
new effective yield been applied since the acquisition of the securities.
Short-term investments include investments with maturities of less than one
year at the date of acquisition. The carrying amounts for these investments
approximate their fair values.
Preferred stocks are reported at cost or amortized cost.
Unaffiliated common stocks are reported at fair value as determined by the
Securities Valuation Office of the NAIC and the related unrealized gains
(losses) are reported in unassigned surplus without adjustment for federal
income taxes.
Policy loans are reported at unpaid balances.
The Company uses various derivative instruments as part of its overall
liability-asset management program for certain investments and life
insurance and annuity products. The Company values all derivative
instruments on a basis consistent with that of the hedged item. Upon
termination, gains and losses on those instruments are included in the
carrying values of the underlying hedged items and are amortized over the
remaining lives of the hedged items as adjustments to investment income or
benefits from the hedged items through the IMR. Any unamortized gains or
losses are recognized when the underlying hedged items are sold. The
premiums paid for interest rate caps and swaptions are deferred and
amoritized to net investment income on a straight-line basis over the term
of the respective derivative.
Hedge accounting is applied as indicated above after the Company determines
that the items to be hedged expose the Company to interest rate
fluctuations, the widening of bond yield spreads over comparable maturity
U.S. Government obligations, increased liabilities associated with certain
reinsurance agreements and foreign exchange risk. Moreover, the derivatives
used are designated as a hedge and reduce the indicated risk by having a
high correlation between changes in the value of the derivatives and the
items being hedged at both the inception of the hedge and throughout the
hedge period. Should such criteria not be met or if the hedged items have
been sold, terminated or matured, the change in value of the derivatives is
included in net income.
Mortgage loans on real estate are reported at unpaid balances, less
allowances for impairments. Real estate is reported at depreciated cost.
Realized investment gains and losses on investments sold are determined
using the specific identification method. Changes in admitted asset carrying
amounts of bonds, mortgage loans and common and preferred stocks are
credited or charged directly in unassigned surplus.
LOANED SECURITIES
Securities loaned are treated as collateralized financing transactions and a
liability is recorded equal to the amount to be paid to reacquire the
security. It is the Company's policy to take possession of securities with a
market value at least equal to the value of the securities loaned.
Securities loaned are recorded at amortized cost as long as the value of the
related collateral is sufficient. The Company's agreements with third
parties generally contain contractual provisions to allow for additional
collateral to be obtained when necessary. The Company values collateral
daily and obtains additional collateral when deemed appropriate.
GOODWILL
Goodwill, which represents the excess of the ceding commission over
statutory-basis net assets of business purchased under an assumption
reinsurance agreement, is amortized on a straight-line basis over ten years.
S-8
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
PREMIUMS
Life insurance and annuity premiums are recognized as revenue when due.
Accident and health premiums are earned pro rata over the contract term of
the policies.
BENEFITS
Life, annuity and accident and health benefit reserves are developed by
actuarial methods and are determined based on published tables using
statutorily specified interest rates and valuation methods that will
provide, in the aggregate, reserves that are greater than or equal to the
minimum or guaranteed policy cash values or the amounts required by the
Department. The Company waives deduction of deferred fractional premiums on
the death of life and annuity policy insureds and returns any premium beyond
the date of death, except for policies issued prior to March 1977. Surrender
values on policies do not exceed the corresponding benefit reserves.
Additional reserves are established when the results of cash flow testing
under various interest rate scenerios indicate the need for such reserves.
If net premiums exceed the gross premiums on any insurance in-force,
additional reserves are established. Benefit reserves for policies
underwritten on a substandard basis are determined using the multiple table
reserve method.
The tabular interest, tabular less actual reserve released and the tabular
cost have been determined by formula or from the basic data for such items.
Tabular interest funds not involving life contingencies were determined
using the actual interest credited to the funds plus the change in accrued
interest.
Liabilities related to guaranteed investment contracts and policyholder
funds left on deposit with the Company generally are equal to fund balances
less applicable surrender charges.
CLAIMS AND CLAIM ADJUSTMENT EXPENSES
Unpaid claims and claim adjustment expenses on accident and health policies
represent the estimated ultimate net cost of all reported and unreported
claims incurred during the year. The Company does not discount claims and
claim adjustment expense reserves. The reserves for unpaid claims and claim
adjustment expenses are estimated using individual case-basis valuations and
statistical analyses. Those estimates are subject to the effects of trends
in claim severity and frequency. Although considerable variability is
inherent in such estimates, management believes that the reserves for claims
and claim adjustment expenses are adequate. The estimates are continually
reviewed and adjusted as necessary as experience develops or new information
becomes known; such adjustments are included in current operations.
REINSURANCE CEDED AND ASSUMED
Reinsurance premiums and claims and claim adjustment expenses are accounted
for on bases consistent with those used in accounting for the original
policies issued and the terms of the reinsurance contracts. Certain business
is transacted on a funds withheld basis and investment income on funds
withheld are reported in net investment income.
PENSION BENEFITS
Costs associated with the Company's defined benefit pension plans is
systematically accrued during the expected period of active service of the
covered employees.
INCOME TAXES
The Company and eligible subsidiaries have elected to file consolidated
federal and state income tax returns with LNC. Pursuant to an intercompany
tax sharing agreement with LNC, the Company provides for income taxes on a
separate return filing basis. The tax sharing agreement also provides that
the Company will receive benefit for net operating losses, capital losses
and tax credits which are not usable on a separate return basis to the
extent such items may be utilized in the consolidated income tax returns of
LNC.
STOCK OPTIONS
The Company recognizes compensation expense for its stock option incentive
plans using the intrinsic value method of accounting. Under the terms of the
intrinsic value method, compensation cost is the excess, if any, of the
quoted market price of LNC's common stock at the grant date, or other
S-9
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
measurement date, over the amount an employee must pay to acquire the stock.
ASSETS HELD IN SEPARATE ACCOUNTS AND LIABILITIES RELATED TO SEPARATE
ACCOUNTS
These assets and liabilities represent segregated funds administered and
invested by the Company for the exclusive benefit of pension and variable
life and annuity contractholders. The fees received by the Company for
administrative and contractholder maintenance services performed for these
separate accounts are included in the Company's statements of income.
2. PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company's statutory-basis financial statements are prepared in
accordance with accounting practices prescribed or permitted by the
Department. "Prescribed" statutory accounting practices include state laws,
regulations and general administrative rules, as well as a variety of
publications of the NAIC. "Permitted" statutory accounting practices
encompass all accounting practices that are not prescribed; such practices
may differ from state to state, may differ from company to company within a
state and may change in the future. The NAIC currently is in the process of
recodifying statutory accounting practices ("Codification"). Codification
will likely change, to some extent, prescribed statutory accounting
practices and may result in changes to the accounting practices that the
Company uses to prepare its statutory-basis financial statements.
Codification, which is expected to be approved by the NAIC in 1998, will
require adoption by the various states before it becomes the prescribed
statutory-basis of accounting for insurance companies domesticated within
those states. Accordingly, before Codification becomes effective for the
Company, the state of Indiana must adopt Codification as the prescribed
basis of accounting on which domestic insurers must report their
statutory-basis results to the Department. At this time, it is unclear
whether Indiana will adopt Codification. However, based on the current draft
guidance, management believes that the impact of Codification will not be
material to the Company's statutory-basis financial statements.
The Company has received written approval from the Department to record
surrender charges applicable to separate account liabilities for variable
life and annuity products as a liability in the separate account financial
statements payable to the Company's general account. In the accompanying
financial statements, a corresponding receivable is recorded with the
related income impact recorded in the accompanying statement of operations
as a change in reserves or change in premium and other deposit funds.
S-10
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS
The major categories of net investment income are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Income:
Bonds $ 1,524.4 $ 1,442.2 $ 1,457.4
----------------------------------------------------------------
Preferred stocks 23.5 9.6 6.4
----------------------------------------------------------------
Unaffiliated common stocks 8.3 6.5 5.2
----------------------------------------------------------------
Affiliated common stocks 15.0 9.5 12.6
----------------------------------------------------------------
Mortgage loans on real estate 257.2 269.3 252.0
----------------------------------------------------------------
Real estate 92.2 114.4 110.0
----------------------------------------------------------------
Policy loans 37.5 35.0 32.1
----------------------------------------------------------------
Other investments 28.2 22.4 62.6
----------------------------------------------------------------
Cash and short-term investments 70.3 48.9 53.2
---------------------------------------------------------------- --------- --------- ---------
Total investment income 2,056.6 1,957.8 1,991.5
- -------------------------------------------------------------------
Expenses:
Depreciation 21.0 25.0 25.9
----------------------------------------------------------------
Other 188.5 176.5 193.4
---------------------------------------------------------------- --------- --------- ---------
Total investment expenses 209.5 201.5 219.3
- ------------------------------------------------------------------- --------- --------- ---------
Net investment income $ 1,847.1 $ 1,756.3 $ 1,772.2
- ------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</TABLE>
Nonadmitted accrued investment income at December 31, 1997
and 1996 amounted to $2,600,000 and $2,500,000,
respectively, consisting principally of interest on bonds in
default and mortgage loans.
S-11
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
The cost or amortized cost, gross unrealized gains and
losses and the fair value of investments in bonds are
summarized as follows:
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------------------------------------------
(IN MILLIONS)
----------------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1997:
Corporate $13,003.8 $ 942.2 $ 60.1 $13,885.9
------------------------------------------------
U.S. government 436.3 67.9 -- 504.2
------------------------------------------------
Foreign government 1,202.1 104.9 5.4 1,301.6
------------------------------------------------
Mortgage-backed 3,874.3 215.2 27.1 4,062.4
------------------------------------------------
State and municipal 44.2 .3 -- 44.5
------------------------------------------------ --------- ----------- ----------- ---------
$18,560.7 $ 1,330.5 $ 92.6 $19,798.6
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
At December 31, 1996:
Corporate $12,548.1 $ 586.5 $ 66.6 $13,068.0
------------------------------------------------
U.S. government 1,088.7 43.2 18.0 1,113.9
------------------------------------------------
Foreign government 1,234.0 105.1 1.4 1,337.7
------------------------------------------------
Mortgage-backed 4,478.4 183.3 27.4 4,634.3
------------------------------------------------
State and municipal 40.4 .1 -- 40.5
------------------------------------------------ --------- ----------- ----------- ---------
$19,389.6 $ 918.2 $ 113.4 $20,194.4
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
</TABLE>
The carrying amount of bonds in the balance sheets at
December 31, 1997 and 1996 reflects NAIC adjustments of
$5,500,000 and $2,700,000, respectively, to decrease
amortized cost.
Fair values for bonds are based on quoted market prices,
where available. For bonds not actively traded, fair values
are estimated using values obtained from independent pricing
services or, in the case of private placements, are
estimated by discounting expected future cash flows using a
current market rate applicable to the coupon rate, credit
quality and maturity of the investments.
S-12
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
A summary of the cost or amortized cost and fair value of
investments in bonds at December 31, 1997, by contractual
maturity, is as follows:
<TABLE>
<CAPTION>
COST OR
AMORTIZED FAIR
COST VALUE
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Maturity:
In 1998 $ 490.1 $ 494.9
--------------------------------------------------------------------------
In 1999-2002 3,088.7 3,185.4
--------------------------------------------------------------------------
In 2003-2007 4,762.7 4,971.0
--------------------------------------------------------------------------
After 2007 6,344.9 7,084.9
--------------------------------------------------------------------------
Mortgage-backed securities 3,874.3 4,062.4
-------------------------------------------------------------------------- --------- ---------
Total $18,560.7 $19,798.6
- ----------------------------------------------------------------------------- --------- ---------
--------- ---------
</TABLE>
The expected maturities may differ from the contractual
maturities in the foregoing table because certain borrowers
may have the right to call or prepay obligations with or
without call or prepayment penalties.
At December 31, 1997, the Company did not have a material
concentration of financial instruments in a single investee,
industry or geographic location.
Proceeds from sales of investments in bonds during 1997,
1996 and 1995 were $9,715,000,000, $10,996,900,000 and
$12,234,100,000, respectively. Gross gains during 1997, 1996
and 1995 of $218,100,000, $169,700,000 and $225,600,000,
respectively, and gross losses of $78,000,000, $177,000,000
and $83,100,000, respectively, were realized on those sales.
At December 31, 1997 and 1996, investments in bonds, with an
admitted asset value of $76,200,000 and $70,700,000,
respectively, were on deposit with state insurance
departments to satisfy regulatory requirements.
The cost or amortized cost, gross unrealized gains and
losses and the fair value of investments in unaffiliated
common stocks and preferred stocks are as follows:
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------------------------
(IN MILLIONS)
--------------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1997:
Preferred stocks $257.3 $12.1 $ .7 $268.7
- ----------------------------------------
Unaffiliated common stocks 357.0 98.5 19.5 436.0
- ----------------------------------------
At December 31, 1996:
Preferred stocks $239.7 $10.5 $ 1.7 $248.5
- ----------------------------------------
Unaffiliated common stocks 289.9 84.6 16.2 358.3
- ----------------------------------------
</TABLE>
The carrying amount of preferred stocks in the balance
sheets at December 31, 1997 and 1996 reflects NAIC
adjustments of $4,000,000 and $700,000, respectively, to
decrease amortized cost.
S-13
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
During 1997, the minimum and maximum lending rates for
mortgage loans were 7.09% and 9.25%, respectively. At the
issuance of a loan, the percentage of loan to value on any
one loan does not exceed 75%. At December 31, 1997, the
Company did not hold any mortgages with interest overdue
beyond one year. All properties covered by mortgage loans
have fire insurance at least equal to the excess of the loan
over the maximum loan that would be allowed on the land
without the building.
Realized capital gains are reported net of federal income
taxes and amounts transferred to the IMR as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Realized capital gains $ 209.3 $ 69.3 $ 186.8
- ------------------------------------------------------------------------
Less amount transferred to IMR (net of related taxes (credit) of $54.0,
$(6.7) and $51.1 in 1997, 1996 and 1995, respectively) 100.2 (12.4) 94.8
- ------------------------------------------------------------------------ --------- --------- ---------
109.1 81.7 92.0
Less federal income taxes on realized gains 77.8 28.4 48.1
- ------------------------------------------------------------------------ --------- --------- ---------
Net realized capital gains $ 31.3 $ 53.3 $ 43.9
- ------------------------------------------------------------------------ --------- --------- ---------
--------- --------- ---------
</TABLE>
4. SUBSIDIARIES
Statutory-basis financial information related to the
Company's four wholly-owned subsidiaries is summarized as
follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
--------------------------------------------
<S> <C> <C> <C> <C>
Cash and invested assets $ 1,154.4 $ 284.8 $ 399.0 $ 796.3
- -----------------------------------------------------------
Other assets 36.9 77.3 481.6 130.8
- ----------------------------------------------------------- --------- ----------- --------- ---------
Total admitted assets $ 1,191.3 $ 362.1 $ 880.6 $ 972.1
- ----------------------------------------------------------- --------- ----------- --------- ---------
--------- ----------- --------- ---------
Insurance reserves $ 1,072.2 $ 266.7 $ 279.3 $ 588.7
- -----------------------------------------------------------
Other liabilities 48.4 21.7 546.4 5.8
- -----------------------------------------------------------
Liabilities related to separate accounts -- -- -- 164.7
- -----------------------------------------------------------
Capital and surplus 70.7 73.7 54.9 212.9
- ----------------------------------------------------------- --------- ----------- --------- ---------
Total liabilities and capital and surplus $ 1,191.3 $ 362.1 $ 880.6 $ 972.1
- ----------------------------------------------------------- --------- ----------- --------- ---------
--------- ----------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 267.6 $ 135.4 $ 125.3 $ 230.0
- ------------------------------------------------------------
Expenses 262.6 244.2 114.6 224.4
- ------------------------------------------------------------
Net realized gains (losses) .1 .6 (.1) (.1)
- ------------------------------------------------------------ --------- --------- --------- ---------
Net income $ 5.1 $ (108.2) $ 10.6 $ 5.5
- ------------------------------------------------------------ --------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
S-14
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
4. SUBSIDIARIES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
------------------------------------------------
<S> <C> <C> <C> <C>
Cash and invested assets $ 1,090.7 $ 146.4 $ 406.7 $ 664.3
- -----------------------------------------------------------
Other assets 31.8 17.7 503.1 9.1
- ----------------------------------------------------------- --------- ----------- ----------- -----------
Total admitted assets $ 1,122.5 $ 164.1 $ 909.8 $ 673.4
- ----------------------------------------------------------- --------- ----------- ----------- -----------
--------- ----------- ----------- -----------
Insurance reserves $ 1,013.5 $ 72.7 $ 261.8 $ 601.1
- -----------------------------------------------------------
Other liabilities 41.3 18.7 597.2 22.1
- -----------------------------------------------------------
Capital and surplus 67.7 72.7 50.8 50.2
- ----------------------------------------------------------- --------- ----------- ----------- -----------
Total liabilities and capital and surplus $ 1,122.5 $ 164.1 $ 909.8 $ 673.4
- ----------------------------------------------------------- --------- ----------- ----------- -----------
--------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 246.5 $ 104.9 $ 120.8 $ 642.7
- -------------------------------------------------------------
Expenses 247.1 97.1 114.1 661.3
- -------------------------------------------------------------
Net realized gains (losses) (.6) -- -- --
- ------------------------------------------------------------- --------- ----------- ----------- -----------
Net income (loss) $ (1.2) $ 7.8 $ 6.7 $ (18.6)
- ------------------------------------------------------------- --------- ----------- ----------- -----------
--------- ----------- ----------- -----------
</TABLE>
The carrying value of affiliated common stocks, representing
their statutory-basis net equity, was $412,100,000 and
$241,500,000 at December 31, 1997 and 1996, respectively.
The cost basis of investments in subsidiaries as of December
31, 1997 and 1996 was $466,200,000 and $194,000,000,
respectively.
During 1997 and 1996, the Company's insurance subsidiaries
paid dividends of $15,000,000 and $10,500,000, respectively.
5. FEDERAL INCOME TAXES
The effective federal income tax rate for financial
reporting purposes differs from the prevailing statutory tax
rate principally due to tax-exempt investment income,
dividends-received tax deductions, differences in policy
acquisition costs and policy and contract liabilities for
tax return and financial statement purposes.
Federal income taxes incurred of $78,300,000, $83,600,000
and $103,700,000 in 1997, 1996 and 1995, respectively, would
be subject to recovery in the event that the Company incurs
net operating losses within three years of the years for
which such taxes were paid.
Prior to 1984, a portion of the Company's current income was
not subject to current income tax, but was accumulated for
income tax purposes in a memorandum account designated as
"policyholders' surplus." The Company's balance in the
"policyholders' surplus" account at December 31, 1983 of
$187,000,000 was "frozen" by the Tax Reform Act of 1984 and,
accordingly, there have been no additions to the accounts
after that date. That portion of current income on which
income taxes have been paid will continue to be accumulated
in a memorandum account designated as "shareholder's
surplus," and is available for dividends to the shareholder
without additional payment of tax by the Company. The
December 31, 1997 memorandum account balance for
"shareholder's surplus"
S-15
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
5. FEDERAL INCOME TAXES (CONTINUED)
was $1,905,000,000. Should dividends to the shareholder
exceed its respective "shareholder's surplus," amounts would
need to be transferred from the "policyholders' surplus" and
would be subject to federal income tax at that time. Under
existing or foreseeable circumstances, the Company neither
expects nor intends that distributions will be made that
will result in any such tax.
6. SUPPLEMENTAL FINANCIAL DATA
The balance sheet caption, "Other Admitted Assets", includes
amounts recoverable from other insurers for claims paid by
the Company, and the balance sheet caption, "Future Policy
Benefits and Claims," has been reduced for insurance ceded
as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Insurance ceded $ 1,431.0 $ 1,154.5
- -------------------------------------------------------------------------------
Amounts recoverable from other insurers 35.9 16.0
- -------------------------------------------------------------------------------
</TABLE>
Reinsurance transactions included in the income statement
caption, "Premiums and Deposits," are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Insurance assumed $ 727.2 $ 241.3 $ 667.7
- ------------------------------------------------------------------------
Insurance ceded 302.9 193.3 453.1
- ------------------------------------------------------------------------ --------- --------- ---------
Net amount included in premiums $ 424.3 $ 48.0 $ 214.6
- ------------------------------------------------------------------------ --------- --------- ---------
--------- --------- ---------
</TABLE>
The income statement caption, "Benefits and Settlement
Expenses," is net of reinsurance recoveries of
$1,240,500,000, $787,900,000 and $1,407,000,000 for 1997,
1996 and 1995, respectively.
S-16
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
6. SUPPLEMENTAL FINANCIAL DATA (CONTINUED)
Deferred and uncollected life insurance premiums and annuity
considerations included in the balance sheet caption,
"Premiums and Fees in Course of Collection," are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------
NET OF
GROSS LOADING LOADING
-----------------------------------
(IN MILLIONS)
-----------------------------------
<S> <C> <C> <C>
Ordinary new business $ 3.2 $ 2.4 $ .8
- ------------------------------------------------------------------------
Ordinary renewal 17.8 3.2 14.6
- ------------------------------------------------------------------------
Group life 10.6 .2 10.4
- ------------------------------------------------------------------------ --------- --- -----
$ 31.6 $ 5.8 $ 25.8
--------- --- -----
--------- --- -----
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------
NET OF
GROSS LOADING LOADING
-----------------------------------
(IN MILLIONS)
-----------------------------------
<S> <C> <C> <C>
Ordinary new business $ 3.9 $ 1.9 $ 2.0
- ------------------------------------------------------------------------
Ordinary renewal 35.1 3.0 32.1
- ------------------------------------------------------------------------
Group life 9.4 (.1) 9.5
- ------------------------------------------------------------------------ --------- --- -----
$ 48.4 $ 4.8 $ 43.6
--------- --- -----
--------- --- -----
</TABLE>
The Company has entered into non-exclusive managing general
agent agreements with International Benefit Services Corp.,
HRM Claim Management, Inc. and Pediatrics Insurance
Consultants, Inc. to write group life and health business.
Direct premiums written related to the agreements amounted
to $2,000,000, $2,600,000 and $8,800,000 in 1997 and
$26,200,000, $3,800,000 and $8,600,000 in 1996,
respectively. During 1996, LNC Administrative Services
Corporation entered into a similar agreement with the
Company with direct premiums written amounting to $7,200,000
and 6,200,000 in 1997 and 1996, respectively. Authority
granted by the managing general agents agreements include
underwriting, claims adjustment and claims payment services.
7. ANNUITY RESERVES
At December 31, 1997, the Company's annuity reserves and
deposit fund liabilities, including separate accounts, that
are subject to discretionary withdrawal with adjustment,
S-17
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
7. ANNUITY RESERVES (CONTINUED)
subject to discretionary withdrawal without adjustment and
not subject to discretionary withdrawal provisions are
summarized as follows:
<TABLE>
<CAPTION>
AMOUNT PERCENT
----------------------
(IN MILLIONS)
----------------------
<S> <C> <C>
Subject to discretionary withdrawal with adjustment:
With market value adjustment $ 2,426.3 5%
-----------------------------------------------------------------------------
At book value, less surrender charge 4,225.8 8
-----------------------------------------------------------------------------
At market value 30,064.7 59
----------------------------------------------------------------------------- --------- ---
36,716.8 72
Subject to discretionary withdrawal without adjustment at book value with
minimal or no charge or adjustment 11,657.7 23
- --------------------------------------------------------------------------------
Not subject to discretionary withdrawal 2,531.1 5
- -------------------------------------------------------------------------------- --------- ---
Total annuity reserves and deposit fund liabilities -- before reinsurance 50,905.6 100%
- -------------------------------------------------------------------------------- ---
---
Less reinsurance 1,797.5
- -------------------------------------------------------------------------------- ---------
Net annuity reserves and deposit fund liabilities, including separate accounts $49,108.1
- -------------------------------------------------------------------------------- ---------
---------
</TABLE>
8. CAPITAL AND SURPLUS
Life insurance companies are subject to certain Risk-Based Capital ("RBC")
requirements as specified by the NAIC. Under those requirements, the amount
of capital and surplus maintained by a life insurance company is to be
determined based on the various risk factors related to it. At December 31,
1997, the Company exceeds the RBC requirements.
The payment of dividends by the Company is limited and cannot be made except
from earned profits. The maximum amount of dividends that may be paid by
life insurance companies without prior approval of the Indiana Insurance
Commissioner is subject to restrictions relating to statutory surplus and
net gain from operations. In 1998, the Company can pay dividends of
$361,600,000 without prior approval of the Indiana Insurance Commissioner.
9. EMPLOYEE BENEFIT PLANS
LNC maintains defined benefit pension plans for its employees (including
Company employees) and a defined contribution plan for the Company's agents.
LNC also maintains 401(k) plans, deferred compensation plans and
postretirement medical and life insurance plans for its employees and agents
(including the Company's employees and agents). The aggregate expenses and
accumulated obligations for the Company's portion of these plans are not
material to the Company's statutory-basis financial statements of income or
financial position for any of the periods shown.
LNC has various incentive plans for key employees, agents and directors of
LNC and its subsidiaries that provide for the issuance of stock options,
stock appreciation rights, restricted stock awards and stock incentive
awards. These plans are comprised primarily of stock option incentive plans.
Stock options granted under the stock option incentive plans are at the
market value at the date of grants and, subject to termination of
employment, expire ten years from the date of grant. Such options are
transferable only upon death and are exercisable one year from the date of
grant for options issued prior to 1992. Option issued subsequent to 1991 are
exercisable in 25% increments on the option issuance anniversary in the four
years following issuance.
As of December 31, 1997, 716,211 shares of LNC common stock were subject to
options granted to Company employees and agents under the stock option
incentive plans of which 370,239 were exercisable on that date. The exercise
prices of the outstanding options range from $23.50 to $75.66. During 1997,
1996 and 1995, 170,789, 72,405 and
S-18
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
117,806 options were exercised, respectively, and 1,846, 10,950 and 11,473
options were forfeited, respectively.
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES
DISABILITY INCOME CLAIMS
The liability for disability income claims net of the related asset for
amounts recoverable from reinsurers at December 31, 1997 and 1996 is a net
liability of $516,900,000 and $572,000,000, respectively. This liability is
based on the assumption that the recent experience will continue in the
future. If incidence levels or claim termination rates fluctuate
significantly from the assumptions underlying reserves, adjustments to
reserves may be required in the future. Accordingly, this liability may
prove to be deficient or excessive. However, it is management's opinion that
such future development will not materially affect the financial position of
the Company. The Company reviews reserve levels on an ongoing basis.
During 1995, the Company completed an in-depth review of the experience of
its disability income business. As a result of this study, and based on the
assumption that recent experience will continue in the future, net income
decreased by $15,200,000 as a result of strengthening the disability income
reserve.
Because of continuing adverse experience and worsening projections of future
experience, the Company conducted an additional in-depth review of loss
experience on its disability income business during 1997. As a result of
this study, the reserve level was deemed to be inadequate to meet future
obligations if current incident levels were to continue in the future. In
order to address this situation, the Company strengthened its disability
income reserve by $80,000,000 (pre-tax).
MARKETING AND COMPLIANCE ISSUES
Regulators continue to focus on market conduct and compliance issues. Under
certain circumstances companies operating in the insurance and financial
services markets have been held responsible for providing incomplete or
misleading sales materials and for replacing existing policies with policies
that were less advantageous to the policyholder. The Company's management
continues to monitor the Company's sales materials and compliance procedures
and is making an extensive effort to minimize any potential liability. Due
to the uncertainty surrounding such matters, it is not possible to provide a
meaningful estimate of the range of potential outcomes at this time;
however, it is management's opinion that such future development will not
materially affect the financial position of the Company.
GROUP PENSION ANNUITIES
The liabilities for guaranteed interest and group pension annuity contracts,
which are no longer being sold by the Company, are supported by a single
portfolio of assets that attempts to match the duration of these
liabilities. Due to the long-term nature of group pension annuities and the
resulting inability to exactly match cash flows, a risk exists that future
cash flows from investments will not be reinvested at rates as high as
currently earned by the portfolio.
Accordingly, these liabilities may prove to be deficient or excessive.
However, it is management's opinion that such future development will not
materially affect the financial position of the Company.
LEASES
The Company leases its home office properties through sale-leaseback
agreements. The agreements provide for a 25 year lease period with options
to renew for six additional terms of five years each. The agreements also
provide the Company with the right of first refusal to purchase the
properties during the term of the lease, including renewal periods, at a
price as defined in the agreements. The Company also has the option to
purchase the leased properties at fair market value as defined in the
agreements on the last day of the initial 25-year lease ending in 2009 or on
the last day of any of the renewal periods.
Total rental expense on operating leases in 1997, 1996 and 1995 was
$29,300,000, $26,400,000 and
S-19
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
$22,500,000, respectively. Future minimum rental commitments are as follows
(in millions):
<TABLE>
<S> <C>
1998 $ 18.5
- --------------------------------------
1999 18.9
- --------------------------------------
2000 20.1
- --------------------------------------
2001 20.4
- --------------------------------------
2002 20.7
- --------------------------------------
Thereafter 152.2
- -------------------------------------- ---------
$ 250.8
---------
---------
</TABLE>
The future commitments include amounts for space and equipment to be used by
the personnel that were added on January 2, 1998 as a result of the purchase
of a block of individual life and annuity business (see NOTE 12).
INFORMATION TECHNOLOGY COMMITMENT
In February 1998, the Company signed a seven-year contract with IBM Global
Services for providing information technology services for the Fort Wayne
operations. Annual costs are estimated to range from $33,600,000 to
$56,800,000.
INSURANCE CEDED AND ASSUMED
The Company cedes insurance to other companies, including certain
affiliates. The portion of risks exceeding the Company's retention limit is
reinsured with other insurers. Industry regulations prescribe the maximum
coverage that the Company can retain on an individual insured. Prior to
December 31, 1997, the Company limited its maximum coverage that it retained
on an individual to $3,000,000. Based on a review of the capital and
business in-force (including the addition of the block of business described
in NOTE 12), effective in January 1998, the Company changed the amount it
will retain on an individual to $10,000,000. Portions of the Company's
deferred annuity business have also been reinsured with other companies to
limit its exposure to interest rate risks. At December 31, 1997, the
reserves associated with these reinsurance arrangements totaled
$1,760,000,000. To cover products other than life insurance, the Company
acquires other insurance coverages with retentions and limits that
management believes are appropriate for the circumstances. The Company
remains liable if its reinsurers are unable to meet their contractual
obligations under the applicable reinsurance agreements.
The Company assumes insurance from other companies, including certain
affiliates. At December 31, 1997, the Company has provided $12,400,000 of
statutory surplus relief to other insurance companies under reinsurance
transactions. Generally, such amounts are offset by corresponding
receivables from the ceding company, which are secured by future profits on
the reinsured business. However, the Company is subject to the risk that the
ceding company may become insolvent and the right of offset would not be
permitted.
The regulatory required liability for unsecured reserves ceded to
unauthorized reinsurers was $8,200,000 and $4,300,000 at December 31, 1997
and 1996, respectively.
VULNERABILITY FROM CONCENTRATIONS
At December 31, 1997, the Company did not have a concentration of: 1)
business transactions with a particular customer, lender or distributor; 2)
revenues from a particular product or service; 3) sources of supply of labor
or services used in the business; or 4) a market or geographic area in which
business is conducted that makes it vulnerable to an event that is at least
reasonably possible to occur in the near term and which could cause a severe
impact to the Company's financial condition.
OTHER CONTINGENCY MATTERS
The Company is involved in various pending or threatened legal proceedings
arising from the conduct of business. Most of these proceedings are routine
in the ordinary course of business. The Company maintains professional
liability insurance coverage for claims in excess of $5,000,000. The degree
of applicability of this coverage depends on the specific facts of each
proceeding. In some instances, these proceedings include claims for
compensatory and punitive damages and similar types of relief in addition to
amounts for alleged contractual liability or requests for equitable relief.
After consultation with legal counsel and a review of available facts, it is
management's opinion that the ultimate liability, if any, under these suits
will
S-20
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
not have a material adverse affect on the financial position or results of
operations of the Company.
Two lawsuits involve alleged fraud in the sale of interest sensitive
universal life and whole life insurance policies. These two suits have been
filed as class actions against the Company, although the court has not
certified a class in either case. Plaintiffs seek unspecified damages and
penalties for themselves and on behalf of the putative class while the
relief sought in these cases in substantial, the cases are in the early
stages of litigation, and it is premature to make assessments about
potential loss, if any. Management intends to defend these suits vigorously.
The amount of liability, if any, which may arise as a result of these suits
cannot be reasonably estimated at this time.
The number of insurance companies that are under regulatory supervision has
resulted, and is expected to continue to result, in assessments by state
guaranty funds to cover losses to policyholders of insolvent or
rehabilitated companies. Mandatory assessments may be partially recovered
through a reduction in future premium taxes in some states. The Company has
accrued for expected assessments net of estimated future premium tax
deductions.
GUARANTEES
The Company has guarantees with off-balance-sheet risks whose contractual
amounts represent credit exposure. Outstanding guarantees with off-
balance-sheet risks, shown in notional or contract amounts, are as follows:
<TABLE>
<CAPTION>
NOTIONAL OR
CONTRACT AMOUNTS
--------------------
DECEMBER 31
--------------------
1997 1996
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Mortgage loan pass-through
certificates $ 41.6 $ 50.3
- ------------------------------
Real estate partnerships -- .5
- ------------------------------ --------- ---------
$ 41.6 $ 50.8
--------- ---------
--------- ---------
</TABLE>
The Company has invested in real estate partnerships that use conventional
mortgage loans to finance their projects. In some cases, the terms of these
arrangements involve guarantees by each of the partners to indemnify the
mortgagor in the event a partner is unable to pay its principal and interest
payments. In addition, the Company has sold commercial mortgage loans
through grantor trusts which issued pass-through certificates. The Company
has agreed to repurchase any mortgage loans which remain delinquent for 90
days at a repurchase price substantially equal to the outstanding principal
balance plus accrued interest thereon to the date of repurchase. It is
management's opinion that the value of the properties underlying these
commitments is sufficient that in the event of default the impact would not
be material to the Company. Accordingly, both the carrying value and fair
value of these guarantees is zero at December 31, 1997 and 1996.
DERIVATIVES
The Company has derivatives with off-balance-sheet risks whose notional or
contract amounts exceed the credit exposure. The Company has entered into
derivative transactions to reduce its exposure to fluctuations in interest
rates, the widening of bond yield spreads over comparable maturity U.S.
Government obligations, increased liabilities associated with reinsurance
agreements and foreign exchange risks. In addition, the Company is subject
to the risks associated with changes in the value of its derivatives;
however, such changes in value generally are offset by changes in the value
of the items being hedged by such contracts. Outstanding derivatives with
off-balance-sheet risks, shown in notional or contract amounts along with
their carrying value and estimated fair values, are as follows:
S-21
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
<TABLE>
<CAPTION>
NOTIONAL OR ASSETS (LIABILITIES)
CONTRACT AMOUNTS -----------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------------------------------------------------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1997 1996 1997 1997 1996 1996
-------------------------------------------------------
(IN MILLIONS)
-------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate derivatives:
Interest rate cap agreements $4,900.0 $5,500.0 $13.9 $ .9 $20.8 $ 8.2
---------------------------------
Swaptions 1,752.0 672.0 6.9 6.9 11.0 10.6
---------------------------------
Financial futures contracts -- 147.7 -- -- (2.4) (2.4)
---------------------------------
Interest rate swaps 10.0 -- -- (1.8) -- --
--------------------------------- -------- -------- -------- ----- -------- ------
6,662.0 6,319.7 20.8 6.0 29.4 16.4
Foreign currency derivatives:
Forward contracts 163.1 251.5 5.4 5.4 .2 (.2)
---------------------------------
Foreign currency options -- 43.9 -- -- .6 .4
---------------------------------
Foreign currency swaps 15.0 15.0 -- (2.1) -- (2.1)
--------------------------------- -------- -------- -------- ----- -------- ------
178.1 310.4 5.4 3.3 .8 (1.9)
-------- -------- -------- ----- -------- ------
$6,840.1 $6,630.1 $26.2 $ 9.3 $30.2 $ 14.5
-------- -------- -------- ----- -------- ------
-------- -------- -------- ----- -------- ------
</TABLE>
A reconciliation and discussion of the notional or contract amounts for the
significant programs using derivative agreements and contracts at December
31 is a follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------
INTEREST RATE CAPS SPREAD LOCKS SWAPTIONS
1997 1996 1997 1996 1997 1996
----------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $ 5,500.0 $ 5,110.0 $ -- $ 600.0 $ 672.0 $ --
- -----------------------------------
New contracts -- 390.0 50.0 15.0 1,080.0 672.0
- -----------------------------------
Terminations and maturities (600.0) -- (50.0) (615.0) -- --
- ----------------------------------- --------- --------- --------- --------- --------- ---------
Balance at end of year $ 4,900.0 $ 5,500.0 $ -- $ -- $ 1,752.0 $ 672.0
- ----------------------------------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL FUTURES INTEREST RATE SWAPS
CONTRACTS
------------------------------------------
1997 1996 1997 1996
------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $ 147.7 $ -- $ -- $ 5.0
- ------------------------------------------------------------
New contracts 88.3 7,918.8 10.0 --
- ------------------------------------------------------------
Terminations and maturities (236.0) (7,771.1) -- (5.0)
- ------------------------------------------------------------ --------- --------- --------- ---------
Balance at end of year $ -- $ 147.7 $ 10.0 $ --
- ------------------------------------------------------------ --------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
S-22
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
<TABLE>
<CAPTION>
FOREIGN CURRENCY DERIVATIVES
----------------------------------------------------------------
FOREIGN EXCHANGE FOREIGN CURRENCY FOREIGN CURRENCY
FORWARD CONTRACTS OPTIONS SWAPS
1997 1996 1997 1996 1997 1996
----------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $ 251.5 $ 15.7 $ 43.9 $ 99.2 $ 15.0 $ 15.0
- --------------------------------------
New contracts 833.1 406.9 -- 1,168.8 -- --
- --------------------------------------
Terminations and maturities (921.6) (171.1) (43.9) (1,224.1) -- --
- -------------------------------------- --------- --------- --------- --------- --------- ---------
Balance at end of year $ 163.1 $ 251.5 $ -- $ 43.9 $ 15.0 $ 15.0
- -------------------------------------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
INTEREST RATE CAPS
The interest rate cap agreements, which expire in 1998 through 2003, entitle
the Company to receive quarterly payments from the counterparties on
specified future reset dates, contingent on future interest rates. For each
cap, the amount of such payments, if any, is determined by the excess of a
market interest rate over a specified cap rate multiplied by the notional
amount divided by four. The purpose of the Company's interest rate cap
agreement program is to protect its annuity line of business from the effect
of rising interest rates. The premium paid for the interest rate caps is
included in other assets ($13,900,000 as of December 31, 1997) and is being
amortized over the terms of the agreements. This amortization is included in
net investment income.
SWAPTIONS
Swaptions, which expire in 2002 and 2003, entitle the Company to receive
settlement payments from the counterparties on specified expiration dates,
contingent on future interest rates. For each swaption, the amount of such
settlement payments, if any, is determined by the present value of the
difference between the fixed rate on a market rate swap and the strike rate
multiplied by the notional amount. The purpose of the Company's swaption
program is to protect its annuity line of business from the effect of
fluctuating interest rates. The premium paid for the swaptions is included
in other assets ($6,900,000 as of December 31, 1997) and is being amortized
over the terms of the agreements. This amortization is included in net
investment income.
SPREAD LOCKS
Spread-lock agreements provide for a lump sum payment to or by the Company,
depending on whether the spread between the swap rate and a specified
Government note is larger or smaller than a contractually specified spread.
Cash payments are based on the product of the notional amount, the spread
between the swap rate and the yield of an equivalent maturity Government
security and the price sensitivity of the swap at that time. The purpose of
the Company's spread-lock program is to protect a portion of its fixed
maturity securities against widening of spreads.
FINANCIAL FUTURES
The Company uses exchange-traded financial futures contracts to hedge
against interest rate risks and to manage duration of a portion of its fixed
maturity securities. Financial futures contracts obligate the Company to buy
or sell a financial instrument at a specified future date for a specified
price. They may be settled in cash or through delivery of the financial
instrument. Cash settlements on the change in market values of financial
futures contracts are made daily.
INTEREST RATE SWAPS
The Company uses interest rate swap agreements to hedge its exposure to
floating rate bond coupon payments, replicating a fixed rate bond. An
interest rate swap is a contractual agreement to exchange payments at one or
more times based on the actual or expected price, level, performance or
value of one or more underlying interest rates. The Company is required to
pay the counterparty to the
S-23
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
agreements the stream of variable coupon payments generated from the bonds,
and in turn, receives a fixed payment from the counterparty at a
predetermined interest rate. The net receipts/payments from interest rate
swaps are recorded in net investment income.
FOREIGN CURRENCY DERIVATIVES
The Company uses a combination of foreign exchange forward contracts,
foreign currency options and foreign currency swaps, all of which are traded
over-the-counter, to hedge some of the foreign exchange risk of investments
in fixed maturity securities denominated in foreign currencies. The foreign
currency forward contracts obligate the Company to deliver a specified
amount of currency at a future date at a specified exchange rate. Foreign
currency options give the Company the right, but not the obligation, to buy
or sell a foreign currency at a specific exchange rate during a specified
time period. A foreign currency swap is a contractual agreement to exchange
the currencies of two different countries pursuant to an agreement to
re-exchange the two currencies at the same rate of exchange at a specified
future date.
ADDITIONAL DERIVATIVE INFORMATION
Expenses for the agreements and contracts described above amounted to
$7,000,000, $6,900,000 and $5,600,000 in 1997, 1996 and 1995, respectively.
Deferred losses of $2,600,000 as of December 31, 1997, were the result of:
1) terminated and expired spread-lock agreements and; 2) financial futures
contracts. These losses are included with the related fixed maturity
securities to which the hedge applied and are being amortized over the life
of such securities.
The Company is exposed to credit loss in the event of nonperformance by
counterparties on interest rate cap agreements, swaptions, spread-lock
agreements, interest rate swaps, foreign exchange forward contracts, foreign
currency options and foreign currency swaps. However, the Company does not
anticipate nonperformance by any of the counterparties. The credit risk
associated with such agreements is minimized by purchasing such agreements
from financial institutions with long-standing, superior performance
records. The amount of such exposure is essentially the net replacement cost
or market value for such agreements with each counterparty if the net market
value is in the Company's favor. At December 31, 1997, the exposure was
$11,700,000.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following discussion outlines the methodologies and assumptions used to
determine the estimated fair values of the Company's financial instruments.
Considerable judgment is required to develop these fair values. Accordingly,
the estimates shown are not necessarily indicative of the amounts that would
be realized in a one-time, current market exchange of all of the Company's
financial instruments.
BONDS AND UNAFFILIATED COMMON STOCK
Fair values of bonds are based on quoted market prices, where available. For
bonds not actively traded, fair values are estimated using values obtained
from independent pricing services. In the case of private placements, fair
values are estimated by discounting expected future cash flows using a
current market rate applicable to the coupon rate, credit quality and
maturity of the investments. The fair values of unaffiliated common stocks
are based on quoted market prices.
MORTGAGE LOANS ON REAL ESTATE
The estimated fair values of mortgage loans on real estate are established
using a discounted cash flow method based on credit rating, maturity and
future income. The rating for mortgages in good standing are based on
property type, location, market conditions, occupancy, debt service
coverage, loan to value, caliber of tenancy, borrower and payment record.
Fair values for impaired mortgage loans are based on: 1) the present value
of expected future cash flows discounted at the loan's effective interest
rate; 2) the loan's market price; or 3) the fair value of the collateral if
the loan is collateral dependent.
POLICY LOANS
The estimated fair values of investments in policy loans are calculated on a
composite discounted cash flow basis using Treasury interest rates
consistent with the maturity durations assumed. These durations are based on
historical experience.
S-24
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
OTHER INVESTMENTS AND CASH AND SHORT-TERM INVESTMENTS
The carrying values for assets classified as other investments and cash and
short-term investments in the accompanying statutory-basis balance sheets
approximate their fair value.
INVESTMENT-TYPE INSURANCE CONTRACTS
The balance sheet captions, "Future Policy Benefits and Claims" and "Other
Policyholder Funds," include investment type insurance contracts (i.e.,
deposit contracts and guaranteed interest contracts). The fair values for
the deposit contracts and certain guaranteed interest contracts are based on
their approximate surrender values. The fair values for the remaining
guaranteed interest and similar contracts are estimated using discounted
cash flow calculations. These calculations are based on interest rates
currently offered on similar contracts with maturities that are consistent
with those remaining for the contracts being valued.
The remainder of the balance sheet captions "Future Policy Benefits and
Claims" and "Other Policyholder Funds," that do not fit the definition of
"investment-type insurance contracts" are considered insurance contracts.
Fair value disclosures are not required for these insurance contracts and
have not been determined by the Company. It is the Company's position that
the disclosure of the fair value of these insurance contracts is important
because readers of these financial statements could draw inappropriate
conclusions about the Company's capital and surplus determined on a fair
value basis. It could be misleading if only the fair value of assets and
liabilities defined as financial instruments are disclosed. The Company and
other companies in the insurance industry are monitoring the related actions
of the various rule-making bodies and attempting to determine an appropriate
methodology for estimating and disclosing the "fair value" of their
insurance contract liabilities.
SHORT-TERM DEBT
Fair values of short-term debt approximates carrying values.
GUARANTEES
The Company's guarantees include guarantees related to real estate
partnerships and mortgage loan pass-through certificates. Based on
historical performance where repurchases have been negligible and the
current status, which indicates none of the loans are delinquent, the fair
value liability for the guarantees related to the mortgage loan pass-through
certificates is insignificant.
DERIVATIVES
The Company's derivatives include interest rate cap agreements, swaptions,
spread-lock agreements, foreign currency exchange contracts, financial
futures contracts, interest rate swaps, foreign currency options and foreign
currency swaps. Fair values for these contracts are based on current
settlement values. These values are based on: 1) quoted market prices for
the foreign currency exchange contracts and financial future contracts and;
2) brokerage quotes that utilize pricing models or formulas using current
assumptions for all other swaps and agreements.
INVESTMENT COMMITMENTS
Fair values for commitments to make investment in fixed maturity securities
(primarily private placements), mortgage loans on real estate and real
estate are based on the difference between the value of the committed
investments as of the date of the accompanying balance sheets and the
commitment date. These estimates would take into account changes in interest
rates, the counterparties' credit standing and the remaining terms of the
commitments.
S-25
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying values and estimated fair values of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------
1997 1996
----------------------------------------------
CARRYING CARRYING
ASSETS (LIABILITIES) VALUE FAIR VALUE VALUE FAIR VALUE
- -----------------------------------------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------
<S> <C> <C> <C> <C>
Bonds $ 18,560.7 $ 19,798.6 $ 19,389.6 $ 20,194.4
- -----------------------------------------------
Preferred stock 257.3 268.7 239.7 248.5
- -----------------------------------------------
Unaffiliated common stock 436.0 436.0 358.3 358.3
- -----------------------------------------------
Mortgage loans on real estate 3,012.7 3,179.2 2,976.7 3,070.9
- -----------------------------------------------
Policy loans 660.5 648.3 626.5 612.7
- -----------------------------------------------
Other investments 335.5 335.5 282.7 282.7
- -----------------------------------------------
Cash and short-term investments 2,133.0 2,133.0 759.2 759.2
- -----------------------------------------------
Investment-type insurance contracts:
Deposit contracts and certain guaranteed
interest contracts (17,324.2) (16,887.6) (17,871.6) (17,333.0)
--------------------------------------------
Remaining guaranteed interest and similar
contracts (1,267.0) (1,294.6) (1,799.7) (1,835.4)
--------------------------------------------
Short-term debt (120.0) (120.0) (100.0) (100.0)
- -----------------------------------------------
Derivatives 26.2 9.3 26.5 13.8
- -----------------------------------------------
Investment commitments -- (.5) -- (.6)
- -----------------------------------------------
</TABLE>
12. ACQUISITIONS AND SALES OF SUBSIDIARIES
In October 1996, the Company and LLANY purchased a block of group
tax-qualified annuity business from UNUM Corporation's affiliate. The
transaction was completed in the form of a reinsurance transaction, which
resulted in a ceding commission of $71,800,000. The ceding commission has
been recorded as admissible goodwill of $62,300,000, which is to be
amortized on a straight-line basis over 10 years. LLANY was required by the
New York Department of Insurance to expense its portion of the ceding
commission in 1996. Policy liabilities and related accruals of the Company
and its wholly owned subsidiary increased by $3,200,000,000 as a result of
this transaction.
In 1997, LNC contributed 25,000,000 shares of common stock of American
States Financial Corporation ("American States") to the Company. American
States is a property casualty insurance holding company of which LNC owned
83.3%. The contributed common stock was accounted for as a capital
contribution equal to the fair value of the common stock received by the
Company. Subsequently, the American States common stock owned by the
Company, along with all other American States common stock owned by LNC and
its affiliates, was sold. The Company received proceeds from the sale in the
amount of $1,175,000,000. The Company recognized no gain or loss on the sale
of its portion of the common stock due to the receipt of such stock at fair
value.
On January 2, 1998, the Company issued a surplus note to LNC in return for
$500,000,000 in cash. The note calls for the Company to pay, on or before
March 31, 2028, the principal amount of the note and interest quarterly at a
6.56% annual rate. LNC also has a right to redeem the note for immediate
repayment in total or in part once per year on the
S-26
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
12. ACQUISITIONS AND SALES OF SUBSIDIARIES (CONTINUED)
anniversary date of the note, but not before January 2, 2003. Any payment of
interest or repayment of principal may be paid only out of excess surplus
(as defined in the note) and is subject to the approval of the Commissioner
of the Indiana Department of Insurance.
Proceeds from the sale of the Company's American States common stock, as
well as proceeds from the surplus note, were used to finance an indemnity
reinsurance transaction whereby the Company reinsured 100% of a block of
individual life insurance and annuity business from CIGNA Corporation. The
Company paid $1,264,400,000 to CIGNA on January 2, 1998 under the terms of
the reinsurance agreement, which will result in a decrease to surplus in
1998 of approximately $1,000,000,000. Operating results generated by this
block of business after the closing date will be included in the Company
financial statements from the closing date. At the time of closing, this
block of business had statutory liabilities of $4,658,200,000 that became
the Company's obligation. The company also received assets, measured on a
historical statutory basis, equal to the liabilities. During 1997, this
block produced premiums, fees and deposits of $1,051,000,000 and earnings of
$87,200,000 on a statutory basis. The Company also expects to pay
$30,000,000 to cover expenses associated with the reinsurance agreement and
to record a charge of approximately $12,000,000 during 1998 to cover certain
costs of integrating the existing operations with the new block of business.
13. TRANSACTIONS WITH AFFILIATES
A wholly owned subsidiary of LNC, Lincoln Financial Group, Inc. ("LFGI"),
has a nearly exclusive general agents contract with the Company under which
it sells the Company's products and provides the service that otherwise
would be provided by a home office marketing department and regional
offices. For providing these selling and marketing services, the Company
paid LFGI override commissions and operating expense allowances of
$61,600,000, $56,300,000 and $43,300,000 in 1997, 1996 and 1995,
respectively. LFGI incurred expenses of $5,500,000, $15,700,000 and
$10,400,000 in 1997, 1996 and 1995, respectively, in excess of the override
commissions and operating expense allowances received from the Company,
which the Company is not required to reimburse. Effective in January 1998,
the Company and LFGI agreed to increase the override commission expense and
eliminate the operating expense allowance.
Cash and short-term investments at December 31, 1997 and 1996 include the
Company's participation in a short-term investment pool with LNC of
$325,600,000 and $175,100,000, respectively. Related investment income
amounted to $15,500,000, $15,300,000 and $21,100,000 in 1997, 1996 and 1995,
respectively. Other liabilities at December 31, 1997 and 1996 include
$120,000,000 and $100,000,000, respectively, of notes payable to LNC.
The Company provides services to and receives services from affiliated
companies which resulted in a net payment of $48,500,000, $34,100,000 and
$24,900,000 in 1997, 1996 and 1995, respectively.
The Company cedes and accepts reinsurance from affiliated companies.
Premiums in the accompanying statements of income include premiums on
insurance business accepted under reinsurance contracts and exclude premiums
ceded to other affiliated companies, as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Insurance assumed $ 11.9 $ 17.9 $ 17.6
- ----------------------
Insurance ceded 100.3 302.8 214.4
- ----------------------
</TABLE>
S-27
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
13. TRANSACTIONS WITH AFFILIATES (CONTINUED)
The balance sheets include reinsurance balances with affiliated companies as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Future policy benefits
and claims assumed $ 245.5 $ 312.7
- ------------------------
Future policy benefits
and claims ceded 997.2 891.8
- ------------------------
Amounts recoverable on
paid and unpaid losses 30.4 31.2
- ------------------------
Reinsurance payable on
paid losses 5.3 2.7
- ------------------------
Funds held under
reinsurance treaties --
net liability 1,115.4 1,062.4
- ------------------------
</TABLE>
Substantially all reinsurance ceded to affiliated companies is with
unauthorized companies. To take a reserve credit for such reinsurance, the
Company holds assets from the reinsurer, including funds held under
reinsurance treaties, and is the beneficiary on letters of credit
aggregating $280,900,000 and $314,200,000 at December 31, 1997 and 1996,
respectively. The letters of credit are issued by banks and represent
guarantees of performance under the reinsurance agreement. At December 31,
1997 and 1996, LNC had guaranteed $229,100,000 and $239,200,000,
respectively, of these letters of credit. At December 31, 1997, the Company
has a receivable (included in the foregoing amounts) from affiliated
insurance companies in the amount of $130,700,000 for statutory surplus
relief received under financial reinsurance ceded agreements.
14. SEPARATE ACCOUNTS
Separate account assets and liabilities reported in the accompanying balance
sheets represent funds that are separately administered, principally for
annuity contracts, and for which the contractholder, rather than the
Company, bears the investment risk. Separate account contractholders have no
claim against the assets of the general account of the Company. Separate
account assets are reported at fair value and consist primarily of long-term
bonds, common stocks, short-term investments and mutual funds. The detailed
operations of the separate accounts are not included in the accompanying
financial statements. Fees charged on separate account policyholder deposits
are included in other income.
Separate account premiums, deposits and other considerations amounted to
$4,821,800,000, $4,148,700,000 and $3,068,200,000 in 1997, 1996 and 1995,
respectively. Reserves for separate accounts with assets at fair value were
$30,560,700,000 and $23,047,800,000 at December 31, 1997 and 1996,
respectively. All reserves are subject to discretionary withdrawal at market
value. Substantially all of the Company's separate accounts are
nonguaranteed.
S-28
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
14. SEPARATE ACCOUNTS (CONTINUED)
A reconciliation of transfers to (from) separate accounts are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996
------------------------
(IN MILLIONS)
------------------------
<S> <C> <C>
Transfers as reported in the Summary of Operations of
various Separate Accounts:
Transfers to separate accounts $ 4,824.0 $ 4,149.6
- ------------------------------------------------------------
Transfers from separate accounts (2,943.8) (2,058.5)
- ------------------------------------------------------------ --------- ---------
Net transfer to separate accounts as reported in the
Company's NAIC Annual Statement -- Summary of Operations $ 1,880.2 $ 2,091.1
- ------------------------------------------------------------ --------- ---------
--------- ---------
</TABLE>
15. RECONCILIATION OF ANNUAL STATEMENT TO AUDITED FINANCIAL STATEMENTS
In 1997, certain errors were identified by the Illinois
Insurance Department in the calculation of the AVR as of
December 31, 1996 and 1995. The effects of the AVR errors
also resulted in the need for revisions in the calculation
of certain investment limitation thresholds, the results of
which indicated that additional assets should have been
nonadmitted as of December 31, 1996. As discussed by the
Company with the Indiana and Illinois Insurance Departments,
corrections were made to affected pages of the Company's
NAIC Annual Statement which were refiled with various state
insurance departments. However, due to immateriality of the
corrections in relation to the financial statements taken as
a whole, the audited 1996 and 1995 statutory-basis financial
statements were not corrected and re-issued.
The Company's 1997 NAIC Annual Statement, as filed with
various state insurance departments, also includes the
corrected balances for 1996 and 1995. The following is a
reconciliation of total admitted assets, total liabilities
and capital and surplus as of December 31, 1996 as presented
in the 1997 NAIC Annual Statement (as corrected) to the
accompanying audited financial statements.
<TABLE>
<CAPTION>
TOTAL CAPITAL
ADMITTED TOTAL AND
ASSETS LIABILITIES SURPLUS
---------------------------------
<S> <C> <C> <C>
Balance as of December 31, 1996 as
reported in the accompanying audited
financial statements $50,016.6 $ 48,054.0 $ 1962.6
- ----------------------------------------
Effect of AVR errors -- 37.6 (37.6)
- ----------------------------------------
Effect of change in investment
limitations (57.0) -- (57.0)
- ---------------------------------------- --------- ----------- --------
Balance as of December 31, 1996 as
reported in the 1997 NAIC Annual
Statement $49,959.6 $ 48,091.6 $1,868.0
- ---------------------------------------- --------- ----------- --------
--------- ----------- --------
</TABLE>
16. IMPACT OF YEAR 2000 (UNAUDITED)
The Year 2000 Issue is pervasive and complex and affects virtually every
aspect of the Company's business. The Company's computer systems and
interfaces with the computer systems of vendors, suppliers, customers and
business partners are particularly vulnerable. The inability to properly
recognize date sensitive electronic information and transfer data between
systems could cause errors or even a complete systems failure which would
result in a temporary inability to process transactions correctly and engage
in normal business
S-29
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
16. IMPACT OF YEAR 2000 (UNAUDITED) (CONTINUED)
activities. The Company is redirecting a large portion of its internal
information technology efforts and contracting with outside consultants to
update its systems to accommodate the year 2000. Also, the Company has
initiated formal communications with critical parties that interface with
the Company's systems to gain an understanding of their progress in
addressing Year 2000 Issues. While the Company is making every effort to
address its own systems and the systems with which it interfaces, it is not
possible to provide assurance that operational problems will not occur. The
Company presently believes that with the modification of existing computer
systems, updates by vendors and conversion to new software and hardware, the
Year 2000 Issue will not pose significant operational problems for its
computer systems. In addition, the Company is developing contingency plans
in the event that, despite its best efforts, there are unresolved year 2000
problems. If the remediation efforts noted above are not completed timely or
properly, the Year 2000 Issue could have a material adverse impact on the
operation of the Company's business.
During 1997 and 1996, the Company incurred expenditures of approximately
$5,500,000 ($3,600,000 after-tax) to address this issue. The Company's
financial plans for 1998 through 2000 include expected expenditures of an
additional $20,000,000 ($13,000,000 after-tax) on this issue. The cost of
addressing Year 2000 Issues and the timeliness of completion will be closely
monitored by management and are based on managements's current best
estimates which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third
party modification plans and other factors. Nevertheless, there can be no
guarantee that these estimated costs will be achieved and actual results
could differ significantly from those anticipated. Specific factors that
might cause such differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer problems and other uncertainties.
S-30
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The Lincoln National Life Insurance Company
We have audited the accompanying statutory-basis balance sheets
of The Lincoln National Life Insurance Company (a wholly owned
subsidiary of Lincoln National Corporation) as of December 31,
1997 and 1996, and the related statutory-basis statements of
income, changes in capital and surplus and cash flows for each
of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
As described in Note 1 to the financial statements, the Company
presents its financial statements in conformity with accounting
practices prescribed or permitted by the Indiana Department of
Insurance, which practices differ from generally accepted
accounting principles. The variances between such practices and
generally accepted accounting principles and the effects on the
accompanying financial statements are also described in Note 1.
In our opinion, because of the effects of the matter described
in the preceding paragraph, the financial statements referred to
above do not present fairly, in conformity with generally
accepted accounting principles, the financial position of The
Lincoln National Life Insurance Company at December 31, 1997 and
1996, or the results of its operations or its cash flows for
each of the three years in the period ended December 31, 1997.
However, in our opinion, the financial statements referred to
above present fairly, in all material respects, the financial
position of The Lincoln National Life Insurance Company at
December 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with accounting practices
prescribed or permitted by the Indiana Department of Insurance.
February 5, 1998
S-31
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA
DECEMBER 31, 1997 (IN MILLIONS)
<TABLE>
<S> <C> <C>
Investment income earned:
Government bonds $ 52.8
-----------------------------------------------------------------------------------------
Other bonds (unaffiliated) 1,471.6
-----------------------------------------------------------------------------------------
Preferred stocks (unaffiliated) 23.5
-----------------------------------------------------------------------------------------
Common stocks (unaffiliated) 8.3
-----------------------------------------------------------------------------------------
Common stocks of affiliates 15.0
-----------------------------------------------------------------------------------------
Mortgage loans 257.2
-----------------------------------------------------------------------------------------
Real estate 92.2
-----------------------------------------------------------------------------------------
Premium notes, policy loans and liens 37.5
-----------------------------------------------------------------------------------------
Cash on hand and on deposit 1.0
-----------------------------------------------------------------------------------------
Short-term investments 69.3
-----------------------------------------------------------------------------------------
Other invested assets 21.9
-----------------------------------------------------------------------------------------
Derivative instruments (10.0)
-----------------------------------------------------------------------------------------
Aggregate write-ins for investment income 16.3
----------------------------------------------------------------------------------------- ---------
Gross investment income $ 2,056.6
- ---------------------------------------------------------------------------------------------------- ---------
---------
Real estate owned (cost, less encumbrances) $ 585.2
- ---------------------------------------------------------------------------------------------------- ---------
---------
Mortgage loans (unpaid balance):
Farm mortgages $ 0.1
-----------------------------------------------------------------------------------------
Residential mortgages 3.1
-----------------------------------------------------------------------------------------
Commercial mortgages 3,009.5
----------------------------------------------------------------------------------------- ---------
Total mortgage loans $ 3,012.7
- ---------------------------------------------------------------------------------------------------- ---------
---------
Mortgage loans by standing (unpaid balance):
Good standing $ 2,974.1
----------------------------------------------------------------------------------------- ---------
---------
Good standing with restructured terms $ 38.5
----------------------------------------------------------------------------------------- ---------
---------
Interest overdue more than three months, not in foreclosure $ --
----------------------------------------------------------------------------------------- ---------
---------
Foreclosure in process $ 0.1
----------------------------------------------------------------------------------------- ---------
---------
Other long-term assets (statement value) $ 281.5
- ---------------------------------------------------------------------------------------------------- ---------
---------
</TABLE>
S-32
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA (CONTINUED)
DECEMBER 31, 1997 (IN MILLIONS)
<TABLE>
<S> <C>
Bonds and stocks of parent, subsidiaries and affiliates (cost):
Common stocks of subsidiaries $ 466.2
- ----------------------------------------------------------------------------------------------- ---------
---------
Bonds and short-term investments by class and maturity:
Bonds by maturity (statement value):
Due within one year or less $ 3,140.1
------------------------------------------------------------------------------------------
Over 1 year through 5 years 5,182.8
------------------------------------------------------------------------------------------
Over 5 years through 10 years 5,772.8
------------------------------------------------------------------------------------------
Over 10 years through 20 years 3,275.3
------------------------------------------------------------------------------------------
Over 20 years 3,270.6
------------------------------------------------------------------------------------------ ---------
Total by maturity $20,641.6
-------------------------------------------------------------------------------------------- ---------
---------
Bonds by class (statement value):
Class 1 $13,879.0
------------------------------------------------------------------------------------------
Class 2 5,215.6
------------------------------------------------------------------------------------------
Class 3 848.0
------------------------------------------------------------------------------------------
Class 4 668.8
------------------------------------------------------------------------------------------
Class 5 23.6
------------------------------------------------------------------------------------------
Class 6 6.6
------------------------------------------------------------------------------------------ ---------
Total by class $20,641.6
-------------------------------------------------------------------------------------------- ---------
---------
Total bonds publicly traded $16,457.1
- ----------------------------------------------------------------------------------------------- ---------
---------
Total bonds privately placed $ 4,184.5
- ----------------------------------------------------------------------------------------------- ---------
---------
Preferred stocks (statement value) $ 257.3
- ----------------------------------------------------------------------------------------------- ---------
---------
Unaffiliated common stocks (market value) $ 436.0
- ----------------------------------------------------------------------------------------------- ---------
---------
Short-term investments (cost or amortized cost) $ 2,080.9
- ----------------------------------------------------------------------------------------------- ---------
---------
Financial options and caps owned (statement value) $ 20.8
- ----------------------------------------------------------------------------------------------- ---------
---------
Financial options and caps written (statement value) $ --
- ----------------------------------------------------------------------------------------------- ---------
---------
Swap and forward agreements open (statement value) $ 5.4
- ----------------------------------------------------------------------------------------------- ---------
---------
Futures contracts open (current value) $ --
- ----------------------------------------------------------------------------------------------- ---------
---------
Cash on deposit $ 52.1
- ----------------------------------------------------------------------------------------------- ---------
---------
Life insurance in-force:
Ordinary $ 108.6
------------------------------------------------------------------------------------------ ---------
---------
Group life $ 31.2
------------------------------------------------------------------------------------------ ---------
---------
</TABLE>
S-33
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA (CONTINUED)
DECEMBER 31, 1997 (IN MILLIONS)
<TABLE>
<S> <C>
Amount of accidental death insurance in-force under ordinary policies $ 5.3
- ----------------------------------------------------------------------------------------------- ---------
---------
Life insurance policies with disability provisions in-force:
Ordinary $ 5.5
------------------------------------------------------------------------------------------ ---------
---------
Group life $ --
------------------------------------------------------------------------------------------ ---------
---------
Supplementary contracts in-force:
Ordinary -- not involving life contingencies:
Amount on deposit $ --
------------------------------------------------------------------------------------------ ---------
---------
Income payable $ 0.8
------------------------------------------------------------------------------------------ ---------
---------
Ordinary -- involving life contingencies:
Income payable $ 3.0
------------------------------------------------------------------------------------------ ---------
---------
Group -- not involving life contingencies:
Income payable $ 1.1
------------------------------------------------------------------------------------------ ---------
---------
Group -- involving life contingencies:
Income payable $ --
------------------------------------------------------------------------------------------ ---------
---------
Annuities:
Ordinary:
Immediate -- amount of income payable $ 71.8
------------------------------------------------------------------------------------------ ---------
---------
Deferred -- fully paid account balance $ 0.7
------------------------------------------------------------------------------------------ ---------
---------
Deferred -- not fully paid account balance $ 264.0
------------------------------------------------------------------------------------------ ---------
---------
Group:
Amount of income payable $ 0.3
------------------------------------------------------------------------------------------ ---------
---------
Fully paid account balance $ 0.1
------------------------------------------------------------------------------------------ ---------
---------
Not fully paid account balance $ 72.3
------------------------------------------------------------------------------------------ ---------
---------
Accident and health insurance -- premiums in-force:
Ordinary $ 166.0
------------------------------------------------------------------------------------------ ---------
---------
Group $ 77.7
------------------------------------------------------------------------------------------ ---------
---------
Deposit funds and dividend accumulations:
Deposit funds account balance $16,507.3
------------------------------------------------------------------------------------------ ---------
---------
Dividend accumulations -- account balance $ 114.4
------------------------------------------------------------------------------------------ ---------
---------
</TABLE>
S-34
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTE TO SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA
NOTE -- BASIS OF PRESENTATION
The accompanying schedule presents selected statutory-basis
financial data as of December 31, 1997 and for the year then
ended for purposes of complying with paragraph 9 of the Annual
Audited Financial Reports in the General Section of the National
Association of Insurance Commissioners' Annual Statement
Instructions and agrees to or is included in the amounts
reported in The Lincoln National Life Insurance Company's 1997
Statutory Annual Statement as filed with the Indiana Department
of Insurance.
S-35
<PAGE>
REPORT OF INDEPENDENT AUDITORS ON
OTHER FINANCIAL INFORMATION
Board of Directors
The Lincoln National Life Insurance Company
Our audits were conducted for the purpose of forming an opinion
on the statutory-basis financial statements taken as a whole.
The accompanying supplemental schedule of selected statutory
basis financial data is presented to comply with the National
Association of Insurance Commissioners' Annual Statement
Instructions and is not a required part of the statutory-basis
financial statements. Such information has been subjected to the
auditing procedures applied in our audit of the statutory-basis
financial statements and, in our opinion, is fairly stated in
all material respects in relation to the statutory-basis
financial statements taken as a whole.
February 5, 1998
S-36
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT E
POST-EFFECTIVE AMENDMENT ON FORM N-4
PART C - OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) List of Financial Statements
1. Part A. The Table of Condensed Financial Information is included in
Part A of this Registration Statement.
2. Part B. The following Financial Statements of Account E are included
in Part B of this Registration Statement:
Statement of Net Assets -- December 31, 1997
Statement of Operations -- Year ended December 31, 1997
Statements of Changes in Net Assets -- Years ended December 31, 1997
and 1996
Notes to Financial Statements -- December 31, 1997
Report of Ernst & Young LLP, Independent Auditors
3. The following Statutory-Basis Financial Statements and Schedules of
Lincoln National Life Insurance Company are included in the SAI:
Balance Sheets -- Statutory Basis -- Years ended December 31, 1997 and
1996
Statements of Income -- Statutory Basis -- Years ended December 31,
1997, 1996, and 1995
Statements of Capital and Surplus -- Statutory Basis -- Years ended
December 31, 1997, 1996, and 1995
Notes to Statutory-Basis Financial Statements -- December 31, 1997
Supplemental Schedule of Selected Statutory-Basis Financial Data --
December 31, 1997
Report of Ernst & Young LLP, Independent Auditors
(b) List of Exhibits
(1)(a) Resolutions of the Board of Directors of the Lincoln National Life
Insurance Company establishing Separate Account E
(1)(b) Establishing Resolution of Segregated Investment Account
(2) None.
(3)(a) Underwriting Agreement
(3)(b) Amendment to Underwriting Agreement
(3)(c) Selling Group Agreement incorporated herein by reference to
Registration Statement on Form N-4 (33-27783) filed on March 27, 1998.
(4)(a) Variable Annuity Contract
(4)(b) Form of Rider to Variable Annuity Contract incorporated herein by
reference to Registration Statement on Form N-4 (33-27783) filed on
March 31, 1997.
(5)(a) Application
(6) Articles of Incorporation and Bylaws of Lincoln National Life Insurance
Company are incorporated herein by reference to Registration Statement
on Form N-4 (33-27783) filed on December 5, 1996.
(7) Not applicable.
(8)(a) Services Agreement between Delaware Management Holdings, Inc., Delaware
Service Company, Inc. and Lincoln National Life Insurance Company is
incorporated herein by reference to the Registration Statement on Form
S-6 (333-40745 filed on November 21, 1997).
(8)(b) Participation Agreement
(9) Consent and Opinion of Jeremy Sachs, incorporated herein by reference
to Post-Effective Amendment #12 filed on April 22, 1998.
(10) Consent of Ernst & Young LLP, Independent Auditors
(14) Other Exhibits:
(a) Organizational Chart of the Lincoln National Insurance
Holding Company System incorporated herein by reference
to Registration Statement on Form N-4 (33-27783) filed
on March 27, 1998.
(b) Books and Records Report.
<PAGE>
Item 25.
DIRECTORS AND OFFICERS OF THE DEPOSITOR
Name Positions and Offices with LNL
- ---- ------------------------------
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
Jeffrey K. Dellinger* Vice President
John H. Gotta**** Senior Vice President
Jack D. Hunter* Executive Vice President and General Counsel
Donald E. Keller* Vice President
Stephen H. Lewis* Senior Vice President
H. Thomas Mc Meekin** Director
Reed P. Miller* Vice President
Ian M. Rolland** Director
Lawrence T. Rowland*** Executive Vice President
Keith J. Ryan* Senior Vice President,
Asst. Treasurer and Chief Financial Officer
Richard C. Vaughan** Director
Roy V. Washington* Vice President
Janet C. Whitney** Vice President and Treasurer
C. Suzanne Womack** Assistant Vice President and Secretary
*Principal business address is 1300 South Clinton Street, Fort Wayne, Indiana
46802.
**Principal business address is 200 East Berry Street, Fort Wayne, Indiana
46802-2706.
***Principal business address is 1700 Magnavox Way, One Reinsurance Place,
Fort Wayne, Indiana 46804.
****Principal business address is 900 Cottage Grove Road, Bloomfield, CT
06152-2321
Item 26.
PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
WITH THE DEPOSITOR OR REGISTRANT
See Exhibit 15(a): Organizational Chart of the Lincoln National Insurance
Holding Company System
Item 27.
NUMBER OF CONTRACTOWNERS
As of January 31, 1998, there were 14,102 Contract Owners (fixed and
variable).
Item 28. Indemnification
Refer to the initial Registration Statement.
Item 29. Principal Underwriter
(a) American Funds Distributors, Inc., is also the Principal Underwriter of
shares of: AMCAP Fund, Inc., American Balanced Fund, Inc., The American Funds
Income Series, The American Funds Tax-Exempt Series I, The American Funds Tax-
Exempt Series II, American High-Income Municipal Bond Fund, Inc., American High-
Income Trust, American Mutual Fund, Inc., Capital Income Builder, Inc., Capital
World Bond Fund, Inc., Capital World Growth and Income Fund, Inc., The Cash
Management Trust of America, EuroPacific Growth Fund, Fundamental Investors,
Inc., The Growth Fund of America, Inc., The Income Fund of America, Inc.,
Intermediate Bond Fund of America, The Investment Company of America, Limited
Term Tax-Exempt Bond Fund of America, The New Economy Fund, New Perspective
Fund, Inc., SMALLCAP World Fund, Inc., The Tax-Exempt Bond Fund of America,
Inc., The Tax-Exempt Money Fund of America, The U.S. Treasury Money Fund of
America and Washington Mutual Investors Fund, Inc.
(b) (1) (2)
Name and Principal Positions and Offices
Business Address with Underwriter
------------------ ---------------------
David L. Abzug Regional Vice President
27304 Park Vista Road
Van Nuys, CA 91301
John A. Agar Regional Vice President
1501 N. University Drive, Suite 227A
Little Rock, AR 72207
<PAGE>
Robert B. Aprison Vice President
2983 Bryn Wood Drive
Madison, WI 53711
S Richard Armstrong Assistant Vice President
L William W. Bagnard Vice President
Steven L. Barnes Senior Vice President
8000 Town Line Avenue South
Suite 204
Minneapolis, MN 55438
B Carl R. Bauer Assistant Vice President
Michelle A. Bergeron Vice President
4160 Gateswalk Drive
Smyrna, GA 30080
Joseph T. Blair Senior Vice President
27 Drumlin Road
West Simsbury, CT 06092
<PAGE>
(b) (1) (2)
Name and Principal Positions and Offices
Business Address with Underwriter
------------------ ---------------------
John A. Blanchard Regional Vice President
6421 Aberdeen Road
Mission Hills, KS 66208
Ian B. Bodell Senior Vice President
P.O. Box 1665
Brentwood, TN 37024-1655
Michael L. Brethower Vice President
2320 North Austin Avenue
Georgetown, TX 78628
C. Alan Brown Regional Vice President
4129 Laclede Avenue
St. Louis, MO 63108
L Daniel C. Brown Sr. Vice President
H J. Peter Burns Vice President
Brian C. Casey Regional Vice President
9508 Cable Drive
Kensington, MD 20895
<PAGE>
Victor C. Cassato Senior Vice President
609 W. Littleton Blvd., Suite 310
Littleton, CO 80120
Christopher J. Cassin Senior Vice President
111 W. Chicago Avenue, Suite G3
Hinsdale, IL 60521
Denise M. Cassin Vice President
1301 Stoney Creek Drive
San Ramon, CA 94538
L Larry P. Clemmensen Director
L Kevin G. Clifford Director, President
Ruth M. Collier Vice President
145 West 67th Street, Suite #12K
New York, NY 10023
S David Coolbaugh Assistant Vice President
<PAGE>
(b) (1) (2)
Name and Principal Positions and Offices
Business Address with Underwriter
--------------------- ---------------------
Thomas E. Cournoyer Vice President
2333 Granada Boulevard
Coral Gables, FL 33134
Douglas A. Critchell Senior Vice President
4116 Woodbine St.
Chevy Chase, MD 20815
L Carl D. Cutting Vice President
Dan J. Delianedis Regional Vice President
8689 Braxton Drive
Eden Prairie, MN 55347
Michael A. Dilella Vice President
P.O. Box 661
Ramsey, NJ 07446
G. Michael Dill Senior Vice President
505 E. Main Street
Jenks, OK 74037
<PAGE>
Kirk D. Dodge Senior Vice President
633 Menlo Avenue, Suite 210
Menlo Park, CA 94025
Peter Doran Senior Vice President
1205 Franklin Avenue
Garden City, NY 11530
L Michael J. Downer Secretary
Robart W. Durbin Vice President
74 Sunny Lane
Tiffin, OH 44883
I Lloyd G. Edwards Senior Vice President
L Paul H. Fieberg Sr. Vice President
John R. Fodor Vice President
15 Latisquama Road
Southborough, MA 01772
<PAGE>
(b) (1) (2)
Name and Principal Positions and Offices
Business Address with Underwriter
------------------ ----------------------
L Mark P. Freeman, Jr. Director
Clyde E. Gardner Vice President
Route 2, Box 3162
Osage Beach, MO 65065
B Evelyn K. Glassford Vice President
Jeffrey J. Greiner Vice President
12210 Taylor Road
Plain City, OH 43064
L Paul G. Haaga, Jr. Director
B Mariellen Hamann Assistant Vice President
David E. Harper Vice President
R.D. 1, Box 210, Rte 519
Frenchtown, NJ 08825
Ronald R. Hulsey Regional Vice President
6744 Avalon
Dallas, TX 75214
Robert S. Irish Regional Vice President
1225 Vista Del Mar Drive
Delray Beach, FL 33483
L Robert L. Johansen Vice President, Controller
Michael J. Johnston Director
630 Fifth Ave., 36th Floor
New York, NY 10111-0121
B Damien M. Jordan Vice President
V. John Kriss Vice President
P.O. Box 274
Surfside, CA 90743
Arthur J. Levine Vice President
12558 Highlands Place
Fishers, IN 46038
<PAGE>
(b) (1) (2)
Name and Principal Positions and Offices
Business Address with Underwriter
------------------ ---------------------
B Karl A. Lewis Assistant Vice President
T. Blake Liberty Regional Vice President
5506 East Mineral Lane
Littleton, CO 80122
L Lorin E. Liesy Assistant Vice President
L Susan G. Lindgren Vice President - Institutional
Investment Services Division
S Stella Lopez Vice President
LW Robert W. Lovelace Director
Stephen A. Malbasa Vice President
13405 Lake Shore Blvd.
Cleveland, OH 44110
Steven M. Markel Senior Vice President
5241 South Race Street
Littleton, CO 80121
L John C. Massar Director, Senior Vice President
L E. Lee McClennahan Senior Vice President
L Jamie R. McCrary Assistant Vice President
S John V. McLaughlin Senior Vice President
Terry W. McNabb Vice President
2002 Barrett Station Road
St. Louis, MO 63131
L R. William Mellnat Vice President-Institutional
Investment Services Division
David R. Murray Vice President
60 Briant Avenue
Sudbury, MA 01776
Stephen S. Nelson Vice President
P.O. Box 470528
Charlotte, NC 28247-0528
<PAGE>
(b) (1) (2)
Name and Principal Positions and Offices
Business Address with Underwriter
------------------ ---------------------
William E. Noe Regional Vice President
304 River Oaks Road
Brentwood, TN 37207
Peter A. Nyhus Regional Vice President
3084 Wilds Ridge Court
Prior Lake, MN 55372
Eric P. Olson Regional Vice President
62 Park Drive
Glenview, IL 60025
Fredric Phillips Vice President
32 Ridge Avenue
Newton Centre, MA 02159
B Candance D. Pilgrim Assistant Vice President
Carl S. Platou Regional Vice President
4021 96th Avenue, SE
Mercer Island, WA 98040
L John O. Post, Jr. Vice President
S Richard P. Prior Assistant Vice President
Steven J. Reitman Vice President
212 The Lane
Hinsdale, IL 60521
Brian A. Roberts Vice President
12025 Delmahoy Drive
Charlotte, NC 28277
George S. Ross Senior Vice President
55 Madison Avenue
Morristown, NJ 07962
L Julie D. Roth Vice President
L James F. Rothenberg Director
Douglas F. Rowe Regional Vice President
30008 Oakland Hills Drive
Georgetown, TX 78628
<PAGE>
(b) (1) (2)
Name and Principal Positions and Offices
Business Address with Underwriter
------------------ ---------------------
Christopher Rowey Regional Vice President
9417 Beverlywood Street
Los Angeles, CA 90034
Dean B. Rydquist Vice President
1080 Bay Pointe Crossing
Alpharetta, GA 30202
Richard R. Samson Vice President
4604 Glencoe Avenue, No. 4
Marina del Rey, CA 90292
Joe D. Scarpitti Regional Vice President
31465 St. Andrews
Westlake, OH 44145
L Daniel B. Seivert Assistant Vice President
L R. Michael Shanahan Director
David W. Short Chairman of the Board
Suite 212, 1000 RIDC Plaza
Pittsburgh, PA 15238-2941
William P. Simon, Jr. Senior Vice President
554 Canterbury Lane
Berwyn, PA 19312
L John C. Smith Vice President-
Institutional Investment
Services Division
L Mary E. Smith Vice President-
Institutional Investment
Services Division
Rodney G. Smith Vice President
100 N. Central Expressway, Suite 1214
Richardson, TX 75080
Nicholas D. Spadaccini Regional Vice President
855 Markley Woods Way
Cincinnati, OH 45230
L Kristen J. Spazafumo Assistant Vice President
<PAGE>
(b) (1) (2)
Name and Principal Positions and Offices
Business Address with Underwriter
------------------ ---------------------
Daniel S. Spradling Senior Vice President
#4 West Fourth Avenue, Suite 406
San Mateo, CA 94402
B Max D. Stites Vice President
Thomas A. Stout Regional Vice President
12913 Kendale Lane
Bowie, MD 20715
Craig R. Strauser Regional Vice President
3 Dover Way
Lake Oswego, OR 97034
Francis N. Strazzeri Vice President
31641 Saddletree Drive
Westlake Village, CA 91361
L Drew Taylor Assistant Vice President
S James P. Toomey Vice President
I Christopher E. Trede Vice President
George F. Truesdail Vice President
400 Abbotsford Court
Charlotte, NC 28270
Scott W. Ursin-Smith Regional Vice President
60 Reedland Woods Way
Tiburon, CA 94920
H Andrew J. Ward Vice President
L David M. Ward Vice President-
Institutional Investment
Services Division
Thomas E. Warren Regional Vice President
1701 Starling Drive
Sarasota, FL 34231
L J. Kelly Webb Sr. Senior Vice President, Treasurer
<PAGE>
<TABLE>
<CAPTION>
(b) (1) (2)
<S> <C>
Name and Principal Positions and Offices
Business Address with Underwriter
------------------ ---------------------
Gregory J. Weimer Vice President
125 Surrey Drive
Canonsburg, PA 15317
B Timothy W. Weiss Director
N. Dexter Williams Senior Vice President
25 Whitside Court
Danville, CA 94526
Timothy J. Wilson Regional Vice President
113 Farmview Place
Venetia, PA 15367
B Laura L. Wimberly Vice President
H Marshall D. Wingo Sr. Director, Senior Vice President
L Robert L. Winston Director, Sr. Vice President
Laurie B. Wood Regional Vice President
3500 West Camino de Urania
Tucson, AZ 85741
William R. Yost Regional Vice President
9320 Overlook Trail
Eden Prairie, MN 55347
Janet M. Young Regional Vice President
1616 Vermont
Houston, TX 77006
Scott D. Zambon Regional Vice President
320 Robinson Drive
Tustin Ranch, CA 92782
</TABLE>
- -------------
L Business Address, 333 South Hope Street, Los Angeles, CA 90071
LW Business Address, 11100 Santa Monica Boulevard, 15th Floor, Los Angeles,
CA 90025
B Business Address, 135 South State College Boulevard, Brea, CA 92821
S Business Address, 8000 IH-10, Suite 1400, San Antonio, TX 78230
H Business Address, 5300 Robin Hood Road, Norfolk, VA 23513
I Business Address, 8332 Woodfield Crossing Blvd., Indianapolis, IN 46240
<PAGE>
Item 30. Location of Accounts and Records
Exhibit 15(b) is hereby expressly incorporated herein by this reference.
Item 31. Management Services
Not Applicable.
50
Item 32. Undertakings
- ---------------------
(a) Registrant undertakes that it will file a post-effective amendment to
this registration statement as frequently as necessary to ensure that
the audited financial statements in the registration statement are
never more than 16 months old for so long as payments under the
variable annuity contracts may be accepted.
(b) Registrant undertakes that it will include either (1) as part of any
application to purchase a Certificate or an Individual Contract
offered by the Prospectus, a space that an applicant can check to
request a Statement of Additional Information, or (2) a post card or
similar written communication affixed to or included in the Prospectus
that the applicant can remove to send for a Statement of Additional
Information.
(c) Registrant undertakes to deliver any Statement of Additional
Information and any financial statements required to be made available
under this Form promptly upon written or oral request to Lincoln Life
at the address or phone number listed in the Prospectus.
(d) 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.
Item 33. ( Additional Item) - Undertaking Concerning the Texas Optional
Retirement Program
Refer to the initial Registration Statement.
Item 34. (Additional Item) - Undertaking Concerning Withdrawal Restrictions
on IRC Section 403(b) Plan Participants
Refer to initial Registration Statement.
51
<PAGE>
SIGNATURES
(a) As required by the Securities Act of 1933 and the Investment Company
Act of 1940, the Registrant certifies that it meets the requirements of
Securities Act Rule 485(b) for effectiveness of this Amendment and has caused
this Amendment to the Registration Statement to be signed on its behalf, in the
City of Fort Wayne and State of Indiana on this 27th day of April, 1998.
LINCOLN NATIONAL VARIABLE ANNUITY
ACCOUNT E (Registrant)
By: /s/ Stephen H. Lewis
--------------------------------
Stephen H. Lewis
(Signature-Officer of Depositor)
Senior Vice President, LNL
(Title)
By: THE LINCOLN NATIONAL LIFE
INSURANCE COMPANY
(Depositor)
By: /s/ Gabriel L. Shaheen
--------------------------------
Gabriel L. Shaheen
President
(Title)
(b) As required by the Securities Act of 1933, this Amendment to the
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ Gabriel L. Shaheen President, Chief Executive Officer April 27, 1998
- ---------------------- & Director (Principal Executive
Gabriel L. Shaheen Officer)
Executive Vice President April 27, 1998
- ---------------------- General Counsel and Director
Jack D. Hunter
Executive Vice President and April 27, 1998
- ---------------------- Director
Lawrence T. Rowland
/s/ Keith J. Ryan Senior Vice President, Chief April 27, 1998
- ---------------------- Financial Officer and Assistant
Keith J. Ryan Treasurer (Principal Accounting
Officer and Principal Financial Officer)
/s/ Ian M. Rolland Director April 27, 1998
- ----------------------
Ian M. Rolland
/s/ Jon A. Boscia Director April 27, 1998
- ----------------------
Jon A. Boscia
/s/ H. Thomas McMeekin Director April 27, 1998
- ----------------------
H. Thomas McMeekin
/s/ Richard C. Vaughan Director April 27, 1998
- ----------------------
Richard C. Vaughan
</TABLE>
<PAGE>
Exhibit 1(a)
I, Marilyn A. Vachon, hereby certify that I am the duly elected and
qualified Secretary of Lincoln National Pension Insurance Company, that the
following is a true and correct copy of a resolution adopted by the Board of
Directors at their meeting of December 14, 1981, and that such resolution is in
full force and effect as of the date hereof:
RESOLVED, That Resolution No. 105 adopted by the Board of Directors on
April 22, 1981, is hereby amended in its entirety to read as follows:
RESOLVED, That the actions of the officers of the Company in
establishing and utilizing a segregated investment account in accordance
with the provisions of the Indiana Insurance Law, such segregated
investment account being designated by the Company as "Lincoln National
Pension Insurance Company Separate Account II", are hereby ratified and
confirmed; and
RESOLVED FURTHER, That the chief executive officer of the Company is
hereby authorized in his discretion from time to time to establish one or
more additional segregated investment accounts for such purpose or purposes
as he may determine and as may be appropriate under the Indiana Insurance
Law; and
RESOLVED FURTHER, That if in the opinion of legal counsel of the
Company it is necessary or desirable to register any of such additional
accounts under the Investment Company Act of 1940 or to register a security
issued by any such account under the Securities Act of 1933, or to make
application to exemption from registration, the chief executive officer or
such other officers as he may designate are hereby authorized to accomplish
any such registration or to make any such application for exemption, and to
perform all other acts as may be desirable or necessary in connection with
the conduct of business of the Company with respect to any such account;
and
RESOLVED FURTHER, That the chief executive officer or such other
officers are authorized to contribute to such segregated investment
accounts on behalf of this Company an amount or amounts not exceeding
$6,000,000 in the aggregate, such contribution to be in such form as the
chief executive officer or such officers determine and to be in addition to
amounts authorized under Resolution No. 118, adopted by the board of
directors on December 14, 1981.
/s/ Marilyn A. Vachon
----------------------------
Marilyn A. Vachon, Secretary
October 1, 1986
[SEAL]
<PAGE>
Exhibit 1(b)
ESTABLISHMENT OF SEGREGATED INVESTMENT ACCOUNT
of
THE LINCOLN NATIONAL PENSION INSURANCE COMPANY
Pursuant to the authority given me by Resolution No. 119 of the Board of
Directors of Lincoln National Pension Insurance Company (the "Company") dated
December 14, 1981, I establish a segregated investment account designated
"Lincoln National Pension Variable Annuity Account E" (the "Account"). The
Account is to be used in connection with the issuance by the Company of variable
annuity policies (the "Policies"). The Account will be registered as a unit
investment trust with the Securities and Exchange Commission ("SEC") and shall
invest in shares of investment companies which are registered with the SEC. The
Account's investment objectives, policies, and limitations shall be, in
accordance with (1) the registration statement for the Policies filed with the
SEC under the Securities Act of 1933, (2) applicable provisions of Indiana
Insurance Law and (3) other applicable legal requirements.
Dated September 26, 1986 /s/ C. David Silletto
-----------------------------
C. David Silletto
<PAGE>
PRINCIPAL UNDERWRITING AGREEMENT
--------------------------------
THIS AGREEMENT is entered into on this 18th day of February, 1987 among
LINCOLN NATIONAL PENSION INSURANCE COMPANY ("Lincoln National"), a life
insurance company organized under laws of the State of Indiana on behalf of
itself and SEPARATE ACCOUNT E OF LINCOLN NATIONAL PENSION INSURANCE COMPANY
("Separate Account"), a separate account established by Lincoln National
pursuant to the Indiana Insurance Code and AMERICAN FUNDS DISTRIBUTORS, INC.
("AFD"), a corporation organized under the laws of the State of California.
WITNESSETH:
WHEREAS, Lincoln National proposes to issue to the public certain variable
annuity contracts ("Contracts") and has, by resolution of its Board of Directors
on September 26, 1986, authorized the creation of a segregated investment
account in connection therewith; and
WHEREAS, Lincoln National has established the Separate Account for the
purpose of issuing the Contracts and has registered the Separate Account with
the Securities and Exchange Commission ("Commission") as a unit investment trust
under the Investment Company Act of 1940; and
WHEREAS, the Contracts to be issued by Lincoln National are registered with
the Commission for offer and sale to the public, and otherwise are in compliance
with all applicable laws; and
WHEREAS, AFD is a broker-dealer registered under the Securities Exchange
Act of 1934 and a member of the National Association of Securities Dealers,
Inc., and proposes to form a selling group for the distribution of said
Contracts; and
WHEREAS, Lincoln National desires to obtain the services of AFD as
principal underwriter of the Contracts issued by Lincoln National through the
Separate Account;
NOW THEREFORE, in consideration of the foregoing, and of the mutual
covenants and conditions set forth herein, and for other good and valuable
consideration, Lincoln National, the Separate Account and AFD hereby agree as
follows:
Duties of AFD
- -------------
1. AFD will form a selling group consisting of broker-dealers appointed by
Lincoln National to distribute the Contracts which are issued by Lincoln
National through the Separate Account and are registered with the Commission for
offer and sale to the public. Broker-dealers listed in the attached Schedule of
Excluded Broker-Dealers may not be members of such selling group. Said Schedule
of Excluded Broker-Dealers may be amended from time to time by the mutual
consent of the undersigned parties.
<PAGE>
2. AFD will enter into and maintain a dealer agreement with each broker-
dealer joining such selling group ("member"); an executed copy of each will be
provided to Lincoln National. Any such dealer agreement expressly will be made
subject to this Agreement. Any such dealer agreement will provide: (i) that each
member will distribute the Contracts only in those jurisdictions in which the
Contracts are registered or qualified for sale and only through duly licensed
registered representatives of the members who are fully licensed with Lincoln
National to sell the Contracts in the applicable jurisdiction(s), (ii) that all
applications and initial and subsequent payments under the Contracts collected
by the member will be remitted promptly by the member to Lincoln National at
such address as it may from time to time designate and (iii) that each member
will comply with all applicable federal and state laws, rules and regulations.
3. AFD will use reasonable efforts to provide information and marketing
assistance to the members, including preparing and providing members with
advertising materials and sales literature, and providing members with current
Prospectuses of the Contracts and of American Pathway Fund (the "Fund"). AFD
will use reasonable efforts to ensure that members deliver only the currently
effective Prospectuses of the Contracts and the Fund. AFD and Lincoln National
will cooperate in the development of advertising and sales literature, as
requested. AFD will deliver to members, and use reasonable efforts to ensure
that members use, only sales literature and advertising material which conforms
to the requirements of federal and state laws and regulations which has been
authorized by Lincoln National and AFD. AFD will be responsible for filing sales
literature and advertising material, where necessary, with appropriate
securities regulatory authorities, including the National Association of
Securities Dealers, Inc. AFD will not distribute any Prospectus, sales
literature, advertising material or any other printed matter or material
relating to the Contracts or the Fund if, to its knowledge, any of the foregoing
misstates the duties, obligations or liabilities of Lincoln National or AFD. AFD
will not actively encourage any member to sell Contracts to employees of
hospitals in the State of California that are members of the California Hospital
Association.
4. AFD shall not be responsible for (i) taking or transmitting
applications for the Contracts; (ii) examining or inspecting risks or approving,
issuing or delivering Contracts; (iii) receiving, collecting or transmitting
insurance premiums; (iv) assisting in the completion of applications for
Contracts; (v) paying sales commissions to licensed broker-dealers and insurance
agents; and (vi) otherwise offering and selling Contracts directly to the
public.
5. AFD will bear all its expenses of providing services under this
Agreement, including the cost of preparing, printing and mailing advertising and
sales literature, and the cost of printing and mailing Fund and Contract
Prospectuses which are used for sales purposes, except that AFD shall not bear
the expenses of registering and qualifying shares or
-2-
<PAGE>
Contracts for sale under federal and state laws and expenses of preparing,
printing and mailing Prospectuses, proxies and shareholder reports to the
extent authorized by law. It is understood that Lincoln National will not be
required to bear the cost of printing and mailing Fund Prospectuses. AFD will,
except with respect to agents and brokers with Lincoln National Sales
Corporation ("LNSC"), reimburse Lincoln National for all state appointing fees
and associated renewal fees incurred to enable members to sell the Contracts.
6. AFD will furnish to Lincoln National such information with
respect to the Fund in such form and signed by such of its officers as Lincoln
National may reasonably request, and will warrant that the statements therein
contained when so signed will be true and correct. AFD will advise Lincoln
National immediately of: (a) any request by the Commission (i) for amendment of
the registration statement relating to the Contracts or the Fund or (ii) for
additional information; (b) the issuance by the Commission of any stop order
suspending the effectiveness of the registration statement of the Contracts or
the Fund or the initiation of any proceedings for that purpose; (c) the
institution of any proceeding, investigation or hearing involving the offer or
sale of the Contracts or the Fund of which it becomes aware; or (d) the
happening of any material event, if known, which makes untrue any statement
made in the registration statement of the Contracts or the Fund or which
requires the making of a change therein in order to make any statement made
therein not misleading.
7. AFD will use reasonable efforts to have the Fund register for
sale under the Securities Act of 1933 and, as required, under state securities
laws, from time to time as necessary, such additional shares of the Fund as may
reasonably be necessary for use as the funding vehicle for the Contracts.
Duties of Lincoln National
- --------------------------
8. Lincoln National or its agent will receive and process
applications and premium payments in accordance with the terms of the Contracts
and the current Prospectuses. All applications for Contracts are subject to
acceptance or rejection by Lincoln National in its sole discretion. Lincoln
National will inform AFD of any such rejection and the reason therefor.
9. Lincoln National will be responsible for filing the Contracts,
forms, sales literature and advertising material, where necessary, with
appropriate insurance regulatory authorities.
10. Lincoln National will furnish to AFD such information with
respect to the Separate Account and the Contracts in such form and signed by
such of its officers as AFD may reasonably request, and will warrant that the
statements therein contained when so signed will be true and correct. Lincoln
National will advise AFD immediately of: (a) any request
-3-
<PAGE>
by the Commission (i) for amendment of the registration statement relating to
the Contracts or the Fund or (ii) for additional information; (b) the issuance
by the Commission of any stop order suspending the effectiveness of the
registration statement of the Contracts or the Fund or the initiation of any
proceedings for that purposes; (c) the institution of any proceeding,
investigation hearing or other action involving the offer or sale of the
Contracts or the Fund of which it becomes aware; (d) the happening of any
material event, if known, which makes untrue any statement made in the
registration statement of the Contracts or the Fund or which requires the making
of a change therein in order to make any statement made therein not misleading.
11. Lincoln National will use reasonable efforts to register for
sale, from time to time as necessary, additional dollar amounts of the Contracts
under the Securities Act of 1933 and, should it ever be required, under state
securities laws and to file for approval under state insurance laws when
necessary and will maintain the Investment Company Act of 1940 registration of
the Separate Account.
12. Lincoln National will pay to members of this selling group such
commissions as are from time to time set forth in dealer agreements. Such dealer
agreements shall provide for the return of sales commissions by the members to
Lincoln National if the Contracts are tendered for redemption to Lincoln
National in accordance with the 20-day review provision in the Contract.
13. Lincoln National will bear its expenses of providing services
under this Agreement, including the cost of preparing, printing and mailing
Prospectuses of the Contracts to Contract owners, expenses and fees of
registering or qualifying the Contracts and the Separate Account under federal
or state laws, and any direct expenses incurred by its employees in assisting
AFD in performing its duties hereunder. Lincoln National will pay to AFD such
remuneration for its services and for the services of its salaried employees,
and such reimbursement for its charges and expenses, as may be contained in such
Schedules of Remuneration as may be adopted and appended to this Agreement from
time to time. Said Schedule of Remuneration may be amended from time to time by
the mutual consent of the undersigned parties; except that AFD may alter the
ratio of commissions paid to dealers and remuneration paid to AFD as set forth
in paragraph 25 of this Agreement.
Warranties
- ----------
14. Lincoln National represents and warrants to AFD that: (i) a
registration statement under the Securities Act of 1933 (File No. 33-09644) and
under the Investment Company Act of 1940 (File No. 811-4882) on Form N-4 with
respect to the Contracts and Separate Account has been filed with the Commission
in the form previously delivered to AFD, and copies of any and all amendments
thereto will be forwarded to AFD at the time that they
-4-
<PAGE>
are filed with the Commission; (ii) the registration statement and any further
amendments or supplements thereto will, when they become effective, conform in
all material respects to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, and the rules and regulations of the Commission
thereunder, and will not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, however, that this representation
and warranty shall not apply to any statement or omission made in reliance upon
and in conformity with information furnished in writing to Lincoln National by
AFD expressly for use therein; (iii) Lincoln National is validly existing as a
stock life insurance company in good standing under the laws of the State of
Indiana, with power (corporate or other) to own its properties and conduct its
business as described in the Prospectus, and has been duly qualified for the
transaction of business and is in good standing under the laws of each other
jurisdiction in which it owns or leases properties, or conducts any business, so
as to require such qualification; (iv) the Contracts to be issued through the
Separate Account have been duly and validly authorized and, when issued and
delivered against payment therefor as provided in the Prospectuses and in the
Contracts, will be duly and validly issued and will conform to the description
of such Contracts contained in the Prospectuses relating thereto; (v) those
persons who offer and sell the Contracts are appropriately licensed in a manner
as to comply with the state insurance laws; (vi) the performance of this
Agreement and the consummation of the transactions herein contemplated will not
result in a breach or violation of any of the terms or provisions of, or
constitute a default under any statute, any indenture, mortgage, deed of trust,
note agreement or other agreement or instrument to which Lincoln National is a
party or by which Lincoln National is bound, Lincoln National's Charter as a
stock life insurance company or By-Laws, or any order, rule or regulation of any
court or governmental agency or body having jurisdiction over Lincoln National
or any of its properties; and no consent, approval, authorization or order of
any court or governmental agency or body which has not been obtained by the
effective date of this Agreement is required for the consummation by Lincoln
National of the transactions contemplated by this Agreement; and (vii) there
are no material legal or governmental proceedings pending to which Lincoln
National or the Separate Account is a party or of which any property of Lincoln
National or the Separate Account is the subject, other than as set forth in the
Prospectus relating to the Contracts, and other than litigation incident to the
kind of business conducted by Lincoln National which, if determined adversely to
Lincoln National, would not individually or in the aggregate have a material
adverse effect on the financial position, surplus or operations of Lincoln
National; and (viii) any information furnished in writing by Lincoln National to
AFD for use in the registration statement of the Fund or the Contracts will not
result in the registration statement's failing to conform in all respects to the
requirements of the Securities Act of 1933 and the rules and regulations
thereunder or containing any untrue statement of a material fact or omission to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading.
-5-
<PAGE>
15. AFD represents and warrants to Lincoln National that: (i) a
registration statement under the Securities Act of 1933 (File No. 2-86838), and
under the Investment Company Act of 1940 (File No. 811-3857) with respect to
American Pathway Fund has been filed with the Commission in the form previously
delivered to Lincoln National, and copies of any and all amendments thereto will
be forwarded to Lincoln National at the time that they are filed with the
Commission; (ii) the Fund's registration statement and any further amendments or
supplements thereto will, when they become effective, conform in all material
respects to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, and the rules and regulations of the Commission thereunder,
and will not contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading; provided, however, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to AFD by Lincoln National
expressly for use therein; (iii) the performance of its duties under this
Agreement by AFD will not result in a breach or violation of any of the terms or
provisions or constitute a default under any statute, any indenture, mortgage,
deed of trust, note agreement or other agreement or instrument to which AFD is a
party or by which AFD is bound, the Certificate of Incorporation or By-Laws of
AFD, or any order, rule or regulation of any court or governmental agency or
body having jurisdiction over AFD or its property; and (iv) any information
furnished in writing by AFD to Lincoln National for use in the registration
statement of the Fund or the Contracts will not result in the registration
statement's failing to conform in all respects to the requirements of the
Securities Act of 1933 and the rules and regulations thereunder or containing
any untrue statement of a material fact or omission to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading. AFD further represents and warrants to Lincoln National that: (i) it
is a broker-dealer duly registered with the Commission pursuant to the
Securities Exchange Act of 1934 and a member in good standing of the National
Association of Securities Dealers, Inc. and is in compliance with the securities
laws in those states in which it conducts business as a broker-dealer; (ii) the
performance of its duties under this Agreement by AFD will not result in a
breach or violation of any of the terms or provisions of or constitute a default
under any statute, any indenture, mortgage, deed or trust, note agreement or
other agreement or instrument to which AFD is a party or by which AFD is bound,
the Certificate of Incorporation or By-Laws of AFD, or any order, rule or
regulation of any court or governmental agency or body having jurisdiction over
AFD or its property; (iii) it will use reasonable efforts to ensure that no
offering, sale or other disposition of the Contracts will be made until it has
been notified by Lincoln National that the subject registration statements have
been declared effective and the Contracts have been released for sale by Lincoln
National, and that such offering, sale or other disposition shall be limited to
those jurisdictions that have approved or otherwise permit the offer and sale of
the Contracts by Lincoln National; (iv) any information furnished in writing by
AFD to
-6-
<PAGE>
Lincoln National for use in the registration statement of the Fund or the
Contracts will not result in the registration statement's failing to conform in
all respects to the requirements of the Securities Act of 1933 and the rules and
regulations thereunder or containing any untrue statement of a material fact or
omission to state a material fact required to be stated therein or necessary to
make the statements therein not misleading; and (v) it will comply with the
requirements of state broker-dealer regulations and the Securities Exchange Act
of 1934 as each applies to AFD and shall conduct its affairs in accordance with
the rules of Fair Practice of the National Association of Securities Dealers,
Inc.
Miscellaneous
- -------------
16. AFD makes no representation or warranty regarding the number of
Contracts to be sold by licensed broker-dealers and insurance agents or the
amount to be paid thereunder. AFD does, however, represent that it will actively
engage in its duties under this Agreement on a continuous basis while the
Agreement is in effect and there is an effective registration of the Contracts
with the Commission.
17. AFD may act as principal underwriter, sponsor, distributor or dealer
for issuers other than Lincoln National or its affiliates in connection with
mutual funds or insurance products; except that AFD shall not, while this
Agreement is in effect, act as principal underwriter, sponsor, distributor or
dealer with respect to insurance contracts which are issued by insurance
companies other than Lincoln National or its affiliates that are similar to the
Contracts. While this Agreement is in effect, Lincoln National will neither
issue any insurance contract similar to the Contracts which are distributed
through broker-dealers (except LNSC and the broker-dealers listed in the
attached Schedule of Excluded Broker-Dealers) without the written consent of AFD
nor enter into an agreement with any other organization for the purpose of
distributing the Contracts. It is understood that shares of American Pathway
Fund may be sold to fund insurance contracts of issuers other than Lincoln
National or its affiliates or to other shareholders in accordance with Internal
Revenue Code Section 817(h) and the regulations thereunder.
18. Nothing in this Agreement shall obligate Lincoln National to appoint
any member or registered representative of a member its agent for purposes of
the distribution of the Contracts. Nothing in this Agreement shall be construed
as requiring AFD to effect sales of the Contracts directly to the public or to
act as an insurance agent or insurance broker on behalf of Lincoln National for
purposes of state insurance laws.
19. AFD agrees to indemnify Lincoln National (or any control person,
shareholder, director, officer or employee of Lincoln National) for any
liability incurred (including costs relating to defense of any action) arising
out of any AFD act or omission relating to (i) rendering services under this
Agreement or (ii) the purchase, retention or surrender of a
-7-
<PAGE>
Contract by any person or entity; provided, however, that indemnification will
not be provided hereunder for any such liability that results from the willful
misfeasance, bad faith or gross negligence of Lincoln National or from the
reckless disregard by Lincoln National of the duties and obligations arising
under this Agreement.
20. Lincoln National agrees to indemnify AFD (or any control person,
shareholder, director, officer or employee of AFD) for any liability incurred
(including costs relating to defense of any action arising out of any Lincoln
National act or omission relating to (i) rendering services under this Agreement
or (ii) the purchase, retention or surrender of a Contract by any person or
entity; provided however, that indemnification will not be provided hereunder
for any such liability that results from the willful misfeasance, bad faith or
gross negligence of AFD or from the reckless disregard by AFD of the duties and
obligations arising under this Agreement.
21. This Agreement will terminate automatically upon its assignment, as
that term is defined in the Investment Company Act of 1940. The parties
understand that there is no intention to create a joint venture in the subject
matter of this Agreement. Accordingly, the right to terminate this Agreement
and to engage in any activity not inconsistent with this Agreement is absolute.
This Agreement will terminate, without the payment of any penalty by either
party: (a) at the option of Lincoln National upon six months' advance written
notice to AFD; or (b) at the option of AFD upon six months' advance written
notice to Lincoln National; or (c) at the option of Lincoln National upon
institution of formal proceedings against AFD by the National Association of
Securities Dealers, Inc. or by the Commission; or (d) as otherwise provided in
the Investment Company Act of 1940.
22. Each notice required by this Agreement shall be given in writing and
delivered by certified mail-return receipt requested.
23. This Agreement shall be subject to the laws of the State of Indiana
and construed so as to interpret the Contracts as insurance products written
within the business operation of Lincoln National.
24. This Agreement covers and includes all agreements, oral and written
(expressed or implied) between Lincoln National and AFD with regard to the
marketing and distribution of the Contracts, and supersedes any and all
Agreements between the parties with respect to the subject matter of this
Agreement; except that this Agreement shall not affect the operation of any
previous agreements entered into between Lincoln National and AFD unrelated to
the subject matter of this Agreement.
25. This Agreement, along with any Schedule of Remuneration attached
hereto and incorporated herein by reference, may be amended from time to time by
the mutual agreement and consent of the undersigned parties, provided such
amendment be in writing and duly executed; except that with respect to any
Schedule of Remuneration, AFD in its sole discretion, may alter upon written
notice to Lincoln National the ratio of commissions
-8-
<PAGE>
paid to dealers and remuneration paid to AFD. AFD agrees to reimburse Lincoln
National any remuneration previously received to the extent necessary to pay
additional commissions to dealers due to a retroactive change of this ration.
This Agreement shall become effective as of the effective date of the Form
N-4 Registration Statement filed under the Securities Act of 1933 and the
Investment Company Act of 1940 with respect to the Contracts.
IN WITNESS WHEREOF, the undersigned parties have caused this Agreement to
be duly executed and attested on the date first stated above.
Lincoln National Pension Insurance
Company on behalf of itself and
Separate Account E of Lincoln
National Pension Insurance Company
Attest:
/s/ Carolyn Bertz By: /s/ Robert A. Nickels
- --------------------------------- ---------------------------------
Carolyn Bertz Robert A. Nickels
Attest:
/s/ Michael Downer By: /s/ Hoyt J. Turner
- --------------------------------- ---------------------------------
Michael Downer Hoyt J. Turner
-9-
<PAGE>
Exhibit 3(b)
AMENDMENT TO THE PRINCIPAL UNDERWRITING AGREEMENT
This amendment, dated as of March 30, 1998 (this "Amendment"), to a certain
Principal Underwriting Agreement effective on the 18th day of February, 1987
(the "Original Agreement"), is executed by and between LINCOLN NATIONAL LIFE
INSURANCE COMPANY ("Lincoln National"), a life insurance company organized under
the laws of the State of Indiana, on behalf of itself and SEPARATE ACCOUNT E OF
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY ("Separate Account"), a separate
account established by Lincoln National pursuant to the Indiana Insurance Code,
and AMERICAN FUNDS DISTRIBUTORS, INC. ("AFD"), a corporation organized under the
laws of the State of California (collectively, the "Parties"). Unless otherwise
specifically provided, this Amendment shall be effective as of September 1,
1997.
WITNESSETH:
WHEREAS, the Original Agreement provides for AFD to serve as principal
underwriter for certain variable annuity contracts defined more fully therein
and marketed under the name "The American Legacy" (the "Contracts"); and
WHEREAS, the Original Agreement contains certain exclusivity provisions in
Section 17 that the Parties desire to eliminate; and
NOW THEREFORE, in consideration of the foregoing, and of the mutual covenants
and conditions contained in the Original Agreement as well as herein and for
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, Lincoln National, the Separate Account and AFD hereby agree
as follows:
A. Section 17. Section 17 of the Original Agreement is hereby replaced and
Section 5 of the Original Agreement is hereby modified by the "Non-Exclusivity
Provisions" set forth below. All other terms and conditions of the Original
Agreement are hereby ratified and confirmed with respect to the Contracts.
Non-Exclusivity Provisions. AFD may act as principal underwriter, sponsor,
distributor or dealer for issuers other than Lincoln National or its affiliates
in connection with mutual funds or insurance products. American Variable
Insurance Series (the "Series") may be sold to fund insurance contracts,
including those other than the Contracts, of issuers other than Lincoln National
or its affiliates or to other shareholders in accordance with Internal Revenue
Code Section 817(h) and the regulations thereunder. Lincoln National may issue
through any broker-dealer any insurance contracts; however, Lincoln National
will not enter into any agreement with any other organization for the purpose of
distributing the Contracts. The foregoing is subject to the covenants and
conditions set forth below:
<PAGE>
1. Appointment Fees. The Original Agreement in the last sentence of
Section 5 provides that AFD will be responsible for all state insurance
appointing fees and associated insurance license renewal fees incurred to
enable members to sell the Contracts ("appointment fees"). This sentence in
Section 5 is hereby eliminated and it is agreed that Lincoln National will
be responsible for any and all appointment fees as of September 1, 1997.
Lincoln National will also assume the responsibility for deciding whether
to pay appointment fees with respect to "non-producers." In the event
Lincoln National determines to stop paying the appointment fees for any
non-producer, AFD shall be given the option to pay such fees.
2. Lincoln Financial Advisors ("LFA"). The Schedule of Commissions to
Dealers and and Remuneration to AFD attached to the Original Agreement is
hereby amended to provide that sales through LFA (referred to in such
schedule by its predecessor company"s name Lincoln National Sales
Corporation or "LNSC") shall be at full reallowance to AFD and subject to
standard Selling Group Agreement terms and conditions including
remuneration for all new sales. This item will be implemented on January 1,
1998.
B. Counterparts. This Amendment may be executed in two or more counterparts,
each of which when so executed, shall be deemed to be an original, but such
counterparts taken together shall constitute but one and the same contract.
IN WITNESS WHEREOF, the undersigned parties have caused the Amendment to be duly
executed and attested as follows:
The Lincoln National Life Insurance Company
for itself and Separate Account E of the
Lincoln National Life Insurance Company
Attest: ______________________ By: ____________________________
American Funds Distributors, Inc.
Attest: ______________________ By: ____________________________
2
<PAGE>
Exhibit 4(a)
Abraham Lincoln
XX-0123456
[Lincoln Head Logo] LINCOLN NATIONAL
LIFE INSURANCE CO.
A part of LINCOLN NATIONAL CORPORATION
ANNUITY CONTRACT
Deferred Variable Annuity or Variable and Fixed Annuity
Benefit Payment Options
Nonparticipating
The Lincoln National Life Insurance Company (LNL) agrees to provide the benefits
and other rights described in this Contract in accordance with the terms of this
Contract.
NOTICE OF 20-DAY RIGHT TO EXAMINE CONTRACT. Within 20 days after this Contract
is first received, it may be cancelled for any reason by delivering or mailing
it to the Home Office of LNL. Upon cancellation, this Contract shall be void
from the beginning and LNL will return the value of any payments made to the
Variable Account and/or any Purchase Payment paid under the fixed portion of the
Contract.
All payments and values provided by this Contract, when based on investment
experience of a separate account, are variable and are not guaranteed as to
fixed dollar amount. See pages 4 and 6.
Signed for The Lincoln National Life Insurance Company at its Home Office in
Fort Wayne, Indiana.
/s/ Jon A. Boscia /s/ Nancy J. Alford
Jon A. Boscia, President Nancy J. Alford, Vice President
Form 23591 1/87
<PAGE>
<TABLE>
<CAPTION>
Table of Contents
Article Page
<S> <C> <C>
1 Purchase Payments......................................... 4
2 Benefits.................................................. 5
3 Beneficiary............................................... 8
4 General Provisions........................................ 8
5 Annuity Purchase Rates under a Variable Payment Option....10
6 Annuity Purchase Rates under a Fixed Payment Option.......11
7 Guaranteed Values for Fixed Allocations...................12
</TABLE>
Form 23591 1/87
<PAGE>
CONTRACT DATA
Contract Number
Annuitant
Age at Issue
Contract Date
Purchase Payment
Purchase Payment Frequency
Maturity Date
Owner
Beneficiary Designation
AS NAMED IN APPLICATION OR SUBSEQUENT WRITTEN DESIGNATION
Form 23591 Page 3
<PAGE>
ARTICLE 1
PURCHASE PAYMENTS
1.01 WHERE PAYABLE
All Purchase Payments must be made to LNL at its Home Office.
1.02 AMOUNT AND FREQUENCY
Purchase Payments are made in an amount and at the frequency shown on page 3.
Purchase Payments may be paid once each year, twice each year, four times each
year, once each month, twice each month, or once each two weeks. The Owner may
change the frequency or amount of Purchase Payments subject to LNL's rules in
effect at the time of the change. The change is made by filing a written request
to LNL at its Home Office.
The minimum initial Purchase Payment is $1,500 for Non-Qualified Plans and $300
for Qualified Plans. The minimum annual amount of subsequent Purchase Payments
is $300 for either Non-Qualified Plans or Qualified Plans. The minimum payment
to the Contract at any one time must be at least $25.00.
1.03 VARIABLE ACCOUNT
Purchase Payments under the Contract may be allocated to the Lincoln National
Life Variable Annuity Account E (Variable Account) and/or to the fixed portion
of the Contract. The Variable Account is for the exclusive benefit of persons
entitled to receive benefits under variable annuity contracts. The Variable
Account will not be charged with the liabilities arising from any other part of
LNL's business. There are currently five sub-accounts in the Variable Account.
The Owner may direct Purchase Payments under the Contract to any of the
available sub-accounts subject to the following limitations. A minimum payment
to any one sub-account must be at least $20. If the Owner elects to direct
Purchase Payments to a new sub-account not previously selected, the election
must be in writing to LNL. All the amounts allocated to each sub-account will be
invested at net asset value in the shares of one of the Funds of the American
Variable Insurance Series (Series). The Funds are:
1. Cash Management Fund
2. High-Yield Bond Fund
3. Growth-Income Fund
4. Growth Fund
5. U.S. Government Guaranteed/AAA-Rated Securities Fund
6. Other Funds made available by LNL.
LNL reserves the right to eliminate the shares of any Fund and substitute the
securities of a different Fund or investment company or mutual fund if the
shares of a Fund are no longer available for investment, or, if in the judgment
of LNL, further investment in any Fund should become inappropriate in view of
the purposes of the Contract. LNL may add a new sub-account in order to invest
the assets of a Fund in the Variable Account. LNL shall give the Owner written
notice of the elimination and substitution of any Fund within five days after
such substitution occurs.
LNL shall use each Purchase Payment allocated to the Variable Account by the
Owner to buy Accumulation Units in the sub-account(s) selected by the Owner. The
number of Accumulation Units bought shall be determined by dividing the amount
directed to the sub-account by the dollar value of an Accumulation Unit in such
sub-account as of the day the Purchase Payment is received at the Home Office of
LNL. The number of Accumulation Units held for the account of an Annuitant shall
not be changed by any change in the dollar value of Accumulation Units in any
sub-account.
1.04 NET INVESTMENT RATE AND NET INVESTMENT FACTOR
The Variable Account value of an Owner's Contract at any time prior to the
Annuity Commencement Date equals the sum of the values of the Accumulation Units
credited in the Variable Account under the Contract.
A "Valuation Date" is each day that the New York Stock Exchange is open for
business. A "Valuation Period" is the period commencing at the close of business
on the New York Stock Exchange on each Valuation Date and ending at the close of
business on the next succeeding Valuation Date.
Accumulation Units for each sub-account are valued separately. Initially the
value of an Accumulation Unit was set at $1.00. Thereafter, the value of an
Accumulation Unit in any sub-account on any Valuation Date equals the value of
an Accumulation Unit in that sub-account for the current Valuation Period. In
order to arrive at this factor, a "Gross Investment Rate" is first determined
for each Series for the Valuation Period. Such rate for the Valuation Period is
equal to:
(a) the investment income of the Fund; plus (b) capital gains (realized and
unrealized); minus (c) capital losses (realized and unrealized); minus (d)
certain operational expenses of the Fund; minus (e) the reserve for federal
taxes on realized capital gains (if applicable); minus (f) the investment
advisory fee accrued by the Fund for each day of the Valuation Period - .60% of
the first $30,000,000 of net assets on an annual basis and .50% of net assets
above $30,000,000; divided by (g) the net
Page 4
<PAGE>
asset value of the Fund as of the beginning of the Valuation Period.
The Gross Investment Rate may be positive or negative.
The Net Investment Rate for each sub-account is equal to the Gross Investment
Rate of the Fund minus a daily charge at an annual rate of 1.25% for each day
of the Valuation Period, plus or minus an adjustment for any taxes attributable
to the operation of the Variable Account. LNL makes the 1.25% deduction for
administrative, mortality, and distribution expense risk guarantees.
The method used to determine unit values may increase or decrease the dollar
value of benefits under the Contract. The dollar value of benefits will not be
adversely affected by expenses incurred by LNL.
The Net Investment Factor for each sub-account is equal to 1.000000000 plus the
Net Investment Rate for the period.
1.05 FIXED ALLOCATIONS
Purchase Payments under the Contract may be allocated to the Variable Account
and/or to the fixed portion of the Contract. A minimum payment to the fixed
portion must be at least $20. Purchase Payments allocated to the fixed portion
will be invested in the General Account of LNL.
1.06 CREDITING OF INTEREST
Interest shall be credited daily on all Purchase Payments that are allocated to
the fixed portion of this Contract.
Prior to the time the Annuitant elects to receive Benefit Payments or the death
of the Annuitant, whichever occurs first, LNL guarantees that it will credit
interest on fixed allocations at an effective annual rate not less than 4.5%
during the first five contract years, 4.0% during the next five contract years,
and 3.5% after that. A table of guaranteed values for the fixed allocations may
be found in Article 7.
LNL may credit interest at rates in excess of the guaranteed rates at any time.
1.07 AUTOMATIC NONFORFEITURE OPTION
In the event that Purchase Payments are stopped, this Contract will continue as
a paid-up Contract until the earlier of the Maturity Date, surrender of the
Contract, or death of the Annuitant. Purchase Payments may be resumed at any
time prior to maturity, surrender, or death of the Annuitant. If the Contract
continues as a paid-up Contract, the total account value must be at least
$600.00. If not, and if Purchase Payments have not been paid for at least two
years, LNL may surrender the Contract.
1.08 TRANSFERS
Prior to the Annuity Commencement Date, the Owner may direct a transfer of
assets from one sub-account to another sub-account or to the fixed portion of
the Contract. The Owner may also direct a transfer of assets from the fixed
portion of the Contract to one or more sub-accounts of the Variable Account.
Such a transfer request must be in writing. Amounts transferred to the sub-
account(s) will purchase Accumulation Units as described in the last paragraph
of Section 1.03.
The minimum transfer amount is $500 or the entire amount in the sub-
account/fixed portion, whichever is less. If after the transfer the amount
remaining under this Contract in the sub-account/fixed portion from which the
transfer is taken is less than $500, the entire amount held in that sub-
account/fixed portion will be transferred with the transfer amount. LNL reserves
the right to limit the number of transfers to six (6) per Contract Year.
For transfers between sub-accounts and from the sub-account(s) to the fixed
portion of the Contract, there are no restrictions on the maximum amount which
may be transferred. For transfers from the fixed portion of the Contract to the
Variable Account, the sum of the percentages of fixed value transferred will be
limited to 25% in any 12 month period.
After the Annuity Commencement Date, the Owner may direct a transfer of assets
from one sub-account to another sub-account or to the fixed portion of the
Contract. Such transfers will be limited to three (3) times per Contract Year.
ARTICLE 2 BENEFITS
2.01 ANNUITY PAYMENTS
An election to receive proceeds under an Annuity Payment Option must be made by
the Maturity Date.
If an Annuity Payment Option is not chosen prior to the Maturity Date, payments
will commence on the Maturity Date under the Annuity Payment Option providing a
Life Annuity with Annuity Payments guaranteed for 10 years.
However, upon written request by the Owner and any Beneficiary who cannot be
changed, the Maturity Date may be deferred. The Maturity Date cannot be deferred
Page 5
<PAGE>
past the Contract Anniversary on which the attained age of the Annuitant is 85.
Purchase Payments may be made until the new Maturity Date.
2.02 CHOICE OF ANNUITY PAYMENT OPTION
By Owner
While the Annuitant is alive, the Owner may choose any Annuity Payment Option or
change any choice, if that right has been reserved, but only before the Maturity
Date. The election must be made not later than thirty days prior to the Maturity
Date.
By Beneficiary
At the time proceeds are payable, a Beneficiary may choose or change any Annuity
Payment Option it proceeds are available to the Beneficiary in one sum.
A choice or change must be in writing to LNL.
2.03 ANNUITY PAYMENT OPTIONS
a. Life Annuity, Guaranteed Period -- Payments will be made for life with no
certain period, or life and a 10 year certain period, or life and a 20 year
certain period.
b. Unit Refund Life Annuity -- An annuity payable monthly during the lifetime
of the Annuitant, terminating with the last payment due prior to the death
of the Annuitant, provided that, at such death, the Beneficiary will
receive an additional payment of the then dollar value of the number of
Annuity Units equal to the excess, if any of (a) over (b) where (a) is the
total amount applied under the option divided by the Annuity Unit Value at
the Annuity Commencement Date and (b) is the product of the number of
Annuity Units represented by each payment and the number of payments made.
c. Joint Life Annuity Guaranteed Period -- Payments will be made for life with
no certain period, or life and a 10 year certain period, or life and a 20
year certain period. Payments will be made during the joint life of the
Annuitant and a Joint Annuitant of the Annuitant's choice. Payments
continue for the life of the survivor at the death of the Annuitant or
Joint Annuitant.
d Other options may be available as agreed upon by LNL.
At the time Annuity Payments start under the provisions of this Contract, the
Owner may elect to have the total value applied to provide a variable annuity a
fixed annuity or a combination fixed and variable annuity If no election is made
the value of the Annuitant's Variable Account shall be used to provide a
variable annuity and the value of the Annuitant's fixed allocations shall be
used to provide a fixed annuity.
The amount of Annuity Payment will depend on the age of the Annuitant at the
time the first payment is due. A choice may be made to receive payments once
each month, four times each year, twice each year, or once each year The value
used to effect benefit payments for an Annuitant will be calculated as of the
fourteenth day prior to the date benefit payments start.
The payment amounts shown in the option tables in Article 5 will be used to
determine the first monthly payment under a variable payment option. The tables
show the dollar amount of the first monthly payment which can be purchased with
each $1,000 of account value, after deduction of any applicable premium taxes.
Amounts shown use the 1971 individual Annuity Mortality Table, modified, with an
assumed rate of return of 4% a per year.
The payment amounts shown in the option tables in Article 6 will be used to
determine the monthly payments under a fixed payment option. The tables show the
dollar amount of the guaranteed monthly payments which can be purchased with
each $1,000 of account value, after deduction of any applicable premium tax.
Amounts shown use the 1971 Individual Annuity Mortality Table, modified, with an
interest rate of 3.5% per year and a 2.5% expense load. At the time of
annuitization, the annuity payments will be based on the greater of our current
payment amounts or the payment amounts found in the option tables in Article 6.
2.04 DETERMINATION OF THE AMOUNT OF VARIABLE ANNUITY PAYMENTS AFTER THE FIRST
Each Variable Annuity Payment after the first will be determined by multiplying
the Annuity Unit Value for the date each payment is due by a constant number of
Annuity Units. This constant is determined by dividing the amount of the first
payment by the Annuity Unit Value for the date the first payment is due.
The Annuity Unit Value for any Valuation Period for any sub-account is
determined by multiplying the Annuity Unit Value for the immediately preceding
Valuation Period by the product of (a) .9998926 raised to a power equal to the
number of days in the current Valuation Period and (b) the Net Investment Factor
of the sub-account for the Valuation Period containing the fourteenth day prior
to the last day of the current Valuation Period.
The valuation of all assets in the sub-account shall be
Page 6
<PAGE>
determined in accordance with the provisions of applicable laws, rules, and
regulations. The method of determination by LNL of the value of an Accumulation
Unit and of an Annuity Unit will be conclusive upon the Annuitant and any
Beneficiary.
LNL guarantees that the dollar amount of each installment after the first shall
not be affected by variations in mortality experience from mortality assumptions
on which the first installment is based.
2.05 PROOF OF AGE
Payment will be subject to proof of age that LNL will accept.
2.06 AMOUNT REQUIREMENTS FOR ANNUITY PAYMENT OPTIONS AND PAYMENTS
If the Annuity Payment Option chosen results in payments of less than $50 per
sub-account, the frequency will be changed so that payments will be at least
$50.
For the purposes of this Section, the fixed portion of the Contract is
considered a sub-account.
2.07 EVIDENCE OF SURVIVAL
LNL has the right to ask for proof that the person on whom the payment is based
is alive when each payment is due.
2.08 CHANGE IN ANNUITY PAYMENT
Changes in Annuity Payments may not be made after Annuity Payments commence.
2.09 ASSIGNMENT
This Contract may not be assigned.
2.10 ACCOUNT CHARGE
On the last business day of each Contract Year; LNL will deduct $35.00 from the
account value. At surrender the account charge will be deducted from the account
value. The account value is the value of all the Accumulation Units in the name
of the Owner plus the value of the fixed portion of the Contract. If the
Annuitant has elected more than one sub-account, the deduction of the Account
Charge shall be taken from each sub-account on a pro-rata basis. Each sub-
account will be adjusted by an amount equal to a fraction of the charge. The
fraction is equal to "a" divided by "b," where "a" is the account value of the
sub-account and "b" is the value of all sub-accounts under the Contract. The
fraction for each sub-account is applied to the deduction to determine each sub-
account's deduction.
For the purposes of this Section, the fixed portion of the Contract is
considered a sub-account.
2.11 SURRENDER OPTION
The Owner may surrender this Contract for its surrender value. On surrender,
this Contract terminates. Surrender will be effective on the Valuation Date on
which or next following the date LNL has received a written request at its Home
Office. The surrender value will be the total account value on the Valuation
Date, less a Contingent Deferred Sales Charge and the Account Charge.
The Contingent Deterred Sales Charge is calculated separately for each Contract
Year's Purchase Payment. The Contingent Deferred Sales Charge is calculated as a
percentage of the Purchase Payments surrendered. This percentage is based on the
number of completed Contract Years between the Contract Year of deposit and the
Contract Year of surrender/withdrawal as shown in the following schedule:
<TABLE>
<CAPTION>
Contract Year of
Surrender/Withdrawal Charge as a % of Total
Minus Contract Year of Purchase Payments Surrendered/
Purchase Payments Withdrawn in a Contract Year
<S> <C>
0-1 6
2 5
3 4
4 3
5 2
6 1
7+ 0
</TABLE>
The Contingent Deferred Sales Charge will be waived in the event the Contract is
surrendered as a result of the death or total and permanent disability of the
Annuitant.
A Contract Year is the period from the Contract effective date (month and day)
to the anniversary of the Contract effective date in the following year.
Any cash payment will be mailed from LNLs Home Office within seven days after
the date of surrender; however, LNL may be permitted to defer such payment under
the Investment Company Act of 1940, as in effect at the time a request for
surrender is received. The Surrender Option is not available after Annuity
Payments have begun.
2.12 WITHDRAWAL OPTION
The Owner may withdraw a part of the surrender value of this Contract, subject
to the charges outlined under Surrender Option. The first partial withdrawal in
any Contract Year will be free of withdrawal charges up to 10% of Purchase
Payments. Withdrawals will be treated as first in-first out for purposes of
calculating the with
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<PAGE>
drawal charge. Withdrawal will be effective on the Valuation date on which or
next following the date LNL receives a written request at its Home Office. The
minimum withdrawal is $300.00. If any withdrawal reduces the total account value
to less than $300, LNL may surrender the Contract for its value. The remaining
value will be subject to the charges as provided under Surrender Option. The
request should specify from which sub-account the withdrawal will be made. If no
sub-account is specified, LNL will withdraw, on a prorata basis from each sub-
account, the amount requested. Any cash payment will be mailed from LNLs Home
Office within seven days after the date of withdrawal; however, LNL may be
permitted to defer such payment under the Investment Company Act of 1940, as in
effect at the time such request for withdrawal is received.
The Withdrawal Option is not available after Annuity Payments have begun.
For purposes of this Section, the fixed portion of the Contract is considered a
sub-account.
2.13 DEATH OF ANNUITANT
On receipt of due proof of the death of the Annuitant before a choice is made to
receive proceeds under an Annuity Payment Option, LNL will pay to the
Beneficiary a Death Benefit equal to the greater of (a) the sum of all Purchase
Payments minus any withdrawals, partial surrenders; or (b) the current value of
the Contract as of the day on which written notice of death is received by LNL.
Due proof of death shall be either the certificate of death, a certified copy of
the statement of death from the attending physician, a certified copy of a
decree of a court of competent jurisdiction as to the finding of death, or any
other proof satisfactory to LNL.
On receipt of due proof of death of the Annuitant after Annuity Payments have
begun under an Annuity Payment Option, if any Annuity Payments remain under the
Option they will be paid to the Beneficiary as provided by the Option.
If the Beneficiary designated at the time of the Annuitant's death is a
surviving spouse, the Contract may be continued in the name of the spouse as the
Annuitant.
For a Beneficiary other than a spouse, if the Annuitant dies before Annuity
Payments have begun under the Contract, the amounts must be distributed to the
designated Beneficiary within five years of the death of the Annuitant.
For a Beneficiary other than a spouse, if the Annuitant dies after Annuity
Payments have begun under the Contract, the remaining portion of the Annuitant's
interest must either be distributed at least as rapidly as under the method of
distribution being used as of the date of the Annuitant's death or distributed
over the life of the Beneficiary or a period not extending beyond the life
expectancy of the Beneficiary. The distribution of these amounts must begin not
later than one year after the Annuitant's death.
Unless otherwise provided in the Beneficiary designation, if no Beneficiary
survives the Annuitant, the proceeds will be paid in one sum to the Owner, if
living; otherwise, to the Owner's estate.
ARTICLE 3
BENEFICIARY
3.01 DESIGNATION
The Beneficiary named in the application for this Contract will receive the
proceeds on the death of the Annuitant unless the Beneficiary has been changed
by the Owner.
3.02 CHANGE
The Owner may change any Beneficiary during the life of the Annuitant, unless
otherwise provided in the previous designation. A change of Beneficiary will
revoke any previous designation.
A change may be made by filing a written request to LNL at its Home Office. The
change will become effective upon receipt of the written request by LNL at its
Home Office.
3.03 DEATH OF BENEFICIARY
Unless otherwise provided in the Beneficiary designation, if any Beneficiary
dies before the Annuitant, that Beneficiary's interest will pass to any other
Beneficiaries according to their respective interests.
If the Beneficiary dies while receiving any remaining Annuity Payments due after
the death of the Annuitant, the value of the remainder of such Annuity Payments
will be paid in one sum to the Beneficiary's estate.
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<PAGE>
ARTICLE 4
GENERAL PROVISIONS
4.01 THE CONTRACT
This Contract, the application, and any riders attached to this Contract make up
the whole Contract. Only the President, a Vice-President, the Secretary or an
Assistant Secretary of LNL has the power, on behalf of LNL, to change, modify,
or waive any provisions of this Contract.
Any changes, modifications, or waivers must be in writing. LNL will not be bound
by any promises or representations made by any representative or other person
except as specified above.
4.02 CONTROL
Consistent with the terms of any Beneficiary designation, the Owner may, during
the life of the Annuitant, do any of the things described below.
1. Prior to the time when Annuity Payments have begun the Owner may surrender
this Contract or withdraw a portion of the surrender value.
2. The Owner may change this Contract with the consent of LNL.
3. The Owner may exercise any right, receive any benefit, or enjoy any
privilege contained in this Contract.
4.03 INCONTESTABILITY
This Contract will not be contested.
4.04 MISSTATEMENT OF AGE
If the age of the Annuitant has been misstated, the benefits available under
this Contract will be those which the Purchase Payments would have purchased for
the correct age. Any underpayments already made by LNL shall be made up
immediately and any overpayments already made by LNL shall be charged against
the Annuity Payments falling due after adjustment.
4.05 NONPARTICIPATING
The Contract is nonparticipating and will not share in the surplus earnings of
LNL.
4.06 VOTING RIGHTS
The Owner shall have a right to vote at the meetings of the Fund. Ownership of
this Contract shall not entitle any person to vote at any meeting of
shareholders of LNL. Votes attributable to the Contract shall be cast in
conformity with applicable law.
4.07 OWNERSHIP OF THE ASSETS
LNL shall have exclusive and absolute ownership and control of its assets,
including all assets in the Variable Account.
4.08 REPORTS
At least once each Contract Year LNL shall mail a report to the Owner. The
report shall be mailed to the last address known to LNL. The report shall
include a statement of the number of units credited to the Variable Account
under this Contract and the dollar value of such units as well as a statement of
the value of the fixed portion of this Contract. The information in the report
shall be as of a date not more than two months prior to the date of mailing the
report. LNL shall also mail to the Owner at least once in each Contract Year a
report of the investments held in the sub-accounts under this Contract.
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<PAGE>
<TABLE>
<CAPTION>
ARTICLE 5
ANNUITY PURCHASE RATES UNDER A VARIABLE PAYMENT OPTION
- --------------------------------------------------------------------------------
DOLLAR AMOUNT OF FIRST MONTHLY PAYMENT WHICH IS
PURCHASED WITH EACH $1,000 APPLIED
- --------------------------------------------------------------------------------
SINGLE LIFE ANNUITIES
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
No 120 240
Period Months Months Cash
Age Certain Certain Certain Refund
- --------------------------------------------------------------------------------
60 $4.93 $4.86 $4.65 $4.67
61 5.02 4.95 4.71 4.74
62 5.13 5.04 4.78 4.82
63 5.24 5.14 4.84 4.90
64 5.36 5.25 4.91 4.99
65 5.48 5.36 4.97 5.09
66 5.62 5.48 5.04 5.19
67 5.77 5.61 5.10 5.29
68 5.93 5.75 5.16 5.40
69 6.11 5.89 5.22 5.52
70 6.30 6.04 5.27 5.64
71 6.51 6.20 5.32 5.77
72 6.73 6.36 5.37 5.90
73 6.97 6.53 5.41 6.04
74 7.24 6.71 5.45 6.19
75 7.52 6.89 5.48 6.35
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
JOINT AND SURVIVOR ANNUITIES
- --------------------------------------------------------------------------------
JOINT AND FULL TO SURVIVOR JOINT AND TWO-THIRDS TO SURVIVOR
- --------------------------------------------------------------------------------
Certain Period Certain Period
- --------------------------------------------------------------------------------
Joint
None 120 Months 240 Months Age None 120 Months 240 Months
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$4.34 $4.34 $4.32 60 $4.72 $4.67 $4.53
4.41 4.41 4.38 61 4.80 4.75 4.60
4.48 4.48 4.44 62 4.89 4.84 4.66
4.56 4.56 4.51 63 4.99 4.93 4.73
4.64 4.64 4.58 64 5.10 5.03 4.79
4.73 4.73 4.65 65 5.21 5.13 4.86
4.83 4.82 4.73 66 5.33 5.24 4.93
4.93 4.92 4.80 67 5.46 5.36 5.00
5.04 5.03 4.88 68 5.60 5.49 5.06
5.16 5.15 4.95 69 5.76 5.62 5.13
5.29 5.27 5.03 70 5.92 5.76 5.19
5.43 5.40 5.10 71 6.10 5.91 5.25
5.58 5.54 5.17 72 6.30 6.06 5.30
5.74 5.69 5.24 73 6.51 6.23 5.35
5.91 5.85 5.30 74 6.73 6.40 5.40
6.10 6.02 5.35 75 6.98 6.57 5.44
- -------------------------------------------------------------------------------
</TABLE>
Page 10
<PAGE>
<TABLE>
<CAPTION>
ARTICLE 6
ANNUITY PURCHASE RATES UNDER A FIXED PAYMENT OPTION
- --------------------------------------------------------------------------------
GUARANTEED DOLLAR AMOUNT OF MONTHLY PAYMENT WHICH IS
PURCHASED WITH EACH $1,000 APPLIED
- --------------------------------------------------------------------------------
SINGLE LIFE ANNUITIES
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
No 120 240
Period Months Months Cash
Age Certain Certain Certain Refund
- --------------------------------------------------------------------------------
60 $5.31 $5.17 $4.77 $4.83
61 5.43 5.27 4.83 4.92
62 5.56 5.38 4.89 5.01
63 5.70 5.50 4.95 5.10
64 5.85 5.62 5.01 5.20
65 6.00 5.74 5.07 5.31
66 6.17 5.88 5.13 5.42
67 6.35 6.01 5.18 5.53
68 6.55 6.16 5.24 5.65
69 6.75 6.30 5.29 5.79
70 6.98 6.46 5.34 5.92
71 7.21 6.63 5.38 6.06
72 7.47 6.79 5.42 6.22
73 7.75 6.96 5.46 6.37
74 8.04 7.13 5.49 6.54
75 8.36 7.31 5.52 6.73
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
JOINT AND SURVIVOR ANNUITIES
- --------------------------------------------------------------------------------
JOINT AND FULL TO SURVIVOR JOINT AND TWO-THIRDS TO SURVIVOR
- --------------------------------------------------------------------------------
Certain Period Certain Period
- --------------------------------------------------------------------------------
Joint
None 120 Months 240 Months Age None 120 Months 240 Months
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$4.49 $4.48 $4.41 60 $5.01 $4.92 $4.64
4.58 4.57 4.48 61 5.11 5.01 4.71
4.67 4.65 4.55 62 5.23 5.11 4.77
4.76 4.75 4.62 63 5.35 5.22 4.84
4.86 4.85 4.69 64 5.48 5.33 4.90
4.97 4.95 4.77 65 5.62 5.45 4.97
5.09 5.06 4.84 68 5.76 5.58 5.03
5.21 5.18 4.92 67 5.92 5.71 5.09
5.34 5.31 4.99 68 6.09 5.85 5.15
5.49 5.44 5.07 69 6.27 5.99 5.21
5.64 5.58 5.14 70 6.46 6.14 5.27
5.80 5.73 5.21 71 6.67 6.30 5.32
5.98 5.89 5.27 72 6.90 6.46 5.37
6.17 6.06 5.33 73 7.14 6.63 5.41
6.37 6.23 5.38 74 7.40 6.81 5.45
6.59 6.41 5.43 75 7.67 6.99 5.49
- --------------------------------------------------------------------------------
</TABLE>
Page 11
<PAGE>
ARTICLE 7
GUARANTEED ACCUMULATED VALUES AND SURRENDER VALUES
FOR FIXED ALLOCATIONS*
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
$1,000 Annual Contribution $100 Monthly Contribution
---------------------------- --------------------------------
End Guaranteed Guaranteed End Guaranteed Guaranteed
of Accumulated Surrender of Accumulated Surrender
Year Value Value Year Value Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 $ 1,010.00 $ 950.00 1 $ 1,194.05 $ 1,122.05
2 2,065.45 1,945.45 2 2,441.84 2,297.84
3 3,168.40 2,998.40 3 3,745.78 3,541.78
4 4,320.98 4,110.98 4 5,108.39 4,856.39
5 5,525.42 5,285.42 5 6,532.32 6,244.32
6 6,751.44 6,491.44 6 7,984.46 7,672.46
7 8,026.50 7,756.50 7 9,494.68 9,170.68
8 9,352.56 9,082.56 8 11,065.31 10,741.31
9 10,731.66 10,461.66 9 12,698.77 12,374.77
10 12,165.93 11,895.93 10 14,397.56 14,073.56
11 13,591.74 13,321.74 11 16,089.11 15,765.11
12 15,067.45 14,797.45 12 17,839.86 17,515.86
13 16,594.81 16,324.81 13 19,651.88 19,327.88
14 18,175.63 17,905.63 14 21,527.33 21,203.33
15 19,811.78 19,541.78 15 23,468.41 23,144.41
16 21,505.19 21,235.19 16 25,477.44 25,153.44
17 23,257.87 22,987.87 17 27,556.78 27,232.78
18 25,071.90 24,801.90 18 29,708.90 29,384.90
19 26,949.42 26,679.42 19 31,936.34 31,612.34
20 28,892.65 28,622.65 20 34,241.74 33,917.74
21 30,903.89 30,633.89 21 36,627.83 36,303.83
22 32,985.53 32,715.53 22 39,097.44 38,773.44
23 35,140.02 34,870.02 23 41,653.48 41,329.48
24 37,369.92 37,099.92 24 44,298.98 43,974.98
25 39,677.87 39,407.87 25 47,037.08 46,713.08
26 42,066.60 41,796.60 26 49,871.00 49,547.00
27 44,538.93 44,268.93 27 52,804.12 52,480.12
28 47,097.79 46,827.79 28 55,839.89 55,515.89
29 49,746.21 49,476.21 29 58,981.92 58,657.92
30 52,487.33 52,217.33 30 62,233.92 61,909.92
31 55,324.39 55,054.39 31 65,599.74 65,275.74
32 58,260.74 57,990.74 32 69,083.36 68,759.36
33 61,299.87 61,029.87 33 72,688.90 72,364.90
34 64,445.37 64,175.37 34 76,420.65 76,096.65
35 67,700.96 67,430.96 35 80,283.00 79,959.00
36 71,070.96 70,800.96 36 84,280.54 83,956.54
37 74,557.96 74,287.96 37 88,417.98 88,093.98
38 78,167.49 77,897.49 38 92,700.24 92,376.24
39 81,903.35 81,633.35 39 97,132.38 96,808.38
40 85,769.97 85,499.97 40 101,719.65 101,395.65
41 89,771.92 89,501.92 41 106,467.47 106,143.47
42 93,913.94 93,643.94 42 111,381.46 111,057.46
43 98,200.93 97,930.93 43 116,467.44 116,143.44
44 102,637.96 102,367.96 44 121,731.43 121,407.43
45 107,230.29 106,960.29 45 127,179.66 126,855.66
- --------------------------------------------------------------------------------
</TABLE>
* Guaranteed Accumulated Values and Guaranteed Surrender Values may be more or
less than shown in the table because of the variable of the day of receipt of
the Purchase Payment at the Home Office from period to period and the
crediting of interest to the Annuitant's account on a daily basis. Values
shown are based upon contributions equally spaced with interest occurring at
the beginning of the year. These values do not provide for premium tax, if
any.
Page 12
<PAGE>
ANNUITY
CONTRACT
Deferred Variable Annuity or Variable and Fixed Annuity
Nonparticipating
If you have any questions concerning
this Contract, please
contact your Lincoln National Life
representative or the Home Office of LNL.
THE LINCOLN NATIONAL
LIFE INSURANCE COMPANY
1300 South Clinton Street
P.O. Box 2348
Fort Wayne, Indiana 46801
800-942-5500
[Recycle LOGO]
<PAGE>
Residents of Pennsylvania must use a special application. See your broker for
details.
- -------------------------------------------------------------------------------
THE AMERICAN LEGACY Lincoln National Life
Variable Annuity Application Insurance Company
- -------------------------------------------------------------------------------
INSTRUCTIONS FOR COMPLETING FORM--Please type or print in permanent black ink.
This form will be photocopied. Make checks payable to Lincoln National Life
Insurance Co. Send check and application to either your Broker/Dealer's home
office or directly to Lincoln National Life Insurance Company, P.O. Box 2348,
1300 South Clinton St., Fort Wayne, IN 46801.
- -------------------------------------------------------------------------------
1. ANNUITANT (If no Contract Owner is specified in Box 2 below, the Annuitant
will be the Contract Owner.)
Name___________________________________________________________________________
Print full name, if no middle name, use NMN.
Address________________________________________________________________________
Street
________________________________________________________________________
City State Zip
Phone___________________________________________________________________________
Date of Birth__________________________________________________ Age:____________
Mo. Day Year
Sex [_] Male [_] Female Soc. Sec. No.______________________________
- -------------------------------------------------------------------------------
2. CONTRACT OWNER (Complete ONLY if different from Annuitant.)
Name___________________________________________________________________________
Print full name, if no middle name, use NMN.
Address________________________________________________________________________
Street
________________________________________________________________________
City State Zip
Phone___________________________________________________________________________
Date of Birth__________________________________________________ Age:____________
Mo. Day Year
Sex [_] Male [_] Female Soc. Sec. No.______________________________
- -------------------------------------------------------------------------------
3. BENEFICIARY (MUST be completed. See instructions on reverse side.)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
4. TYPE OF PLAN
[_] Nonqualified
[_] Qualified (Indicate type below.)
[_] IRA (circle one): Regular Rollover Transfer
[_] Self-Employed Retirement Plan (Keogh-type)
(Please attach phototype agreement.)
[_] Simplified Employee Pension IRA (Established by Employer)
(Please attach prototype agreement.)
[_] Sec. 401 Corporate Plan________________________________________________
[_] Sec. 457 Deferred Compensation Plan
[_] _______________________________________________________________________
- -------------------------------------------------------------------------------
5. PURCHASE PAYMENTS
The minimum initial payment is $1,500 for nonqualified contracts and $300 for
qualified contracts. The minimum subsequent payment for all contracts is $25.
Initial Premium Payment. An initial payment of $__________________ is attached.
Premium to be allocated to the _________________ calendar year.
Periodic Purchase Payments [_] Annually [_] Semi-annually
[_] Quarterly [_] Monthly [_] Semi-monthly [_] Biweekly
Amount $________________________________ Start Date:___________________________
Note: If you wish to establish an Automatic Bank Draft for future payments
please attach a bank authorization card and a voided check.
- -------------------------------------------------------------------------------
6. ALLOCATION OF PURCHASE PAYMENTS
(Use whole percentages.)
_______% Variable Growth Fund
_______% Variable Growth-Income Fund
_______% Variable High-Yield Bond Fund
_______% Variable U.S. Govt. Guaranteed/AAA-Rated Securities Fund
_______% Variable Cash Management Fund
_______% The Fixed Account
100 % (If no allocations are indicated, the total Purchase Payment will be
- ------- allocated to the Variable Cash Management Fund pending instructions
from Owner.)
- -------------------------------------------------------------------------------
7. DOLLAR COST AVERAGING OPTION
Please dollar cost average from the (check one):
[_] Fixed Account [_] Cash Management Fund
(Use whole percentages)
_______% into the Growth Fund
_______% into the Growth-Income Fund
_______% into the High-Yield Bond Fund
_______% into the U.S. Govt. Guaranteed/AAA-Rated Securities Fund
over the period checked:
[_] 12 months [_] 24 months [_] 36 months
($10,000 minimum) ($25,000 minimum) ($25,000 minimum)
- -------------------------------------------------------------------------------
8. TELEPHONE TRANSFER AUTHORIZATION
[_] I hereby authorize and direct Lincoln National Life Insurance Company to
accept telephone instructions from any person who can furnish proper
identification to exchange units from subaccount to subaccount and/or change the
allocation of future deposits. Neither LNLIC, American Funds Distributors, Inc.
nor any of their affiliates nor any fund managed by such affiliates is liable
for any losses arising from such instructions.
- -------------------------------------------------------------------------------
9. AUTOMATIC WITHDRAWAL OPTION
(Available only after age 59 1/2)
Amount of distribution _________________% (no more than 9% /year of total
purchase payments)
Check one: [_] Quarterly [_] Semi-annually [_] Annually
Commence payments_______________________________________________________________
(Date)
- -------------------------------------------------------------------------------
10. REPLACEMENT
Will the proposed contract replace any existing annuity or insurance contract?
[_] No [_] Yes (List company name, plan and year issued.)
----------------------------------------------------------------------
- -------------------------------------------------------------------------------
11. STATEMENT OF ANNUITANT & CONTRACT OWNER-APPLICANT
All statements in this Application are true to the best of our knowledge and
belief. We agree that this Application shall be a part of the annuity contract.
We hereby verify our understanding that all payments and values provided by the
contract, when based on investment experience of a fund series, are variable and
not guaranteed as to dollar amount. We acknowledge receipt of current
prospectuses for THE AMERICAN LEGACY and AMERICAN VARIABLE INSURANCE SERIES.
Signed at_______________________________________________________________________
(City)
_________________________________________on_____________________________________
(State) (Date)
Under penalty of perjury, I (the Owner) certify that my Social Security (or
taxpayer I.D.) number is correct as it appears in this Application.
Signature of Annuitant_________________________________________________________
Signature of Owner_____________________________________________________________
<PAGE>
- -------------------------------------------------------------------------------
12. STATEMENT OF AGENT
The Agent hereby certifies he/she witnessed the signature(s) in Box 11 and that
his/her answer to the question below is true to the best of his/her knowledge
and belief.
Agent: Will this contract replace or change any other life insurance or annuity
in this or any other company?
[_] No [_] Yes If yes, please give details in Box 13.
Signature of Agent_____________________________________________________________
- -------------------------------------------------------------------------------
13. INSURANCE IN FORCE (For Agent only)
If Agent's answer in Box 12 is yes (in New Jersey, if either yes or no), please
list below the insurance in force on the life of the Proposed Annuitant.
<TABLE>
<CAPTION>
Accidental
Company Name Year Issued Amount Death
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1.___________________________________________________________________________________________________________
2.___________________________________________________________________________________________________________
3.___________________________________________________________________________________________________________
</TABLE>
- --------------------------------------------------------------------------------
14. AGENT INFORMATION (Please type or print)
Agent's Name_________________________________________Agent's Code_______________
General Agent________________________________ LNLIC Performance Code Q__________
Branch Office Address___________________________________________________________
(Street)
___________________________________________________________
(City) (State) (Zip)
Agent's Phone No. ( )
______________________________________________________________
Broker/Dealer___________________________________________________________________
(Name) (City) (State)
- --------------------------------------------------------------------------------
15. ENDORSEMENT (For LNLIC office use only) No change shall be made in the
amount of insurance, Issue Age, Plan of Insurance or any Benefits applied for by
such endorsement without prior written approval by the Applicant.
- --------------------------------------------------------------------------------
BENEFICIARY INSTRUCTIONS
1. The full name, age, relationship to the Annuitant and address of each
beneficiary should be shown.
2. A married woman should indicate her own given name, not that of her husband.
Example: Mary N. Jones, not Mrs. John B. Jones
3. Listed below are the most common types of beneficiary designations.
IF THE BENEFICIARY WORDING DESIRED IS NOT INDICATED BELOW, PLEASE CONTACT
LINCOLN NATIONAL LIFE INSURANCE COMPANY FOR ASSISTANCE.
<TABLE>
Designation Proper Wording
<S> <C>
ONE BENEFICIARY Jane Doe, wife of the Annuitant.
TWO BENEFICIARIES John Doe, father of the Annuitant, and
Anna Doe, mother of the Annuitant,
equally, or to the survivor.
ONE PRIMARY AND ONE CONTINGENT BENEFICIARY Jane Doe, wife of the Annuitant,
if living; otherwise Richard
Doe, son of the Annuitant.
ONE PRIMARY AND TWO OR MORE CONTINGENT BENEFICIARIES Jane Doe, wife of the Annuitant,
if living; otherwise Richard
Doe, Mary Doe, and Robert Doe,
children of the Annuitant, or the
survivors, equally, or the survivor.
ONE PRIMARY AND UNNAMED CHILDREN AS Jane Doe, wife of the Annuitant, if
CONTINGENT BENEFICIARIES (EXCEPT ADOPTED living; otherwise the children
CHILDREN) born of the marriage of the
Annuitant and said wife, or the
survivors, equally, or the survivor.
ONE PRIMARY AND ONE OR MORE CHILDREN Jane Doe, wife of the Annuitant, if
INCLUDING LEGALLY ADOPTED CHILDREN AS living; otherwise any children born
CONTINGENT BENEFICIARIES of the marriage of or legally adopted
by the Annuitant and said wife,
or the survivors, equally, or
the survivor.
</TABLE>
- --------------------------------------------------------------------------------
Lincoln National Life Insurance Company, P.O. Box 2348, 1300 South Clinton St.,
Fort Wayne, IN 46801
<PAGE>
Exhibit 8(b)
FUND PARTICIPATION AGREEMENT
----------------------------
THIS AGREEMENT, entered into on this lst day of October, 1986 among LINCOLN
NATIONAL PENSION INSURANCE COMPANY ("Lincoln National"), a life insurance
company organized under the laws of the State of Indiana for itself and on
behalf of LINCOLN NATIONAL SEPARATE ACCOUNT E ("Account"), a separate account
established by Lincoln National in accordance with the laws of the State of
Indiana, and AMERICAN PATHWAY FUND ("Fund"), an open-end management investment
company organized under the laws of the State of Massachusetts.
WITNESSETH:
WHEREAS, the Account has been established by Lincoln National pursuant to
the Indiana Insurance Code in connection with certain flexible premium variable
annuity contracts ("Contracts") proposed to be issued to the public by Lincoln
National; and
WHEREAS, the Account is being registered as a unit investment trust under
the Investment Company Act of 1940; and
WHEREAS, the income, gains and losses, whether or not realized, from assets
allocated to the Account are, in accordance with the applicable Contracts, to be
credited to or charged against such Account without regard to other income,
gains or losses of Lincoln National; and
<PAGE>
WHEREAS, the Account is subdivided into various subaccounts ("Subaccounts")
under which income, gains and losses, whether or not realized, from assets
allocated to each such Subaccount are, in accordance with the applicable
Contracts, to be credited to or charged against such Subaccounts without regard
to other income, gains or losses of other Subaccounts or of Lincoln National;
and
WHEREAS, the Fund is divided into various series ("Series"), each Series
being subject to separate investment policies and restrictions which may not be
changed without a majority vote of the shareowners of such Series; and
WHEREAS, certain Series will serve as the underlying investment medium for
certain Subaccounts; and
WHEREAS, American Funds Distributors, Inc., the principal underwriter for
the Contracts to be funded by the Account, is a broker-dealer registered as such
under the Securities Exchange Act of 1934;
NOW THEREFORE, in consideration of the foregoing and. of mutual covenants
and conditions set forth herein and for other good and valuable consideration,
Lincoln National, the Account, and the Fund, hereby agree as follows:
1. The Contracts funded through the Account will provide for the
allocation of net amounts among certain Subaccounts for investment in such
shares of the Series as may be offered from
-2-
<PAGE>
time to time in the prospectus of the Contracts. The selection of the particular
Subaccount is to be made by the Contract Owner and such selection may be changed
in accordance with the terms of the Contracts.
2. No representation is made as to the number or amount of such Contracts
to be sold. American Fund Distributors, Inc. will make reasonable efforts to
market such Contracts and will comply with all applicable federal or state laws
in connection therewith.
3. Fund shares to be made available to certain Subaccounts shall be sold
by the respective Series and purchased by Lincoln National for the corresponding
Subaccount at the net asset value (without the imposition of a sales load) next-
computed after receipt of each order, as established in accordance with the
provisions of the then current prospectus of the Fund. Shares of a particular
Series shall be ordered in such quantities and at such times as determined by
Lincoln National to be necessary to meet the requirements of the Contracts.
Orders or payments for shares purchased will be sent promptly to the Fund and
will be made in the manner established from time to time by the Fund.
The Fund reserves the right to delay transfer of its shares until the
payment check has cleared. The Fund reserves the right to suspend sales if the
Board of Trustees of the Fund deems it appropriate and in the best interests of
the Fund or in response to the order of an appropriate regulatory authority.
-3-
<PAGE>
4. Transfer of the Fund's shares will be by book entry only. No stock
certificates will be issued to the Account. Shares ordered from a particular
Series will be recorded in an appropriate title for the corresponding Subaccount
by Lincoln National.
5. The Fund shall furnish notice promptly to Lincoln National of any
dividend or distribution payable on any shares underlying Subaccounts. All of
such dividends and distributions as are payable on shares of a Series recorded
in the title for the corresponding Subaccount shall be automatically reinvested
in additional shares of that Series. The Fund shall notify Lincoln National of
the number of shares so issued.
6. The Fund shall pay all expenses incident to its performance under this
Agreement. The Fund shall see to it that all of its shares are registered and
authorized for issue in accordance with applicable federal and state laws prior
to their purchase for the Subaccount. The Fund shall bear the expenses for the
cost of registration of its shares, preparation of its prospectuses, proxy
materials and reports, the printing and distribution of such items to each
Contract Owner who has allocated net amounts to any Subaccount, the preparation
of all statements and notices required by any federal-or state law, or taxes on
the issue
-4-
<PAGE>
or transfer of the Fund's shares subject to this Agreement.
7. Lincoln National shall make no representations concerning the Fund's
shares except those contained in the then current prospectus of the fund and in
printed information subsequently issued on behalf of the Fund as supplemental to
such prospectus.
8. From the effective date of this agreement, shares of the Fund will be
offered exclusively to Anchor National's - American Pathway II - Separate
Account and to LNP's Separate Account E for the purpose of funding variable
annuity contracts. This exclusivity will apply as long as American Funds
Distributors, Inc. remains the sole distributor of the Contracts. Shares of the
Fund may be offered to variable life insurance separate accounts of various
insurance companies in addition to Lincoln National. The Parties recognize
that, due to differences in tax treatment or other considerations, the interests
of various Contract (or policy) Owners participating in one or more Series
might, at some time, be in conflict. Lincoln National shall consider whether
disclosure in the Contract prospectus regarding the potential risks of mixed and
shared funding is appropriate. Each Party shall report to the other Party any
potential or existing conflicts of which it becomes aware. The Board of
Trustees of the Fund shall promptly notify Lincoln National of the existence of
an irreconcilable material conflict and its implications. If such a conflict
exists, Lincoln National will, at its own expense, take whatever action is
necessary to remedy such conflict; in any case, Contract Owners will not be
required to bear such expenses.
-5-
<PAGE>
9. Lincoln National shall be responsible for assuring that the Account
calculates pass-through voting privileges of Contract Owners in a manner
consistent with the method of calculating pass-through voting privileges set
forth in the current prospectus for American Pathway II.
10. This Agreement shall terminate:
a. at the option of Lincoln National or of the Fund upon nine
months' advance written notice to the other;
b. at the option of Lincoln National upon institution of formal
proceedings against the Fund by the Securities and Exchange
Commission;
c. upon requisite vote of the Contract Owners having an interest in
a particular Subaccount to substitute the shares of another
investment company for the corresponding Fund shares in
accordance with the terms of the Contracts for which those Fund
shares had been selected to serve as the underlying investment
medium. Lincoln National will give 30 days' prior written notice
to the Fund of the date of any proposed vote to replace Fund
shares; and
d. in the event the Fund's shares are not registered, issued or sold
in accordance with applicable state and/or federal law or such
law precludes the use of such shares as an underlying investment
for the Policies issued or to be issued by Lincoln National,
prompt notice shall be given by Lincoln National or the Fund to
the other.
11. The obligations of the Fund under this Agreement are not binding upon
any of the Trustees, officers, employees, agents or shareholders of the Fund
individually, but bind only the Fund's assets. Lincoln National and the Account
agree to look solely to the assets of the Fund for the satisfaction of any
liability of the Fund in respect of this Agreement and will
-6-
<PAGE>
not seek recourse against the Fund's Trustees, officers, employees, agents or
shareholders, or any of them, or any of their personal assets for such
satisfaction.
12. This Agreement shall be construed in accordance with the laws of the
state of California.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and attested as of the date first above written.
LINCOLN NATIONAL PENSION INSURANCE
COMPANY FOR ITSELF AND ON BEHALF OF
LINCOLN NATIONAL SEPARATE ACCOUNT E
Attest:
__________________________________ By: ______________________________________
AMERICAN PATHWAY FUND
Attest:
__________________________________ By: ______________________________________
Paul G. Haaga, Jr.
Vice President
-7-
<PAGE>
Exhibit 10
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Independent Auditors"
in the Post Effective Amendment No. 13 to the Registration Statement (Form N-4
No. 33-26032) and the related Statement of Additional Information pertaining to
Lincoln National Variable Annuity Account E, and to the use therein of our
reports dated (a) February 5, 1998, with respect to the statutory-basis
financial statements of The Lincoln National Life Insurance Company, and (b)
April 7, 1998, with respect to the financial statements of Lincoln National
Variable Annuity Account E.
Fort Wayne, Indiana
April 24, 1998
<PAGE>
ORGANIZATIONAL CHART OF THE
LINCOLN NATIONAL INSURANCE HOLDING COMPANY SYSTEM
All the members of the holding company system are corporations, with
the exception of, Delaware Distributors, L.P and Founders CBO, L.P.
--------------------------------
| |
| Lincoln National Corporation |
| Indiana - Holding Company |
--------------------------------
| --------------------------------------------
|--| City Financial Planners, Ltd. |
| | 100% - Englad/Wales - Distribution of life|
| | assurance & pension products |
| --------------------------------------------
| -------------------------------
|--| The Insurers' Fund, Inc. # |
| | 100% - Maryland - Inactive |
| -------------------------------
| ------------------------------------------------
|--| LNC Administrative Services Corporation |
| | 100% - Indiana - Third Party Administrator |
| ------------------------------------------------
| ------------------------------------------------
|--| Lincoln Funds Corporation |
| | 100% - Delaware - Intermediate Holding Company |
| ------------------------------------------------
| ---------------------------------------------------
|--|Lincoln National Financial Institutions Group, Inc.|
| |(fka The Richard Leahy Corporation) |
| | 100% - Indiana - Insurance Agency |
| ---------------------------------------------------
| | ---------------------------------
| |--| The Financial Alternative, Inc. |
| | | 100% - Utah- Insurance Agency |
| | ---------------------------------
| | ---------------------------------------
| |--| Financial Alternative Resources, Inc. |
| | | 100% - Kansas - Insurance Agency |
| | ---------------------------------------
| | -----------------------------------------
| |--| Financial Choices, Inc. |
| | | 100% - Pennsylvania - Insurance Agency |
| | -----------------------------------------
| | -----------------------------------------------
| | | Financial Investment Services, Inc. |
| |--| (formerly Financial Services Department, Inc.)|
| | | 100% - Indiana - Insurance Agency |
| | -----------------------------------------------
| | -----------------------------------------
| | | Financial Investments, Inc. |
| |--| (formerly Insurance Alternatives, Inc.) |
| | | 100% - Indiana - Insurance Agency |
| | -----------------------------------------
| | -------------------------------------------
| |--| The Financial Resources Department, Inc. |
| | | 100% - Michigan - Insurance Agency |
| | -------------------------------------------
| | -----------------------------------------
| |--| Investment Alternatives, Inc. |
| | | 100% - Pennsylvania - Insurance Agency |
| | -----------------------------------------
| | --------------------------------------
| |--| The Investment Center, Inc. |
| | | 100% - Tennessee - Insurance Agency |
| | --------------------------------------
| | --------------------------------------
| |--| The Investment Group, Inc. |
| | | 100% - New Jersey - Insurance Agency |
| | --------------------------------------
<PAGE>
-------------------------------
| |
| Lincoln National Corporation |
| Indiana - Holding Company |
-------------------------------
| ---------------------------------------------------
|--|Lincoln National Financial Institutions Group, Inc.|
| |(fka The Richard Leahy Corporation) |
| | 100% - Indiana - Insurance Agency |
| ---------------------------------------------------
| | ------------------------------------
| |--| Personal Financial Resources, Inc. |
| | | 100% - Arizona - Insurance Agency |
| | ------------------------------------
| | ----------------------------------------
| |--| Personal Investment Services, Inc. |
| | 100% - Pennsylvania - Insurance Agency |
| ----------------------------------------
| -------------------------------------------
|--| LincAm Properties, Inc. |
| | 50% - Delaware - Real Estate Investment |
| -------------------------------------------
|
| ----------------------------------------------
| | Lincoln Financial Group, Inc. |
|--| (formerly Lincoln National Sales Corporation)|
| | 100% - Indiana - Insurance Agency |
| ----------------------------------------------
| | ----------------------------------------
| |--| Lincoln Financial Advisors Corporation |
| | | (formerly LNC Equity Sales Corporation)|
| | | 100% - Indiana - Broker-Dealer |
| | ----------------------------------------
| | -------------------------------------------------------------
| | |Corporate agencies: Lincoln Financial Group, Inc. ("LFG") |
| |--|has subsidiaries of which LFG owns from 80%-100% of the |
| | |common stock (see Attachment #1). These subsidiaries serve |
| | |as the corporate agency offices for the marketing and |
| | |servicing of products of The Lincoln National Life Insurance |
| | |Company. Each subsidiary's assets are less than 1% of the |
| | |total assets of the ultimate controlling person. |
| | -------------------------------------------------------------
| |
| | ------------------------------------------------
| |--| Professional Financial Planning, Inc. |
| | 100% - Indiana - Financial Planning Services |
| ------------------------------------------------
| ---------------------------------------
|--| Lincoln Life Improved Housing, Inc. |
| | 100% - Indiana |
| ---------------------------------------
|
| -----------------------------------------------
|--| Lincoln National (China) Inc. |
| | 100% - Indiana - China Representative Office |
| -----------------------------------------------
|
| -----------------------------------------------
|--| Lincoln National (India) Inc. |
| | 100% - Indiana - India Representative Office |
| -----------------------------------------------
| ---------------------------------------------
|--| Lincoln National Intermediaries, Inc. |
| | 100% - Indiana - Reinsurance Intermediary |
| ---------------------------------------------
| --------------------------------------------------
|__| Lincoln National Investments, Inc. |
| | (fka Lincoln National Investment Companies, Inc.)|
| | 100% - Indiana - Holding Company |
| --------------------------------------------------
| | --------------------------------------------
| |--| Lincoln National Investment Companies, Inc.|
| | |(fka Lincoln National Investments, Inc.) |
| | | 100% - Indiana - Holding Company |
| | --------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
<S><C>
-------------------------------
| |
| Lincoln National Corporation |
| Indiana - Holding Company |
-------------------------------
| --------------------------------------------------
|__| Lincoln National Investments, Inc. |
| | (fka Lincoln National Investment Companies, Inc.)|
| | 100% - Indiana - Holding Company |
| --------------------------------------------------
| | --------------------------------------------
| |--| Lincoln National Investment Companies, Inc.|
| | |(fka Lincoln National Investments, Inc.) |
| | | 100% - Indiana - Holding Company |
| | --------------------------------------------
| | | ----------------------------------
| | |--|Delaware Management Holdings, Inc.|
| | | | 100% - Delaware - Holding Company|
| | | ----------------------------------
| | | | -----------------------------------
| | | |--| DMH Corp. |
| | | | 100% - Delaware - Holding Company |
| | | -----------------------------------
| | | | ----------------------------------------
| | | |--| Delaware International Advisers Ltd. |
| | | | | 81.1% - England - Investment Advisor |
| | | | ----------------------------------------
| | | | --------------------------------------
| | | |--| Delaware Management Trust Company |
| | | | | 100% - Pennsylvania - Trust Service |
| | | | --------------------------------------
| | | | ------------------------------------------------
| | | |--| Delaware International Holdings, Ltd. |
| | | | | 100% - Bermuda - Investment Advisor |
| | | | ------------------------------------------------
| | | | | | --------------------------------------
| | | | | --| Delaware International Advisers, Ltd.|
| | | | | | 18.9% - England - Investment Advisor |
| | | | | --------------------------------------
| | | | -------------------------------------------------
| | | |--| Delvoy, Inc. |
| | | | | 100% - Minnesota - Holding Company |
| | | | -------------------------------------------------
| | | | ---------------------------------------
| | | | |--| Delaware Management Company, Inc. |
| | | | | | 100% - Delaware - Investment Advisor |
| | | | | ---------------------------------------
| | | | | | -------------------------------------------------------
| | | | | |--| Delaware Distributors, L.P. |
| | | | | | | 98%-Delaware-MutualFund Distributor & Broker/Dealer |
| | | | | | | 1% Equity-Delaware Capital Management, Inc. |
| | | | | | | 1% Equity-Delaware Distributors, Inc. |
| | | | | | | |
| | | | | | -------------------------------------------------------
| | | | | | ------------------------------------
| | | | | |--| Founders Holdings, Inc. |
| | | | | | | 100% - Delaware - General Partner |
| | | | | | ------------------------------------
| | | | | | | -----------------------------------------
| | | | | | | | Founders CBO, L.P. |
| | | | | | --| 1% - Delaware - Investment Partnership |
| | | | | | | 99% held by outside investors |
| | | | | | -----------------------------------------
| | | | | | | ------------------------------------------
| | | | | | --|Founders CBO Corporation |
| | | | | | |100%-Delaware-Co-Issuer with Founders CBO |
------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S><C>
--------------------------------
| |
| Lincoln National Corporation |
| Indiana - Holding Company |
--------------------------------
| --------------------------------------------------
|--| Lincoln National Investments, Inc. |
| | (fka Lincoln National Investment Companies, Inc.)|
| | 100% - Indiana - Holding Company |
| --------------------------------------------------
| | --------------------------------------------
| |--| Lincoln National Investment Companies, Inc.|
| | |(fka Lincoln National Investments, Inc.) |
| | | 100% - Indiana - Holding Company |
| | --------------------------------------------
| | | ----------------------------------
| | |--|Delaware Management Holdings, Inc.|
| | | | 100% - Delaware - Holding Company|
| | | ----------------------------------
| | | | -----------------------------------
| | | |--| DMH Corp. |
| | | | 100% - Delaware - Holding Company |
| | | -----------------------------------
| | | | -------------------------------------
| | | |--| Delvoy, Inc. |
| | | | | 100% - Minnesota - Holding Company |
| | | | -------------------------------------
| | | | | ------------------------------------
| | | | |---| Delaware Distributors, Inc. |
| | | | | | 100% - Delaware - General Partner |
| | | | | ------------------------------------
| | | | | | ------------------------------------------------------
| | | | | |--| Delaware Distributors, L.P. |
| | | | | | 98%-Delaware-Mutual Fund Distributor & Broker/Dealer |
| | | | | | 1% Equity-Delaware Capital Management, Inc. |
| | | | | | 1% Equity-Delaware Distributors, Inc. |
| | | | | ------------------------------------------------------
| | | | | -----------------------------------------------
| | | | |---| Delaware Capital Management, Inc. |
| | | | | |(formerly Delaware Investment Counselors, Inc.)|
| | | | | | 100% - Delaware - Investment Advisor |
| | | | | -----------------------------------------------
| | | | | | -------------------------------------------------------
| | | | | |-- | Delaware Distributors, L.P. |
| | | | | | | 98%-Delaware-Mutual Fund Distributor & Broker/Dealer |
| | | | | | |1% Equity-Delaware Capital Management, Inc. |
| | | | | | | 1% Equity-Delaware Distributors, Inc. |
| | | | | | -------------------------------------------------------
| | | | | -----------------------------------------------------
| | | | |---| Delaware Service Company, Inc. |
| | | | | | 100%-Delaware-Shareholder Services & Transfer Agent |
| | | | | -----------------------------------------------------
| | | | | -----------------------------------------------------
| | | | |---| Delaware Investment & Retirement Services, Inc. |
| | | | | 100% - Delaware - Registered Transfer Agent |
| | | | -----------------------------------------------------
| | | -----------------------------------------
| | |--| Lynch & Mayer, Inc. |
| | | | 100% - Indiana - Investment Adviser |
| | | -----------------------------------------
| | | | -----------------------------------------
| | | |--| Lynch & Mayer Asia, Inc. |
| | | | | 100% - Delaware - Investment Management |
| | | | -----------------------------------------
| | | | ----------------------------------------
| | | |--| Lynch & Mayer Securities Corp. |
| | | | 100% - Delaware - Securities Broker |
| | | ----------------------------------------
| | | ----------------------------------------------------
| | | | Vantage Global Advisors, Inc. |
| | |--| (formerly Modern Portfolio Theory Associates, Inc.)|
| | | | 100% - Delaware - Investment Adviser |
| | | ----------------------------------------------------
</TABLE>
<PAGE>
--------------------------------
| |
| Lincoln National Corporation |
| Indiana - Holding Company |
--------------------------------
| --------------------------------------------------
|--| Lincoln National Investments, Inc. |
| | (fka Lincoln National Investment Companies, Inc.)|
| | 100% - Indiana - Holding Company |
| --------------------------------------------------
| | -----------------------------------------------------------
| | | Lincoln Investment Management, Inc. |
| |--| (formerly Lincoln National Investment Management Company) |
| | | 100% - Illinois - Mutual Fund Manager and |
| | | Registered Investment Adviser |
| -----------------------------------------------------------
| -----------------------------------------------
|--| The Lincoln National Life Insurance Company |
| | 100% - Indiana |
| -----------------------------------------------
| | --------------------------------------------------
| |--| AnnuityNet, Inc. |
| | | 100% - Indiana - Distribution of annuity products|
| | --------------------------------------------------
| | -------------------------------------------
| |--| Cigna Associates, Inc. |
| | | 100% - Connecticut - Insurance Agency |
| | -------------------------------------------
| | | ----------------------------------------------------------
| | |--| Cigna Associates of Massachusetts, Inc. |
| | | | 100% - Massachusetts - Insurance Agency |
| | ----------------------------------------------------------
| | -------------------------------------------
| |--|Cigna Financial Advisors, Inc. |
| | | 100% - Connecticut - Broker Dealer |
| | -------------------------------------------
| | -------------------------------------------
| |--| First Penn-Pacific Life Insurance Company |
| | | 100% - Indiana |
| | -------------------------------------------
| | -----------------------------------------------
| |--| Lincoln Life & Annuity Company of New York |
| | | 100% - New York |
| | -----------------------------------------------
| |
| | ------------------------------------------------
| |--| Lincoln National Aggressive Growth Fund, Inc. |
| | | 100% - Maryland - Mutual Fund |
| | ------------------------------------------------
| | -----------------------------------
| |--| Lincoln National Bond Fund, Inc. |
| | | 100% - Maryland - Mutual Fund |
| | -----------------------------------
| | --------------------------------------------------
| |--| Lincoln National Capital Appreciation Fund, Inc. |
| | | 100% - Maryland - Mutual Fund |
| | --------------------------------------------------
| | --------------------------------------------
| |--| Lincoln National Equity-Income Fund, Inc. |
| | | 100% - Maryland - Mutual Fund |
| | --------------------------------------------
| | ------------------------------------------------------
| | | Lincoln National Global Asset Allocation Fund, Inc. |
| |--| (formerly Lincoln National Putnam Master Fund, Inc.) |
| | | 100% - Maryland - Mutual Fund |
| | ------------------------------------------------------
| | ------------------------------------------------
| | | Lincoln National Growth and Income Fund, Inc. |
| |--| (formerly Lincoln National Growth Fund, Inc.) |
| | | 100% - Maryland - Mutual Fund |
| | ------------------------------------------------
<PAGE>
--------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
--------------------------------
| -----------------------------------------------
|--| The Lincoln National Life Insurance Company |
| | 100% - Indiana |
| -----------------------------------------------
| | --------------------------------------------------------
| |--| Lincoln National Health & Casualty Insurance Company |
| | | 100% - Indiana |
| --------------------------------------------------------
| | -----------------------------------------------
| |--| Lincoln Re, S.A. |
| | | 1% Argentina - General Business Corp |
| | | (Remaining 99% owned by Lincoln National |
| | | Reassurance Company) |
| -----------------------------------------------
| -------------------------------------------
| |--| Lincoln National International Fund, Inc. |
| | | 100% - Maryland - Mutual Fund |
| | | -------------------------------------------
| | ---------------------------------------
| |--| Lincoln National Managed Fund, Inc. |
| | | 100% - Maryland - Mutual Fund |
| | ---------------------------------------
| | --------------------------------------------
| |--| Lincoln National Money Market Fund, Inc. |
| | | 100% - Maryland - Mutual Fund |
| | --------------------------------------------
| | -----------------------------------------------
| |--| Lincoln National Social Awareness Fund, Inc. |
| | | 100% - Maryland - Mutual Fund |
| | -----------------------------------------------
| | -----------------------------------------------------
| |--| Lincoln National Special Opportunities Fund, Inc. |
| | | 100% - Maryland - Mutual Fund |
| | -----------------------------------------------------
| | ------------------------------------------------------
| |--| Lincoln National Reassurance Company |
| | 100% - Indiana - Life Insurance |
| ------------------------------------------------------
| | -----------------------------------------------
| |--| Lincoln Re, S.A. |
| | | 99% Argentina - General Business Corp |
| | | (Remaining 1% owned by Lincoln National Health|
| | | & Casualty Insurance Company) |
| | -----------------------------------------------
| | -----------------------------------------------
| |--| Special Pooled Risk Administrators, Inc. |
| | 100% - New Jersey - Catastrophe Reinsurance |
| | Pool Administrator |
| -----------------------------------------------
| ---------------------------------------------------------
|--| Lincoln National Management Services, Inc. |
| | 100% - Indiana - Underwriting and Management Services |
| ---------------------------------------------------------
| ---------------------------------------
|--| Lincoln National Realty Corporation |
| | 100% - Indiana - Real Estate |
| ---------------------------------------
| -----------------------------------------------------------
|--| Lincoln National Reinsurance Company (Barbados) Limited |
| | 100% - Barbados |
| -----------------------------------------------------------
|
| ----------------------------------------------
|--| Lincoln National Reinsurance Company Limited |
| | (formerly Heritage Reinsurance, Ltd.) |
| | 100% ** - Bermuda |
| ----------------------------------------------
| | -------------------------------------------------------
| |--| Lincoln European Reinsurance S.A. |
| | | 79% - Belgium |
| | | (Remaining 21% owned by Lincoln National Underwriting |
| | | Services, Ltd. |
| | -------------------------------------------------------
<PAGE>
--------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
--------------------------------
| ----------------------------------------------
|--| Lincoln National Reinsurance Company Limited |
| | (formerly Heritage Reinsurance, Ltd.) |
| | 100% ** - Bermuda |
| ----------------------------------------------
| | ---------------------------------------------------------
| | | Lincoln National Underwriting Services, Ltd. |
| |--| 90% - England/Wales - Life/Accident/Health Underwriter |
| | | (Remaining 10% owned by Old Fort Ins. Co. Ltd.) |
| | ---------------------------------------------------------
| | | ------------------------------------------------------
| | |--| Lincoln European Reinsurance S.A. |
| | | | 21% - Belgium |
| | | |(Remaining 79% owned by Lincoln National Reinsurance |
| | | | Company Limited |
| | | ------------------------------------------------------
| | --------------------------------------------------------
| | | Servicios de Evaluacion de Riesgos, S. de R.L. de C.V. |
| |--| 51% - Mexico - Reinsurance Underwriter |
| | | (Remaining 49% owned by Lincoln National Corp.) |
| | --------------------------------------------------------
| ---------------------------------------------
|--| Lincoln National Risk Management, Inc. |
| | 100% - Indiana - Risk Management Services |
| ---------------------------------------------
| ------------------------------------------------
|--| Lincoln National Structured Settlement, Inc. |
| | 100% - New Jersey |
| ------------------------------------------------
| -----------------------------------------
|--| Lincoln National (UK) PLC |
| | 100% - England/Wales - Holding Company |
| -----------------------------------------
| | -------------------------------------------------------
| |--| Allied Westminster & Company Limited |
| | | (formerly One Olympic Way Financial Services Limited) |
| | | 100% - England/Wales - Sales Services |
| | -------------------------------------------------------
| | -----------------------------------
| |--|Cannon Fund Managers Limited |
| | | 100% - England/Wales - Inactive |
| | -----------------------------------
| | --------------------------------------------------------
| |--| Culverin Property Services Limited |
| | | 100% - England/Wales - Property Development Services |
| | --------------------------------------------------------
| | ---------------------------------------------------------
| |--| HUTM Limited |
| | | 100% - England/Wales - Unit Trust Management (Inactive) |
| | ---------------------------------------------------------
| |
| | --------------------------------------------
| |--| ILI Supplies Limited |
| | | 100% - England/Wales - Computer Leasing |
| | --------------------------------------------
| | ------------------------------------------------
| |--| Lincoln Financial Advisers Limited |
| | | (formerly: Laurentian Financial Advisers Ltd.) |
| | | 100% - England/Wales - Sales Company |
| | ------------------------------------------------
| |
| | --------------------------------------------------
| |--| Lincoln Financial Group PLC |
| | | (formerly: Laurentian Financial Group PLC) |
| | | 100% - England/Wales - Holding Company |
| | --------------------------------------------------
| | | ----------------------------------------------------
| | |--| Lincoln Unit Trust Management Limited |
| | | |(formerly: Laurentian Unit Trust Management Limited)|
| | | | 100% - England/Wales - Unit Trust Management |
| | | ----------------------------------------------------
| | | | --------------------------------------------------
| | | |--| LUTM Nominees Limited |
| | | | | 100% - England/Wales - Nominee Services (Dormat) |
| | | | --------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
<S><C>
--------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
--------------------------------
| -----------------------------------------
|--| Lincoln National (UK) PLC |
| | 100% - England/Wales - Holding Company |
| -----------------------------------------
| | --------------------------------------------------
| |--| Lincoln Financial Group PLC |
| | | (formerly: Laurentian Financial Group PLC) |
| | | 100% - England/Wales - Holding Company |
| | --------------------------------------------------
| | | ---------------------------------------
| | |--| Lincoln Milldon Limited |
| | | |(formerly: Laurentian Milldon Limited) |
| | | | 100% - England/Wales - Sales Company |
| | | ---------------------------------------
| | | -----------------------------------------------------------
| | |--| Laurtrust Limited |
| | | | 100% - England/Wales - Pension Scheme Trustee (Inactive) |
| | | -----------------------------------------------------------
| | | --------------------------------------------------
| | |--| Lincoln Management Services Limited |
| | | |(formerly: Laurentian Management Services Limited)|
| | | | 100% - England/Wales - Management Services |
| | | --------------------------------------------------
| | | | ------------------------------------------------
| | | |--|Laurit Limited |
| | | | |100% - England/Wales - Data Processing Systems |
| | | | ------------------------------------------------
| | --------------------------------------------------------
| |--| Liberty Life Pension Trustee Company Limited |
| | | 100% - England/Wales - Corporate Pension Fund (Dormat) |
| | --------------------------------------------------------
| | ----------------------------------------------------------
| |--| LN Management Limited |
| | | 100% - England/Wales - Administrative Services (Dormat) |
| | ----------------------------------------------------------
| | | -----------------------------------
| | |--| UK Mortgage Securities Limited |
| | | 100% - England/Wales - Inactive |
| | -----------------------------------
| | ------------------------------------------
| |--| Liberty Press Limited |
| | | 100% - England/Wales - Printing Services |
| ------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S><C>
--------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
--------------------------------
| -----------------------------------------
|--| Lincoln National (UK) PLC |
| | 100% - England/Wales - Holding Company |
| -----------------------------------------
| | ----------------------------------------------
| |--| Lincoln General Insurance Co. Ltd. |
| | | 100% - Accident & Health Insurance |
| | ----------------------------------------------
| | --------------------------------------------
| |--|Lincoln Assurance Limited |
| | | 100% ** - England/Wales - Life Assurance |
| | --------------------------------------------
| | | |
| | | | ---------------------------------------------
| | | |--|Barnwood Property Group Limited |
| | | | |100% - England/Wales - Property Management Co|
| | | | ---------------------------------------------
| | | | | ------------------------------------------
| | | | |--| Barnwood Developments Limited |
| | | | | | 100% England/Wales - Property Development|
| | | | | ------------------------------------------
| | | | |
| | | | | --------------------------------------------
| | | | |--| Barnwood Properties Limited |
| | | | | | 100% - England/Wales - Property Investment |
| | | | --------------------------------------------
| | | | -----------------------------------------------------
| | | |--|IMPCO Properties G.B. Ltd. |
| | | | |100% - England/Wales - Property Investment (Inactive)|
| | | | -----------------------------------------------------
| | | | ----------------------------------------------------
| | | |--| Lincoln Insurance Services Limited |
| | | | 100% - Holding Company |
| | | ----------------------------------------------------
| | | | ---------------------------------
| | | |--| British National Life Sales Ltd.|
| | | | | 100% - Inactive |
| | | | ---------------------------------
| | | |
| | | | ----------------------------------------------------------
| | | |--| BNL Trustees Limited |
| | | | | 100% - England/Wales - Corporate Pension Fund (Inactive) |
| | | | ----------------------------------------------------------
| | | | -------------------------------------
| | | |--| Chapel Ash Financial Services Ltd. |
| | | | | 100% - Direct Insurance Sales |
| | | | -------------------------------------
| | | | --------------------------
| | | |--| P.N. Kemp-Gee & Co. Ltd. |
| | | | | 100% - Inactive |
--------------------------
</TABLE>
<PAGE>
--------------------------------
| |
| Lincoln National Corporation |
| Indiana - Holding Company |
--------------------------------
|
| -----------------------------------------
|--| Lincoln National (UK) PLC |
| | 100% - England/Wales - Holding Company |
| -----------------------------------------
| | ----------------------------------------------
| |--| Lincoln Unit Trust Managers Limited |
| | | 100% - England/Wales - Investment Management |
| | ----------------------------------------------
| | ----------------------------------------------------------
| |--| LIV Limited (formerly Lincoln Investment Management Ltd.)|
| | | 100% - England/Wales - Investment Management Services |
| | ----------------------------------------------------------
| | | -----------------------------------------------
| | |--| CL CR Management Ltd. |
| | | 50% - England/Wales - Administrative Services |
| | -----------------------------------------------
| | -----------------------------------------------------------
| |--| Lincoln Independent Limited |
| | |(formerly: Laurentian Independent Financial Planning Ltd.) |
| | | 100% - England/Wales - Independent Financial Adviser |
| | -----------------------------------------------------------
| | ----------------------------------------------
| |--| Lincoln Investment Management Limited |
| | |(formerly: Laurentian Fund Management Ltd.) |
| | | 100% - England/Wales - Investment Management |
| | ----------------------------------------------
| | ------------------------------------------
| |--| LN Securities Limited |
| | | 100% - England/Wales - Nominee Company |
| | ------------------------------------------
| |
| | ---------------------------------------------
| |--| Niloda Limited |
| | | 100% - England/Wales - Investment Company |
| | ---------------------------------------------
| |
| | --------------------------------------------------
| |--| Lincoln National Training Services Limited |
| | | 100% - England/Wales - Training Company |
| | --------------------------------------------------
| | -------------------------------------------------
| |--| Lincoln Pension Trustees Limited |
| | | 100% - England/Wales - Corporate Pension Fund |
| | -------------------------------------------------
| |
| | --------------------------------------------------
| |--| Lincoln National (Jersey) Limited |
| | | 100% - England/Wales - Dormat |
| | --------------------------------------------------
| |
| | -------------------------------------------------
| |--| Lincoln National (Guernsey) Limited |
| | | 100% - England/Wales - Dormat |
| | -------------------------------------------------
| |
| | -------------------------------------------------
| |--| Lincoln SBP Trustee Limited |
| | 100% - England/Wales |
--------------------------------------------------
<PAGE>
--------------------------------
| |
| Lincoln National Corporation |
| Indiana - Holding Company |
--------------------------------
| -------------------------------------------------
| | Linsco Reinsurance Company |
|--| (formerly Lincoln National Reinsurance Company) |
| | 100% - Indiana - Property/Casualty |
| -------------------------------------------------
|
| ------------------------------------
|--| Old Fort Insurance Company, Ltd. |
| | 100% ** - Bermuda |
| ------------------------------------
| | --------------------------------------------------------
| | | Lincoln National Underwriting Services, Ltd. |
| |--| 10% - England/Wales - Life/Accident/Health Underwriter |
| | | (Remaining 90% owned by Lincoln Natl. Reinsurance Co.) |
| | --------------------------------------------------------
| | ---------------------------------------------------
| | | Solutions Holdings, Inc. |
| |--| 100% - Delaware - General Business Corporation |
| | ---------------------------------------------------
| | | ----------------------------------------
| | |--|Solutions Reinsurance Limited |
| | | 100% - Bermuda - Class III Insurance Co|
| ----------------------------------------
| ----------------------------------------------------------
| | Seguros Serfin Lincoln, S.A. |
|--| 49% - Mexico - Insurance |
| ----------------------------------------------------------
| ----------------------------------------------------------
| | Servicios de Evaluacion de Riesgos, S. de R.L. de C.V. |
|--| 49% - Mexico - Reinsurance Underwriter |
| | (Remaining 51% owned by Lincoln Natl. Reinsurance Co.) |
| ----------------------------------------------------------
| --------------------------------------------
|--| Underwriters & Management Services, Inc. |
| 100% - Indiana - Underwriting Services |
--------------------------------------------
FOOTNOTES:
* The funds contributed by the Underwriters were, and continue to be subject
to trust agreements between American States Insurance Company, the grantor,
and each Underwriter, as trustee.
** Except for director-qualifying shares
# Lincoln National Corporation has subscribed for and paid for 100 shares of
Common Stock (with a par value of $1.00 per share) at a price of $10 per
share, as part of the organizing of the fund. As such stock is further
sold, the ownership of voting securities by Lincoln National Corporation
will decline and fluctuate.
<PAGE>
ATTACHMENT #1
LINCOLN FINANCIAL GROUP, INC.
CORPORATE AGENCY SUBSIDIARIES
1) Lincoln Financial Group, Inc. (AL)
2) Lincoln Southwest Financial Group, Inc. (Phoenix, AZ)
3) Lincoln Financial and Insurance Services Corporation (Walnut Creek, CA)
3a) California Fringe Benefit and Insurance Marketing Corporation
DBA/California Fringe Benefit Company (Walnut Creek, CA)
4) Colorado-Lincoln Financial Group, Inc. (Denver, CO)
5) Lincoln National Financial Services, Inc. (Lake Worth, FL)
6) CMP Financial Services, Inc. (Chicago, IL)
7) Lincoln Financial Group of Northern Indiana, Inc. (Fort Wayne, IN)
8) Financial Planning Partners, Ltd. (Mission, KS)
9) The Lincoln National Financial Group of Louisiana, Inc. (Shreveport, LA)
10) Benefits Marketing Group, Inc. (D.C. & Chevy Chase, MD)
11) Lincoln Financial Services and Insurance Brokerage of New England, Inc
(formerly: Lincoln National of New England Insurance Agency, Inc.)
(Worcester, MA)
12) Lincoln Financial Group of Michigan, Inc. (Troy, MI)
12a) Financial Consultants of Michigan, Inc. (Troy, MI)
13) Lincoln Financial Group of Missouri, Inc. (formerly: John J. Moore &
Associates, Inc.) (St. Louis, MO)
14) Beardslee & Associates, Inc. (Clifton, NJ)
15) Lincoln Financial Group, Inc. (formerly: Resources/Financial, Inc.
(Albuquerque, NM)
16) Lincoln Cascades, Inc. (Portland, OR)
17) Lincoln Financial Group, Inc. (Salt Lake City, (UT)
<PAGE>
Summary of Changes to Organizational Chart:
JANUARY 1, 1995-DECEMBER 31, 1995
SEPTEMBER 1995
a. Lincoln National (Jersey) Limited was incorporated on September 18,
1995. Company is dormat and was formed for tax reasons per Barbara
Benoit, Assistant Corporate Secretary at Lincoln UK.
JANUARY 1, 1996-DECEMBER 1, 1996
MARCH 1996
a. Delaware Investment Counselors, Inc. changed its name to Delaware
Capital Management, Inc. effective March 29, 1996.
AUGUST 1996
a. Lincoln National (Gernsey) Limited was incorporated on August 9, 1996;
company is dormat and was formed for tax reasons.
SEPTEMBER 1996
a. Morgan Financial Group, Inc. changed its name to Lincoln National
Sales Corporation of Maryland effective September 23, 1996.
OCTOBER 1996
a. Addition of Lincoln National (India) Inc., incorporated as an Indiana
corporation on October 17, 1996.
NOVEMBER 1996
a. Lincoln National SBP Trustee Limited was bought "off the shelf" and
was incorporated on November 26, 1996; it was formed to act ast
Trustee for Lincoln Staff Benefits Plan.
DECEMBER 1996
a. Addition of Lincoln National Investments, Inc., incorporated as an
Indiana corporation on December 12, 1996.
JANUARY 1, 1997-DECEMBER 31, 1997
JANUARY 1997
a. Delaware Management Holdings, Inc., Lynch & Mayer, Inc. and Vantage
Global Advisors, Inc. were transferred via capital contribution to
Lincoln National Investments, Inc. effective January 2, 1997.
b. Lincoln National Investments, Inc. changed its name to Lincoln
National Investment Companies, Inc. effective January 24, 1997.
c. Lincoln National Investment Companies, Inc. changed its named to
Lincoln National Investments, Inc. effective January 24, 1997.
<PAGE>
JANUARY 1997 CON'T
d. The following Lincoln National (UK) subsidiaries changed their name
effective January 1, 1997: Lincoln Financial Group PLC (formerly
Laurentian Financial Group PLC); Lincoln Milldon Limited (formerly
Laurentian Milldon Limited); Lincoln Management Services Limited
(formerly Laurentian Management Services Limited).
FEBRUARY 1997
a. Removal of Lincoln National Financial Group of Philadelphia, Inc.
which was dissolved effective February 25, 1997.
MARCH 1997
a. Removal of Lincoln Financial Services, Inc. which was dissolved
effective March 4, 1997.
APRIL 1997
a. Acquisition of Dougherty Financial Group, Inc. on April 30, 1997.
Company then changed its name to Delvoy, Inc. The acquisition
included the mutual fund group of companies as part of the Voyager
acquisition. The following companies all then were moved under the
newly formed holding company, Delvoy, Inc. effective April 30, 1997:
Delaware Management Company, Inc., Delaware Distributors, Inc.,
Delaware Capital Management, Inc., Delaware Service Company, Inc. and
Delaware Investment & Retirement Services, Inc.
b. Acquisition of Voyager Fund Managers, Inc. and Voyager Fund
Distributors, Inc. on April 30, 1997; merger is scheduled for May 31,
1997 for Voyager Fund Managers, Inc. into Delaware Management Company,
Inc. and Voyager Fund Distributors, Inc. is to merge into Delaware
Distributors, L.P.
c. Removal of Aseguradora InverLincoln, S.A. Compania de Seguros y
Reaseguros, Grupo Financiero InverMexico. Stock was sold to Grupo
Financiero InverMexico effective April 18, 1997.
MAY 1997
a. Name change of The Richard Leahy Corporation to Lincoln National
Financial Institutions Group, Inc. effective May 6, 1997.
b. Voyager Fund Managers, Inc. merged into Delaware Management Company,
Inc. effective May 30, 1997 at 10:00 p.m. with Delaware Management
Company, Inc. surviving.
c. On May 31, 1997 at 2:00 a.m., Voyager Fund Distributors, Inc. merged
into a newly formed company Voyager Fund Distributors (Delaware),
Inc., incorporated as a Delaware corporation on May 23, 1997. Voyager
Fund Distributors (Delaware), Inc. then merged into Delaware
Distributors, L.P. effective May 31, 1997 at 2:01 a.m. Delaware
Distributors, L.P. survived.
JUNE 1997
a. Removal of Lincoln National Sales Corporation of Maryland -- company
dissolved June 13, 1997.
b. Addition of Lincoln Funds Corporation, incorporated as a Delaware
corporation on June 10, 1997 at 2:00 p.m.
<PAGE>
c. Addition of Lincoln Re, S.A., incorporated as an Argentina company on
June 30, 1997.
JULY 1997
a. LNC Equity Sales Corporation changed its name to Lincoln Financial
Advisors Corporation effective July 1, 1997.
b. Addition of Solutions Holdings, Inc., incorporated as a Delaware
corporation on July 27, 1997.
SEPTEMBER 1997
a. Addition of Solutions Reinsurance Limited, incorporated as a Bermuda
corporation on September 29, 1997.
OCTOBER 1997
a. Removal of the following companies: American States Financial
Corporation, American States Insurance Company, American Economy
Insurance Company, American States Insurance Company of Texas,
American States Life Insurance Company, American States Lloyds
Insurance Company, American States Preferred Insurance Company, City
Insurance Agency, Inc. And Insurance Company of Illinois -- all were
sold 10-1-97 to SAFECO Corporation.
b. Liberty Life Assurance Limited was sold to Liberty International
Holdings PLC effective 10-6-97.
c. Addition of Seguros Serfin Lincoln, S.A., acquired by LNC on 10-15-97.
DECEMBER 1997
a. Addition of City Financial Planners, Ltd. as a result of its
acquisition by Lincoln National Corporation on December 22, 1997.
This company will distribute life assurance and pension products of
Lincoln Assurance Limited.
JANUARY 1998
a. Addition of Cigna Associates, Inc., Cigna Financial Advisors, Inc. and
Cigna Associates of Massachusetts, Inc., acquired by The Lincoln
National Life Insurance Company on January 1, 1998. Cigna Associates
of Massachusetts is 100% owned by Cigna Associates, Inc.
b. Removal of Lincoln National Mezzanine Corporation and Lincoln National
Mezzanine Fund, L.P. Lincoln National Mezzanine Corporation was
dissolved on January 12, 1998 and Lincoln National Mezzanine Fund,
L.P. was cancelled January 12, 1998.
c. Corporate organizational changes took place in the UK group of
companies on January 21, 1998: Lincoln Insurance Services Limited and
its subsidiaries were moved from Lincoln National (UK) PLC to Lincoln
Assurance Limited; Lincoln General Insurance Co. Ltd. was moved from
Lincoln Insurance Services Limited to Lincoln National (UK) PLC.
d. Addition of AnnuityNet, Inc., incorporated as an Indiana corporation
on January 16, 1998 and a wholly-owned subsidiary of The Lincoln
National Life Insurance Company.
<PAGE>
Exhibit 14(b)
BOOKS AND RECORDS
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT E
RULES UNDER SECTION 31 OF THE INVESTMENT COMPANY ACT OF 1940
Records to Be Maintained by Registered Investment Companies, Certain Majority-
Owned Subsidiaries Thereof, and Other Persons Having Transactions with
Registered Investment Companies.
Reg. 270.31a-1. (a) Every registered investment company, and every
underwriter, broker, dealer, or investment advisor which is a majority-owned
subsidiary of such a company, shall maintain and keep current the accounts,
books, and other documents relating to its business which constitute the record
forming the basis for financial statements required to be filed pursuant to
Section 30 of the Investment Company Act of 1940 and of the auditor's
certificates relating thereto.
<TABLE>
<CAPTION>
LN-Record Location Person to Contact Retention
- ----------------- -------- ----------------- -----------------------------
<S> <C> <C> <C>
Annual Reports F&RM Eric Jones Permanently, the first two
To Shareholders years in an easily accessible
place
Semi-Annual F&RM Eric Jones Permanently, the first two
Reports years in an easily accessible
place
Form N-SAR F&RM Eric Jones years in an easily accessible
place
</TABLE>
(b) Every registered investment company shall maintain and keep current the
following books, accounts, and other documents:
Type of Record
- --------------
(1) Journals (or other records of original entry) containing an itemized daily
record in detail of all purchases and sales of securities (including sales and
redemptions of its own securities), all receipts and deliveries of securities
(including certificate numbers if such detail is not recorded by custodian or
transfer agent), all receipts and disbursements of cash and all other debits and
credits. Such records shall show for each such transaction the name and
quantity of securities, the unit and aggregate purchase or sale price,
commission paid, the market on which effected, the trade date, the settlement
date, and the name of the person through or from whom purchased or received or
to whom sold or delivered.
Purchases and Sales Journals
- ----------------------------
Daily reports CSRM Nancy Alford Permanently, the first two
of securities F&RM Eric Jones years in an easily accessible
transactions place
Portfolio Securities
- --------------------
C-Port Purchase/ F&RM Eric Jones Permanently, the first two
Sales Report years in an easily
accessible place
<PAGE>
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
Receipts and Deliveries of Securities (units)
- ---------------------------------------------
Not Applicable.
Portfolio Securities
- --------------------
Not Applicable.
Receipts and Disbursements of Cash and other Debits and Credits
- ---------------------------------------------------------------
Daily Journals CSRM & Nancy Alford Permanently, the first two
F&RM. Eric Jones years in an easily accessible
place
(2) General and auxiliary ledgers (or other record) reflecting all asset,
liability, reserve, capital, income and expense accounts, including:
(i) Separate ledger accounts (or other records) reflecting the following:
(a) Securities in transfer;
(b) Securities in physical possession;
(c) Securities borrowed and securities loaned;
(d) Monies borrowed and monies loaned (together with a record of the
collateral therefore and substitutions in such collateral);
(e) Dividends and interest received;
(f) Dividends receivable and interest accrued.
Instructions. (a) and (b) shall be stated in terms of securities quantities
only; (c) and (d) shall be stated in dollar amounts and securities quantities as
appropriate; (e) and (f) shall be stated in dollar amounts only.
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
General Ledger
- --------------
LNL trial F&RM Eric Jones Permanently, the first two
Balance (5000 years in an easily accessible
series) place
Securities in Transfer
- ----------------------
Not Applicable.
Securities in Physical Possession
- ---------------------------------
Not Applicable.
Securities Borrowed and Loaned
- ------------------------------
Not Applicable.
<PAGE>
<TABLE>
<CAPTION>
Not Applicable.
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- --------------------------
<S> <C> <C> <C>
Dividends and Interest Received
- ---------------------------------------------
LNL Trial F&RM Eric Jones Permanently, the first two
Balance (5000 years in an easily accessible
series) place
Dividends Receivable and Interest Accrued
- ---------------------------------------------
LNL Trial F&RM Eric Jones Permanently, the first two
Balance (5000 years in an easily accessible
series) place
</TABLE>
(ii) Separate ledger accounts (or other records) for each portfolio security,
showing (as of trade dates), (a) the quantity and unit and aggregate price for
each purchase, sale, receipt, and delivery of securities and commodities for
such accounts, and (b) all other debits and credits for such accounts.
Securities positions and money balances in such ledger accounts (or other
records) shall be brought forward periodically but not less frequently than at
the end of fiscal quarters. Any portfolio security, the salability of which is
conditioned, shall be so noted. A memorandum record shall be available setting
forth, with respect to each portfolio security accounts, the amount and
declaration, ex-dividend, and payment dates of each dividend declared thereon.
Ledger Account for each portfolio Security
- ------------------------------------------
Not Applicable.
(iii) Separate ledger accounts (or other records) for each broker-dealer, bank
or other person with or through which transactions in portfolio securities are
affected, showing each purchase or sale of securities with or through such
persons, including details as to the date of the purchase or sale, the quantity
and unit and aggregate prices of such securities, and the commissions or other
compensation paid to such persons. Purchases or sales effected during the same
day at the same price may be aggregated.
Not Applicable.
(iv) Separate ledger accounts (or other records), which may be maintained by a
transfer agent or registrar, showing for each shareholder of record of the
investment company the number of shares of capital stock of the company held. in
respect of share accumulation accounts (arising from periodic investment plans,
dividend reinvestment plans, deposit of issued shares by the owner thereof,
etc.), details shall be available as to the dates and number of shares of each
accumulation, and except with respect to already issued shares deposited by the
owner thereof, prices of each such accumulation.
Shareholder Accounts
- --------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Master file F&RM/ Eric Jones Permanently, the first two
record CSRM Nancy Alford years in an easily
accessible place
</TABLE>
<PAGE>
(3) A securities record or ledger reflecting separately for each portfolio
security as of trade date all "long" and "short" positions carried by the
investment company for its own account and showing the location of all
securities long and the off-setting position to all securities short. The record
called for by this paragraph shall not be required in circumstances under which
all portfolio securities are maintained by a bank or banks or a member or
members of a national securities exchange as custodian under a custody agreement
or as agent for such custodian.
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
Not Applicable
(4) Corporate charters, certificates of incorporation or trust agreements, and
bylaws, and minute books of stockholders' and directors' or trustees' meetings;
and minute books of directors' or trustees' committee and advisory board or
advisory committee meetings.
Corporate Documents
- -------------------
Not Applicable.
(5) A record of each brokerage order given by or in behalf of the investment
company for, or in connection with, the purchase or sale of securities, whether
executed or unexecuted. Such record shall include the name of the broker, the
terms and conditions of the order and of any modification or cancellation
thereof, the time of entry or cancellation, the price at which executed, and the
time of receipt of report of execution. The record shall indicate the name of
the person who placed the order in behalf of the investment company.
Order Tickets
- -------------
UIT applica- Not Six years, the first two
tions and Applicable years in an easily accessible
daily reports place
of securities
transactions
(6) A record of all other portfolio purchase or sales showing details comparable
to those prescribed in paragraph 5 above.
Commercial Paper
- ----------------
Not Applicable.
(7) A record of all puts, calls, spreads, straddles, and other options in which
the investment company has any direct or indirect interest or which the
investment company has granted or guaranteed; and a record of any contractual
commitments to purchase, sell, receive or deliver securities or other property
(but not including open orders placed with broker-dealers for the purchase or
sale of securities, which may be cancelled by the company on notices without
penalty or cost of any kind); containing at least an identification of the
security, the number of units involved, the option price, the date of maturity,
the date of issuance, and the person to whom issued.
<PAGE>
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
Record of Puts, Calls, Spreads, Etc.
- ------------------------------------
Not Applicable.
(8) A record of the proof of money balances in all ledger accounts (except
shareholder accounts), in the form of trial balances. Such trial balances shall
be prepared currently at least once a month.
Trial Balance
- -------------
LNL Trial F&RM Eric Jones Permanently, the first two
Balance (5000 years in an easily
series) accessible place
(9) A record for each fiscal quarter, which shall be completed within 10 days
after the end of such quarter, showing specifically the basis or bases upon
which the allocation of orders for the purchase and sale of portfolio securities
to named brokers or dealers and the division of brokerage commissions or other
compensation on such purchase and sale orders among named persons were made
during such quarter. The record shall indicate the consideration given to (a)
sales of shares of the investment company by brokers or dealers, (b) the
supplying of services or benefits by brokers or dealers to the investment
company, its investment advisor or principal underwriter or any persons
affiliated therewith, and (c) any other considerations other than the technical
qualifications of the brokers and the dealers as such. The record shall show the
nature of their services or benefits made available, and shall describe in
detail the application of any general or specific formula or other determinant
used in arriving at such allocation of purchase and sales orders and such
division of brokerage commissions or other compensation. The record shall also
include the identifies of the person responsible for the determination of such
allocation and such division of brokerage commissions or other compensation.
Not Applicable.
(10) A record in the form of an appropriate memorandum identifying the person or
persons, committees, or groups authorizing the purchase or sale of portfolio
securities. Where an authorization is made by a committee or group, a record
shall be kept in the names of its members who participated in the authorization.
There shall be retained a part of the record required by this paragraph any
memorandum, recommendation, or instruction supporting or authorizing the
purchase or sale of portfolio securities. The requirements of this paragraph are
applicable to the extent they are not met by compliance with the requirements of
paragraph 4 of this Rule 31a1(b).
Advisory Law Division Sandy Lamp Six years, the first two
Agreements years in an easily
accessible place
(11) Files of all advisory material received from the investment advisor, any
advisory board or advisory committee, or any other persons from whom the
investment company accepts investment advice publications distributed generally.
Not Applicable.
<PAGE>
(12) The term "other records" as used in the expressions "journals (or other
records of original entry)" and "ledger accounts (or other records)" shall be
construed to include, where appropriate, copies of voucher checks,
confirmations, or similar documents which reflect the information required by
the applicable rule or rules in appropriate sequence and in permanent form,
including similar records developed by the use of automatic data processing
systems.
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
Correspondence CSRM Nancy Alford Six years, the first two
years in an easily
accessible place
Proxy State- CSRM Nancy Alford Six years, the first two
ments and years in an easily
Proxy Cards accessible place
Pricing Sheets F&RM Eric Jones Permanently, the first two
years in an easily
accessible place
Bank Statements Treasurers Rusty Summers Six years, the first two
years in an easily
accessible place
March 12, 1998
