<PAGE>
As filed with the Securities and Exchange Commission on March 27, 1998
Registration No.: 33-27783
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [_]
POST-EFFECTIVE AMENDMENT NO. 11 [X]
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [_]
AMENDMENT NO. 13 [X]
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H
(Exact Name of Registrant)
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
(Name of Depositor)
1300 South Clinton Street
Post Office Box 1110
Fort Wayne, Indiana 46801
- --------------------------------------------------------------------------------
(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
Post Office Box 1110
Fort Wayne, Indiana 46802
- --------------------------------------------------------------------------------
(Name and Address of Agent for Service)
Copy to:
Kimberly J. Smith
Sutherland, Asbill & Brennan LLP
1275 Pennsylvania Avenue, N.W.
Washington, DC 20004
Title of securities 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 1, 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 H
CROSS REFERENCE SHEET
(PURSUANT TO RULE 495 OF REGULATION C
UNDER THE SECURITIES ACT OF 1933)
RELATING TO ITEMS REQUIRED BY FORM N-4
N-4 ITEM CAPTION IN PROSPECTUS (PART A)
- -------- ------------------------------
1. Cover Page
2. Special terms
3. (a) Expense Table
(b) Synopsis
(c) Synopsis
(d) Not Applicable
4. (a) Condensed Financial Information
(b) Investment Results
(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) Charges and Other Deductions
(b) Charges and Other Deductions
(c) Charges and Other Deductions
(d) The Contracts - Commissions
(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
<PAGE>
CROSS REFERENCE SHEET TO ITEMS REQUIRED BY FORM N-4
N-4 ITEM CAPTION IN PROSPECTUS (PART A)
- -------- ------------------------------
8. (a) Annuity Payouts
(b) Annuity Payouts
(c) Annuity Payouts
(d) Annuity Payouts
(e) 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 H American Legacy II
<PAGE>
CAPTION IN STATEMENT OF ADDITIONAL
N-4 ITEM INFORMATION (PART B) (continued)
- -------- ----------------------------------
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)
<PAGE>
CROSS REFERENCE SHEET TO ITEMS REQUIRED BY FORM N-4
CAPTION IN STATEMENT OF ADDITIONAL
N-4 ITEM INFORMATION (PART B)
- -------- ----------------------------------
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. Calculation of Investment Results
22. Annuity Payouts
23. (a) Financial Statements -- Lincoln National Variable
Annuity Account H
(b) Financial Statements -- The Lincoln
National Life Insurance Company
<PAGE>
AMERICAN LEGACY II
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H
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
National Life Insurance Co. (Lincoln Life). It is for use with the following
retirement 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 qualified
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);
6. Simplified employee pension plans (SEP); and
7. SIMPLE 401(k) and IRA plans. Consult your investment dealer as to the
availability of this contract for these plans.
8. Roth IRAs.
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
mentioned plans (nonqualified contracts).
The contract offers you the accumulation of contract value and payment of
periodic annuity benefits. These benefits may be paid on a variable or fixed
basis 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
benefit (GMDB) or, if it is then in effect, the enhanced guaranteed minimum
death benefit (EGMDB) will be paid to the beneficiary. You may elect the EGMDB
when you apply for the contract. (See Death benefit before 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 H (variable annuity account
[VAA]). The VAA is a segregated investment account of Lincoln Life, which is
the depositor. Based upon your instructions, the VAA invests purchase payments
(at net asset value) in 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-Income Fund, Asset
Allocation Fund, High-Yield Bond Fund, Bond Fund, U.S. Government/AAA-Rated
Securities Fund, and Cash Management Fund. Both the value of a contract before
the annuity commencement date and the amounts applied for afterward will depend
upon the investment performance of the fund(s) selected. Investments in these
funds are neither insured nor guaranteed by the U.S. Government or 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
Prospectus 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
series. Both should be read carefully before investing and kept for future
reference.
A statement of additional information (SAI), dated April 1, 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 1, 1998.
1
<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
- ----------------------------------------------------------------------
Investment results 9
- ----------------------------------------------------------------------
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
- ----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Page
- ------------------------------------------------------------------------
<S> <C>
Annuity payouts 17
- ------------------------------------------------------------------------
Federal tax status 18
- ------------------------------------------------------------------------
Voting rights 20
- ------------------------------------------------------------------------
Distribution of the contracts 20
- ------------------------------------------------------------------------
Return privilege 20
- ------------------------------------------------------------------------
State regulation 21
- ------------------------------------------------------------------------
Restrictions under the Texas Optional Retirement Program 21
- ------------------------------------------------------------------------
Records and reports 21
- ------------------------------------------------------------------------
Other information 21
- ------------------------------------------------------------------------
Statement of Additional Information table of contents for Separate
Account H American Legacy II 22
- ------------------------------------------------------------------------
</TABLE>
2
<PAGE>
SPECIAL TERMS
(Throughout this Prospectus, in order to make the following documents more
understandable to you, we have italicized the special terms.)
Account or variable annuity account (VAA) -- The segregated investment account,
Account H, 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
variable side of the contract before the annuity commencement date. See The
contracts.
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 payments made after
the annuity commencement date will be based.
Annuity commencement date -- The valuation date when the funds are withdrawn or
converted into annuity units or fixed dollar payout for payment of annuity
benefits under the annuity payout option selected. For purposes of determining
whether an event occurs before or after the annuity commencement date, the
annuity commencement date is deemed to begin at close of business on the
valuation date.
Annuity payout option -- An optional form of payout of the annuity available
within the contract. See Annuity payouts.
Annuity payout -- An amount paid at regular intervals after the annuity
commencement date under one of several options available to the annuitant
and/or any other payee. 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 after
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
providing 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 option, designates the beneficiary, etc.). Usually, but not always, the
owner 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
annuitant 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 payment
of a death benefit claim; or (2) the highest contract value on any policy
anniversary date (including the inception date) between 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
purchase payment, allowing additional purchase payments to be made, and with
annuity 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
surrender charge period has expired). See Death benefit before the annuity
commencement date.
Home office -- The headquarters of Lincoln National Life Insurance Co., located
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
purchase 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
variable annuity contract.
Subaccount or American Legacy II subaccount -- That portion of the VAA that
reflects investments in accumulation and annuity units of a class of a
particular fund available under the contracts. There is a separate subaccount
which corresponds to each class of a fund.
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
p.m. New York time) on each day that the NYSE is open for trading (valuation
date) and ending at the close of such trading on the next valuation date.
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
respect 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
valuation date of each contract year and upon full surrender; it is not a
separate charge for each subaccount.
- --------------------------------------------------------------------------------
VARIABLE ANNUITY ACCOUNT H ANNUAL EXPENSES FOR AMERICAN LEGACY II SUBACCOUNTS:*
(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 .15% --
Account fees and expenses .10% .10%
----- -----
Total Account H annual expenses
for American Legacy II
subaccounts 1.50% 1.35%
</TABLE>
ANNUAL EXPENSES OF THE FUNDS FOR THE 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 separately-named subaccounts, ten of which are
available under the contracts.
Each subaccount, in turn, invests purchase payments in shares of a class of
its respective fund.
**These expenses are estimated amounts for the current fiscal year.
4
<PAGE>
EXAMPLES
(reflecting expenses both of the American Legacy II 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 $81 $116 $143 $244
- --------------------------------------------------------------------
2. Global Small Capitalization** 82 119 148 254
- --------------------------------------------------------------------
3. Growth 78 106 126 208
- --------------------------------------------------------------------
4. International 81 113 139 234
- --------------------------------------------------------------------
5. Growth-Income 77 104 123 202
- --------------------------------------------------------------------
6. Asset Allocation 78 107 128 213
- --------------------------------------------------------------------
7. High-Yield Bond 79 109 131 218
- --------------------------------------------------------------------
8. Bond 79 110 133 222
- --------------------------------------------------------------------
9. U.S. Gov't./AAA-Rated Securities 79 109 132 220
- --------------------------------------------------------------------
10. Cash Management 78 107 128 213
- --------------------------------------------------------------------
</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 $21 $66 $113 $244
- -------------------------------------------------------------------
2. Global Small Capitalization** 22 69 118 254
- -------------------------------------------------------------------
3. Growth 18 56 96 208
- -------------------------------------------------------------------
4. International 21 63 109 234
- -------------------------------------------------------------------
5. Growth-Income 17 54 93 202
- -------------------------------------------------------------------
6. Asset Allocation 18 57 98 213
- -------------------------------------------------------------------
7. High-Yield Bond 19 59 101 218
- -------------------------------------------------------------------
8. Bond 19 60 103 222
- -------------------------------------------------------------------
9. U.S. Govt./AAA-Rated Securities 19 59 102 220
- -------------------------------------------------------------------
10. Cash Management 18 57 98 213
- -------------------------------------------------------------------
</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 amounts 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
underwriter, 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
Management 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
portion 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
chargeable with liabilities arising out of any other business which Lincoln
Life may conduct. See Variable annuity account.
WHAT ARE MY INVESTMENT CHOICES? Through its various subaccounts, the VAA uses
your purchase payments to purchase 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
Management. In turn, each fund holds a portfolio of securities consistent with
its own particular investment policy. See Investments of the variable annuity
account and Description of the series.
WHO INVESTS MY MONEY? The investment advisor for the series is CRMC, Los
Angeles, 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
issued your individual annuity contract. During the accumulation period, while
you are paying in, your purchase payments will buy accumulation units under the
contract. Should you decide to annuitize (that is, change your contract to a
payout mode rather than an accumulation mode), your accumulation units will be
converted to annuity units. Your periodic annuity payout will be based upon the
number of annuity units to which you became entitled at the time you decided to
annuitize and the value of each unit on the valuation date. See The contracts.
WHAT 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 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 electing an annuity payout option available within the contract.
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
deduct those amounts from purchase payments or contract value, as applicable.
We assess charges in the aggregate annual amount of 1.35% against the daily net
asset value of the VAA, including that portion of the account attributable to
your purchase payments. These charges consist of a 0.10% administrative charge
and 1.25% mortality and expense risk charge. If the EGMDB is in effect, the
aggregate charge against the VAA is 1.50% consisting of a 0.10% administrative
charge, a 1.25% mortality and expense risk charge and a 0.15% 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
variable annuity account--Investment advisor. In addition, there are other
expenses associated with the daily operation of the series. These are more
fully described 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 of 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'
PORTFOLIOS.
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
6
<PAGE>
beneficiary will receive either the EGMDB or the then current value of the
contract, whichever 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 special rules apply. See The contracts--Death benefit before the
annuity commencement 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
CONTRACT, AND VICE-VERSA? Yes, subject once again to specific restrictions in
the contract. See The contracts--Transfers to and from the General Account on
or before the annuity commencement date.
MAY I SURRENDER THE CONTRACT OR MAKE A WITHDRAWAL? Yes, subject to contract
requirements and to restrictions imposed under certain qualified retirement
plans, for which the contract is purchased. See The contracts-- Surrenders and
withdrawals.
If you surrender the contract or make a withdrawal, certain charges may be
assessed, as discussed previously and under Charges and other deductions. In
addition, the Internal Revenue Service (IRS) may assess a 10% premature
withdrawal penalty 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 ten days (or a longer
period if required by law) of the date you first receive the contract you
return it, postage prepaid 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 variable side of the contract. See Return privilege.
7
<PAGE>
CONDENSED FINANCIAL INFORMATION FOR THE VARIABLE ANNUITY ACCOUNT
ACCUMULATION UNIT VALUES
The following information relating to accumulation unit values and number of
accumulation units for the American Legacy II subaccounts for each of the nine
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 statements
and notes which are all included in the SAI.
<TABLE>
<CAPTION>
1989* 1990 1991 1992 1993 1994 1995 1996 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Global Growth subaccount
*+
Accumulation unit value
. Beginning of period... $ 1.000
. End of period......... $ 1.076
Number of accumulation
units
. End of period (000's
omitted)............... 73,141
- ---------------------------------------------------------------------------------------------------------------
Growth subaccount
Accumulation unit value
. Beginning of period... $ 1.000 1.009 .952 1.252 1.369 1.571 1.558 2.049 2.292
. End of period......... $ 1.009 .952 1.252 1.369 1.571 1.558 2.049 2.292 2.942
Number of accumulation
units
. End of period (000's
omitted)............... 48,888 298,367 486,812 752,797 980,310 1,133,151 1,335,028 1,446,260 1,422,265
- ---------------------------------------------------------------------------------------------------------------
International
subaccount**
Accumulation unit value
. Beginning of period .. $ 1.000 .947 1.044 1.021 1.354 1.361 1.514 1.755
. End of period ........ $ .947 1.044 1.021 1.354 1.361 1.514 1.755 1.889
Number of accumulation
units
. End of period (000's
omitted)............... 78,763 200,309 360,734 697,520 984,460 1,078,152 1,293,784 1,295,595
- ---------------------------------------------------------------------------------------------------------------
Growth-Income subaccount
Accumulation unit value
. Beginning of period... $ 1.000 1.021 .982 1.202 1.280 1.418 1.428 1.875 2.196
. End of period ........ $ 1.021 .982 1.202 1.280 1.418 1.428 1.875 2.196 2.727
Number of accumulation
units
. End of period (000's
omitted)............... 88,723 340,270 703,495 1,122,418 1,500,824 1,680,732 1,877,129 2,097,592 2,130,365
- ---------------------------------------------------------------------------------------------------------------
Asset Allocation
subaccount
Accumulation unit value
. Beginning of period... $ 1.000 1.022 .998 1.200 1.284 1.399 1.377 1.760 2.011
. End of period ........ $ 1.022 .998 1.200 1.284 1.399 1.377 1.760 2.011 2.390
Number of accumulation
units
. End of period (000's
omitted)............... 41,276 110,929 174,468 285,119 410,464 448,248 480,392 534,903 557,929
- ---------------------------------------------------------------------------------------------------------------
High-Yield Bond
subaccount
Accumulation unit value
. Beginning of period... $ 1.000 1.006 1.031 1.287 1.429 1.641 1.513 1.818 2.031
. End of period ........ $ 1.006 1.031 1.287 1.429 1.641 1.513 1.818 2.031 2.253
Number of accumulation
units
. End of period (000's
omitted)............... 5,671 17,624 47,739 101,884 191,433 216,546 256,041 294,401 305,114
- ---------------------------------------------------------------------------------------------------------------
Bond subaccount***
Accumulation unit value
. Beginning of period... $ 1.000 1.044
. End of period......... $ 1.044 1.135
Number of accumulation
units
. End of period (000's
omitted)............... 72,747 116,011
- ---------------------------------------------------------------------------------------------------------------
U.S. Government/AAA-
Rated subaccount
Accumulation unit value
. Beginning of period... $ 1.000 1.018 1.089 1.246 1.323 1.451 1.369 1.559 1,586
. End of period......... $ 1.018 1.089 1.246 1.323 1.451 1.369 1.559 1.586 1.697
Number of accumulation
units
. End of period (000's
omitted)............... 13,695 59,506 139,710 212,716 282,851 282,879 296,349 274,674 240,056
- ---------------------------------------------------------------------------------------------------------------
Cash Management
subaccount
Accumulation unit value
. Beginning of period... $ 1.000 1.029 1.095 1.140 1.161 1.177 1.206 1.256 1.302
. End of period ........ $ 1.029 1.095 1.140 1.161 1.177 1.206 1.256 1.302 1.351
Number of accumulation
units
. End of period (000's
omitted)............... 23,046 96,578 106,259 133,763 106,323 141,512 130,252 168,072 137,827
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
*The VAA began operations on August 1, 1989, so the figures for 1989 represent
experience of less than one year.
**The International subaccount began operations on May 1, 1990, so the figures
for 1990 represent experience of less than one year.
***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>
INVESTMENT RESULTS
At times, the VAA may compare its investment results to various unmanaged
indices or other variable annuities in reports to shareholders, sales
literature and advertisements. The results will be calculated on a total return
basis for various periods, with or without contingent deferred sales charges
and contract fees. Results calculated without contingent deferred sales charges
or contract fees will be higher. Total returns include the reinvestment of all
distributions, which are reflected in changes in unit value. See the SAI for
further information.
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
experience of the VAA. The general account is subject to regulation and
supervision 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 company
under the 1940 Act. Accordingly, neither the general account nor any interests
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 disclosures,
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 February 7, 1989, the VAA was established as an insurance company separate
account under Indiana law. It is registered with the SEC as a unit investment
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 definition of
separate account under the federal securities laws. We do not guarantee the
investment performance of the VAA. Any investment gain or loss depends on the
investment performance of the funds. YOU ASSUME THE FULL INVESTMENT RISK FOR
ALL AMOUNTS PLACED IN THE VAA.
The VAA is used to support annuity contracts offered by Lincoln Life other than
the contracts described in this prospectus. The other annuity contracts
supported by the VAA invest in the same portfolios of the series as the
contracts described herein. These other annuity contracts may have different
charges that could affect performance of the subaccount.
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 a class of each fund in the series.
You may change your allocation without penalty or
9
<PAGE>
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
Angeles, California 90071. CRMC is one of the nation's largest and oldest
investment management organizations. As compensation for its services to the
series, 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 Purchase and Redemption of Shares, in the Prospectus for the
series.
DESCRIPTION OF THE SERIES
The series was organized as a Massachusetts business trust in 1983 and is
registered as a diversified, open-end management investment company under the
1940 Act. Diversified means not owning too great a percentage of the securities
of any one company. An open-end company is one which, in this case, permits
Lincoln Life to sell its shares back to the series when you make a withdrawal,
surrender the contract or transfer from one fund to another. Management
investment company is the legal term for a mutual fund. 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
arrangement; and (4) each class has separate voting rights on any matter
submitted to its shareholders in which the interests of one class differ from
the interests 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
subject 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
investment 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.
2. GLOBAL SMALL CAPITALIZATION FUND seeks long-term growth of capital 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 invest in
securities convertible into common stocks, straight debt securities,
government securities or nonconvertible preferred stocks. PLEASE NOTE: THE
GLOBAL SMALL CAPITALIZATION FUND WILL NOT BE MADE AVAILABLE UNDER THE
CONTRACTS UNTIL APRIL 30, 1998. IN ADDITION, THIS FUND IS NOT YET AVAILABLE
IN ALL STATES. PLEASE CONSULT YOUR INVESTMENT 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.
10
<PAGE>
5. Growth-Income Fund--The investment objective is growth of capital and
income. 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 can include
common stocks and other equity-type securities (such as convertible bonds
and preferred stocks), bonds and other intermediate and long-term fixed-
income securities and money market instruments (debt securities maturing in
one year or less).
7. High-Yield Bond Fund--The investment objective is a fully managed,
diversified 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 Bond 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
preserving 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/withdrawal
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
funding.
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
Prospectus for the series.
REINVESTMENT OF DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS
All dividend and capital gain distributions of the funds are automatically
reinvested in shares of the distributing funds at their net asset value on the
date of distribution. Dividends are not paid out to contractowners as
additional units, but are reflected as changes in unit values.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
We reserve the right, within the law, to make additions, deletions and
substitutions for the series and/or any funds within the series in which the
VAA participates. (We may substitute shares of other funds for shares already
purchased, or to be purchased in the future, under the contract. This
substitution might occur if shares of a fund should no longer be available, or
if investment in any fund's shares should 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 include:
processing applications for and issuing the contracts, processing purchases and
redemptions of fund shares as
11
<PAGE>
required (including dollar cost averaging, cross-reinvestment, automatic
withdrawal services), maintaining records, administering annuity payouts,
furnishing accounting and valuation services (including the calculation and
monitoring of daily subaccount values), reconciling and depositing cash
receipts, providing contract confirmations, 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 include: the risk that the actual life span
of persons receiving annuity payouts under contract guarantees will exceed the
assumptions reflected in our guaranteed rates (these rates are incorporated in
the contract and cannot be changed); the risk that death benefits paid under
the EGMDB or GMDB, will exceed actual contract value; the risk that more owners
than expected will qualify for waivers of the contingent deferred sales charge;
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 associated with providing the services
or benefits indicated by the designation of the charge or associated with a
particular contract. For example, the contingent 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 does apply (except as described below) to
surrenders and withdrawals of other 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 than At least
2 years 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%
withdrawal 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 nontrustee 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
issued to employees and registered representatives of any member of the
selling 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 contract
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
We deduct from the VAA an amount, computed daily, which is equal to an annual
rate of 1.35% (1.50% for contracts with the EGMDB) of the daily net asset
value. The charge consists of a 0.10% administrative charge and a 1.25%
mortality and expense risk charge. For those contracts which include the EGMDB,
there is an additional risk charge of 0.15% of the daily net asset value.
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
12
<PAGE>
administrative interpretation or by judicial action. These premium taxes
generally 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 underlying
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
distribution and/or administrative expenses, or that we perform fewer sales or
administrative services than those originally contemplated in establishing the
level of those charges. Lower distribution and administrative expenses may be
the result of economies associated with (1) the use of mass enrollment
procedures, (2) the performance of administrative or sales functions by the
employer, (3) the use by an employer of automated techniques in submitting
deposits or information related to 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
representative 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
contract 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
completed within those five days, you will be informed of the reasons, and the
purchase payment will be returned immediately (unless you specifically
authorize us to keep it until the application is complete). Once the
application is complete, the initial purchase payment must be priced within two
business days.
WHO CAN INVEST
To apply for a contract, you must be of legal age in a state where the
contracts may be lawfully sold and also be eligible to participate in any of
the qualified or nonqualified plans for which the contracts are designed. The
annuitant 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
nonqualified contracts and Section 403(b) transfers/rollovers; and $300 for
qualified contracts. The minimum annual amount for subsequent purchase payments
is $300 for nonqualified and qualified contracts, with a minimum of $25 per
payment. 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 payment of any death benefit, whichever comes first.
VALUATION DATE
Accumulation and annuity units will be valued once daily at the close of
trading (currently 4:00 p.m., New York time) on each day the NYSE is open
(valuation date). On any date other than a valuation date, the accumulation
unit value and the annuity unit value will not change.
ALLOCATION OF PURCHASE PAYMENTS
Purchase payments are placed into the 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 our home office
if received before 4:00 p.m., New York time. If the purchase payment is
received at or after 4:00 p.m., New York time, we will use the accumulation
unit value computed on the next valuation date. The number of accumulation
units determined in this way 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.
13
<PAGE>
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
established at the inception of the subaccount. It may increase or decrease
from valuation period to valuation period. The accumulation unit value for a
subaccount for 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
beginning of the valuation period by the net asset value per share of the
fund at the end of the valuation period, and adding any dividend or other
distribution of the fund if an ex-dividend date occurs during the valuation
period; minus
(2) The liabilities of the subaccount at the end of the valuation period; these
liabilities include daily charges imposed on the subaccount, and may
include a charge or credit with respect to any taxes paid or reserved for
by us that we determine result from operations of the VAA; and
(3) The result of (2) is divided by the number of subaccount units outstanding
at the beginning of the valuation period.
The daily charges imposed on a subaccount for any valuation period are equal to
the daily mortality and expense risk charge and the daily administrative charge
multiplied by the number of calendar 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 contracts 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 the request if received by 4 p.m. New York time. If
it 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 transferred
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 our home office or, if a Telephone
Exchange 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 information
before we will act upon their instructions. We may also assign the
contractowner a Personal Identification Number (PIN) to serve as
identification. We will not be liable for following telephone instructions we
reasonably believe are genuine. Telephone transfer requests may be recorded and
written confirmation 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 4:00 P.M. New York time.
When thinking about a transfer of contract value, you should consider the
inherent risk involved. Frequent transfers based on short-term expectations may
increase the risk that a transfer will be made at an inopportune time.
TRANSFERS 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. 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 transfer 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
account; 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.
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TRANSFERS AFTER THE ANNUITY COMMENCEMENT DATE
You may transfer all or a portion of your investment in one subaccount to
another 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 our home office. Each change of
beneficiary revokes any previous designation. We reserve the right to request
that you send us the contract for endorsement of a change of beneficiary.
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
authorization for payment; and (3) Our receipt of all required claim forms,
fully completed.
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 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 payable 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 (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.
You can only elect the EGMDB at purchase by completing the EGMDB election form
available from us. If the EGMDB is elected at purchase, the benefit will take
effect on the inception date but we will not begin deducting the charge for the
EGMDB until the first policy anniversary date.
If you purchased a contract before January 1, 1997, 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 effect 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 of this benefit 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
completing the Enhanced 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
request, 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 discontinue 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.
Federal tax law requires that an annuity election be made no later than 60 days
after we receive satisfactory notice of death as discussed previously.
If a lump sum settlement is requested, the proceeds will be mailed within seven
days of receipt of satisfactory claim documentation as discussed previously,
subject to the laws and regulations governing payment of death benefits. If an
election has not been made by the end of the 60-day period, a lump sum
settlement will be made to the beneficiary at that time. This payment may be
postponed as permitted by the 1940 Act.
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Payment will be made in accordance with applicable laws and regulations
governing 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
interests (There are no restrictions on the beneficiary's use of the
proceeds.); and/or
2. If no beneficiary survives the annuitant, the proceeds will be paid to the
contractowner or to the contractowner's estate, as applicable.
JOINT/CONTINGENT OWNERSHIP
If a joint owner is named in the application, the joint owners shall be treated
as having equal undivided interests in the contract. Either owner,
independently 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
commencement 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 nonannuitant contractowner, the cash surrender value
shall be paid to any surviving joint or contingent owner(s). If no joint or
contingent owner has been named, then the cash surrender value shall be paid
to the annuitant named in the contract; and
2. Upon the death of a contractowner, who is also the annuitant, the death will
be treated as death of the annuitant and the provisions of this contract
regarding 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 contract, 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
expectancy.
SURRENDERS AND WITHDRAWALS
Before the annuity commencement date, we will allow the surrender of the
contract or a withdrawal of the contract value upon your written request,
subject to the rules discussed below. Surrender or withdrawal rights after the
annuity commencement date depend upon the annuity option you select.
Special restrictions on surrenders/withdrawals apply if your contract is
purchased as part of a retirement plan of a public school system or 501(c)(3)
organization under Section 403(b) of the code. Beginning January 1, 1989, in
order 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) separates from service, (c) dies, (d) becomes totally and permanently
disabled and/or (e) experiences financial hardship (in which event the income
attributable 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 at the end of the valuation period during which the written 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 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
Restrictions 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
contract.
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
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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 reinvestment 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
notified in writing of any changes, modifications or waivers.
COMMISSIONS
The commissions paid to dealers are a maximum of 4.70% 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 0.50% 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 0.25% of purchase
payments and up to 0.05% annually of the variable account value while the EGMDB
is in effect) may be provided to dealers maintaining certain sales volume
levels. In addition, the equivalent of 4.70% 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
permitted by the Employee Retirement Income Security Act (ERISA) of 1974 and
upon written notification to us. Non-qualified contracts may not be
collaterally assigned. We assume no responsibility for the validity or effect
of any assignment. Consult your tax advisor about the tax consequences of an
assignment.
CONTRACTOWNER QUESTIONS
The obligations to purchasers under the contracts are those of Lincoln Life.
Questions about your contract should be directed to us 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
annuity payouts to start at the date and under the option specified in the
plan.)
The contract provides optional forms of payouts of annuities (annuity options),
each of which is payable on a variable basis, a fixed basis or a combination of
both. The contract provides that all or part of the contract value may be used
to purchase an annuity.
You may elect annuity payouts in monthly, quarterly, semiannual or annual
installments. 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 beneficiaries.
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
guarantees periodic payouts during a designated period, usually 10 or 20 years,
and then continues throughout the lifetime of the annuitant. The designated
period is selected by the contractowner.
JOINT LIFE ANNUITY. This option offers a periodic payout during the joint
lifetime of the annuitant and a designated joint annuitant. The payouts
continue during the lifetime of the survivor.
JOINT LIFE ANNUITY WITH GUARANTEED PERIOD. This option guarantees periodic
payouts during a designated period, usually 10 or 20 years, and continues
during the joint lifetime of the annuitant and a designated joint
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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, divided by (b)
the annuity units represented by each payout to the annuitant multiplied by the
number of payouts paid before death. The value of the number of annuity units
is computed on the date the death claim is approved for payment by the home
office.
GENERAL INFORMATION
None of the options listed above currently provide withdrawal features,
permitting 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
requirements of the contract as well as Sections 72(s) and 401(a)(9) of the
code, if applicable. The mortality and expense risk charge and the charge for
administrative services 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
option 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, variable
or combination fixed and variable basis, in proportion to the account
allocations at the time of annuitization) except when a joint life payout is
required by law. Under any option providing for guaranteed payouts, the number
of payouts which remain unpaid at the date of the annuitant's death (or
surviving annuitant's death in the case of a joint life annuity) will be paid
to your beneficiary as payouts become due.
VARIABLE ANNUITY PAYOUTS
Variable annuity payouts will be determined using:
1. The contract value on the annuity commencement date;
2. The annuity tables contained in the contract;
3. The annuity 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
implications with respect to the contracts, you should consult a tax advisor.
The following 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
contract, or designation of an annuitant (or other beneficiary) who is not also
the
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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
ordinary 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
applies 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 made by or on behalf of an individual under a
contract which is not excluded from the individual's gross income.
Even though the tax consequences may vary depending on the form of annuity
payout selected under the contract, the contractowner of an annuity payout
generally is taxed on the portion of the annuity 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 contract by the total number of expected periodic payouts.
For fixed annuity payouts, there generally is no tax on the portion of each
payout that represents the same ratio that the investment in the contract bears
to the total expected value of payouts for the term of the annuity; the
remainder of each payout 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
imposed a penalty tax on distributions equal to 10% of the amount treated as
taxable 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;
5. Under an immediate annuity contract as defined in the code; and/or
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;
5. SEPs, qualified under Section 408(k) of the code;
6. Simple retirement accounts, qualified under Section 401(k)(11) of the code,
commonly referred to as SIMPLE or SIMPLE 401(k) and SIMPLE IRA plans; and/or
7. Roth IRA, qualified under Section 408A of the code.
The tax rules applicable to these plans, including restrictions on
contributions and benefits, taxation of distributions and any tax penalties,
vary according to the type of 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
insurance company (or its affiliates) to the same contractowner during any
calendar 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 investments
underlying the contract. They may consider the number of investment options or
the
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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
Department has adopted require that assets underlying a variable annuity
contract be adequately diversified. The regulations provide that a variable
annuity 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
diversify 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 contract 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
mandatory 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.
Distributions 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
invest 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
applying your percentage interest in a subaccount to the total number of votes
attributable to the subaccount. In determining the number of votes, fractional
shares will be recognized.
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 shareholders meeting is called, each person having a voting interest
in a subaccount will receive proxy voting material, reports and other materials
relating to the series. Since the series engages in shared funding, other
persons or entities besides 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 prepaid, to the home office
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 contract
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.
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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 purchase
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
participants in the Texas Optional Retirement Program (ORP) to redeem their
interest in a variable annuity contract issued under the ORP only upon:
1. Termination of employment in all institutions of higher education as defined
in Texas law;
2. Retirement; or
3. Death.
Accordingly, a participant in the ORP will be required to obtain a certificate
of termination from their employer before accounts can be redeemed.
RECORDS AND REPORTS
As presently required by the 1940 Act and applicable regulations, we are
responsible for maintaining all records and accounts relating to the VAA. We
have entered into an agreement with the Delaware Management Company, 2005
Market 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
office, at least semiannually after the first contract year, reports containing
information required by that 1940 Act or any other applicable law or
regulation.
OTHER INFORMATION
A Registration Statement has been filed with the SEC, under the Securities Act
of 1933 as amended, for the contracts being offered here. This Prospectus does
not contain all the information in the Registration Statement, its amendments
and exhibits. Please refer to the Registration Statement for further
information about the VAA, Lincoln Life and the contracts offered. Statements
in this Prospectus about the content of contracts and other legal instruments
are summaries. For the complete text of those contracts and instruments, please
refer to those documents as filed with the SEC.
Lincoln National Variable Annuity Account E and Lincoln Life Flexible Premium
Variable Life Accounts F, G and J (all registered as investment companies under
the 1940 Act) and Lincoln National Flexible Premium Group Variable Annuity
Accounts 50, 51 and 52 are all segregated investment accounts of Lincoln
National Life Insurance Co. (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 year 2000. Lincoln Life and Delaware have
begun formal discussions with each other to assess the requirements for their
respective systems to interface properly in order to facilitate the accurate
and orderly operation of the VAA beginning in the year 2000.
The year 2000 issue is pervasive and complex and affects virtually every aspect
of the businesses of both Lincoln Life and Delaware (the Companies). The
computer systems of the Companies and their interfaces with the computer
systems of vendors, suppliers, customers and other business partners are
particularly vulnerable. The inability to properly recognize date-sensitive
electronic information and to transfer data between systems could cause errors
or even complete failure of systems, which would result in a temporary
inability to process transactions correctly and engage in normal business
activities for the VAA. The Companies respectively are redirecting significant
portions of their internal information technology efforts and are contracting,
as needed, with outside consultants to help update their systems to accommodate
the year 2000. Also, in addition to the discussions with each other noted
above, the Companies have respectively initiated formal
21
<PAGE>
discussions with other critical parties that interface with their systems to
gain an understanding of the progress by those parties in addressing year 2000
issues. While the Companies are making substantial efforts to address their own
systems and the systems with which they interface, it is not possible to
provide assurance that operational problems will not occur. The Companies
presently believe that, with the modification of existing computer systems,
updates by vendors and conversion to new software and hardware, the year 2000
issue will not pose significant operations problems for their respective
computer systems. In addition, the Companies are incorporating potential issues
surrounding year 2000 into their contingency planning process, in the event
that, despite these substantial efforts, there are unresolved year 2000
problems. If the remediation efforts noted above are not completed timely or
properly, the year 2000 issue could have a material adverse impact on the
operation of the businesses of Lincoln Life or Delaware, or both.
The cost of addressing year 2000 issues and the timeliness of completion will
be closely monitored by management of the respective Companies and, for each
company, will be based on its management's best estimates which are derived
utilizing numerous assumptions of future events, including the continued
availability of certain resources, third-party modification plans and other
factors. Nevertheless, there can be no guarantee either by Lincoln Life or by
Delaware that estimated costs will be achieved, and actual results could differ
significantly from those anticipated. Specific factors that might cause such
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer problems, and other uncertainties.
LEGAL PROCEEDINGS
Lincoln Life is involved in various pending or threatened legal proceedings
arising from the conduct of its business. Most of those proceedings are routine
and in the ordinary course of business. In some instances these proceedings
include claims for unspecified or substantial punitive damages and similar
types of relief in addition to amounts for alleged contractual liability or
requests for equitable relief. After consultation with legal counsel and a
review of available facts, it is management's opinion that the ultimate
liability, if any, under these suits will not have a material adverse effect on
the financial position of Lincoln Life.
Two lawsuits involve alleged fraud in the sale of interest-sensitive universal
and whole life insurance policies. These two suits have been filed as class
actions against Lincoln Life, although as of the date of this Prospectus the
court had not certified a class in either case. Plaintiffs seek unspecified
damages and penalties for themselves and on behalf of the putative class.
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 H
Item
- -----------------------------------------
General information and history of
Lincoln Life
- -----------------------------------------
Special terms
- -----------------------------------------
Services
- -----------------------------------------
Principal underwriter
- -----------------------------------------
Purchase of securities being offered
- -----------------------------------------
Calculation of investment results
- -----------------------------------------
Annuity payouts
- -----------------------------------------
Federal tax status
- -----------------------------------------
Automatic increase in the guaranteed
minimum death benefit
- -----------------------------------------
Advertising and sales literature
- -----------------------------------------
Financial statements
For a free copy of the SAI please see page one of this booklet.
22
<PAGE>
AMERICAN LEGACY II
LINCOLN NATIONAL
VARIABLE ANNUITY ACCOUNT H (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 H dated April 1, 1998. You may obtain a copy of the
American Legacy II Account H Prospectus on request and without charge. Please
write American Legacy Customer Service, The 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
- ------------------------------------------
CALCULATION OF INVESTMENT RESULTS B-3
- ------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Page
- ------------------------------------------
<S> <C>
ANNUITY PAYOUTS B- 7
- ------------------------------------------
FEDERAL TAX STATUS B- 7
- ------------------------------------------
AUTOMATIC INCREASE IN THE GUARANTEED
MINIMUM DEATH BENEFIT B-10
- ------------------------------------------
ADVERTISING AND SALES LITERATURE B-11
- ------------------------------------------
FINANCIAL STATEMENTS B-13
- ------------------------------------------
</TABLE>
THIS SAI IS NOT A PROSPECTUS.
The date of this SAI is April 1, 1998.
<PAGE>
GENERAL INFORMATION AND
HISTORY OF
LINCOLN NATIONAL LIFE
INSURANCE CO. (LINCOLN LIFE)
The Lincoln National Life Insurance Company (Lincoln Life), organized in 1905,
is an Indiana stock insurance corporation, engaged primarily in the direct
insurance of life and health insurance contracts and annuities, and is also a
professional reinsurer. Lincoln Life is wholly owned by Lincoln National
Corporation (LNC), a publicly held insurance and financial services holding
company domiciled 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 New York Stock Exchange (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 weekend day, the NYSE may also be closed on the
business day occurring just before or just after the holiday.
SERVICES
INDEPENDENT AUDITORS
The financial statements of the VAA and the statutory-basis financial
statements and schedules of Lincoln Life appearing in this SAI and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports which also appear elsewhere in this document and in the
Registration Statement. The financial statements and schedules audited by Ernst
& Young LLP have been included in this document in reliance on their reports
given on their authority as experts in accounting and auditing.
KEEPER OF RECORDS
All accounts, books, records and other documents which are required to be
maintained for the VAA are maintained by Lincoln Life or by third parties
responsible 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 offered to the public through certain securities
broker/dealers who have entered into selling agreements with AFD and whose
personnel are legally authorized to sell annuity products. Although there are
no special purchase plans for any class of prospective 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 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
privileges 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.
The offering of the contracts is continuous.
CALCULATION OF INVESTMENT RESULTS
The paragraphs set forth below present performance information for the VAA and
the subaccounts calculated in several different ways. Paragraph A shows the
performance of the series over the periods indicated in the table set forth in
the Paragraph adjusted to reflect the charges and expenses associated with the
contracts. Paragraph B shows the average annual total return of each subaccount
since its inception. The information presented in Paragraph B is commonly re-
ferred to as "standard performance" because it is calculated in accordance with
formulas prescribed by the SEC. Under rules issued by the SEC, standard perfor-
mance must be included in certain advertising material that discusses the per-
formance of the VAA and the subaccounts. Standard performance is described in
paragraph (C). Paragraph D shows additional "non-standardized" performance in-
formation (i.e., performance information not calculated in
B-2
<PAGE>
accordance with SEC guidelines) for each of the subaccounts that may be used to
advertise the performance of the VAA and the subaccounts.
A. SUBACCOUNT PERFORMANCE ADJUSTED FOR CONTRACT EXPENSE CHARGES:
The examples that follow show, for the various subaccounts of the VAA, annual
total return as of the stated periods, based upon a hypothetical initial
purchase payment of $1,000, calculated according to the formula provided after
the examples. The annual total return has been calculated to show the annual
total return for a hypothetical contract with the enhanced guaranteed minimum
death benefit (EGMDB) and without it. Although the VAA commenced activity in
1989 and the EGMDB did not become available until 1997, these figures are
calculated as if the subaccounts had commenced activity at the same time as the
underlying funds.
SUBACCOUNT PERFORMANCE (ADJUSTED FOR CONTRACT EXPENSE CHARGES)
Period Ending December 31, 1997
<TABLE>
<CAPTION>
1-year period 5-year period 10-year period
Without With Without With Without With
EGMDB EGMDB EGMDB EGMDB EGMDB EGMDB
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Global Growth subaccount 2.30%* 2.17%* N/A N/A N/A N/A
(commenced activity 4/30/97)
Growth subaccount 22.30 22.11 16.24% 16.07% 15.54% 15.36%
(as if commenced activity 2/8/84)
International subaccount 1.54 1.38 12.77 12.60 8.57* 8.41*
(commenced activity 5/1/90)
Growth-Income subaccount 18.09 17.91 16.04 15.86 14.00 13.83
(as if commenced activity 2/8/84)
Asset Allocation subaccount 12.82 12.64 12.91 12.74 10.83* 10.67*
(commenced activity 8/1/89)
High-Yield Bond subaccount 4.84 4.68 9.19 9.02 10.62 10.45
(as if commenced activity 2/8/84)
Bond subaccount 2.59 2.43 3.62* 3.45* N/A N/A
(commenced activity 1/2/96)
U.S. Gov't./AAA subaccount 0.94 0.78 4.71 4.55 6.80 6.64
(as if commenced activity 12/1/85)
Cash Management subaccount (2.31) (2.46) 2.64 2.48 3.99 3.83
(as if commenced activity 2/8/84)
</TABLE>
*The lifetime of this subaccount is less than the complete period indicated.
See the date the subaccount commenced activity under its name.
There is a Global Small Capitalization subaccount but it is not in the chart
because it did not begin activity until 1998.
The length of the periods and the last day of each period used in the above
table are set
out in the table heading and in the footnotes above.
B-3
<PAGE>
(B) AVERAGE ANNUAL TOTAL RETURN
Period Ending December 31, 1997
<TABLE>
<CAPTION>
1-year period 5-year period 10-year period
Without With Without With Without With
EGMDB EGMDB* EGMDB EGMDB EGMDB EGMDB
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Global Growth subaccount 2.30%* 2.24% N/A N/A N/A N/A
Growth subaccount 22.30 30.40 16.24% N/A 13.59%* N/A
International subaccount 1.54 (5.22) 12.77 N/A 8.57* N/A
Growth-Income subaccount 18.09 19.51 16.04 N/A 12.55* N/A
Asset Allocation subaccount 12.82 12.29 12.91 N/A 10.83* N/A
High-Yield Bond subaccount 4.84 5.48 9.19 N/A 10.04* N/A
Bond subaccount 2.59 3.07 3.62* N/A N/A N/A
U.S. Gov't./AAA subaccount 0.94 0.98 4.71 N/A 6.42* N/A
Cash Management subaccount (2.31) (5.28) 2.64 N/A 3.55* N/A
</TABLE>
*The lifetime of this subaccount is less than the complete period indicated.
Each subaccount with the EGMDB commenced activity on May 1, 1997. Each
subaccount without the EGMDB commenced activity on August 2, 1989, except the
International subaccount (5/1/90), the Bond subaccount (1/2/96), and the Global
Growth subaccount (4/30/97).
There is a Global Small Capitalization subaccount but it is not in the chart
because it did not begin activity until 1998.
(C) FORMULAS Average annual total return for each period was determined by
finding the average annual compounded rate of return over each period that
would equate the initial amount invested to the ending redeemable value for
that period, according to the following formula--
n
P(1 + T) = ERV
Where: P = a hypothetical initial purchase payment of $1,000
T = average annual total return for the period in question
n = number of years
ERV = redeemable value (as of the end of the period in question) of a
hypothetical $1,000 purchase payment made at the beginning of the
1-year, 5-year or 10-year period in question (or fractional portion
thereof)
The formula assumes that: 1) all recurring fees have been charged to
contractowner accounts; 2) all applicable nonrecurring charges are deducted at
the end of the period in question; and 3) there will be a complete redemption at
the end of the period in question.
B-4
<PAGE>
D. NONSTANDARDIZED INVESTMENT RESULTS:
The VAA may illustrate its results over various periods and compare its results
to indices and other variable annuities in sales materials including
advertisements, brochures and reports. Such results may be computed on a
cumulative and/or annualized basis.
Cumulative quotations are arrived at by calculating the change in the accumula-
tion unit value between the first and last day of the base period being mea-
sured, and expressing the difference as a percentage of the unit value at the
beginning of the base period.
Annualized quotations are arrived at by applying a formula which determines the
level rate of return which, if earned over the entire base period, would
produce the cumulative return.
NONSTANDARDIZED INVESTMENT RESULTS
SUBACCOUNTS OF ACCOUNT H*
$10,000 INVESTED IN
THIS FUND THROUGH
AMERICAN LEGACY II
THIS MANY YEARS AGO...
...WOULD HAVE GROWN TO THIS AMOUNT ON DECEMBER 31,
1997**
<TABLE>
<CAPTION>
Without EGMDB
-------------------------------------------------------------------------------
Growth Growth-Income High-Yield Bond Cash Management
- -------------------------------------------------------------------------------------------------------------------
Number Compound Compound Compound Compound
of growth growth growth growth
years Periods Amount rate Amount rate Amount rate Amount rate
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 12/31/96-12/31/97 $12,836.26 28.36% $12,415.48 24.15% $11,090.21 10.90% $10,374.74 3.75%
2 12/31/95-12/31/97 14,358.59 19.83 14,544.95 20.60 12,387.90 11.30 10,756.56 3.71
3 12/31/94-12/31/97 18,884.69 23.61 19,089.36 24.05 14,884.84 14.18 11,202.01 3.86
4 12/31/93-12/31/97 18,723.38 16.98 19,224.79 17.75 13,724.06 8.24 11,480.24 3.51
5 12/31/92-12/31/97 21,490.36 16.53 21,302.29 16.33 15,766.24 9.53 11,628.74 3.06
Lifetime of fund 02/08/84-12/31/97 69,997.83 15.03 65,294.33 14.46 45,423.57 11.51 18,500.61 4.53
<CAPTION>
With EGMDB
-------------------------------------------------------------------------------
Growth Growth-Income High-Yield Bond Cash Management
- -------------------------------------------------------------------------------------------------------------------
Number Compound Compound Compound Compound
of growth growth growth growth
years Periods Amount rate Amount rate Amount rate Amount rate
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 12/31/96-12/31/97 $12,817.03 28.17% $12,396.88 23.97% $11,073.59 10.74% $10,359.19 3.59%
2 12/31/95-12/31/97 14,315.42 19.65 14,501.21 20.42 12,350.64 11.13 10,724.20 3.56
3 12/31/94-12/31/97 18,799.84 23.42 19,003.59 23.86 14,817.95 14.01 11,151.66 3.70
4 12/31/93-12/31/97 18,611.32 16.80 19,109.72 17.57 13,641.91 8.07 11,411.51 3.36
5 12/31/92-12/31/97 21,329.72 16.36 21,143.04 16.15 15,648.38 9.37 11,541.79 2.91
Lifetime of fund 02/08/84-12/31/97 68,553.11 14.86 63,946.64 14.29 44,486.00 11.34 18,118.74 4.37
</TABLE>
*Although the VAA commenced activity in 1989, these figures are calculated as
if its subaccounts had commenced activity at the same time as the underlying
funds.
**For purposes of determining these investment results, American Legacy II's
1.35% annual asset charge and administrative fee (1.50% for contracts with the
EGMDB) have been taken into account. However, the annual maintenance fee of $35
is not reflected and these examples do not assume redemption at the end of the
period.
B-5
<PAGE>
<TABLE>
<CAPTION>
Without EGMDB With EGMDB
------------------- -------------------
U.S. Govt/AAA U.S. Govt/AAA
------------------- -------------------
Compound Compound
growth growth
Amount rate Amount rate
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
12/31/96-
1 12/31/97 $10,699.72 7.00% $10,683.69 6.84%
12/31/95-
2 12/31/97 10,884.48 4.33 10,851.75 4.17
12/31/94-
3 12/31/97 12,392.19 7.41 12,336.51 7.25
12/31/93-
4 12/31/97 11,694.91 3.99 11,624.91 3.84
12/31/92-
5 12/31/97 12,828.56 5.11 12,732.66 4.95
12/01/85-
Lifetime of fund 12/31/97 22,282.54 6.84 21,881.01 6.68
<CAPTION>
Asset Allocation Asset Allocation
------------------- -------------------
Compound Compound
growth growth
Amount rate Amount rate
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
12/31/96-
1 12/31/97 $11,887.66 18.88% $11,869.86 18.70%
12/31/95-
2 12/31/97 13,581.33 16.54 13,540.50 16.36
12/31/94-
3 12/31/97 17,364.34 20.19 17,286.33 20.01
12/31/93-
4 12/31/97 17,082.78 14.32 16,980.54 14.15
12/31/92-
5 12/31/97 18,611.68 13.23 18,472.55 13.06
08/01/89-
Lifetime of fund 12/31/97 23,904.45 10.91 23,604.38 10.74
<CAPTION>
International International
------------------- -------------------
Compound Compound
growth growth
Amount rate Amount rate
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
12/31/96-
1 12/31/97 $10,759.76 7.60% $10,743.64 7.44%
12/31/95-
2 12/31/97 12,478.49 11.71 12,440.96 11.54
12/31/94-
3 12/31/97 13,873.51 11.53 13,811.16 11.36
12/31/93-
4 12/31/97 13,950.92 8.68 13,867.41 8.52
12/31/92-
5 12/31/97 18,494.63 13.09 18,356.36 12.92
04/30/90-
Lifetime of fund 12/31/97 18,886.27 8.64 18,670.03 8.48
<CAPTION>
Bond Bond
------------------- -------------------
Compound Compound
growth growth
Amount rate Amount rate
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
12/31/95-
1 12/31/97 $10,865.11 8.65% $10,848.83 8.49%
01/02/96-
Lifetime of fund 12/31/97 11,346.89 6.54 11,312.95 6.38
<CAPTION>
Global Growth Global Growth
------------------- -------------------
Compound Compound
growth growth
Amount rate Amount rate
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
04/30/97-
Lifetime of fund 12/31/97 $10,760.49 11.55% $10,749.69 11.38%
</TABLE>
There is also a Global Small Capitalization subaccount but it is not in this
chart because it did not begin activity until 1998.
B-6
<PAGE>
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
calculation: 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 below.
The dollar amount of the first periodic variable annuity payout is determined
by applying the total value of the accumulation units credited under the
contract valued as of the annuity commencement date (less any premium taxes) to
the annuity tables contained in the contract. The variable annuity payout 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 the 1971 Individual Annuity Mortality Tables,
modified, with an assumed investment return at the rate of 4% per annum. The
first annuity payout is determined by multiplying the benefit per $1,000 of
value shown in the contract tables by the number of thousands of dollars of
contract value. 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 increase 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.
We may use sex distinct annuity tables in contracts that are not associated
with employer sponsored plans and where not prohibited by law.
At an annuity commencement date, the annuitant is credited with annuity units
for each subaccount on which variable annuity payouts are based. The number of
annuity units to be credited is determined by dividing the amount of the first
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 periodic payouts is determined by multiplying the
contractowner's fixed number of annuity units in each subaccount by the
appropriate annuity unit value for the valuation date ending 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 immediately
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
We may require proof of age, sex or survival of any payee upon whose age, sex
or survival payouts depend.
FEDERAL TAX STATUS
GENERAL
The operations of the VAA form a part of, and are taxed with, the operations of
Lincoln Life under the Internal Revenue Code of 1986, as amended (the code).
Investment income and realized net capital gains on the assets of the VAA are
reinvested and taken into account in determining the accumulation and annuity
unit values. As a result, such investment income and realized net capital gain
are automatically retained as part of the reserves under the contract. Under
existing federal income tax law, we believe that the VAA investment income and
realized net capital gain are not taxed to the extent they are retained as part
of the reserves under the contract. Accordingly, we do 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 we may
impose a charge against the VAA (with respect to some or all contracts) in
order to make provision for payment of such taxes.
B-7
<PAGE>
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 accounts
of insurance companies) underlying the contract be adequately diversified in
accordance with Treasury regulations in order for the contract to qualify as an
annuity contract under Section 72 of the code. The 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, we believe 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
guidance concerning the extent to which contractowners may direct their
investments to particular subaccounts of a separate account. When guidance is
provided, the contract may need to be modified to comply with that guidance.
For these reasons, we reserve the right to modify the contract as necessary to
prevent the contractowner from being considered the owner of the assets of the
VAA.
In addition to the requirements of Section 817(h), code Section 72(s) provides
that contracts will not be treated 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 before the time the entire interest in the contract
has been distributed, the remaining portion of such interest must be
distributed at least as rapidly as under the method of distribution in effect
at the time of the contractowner's death; and (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 designated beneficiary is distributed over
that designated beneficiary's life, or a period not extending beyond the
designated beneficiary's life expectancy, and if that distribution begins
within one year of the contractowner's death. The designated beneficiary must
be a natural person. No regulations interpreting these requirements have yet
been issued. Thus, no assurance can be given that the provisions contained in
contracts satisfy all such code requirements. However, we believe that such
provisions in such contracts meet these requirements. We intend to review such
provisions and modify them as necessary to
assure that they comply with the requirements of Section 72(s) when clarified
by regulations or otherwise.
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
regulations, are complex and subject to change. These rules also vary according
to the type of plan and the terms and conditions of the plan itself. Therefore,
no attempt is made herein to provide more than general information about the
use of contracts with the various types of plans, based on Lincoln Life's
understanding of the current federal tax laws as interpreted by the IRS.
Purchasers of contracts for use with such a plan and plan participants and
beneficiaries 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 limitations 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 conditions of the contract.
Following are brief descriptions of the various types of plans and of the use
of contracts in connection therewith.
PUBLIC SCHOOL SYSTEMS AND 501(C)(3) ORGANIZATIONS [SECTION 403(B) PLANS]
Payments made to purchase annuity contracts by public school systems or code
Section 501(c)(3) organizations for their employees are excludable from the
gross income of the employee to the extent that aggregate payments for the
employee do not exceed the exclusion allowance provided by Section 403(b) of
the code, the 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 either in the form of annuity payouts, 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 [SECTION 401(A) PLANS]
Payments made by a corporate employer and the increments on all payments for
qualified corporate plans are not taxable as income to the employee until
distributed. However, the employee may be required to include these amounts in
gross income before
B-8
<PAGE>
distribution if the qualified plan or trust loses its qualification. Corporate
plans qualified under Sections 401(a) or 403(a) of the code are subject to
extensive rules, including limitations on maximum contributions or benefits.
For plan years beginning after December 31, 1996, tax exempt organizations,
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 available
in all cases.
SELF-EMPLOYED INDIVIDUALS
(H.R. 10 OR KEOGH)
Under code provisions, self-employed individuals may establish plans commonly
known as H.R. 10 or Keogh plans for themselves and their employees. The tax
consequences to participants under such plans depend upon the plan itself. Such
plans are subject to special rules in addition to those applicable to qualified
corporate plans; therefore, purchasers of the contracts for use with H.R. 10
plans should seek competent advice as to suitability of plan documents and the
funding contracts.
INDIVIDUAL RETIREMENT ANNUITIES (IRA)
Under Section 408 of the code, individuals may participate in a retirement
program known as Individual Retirement Annuity (IRA). An individual may make an
annual IRA contribution of up to the lesser of $2,000 (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
individual and his spouse) exceeds a specified amount. Distributions from
certain other IRA plans or qualified plans may be rolled over to an IRA on a
tax deferred basis without regard to the limit on contributions, provided
certain requirements are met. Distributions from IRA's are subject to certain
restrictions. Deductible IRA contributions and all IRA earnings will be taxed
as ordinary income when distributed. The failure to satisfy certain code
requirements with respect to an IRA may result in adverse tax consequences.
ROTH IRA
Beginning in 1998, Roth IRA's may be established. Non-deductible contributions
of $2,000 per year can be made to the Roth IRA. The contribution limits for
deductible and non-deductible IRA's are coordinated. In general, distributions
from a Roth IRA are not taxable and are not subject to the 10% early withdrawal
penalty that applies to Traditional IRA's. A five-year holding period as well
as other requirements must be satisfied if distributions are to be non-taxable.
Assuming certain income restrictions are satisfied, a Traditional IRA can be
converted to a Roth IRA. This is a taxable event.
DEFERRED COMPENSATION PLANS (457 PLANS)
Under the code provisions, employees and independent contractors (participants)
performing services for state and local governments and certain tax-exempt
organizations 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
sponsoring employer and are subject to the claims of its creditors. Plans of
state or local governments established on August 20, 1996, or later, must hold
all assets and income in trust (or custodial accounts or an annuity contract)
for the exclusive benefit of participants and their beneficiaries. Section 457
plans that were in existence before August 20, 1996 are allowed until January
1, 1999 to meet this requirement. The amounts deferred under a plan which meet
the requirements of Section 457 of the code are not taxable as income to the
participant until paid or otherwise made available to the participant or
beneficiary. Deferrals are taxed as compensation from the employer when they
are actually or constructively received by the employee. As a general rule, the
maximum amount which can be deferred in any one year is the lesser of $7,500 or
33 1/3% of the participant's includable compensation. However, in limited
circumstances, up to $15,000 may be deferred in each of the last three years
before retirement.
SIMPLIFIED EMPLOYEE PENSION PLANS [SECTION 408(K)]
An employer may make contributions on behalf of employees to a simplified
employee pension plan (SEP) as provided by Section 408(k) of the code. The
contributions and distribution dates are limited by the code provisions. All
distributions from the plan will be taxed as ordinary income. Any distribution
before the employee attains age 59 1/2 (except in the event of death or
disability) or the failure to satisfy certain other code requirements may
result in adverse tax consequences. For tax years after 1996, salary reduction
SEPs (SAR/SEP) may no longer be established. However, SAR/SEPs in existence
before January 1, 1997 may continue to receive contributions.
B-9
<PAGE>
SAVINGS INCENTIVE MATCHED PLAN FOR EMPLOYEES (SIMPLE)
Employers with 100 or fewer employees, who earned $5,000.00 during the
preceding year, may establish SIMPLEs. For tax years beginning after December
31, 1996, SIMPLE plans are available and may be in the form of an IRA or part
of a 401(k) plan. Under a SIMPLE IRA, employees are permitted to make elective
contributions to an IRA, stated as a percentage of the employees compensation,
but not to exceed $6,000.00 annually as indexed. Such deferrals are not subject
to income tax until withdrawn. Withdrawals made by an employee in the first two
years of the employee's participation are subject to a 25 percent penalty.
Later withdrawals are subject to penalties applicable to IRAs. Under a SIMPLE
401(k), employee deferrals are limited to no more than $6,000.00 annually.
Employer contributions are usually required for each type of SIMPLE.
TAX ON DISTRIBUTIONS FROM
QUALIFIED CONTRACTS
The following rules generally apply to distributions from contracts purchased
in connection with the plans discussed previously, other than 457 plans and
Roth IRAs.
The portion, if any, of any contribution under a contract made by or on behalf
of an individual which is not excluded from the employee's gross income
(generally, the employee's own nondeductible contributions) constitutes his
investment in the contract. If a distribution is made in the form of annuity
payouts, the employee's investment in the contract (adjusted for certain refund
provisions) divided by his life expectancy (or other period for which annuity
payouts are expected to be made) constitutes a return of capital each year. The
dollar amount of annuity payouts received in any year in excess of such return
is taxable as ordinary income. However, 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 investment 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.
Rules generally provide that all distributions which are not received as an
annuity will be taxed as a pro rata distribution of taxable and nontaxable
amounts (rather than as a distribution first of nontaxable amounts).
If a surrender of or withdrawal from the contract is effected and a
distribution is made in a single payment, the proceeds may qualify for special
lump-sum distribution treatment under certain qualified plans, as discussed
previously. Otherwise, the amount by which the payment exceeds the investment
in the contract (adjusted for any prior withdrawals) allocated to that payout,
if any, will be taxed as ordinary income in the year of receipt.
Distributions from Section 401(a) plans, Section 403(b) plans, IRAs, SEPs and
Keoghs will be subject to a 10% penalty tax if made before age 59 1/2 unless
certain other exceptions apply. Failure to meet certain minimum distribution
requirements for the above
plans, as well as for Section 457 plans, will result in a 50% excise tax.
Various other adverse tax consequences may also be potentially applicable in
certain circumstances to these types of plans.
Upon an 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
consequences under these contracts are not exhaustive and that special rules
are provided with respect to other tax situations not discussed herein.
Further, the foregoing discussion does not address any applicable state, local
or foreign tax laws. In recent years, numerous changes have been made in the
federal income tax treatment of contracts and retirement plans, which are not
fully discussed previously. 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 National Life Insurance Co. (Lincoln Life)
will automatically increase the guaranteed minimum death benefit (GMDB):
We will automatically increase the GMDB, separately for each contract year's
purchase payment(s), effective upon the seventh anniversary of each eligible
contract year in which those payments were made (as the contingent 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 increase
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
B-10
<PAGE>
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.
If on the seventh contract anniversary, the contract 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 AG, 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
application of the IRR methodology to any particular contract year could
allocate gain, if any, in a manner which does not precisely correlate with the
contract's actual investment experience for a particular contract year or
subaccount. The calculation of the IRR assumes all purchase payments and
withdrawals occur at the beginning of the 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 withdrawals
applied on a FIFO basis.
ADVERTISING AND SALES LITERATURE
As set forth in the Prospectus, Lincoln Life may refer to the following
organizations (and others) in its marketing materials:
A.M. BEST'S RATING SYSTEM is designed to evaluate the various factors affecting
the overall performance of an insurance company in order to provide an opinion
as to an insurance company's relative financial strength and ability to meet
its contractual obligations. The procedure includes both a quantitative and
qualitative review of each company. A.M. Best also provides certain rankings,
to which Lincoln Life intends to refer.
DUFF & PHELPS insurance company claims-paying ability (CPA) service provides
purchasers of insurance company policies and contracts with analytical and
statistical information on the solvency and liquidity of major U.S. licensed
insurance companies, both mutual and stock.
EAFE INDEX is prepared by Morgan Stanley Capital International (MSCI). It
measures performance of securities in Europe, Australia and the Far East. The
index reflects the movements of world stock markets by representing the
evolution of an unmanaged portfolio. The EAFE Index offers international
diversification with over 1,000 companies across 20 different countries.
LIPPER VARIABLE INSURANCE PRODUCTS PERFORMANCE ANALYSIS SERVICE is a publisher
of statistical data covering the investment company industry in the United
States and overseas. Lipper is recognized as the leading source of data on
open-end and closed-end funds. Lipper currently tracks the performance of over
5,000 investment companies and publishes numerous specialized reports,
including reports on performance and portfolio analysis, fee and expense
analysis.
MOODY'S insurance claims-paying rating is a system of rating insurance
company's financial strength, market leadership and ability to meet financial
obligations. The purpose of Moody's ratings is to provide investors with a
simple system of gradation by which the relative quality of insurance companies
may be noted.
MORNINGSTAR is an independent financial publisher offering comprehensive
statistical and analytical coverage of open-end and closed-end funds and
variable annuities.
STANDARD & POOR'S insurance claims-paying ability rating is an assessment of an
operating insurance company's financial capacity to meet obligations under an
insurance policy in accordance with the terms. The likelihood of a timely flow
of funds from the insurer to the trustee for the bondholders is a key element
in the rating determination for such debt issues.
VARDS (VARIABLE ANNUITY RESEARCH DATA SERVICE) provides a comprehensive guide
to variable annuity contract features and historical fund performance. The
service also provides a readily understandable analysis of the comparative
characteristics and market performance of funds inclusive in variable
contracts.
STANDARD & POOR'S INDEX -- broad-based measurement of changes in stock-market
conditions based on the average performance of 500 widely held common stocks;
commonly known as the Standard & Poor's 500 (S&P 500). The selection of stocks,
their relative weightings to reflect differences in the number of outstanding
shares, and publication of the index itself are services of Standard & Poor's
Corp., a financial advisory, securities rating and publishing firm.
NASDAQ-OTC Price Index -- this index is based on the National Association of
Securities Dealers Automated Quotations (NASDAQ) and represents all domestic
over-the-counter stocks except those traded on exchanges and those having only
one market maker, a total of some 3,500 stocks. It is market value-weighted
B-11
<PAGE>
and was introduced with a base of 100.00 on February 5, 1971.
DOW JONES INDUSTRIAL AVERAGE (DJIA) -- price-weighted average of 30 actively
traded blue chip stocks, primarily industrials but including American Express
Company and American Telephone and Telegraph Company. Prepared and published by
Dow Jones & Company, it is the oldest and most widely quoted of all
the market indicators. The average is quoted in points, not dollars.
In its advertisements and other sales literature for the VAA and the series
funds, Lincoln Life intends to illustrate the advantages of the contracts in a
number of ways:
COMPOUND INTEREST ILLUSTRATIONS. These will emphasize several advantages of the
variable annuity contract. For example, but not by way of illustration, the
literature may emphasize the potential savings through tax deferral; the
potential advantage of the VAA over the fixed account; and the compounding
effect when a client makes regular deposits to his contract.
INTERNET. An electronic communications network which may be used to provide
information regarding Lincoln Life, performance of the subaccounts and
advertising and sales literature.
DOLLAR COST AVERAGING (DCA). You may systematically transfer on a monthly basis
amounts from certain subaccounts or from the fixed side of the contract into
the subaccounts or the fixed side of the contract. You may elect to participate
in the DCA program at the time of application or at anytime before the annuity
commencement date by completing an election form available from us. The minimum
amount to be dollar cost averaged is $10,000 over any period between six and 60
months. Once elected, the program will remain in effect until the earlier of:
(1) the annuity commencement date; (2) the value of the amount being DCA'd is
depleted; or (3) you cancel the program by written request or by telephone if
we have your telephone authorization on file. Currently, there is no charge for
this service. However, we reserve the right to impose one. A transfer under
this program is not considered a transfer for purposes of limiting the number
of transfers that may be made, or assessing any charges which may apply to
transfers. We reserve the right to discontinue this program at any time. DCA
does not assure a profit or protect against loss.
AUTOMATIC WITHDRAWAL SERVICE (AWS). AWS provides an automatic, periodic
withdrawal of contract value to you. You may elect to participate in AWS at the
time of application or at any time before the annuity commencement date by
sending a written request to our home office. The minimum contract value
required to establish AWS is $10,000. You may cancel or make changes to your
AWS program at any time by sending a written request to our home office. If
telephone authorization has been elected, certain changes may be made by
telephone. Notwithstanding the requirements of the program, any withdrawal must
be permitted by Section 401(a)(9) of the code for qualified plans or permitted
under Section 72 for nonqualified contracts. To the extent that withdrawals
under AWS do not qualify for an exemption from the contingent deferred sales
charge, we will assess any applicable surrender charges on those withdrawals.
See Contingent deferred sales charges. Currently, there is no charge for this
service. However, we reserve the right to impose one. If a charge is imposed,
it will not exceed $25 per transaction or 2% of the amount withdrawn, whichever
is less. We reserve the right to discontinue this service at any time.
CROSS-REINVESTMENT SERVICE. Under this option, account value in a designated
subaccount or the fixed side of the contract that exceeds a certain baseline
amount is automatically transferred to another specific variable subaccount(s)
or the fixed side of the contract at specific intervals. You may elect to
participate in cross-reinvestment at the time of application or at any time
before the annuity commencement date by sending a written request to our home
office or by telephone if we have your telephone authorization on file. You
designate the holding account, the receiving account(s), and the baseline
amount. Cross-reinvestment will continue until we receive authorization to
terminate the program.
The minimum holding account value required to establish cross-reinvestment is
$10,000. Currently, there is no charge for this service. However, we reserve
the right to impose one. A transfer under this program is not considered a
transfer for purposes of limiting the number of transfers that may be made, or
assessing any charges which may apply to transfers. We reserve the right to
discontinue this service at any time.
LINCOLN LIFE'S CUSTOMERS. Sales literature for the VAA and the series funds may
refer to the number of employers and the number of individual annuity clients
which Lincoln Life serves. As of the date of this SAI, we were serving over
15,000 employers and had more than 1 million annuity clients.
LINCOLN LIFE'S ASSETS, SIZE. Sales literature for the VAA may discuss Lincoln
Life's general financial condition (see, for example, the reference to A.M.
Best Company, above); it may refer to its assets; it may also discuss its
relative size and/or ranking among companies in the industry or among any sub-
classification of those companies, based upon recognized evaluation criteria
(see reference to A.M. Best Company above). For example, at year-end 1997
Lincoln Life had statutory admitted assets of over $58 billion.
B-12
<PAGE>
FINANCIAL STATEMENTS
Financial statements for the VAA and Lincoln Life appear on the following
pages. For more information about the financial statements for Lincoln Life
provided in this SAI, please see the cover page of this SAI.
B-13
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Combined Legacy II Legacy III
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Investment Securities - at market
(cost $12,943,058,221) $15,811,428,616 $15,301,632,118 $509,796,498
Liability - Payable to The Lincoln
Life Insurance Company 586,537 567,475 19,062
- ----------------------------------- --------------- --------------- ------------
Net assets 15,810,842,079 15,301,064,643 509,777,436
- ----------------------------------- =============== =============== ============
CONTRACT OWNER RESERVES:
Reserves for Redeemable Annuity
Contracts 15,771,427,071 15,264,270,522 507,156,549
Reserves for Annuity Contracts On
Benefit 39,415,008 36,794,121 2,620,887
- ----------------------------------- --------------- --------------- ------------
Total contract owner reserves $15,810,842,079 $15,301,064,643 $509,777,436
- ----------------------------------- =============== =============== ============
</TABLE>
See accompanying notes.
H-1
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Combined Legacy II Legacy III
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Investment Income:
. Dividends from Investment
Income $ 326,829,337 $ 322,253,841 $ 4,575,496
--------------------------------
. Dividends from Net Realized
Gains on Investments 1,420,362,090 1,382,510,372 37,851,718
--------------------------------
. Mortality and Expense
Guarantees:
--------------------------------
. Legacy w/o Guaranteed Minimum
Death Benefit Rider (190,589,831) (190,218,555) (371,276)
. Legacy w/ Guaranteed Minimum
Death Benefit Rider (4,873,326) (3,183,556) (1,689,770)
- --------------------------------- -------------- -------------- -----------
NET INVESTMENT INCOME 1,551,728,270 1,511,362,102 40,366,168
- ---------------------------------
Net realized and unrealized gain
(loss) on investments:
. Net Realized Gain on
Investments 220,798,258 220,794,057 4,201
--------------------------------
. Net Change in Unrealized
Appreciation or Depreciation
on Investments 792,118,810 823,411,043 (31,292,233)
- --------------------------------- -------------- -------------- -----------
NET GAIN (LOSS) ON INVESTMENTS 1,012,917,068 1,044,205,100 (31,288,032)
- --------------------------------- -------------- -------------- -----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $2,564,645,338 $2,555,567,202 $9,078,136
- --------------------------------- ============== ============== ===========
</TABLE>
See accompanying notes.
H-2
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Combined
Year Ended December 31,
1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS AT JANUARY 1 $12,596,374,351 $ 9,838,094,560
Changes from operations:
. Net Investment Income 1,551,728,270 852,218,931
------------------------------------------
. Net Realized Gain on Investments 220,798,258 78,069,710
------------------------------------------
. Net Change in Unrealized Appreciation or
Depreciation on Investments 792,118,810 553,623,030
- ------------------------------------------- --------------- ---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS 2,564,645,338 1,483,911,671
- -------------------------------------------
Net increase from unit transactions 649,822,390 1,274,368,120
- ------------------------------------------- --------------- ---------------
TOTAL INCREASE IN NET ASSETS 3,214,467,728 2,758,279,791
- ------------------------------------------- --------------- ---------------
NET ASSETS AT DECEMBER 31 $15,810,842,079 $12,596,374,351
- ------------------------------------------- =============== ===============
<CAPTION>
Legacy II
Year Ended December 31,
1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS AT JANUARY 1 $12,596,374,351 $ 9,838,094,560
Changes from operations:
. Net Investment Income 1,511,362,102 852,218,931
------------------------------------------
. Net Realized Gain on Investments 220,794,057 78,069,710
------------------------------------------
. Net Change in Unrealized Appreciation or
Depreciation on Investments 823,411,043 553,623,030
- ------------------------------------------- --------------- ---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS 2,555,567,202 1,483,911,671
- -------------------------------------------
Net increase from unit transactions 149,123,090 1,274,368,120
- ------------------------------------------- --------------- ---------------
TOTAL INCREASE IN NET ASSETS 2,704,690,292 2,758,279,791
- ------------------------------------------- --------------- ---------------
NET ASSETS AT DECEMBER 31 $15,301,064,643 $12,596,374,351
- ------------------------------------------- =============== ===============
<CAPTION>
Legacy III
Year Ended December 31,
1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS AT JANUARY 1 $ -- $ --
Changes from operations:
. Net Investment Income 40,366,168 --
------------------------------------------
. Net Realized Gain on Investments 4,201 --
------------------------------------------
. Net Change in Unrealized Appreciation or
Depreciation on Investments (31,292,233) --
- ------------------------------------------- --------------- ---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS 9,078,136 --
- -------------------------------------------
Net increase from unit transactions 500,699,300 --
- ------------------------------------------- --------------- ---------------
TOTAL INCREASE IN NET ASSETS 509,777,436 --
- ------------------------------------------- --------------- ---------------
NET ASSETS AT DECEMBER 31 $ 509,777,436 --
- ------------------------------------------- =============== ===============
</TABLE>
See accompanying notes.
H-3
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H
NOTES TO FINANCIAL
STATEMENTS
1. ACCOUNTING POLICIES & ACCOUNT INFORMATION
The Account: Lincoln National Variable Annuity Account H (Variable Account) is
a segregated investment account of The Lincoln Life Insurance Company (the
Company) and is registered under the Investment Company Act of 1940, as
amended, as a unit investment trust. The Variable Account consists of two
products, each with a Company annuity contract offering a guaranteed minimum
death benefit (GMDB) rider option. The available contracts are as follows:
. Legacy II
. Legacy III
Effective April 30, 1997, the Legacy III contract became available to clients
of the Company.
Investments: The Variable Account invests in the American Variable Insurance
Series (AVIS) which consists of nine funds. Growth Income Fund, Growth Fund,
Asset Allocation Fund, High-Yield Bond Fund, U.S. Government/AAA-Rated
Securities Fund, Cash Management Fund, International Fund, Bond Fund and Global
Growth Fund (the Funds). Legacy II and Legacy III invest in different classes
of shares of the Funds and these investments 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. Under 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
involving life contingencies are calculated using a modification of the 1971
Individual Annuitant Mortality Table and an assumed investment rate of 4%.
2. MORTALITY AND EXPENSE GUARANTEES & OTHER TRANSACTIONS WITH AFFILIATES
Amounts are paid to the Company for mortality and expense guarantees at a
percentage of the current value of the Variable Account each day. The rates are
as follows for the two contract types and the corresponding rider options
within the Variable Account:
. Legacy II at a daily rate of .0036986% (1.35% on an annual basis),
. Legacy II with GMDB rider at a daily rate of .0041096% (1.50% on an annual
basis),
. Legacy III at a daily rate of .0034247% (1.25% on an annual basis),
. Legacy III with GMDB rider at a daily rate of .0038356% (1.40% on an annual
basis).
In addition, amounts retained by the Company from the proceeds of the sales of
annuity contracts for contract charges and surrender charges were as follows
during 1997:
<TABLE>
<CAPTION>
Legacy II Legacy III
- -------------------------------------------------------------------
<S> <C> <C>
Growth Account $ 4,271,353 $ 2,289
International Account 2,730,589 1,041
Growth-Income Account 5,752,656 3,507
Asset Allocation Account 1,257,664 525
Bond Account 82,345 18
High-Yield Bond Account 676,920 2
U.S. Govemment/AAA-Rated Securities Account 522,461 0
Cash Management Account 846,158 5,474
Global Growth 19,384 75
- ------------------------------------------- ----------- -------
$16,159,530 $12,931
=========== =======
</TABLE>
Accordingly, the Company is responsible for all sales, general and
administrative expenses applicable to the Variable Account.
H-4
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H
NOTES TO FINANCIAL STATEMENTS CONTINUED
3. 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>
Combined
Aggregate
Aggregate Cost Proceeds from
of Purchases Sales
- ------------------------------------------------------------------------
<S> <C> <C>
Growth Fund $ 836,767,470 $ 315,018,391
International Fund 564,889,484 232,328,305
Growth Income Fund 1,141,868,690 273,691,162
Asset Allocation Fund 259,444,048 56,187,274
Bond Fund 75,261,595 6,852,372
High-Yield Bond Fund 150,674,021 47,048,225
U.S. Government/AAA-Rated Securities Fund 58,354,968 82,569,794
Cash Management Fund 245,442,791 263,189,288
Global Growth Fund 134,431,778 2,535,813
- ----------------------------------------- -------------- --------------
$3,467,134,845 $1,279,420,624
============== ==============
<CAPTION>
Legacy II
Aggregate
Aggregate Cost Proceeds from
of Purchases Sales
- ------------------------------------------------------------------------
<S> <C> <C>
Growth Fund $ 736,424,112 $ 314,963,526
International Fund 501,092,644 232,215,097
Growth Income Fund 934,180,895 273,627,544
Asset Allocation Fund 206,522,044 55,976,479
Bond Fund 60,949,172 6,822,825
High-Yield Bond Fund 125,217,747 47,044,780
U.S. Government/AAA-Rated Securities Fund 47,866,400 80,773,680
Cash Management Fund 223,068,178 255,555,698
Global Growth Fund 80,665,045 2,376,917
- ----------------------------------------- -------------- --------------
$2,915,986,237 $1,269,356,546
============== ==============
<CAPTION>
Legacy III
Aggregate
Aggregate Cost Proceeds from
of Purchases Sales
- ------------------------------------------------------------------------
<S> <C> <C>
Growth Fund $ 100,343,358 $ 54,865
International Fund 63,796,840 113,208
Growth Income Fund 207,687,795 63,618
Asset Allocation Fund 52,922,004 210,795
Bond Fund 14,312,423 29,547
High-Yield Bond Fund 25,456,274 3,445
U.S. Government/AAA-Rated Securities Fund 10,488,568 1,796,114
Cash Management Fund 22,374,613 7,633,590
Global Growth Fund 53,766,733 158,896
- ----------------------------------------- -------------- --------------
$ 551,148,608 $ 10,064,078
============== ==============
</TABLE>
H-5
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H
NOTES TO FINANCIAL STATEMENTS CONTINUED
4. SUMMARY OF CHANGES FROM UNIT TRANSACTIONS
<TABLE>
<CAPTION>
Legacy II Legacy III
Units Amount Units Amount
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Growth Account
Accumulation Units:
Contract purchases 238,284,940 $ 728,546,239 75,302,468 $ 90,888,019
- ------------------------------------------------
Terminated contracts & transfers to annuity
reserves (259,330,680) (776,465,942) (1,404,144) (1,946,987)
- ------------------------------------------------ ------------ ------------- ----------- ------------
(21,045,740) (47,919,703) 73,898,324 88,941,032
Annuity Reserves:
Transfers from accum. Units & between accts. 787,251 1,980,548 544,941 676,526
- ------------------------------------------------
Annuity payments (476,043) (1,158,554) (30,018) (36,798)
- ------------------------------------------------
Receipt (payment) of mortality guarantee adj. 16,761 47,626 0 0
- ------------------------------------------------ ------------ ------------- ----------- ------------
327,969 869,620 514,923 639,728
------------ ------------- ----------- ------------
Account Total: (20,717,771) (47,050,083) 74,413,247 89,580,760
- ------------------------------------------------
International Account
Accumulation Units:
Contract purchases 254,391,249 563,896,305 54,896,368 59,737,776
- ------------------------------------------------
Terminated contracts & transfers to annuity
reserves (249,942,107) (559,225,049) (1,574,793) (2,024,029)
- ------------------------------------------------ ------------ ------------- ----------- ------------
4,449,142 4,671,256 53,321,575 57,713,747
Annuity Reserves:
Transfers from accum. Units & between accts. 1,013,140 1,901,955 187,062 204,394
- ------------------------------------------------
Annuity payments (505,294) (976,576) (7,659) (7,992)
- ------------------------------------------------
Receipt (payment) of mortality guarantee adj. 6,871 12,677 (105) (105)
- ------------------------------------------------ ------------ ------------- ----------- ------------
514,717 938,056 179,298 196,297
------------ ------------- ----------- ------------
Account Total: 4,963,859 5,609,312 53,500,873 57,910,044
- ------------------------------------------------
Growth-Income Account
Accumulation Units:
Contract purchases 345,247,553 986,854,299 166,504,709 191,858,393
- ------------------------------------------------
Terminated contracts & transfers to annuity
reserves (308,301,070) (905,566,078) (2,832,635) (3,799,497)
- ------------------------------------------------ ------------ ------------- ----------- ------------
36,946,483 81,288,221 163,672,074 188,058,896
Annuity Reserves:
Transfers from accum. Units & between accts. 1,318,985 3,337,569 762,112 899,607
- ------------------------------------------------
Annuity payments (745,210) (1,900,756) (41,987) (49,315)
- ------------------------------------------------
Receipt (payment) of mortality guarantee adj. 12,634 33,680 (357) (414)
- ------------------------------------------------ ------------ ------------- ----------- ------------
586,409 1,470,493 719,768 849,878
------------ ------------- ----------- ------------
Account Total: 37,532,892 82,758,714 164,391,842 188,908,774
Asset Allocation Account
Accumulation Units:
Contract purchases 99,487,819 253,359,668 45,808,506 51,111,537
- ------------------------------------------------
Terminated contracts & transfers to annuity
reserves 1.2504
(74,895,282) (201,113,144) (1,327,543) (1,659,971)
- ------------------------------------------------ ------------ ------------- ----------- ------------
24,592,537 52,246,524 44,480,964 49,451,566
Annuity Reserves:
Transfers from accum. Units & between accts. 779,739 1,701,628 118,021 134,397
- ------------------------------------------------
Annuity payments (425,728) (939,220) (3,183) (3,613)
- ------------------------------------------------
Receipt (payment) of mortality guarantee adj. 4,785 11,258 0 0
- ------------------------------------------------ ------------ ------------- ----------- ------------
358,796 773,666 114,838 130,784
------------ ------------- ----------- ------------
Account Total: 24,951,333 53,020,190 44,595,802 49,582,350
</TABLE>
H-6
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H
NOTES TO FINANCIAL STATEMENTS CONTINUED
4. SUMMARY OF CHANGES FROM UNIT TRANSACTIONS CONTINUED
<TABLE>
<CAPTION>
Legacy II Legacy III
Units Amount Units Amount
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Bond Account
Accumulation Units:
Contract purchases 67,545,512 $ 80,136,740 13,364,059 $ 14,154,820
- ------------------------------------------------
Terminated contracts & transfers to annuity
reserves (24,241,138) (33,142,189) (404,465) (424,215)
- ------------------------------------------------ ------------ ------------- ----------- ------------
43,304,374 46,994,551 12,959,594 13,730,605
Annuity Reserves:
Transfers from accum. Units & between accts. 615,032 691,290 123,284 132,811
- ------------------------------------------------
Annuity payments (91,077) (102,359) (3,066) (3,293)
- ------------------------------------------------
Receipt (payment) of mortality guarantee adj. (206) (234) 0 0
- ------------------------------------------------ ------------ ------------- ----------- ------------
523,749 588,697 120,218 129,518
------------ ------------- ----------- ------------
Account Total: 43,828,123 47,583,248 13,079,812 13,860,123
High-Yield Bond Account
Accumulation Units:
Contract purchases 71,467,210 184,270,318 23,184,054 24,783,776
- ------------------------------------------------
Terminated contracts & transfers to annuity
reserves (60,381,200) (160,961,554) (518,161) (581,153)
- ------------------------------------------------ ------------ ------------- ----------- ------------
11,086,010 23,308,764 22,665,893 24,202,623
Annuity Reserves:
Transfers from accum. Units & between accts. 281,001 602,849 180,292 195,211
- ------------------------------------------------
Annuity payments (128,221) (269,443) (6,899) (7,401)
- ------------------------------------------------
Receipt (payment) of mortality guarantee adj. (2,157) (4,844) 0 0
- ------------------------------------------------ ------------ ------------- ----------- ------------
150,623 328,562 173,393 187,810
------------ ------------- ----------- ------------
Account Total: 11,236,633 23,637,326 22,839,286 24,390,433
U.S Government/AAA-Rated Account
Accumulation Units:
Contract purchases 41,386,459 83,083,299 10,741,078 10,953,372
- ------------------------------------------------
Terminated contracts & transfers to annuity
reserves (75,125,421) (137,391,592) (2,855,925) (2,791,708)
- ------------------------------------------------ ------------ ------------- ----------- ------------
(33,738,962) (54,308,293) 7,885,153 8,161,664
Annuity Reserves:
Transfers from accum. Units & between accts. (3,273) (2,080) 315,587 331,202
- ------------------------------------------------
Annuity payments (119,164) (193,843) (14,183) (14,806)
- ------------------------------------------------
Receipt (payment) of mortality guarantee adj. (21,861) (37,097) (107) (114)
- ------------------------------------------------ ------------ ------------- ----------- ------------
(144,298) (233,020) 301,297 316,282
------------ ------------- ----------- ------------
Account Total: (33,883,260) (54,541,313) 8,186,450 8,477,946
Cash Management Account
Accumulation Units:
Contract purchases 268,850,528 437,685,502 28,016,677 28,789,775
- ------------------------------------------------
Terminated contracts & transfers to annuity
reserves (298,457,449) (477,381,751) (13,733,991) (14,362,271)
- ------------------------------------------------ ------------ ------------- ----------- ------------
(29,606,921) (39,696,249) 14,282,686 14,427,504
Annuity Reserves:
Transfers from accum. Units & between accts. (182,663) (238,314) 0 0
- ------------------------------------------------
Annuity payments (143,177) (192,442) 0 0
- ------------------------------------------------
Receipt (payment) of mortality guarantee adj. 1,305 1,762 0 0
- ------------------------------------------------ ------------ ------------- ----------- ------------
(324,535) (428,994) 0 0
------------ ------------- ----------- ------------
Account Total: (29,931,456) (40,125,243) 14,282,686 14,427,504
</TABLE>
H-7
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H
NOTES TO FINANCIAL STATEMENTS CONTINUED
4. SUMMARY OF CHANGES FROM UNIT TRANSACTIONS CONTINUED
<TABLE>
<CAPTION>
Legacy II Legacy III
Units Amount Units Amount
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Global Growth Account
Accumulation Units:
Contract purchases 81,389,511 $ 94,807,473 50,699,765 $ 54,736,214
- ------------------------------------------------
Terminated contracts & transfers to annuity
reserves (8,248,535) (16,701,300) (1,195,537) (1,342,871)
- ------------------------------------------------ ---------- ------------ ---------- ------------
73,140,976 78,106,173 49,504,228 53,393,343
Annuity Reserves:
Transfers from accum. Units & between accts. 123,148 129,435 159,025 175,393
- ------------------------------------------------
Annuity payments (4,358) (4,669) (6,739) (7,262)
- ------------------------------------------------
Receipt (payment) of mortality guarantee adj. 0 0 (103) (108)
- ------------------------------------------------ ---------- ------------ ---------- ------------
118,790 124,766 152,183 168,023
---------- ------------ ---------- ------------
Account Total: 73,259,766 78,230,939 49,656,411 53,561,366
---------- ------------ ---------- ------------
PRODUCT TOTAL $149,123,090 $500,699,300
- ------------------------------------------------ ============ ============
</TABLE>
5. SUMMARY OF UNITS OUTSTANDING AT 12/31/97
<TABLE>
<CAPTION>
Accumulation Reserve Unit Accumulation Reserve
Legacy II Investments Units Units Value Amount Amount Net Asset Total
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Legacy II
Growth Fund 1,371,456,096 3,276,283 $ 2.942 $ 4,034,333,274 $ 9,637,653 $ 4,043,970,927
International Fund 1,251,630,743 3,152,825 1.889 2,363,901,327 5,954,605 2,369,855,932
Growth Income Fund 2,042,635,917 4,760,223 2.727 5,570,035,673 12,980,586 5,583,016,259
Asset Allocation Fund 538,888,224 1,925,954 2.390 1,288,182,052 4,603,885 1,292,785,937
Bond Fund 112,840,010 563,924 1.135 128,038,263 639,878 128,678,141
High-Yield Bond Fund 295,795,685 523,596 2.253 666,318,704 1,179,469 667,498,173
U.S. Government/AAA-
Rated Securities Fund 232,571,089 734,916 1.697 394,672,212 1,247,150 395,919,362
Cash Management Fund 131,494,182 313,235 1.351 177,602,876 423,071 178,025,947
Global Growth Fund 70,350,506 118,790 1.076 75,700,581 127,824 75,828,405
------------- ---------- --------------- ----------- ---------------
Subtotal 6,047,662,452 15,369,746 14,698,784,962 36,794,121 14,735,579,083
Legacy II with GMDB
Rider
Growth Fund 50,809,398 -- 2.939 149,316,846 -- 149,316,846
International Fund 43,964,354 -- 1.886 82,911,160 -- 82,911,160
Growth Income Fund 87,728,733 -- 2.724 238,988,462 -- 238,988,462
Asset Allocation Fund 19,040,601 -- 2.388 45,470,596 -- 45,470,596
Bond Fund 3,171,343 -- 1.134 3,594,882 -- 3,594,882
High-Yield Bond Fund 9,318,441 -- 2.250 20,970,022 -- 20,970,022
U.S. Government/AAA-
Rated Securities Fund 7,484,513 -- 1.695 12,688,557 -- 12,688,557
Cash Management Fund 6,333,165 -- 1.349 8,545,332 -- 8,545,332
Global Growth Fund 2,790,470 -- 1.075 2,999,703 -- 2,999,703
------------- ---------- --------------- ----------- ---------------
Subtotal 230,641,018 -- 565,485,560 -- 565,485,560
------------- ---------- --------------- ----------- ---------------
TOTAL LEGACY II 6,278,303,470 15,369,746 $15,264,270,522 $36,794,121 $15,301,064,643
============= ========== =============== =========== ===============
</TABLE>
H-8
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H
NOTES TO FINANCIAL STATEMENTS CONTINUED
5. SUMMARY OF UNITS OUTSTANDING AT 12/31/97 CONTINUED
<TABLE>
<CAPTION>
Accumulation Reserve Unit Accumulation Reserve Net Asset
Legacy III Investments Units Units Value Amount Amount Total
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Legacy III
Growth Fund 12,933,461 514,923 $1.256 $ 16,241,826 $ 646,640 $16,888,466
International Fund 8,628,728 179,298 1.025 8,843,539 183,762 9,027,301
Growth Income Fund 31,735,011 719,767 1.187 37,674,736 854,484 38,529,220
Asset Allocation Fund 9,909,379 114,838 1.141 11,302,043 130,977 11,433,020
Bond Fund 2,561,568 120,218 1.081 2,768,578 129,934 2,898,512
High-Yield Bond Fund 3,665,424 173,394 1.096 4,017,386 190,043 4,207,429
U.S. Government/AAA-
Rated Securities Fund 1,559,073 301,297 1.067 1,663,299 321,439 1,984,738
Cash Management Fund 3,421,740 0 1.024 3,505,520 -- 3,505,520
Global Growth Fund 8,427,168 152,182 1.075 9,059,867 163,608 9,223,475
----------- --------- ------------ ---------- ------------
Subtotal 82,841,552 2,275,917 95,076,794 2,620,887 97,697,681
Legacy III with GMDB
Rider
Growth Fund 60,964,863 -- 1.255 76,481,573 -- 76,481,573
International Fund 44,692,847 -- 1.024 45,759,103 -- 45,759,103
Growth Income Fund 131,937,064 -- 1.186 156,474,168 -- 156,474,168
Asset Allocation Fund 34,571,585 -- 1.139 39,390,796 -- 39,390,796
Bond Fund 10,398,026 -- 1.080 11,226,674 -- 11,226,674
High-Yield Bond Fund 19,000,468 -- 1.095 20,804,333 -- 20,804,333
U.S. Government/AAA
Rated Securities Fund 6,326,080 -- 1.066 6,742,199 -- 6,742,199
Cash Management Fund 10,860,946 -- 1.023 11,115,710 -- 11,115,710
Global Growth Fund 41,077,061 -- 1.073 44,085,199 -- 44,085,199
----------- --------- ------------ ---------- ------------
Subtotal 359,828,940 -- 412,079,755 -- 412,079,755
----------- --------- ------------ ---------- ------------
TOTAL LEGACY III 442,670,492 2,275,917 $507,156,549 $2,620,887 $509,777,436
=========== ========= ============ ========== ============
</TABLE>
H-9
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H
NOTES TO FINANCIAL STATEMENTS CONTINUED
6. INVESTMENTS
Fund shares are purchased at the net asset value with net contract payments
(contract purchases less surrenders/withdrawals and amounts payable to the
Company for administrative and surrender charges) and with reinvestment of
distributions made by the funds. The following is a summary of fund shares
owned at 12/31/97.
<TABLE>
<CAPTION>
Growth- Asset
Growth International Income Allocation
Legacy II Combined Account Account Account Account
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Unit Transactions:
Accumulation units: $ 8,358,967,609 $2,003,869,722 $1,659,126,839 $2,866,827,684 $ 742,273,809
- ------------------------
Annuity reserves 25,061,775 6,497,773 4,653,049 7,970,551 3,032,551
- ------------------------ --------------- -------------- -------------- -------------- --------------
8,384,029,384 2,010,367,495 1,663,779,888 2,874,798,235 745,306,360
Accumulated net
investment Income 3,590,085,058 990,362,936 487,157,071 1,416,815,693 316,569,207
- ------------------------
Accumulated net realized
gain (loss) on
investments 427,287,573 202,797,593 81,071,588 121,510,140 21,201,350
- ------------------------
Net unrealized
appreciation
(depreciation) on
investments: 2,899,662,628 989,759,730 220,758,551 1,408,880,664 255,179,617
- ------------------------ --------------- -------------- -------------- -------------- --------------
$15,301,064,643 $4,193,287,754 $2,452,767,098 $5,822,004,732 $1,338,256,534
=============== ============== ============== ============== ==============
<CAPTION>
Growth- Asset
Growth International Income Allocation
Legacy III Combined Account Account Account Account
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Unit Transactions:
Accumulation units $ 498,080,980 $ 88,941,032 $ 57,713,747 $ 188,058,896 $ 49,451,566
- ------------------------
Annuity reserves 2,618,320 639,728 196,297 849,878 130,784
- ------------------------ --------------- -------------- -------------- -------------- --------------
500,699,300 89,580,760 57,910,044 188,908,774 49,582,350
Accumulated net
investment income 40,366,168 10,704,245 5,771,525 18,708,120 3,126,965
- ------------------------
Accumulated net realized
gain (loss) on
investments 4,201 527 (7,333) 667 (395)
- ------------------------
Net unrealized
appreciation
(depreciation) on
investments (31,292,233) (6,915,495) (8,887,830) (12,614,175) (1,885,103)
- ------------------------ --------------- -------------- -------------- -------------- --------------
$ 509,777,436 $ 93,370,037 $ 54,786,406 $ 195,003,386 $ 50,823,817
=============== ============== ============== ============== ==============
</TABLE>
H-10
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
U.S. Govt
High-Yield AAA-Rated Cash Global
Bond Bond Securities Management Growth
Account Account Account Account Account
- ----------------------------------------------------------------------------------
$118,997,145 $467,704,460 $275,537,472 $146,524,305 $78,106,173
628,697 882,339 928,647 343,402 124,766
- ------------ ------------ ------------ ------------ -----------
119,625,842 468,586,799 276,466,119 146,867,707 78,230,939
8,455,007 190,781,522 140,066,935 39,822,418 54,269
297,279 2,774,032 (3,534,889) 1,165,921 4,559
3,894,897 26,325,845 (4,390,246) (1,284,770) 538,340
- ------------ ------------ ------------ ------------ -----------
$132,273,025 $688,468,198 $408,607,919 $186,571,276 $78,828,107
============ ============ ============ ============ ===========
U.S. Govt
High-Yield AAA-Rated Cash Global
Bond Bond Securities Management Growth
Account Account Account Account Account
- ----------------------------------------------------------------------------------
$ 13,730,605 $ 24,202,623 $ 8,161,664 $ 14,427,504 $53,393,343
129,518 187,810 316,282 -- 168,023
- ------------ ------------ ------------ ------------ -----------
13,860,123 24,390,433 8,477,946 14,427,504 53,561,366
422,226 1,061,465 214,181 312,971 44,470
118 9 11,144 (1,065) 529
(157,282) (440,143) 23,665 (118,178) (297,692)
- ------------ ------------ ------------ ------------ -----------
$ 14,125,185 $ 25,011,764 $ 8,726,936 $ 14,621,232 $53,308,673
============ ============ ============ ============ ===========
</TABLE>
H-11
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H
NOTES TO FINANCIAL STATEMENTS CONTINUED
7. NET ASSETS
<TABLE>
<CAPTION>
Net
Percentage Shares Asset Value of Cost of Unrealized
Legacy II Investments of Net Outstanding Value Shares Shares Appreciation
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Growth Fund 27.4% 93,229,053.011 $44.98 $ 4,193,442,804 $ 3,203,683,074 $ 989,759,730
International Fund 16.0% 169,396,297.263 14.48 2,452,858,384 2,232,099,833 220,758,551
Growth Income Fund 38.0% 159,863,282.211 36.42 5,822,220,738 4,413,340,074 1,408,880,664
Asset Allocation Fund 8.8% 87,356,799.553 15.32 1,338,306,169 1,083,126,552 255,179,617
Bond Fund 0.9% 12,682,448.341 10.43 132,277,936 128,383,039 3,894,897
High-Yield Bond Fund 4.5% 46,964,102.195 14.66 688,493,738 662,167,893 26,325,845
U.S. Government/AAA-
Rated Securities Fund 2.7% 36,812,889.048 11.10 408,623,068 413,013,314 (4,390,246)
Cash Management Fund 1.2% 16,946,253.787 11.01 186,578,254 187,863,024 (1,284,770)
Global Growth Fund 0.5% 7,312,711.250 10.78 78,831,027 78,292,687 538,340
------ --------------- --------------- --------------
LEGACY II TOTAL 100.0% $15,301,632,118 $12,401,969,490 $2,899,662,628
====== =============== =============== ==============
<CAPTION>
Legacy III Investments
<S> <C> <C> <C> <C> <C> <C>
Growth Fund (class II
shares) 18.3% 2,076,351.452 $44.97 $ 93,373,525 $ 100,289,020 $ (6,915,495)
International Fund
(class II shares) 10.7% 3,783,734.077 14.48 54,788,469 63,676,299 (8,887,830)
Growth Income Fund
(class II shares) 38.2% 5,355,964.534 36.41 195,010,669 207,624,844 (12,614,175)
Asset Allocation Fund
(class II shares) 10.0% 3,319,772.098 15.31 50,825,711 52,710,814 (1,885,103)
Bond Fund (class II
shares) 2.8% 1,354,334.833 10.43 14,125,712 14,282,994 (157,282)
High-Yield Bond Fund
(class II shares) 4.9% 1,707,351.222 14.65 25,012,695 25,452,838 (440,143)
U.S. Government/AAA-
Rated Securities Fund
(class II shares) 1.7% 786,239.905 11.10 8,727,263 8,703,598 23,665
Cash Management Fund
(class II shares) 2.9% 1,328,045.420 11.01 14,621,780 14,739,958 (118,178)
Global Growth Fund
(class II shares) 10.5% 4,949,923.324 10.77 53,310,674 53,608,366 (297,692)
------ --------------- --------------- --------------
Legacy III Total 100.0% $ 509,796,498 $ 541,088,731 $ (31,292,233)
====== --------------- --------------- --------------
ACCOUNT "H" TOTAL $15,811,428,616 $12,943,058,221 $2,868,370,395
=============== =============== ==============
</TABLE>
8. NEW INVESTMENT FUNDS
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
Account contract owners.
9. DAILY UNIT VALUATION CALCULATIONS
Effective October 1996, the daily unit value calculation process was
transferred from the Company to the Delaware Services Company, an affiliate of
Lincoln National Corporation. Costs associated with the calculation of the unit
values are paid by the Company.
H-12
<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 H
We have audited the accompanying statement of net assets of
Lincoln National Variable Annuity Account H ("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 management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. Our procedures included confirmation
of securities owned as of December 31, 1997, by
correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial
position of Lincoln National Variable Annuity Account H at
December 31, 1997, the results of its operations for the
year then ended, and the changes in its net assets for each
of the two years in the period then ended in conformity with
generally accepted accounting principles.
Fort Wayne, Indiana
March 11, 1998
H-13
<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 H
REGISTRATION STATEMENT 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 for the Variable Account 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. Part B The following Statutory Financial Statements and Schedules of
Lincoln National Life Insurance Company are included in the SAI:
Balance Sheets--Years ended December 31, 1997 and 1996
Statements of Income--Years ended December 31, 1997, 1996 and 1995
Statements of Capital and Surplus--Years ended December 31, 1997, 1996, and 1995
Notes to Financial Statements--December 31, 1997
Supplemental Schedule of Selected Statutory Basis Financial Data--December 31,
1997
Report of Ernst & Young LLP, Independent Auditors
<PAGE>
Item 24. (Continued)
(b) List of Exhibits
(1) Resolutions of the Board of Directors of the Lincoln National Life
Insurance Company establishing Separate Account H are incorporated herein
by reference to Registration Statement on Form N-4 (33-27783) filed on
December 5, 1996.
(2) None.
(3)(a) Underwriting Agreement incorporated herein by reference to Registration
Statement on Form N-4 (33-27783) filed on March 31, 1997.
(b) Amendment to Underwriting Agreement
(3)(c) Selling Group Agreement
(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 of Form
S-6 (333-40745) filed on November 21, 1997.
(8)(b) Participation Agreement incorporated herein by reference to Registration
Statement on Form N-4 (33-27783) filed on March 31, 1997.
(8)(c) Amendment to Participation Agreement incorporated herein by reference to
Registration Statement on Form N-4 (33-27783) filed on March 31, 1997.
(8)(d) Amendment to Indemnification Agreement incorporated herein by reference
to Registration Statement on Form N-4 (33-27783) filed on March 31, 1997.
(9) Consent and Opinion of Jeremy Sachs, Senior Counsel, Lincoln National
Life Insurance Company as to the legality of securities being registered
incorporated herein by reference to Registration Statement on Form N-4
(33-27783) filed on March 31, 1997.
(10) Consent of Ernst & Young LLP, Independent Auditors.
(13) Schedule for Computation of Performance Quotations is incorporated herein
by reference to Registration Statement on Form N-4 (33-27783) filed on
December 5, 1996.
(14) Other Exhibits:
(a) Organizational Chart of the Lincoln National Insurance
Holding Company System
(b) Books and Records Report
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 McMeekin** Director
Reed P. Miller* Vice President
Ian M. Rolland** Director
Lawrence T. Rowland*** Executive Vice President
Keith J. Ryan* Senior Vice President,
Chief Financial Officer and Assistant Treasurer
Richard C. Vaughan** Director
Roy V. Washington* Vice President
Janet C. Whitney** Vice President and Treasurer
C. Suzanne Womack** Secretary and Assistant Vice President
*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
<PAGE>
Item 26.
PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
WITH THE DEPOSITOR OR REGISTRANT
See Exhibit 14(b): Organizational Chart of the Lincoln National Insurance
Holding Company System.
Item 27.
NUMBER OF CONTRACTOWNERS
As of January 31, 1998, there were 247,422 (variable and fixed) Contract
Owners under Account H.
Item 28. Indemnification
See prior filings.
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
Item 32
- -------
(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 a 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) The Lincoln National Life Insurance Company hereby represents that the fees
and charges deducted under the contract, in the aggregate, are reasonable
in relation to the services rendered, the expenses expected to be incurred,
and the risks assumed by The Lincoln National Life Insurance Company.
(e) Registrant hereby represents that it is relying on the American Council of
Life Insurance (avail. Nov. 28, 1988) no-action letter with respect to
Contracts used in connection with retirement plans meeting the requirements
of Section 403(b) of the Internal Revenue Code, and represents further that
it will comply with the provisions of paragraphs (1) through (4) set forth
in that no-action letter.
<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 March, 1998.
LINCOLN NATIONAL VARIABLE ANNUITY
ACCOUNT H (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 March 27, 1998
- ------------------------ Officer & Director
Gabriel L. Shaheen (Principal Executive
Officer)
Executive Vice President, _______, 1998
- ------------------------ General Counsel & Director
Jack D. Hunter
Executive Vice President _______, 1998
- ------------------------ and Director
Lawrence T. Rowland
/s/ Keith J. Ryan Senior Vice President, and March 27, 1998
- ------------------------ Assistant Treasurer and
Keith J. Ryan Chief Financial Officer
(Principal Financial
Officer and Principal
Accounting Officer)
/s/ Ian M. Rolland Director March 27, 1998
- ------------------------
Ian M. Rolland
/s/ Jon A. Boscia Director March 27, 1998
- ------------------------
Jon A. Boscia
/s/ H. Thomas McMeekin Director March 27, 1998
- ------------------------
H. Thomas McMeekin
/s/ Richard C. Vaughan Director March 27, 1998
- ------------------------
Richard C. Vaughan
</TABLE>
<PAGE>
Exhibit 3(b)
AMENDMENT TO THE PRINCIPAL UNDERWRITING AGREEMENT
This amendment, dated as of January 14, 1998 (this "Amendment"), to a certain
Principal Underwriting Agreement effective on the 12th day of July, 1989 (the
"Original Agreement") as amended April 30, 1997, 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 H 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, as amended, provides for AFD to serve as
principal underwriter for certain variable annuity contracts defined more fully
therein and marketed under the name "American Legacy II" and "American Legacy
III" (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 amended 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 as previously amended, 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:
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,
<PAGE>
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. Persistency Risk Sharing Agreement ("PRSA"). A new PRSA for the
Contracts which shall supersede all persistency risk sharing understandings
and proposals between the Parties, including the letters dated September
28, 1994 regarding "Death Benefit Adjustment Cost Sharing" and May 15, 1997
regarding a proposed American Legacy III Persistency Risk Sharing
Agreement, will be executed. The new PRSA will clarify that AFD will share
the persistency risk for experience only in the event that one or more of
the following occurs:
a. AFD has elected to terminate the Original Agreement, as amended
and is not providing wholesaler support for American Legacy III or a
successor contract, or
b. Capital Research and Management Company (or an affiliated
company) has elected to terminate the Investment Advisory and Service
Agreement in effect with respect to the Series, or
c. American Variable Insurance Series has elected to terminate any
Fund Participation Agreement with respect to the Contracts.
3. Lincoln Financial Advisors ("LFA"). Schedule A - III dated August 30,
1997 is hereby amended to provide that sales through LFA (referred to in
Schedule A - III 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. New sales is defined as Contracts
established on or after January 1, 1998. AFD undertakes to provide
wholesaler support commensurate with LFA's high American Legacy sales
ranking. This item will be implemented on January 1, 1998. For purposes of
the marketing reallowance and for other purposes as appropriate, LFA shall
include the Lincoln-owned CIGNA Financial Advisors ("CFA"), effective
January 1, 1998.
4. Best Deal Provision. Lincoln National shall make available to AFD for
distribution through an AFD-formed selling group, at AFD's option, any
variable contract type or variable contract feature issued by Lincoln
National through broker-dealers on the same terms and conditions. Lincoln
National shall make available to AFD any proposed variable contract type to
be issued through broker-dealers prior to introduction. AFD shall use its
best efforts to provide wholesaler support for American Legacy III and
successor contracts as long as the Original Agreement, as amended or
similar agreement is in effect that is at least comparable to the level of
support provided by AFD for non-Lincoln contracts. AFD will recommend to
the Series' Board of Trustees that Lincoln National may use at its option
any fund of the Series in any of its contracts.
2
<PAGE>
5. 1035 Exchanges. Lincoln National and AFD each agree not to seek or
encourage exchanges between the Contracts and either any non-Lincoln
National contract or other Lincoln National contract. Both parties will
give their respective "best efforts" to discourage such exchanges. The
payment of compensation in connection with such an exchange will not be a
violation of this agreement; however, either Party may, if necessary, cause
commissions not to be paid on exchanges of this type that do occur.
6. Names. Lincoln National agrees that it will not issue any insurance
contract using names that include any following terms unless AFD is serving
as principal underwriter for such contract: "American" or "Capital" or
"Legacy" or "Estate Builder" or "Personal Defined Benefit Plan" or
"Shareholder Advantage."
7. Bank Wholesaling. Lincoln National agrees to provide funding to AFD to
stimulate sales of American Legacy III or a successor contract ("American
Legacy") within the "banking distribution channel" ("banks"). AFD agrees to
focus its wholesaling efforts on banks in exchange for receiving such
funding.
Lincoln National will provide AFD with an increase in its deposit-based
marketing allowance based on the level of American Legacy sales in banks.
The level of American Legacy Sales that will obligate Lincoln National to
provide the funding and the amounts of such funding will be determined from
the table below.
The definition of "banks" will be by mutual agreement of the parties.
Lincoln National and AFD agree to meet at least once a year during the
period Lincoln National is providing funding to review this arrangement.
AFD will share at least annually with LNL in writing an advance
recommendation as to how the funding for bank wholesaling will be spent.
<TABLE>
<CAPTION>
Year LNL will pay AFD this Up to a If at least this percent of average monthly
percentage of deposits of maximum American Legacy sales for the previous
the prior year: deposit level of: year are attributable to banks:
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998 .066% $1,500,000,000 0%
- -------------------------------------------------------------------------------------------------------
1999 .05% $2,000,000,000 3%
- -------------------------------------------------------------------------------------------------------
2000-2004 .05% $2,000,000,000 At least 6%, but not more than 10%
$3,000,000,000 At least 10%, but not more than 20%
$4,000,000,000 At least 20%, but not more than 25%
$5,000,000,000 At least 25%
- -------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
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 H
Of the Lincoln National Life Insurance
Attest: /s/ Kelly D. Clevenger Company
-----------------------
By: /s/Jeffrey K. Dellinger
------------------------
Attest:/s/Michael J. Downer American Funds Distributors, Inc.
------------------------
Michael J. Downer
Counsel and Secretary By: /s/ J. Cliffton Massar
------------------------
J. Cliffton Massar
Senior Vice President
4
<PAGE>
Exhibit 3(c)
AMERICAN FUNDS DISTRIBUTORS
----------------------------------------------------------------
333 South Hope Street . Los Angeles, California 90071
Telephone 800/421-9900, ext. 11
LOGO
THE AMERICAN LEGACY--SEPARATE ACCOUNT E
AMERICAN LEGACY LIFE--SEPARATE ACCOUNT F
AMERICAN LEGACY II--SEPARATE ACCOUNT H
AMERICAN LEGACY VARIABLE LIFE-- SEPARATE ACCOUNT J
THE AMERICAN LEGACY GROUP
VARIABLE ANNUITY--SEPARATE ACCOUNT 50
AMERICAN LEGACY GROUP II
VARIABLE ANNUITY--SEPARATE ACCOUNT 51
AMERICAN LEGACY RETIREMENT
INVESTMENT PLAN--SEPARATE ACCOUNT 52
OF THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
SELLING GROUP AGREEMENT
Gentlemen:
We have entered into Principal Underwriting Agreements with The Lincoln
National Life Insurance Company ("LNL") and Separate Accounts E, F, H, J, 50,
51 and 52 of LNL under which we are appointed to form a selling group of duly
registered and licensed brokers or dealers to distribute Individual and Group
Flexible Premium Deferred Variable Annuity Contracts (the "Contracts") issued
by LNL through Separate Accounts E and H (individual) and 50, 51 and 52
(group); and Individual Flexible Premium Variable Life Insurance Policies (the
"Policies") issued by LNL through Separate Accounts F and J. The Contracts and
Policies are considered securities under the Securities Act of 1933. We have
also been appointed to distribute certain fixed single premium immediate
annuity Contracts issued by LNL. This Agreement is subject to all provisions
of the relevant Principal Underwriting Agreements among the parties mentioned
above. This Agreement on your part runs to us and to LNL and Separate Accounts
E, F, H, J, 50, 51 and 52 and is for the benefit of and enforceable by each
party. The terms "you" and "your" as used herein refer to the firm actually
signing this Agreement as well as the signing firm's insurance agency
subsidiaries, if any.
You are authorized to offer and sell the Contracts and Policies subject to
the following conditions:
1. You represent that you are a properly registered and licensed broker or
dealer under applicable federal and state securities laws and regulations and
a member in good standing of the NASD and agree to notify us immediately if
you cease to be so registered or licensed or a member in good standing of that
Association. (The provisions of the preceding sentence do not apply to a
broker or dealer located in a foreign country and doing business outside the
jurisdiction of the United States.)
2. You agree to abide by all rules and regulations of the NASD, including
its Rules of Fair Practice, and to comply with all applicable federal and
state laws, rules and regulations (all of which shall control and override any
provision to the contrary in this Agreement).
You are responsible for such supervision of your registered representatives
and other associated persons which will enable you to ensure that your
registered representatives and associated persons are in compliance with
applicable securities laws, rules, regulations and statements of policy
promulgated thereunder.
<PAGE>
Your authority under this Agreement extends only to the Contracts and
Policies described herein.
3. You represent that you will not sell any Contracts or Policies until you
are a properly licensed insurance agent duly appointed by LNL.
4. You will distribute the Contracts and Policies only in those
jurisdictions in which the Contracts and Policies are registered or qualified
for sale and only through your duly licensed registered representatives (in
accordance with the rules of the NASD) who are also fully licensed with LNL to
sell the Contracts or Policies in the applicable jurisdictions (in accordance
with the insurance regulations and laws of such jurisdictions).
5. All applications and initial and subsequent payments under the Contracts
or Policies collected by you will be remitted promptly by you to LNL at such
address as LNL may from time to time designate.
6. You agree to indemnify and hold LNL harmless from any liabilities (and
reasonable attorney fees and court costs) that may result from your actions or
omissions or those of your registered representatives and other associated
persons.
7. All applications are subject to acceptance or rejection by LNL at its
sole discretion. LNL will make payment of commissions directly to you with
respect to the sale of the Contracts or Policies according to the schedule set
forth below except that no commissions will be paid on Contracts that are not
initially subject to the contingent deferred sales charge.
THE AMERICAN LEGACY
VARIABLE ANNUITY COMMISSIONS TO DEALERS
4.00%
ALL INDIVIDUAL CONTRACT PURCHASE
PAYMENTS SOLD BY DEALERS
An annual .25% continuing commission will be paid to dealers on the value
of all Contract purchase payments beginning in the second Contract year.
This compensation will be paid at the end of each calendar quarter and will
be calculated as follows: At the end of each calendar quarter, LNL will
calculate and pay for all Contracts which have been in force for 15 months
or more as of the last day of the quarter, an amount equal to .0625% of an
amount equal to the quarter ending account value less any deposits made in
the previous 15 months. This continuing commission is not paid on Contracts
that have been annuitized.
An additional annual .30% fee will be paid to dealers maintaining a sales
volume of at least $7,500,000 in each calendar year. The allowance will be
paid on all purchase payments received during the calendar year. Payments
will be made to dealers every quarter after the $7,500,000 sales level is
attained. Dealers must attain the $7,500,000 sales volume each calendar
year to qualify for additional allowance payments.
With respect to each Contract year's purchase payments, an annual .40%
persistency bonus will be paid to dealers on any "Increased Guaranteed
Minimum Death Benefit" amount as described in the Contract. The first bonus
will be payable at the time the guaranteed minimum death benefit is
adjusted, which will be on the seventh Contract anniversary of each such
purchase payment. Subsequent bonus payments will be made for the next seven
years on each applicable Contract anniversary date, provided the Contract
remains in effect. The amount of each bonus payment will remain constant
during the period unless the "Increased Guaranteed Minimum Death Benefit"
amount is reduced due to withdrawals. Withdrawals are applied to reduce the
"Increased Guaranteed Minimum Death Benefit" amount on a first-in first-out
basis, so subsequent bonus payments would be reduced accordingly. The
persistency bonus will not be paid on Contracts that have been annuitized.
After American Legacy II becomes available, with respect to The American
Legacy, purchase payments will generally be accepted only in connection
with existing Contracts.
COMMISSIONS TO DEALERS
THE AMERICAN LEGACY 4.00%
VARIABLE ANNUITY--ANNUITIZATION
ALL PURCHASE PAYMENTS HELD
FIVE YEARS AND INDIVIDUAL CONTRACT EARNINGS
WHICH ARE ANNUITIZED (CONTRACTS ISSUED BY
LNL THAT ARE ANNUITIZED SOLELY ON A FIXED BASIS
WILL RESULT IN A SEPARATE CONTRACT BEING ISSUED.)
2
<PAGE>
AMERICAN LEGACY II
VARIABLE ANNUITY COMMISSIONS TO DEALERS
INDIVIDUAL CONTRACT PURCHASE 4.70% ON ALL INDIVIDUAL
PAYMENTS SOLD BY DEALERS CONTRACT PURCHASE PAYMENTS TO
CONTRACTS WITH ANNUITANTS
UNDER AGE 81
(2.50% on all individual
Contract Purchase Payments to
Contracts with annuitants age
81 and above)
An annual .25% continuing commission will be paid to dealers on the value
of all Contract purchase payments beginning in the second Contract year.
The compensation will be paid at the end of each calendar quarter and will
be calculated as follows: At the end of each calendar quarter, LNL will
calculate and pay for all Contracts which have been in force for 15 months
or more as of the last day of the quarter, an amount equal to .0625% of an
amount equal to the quarter ending account value less any deposits made in
the previous 15 months. This continuing commission is not paid on Contracts
that have been annuitized.
An additional annual .30% fee will be paid to dealers maintaining a sales
volume of at least $7,500,000 in each calendar year. The allowance will be
paid on all purchase payments received during the calendar year, except on
any purchase payments on which you have received commissions in excess of
4.70%. Payments will be made to dealers every quarter after the $7,500,000
sales level is attained. Dealers must attain the $7,500,000 sales volume
each calendar year to qualify for additional allowance payments. Additional
fees may be paid to dealers after attainment of certain additional sales
volume levels, provided the dealer has agreed to the terms contained in a
letter agreement that supplements this agreement.
With respect to each Contract year's purchase payments, an annual .50%
persistency bonus will be paid to dealers on any "Increased Guaranteed
Minimum Death Benefit" amount as described in the Contract. The first bonus
will be payable at the time the guaranteed minimum death benefit is
adjusted, which will be on the seventh Contract anniversary of each such
purchase payment. Subsequent bonus payments will be made for the next seven
years on each applicable Contract anniversary date, provided the Contract
remains in effect. The amount of each bonus payment will remain constant
during the period unless the "Increased Guaranteed Minimum Death Benefit"
amount is reduced due to withdrawals. Withdrawals are applied to reduce the
"Increased Guaruanteed Minimum Death Benefit" amount on a first-in first-out
basis, so subsequent bonus payments would be reduced accordingly. The
persistency bonus will not be paid on Contracts that have been annuitized.
A .25% commission is all that will be paid on transfers from The American
Legacy to American Legacy II.
AMERICAN LEGACY II
VARIABLE ANNUITY--ANNUITIZATION COMMISSIONS TO DEALERS
ALL PURCHASE PAYMENTS HELD 4.70%
FIVE YEARS AND INDIVIDUAL CONTRACT
EARNINGS WHICH ARE ANNUITIZED
(CONTRACTS ISSUED BY LNL THAT ARE
ANNUITIZED SOLELY ON A FIXED BASIS WILL
RESULT IN A SEPARATE CONTRACT BEING
ISSUED.)
THE AMERICAN LEGACY
GROUP VARIABLE ANNUITY COMMISSIONS TO DEALERS
ALL GROUP CONTRACT PURCHASE 1.00% OR 3.00%
PAYMENTS SOLD BY DEALERS
(AS SPECIFIED IN
THE CONTRACT)
3
<PAGE>
After American Legacy Group II Variable Annuity becomes available, with
respect to The American Legacy Group Variable Annuity, purchase payments
will generally be accepted only in connection with exiting Contracts.
AMERICAN LEGACY
GROUP II VARIABLE ANNUITY COMMISSIONS TO DEALERS
ALL GROUP CONTRACT PURCHASE 3.25% ON ALL CONTRACT PURCHASE
PAYMENTS SOLD BY DEALERS PAYMENTS SOLD IN CONNECTION
WITH CONTRACTS ESTABLISHED ON
OR AFTER OCTOBER 15, 1993
(3.35% on all Contract
Purchase Payments sold in
connection with Contracts
established on or after
December 1, 1991 and prior to
October 15, 1993)
(3.50% on all Contract
Purchase Payments sold in
connection with Contracts
established prior to December
1, 1991)
An annual .25% continuing commission will be paid to dealers on the value
of all Contract purchase payments beginning in the second Contract year.
This compensation will be paid at the end of each calendar quarter and will
be calculated as follows: At the end of each calendar quarter, LNL will
calculate and pay for all Contracts which have been in force for 15 months
or more as of the last day of the quarter, an amount equal to .0625% of an
amount equal to the quarter ending account value less any deposits made in
the previous 15 months.
AMERICAN LEGACY
RETIREMENT INVESTMENT PLAN
Following the establishment of a Contract, a commission of 3.00% on all
Contract purchase payments made during the first twelve months will be paid
to dealers. During the second and third years following the establishment
of a Contract, a commission of 2.00% on all Contract purchase payments made
during such years will be paid to dealers. Once a Contract has been
effective for 13 full calendar quarters, an annual .40% continuing
commission will be paid to dealers on the value of all Contract purchase
payments. This compensation will be paid at the end of each calendar
quarter in an amount equal to .10% of quarter ending account value.
After the American Legacy Retirement Investment Plan becomes available,
purchase payments with respect to the American Legacy Group II Variable
Annuity will generally be accepted only in connection with existing
Contracts.
AMERICAN LEGACY LIFE COMMISSIONS TO DEALERS
ALL PREMIUMS FROM POLICIES 5.50%
SOLD BY DEALERS
An annual .25% continuing commission will be paid to dealers on the value
of all Policy premiums beginning in the second Policy year. This
compensation will be paid at the end of each calendar quarter and will be
calculated as follows: At the end of each calendar quarter, LNL will
calculate and pay for all Policies which have been in force for 15 months
or more as of the last day of the quarter, an amount equal to .0625% of an
amount equal to the excess of the Policy value over loans as of the last
day of the quarter.
An additional annual .25% fee will be paid to dealers maintaining a sales
volume of at least $2,000,000 in each calendar year. This fee will be paid
on all premiums received during the calendar year, except on any premiums
on which you have received commissions in excess of 5.50%. Payments will be
made to dealers every quarter after the $2,000,000 sales level is attained.
Dealers must attain the $2,000,000 sales volume each calendar year to
qualify for additional allowance payments.
4
<PAGE>
AMERICAN LEGACY VARIABLE LIFE COMMISSIONS TO DEALERS
ALL INDIVIDUAL POLICIES SOLD BY DEALERS FIRST YEAR:
80% of Commissionable Premium
(as specified in product rate
book for American Legacy
Variable Life) plus 3% of
excess premium.
RENEWAL (YEARS 2 THROUGH 10):
3% of premiums
SERVICE FEES (YEARS 11+):
3% of premiums
ASSET PARTICIPATION FEE:
.25% of net Policy Value (net
of policy loans starting at
the end of policy year 3 for
all years).
At the end of each calendar quarter, LNL will calculate and pay the above
mentioned Asset Participation Fee for all policies which have been in force
for 39 months or more as of the last day of the quarter, an amount equal to
.0625% of an amount equal to the excess of the Policy Value over loans as
of the last day of the quarter.
Any commission paid on a Contract or Policy that is cancelled under the
Contract's or Policy's review provisions will be repaid to LNL or charged
against your account.
8. We will use reasonable efforts to provide information and marketing
assistance to you, including providing you without charge reasonable
quantities of advertising materials, sales literature, reports, current
Prospectuses of the Contracts or Policies and of the underlying variable
funding vehicle, the American Variable Insurance Series.
9. In making all offers of the Contracts or Policies you will deliver the
applicable currently effective Prospectuses.
10. You are to offer and sell the Contracts or Policies only at the regular
public offering price currently determined by the applicable Separate Account
in the manner described in the current applicable Prospectus or Contract or
Policy and will make no representation not included in the Prospectus or
Contract or Policy or in any authorized supplement material. This Agreement is
in all respects subject to all provisions of the current applicable
Prospectuses.
11. We will deliver and you will use only sales literature and advertising
material which conforms to the requirements of federal and state laws and
regulations and which have been authorized by LNL and us.
12. The signing of this Agreement does not obligate LNL to license any
particular registered representative as a salesman of Contracts or Policies.
All licensing matters under any applicable state insurance law shall be
handled directly by you and the registered representative involved, but LNL
must be furnished all required proof of state insurance licensing before
commission payments may be made.
13. Prior to soliciting the sale of a Contract to any plan qualified under
Section 403(b) of the Internal Revenue Code it is necessary to first obtain
approval from LNL. Please contact American Funds Distributors, Inc. to begin
the approval process. American Legacy II (individual or group) is not
available with respect to plans qualified under Section 403(b) (except in
connection with transfers).
14. You understand that with respect to American Funds Distributors, Inc.
you are acting in the capacity of an independent contractor.
15. Any party to this Agreement may cancel at any time upon written notice
to all other parties, effective upon receipt.
16. All communications to us should be sent to the above address. All
communications to LNL should be sent to their address, which is listed below.
Any notice to you shall be duly given if mailed or telegraphed to you at the
address specified by you below.
17. The schedules of commissions, bonuses and allowances in this Agreement
apply to Contracts and Policies initially sold through you. Compensation on
Contracts and Policies initially sold through another dealer for which you
become the supervising dealer will be paid to you based on the original
dealer's schedule of commissions, bonuses and allowances.
5
<PAGE>
Three originals of this Agreement should be executed. Two of the originals
should be returned to us for our files. The Agreement shall be effective as of
the date of acceptance by you, but only upon receipt by us of the two
originals. This Agreement may be amended by notification from us and orders
received following such notification shall be deemed to be an acceptance of
such amendments. This Agreement shall be construed in accordance with the laws
of the State of California.
Very truly yours,
American Funds Distributors, Inc.
333 South Hope Street
Los Angeles, CA 90071
LOGO
By:________________________________________
The Lincoln National Life Insurance
Company
1300 South Clinton Street
Fort Wayne, IN 46801
LOGO
By:________________________________________
Accepted:
- ----------------------------------
Firm
By: ______________________________
Signature of Officer or Partner
- ---------------------------------- Print Name of Officer or Partner
Address: _________________________
-------------------------
Date: _________________________
6
<PAGE>
Exhibit 4(a)
Abraham Lincoln
XX-0123456
[LINCOLN HEAD LOGO]
LINCOLN NATIONAL
LIFE INSURANCE CO.
--------------------
A part of LINCOLN NATIONAL CORPORATION
ANNUITY CONTRACT
Flexible Premium 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 10-DAY RIGHT TO EXAMINE CONTRACT. Within 10 days after this Contract
is first received, it may be cancelled for any reason without penalty (e.g., no
contingent deferred sales charge will be deducted) by delivering or mailing it
to the Home Office of LNL. Upon cancellation, 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 25338 4/89
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Article Page
<S> <C> <C>
1 Purchase Payments....................................... 4
2 Benefits................................................ 5
3 Beneficiary............................................. 8
4 General Provisions...................................... 9
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 25338 4/89
<PAGE>
CONTRACT DATA
Contract Number XX-0123456
Annuitant Abraham Lincoln
Age at Issue 35
Contract Date April 1,1989
Purchase Payment $1,500.00
Purchase Payment Frequency Monthly
Maturity Date April 1, 2039
Owner
Abraham Lincoln
Mary Lincoln
Todd Lincoln
Beneficiary Designation
PLEASE REFER TO THE CLIENT INFORMATION PROFILE FOR BENEFICIARY DESIGNATION.
Form 25338 Page 3 10/96
<PAGE>
ARTICLE I
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 made once, once each year, twice each year, four times
each year, or once each month. 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
Variable Annuity Account H (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 six 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 or by telephone transfer provided LNL has a telephone
authorization form completed by the owner. 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. Growth Fund
2. Growth-Income Fund
3. Asset Allocation Fund
4. High-Yield Bond Fund
5. U.S. Government/AAA-Rated Securities Fund
5. Cash Management Fund
7. 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 judgement
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 the Variable Account in to a Fund. 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.
The value of a sub-account is the number of units in the sub-account multiplied
by the value or an accumulation unit in the sub-account.
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 as of the immediately preceding
Valuation Date, multiplied by the "Net Investment Factor" of that sub-account
for the current Valuation Period. In order to arrive at the Net Investment
Factor, a "Gross Investment Rate" is first determined for each Fund for the
Valuation Period. The "Gross Investment Rate" for the Valuation Period is equal
to:
a) the investment income of the Fund for the Valuation Period; 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 (0.60% on
Form 25338 Page 4 4/89
<PAGE>
that portion of the Fund's assets not exceeding $30,000,000 plus 0.50% on
that portion of the Fund's assets in excess of $30,000,000); divided by
g) the net 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 1.35% for each day of
the Valuation Period, plus or minus an adjustment for any taxes attributable to
the operation of the Variable Account. This charge consists of 1.25% for
mortality and distribution expense risks and 0.10% for administrative expenses.
(see Section 2.10)
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 Valuation 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% for 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 accountvalue must be at least
$300.00. If not, and if Purchase Payments have not been made 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 or by telephone provided LNL has a
telephone authorization form completed by the Owner. Amounts transferred to the
sub-account(s) will purchase Accumulation Units as described in Section 1.03
A transfer will result in the purchase of Accumulation Units in one sub-account,
and the redemption of Accumulation Units in the other sub-account. Such a
transfer will be accomplished at relative Accumulation Unit values as of the
Valuation Date immediately following receipt of the transfer request. The
valuation of Accumulation Units is described in Section 1.04.
The minimum transfer amount is $300 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 $300, the entire amount held in that sub-
account/fixed portion will be transferred with the transfer amount.
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. Transfers cannot be made during the first
30 days after the issue date of the Contract and cannot be elected more than six
times every Contract Year. LNL reserves the right to waive any of these
restrictions.
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.
Form 25338 Page 5 4/89
<PAGE>
If an Annuity Payment Option is not chosen prior to the Maturity Date, payments
will commence to the Annuitant 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
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 annuity
payments commence. The election must be made not later than thirty days prior to
the time annuity payments commence.
By Beneficiary
At the time proceeds are payable to a Beneficiary, a Beneficiary may choose or
change any Annuity Payment Option if 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 with the guarantee that upon death a payment will be made
of the value of the number of Annuity Units equal to the excess, if any, of
(a) 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 paid prior to death.
c) Joint Life Annuity, Guaranteed Period -- Payments will be made during the
joint life of the Annuitant and a Joint Annuitant of the Annuitant's
choice. 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
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 in writing by LNL.
At the time Annuity Payments start under the provisions of this Contract, the
Owner may elect to have the total account 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 Annuity Commencement Date.
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% 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 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
The first Variable Annuity Payment is sub-divided into components each of which
represents the product of: (a) the percentage elected by the Contract Owner of a
specific sub-account the performance of which will determine future Variable
Annuity Payments, and (b) the entire first Variable Annuity Payment. Each
Variable Annuity Payment after the first payment attributable to a specific sub-
account will be determined by multiplying the Annuity Unit Value for that sub-
account for the date each payment is due by a constant number of Annuity Units.
This constant for each specific sub-account is determined by dividing the
component of the first payment attributable to such sub-account as described
above by the Annuity Unit Value for that sub-account for the date the first
payment is due. The total Variable Annuity Payment will be the sum of the
payments attributable to each sub-account.
The Annuity Unit Value for any Valuation Period for any sub-account is
determined by multiplying the
Form 25338 Page 6 4/89
<PAGE>
Annuity Unit Value for the immediately preceding Valuation Period by the product
of (a) 0.9998926 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 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 such as a certified
copy of a birth certificate.
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 whose life the payment is
based is alive when each payment is due.
2.08 CHANGE IN ANNUITY PAYMENT
A change in the Annuity Payment Option may not be made after Annuity Payments
commence.
2.09 ASSIGNMENT
This Contract may not be assigned.
2.10 ADMINISTRATIVE CHARGES
On the last business day of each Contract Year, LNL will deduct a $35.00
Administrative Charge from the account value. The Administrative Charge will
also be deducted from the account value at surrender. 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 Administrative 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 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.
The deduction of the Administrative Charge from each sub-account on a pro-rata
basis shall be treated as a redemption of Accumulation Units in the respective
sub-accounts. This charge will be deducted from the account value on the last
Valuation Date of each Contract Year. The Valuation Date is described in Section
1.04.
For the purposes of this Section, the fixed portion of the Contract is
considered a sub-account.
In addition, LNL will make a daily charge at a rate of 0.10% per annum which
will be deducted from the Variable Account during the accumulation and payout
periods. See Section 1.04
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 LNL receives 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 $35.00 Administrative Charge.
The Contingent Deferred Sales Charge is calculated separately for each Contract
Year's Purchase Payments to which a charge applies. LNL assumes that Purchase
Payments are withdrawn on a "first in-first out (FIFO) basis," and that all
Purchase Payments are withdrawn before any earnings are withdrawn.
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>
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.
Form 25338 Page 7 4/89
<PAGE>
Any cash payment will be mailed from LNL's 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 the Annuity
Commencement Date.
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 withdrawal charge. Withdrawal will be effective on the Valuation
date on which LNL receives a written request at its Home Office. The minimum
withdrawal is $300. If any withdrawal reduces the total account value to less
than $300, LNL may surrender the Contract for its surrender 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 pro rata basis from each sub-
account, the amount requested. Any cash payment will be mailed from LNL's 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.
For purposes of this Section, the fixed portion of the Contract is considered a
sub-account.
The Withdrawal Option is not available after Annuity Payments have begun.
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 prior withdrawals; 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.
2.14 WAIVER OF CONTINGENT DEFERRED SALES CHARGES
A surrender of this Contract or withdrawal of Contract Value prior to the
Annuity Commencement Date, may be subject to a Contingent Deferred Sales Charge
as described in Sections 2.11 and 2.12, except that such charges do not apply to
(1) the first withdrawal of Contract Value during a Contract Year to the extent
such withdrawal does not exceed 10% of the Purchase Payments (this 10%
withdrawal exception does not apply to a surrender of a Contract); (2) a
surrender of a Contract as a result of the "permanent and total disability" of
the Annuitant as defined in section 22(e)(3) of the Internal Revenue Code; (3) a
surrender of the Contract as a result of the death of the Annuitant; (4)
annuitization.
ARTICLE 3
BENEFICIARY
3.01 DESIGNATION
The Beneficiary for this Contract will receive the proceeds on the death of the
Annuitant.
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 ef-
Form 25338 Page 8 4/89
<PAGE>
fective 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.
ARTICLE 4
GENERAL PROVISIONS
4.01 THE CONTRACT
The 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. No representative or
person other than the above named officers has authority to change or modify
this Contract or waive any of its provisions.
All terms used in this Contract will have usual and customary meaning except
when specifically defined.
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 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 Series. 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.
4.09 PREMIUM TAX
State and local government premium tax, if applicable, will be deducted from
Purchase Payments or account value when incurred by LNL.
Form 25338 Page 9 4/89
<PAGE>
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
- -----------------------------------------------
<TABLE>
<CAPTION>
No 120 240
Period Months Months Unit
Age Certain Certain Certain Refund
<S> <C> <C> <C> <C>
- -----------------------------------------------
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 5.35 4.97 5.09
66 5.52 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 5.04
74 7.24 6.71 5.45 5.19
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>
Form 25338 Page 10 4/89
<PAGE>
ARTICLE 6
ANNUITY PURCHASE RATES UNDER A FIXED PAYMENT OPTION
GUARANTEED DOLLAR AMOUNT OF FIRST MONTHLY PAYMENT WHICH IS
PURCHASED WITH EACH $1,000 APPLIED
- ----------------------------------------------------------
SINGLE LIFE ANNUITIES
- ----------------------------------------------------------
<TABLE>
<CAPTION>
No 120 240
Period Months Months Unit
Age Certain Certain Certain Refund
<S> <C> <C> <C> <C>
- ----------------------------------------------------------
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 66 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>
Form 25338 Page 11 4/89
<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 23,257.86 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.
Form 25338 Page 12 4/89
<PAGE>
VARIABLE ANNUITY AMENDMENT
Made a part of the Contract to which it is attached ("this Contract")
The Section of this Contract titled "VARIABLE ACCOUNT" shall be amended in part
as follows:
"The Funds are:
1. Cash Management Fund
2. High-Yield Bond Fund
3. Growth-Income Fund
4. Growth Fund
5. U.S. Government/AAA-Rated Securities Fund
6. Asset Allocation Fund
7. International Fund
8. Bond Fund
9. Global Growth Fund
10. Other funds made available by LNL."
The Lincoln National Life Insurance Company
/s/ Nancy J. Alford
Nancy J. Alford, Vice President
Form 28556 0497
<PAGE>
VARIABLE ANNUITY AMENDMENT
Made a part of the Contract to which it is attached ("this Contract")
Under Section 2.14, WAIVER OF CONTINGENT DEFERRED SALES CHARGES, of this
Contract, the sentence in (2) shall be replaced by the following:
"a surrender of the Contract as a result of total and permanent
disability of the Annuitant (as defined in Section 22(e)(3) of the
Internal Revenue Code) subsequent to the effective date of this
Contract and prior to the 65th birthday of the Annuitant;"
The Lincoln National Life Insurance Company
/s/ Kathleen Peterson
Kathleen Peterson, Second Vice President
FORM 26086 3/90
<PAGE>
CONTRACT AMENDMENT
Made a part of the Contract to which it is attached ("this Contract")
The first sentence in the first paragraph under section "THE CONTRACT", found in
the Article entitled GENERAL PROVISIONS of this Contract, shall be replaced by
the following:
This Contract, and any riders attached, constitute the entire Contract.
The Lincoln National Life Insurance Company
/s/ Kathleen Peterson
Kathleen Peterson, Second Vice President
Form A444ST 6/92
<PAGE>
INCREASED GUARANTEED MINIMUM DEATH BENEFIT
Made a part of the Contract to which it is attached ("this Contract")
The following shall be inserted into Section 2.13 DEATH OF ANNUITANT after the
first paragraph:
The Lincoln National Life Insurance Company (LNL) will automatically
increase the Guaranteed Minimum Death Benefit (GMDB), separately for each
Contract Year's purchase payment(s), effective upon the Seventh Anniversary
of each eligible Contract Year in which those payments were made (as the
contingent deferred sales charge period expires on those payments).
The increased 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 increase is made. The gain
attributable to the eligible Contract Year would be calculated by
allocating the appreciation in the Contract, respectively, to each year's
net purchase payments based on LNL's internal rate of return (IRR)
calculation. This gain will be referred to as "Attributable Gain".
If the annuitant dies after the GMDB is increased, LNL will pay to the
Beneficiary an increased death benefit which will be the greater of:
1. The current value of the Contract as of the day on which the death
benefit is paid by LNL; or,
2. The sum of all purchase payments plus any Attributable Gain, less
any partial surrenders, partial annuitizations and premium taxes
incurred.
The GMDB will be increased provided the annuitant is less than 81 years of
age and is still living on the Seventh Anniversary of the eligible Contract
Year. This increase will only be made once with respect to each Contract
Year's net purchase payments.
The Lincoln National Life Insurance Company
/s/ Kathleen Peterson
Kathleen Peterson, Second Vice President
Form DBA-2 9/94
<PAGE>
ANNUITY
CONTRACT
Deferred Variable Annuity or Variable and Fixed Annuity
Benefit Payment Options
Nonparticipating
If you have any questions concerning
this Contract, or if anyone suggests that
you change or replace 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]
Form 25338
<PAGE>
-------------------------
The Lincoln National Life
[LOGO FOR AMERICAN LEGACY II] Insurance Company
Variable Annuity Application -------------------------
================================================================================
Instructions: Please type or print. Any alterations to this application MUST BE
INITIALED BY THE CONTRACT OWNER.
================================================================================
1 Contract Owner(s)
(if no annuitant is specified in section 2, the Contract Owner listed on the
left side of section 1 will be the only annuitant)
- ---------------------------------------
Full legal name
- ---------------------------------------
Street address
- ---------------------------------------
City State Zip
Social Security number [___]-[__]-[____]
[ ] Male
[ ] Female
Tax ID number _____________________________________
Date of birth [__] [__] [__]
Month Day Year
Note: Maximum age of annuitant is 85 (80 in Pennsylvania).
[_] Joint Owner [_] Contingent Owner
- ---------------------------------------
Full legal name
- ---------------------------------------
Street address
- ---------------------------------------
City State Zip
Social Security number [___]-[__]-[____]
[ ] Male
[ ] Female
Date of birth [__] [__] [__]
Month Day Year
================================================================================
2 Annuitant (complete only if different from Contract Owner)
- ---------------------------------------
Full legal name
- ---------------------------------------
Street address
- ---------------------------------------
City State Zip
Social Security number [___]-[__]-[____]
[ ] Male
[ ] Female
Date of birth [__] [__] [__]
Month Day Year
Note: Maximum age of Annuitant is 85 (80 in Pennsylvania).
================================================================================
3 Beneficiary(ies) of Annuitant
Primary:
1._____________________________________________________________
Full legal name
______________________________ ____________________ _______
Relationship SSN/TIN %
2._____________________________________________________________
Full legal name
______________________________ ____________________ _______
Relationship SSN/TIN %
Contingent:
1._____________________________________________________________
Full legal name
______________________________ ____________________ _______
Relationship SSN/TIN %
2._____________________________________________________________
Full legal name
______________________________ ____________________ _______
Relationship SSN/TIN %
Trusts only: Date of Trust
[__] [__] [__]
Month Day Year
- ------------------------------
Executor/Trustee
================================================================================
4 Type of Contract Plan Type (check one)
[_] IRA [_] 401(k)*
Nonqualified: Tax-Qualified
(must complete plan type): [_] 401(a)*
---------------
(specify)
[_] Initial Contribution [ ] Initial Contribution, [_] Other*
OR Tax year 19__ ---------------
[ ] 1035 Exchange OR (specify)
[_] 457 [_] 403(b) (transfers only)
[ ] Transfer
[ ] Rollover
*Indicate plan year-end [__] [__]
Month Day
================================================================================
5a Allocation Please allocate my investment of
$______________________________ as follows:
Initial minimums:
Nonqualified/403(b) - $1,500.00 ________________ % Global Growth Fund
Qualified - $300.00 ________________ % Growth Fund
________________ % International Fund
The current allocation will ________________ % Growth-Income Fund
apply to future contributions ________________ % Asset Allocation Fund
unless otherwise specified. ________________ % High-Yield Bond Fund
If no allocations are specified, ________________ % Bond Fund
the entire amount will be ________________ % U.S. Govt./AAA-Rated
allocated to the Cash Management Securities Fund
Fund pending Instructions from ________________ % Cash Management Fund
the Contract Owner. ________________ % Fixed Account
Use whole percentages ================ % Total (must = 100%)
- --------------------------------------------------------------------------------
5b Dollar Cost Averaging
------------------------------------------------------
Total amount to DCA: $___________________________
OR (min. $10,000)
MONTHLY amount to DCA:$___________________________
------------------------------------------------------
OVER THE FOLLOWING PERIOD:
____________MONTHS(6-60)
NOTE: Period can be 6-60 months with a minimum of
$10,000 in the holding account.
------------------------------------------------------
INTO THE FUND(S) AT THE RIGHT
------------------------------------------------------
FROM THE FOLLOWING HOLDING ACCOUNT (check one):
[ ] DCA Fixed Account*
[ ] Cash Management Fund*
[ ] U.S. Govt./AAA-Rated Securities Fund*
------------------------------------------------------
Use whole percentages:
________________ % Global Growth Fund
________________ % Growth Fund
________________ % International Fund
________________ % Growth-Income Fund
________________ % Asset Allocation Fund
________________ % High-Yield Bond Fund
________________ % Bond Fund
________________ % U.S. Govt./AAA-Rated
Securities Fund*
________________ % Cash Management Fund*
________________ % Fixed Account*
================ % Total (must = 100%)
*The DCA holding account and the DCA fund elected cannot be the same.
- -------------------------------------------------------------------------------
5c Cross-Reinvestment To initiate the cross-reinvestment program, complete the
appropriate form (available from your broker or financial planner).
===============================================================================
6 Automatic Bank Draft
To: ATTACH VOIDED CHECK
------------------------- -------------------------
Bank name ABA number
-------------------------- ------------------ -------------- ------------
Bank street address City State ZIP
Automatic bank draft start date: [__] [__] [__]
Month Day(1-28) Year
$
--------------------------------------------------- ---------------------
Checking account number Monthly amount
I/We hereby request and authorize you to pay and charge to my/our account
checks or electronic fund transfer debits processed by and payable to the
order of Lincoln Life, P.O. Box 2348, Fort Wayne, IN 46801-2348, provided
there are sufficient collected funds in said account to pay the same upon
presentation. It will not be necessary for any officer or employee of Lincoln
Life to sign such checks. I/We agree that your rights in respect to each such
check shall be the same as if it were a check drawn on you and signed
personally by me/us. This authority is to remain in effect until revoked by
me/us, and until you actually receive such notice. I/We agree that you shall
be fully protected in honoring any such check or electronic fund transfer
debit. I/We further agree that if any such check or electronic fund transfer
debit be dishonored, whether with or without cause and whether intentionally
or inadvertently, you shall be under no liability whatsoever even though such
dishonor results in the forfeiture of insurance or investment loss to me/us.
Date [__] [__] [__]
Month Day Year
- ------------------------- ------------------------
Signature(s) EXACTLY as shown on bank records
Litho in USA CGD/CG/3445
- ------------------------- ------------------------ (C)1997 American Funds
Form 28296 1296 Print full legal name(s) Distributors, Inc.
Lit. No. AMLEGII-050-0597
<PAGE>
================================================================================
7 Automatic Withdrawal A $10,000 minimum account balance is required. Note:
Withdrawals may not exceed 10% per year of total contract value.
___ Please provide me with automatic withdrawals based on 10% of total
contract value
OR
___ Please provide me with automatic withdrawals of $__________
The withdrawal(s) should be made (check one): [_] Monthly [_] Quarterly
[_] Semiannually [_] Annually. Begin withdrawals in [___] [__]
Month Year
ELECT ONE: [_] Do withhold taxes [_] Do not withhold taxes Note: If no
selection is made, taxes will be withheld.
ELECT ONE: [_] Send check to address of record OR [_] Send check to the
following alternate address: ______________________________________________
______________________________________________
For direct deposit into your bank account, an electronic fund transfer form
must be completed and submitted with a voided check _______________________
================================================================================
8 Telephone Transfer [_] YES. I/we hereby authorize and direct Lincoln Life
to accept telephone instructions from any person who can furnish proper
identification to exchange units from subaccount to subaccount and/or to
change the allocation of future investments. I/We agree to hold harmless
and indemnify Lincoln Life, American Funds Distributors, Inc. and their
affiliates and any mutual fund managed by such affiliates and their
directors, trustees, officers, employees and agents for any losses arising
from such instructions.
================================================================================
9 Replacement Will the proposed contract replace any existing annuity or
insurance contract?
ELECT ONE: [_] No [_] Yes If yes, complete the 1035 Exchange or Qualified
Retirement Account Transfer form.
Company name _________________________________ Plan name __________________
Year issued ______ (Attach a replacement form if required by your state.)
================================================================================
10 Signatures
All statements made in this application (including on the reverse side) are
true to the best of my/our knowledge and belief, and I/we agree to all
terms and conditions as shown on the front and back. I/We further agree
that this application is part of the annuity contract. I/We acknowledge
receipt of current prospectuses for American Legacy II and American
Variable Insurance Series and verify my/our understanding that all payments
and values provided by the contract, when based on investment experience of
the funds in the Series, are variable and not guaranteed as to dollar
amount. Under penalty of perjury, the Contract Owner(s) certifies that the
Social Security (or taxpayer identification) number(s) is correct as it
appears in this application. Any person who knowingly and with intent to
defraud any insurance company or other person, files or submits an
application for insurance or statement of claim containing any materially
false or deceptive information, or conceals, for the purpose of misleading,
information concerning any fact material thereto, commits a fraudulent
insurance act, which is a crime and subjects such person to criminal and
civil penalties.
_____________________________ __________________ ________________________
Signed at (city) State County
___________________________________________________________________________
Signature of Contract Owner/Joint Contract Owner (if applicable)
Date [____] [__] [__]
Month Day Year
_____________________________ __________________ ________________________
Signed at (city) State County
___________________________________________________________________________
Signature of annuitant (annuitant must sign if Contract Owner is a trust
or custodian)
Date [____] [__] [__]
Month Day Year
================================================================================
THE FOLLOWING SECTIONS MUST BE COMPLETED BY THE SECURITIES DEALER OR FINANCIAL
PLANNER. Please type or print.
================================================================================
11 Insurance in Force Does this contract replace or change any other life
insurance or annuity in this or any other company?
ELECT ONE: [_] No [_] Yes If yes, please list the insurance in force on
the life of the proposed annuitant:
Company name _______________________ Year issued __________________________
Amount _____________________________ Accidental death amount ______________
================================================================================
12 Additional Remarks ________________________________________________________
___________________________________________________________________________
================================================================================
13 Dealer Information Note: Licensing appointment with Lincoln Life is
required for this application to be processed.
___________________________________________________________________________
Registered representative's name (print as it appears on NASD licensing.)
[___] [___]-[____]
Registered representative's telephone number
___________________________________________________________________________
Client account number at dealer
[___]-[___]-[____]
Social Security number
___________________________________________________________________________
Dealer's name
___________________________________________________________________________
Branch address [_] Check if broker change of address
___________________________________________________________________________
City State ZIP
================================================================================
14 Representative's Signature
The representative hereby certifies that he/she witnessed the signature(s)
in section 10 and that all information contained in this application is
true to the best of his/her knowledge and belief.
Signature _________________________________________________________________
================================================================================
Send completed application--with a check made payable to Lincoln Life--to your
investment dealer's home office or to:
By Express Mail:
American Lincoln Life Lincoln Life
Legacy P.O. Box 2348 Attention: American Legacy Operations
II/R/ Fort Wayne, IN 46801-2348 1300 South Clinton Street
Fort Wayne, IN 46802
<PAGE>
How to complete the American Legacy II
Variable Annuity Application
================================================================================
1 Contract Owner(s)
Complete the name, address, Social Security or tax ID number, date of birth
and sex of the person(s) entitled to exercise rights under the annuity
contract, including accepting payments, making withdrawals or choosing someone
else to receive the payments. If joint or contingent ownership applies,
complete the adjoining section.
2 Annuitant
Complete this section only if different from contract owner. Give the name,
address, Social Security number, date of birth and sex of the person on whose
life the contract is based. Please note that you may only elect a single
annuitant.
THE MAXIMUM AGE OF THE ANNUITANT IS 85 (80 IN PENNSYLVANIA).
3 Beneficiary of Annuitant
Designate the person(s) to receive the contract value or remaining payments
upon the death of the annuitant, and indicate the relationship to the
annuitant, the Social Security number or tax identification number, and the
percentage for each beneficiary elected. If the beneficiary is a trust,
indicate the name of the Executor or Trustee and the date of the trust. THE
ANNUITANT AND THE BENEFICIARY CANNOT BE THE SAME PERSON.
4 Type of Contract
Indicate whether the payment for this contract is an initial contribution, a
transfer, or a rollover. Specify the type of contract by indicating
nonqualified or tax-qualified. For a tax-qualified plan, indicate the type of
tax-qualified plan. Please note that if the tax-qualified plan is a profit
sharing, 401(k), or 401(a) plan, the plan year-end section should be
completed. THE INDIVIDUAL CONTRACT MAY ONLY BE USED FOR PLANS WITH FIVE OR
LESS PARTICIPANTS.
5a Allocation
Fill in the total amount to be invested. If this is a transfer or 1035
exchange, indicate the approximate amount to be transferred. Use whole
percentages when allocating among the subaccounts.
5b Dollar Cost Averaging
If the dollar cost averaging option is desired, please indicate ALL of the
following:
. total amount or monthly amount to be dollar cost averaged
. duration of the dollar cost averaging program (6-60 months)
. holding account for the program (elect either DCA Fixed Account, Cash
Management Fund, or U.S. Govt./AAA-Rated Securities Fund)
. allocation of monthly percentages (cannot DCA into a fund that is the same as
the holding account)
5c Cross-Reinvestment
To initiate the cross-reinvestment program, complete the appropriate form
(available from your broker or financial planner).
6 Automatic Bank Draft
Complete the bank name and address, ABA routing number, the monthly amount to
be drafted from the account, the checking account number, and indicate the
month, day and year for the bank draft starting date (the day indicated should
be between 1 and 28; money will be drafted on this day each month). A voided
check must be attached to initiate the bank draft. The owner(s) of the
checking account must sign to authorize the draft.
[EXAMPLE SHOWING HOW TO FILL OUT VARIABLE ANNUITY APPLICATION FORM (PAGE ONE)]
[LOGO OF AMERICAN LEGACY II]
<PAGE>
How to complete the American Legacy II
Variable Annuity Application
================================================================================
7 Automatic Withdrawal
Specify the annual amount to be withdrawn (not to exceed 10% per contract year
of total payments), when to begin the payments, the frequency of payments,
whether to withhold federal income tax, and where the payments should be sent.
8 Telephone Transfer
If the contract owner wants telephone transfer privileges, this box must be
checked.
9 Replacement
The contract owner must indicate yes or no if this contract will replace
another existing annuity or life insurance contract. If "yes" is elected, the
1035 Exchange or Qualified Retirement Account Transfer form must be completed
(these forms are attached to this application). Note that the election in
section 9 should be the same as in section 11. ATTACH A REPLACEMENT FORM IF
REQUIRED BY YOUR STATE.
10 Signatures
This application requires the signature of the contract owner(s). Indicate the
city where and the date when the application is signed. The "signed at"
city/state will be used for broker licensing purposes. The annuitant must also
sign the application if the contract owner is a trust or custodian.
11 Insurance in Force
The broker must complete this section to indicate yes or no whether this
contract replaces or changes any other annuity or life insurance contract in
force on the proposed annuitant's life. Note that the election in section 11
should be the same as in section 9.
12 Additional Remarks
Use to provide Lincoln Life with any additional instructions or information.
13 Dealer Information
Print the registered representative's name and indicate registered
representative's telephone number, Social Security number, dealer's name,
branch address (check box if this is a change of address), and the client
account number at the dealer.
14 Representative's Signature
The registered representative must sign in the space provided. The registered
representative should only sign this application if he/she is licensed in the
state indicated in section 10 of this application. (In some states, the
representative may also be required to be licensed in the contract owner's
state.) For questions concerning licensing, contact Lincoln Life's licensing
department at 800/331-4949.
- --------------------------------------------------------------------------------
Important Notes
1. Any alterations made to the application, including cross-out or white-out of
information, must be initialed by the contract owner. If the alteration is
not initialed by the contract owner, an amendment will be generated for the
contract owner to sign upon delivery of the contract.
2. Each registered representative and his/her broker/dealer firm MUST be
appointed by Lincoln Life to sell American Legacy II. If the appointment
process is not completed, Lincoln Life will return the application. Please
call the Lincoln Life licensing department at 800/331-4949 it you have any
questions regarding appointment procedures.
3. If information on the application is missing or incomplete, a delay in
processing may result. The contract may be issued with an amendment
pertaining to the missing or incomplete section.
- --------------------------------------------------------------------------------
[EXAMPLE SHOWING HOW TO FILL OUT VARIABLE ANNUITY APPLICATION FORM (PAGE TWO)]
<PAGE>
American Legacy II(R)
Request for 1035 Exchange (Nonqualified)
================================================================================
Instructions: A. Please type or print.
B. Owner's and any joint owner's signatures are required on this
form.
C. The following items must be mailed to Lincoln Life to process a
1035 exchange:
1. This form, "Request for 1035 Exchange (Nonqualified)"
2. Old policy/contract, to be exchanged (if lost, please
indicate in section 2 below)
3. State replacement form (if required by the state)
4. American Legacy Variable Annuity Application
================================================================================
1 Surrendering Company Information
____________________________________________ [_][_][_] [_][_][_]-[_][_][_][_]
Surrendering insurance company Telephone number
________________________________ ____________________________________________
Address City State ZIP
================================================================================
2 Policy/Contract Information
____________________________________________
Policy/contract number
Transfer the proceeds: [_] Immediately [_] When indicated (date must be
within 30 days):
[_][_] [_][_] [_][_]
Month Day Year
The policy/contract is:
[_] Enclosed
[_] Lost or destroyed (I certify that the policy/contract is lost or
destroyed. In addition, I certify that the policy/contract has not been
assigned or pledged as collateral.)
__________________________ [_][_][_]-[_][_]-[_][_][_][_] _____________
Owner name Social Security Number Tax ID number
__________________________ [_][_][_]-[_][_]-[_][_][_][_] _____________
Joint owner name Social Security Number Tax ID number
__________________________ [_][_][_]-[_][_]-[_][_][_][_] _____________
Annuitant name(s) Social Security Number Tax ID number
================================================================================
3 Accepting Company Information
Lincoln Life
____________________________________________ [8][0][0] [4][4][3]-[8][1][3][7]
Accepting insurance company Telephone number
P.O. Box 2348 Fort Wayne IN 46801-2348
________________________________ ____________________________________________
Address City State ZIP
================================================================================
4 Signatures
I hereby make a complete and absolute assignment and transfer to the
Accepting Insurance Company of all right, title and interest to the above-
listed policy/contract in an exchange intended to qualify under Section 1035
of the Internal Revenue Code. I understand that if the Accepting Insurance
Company underwrites and issues a new life insurance policy/contract or
annuity on the life of the policy/contract owner named above, then the
Accepting Insurance Company intends to surrender the assigned
policy/contract. I understand that the policy/contract to be issued by the
Accepting Insurance Company shall have the same designated Insured(s),
Annuitant(s), and Owner(s) as the above-listed policy/contract.
I certify that the above-listed policy/contract is currently in force and not
subject to any prior assignments, any legal or equitable claims, liens or
trusts. I further certify that there are no proceedings in bankruptcy pending
against me. I understand and agree that I will be responsible for keeping the
above-listed policy/contract in force by paying any premiums as they become
due until such time as I have been issued a new life insurance or annuity
policy/contract.
I represent and agree that the Accepting Insurance Company is participating
in this transaction at my request and as an accommodation to me. I understand
that the Accepting Insurance Company assumes no responsibility or liability
for my tax treatment under Internal Revenue Code Section 1035. I agree that
if the Accepting Insurance Company, in its sole discretion, determines that
it is unlikely to receive timely payment of the full contract cash surrender
values, the Accepting Insurance Company may reassign ownership of the
contract back to me. I agree that any such reassignment shall be considered
accepted by me upon my receipt of a reassignment form duly executed by the
Accepting Insurance Company.
Signed at ___________________________this__________day of ____________19_____
City
____________________________________ _______________________________________
Owner signature Joint owner or spousal (if community
property) signature
____________________________________ _______________________________________
Insured signature (life only) Irrevocable beneficiary signature
================================================================================
5 Acceptance of Assignment
The Accepting Insurance Company, as assignee, accepts this assignment and
hereby requests full surrender of the above-referenced policy/contract. The
surrender represents a transfer of funds to the Accepting Insurance Company
to qualify as a Section 1035(a) exchange. When the surrender is completed,
please provide the Accepting Insurance Company a report of the pre- and post-
TEFRA cost basis in the policy/contract.
____________________________________ _______________________________________
Authorized signature Title
Date [_][_] [_][_] [_][_]
Month Day Year
_____________________________________________________________________________
New policy/contract number
================================================================================
Send completed application and this form to your investment dealer's home office
or to:
By Express Mail:
Lincoln Life Lincoln Life
P.O. Box 2348 Attention: American Legacy Operations
Fort Wayne, IN 46801-2348 1300 South Clinton Street
Fort Wayne, IN 46802
<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. 33-27783), the Post Effective Amendment No. 1 to the Registration Statement
(Form N-4 No. 333-18419), and the related Statement of Additional Information
appearing therein and pertaining to Lincoln National Variable Annuity Account H,
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 for each of the three years in the period ended December 31,
1997, and (b) March 11, 1998, with respect to the financial statements of
Lincoln National Variable Annuity Account H.
Fort Wayne, Indiana
March 25, 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 H
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 reports relating thereto.
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
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 Permanently, the first two
years in an easily accessible
place
(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 years in an easily accessible
transactions F&RM Eric Jones place
Portfolio Securities
- --------------------
C--Port Purchase/ F&RM Eric Jones Permanently, the first two
Sales Reports 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.
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.
Monies Borrowed and Loaned
- --------------------------
Not Applicable.
Dividends and Interest Received
- -------------------------------
<PAGE>
LNL Trial Controllers Eric Jones Permanently, the first two
Balance (5000 years in an easily accessible
series) place
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
Dividends Receivable and Interest Accrued
- -----------------------------------------
LNL Trial F&RM Eric Jones Permanently, the first two
Balance (5000 years in an easily accessible
series) place
(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
- ------------------------------------------
Daily Report Not Permanently, the first two
of Securities Applicable years in an easily accessible
transactions place
(iii) Separate ledger accounts (or other records) for each broker-dealer, bank
or other person with or through which transactions in portfolio securities are
affected, showing each purchase or sale of securities with or through such
persons, including details as to the date of the purchase or sale, the quantity
and unit and aggregate prices of such securities, and the commissions or other
compensation paid to such persons. Purchases or sales effected during the same
day at the same price may be aggregated.
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
- --------------------
Master file F&RM Eric Jones Permanently, the first two
Record CSRM Nancy Alford years in an easily accessible
place
(3) A securities record or ledger reflecting separately for each portfolio
security as of trade date all "long" and "short" positions carried by the
investment company for its own account and showing the location of all
securities long and the off-setting position to all securities short. The record
called for by this paragraph shall not be required in circumstances under which
all portfolio securities are maintained by a bank or banks or a member or
members of a national securities exchange as custodian under a custody agreement
or as agent for such custodian.
<PAGE>
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- CSRM Nancy Alford Six years,the first two
tions and 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.
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.
<PAGE>
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
Trial Balance
- -------------
LNL Trial F&RM Eric Jones Permanently, the first two
Balance (5000 years in an easily accessible
series) 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.
(12) The term "other records" as used in the expressions "journals (or other
records of original entry)" and "ledger accounts (or other records)" shall be
construed to include, where appropriate, copies of voucher checks,
confirmations, or similar documents which reflect the information required by
the applicable rule or rules in appropriate sequence and in permanent form,
including similar records developed by the use of automatic data processing
systems.
Correspondence CSRM Nancy Alford Six years, the first two
years in an easily accessible
place
<PAGE>
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
Proxy State- CSRM Nancy Alford Six years, the first two
ments and years in an easily accessible
Proxy Cards place
Pricing Sheets F&RM Eric Jones Permanently, the first two
years in an easily accessible
place
Bank State- Treasurers Rusty Summers
ments
March 12, 1998
